... helping people live better
Extendicare Inc.
2018 Annual Report
... helping people live better
MMANAGEMENT’S DISCUSSION AND ANALYSIS
Year Ended December 31, 2018
Extendicare Inc.
Dated: February 28, 2019
Management’s Discussion and Analysis
Year ended December 31, 2018
Dated: February 28, 2019
TABLE OF CONTENTS
Basis of Presentation ........................................................... 1
Additional Information ........................................................ 1
Forward-looking Statements ............................................... 2
Non-GAAP Measures ......................................................... 2
Changes Affecting Results .......................................... 25
Business Strategy ................................................................ 4
Liquidity and Capital Resources ..................................... 29
Significant 2018 Events and Developments ........................ 4
Other Contractual Obligations and Contingencies .......... 33
Business Overview .............................................................. 5
Key Performance Indicators ................................................ 9
Related Party Transactions .............................................. 35
2018 Selected Annual Information.................................... 11 Risks and Uncertainties ................................................... 35
2018 Selected Quarterly Information ................................ 12
Accounting Policies and Estimates ................................. 42
2018 Fourth Quarter Financial Review ............................. 14
2018 Financial Review.................................................... 18
Adjusted Funds from Operations .................................... 22
Other Significant Developments ..................................... 24
Update of Regulatory and Funding
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 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.
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, 2018. This MD&A should be read in
conjunction with Extendicare’s audited consolidated financial statements for the years ended 2018 and 2017, 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, 2018, 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, 2019.
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.
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.
Extendicare Inc. – 2018 Management’s Discussion and Analysis
1
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 the expected annual revenue, net
operating income yield (NOI Yield) to be derived from development projects and adjusted funds from operations to be
derived from acquisitions and development projects; and statements relating to indemnification provisions and deferred
consideration in respect of disposed operations. 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 measures are not
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
Company’s financial statements to assess the Company’s operating performance and ability to pay cash dividends; 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.
Extendicare Inc. – 2018 Management’s Discussion and Analysis
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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 investments”, 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 investments,
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 deferred 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 deferred 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 pay cash dividends 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.
Extendicare Inc. – 2018 Management’s Discussion and Analysis
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Reconciliations of “earnings (loss) from continuing operations before income taxes” to “Adjusted EBITDA” and “net
operating income” are provided under the headings “2018 Selected Quarterly Information”, “2018 Fourth Quarter Financial
Review” and “2018 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”.
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 – offering the right care at the right
time, in the right place for Canadian seniors as they age and their care and service needs change – and to be an employer of
choice in the communities in which we operate.
Our core long-term care services are complemented by a market leading home health care platform operating under the
ParaMed banner and a private-pay retirement business operating under the Esprit Lifestyle Communities banner, as well as
growing management/consulting and group purchasing divisions. We have continued to grow Esprit through acquisition
and development and to pursue private-pay home health care opportunities with the intent to diversify our revenue streams
to achieve a better balance between government and privately funded activities.
We believe that the effective execution of this strategy will provide an appropriate and consistent return to our shareholders
who have demonstrated their belief in our mission by investing in Extendicare.
SIGNIFICANT 2018 EVENTS AND DEVELOPMENTS
This section provides an update on our current activities related to the growth of our retirement operations and the
completion of our convertible debt refinancing in 2018. 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 a variety of lifestyle options, including independent
and enhanced living and memory care, as well as short-term stay, and respite care.
During 2018, Esprit Lifestyle Communities had nine retirement communities in operation that it had either acquired or
developed since 2015, and in January 2019, it opened its tenth, Bolton Mills Retirement Community (Bolton Mills) in
Bolton, Ontario.
RETIREMENT ACQUISITIONS
In April 2018, the Company completed the acquisition of the Lynde Creek Retirement Community, located in Whitby,
Ontario, for a cash purchase price of $33.8 million, including working capital adjustments (the “Lynde Creek Acquisition”).
The acquired community consists of Lynde Creek Manor, a retirement residence offering 93 independent and assisted
living suites, (the “Manor”); Lynde Creek Village, a life lease seniors community of 113 townhomes, (the “Village”); and
3.7 acres of adjacent land for expansion (the “Excess Land”). Further details of the Lynde Creek Acquisition are provided
in note 6 of the audited consolidated financial statements.
The Manor is a modern private pay luxury retirement residence with 93 suites offering independent supportive living (ISL)
and assisted living (AL) suites. The Village is an enclave of 113 townhomes 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 earns a fee equal to 10% of 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.
Extendicare Inc. – 2018 Management’s Discussion and Analysis
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2018 COMPLETED PROJECTS
In November 2018, we completed the 45-suite expansion of Douglas Crossing Retirement Community (Douglas Crossing),
in Uxbridge, Ontario, and at January 31, 2019, the expanded 148-suite community was 80% leased. Phase 1, or 103 suites,
opened in October 2017, and by the end of 2018 was 92% leased. The robust pre-lease activity of phase 1 led to the
decision in 2017 to accelerate the phase 2 expansion plans. The Adjusted Development Costs for the total 148-suite project
are estimated to be $35.7 million, with an expected stabilized occupancy of 94% in the 2019 fourth quarter, an estimated
stabilized NOI of $4.1 million and a corresponding NOI Yield of 11.4%.
At the end of December 2018, we completed development of Bolton Mills, a 112-suite retirement community in Bolton,
Ontario, and welcomed its first resident in January 2019. The Adjusted Development Costs for this project are estimated to
be $30.7 million, with an expected stabilized occupancy of 95% in the 2021 fourth quarter, an estimated stabilized NOI of
$2.4 million and a corresponding NOI Yield of 7.8%.
PROJECTS UNDER CONSTRUCTION
We currently have a 124-suite retirement project under construction in Barrie, Ontario, that is scheduled to open in the 2019
fourth quarter. The Adjusted Development Costs for this project are estimated to be $38.5 million, with an expected
stabilized occupancy of 92% in the 2022 second quarter, an estimated stabilized NOI of $3.2 million and a corresponding
NOI Yield of 8.2%.
Issue of 2025 Convertible Debentures and Redemption of 2019 Convertible Debentures
In April 2018, the Company issued $126.5 million aggregate principal amount of 5.00% convertible unsecured
subordinated debentures due April 30, 2025 (the “2025 Debentures”), with a conversion price of $12.25 per Common Share
(the “Offering”). The initial offering for $110.0 million of the 2025 Debentures closed on April 17, 2018, and the exercise
of the over-allotment option for $16.5 million debentures closed on April 25, 2018.
The net proceeds from the Offering of $120.9 million, together with cash on hand, was used by the Company to finance the
redemption of its outstanding 6.00% convertible unsecured subordinated debentures due September 30, 2019 (the “2019
Debentures”). The redemption of the 2019 Debentures was completed on April 30, 2018, at a price equal to the sum of the
outstanding aggregate principal amount of $126.5 million and all accrued and unpaid interest thereon for a total of
$127.1 million, or $1,004.93 for each $1,000 principal amount of 2019 Debentures. As a result of the early redemption,
the unaccreted liability of $1.4 million and unamortized deferred financing costs of $1.1 million were expensed, and the
related equity portion of $5.6 million was classified as part of accumulated deficit during the 2018 second quarter. Further
details of the issuance and redemption are provided in note 12 of the audited consolidated financial statements.
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, or SGP, division. In 2018, approximately 56% of the revenue from our Canadian
operations was derived from our long-term care operations, approximately 39% was from our home health care business,
approximately 3% was from our retirement living operations, and the balance was from the Extendicare Assist and SGP
divisions.
As at December 31, 2018, Extendicare owned and operated 58 LTC centres, 9 retirement communities, and managed 53
senior care and living centres for third parties. In total, we operated 120 senior care and living centres across four provinces
in Canada, with capacity for 15,447 residents, with a significant presence in Ontario and Alberta, where approximately 76%
and 11% of our residents, respectively were served. ParaMed’s home health care services operated from 35 locations across
six provinces (29 in Ontario, 1 in British Columbia, 2 in Alberta, 1 in Manitoba, 1 in Nova Scotia, and 1 in Quebec)
providing approximately 10.9 million hours of service in 2018. SGP Purchasing Partner Network provided group
purchasing services to third-party clients representing approximately 51,100 seniors across Canada. Our highly trained
workforce of approximately 23,000 individuals across Canada is dedicated to helping people live better through a
commitment to quality service and passion for what we do.
Extendicare Inc. – 2018 Management’s Discussion and Analysis
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The table below summarizes the senior care and living centres operated by Extendicare, including those managed for third
parties, as at December 31, 2018. Included are nine LTC centres in Ontario that the Company operates under 25-year
finance lease arrangements, with full ownership obtained at the end of the lease term. In addition to the following, the
Company owns land adjacent to its retirement residence at Lynde Creek in Whitby, Ontario, on which there is an enclave of
113 townhomes, known as Lynde Creek Village, that are leased by the Company to seniors under life leases.
By Province
Owned/Leased
Ontario
Alberta
Saskatchewan
Manitoba
Managed
Ontario
Alberta
Manitoba
Total
Long-term Care
No. of Resident
Centres Capacity
Retirement Living
No. of Resident
Centres Capacity
Chronic Care Unit
No. of Resident
Centres Capacity
Total
No. of Resident
Centres Capacity
34
14
5
5
58
42
1
2
45
103
5,207
1,519
649
762
8,137
5,338
102
168
5,608
13,745
5
–
4
–
9
6
1
–
7
16
472
–
341
–
813
660
109
–
769
1,582
–
–
–
–
–
1
–
–
1
1
–
–
–
–
–
120
–
–
120
120
39
14
9
5
67
49
2
2
53
120
5,679
1,519
990
762
8,950
6,118
211
168
6,497
15,447
(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 2018 and
2017.
Senior Care and Living Centres
As at beginning of year
Managed contracts added
Managed contracts ceased
Retirement communities acquired/developed
LTC addition
Operational capacity adjustments
As at end of year
Operating Segments
No. of
Centres
116
4
(1)
1
–
–
120
2018
Resident
Capacity
15,004
524
(243)
138
24
–
15,447
No. of
Centres
118
7
(10)
1
–
–
116
2017
Resident
Capacity
15,022
764
(900)
103
–
15
15,004
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 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 sale of the Company’s U.S. business in 2015 (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.
Extendicare Inc. – 2018 Management’s Discussion and Analysis
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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 8,137 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 56.5% of consolidated
revenue from continuing operations in 2018 (2017 year – 56.2%).
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 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 Alberta Health Services (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, 2018, as well as the maximum preferred differential rates for each classification of bed.
Ontario Owned/Leased
New
Class C (1)
No. of
Centres
13
21
34
Private
$26.04 premium
1,106
–
1,106
Private
$18.74 premium
–
476
476
Semi-private
$8.33 premium Basic/Other
741
–
1,412
1,396
2,153
1,396
Total
1,847
3,284
5,131
Composition of Beds
(1) Beds in operation of 3,284 exclude 3 beds held in abeyance.
RETIREMENT LIVING
Under the Esprit Lifestyle Communities brand, the Company owned and operated nine retirement communities with 813
suites as at December 31, 2018, with a tenth community (112 suites) that opened in January 2019. Four of these
communities (341 suites) are located in Saskatchewan and six communities (584 suites) are located in Ontario. A new
retirement community (124 suites) is presently under construction in Ontario, and plans are under way for a 59-suite
expansion of our 63-suite Empire Crossing retirement community in Port Hope, Ontario.
Extendicare’s retirement communities provide accommodation and services to private-pay residents at rates set by the
Company 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 able to choose the living arrangements best suited to their personal preference and needs, as well as the level of care and
support they receive as their needs evolve over time. Revenue from these operations represented 3.0% of consolidated
revenue from continuing operations in 2018 (2017 year – 1.9%).
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 38.5% of consolidated
revenue from continuing operations in 2018 (2017 year – 39.7%).
Provincial governments fund a wide range of home health care services, and contract these services to providers such as
ParaMed. In 2018, ParaMed received approximately 98% of its revenue from contracts tendered by locally administered
provincial agencies (2017 year – 98%), with the remainder from private-pay clients. During 2018, ParaMed’s 35 locations
Extendicare Inc. – 2018 Management’s Discussion and Analysis
7
across Canada provided approximately 10.9 million hours of service, of which approximately 83% were provided in
Ontario, 11% 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 divisions,
collectively, represented 2.0% of consolidated revenue from continuing operations in 2018 (2017 year – 1.7%).
Management and Consulting Services
Through its Extendicare Assist division, Extendicare leverages its expertise in operating senior care centres in providing a
wide range of management and consulting services to third-party owners of senior care and living centres. Extendicare
Assist partners with not-for-profit and for-profit organizations, hospitals and municipalities that seek to improve their
management practices, quality of care practices and operating efficiencies. Extendicare Assist provides a broad range of
services aimed at meeting the needs of its partners, from operational consulting to overall facility management. The
management service offering can include a broad spectrum of services, including: financial administration, record keeping,
regulatory compliance and purchasing. In addition, Extendicare Assist provides consulting services to third parties for the
development and redevelopment of long-term care centres, and secured such a contract in 2018 with a Toronto area hospital
network.
As a skilled manager and operator of senior care centres for third parties, Extendicare Assist’s managed portfolio consisted
of 53 senior care centres with capacity for 6,497 residents as at December 31, 2018 (December 31, 2017 – 50 centres with
capacity for 6,216 residents).
Group Purchasing Services
Through its SGP Purchasing Partner Network division, 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 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, 2018, SGP provided services to third-party clients, serving approximately 51,100 seniors across
Canada, and beginning in January 2019, brought on new clients increasing those served to over 56,800 (December 31, 2017
– 45,200 seniors).
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 continue 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, 2018, the accrual for U.S. self-insured general and professional liabilities was $37.1 million
(US$27.2 million) compared to $61.1 million (US$48.6 million) at the beginning of the year, and the investments held for
U.S. self-insured liabilities totalled $67.9 million (US$49.8 million) compared to $86.3 million (US$68.6 million) at the
beginning of the year, with the decline in each primarily reflecting the “run off” of these operations and release of reserves.
Following the completion of an independent actuarial review, the Company released US$9.9 million of reserves for self-
insured liabilities in 2018, bringing the total since the sale of the U.S. operations in 2015 to US$29.6 million. Following the
release of these reserves, the Captive has transferred a total of US$28.5 million of its funds previously held for investment
to the Company for general corporate use since the sale in 2015, of which US$7.5 million was transferred in October 2018.
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.
Extendicare Inc. – 2018 Management’s Discussion and Analysis
8
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 five retirement communities (Empire Crossing, Harvest, Lynde Creek Manor, Riverbend Crossing and Stonebridge
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 one retirement community that opened during 2017 (Douglas Crossing), Lynde Creek that was acquired
in April 2018, and two retirement communities that were under development (Bolton and Barrie);
“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 classified as NSS above.
Long-term Care
The following table provides the average occupancy levels of our LTC operations for the past eight quarters.
Long-term Care Centres
Average Occupancy (%)
Total LTC
Ontario LTC
Total operations
Preferred Accommodation (1)
“New” centres – private
“C” centres – private
“C” centres – semi-private
Q1
96.4%
Q2
97.2%
Q3
Q4
97.8% 97.6%
2018
Year
97.3%
Q1
97.2%
Q2
97.6%
Q3
98.2%
Q4
97.7%
2017
Year
97.7%
97.1%
97.7%
98.3% 98.2%
97.8%
97.6%
98.2%
98.5%
98.2%
98.1%
96.3%
97.4%
65.2%
96.7%
97.3%
65.7%
97.6% 96.6%
97.8% 97.6%
66.5% 66.1%
96.8%
97.5%
65.9%
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%
(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.
The average occupancy at our LTC centres was 97.6% this quarter compared to 97.7% in the 2017 fourth quarter, and to
97.8% in the 2018 third quarter. For the year, occupancy averaged 97.3% compared to 97.7% in 2017. 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 a temporary freeze on admissions. In addition, occupancy levels in the 2018 first quarter
were impacted by the fill-up of a 24-bed addition to one of our LTC centres that opened in February, yet achieved stabilized
occupancy levels in April 2018.
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. Extendicare’s LTC centres in
Ontario achieved an overall average occupancy of 97.8%, 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 was 96.8% this year compared to 97.9% in 2017. The average occupancy of the
private beds at our Class C centres was 97.5% this year compared to 98.4% in 2017.
Extendicare Inc. – 2018 Management’s Discussion and Analysis
9
Retirement Living
During 2018, we had nine retirement communities in operation, two of which were classified as non same-store. Five of the
retirement communities were classified as stabilized, including Lynde Creek Manor, which had achieved stabilized
occupancy at the time it was acquired earlier this year, and four that were acquired in 2015 (Empire, Harvest, Riverbend,
and Stonebridge). The remaining four communities were classified as lease-up communities during 2018.
AS AT OCCUPANCY
The following table provides the combined occupancy of our stabilized and lease-up retirement communities at the end of
each quarter in 2018 and 2017.
Retirement Communities
As at Occupancy (%)
Stabilized communities (Empire/Harvest/
Lynde Creek/Riverbend/Stonebridge)
Lease-up communities
Mar. 31
2018
Jun. 30 Sept. 30 Dec. 31
Mar. 31
2017
Jun. 30 Sept. 30 Dec. 31
90.5% 93.2%
70.6% 76.4%
94.8%
82.4%
95.0%
81.0%
83.8%
38.6%
83.2%
43.9%
89.6%
55.7%
93.4%
63.0%
The average occupancy of the stabilized communities improved to 95.0% on December 31, 2018, from 93.4% on December
31, 2017. In terms of the quarterly trends throughout the year, lower occupancy levels can be expected during the winter
months as a result of higher attrition, as was experienced in the first half of 2018 from the 2017 year-end levels. The
average occupancy of the four lease-up communities grew to 81.0%% at year end from 63.0% on December 31, 2017, with
the slight decline from September 30, 2018 due to the completion of the 45-suite addition at Douglas Crossing.
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 for the past eight quarters. The average occupancy of the stabilized communities improved to 94.8%
this quarter from 93.4% in each of the 2017 fourth and 2018 third quarters, and averaged 93.3% for the year.
Retirement Communities
Average Occupancy (%) – total
Stabilized communities
Lease-up communities
Q1
80.4%
92.6%
67.6%
Q2
84.4%
92.1%
74.5%
Q3
87.9%
93.4%
80.6%
Q4
88.4%
94.8%
80.6%
2018
Year
85.5%
93.3%
75.9%
Q1
63.4%
82.7%
34.0%
Q2
66.6%
83.1%
41.7%
Q3
71.9%
86.8%
49.4%
Q4
75.9%
93.4%
55.5%
2017
Year
69.7%
86.5%
46.0%
Home Health Care
The following table provides the service volumes of our home health care operations for the past eight quarters.
Home Health Care
Service Volumes
Hours of service (000’s)
Hours per day
Q1
2,705.0
30,055
Q2
2,734.8
30,053
Q3
2,708.6
29,441
Q4
2,750.0
29,891
2018
Year
10,898.4
29,859
Q1
2,815.7
31,285
Q2
2,859.1
31,418
Q3
2,833.6
30,800
Q4
2,818.4
30,634
2017
Year
11,326.8
31,032
Revenue from provincial programs represented approximately 98% of Extendicare’s home health care revenue in 2018
(2017 year – 98%). ParaMed’s average daily hours of service increased this quarter from the 2018 third quarter by 1.5% to
29,891, the first quarter-over-quarter sequential increase in the past six quarters. For the year, ParaMed’s average daily
hours of service were 29,859, or 3.8% below 2017, largely due to challenges with the Ontario operations. Competition for
personal support workers (PSWs), and to a lesser extent nurses, intensified in 2018. A labour shortage in many areas across
the country has adversely impacted our ability to continue to meet the growing demand in services. We continue efforts to
build capacity to address these challenges and to take advantage of the significant organic growth opportunity that exists
across Canada. Retention efforts have reduced turnover rates by half in the last half of 2018 compared to the beginning of
the year. If sustained, we believe this will improve capacity in future quarters.
Also, in the summer of 2018 we successfully launched new enterprise software to replace three legacy systems, which is
expected to enhance ParaMed’s operational capabilities enabling it to respond to the growing market demand. As of the end
of February 2019, we have completed the roll out of the new software to branch offices representing approximately 53% of
our business volumes and anticipate completing the balance by the end of 2019. During the implementation, we will be
shouldering the cost of the legacy systems and investing in significant one-time training and implementation resources.
Costs incurred in 2018 in respect of the three legacy systems to be decommissioned and temporary staff for training, data
Extendicare Inc. – 2018 Management’s Discussion and Analysis
10
migration, and implementation of the new software impacted EBITDA by approximately $3.3 million ($2.3 million at the
NOI level), compared to $1.6 million at the NOI and EBITDA levels in 2017. Management anticipates these costs will
escalate in 2019 to approximately $5.0 million ($2.8 million at the NOI level), after which the implementation will be
complete. As we start to leverage the new system throughout 2019, we expect productivity and service volumes to improve.
For further information on the home health care operations, refer to the discussion under the heading “Update of Regulatory
and Funding Changes Affecting Results – Ontario Home Health Care Legislation and Funding”.
2018 SELECTED ANNUAL INFORMATION
The following is a summary of selected annual financial information for each of the past three years.
(thousands of dollars unless otherwise noted)
Financial Results
Revenue
Earnings before depreciation, amortization and
other expense (Adjusted EBITDA)
Earnings from continuing operations
per basic share ($)
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
2018
2017
2016
1,120,007
1,097,331
1,060,758
94,238
8,084
0.09
–
23,654
31,738
0.36
0.36
57,751
0.653
57,751
0.653
42,351
0.480
896,324
543,359
454,344
528,970
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
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
Financial Results – The selected information provided for each of the years under the heading “Financial Results”, reflects
the classification of disposed U.S. operations as discontinued. The U.S. senior care operations were sold in 2015 and the
U.S. information technology hosting and professional services business was sold in 2016, resulting in a loss, net of tax of
$8.4 million recorded in 2016. The financial results for 2017 reflect an improvement in earnings from continuing operations
over 2016, resulting from growth in home health care volumes, continued lease up of retirement communities, and an
increase in clients served by the Extendicare Assist and SGP divisions, partially offset by higher costs of resident care in
our LTC operations and a reduction in interest revenue in connection with deferred consideration from the disposed U.S.
operations. A comparison of the 2018 financial results to 2017 is provided under the heading “2018 Financial Review”.
Financial Position – Since the end of 2016, total assets and non-current liabilities have declined, largely due to the “run
off” of the U.S. self-insured liabilities and related investments held by the Captive and an impairment charge recorded in
2018. Total assets declined by $54.3 million and $38.0 million in 2017 and 2018, respectively. The investments held by the
Captive declined by $49.8 million in 2017 and by $18.4 million in 2018. In addition, the Company recorded an impairment
charge of $16.2 million in 2018 in respect of certain of its retirement and LTC centres (refer to the discussion under the
heading “Other Significant Developments – Impairment Charge”).
In 2017, total non-current liabilities declined by $16.5 million, largely due to the decline in the accrual for U.S. self-insured
liabilities by $33.7 million (US$22.0 million), partially offset by an increase in long-term debt. Total long-term debt,
including current portion, increased by $32.5 million, reflecting the issuance of debt in connection with the acquisition and
development of our retirement communities.
Extendicare Inc. – 2018 Management’s Discussion and Analysis
11
In 2018, total non-current liabilities declined by $45.4 million, largely due to the decline in the accrual for U.S. self-insured
liabilities of $24.0 million (US$21.4 million) and a decline in long-term debt. Total long-term debt, including current
portion, declined by $7.1 million primarily due to the convertible debt refinancing completed in 2018, and resulting
bifurcation of a component to equity.
A comparison between the 2018 and 2017 financial results is provided in the discussion under the headings “2018 Financial
Review” and “Liquidity and Capital Resources”.
2018 SELECTED QUARTERLY INFORMATION
The following is a summary of selected quarterly financial information for the past eight quarters.
(thousands of dollars unless otherwise noted)
Revenue
Q4
288,793
Q3
280,302
Q2
279,488
Net operating income
NOI margin
Adjusted EBITDA
Adjusted EBITDA margin
32,863
11.4%
22,538
7.8%
35,492
12.7%
24,393
8.7%
36,307
13.0%
27,330
9.8%
2018
Q1
271,424
29,322
10.8%
19,977
7.4%
Q4
281,398
Q3
273,230
Q2
273,845
35,622
12.7%
27,555
9.8%
34,729
12.7%
24,025
8.8%
33,867
12.4%
24,588
9.0%
2017
Q1
268,858
31,604
11.8%
21,429
8.0%
Earnings (loss) from continuing operations
Earnings (loss) from discontinued
operations
Net earnings (loss)
AFFO (continuing operations)
per basic share ($)
AFFO
per basic share ($)
Maintenance Capex
Continuing operations
Discontinued operations
Cash dividends declared
per share ($)
Weighted Average Number of Shares
Basic
Diluted
(9,055)
7,598
5,975
3,566
10,301
6,545
9,919
4,947
15,562
6,507
11,955
0.135
11,955
0.135
4,817
–
10,612
0.120
975
8,573
13,379
0.151
13,379
0.151
3,639
–
10,591
0.120
5,852
11,827
17,133
0.194
17,133
0.194
3,783
–
10,570
0.120
1,265
4,831
14,669
0.166
14,669
0.166
1,051
–
10,578
0.120
3,333
13,634
15,713
0.178
15,713
0.178
3,271
–
10,623
0.120
–
6,545
(32,913)
(22,994)
15,646
0.176
15,646
0.176
2,777
–
10,642
0.120
14,448
0.162
14,448
0.162
1,858
–
10,666
0.120
–
4,947
12,688
0.143
12,688
0.143
907
–
10,652
0.120
88,612
98,962
88,412
98,788
88,208
98,595
88,379
99,688
88,633
99,916
88,844
100,123
88,938
100,244
88,807
100,086
The following is a reconciliation of “earnings (loss) from continuing operations before income taxes” to Adjusted EBITDA
and “net operating income”.
(thousands of dollars)
Earnings (loss) from continuing
operations before income taxes
Add (Deduct):
Depreciation and amortization
Net finance costs
Other expense
Adjusted EBITDA
Add (Deduct):
Administrative costs
Lease costs
Net operating income
Q4
Q3
Q2
2018
Q1
Q4
Q3
Q2
2017
Q1
(12,327)
10,135
9,131
5,380
13,212
9,874
12,763
6,715
10,184
8,039
16,642
22,538
9,014
5,244
–
24,393
8,235
6,591
3,373
27,330
7,837
6,580
180
19,977
8,170
6,173
–
27,555
7,766
6,385
–
24,025
7,911
3,914
–
24,588
7,532
7,182
–
21,429
8,601
1,724
32,863
9,376
1,723
35,492
7,309
1,668
36,307
7,718
1,627
29,322
6,372
1,695
35,622
9,058
1,646
34,729
7,524
1,755
33,867
8,513
1,662
31,604
Extendicare Inc. – 2018 Management’s Discussion and Analysis
12
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:
(cid:120) Ontario long-term care funding tied to flow-through funding 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;
(cid:120) 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;
(cid:120) 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
(cid:120)
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 $1.6 million quarterly.
In addition, we report as separate line items, “other expense”, “fair value adjustments”, and “loss (gain) on foreign
exchange and investments”, as these are transitional in nature and would otherwise distort historical trends. Those items
impacting our results are as follows:
(cid:120)
(cid:120)
(cid:120)
transaction and integration costs in connection with acquisitions, asset impairment charges, gains or losses on
disposals, and other costs considered transitional in nature are reported as “other expense”; as a result of these items,
the results from continuing operations included “other expense” of $20.2 million in 2018 ($0.2 million in the first
quarter, $3.4 million in the second quarter, and $16.6 million in the fourth quarter), compared to no such charges in
2017);
interest rate swaps are measured at fair value through profit or loss each period, along with realized gains or losses, as
part of “fair value adjustments”; as a result, a net loss of $1.0 million was recorded in 2018 (gain of $0.3 million, nil,
gain of $0.5 million, and loss of $1.8 million in each of the quarters, respectively), compared to a net gain of $2.5
million in 2017 (loss of $0.1 million, gain of $1.1 million, gain of $1.2 million, and a gain of $0.3 million, in each of
the quarters, respectively); and
foreign currency exchange rate fluctuations between the U.S. and Canadian dollars impact translation of our remaining
U.S. net assets in connection with net proceeds and deferred consideration received in respect of the disposed U.S.
operations and repatriation of funds from our Captive, in addition, our investments held for U.S. self-insured liabilities
are measured at fair value through profit and loss and reflected as part of “loss (gain) on foreign exchange and
investments” (in 2017 unrealized changes in fair value were reflected in other comprehensive income); as a result of
these activities, a net gain of $1.2 million was recorded in 2018 (loss of $0.2 million, gain of $0.4 million, gain of $0.9
million, and gain of $0.1 million, in each of the quarters, respectively), compared to a net gain of $0.8 million in 2017
(loss of $0.4 million , gain of $1.5 million, loss of $0.7 million, and a gain of $0.4 million, in each of the quarters,
respectively).
Further details on the above can be found under the sections “Significant 2018 Events and Developments”, “Key
Performance Indicators”, “Other Significant Developments” and “Update of Regulatory and Funding Changes Affecting
Results”.
Extendicare Inc. – 2018 Management’s Discussion and Analysis
13
2018 FOURTH QUARTER FINANCIAL REVIEW
The following provides a breakdown of our consolidated statement of earnings between our Canadian and remaining U.S.
operations.
(thousands of dollars)
Revenue
Operating expenses
Net operating income
Administrative costs
Lease costs
Adjusted EBITDA
Depreciation and amortization
Other expense
Earnings (loss) before net finance costs
and income taxes
Interest expense (net of capitalized interest)
Interest revenue
Accretion
Fair value adjustments
Loss (gain) on foreign exchange and investments
Net finance costs (income)
Earnings (loss) from continuing
operations before income taxes
Income tax expense (recovery)
Current
Deferred
Total income tax expense
Earnings (loss) from continuing operations
Earnings from discontinued operations
Net earnings (loss)
Earnings (loss) from continuing operations
Add (Deduct) (1):
Fair value adjustments
Loss (gain) on foreign exchange and investments
Other expense
Earnings (loss) from continuing operations
before separately reported items,
net of taxes
Canada
288,516
255,930
32,586
8,262
1,724
22,600
10,184
16,642
(4,226)
6,685
(926)
299
1,792
(503)
7,347
2018
Total
288,793
255,930
32,863
8,601
1,724
22,538
10,184
16,642
(4,288)
6,685
(926)
635
1,792
(147)
8,039
U.S.
277
–
277
339
–
(62)
–
–
(62)
–
–
336
–
356
692
Three months ended December 31
Total
Change
7,395
10,154
(2,759)
2,229
29
(5,017)
2,014
16,642
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
279,085
245,776
33,309
6,462
1,695
25,152
8,170
–
16,982
7,342
(1,091)
351
(271)
(179)
6,152
2,403
–
–
265
–
(244)
21
19,385
7,342
(1,091)
616
(271)
(423)
6,173
(23,673)
(657)
165
19
2,063
276
1,866
(11,573)
(754)
(12,327)
10,830
2,382
13,212
(25,539)
2,001
(5,273)
(3,272)
(8,301)
–
(8,301)
(8,301)
1,315
(600)
12,153
–
–
–
(754)
15,562
14,808
(754)
2,001
(5,273)
(3,272)
(9,055)
15,562
6,507
(9,055)
–
356
–
1,315
(244)
12,153
1,679
1,232
2,911
7,919
–
7,919
7,919
(199)
(206)
–
–
–
–
2,382
3,333
5,715
2,382
–
(244)
–
1,679
1,232
2,911
10,301
3,333
13,634
10,301
(199)
(450)
–
322
(6,505)
(6,183)
(19,356)
12,229
(7,127)
(19,356)
1,514
206
12,153
4,567
(398)
4,169
7,514
2,138
9,652
(5,483)
(1) The separately reported items being added to or deducted from earnings (loss) from continuing operations are net of income taxes, and are
non-GAAP measures. Refer to the discussion of non-GAAP measures.
The following provides a reconciliation of “earnings from continuing operations before income taxes” to “Adjusted
EBITDA” and “net operating income”.
(thousands of dollars)
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
Canada
U.S.
2018
Total
Canada
Three months ended December 31
Total
Change
2017
Total
U.S.
(11,573)
(754)
(12,327)
10,830
2,382
13,212
(25,539)
10,184
7,347
16,642
22,600
8,262
1,724
32,586
–
692
–
(62)
339
–
277
10,184
8,039
16,642
22,538
8,601
1,724
32,863
8,170
6,152
–
25,152
6,462
1,695
33,309
–
21
–
2,403
8,170
6,173
–
27,555
(90)
–
2,313
6,372
1,695
35,622
2,014
1,866
16,642
(5,017)
2,229
29
(2,759)
14
Extendicare Inc. – 2018 Management’s Discussion and Analysis
The following is an analysis of the consolidated results from operations for the 2018 fourth quarter in comparison to the
2017 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 $7.4 million or 2.6% to $288.8 million in the 2018 fourth
quarter, driven primarily by LTC funding enhancements, expansion of the retirement living operations, home health care
funding increases, including $1.2 million accrued to support legislated amendments resulting from the Fair Workplaces,
Better Jobs Act, 2017 (Ontario), or Bill 148, that came into effect on January 1, 2018, and growth in management and group
purchasing services, partially offset by a decline in home health care volumes, and lower investment income from the
Captive. For further information on Bill 148, refer to the discussion under the heading “Update of Regulatory and Funding
Changes Affecting Results – Ontario Home Health Care Legislation and Funding”.
Consolidated Operating Expenses
Consolidated operating expenses from continuing operations increased by $10.1 million or 4.1% to $255.9 million in the
2018 fourth quarter, driven by increased costs of resident care, expansion of the retirement living operations, and higher
labour costs, including the impact on the home health care operations of Bill 148, partially offset by the impact of lower
home health care volumes delivered. Total labour costs increased by $7.6 million over the 2017 fourth quarter, and
represented 85.1% and 85.5% of operating expenses in the fourth quarters of 2018 and 2017, respectively, and as a
percentage of revenue were 75.4% and 74.7%, respectively.
Consolidated Net Operating Income
Consolidated net operating income from continuing operations declined by $2.7 million or 7.7% to $32.9 million in the
2018 fourth quarter, and represented 11.4% of revenue compared to 12.7% in the same 2017 period. Net operating income
from the Canadian operations declined by $0.7 million and was favourably impacted by home health care funding
enhancements, and growth of our retirement living, management and group purchasing operations, offset by lower home
health care volumes and higher labour related costs, including the impact of Bill 148. Net operating income from our U.S.
operations reflects investment income from the Captive, which was nominal this quarter compared to the same 2017 period.
Administrative and Lease Costs
Administrative and lease costs from continuing operations increased by $2.3 million in the 2018 fourth quarter, and were
impacted by increased costs of approximately $0.4 million to support the implementation of new enterprise software, a non-
recurring reinsurance premium refund of $0.5 million received by the Captive in 2017, and other higher compensation costs
and professional fees.
Consolidated Adjusted EBITDA
Consolidated Adjusted EBITDA from continuing operations declined by $5.0 million to $22.5 million this quarter, and
represented 7.8% of revenue compared to 9.8% in the same 2017 period, of which $2.5 million was from the Canadian
operations, reflecting the $0.7 million decline in net operating income and increase in administrative and lease costs.
Other Expense
Other expense of $16.6 million ($12.2 million after tax) recorded this period related primarily to an impairment charge in
respect of certain of the Company’s retirement and LTC centres (refer to discussion under the heading “Other Significant
Developments – Impairment Charge”).
Net Finance Costs
Net finance costs increased by $1.8 million to $8.0 million this quarter, primarily due to a net change in loss (gain) on
foreign exchange and the Captive’s investments and interest rate swap fair value adjustments aggregating $2.3 million,
partially offset by slightly lower net interest costs associated with a lower weighted average interest rate and decline in net
debt levels.
Extendicare Inc. – 2018 Management’s Discussion and Analysis
15
Income Taxes
The Company recognized a consolidated income tax recovery this quarter of $3.3 million, representing an effective tax rate
of 26.5%, compared to a provision of $2.9 million and an effective tax rate of 22.0% in the 2017 fourth quarter. The
effective tax rate of the Canadian operations was 28.3% this quarter compared to 26.9% in the 2017 fourth quarter, and was
impacted by, among other things, fair value adjustments, gains and losses on foreign exchange and investments, and other
expense items that have been separately reported. The effective tax rate of the Canadian operations excluding the impact of
separately reported items was 28.2% compared to 27.6%.
Discontinued Operations
Earnings from discontinued operations relate to the former U.S. operations. The after-tax earnings of $15.5 million in the
2018 fourth quarter included $6.0 million related to the Captive’s reserves (release and favourable impact of discount rate
adjustments), a $3.6 million decrease in indemnification provisions and other items, and a net tax recovery of $5.9 million.
The after-tax earnings of $3.3 million in the 2017 fourth quarter related to a release of the Captive’s reserves of $3.1 million
and a net reduction in indemnification provisions and other items of $0.3 million, partially offset by a tax provision of $0.1
million.
Summary of Results of Operations by Segment
The following provides an analysis of the operating performance of each of our operating segments. Refer to the table at the
end of the discussion for a summary of the segmented “revenue”, “operating expenses” and “net operating income”.
LONG-TERM CARE OPERATIONS
Net operating income from our long-term care operations was $18.8 million this quarter compared to $18.3 million in the
2017 fourth quarter, representing 11.4% of revenue compared to 11.6%, respectively. Revenue this quarter grew by
$6.0 million, or 3.8%, of which approximately $2.1 million related to the Ontario flow-through funding envelopes, and was
therefore directly offset by increased costs of resident care, and the balance was from other funding enhancements.
Operating expenses increased by $5.5 million, or 3.9%, and included the impact of higher labour, maintenance, supply, and
food costs. Total labour costs increased by $3.3 million and represented 81.2% of operating expenses this quarter compared
to 82.0% in the same 2017 period.
RETIREMENT LIVING OPERATIONS
Net operating income from our retirement living operations improved by $1.3 million this quarter, with growth from same-
store operations of $0.4 million, reflecting an increase in average occupancy to 90.7% from 81.0% in the 2017 fourth
quarter. Non same-store net operating income improved by $0.9 million this period, reflecting the contribution from the
Lynde Creek Acquisition in April 2018 and the opening of Douglas Crossing in October 2017, partially offset by pre-
opening costs associated with two communities under construction.
HOME HEALTH CARE OPERATIONS
Net operating income from our home health care operations declined by $3.1 million or 27.9% to $7.9 million this quarter,
and represented 7.3% of revenue compared to 10.1% in the 2017 fourth quarter. Operations were impacted this quarter by a
2.4% decline in volumes, and higher labour related costs, partially offset by government contract funding increases. The
reduction in home health care volumes was in large part due to an industry-wide capacity shortage of PSWs, and to a lesser
extent nurses, which has adversely impacted our ability to continue to meet the growing demand, and in some locations has
given rise to increased overtime and use of subcontracted staff. Initiatives are under way to improve our ability to attract
and retain care staff. As well, in addition to temporary costs associated with the implementation of new enterprise software,
the number of back office administrative staff increased as we manage through the implementation process and associated
re-engineering of workflows. Despite the reduction in business volumes as compared to the same 2017 period, total labour
costs increased this quarter by $3.6 million and represented 92.8% of operating expenses compared to 91.9% in the same
2017 period. While volumes this quarter were below that of the same 2017 period, this was the first time in six quarters that
we experienced a quarter-over-quarter sequential increase in business volumes. Refer to the discussions under the heading
“Key Performance Indicators – Home Health Care” and “Update of Regulatory and Funding Changes Affecting Results –
Ontario Home Health Care Legislation and Funding”.
OTHER CANADIAN OPERATIONS
Net operating income from our management and group purchasing operations increased by $0.6 million this quarter, and
represented 61.7% of revenue compared to 57.8% in the 2017 fourth quarter, due to growth in clients served.
Extendicare Inc. – 2018 Management’s Discussion and Analysis
16
U.S. OPERATIONS
The decline in net operating income from the U.S. operations reflected lower investment income from the Captive, and the
impact of a non-recurring reinsurance premium refund received in the 2017 fourth quarter.
The following summarizes our segmented “revenue”, “operating expenses” and “net operating income”.
Three months ended December 31
(thousands of dollars)
2018 – Same-store
Revenue
Operating expenses
Net operating income
NOI margin %
2018 – Non Same-store
Revenue
Operating expenses
Net operating income
2018 – Total
Revenue
Operating expenses
Net operating income
NOI margin %
2017 – Same-store
Revenue
Operating expenses
Net operating income
NOI margin %
2017 – Non Same-store
Revenue
Operating expenses
Net operating loss
2017 – Total
Revenue
Operating expenses
Net operating income
NOI margin %
Change in Total
Revenue
Operating expenses
Net operating income
Long-term Retirement
Living
Care
Canadian Corporate
Canada
Care Operations
Total
Canada
Total
U.S.
Total
Home
Health
Other
164,656
145,849
18,807
11.4%
6,433
4,788
1,645
25.6%
109,012
101,097
7,915
7.3%
5,808
2,223
3,585
61.7%
1
–
1
100.0%
285,910
253,957
31,953
11.2%
277
–
277
100.0%
286,187
253,957
32,230
11.3%
–
–
–
2,606
1,973
633
–
–
–
164,656
145,849
18,807
11.4%
158,694
140,349
18,345
11.6%
9,039
6,761
2,278
25.2%
109,012
101,097
7,915
7.3%
5,746
4,492
1,254
21.8%
109,141
98,160
10,981
10.1%
–
–
–
352
600
(248)
–
–
–
–
–
–
5,808
2,223
3,585
61.7%
5,149
2,175
2,974
57.8%
–
–
–
–
–
–
2,606
1,973
633
–
–
–
2,606
1,973
633
1
–
1
100.0%
288,516
255,930
32,586
11.3%
277
–
277
100.0%
288,793
255,930
32,863
11.4%
3
–
3
100.0%
278,733
245,176
33,557
12.0%
2,313
–
2,313
100.0%
281,046
245,176
35,870
12.8%
–
–
–
352
600
(248)
–
–
–
352
600
(248)
158,694
140,349
18,345
11.6%
6,098
5,092
1,006
16.5%
109,141
98,160
10,981
10.1%
5,149
2,175
2,974
57.8%
3
–
3
100.0%
279,085
245,776
33,309
11.9%
2,313
–
2,313
100.0%
281,398
245,776
35,622
12.7%
5,962
5,500
462
2,941
1,669
1,272
(129)
2,937
(3,066)
659
48
611
(2)
–
(2)
9,431
10,154
(723)
(2,036)
–
(2,036)
7,395
10,154
(2,759)
Extendicare Inc. – 2018 Management’s Discussion and Analysis
17
2018 FINANCIAL REVIEW
The following provides a breakdown of our consolidated statement of earnings between our Canadian and remaining U.S.
operations.
(thousands of dollars)
Revenue
Operating expenses
Net operating income
Administrative costs
Lease costs
Adjusted EBITDA
Depreciation and amortization
Other expense
Earnings (loss) before net finance costs
and income taxes
Interest expense (net of capitalized interest)
Interest revenue
Accretion
Fair value adjustments
Loss (gain) on foreign exchange and investments
Net finance costs (income)
Earnings (loss) from continuing
operations before income taxes
Income tax expense (recovery)
Current
Deferred
Total income tax expense
Earnings (loss) from continuing operations
Earnings (loss) from discontinued operations
Net earnings (loss)
Earnings (loss) from continuing operations
Add (Deduct) (1):
Fair value adjustments
Loss (gain) on foreign exchange and investments
Other expense
Earnings (loss) from continuing operations
before separately reported items,
net of taxes
Canada
1,119,602
986,023
133,579
31,828
6,742
95,009
35,270
20,195
39,544
27,584
(3,761)
1,250
956
(1,105)
24,924
U.S.
405
–
405
1,176
–
(771)
–
–
(771)
–
–
1,628
–
(98)
1,530
2018
Total
1,120,007
986,023
133,984
33,004
6,742
94,238
35,270
20,195
Canada
1,092,082
961,509
130,573
30,333
6,758
93,482
31,379
–
U.S.
Years ended December 31
Total
Change
22,676
24,514
(1,838)
1,537
(16)
(3,359)
3,891
20,195
2017
Total
5,249 1,097,331
961,509
135,822
31,467
6,758
97,597
31,379
–
–
5,249
1,134
–
4,115
–
–
38,773
27,584
(3,761)
2,878
956
(1,203)
26,454
62,103
28,082
(3,695)
1,529
(2,474)
666
24,108
4,115
–
(207)
1,283
–
(1,530)
(454)
66,218
28,082
(3,902)
2,812
(2,474)
(864)
23,654
(27,445)
(498)
141
66
3,430
(339)
2,800
14,620
(2,301)
12,319
37,995
4,569
42,564
(30,245)
8,129
(3,894)
4,235
10,385
–
10,385
10,385
702
(1,225)
15,165
–
–
–
(2,301)
23,654
21,353
(2,301)
–
(98)
–
8,129
(3,894)
4,235
8,084
23,654
31,738
8,084
702
(1,323)
15,165
10,149
603
10,752
27,243
–
100
100
4,469
– (29,580)
27,243 (25,111)
4,469
27,243
10,149
703
10,852
31,712
(29,580)
2,132
31,712
(1,813)
805
–
–
(1,512)
–
(1,813)
(707)
–
(2,020)
(4,597)
(6,617)
(23,628)
53,234
29,606
(23,628)
2,515
(616)
15,165
25,027
(2,399)
22,628
26,235
2,957
29,192
(6,564)
(1) The separately reported items being added to or deducted from earnings (loss) from continuing operations are net of income taxes, and are
non-GAAP measures. Refer to the discussion of non-GAAP measures.
The following provides a reconciliation of “earnings from continuing operations before income taxes” to “Adjusted
EBITDA” and “net operating income”.
(thousands of dollars)
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
Canada
U.S.
2018
Total
Canada
Years ended December 31
Total
Change
2017
Total
U.S.
14,620
(2,301)
12,319
37,995
4,569
42,564
(30,245)
35,270
24,924
20,195
95,009
–
1,530
–
(771)
35,270
26,454
20,195
94,238
31,379
24,108
–
93,482
–
(454)
–
4,115
31,379
23,654
–
97,597
31,828
6,742
133,579
1,176
–
405
33,004
6,742
133,984
30,333
6,758
130,573
1,134
–
5,249
31,467
6,758
135,822
3,891
2,800
20,195
(3,359)
1,537
(16)
(1,838)
18
Extendicare Inc. – 2018 Management’s Discussion and Analysis
The following is an analysis of the consolidated results from operations for 2018 in comparison to 2017. 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 $22.7 million or 2.1% to $1,120.0 million in 2018, driven
primarily by LTC funding enhancements (despite the impact of a $0.8 million prior period settlement adjustment received
in the 2017 first quarter), expansion of the retirement living operations, home health care funding increases, including
$5.3 million in enhanced funding to offset costs related to Bill 148, and growth in management and group purchasing
services, partially offset by a decline in home health care volumes, and lower investment income from the Captive. For
further information on Bill 148, refer to the discussion under the heading “Update of Regulatory and Funding Changes
Affecting Results – Ontario Home Health Care Legislation and Funding”.
Consolidated Operating Expenses
Consolidated operating expenses from continuing operations increased by $24.5 million or 2.5% to $986.0 million in 2018,
driven by, increased costs of resident care, expansion of the retirement living operations, and higher labour related costs,
including the impact of Bill 148, increased overtime and use of subcontracted staff in response to industry wide staffing
shortages in certain positions and locations, and the implementation of a new enterprise system, partially offset by lower
direct costs due to the impact of lower home health care volumes delivered. Total labour costs increased by $15.7 million
over 2017, and represented 86.0% and 86.6% of operating expenses in 2018 and 2017, respectively, and as a percentage of
revenue were 75.7% and 75.9%, respectively.
Consolidated Net Operating Income
Consolidated net operating income from continuing operations declined by $1.8 million or 1.4% to $134.0 million in 2018,
and represented 12.0% of revenue compared to 12.4% in 2017. Net operating income from the Canadian operations
improved by $3.0 million or 2.3% to $133.6 million, and as a percentage of revenue was 11.9% this year compared to
12.0% in 2017, reflecting growth of our retirement living, management and group purchasing operations, partially offset by
a decline in contribution from our LTC operations of $0.9 million due to prior period adjustments and higher costs of
resident care, and a decline of $5.8 million from our home health care operations due to higher labour related costs and
lower business volumes. Net operating income from our U.S. operations reflects investment income from the Captive,
which was nominal this period compared to $5.2 million in 2017.
Administrative and Lease Costs
Administrative and lease costs from continuing operations increased by $1.6 million in 2018, and were impacted by
increased costs of approximately $1.0 million to support the implementation of new enterprise software. Both periods
included lump-sum executive compensation charges, net of the impact of forfeited non-cash share-based awards, of $1.7
million in 2018 and $2.0 million in 2017.
Consolidated Adjusted EBITDA
Consolidated Adjusted EBITDA from continuing operations declined by $3.4 million or 3.4% to $94.2 million this year,
representing 8.4% of revenue compared to 8.9% in 2017. Adjusted EBITDA from the Canadian operations improved by
$1.5 million, and as a percentage of revenue was 8.5% compared to 8.6% in 2017. Adjusted EBITDA from the U.S.
operations declined by $4.9 million reflecting lower investment income from the Captive.
Other Expense
Other expense of $20.2 million ($15.2 million after tax) recorded this year included an impairment charge of $16.2 million
in respect of certain of the Company’s retirement and LTC centres (refer to discussion under the heading “Other Significant
Developments – Impairment Charge”), $2.5 million expensed in connection with the redemption of the 2019 Debentures,
and transaction costs of $1.0 million associated with the Lynde Creek Acquisition.
Net Finance Costs
Net finance costs increased by $2.8 million to $26.5 million this year, reflecting a net change in interest rate swap fair value
adjustments and loss (gain) on foreign exchange and the Captive’s investments aggregating $3.1 million, partially offset by
slightly lower net interest costs associated with a lower weighted average interest rate and decline in net debt levels.
Extendicare Inc. – 2018 Management’s Discussion and Analysis
19
Income Taxes
The consolidated income tax provision in 2018 was $4.2 million, and represented an effective tax rate of 34.4%, compared
to $10.8 million and an effective tax rate of 25.5% in 2017, with the increase primarily reflecting the proportion of taxable
and non-taxable entities. The effective tax rate of the Canadian operations was 29.0% this year compared to 28.3% in 2017,
and was impacted by, among other things, fair value adjustments, gains and losses on foreign exchange and investments,
and other expense items that have been separately reported. The effective tax rate of the Canadian operations excluding the
impact of separately reported items was 27.8% compared to 27.5%.
Discontinued Operations
Earnings (loss) from discontinued operations relate to the former U.S. operations. The after-tax earnings of $23.6 million in
2018 included $14.1 million related to the Captive’s reserves (release and favourable impact of discount rate adjustments),
a $3.6 million decrease in indemnification provisions and other items, and a net tax recovery of $5.9 million. The after-tax
loss of $29.6 million in 2017 related to the write-off of deferred consideration of $37.5 million, and a net increase in
indemnification provisions and other items of $4.8 million, partially offset by a release of the Captive’s reserves of
$5.7 million, and a tax recovery of $7.0 million.
Summary of Results of Operations by Segment
The following provides an analysis of the operating performance of each of our operating segments. Refer to the table at the
end of the discussion for a summary of the segmented “revenue”, “operating expenses” and “net operating income”.
LONG-TERM CARE OPERATIONS
Net operating income from our long-term care operations declined by $0.9 million to $73.0 million in 2018, representing
11.5% of revenue this year compared to 12.0% in 2017, and included the impact of $0.8 million of favourable prior period
revenue adjustments received in 2017. Revenue grew by $15.6 million, or 2.5%, of which approximately $6.5 million
related to Ontario flow-through funding envelopes, and was therefore directly offset by increased costs of resident care,
approximately $0.4 million was from improvements in preferred accommodation, and the balance was from other funding
enhancements. Operating expenses increased by $16.5 million, or 3.0%, primarily due to higher labour, supply,
maintenance, and food costs. Recruitment challenges in some markets have led to an increased use of subcontracted staff
and overtime premiums in response to staffing shortages. Total labour costs increased by $9.8 million and represented
82.5% of operating expenses this year compared to 83.2% in 2017.
RETIREMENT LIVING OPERATIONS
Net operating income from our retirement living operations improved by $6.6 million this year, reflecting continued
improvements across all communities and the acquisition completed in April 2018. On a same-store basis, growth in net
operating income of $3.5 million was primarily attributable to higher revenue, reflecting an improvement in average
occupancy to 85.7% this year from 70.8% in 2017. Non same-store net operating income improved by $3.1 million this
period, reflecting the contribution from the Lynde Creek Acquisition and the opening of Douglas Crossing, partially offset
by pre-opening costs associated with two communities under construction.
HOME HEALTH CARE OPERATIONS
Net operating income from our home health care operations declined by $5.8 million or 13.4% to $38.0 million this year,
and represented 8.8% of revenue compared to 10.1% in 2017. Operations were impacted this year by a 3.8% decline in
volumes, and higher labour related costs, partially offset by government contract funding increases. The reduction in home
health care volumes was in large part due to an industry-wide capacity shortage of PSWs, and to a lesser extent nurses,
which has adversely impacted our ability to continue to meet the growing demand, and in some locations has given rise to
increased overtime and use of subcontracted staff. Initiatives are under way to improve our ability to attract and retain care
staff. In addition to temporary costs associated with the implementation of new enterprise software, the number of back
office administrative staff increased as we manage through the implementation process and associated re-engineering of
workflows. Despite the reduction in business volumes in 2017, total labour costs increased this year by $2.5 million and
represented 92.8% of operating expenses compared to 92.5% in 2017. Refer to the discussion under the heading “Key
Performance Indicators – Home Health Care” and “Update of Regulatory and Funding Changes Affecting Results – Ontario
Home Health Care Legislation and Funding”.
Extendicare Inc. – 2018 Management’s Discussion and Analysis
20
OTHER CANADIAN OPERATIONS
Net operating income from our management and group purchasing operations increased by $3.1 million this period, and
represented 60.7% of revenue compared to 55.4% in 2017, due to growth in clients served.
U.S. OPERATIONS
The decline in net operating income from the U.S. operations reflected lower investment income from the Captive.
The following summarizes our segmented “revenue”, “operating expenses” and “net operating income”.
Years ended December 31
(thousands of dollars)
2018 – Same-store
Revenue
Operating expenses
Net operating income
NOI margin %
2018 – Non Same-store
Revenue
Operating expenses
Net operating income
2018 – Total
Revenue
Operating expenses
Net operating income
NOI margin %
2017 – Same-store
Revenue
Operating expenses
Net operating income
NOI margin %
2017 – Non Same-store
Revenue
Operating expenses
Net operating loss
2017 – Total
Revenue
Operating expenses
Net operating income
NOI margin %
Change in Total
Revenue
Operating expenses
Net operating income
Long-term Retirement
Living
Care
Home
Other
Health Canadian Corporate
Canada
Care Operations
Total
Canada
Total
U.S.
Total
632,533
559,489
73,044
11.5%
24,466
18,093
6,373
26.0%
431,343
393,354
37,989
8.8%
22,291
8,750
13,541
60.7%
23
–
23
100.0%
1,110,656
979,686
130,970
405
–
405
11.8% 100.0%
1,111,061
979,686
131,375
11.8%
–
–
–
8,946
6,337
2,609
–
–
–
–
–
–
–
–
–
8,946
6,337
2,609
–
–
–
8,946
6,337
2,609
632,533
559,489
73,044
11.5%
616,887
542,965
73,922
12.0%
33,412
24,430
8,982
26.9%
431,343
393,354
37,989
8.8%
20,321
17,448
2,873
14.1%
435,718
391,867
43,851
10.1%
22,291
8,750
13,541
60.7%
18,789
8,387
10,402
55.4%
23
–
23
100.0%
1,119,602
986,023
133,579
405
–
405
11.9% 100.0%
1,120,007
986,023
133,984
12.0%
15
–
15
100.0%
1,091,730
960,667
131,063
5,249
–
5,249
12.0% 100.0%
1,096,979
960,667
136,312
12.4%
–
–
–
352
842
(490)
–
–
–
–
–
–
–
–
–
352
842
(490)
–
–
–
352
842
(490)
616,887
542,965
73,922
12.0%
20,673
18,290
2,383
11.5%
435,718
391,867
43,851
10.1%
18,789
8,387
10,402
55.4%
15
–
15
100.0%
1,092,082
961,509
130,573
5,249
–
5,249
12.0% 100.0%
1,097,331
961,509
135,822
12.4%
15,646
16,524
(878)
12,739
6,140
6,599
(4,375)
1,487
(5,862)
3,502
363
3,139
8
–
8
27,520
24,514
3,006
(4,844)
–
(4,844)
22,676
24,514
(1,838)
Extendicare Inc. – 2018 Management’s Discussion and Analysis
21
ADJUSTED FUNDS FROM OPERATIONS
The following provides a reconciliation of our “net earnings” 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)
Net earnings
Add (Deduct):
Depreciation and amortization
Depreciation for FFEC (maintenance capex) (1)
Other expense (continuing operations)
Other expense (income) (discontinued operations)
Fair value adjustments
Gain on foreign exchange and investments
Current income tax recovery on other expense,
fair value adjustments, and gain/loss on foreign exchange
and investments (2)
Deferred income tax expense (recovery)
FFO
Amortization of deferred 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
Per Basic Share ($)
FFO
AFFO
Per Diluted Share ($)
FFO
AFFO
Dividends ($)
Declared
Declared per share ($)
Weighted Average Number of Shares (thousands)
Basic
Diluted
Total maintenance capex (1)
Three months ended
December 31
2017 Change
(7,127)
13,634
Twelve months ended
December 31
2017 Change
29,606
2,132
2018
31,738
8,170
(1,914)
–
(3,441)
(271)
(423)
2,014
32
16,642
(6,222)
2,063
276
35,270
(7,422)
20,195
(17,755)
956
(1,203)
31,379
(7,495)
–
36,576
(2,474)
(864)
3,891
73
20,195
(54,331)
3,430
(339)
2018
6,507
10,184
(1,882)
16,642
(9,663)
1,792
(147)
(12,076)
830
12,187
391
635
214
1,300
–
(1,391)
2,570
16,934
417
616
289
1,232
–
(10,685)
(1,740)
(4,747)
(26)
19
(75)
68
–
(11,805)
1,936
51,910
1,736
2,878
430
5,200
–
(1,230)
(5,063)
52,961
1,728
2,812
1,496
4,928
66
(10,575)
6,999
(1,051)
8
66
(1,066)
272
(66)
163
(2,320)
12,570
(2,418)
(1,357)
15,713
2,581
(963)
(3,143)
850
(5,253)
57,751
(4,178)
(1,318)
58,495
5,028
(3,935)
(744)
0.137
0.142
0.191
0.178
(0.054)
(0.036)
0.587
0.653
0.596
0.659
(0.009)
(0.006)
0.137
0.138
0.191
0.171
(0.054)
(0.033)
0.587
0.634
0.596
0.640
(0.009)
(0.006)
10,612
0.120
10,623
0.120
(11)
–
42,351
0.480
42,583
0.480
(232)
–
88,612
98,962
4,202
88,633
99,916
3,271
88,403
98,753
12,675
88,805
100,088
8,813
3,862
931
(1) The aggregate of the items “depreciation for FFEC” and “additional maintenance capex” 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 from the actual 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, such as fair value adjustments,
gains or losses on foreign exchange and investments, and other expense.
(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.
Extendicare Inc. – 2018 Management’s Discussion and Analysis
22
AFFO 2018 Fourth Quarter Financial Review
AFFO for the 2018 fourth quarter declined by $3.1 million to $12.6 million ($0.142 per basic share) from $15.7 million
($0.178 per basic share) in the same 2017 period, reflecting a decrease in Adjusted EBITDA (excluding the impact of any
earnings from the Captive and any non-cash share-based compensation), and an increase in maintenance capex and current
income taxes. A discussion of the factors impacting net earnings can be found under the heading “2018 Fourth Quarter
Financial Review”.
Maintenance capex was $4.2 million this quarter, compared to $3.3 million in 2017, and compared to $3.6 million in the
2018 third quarter, representing 1.5%, 1.2% and 1.3% of revenue, respectively.
AFFO 2018 Financial Review
AFFO for the year declined by $0.7 million to $57.8 million ($0.653 per basic share) from $58.5 million ($0.659 per basic
share) in 2017, reflecting an improvement in Adjusted EBITDA (excluding the impact of any earnings from the Captive
and any non-cash share-based compensation) , and lower current income taxes of $1.9 million, offset by an increase in
maintenance capex of $3.9 million. AFFO for both years was impacted by lump-sum executive cash compensation charges
of $2.1 million and $1.5 million on an after-tax basis in 2018 and 2017, respectively. A discussion of the factors impacting
net earnings can be found under the heading “2018 Financial Review”.
Our current income taxes benefitted in 2018 from favourable timing differences, and the utilization of tax loss
carryforwards, and represented an effective tax rate on FFO of 13.6% in 2018 compared to 16.1% in 2017. In 2019, we
anticipate our effective tax rate on FFO will be in the range of 17% to 19%. The determination of FFO includes a deduction
for current income tax expense, and does not include deferred income tax expense. As a result, the effective tax rates on our
FFO can be impacted by: adjustments to our estimates of annual deferred timing differences, particularly when dealing
with cash-based tax items versus accounting accruals; changes in the proportion of earnings between taxable and non-
taxable entities; book-to-file adjustments for prior year filings; and the ability to utilize loss carryforwards.
Maintenance capex was $12.7 million in 2018, compared to $8.8 million in 2017, representing 1.1% and 0.8% of revenue,
respectively. 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 2019, we are expecting to spend in the range of $10 million to $12 million in
maintenance capex.
Reconciliation of Net Cash from Operating Activities to AFFO
The following provides a reconciliation of our “net cash from operating activities” to AFFO.
(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)
AFFO
Three months ended
December 31
2017
10,581
2018
1,189
Twelve months ended
December 31
2017
47,160
2018
39,473
26,196
(12,076)
(1,882)
(2,320)
1,300
–
163
12,570
10,980
(1,391)
(1,914)
(1,357)
1,232
–
(2,418)
15,713
36,708
(11,805)
(7,422)
(5,253)
5,200
–
850
57,751
20,562
(1,230)
(7,495)
(1,318)
4,928
66
(4,178)
58,495
(1) Represents current income tax with respect to items that are excluded from the computation of AFFO, such as fair value adjustments, gains or
losses on foreign exchange, and other expense.
(2) The aggregate of the items “depreciation for FFEC” and “additional maintenance capex” 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 from the actual 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.
Extendicare Inc. – 2018 Management’s Discussion and Analysis
23
OTHER SIGNIFICANT DEVELOPMENTS
The discussion under the heading “Significant 2018 Events and Developments” summarizes our current activities related to
the growth of our retirement living operations and convertible debenture activity. This section provides a summary of other
developments that have impacted the financial results or operations of Extendicare for 2018 in comparison to 2017.
Impairment Charge
In the 2018 fourth quarter, the Company recorded an impairment charge of $16.2 million ($11.8 million after tax), in
respect of certain of its retirement communities ($15.9 million), and LTC centers ($0.3 million). Further details are
provided in note 19 of the audited consolidated financial statements.
The impairment charge for the retirement living operations relates to the write down of the carrying value of the property
and equipment of three Saskatchewan retirement communities that were acquired in late 2015 and early 2016, two of which
were newly opened at that time and are still in lease up. These communities have not performed as expected, primarily due
to competitive market conditions resulting in lower rates and occupancy and higher labour and benefit costs.
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 a cost of $3.6 million. The initial 180-bed centre was built in 2011 with a design allowing for
expansion. This addition achieved stabilized occupancy in April 2018, and is anticipated to 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 events and discussions that
transpired during 2017, the remaining balance of the deferred consideration of $37.5 million (US$27.9 million) was written
off in 2017.
Other Financing Activity
In August 2018, the Company renewed Canadian Mortgage and Housing Corporation mortgages in the amount of
$8.3 million for a term of four years to August 2022, at a fixed rate of 2.96%.
In September 2018, the Company secured financing of $10.5 million on one of its Ontario retirement communities for a
term of 10 years, with a variable rate of prime plus 0.5%. In conjunction therewith, the Company entered into an interest
rate swap contract to lock in the interest rate at 5.04% for the full term of the financing.
In the 2018 third quarter, the Company secured construction financing of $27.2 million for its retirement development
project in Barrie, Ontario, with an additional letter of credit facility of $1.0 million. Loan payments are interest-only based
on a variable 30-day banker’s acceptance rate plus 2.25%, with no standby fee. The construction loan is repayable on
demand and, in any event, is to be fully repaid by the earlier of September 2023 and three months following stabilized
occupancy as defined by the agreement.
Extendicare Inc. – 2018 Management’s Discussion and Analysis
24
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. The
Company is unable to predict whether governments will adopt changes in their funding or regulatory programs, and if
adopted and implemented, the impact, if any, such changes will have on the Company’s business, results of operations and
financial condition.
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, the issuance of new licenses for LTC beds is infrequent because of
the funding implications for the provincial governments, while the issuance of licenses for retirement centres is less
restrictive as the funding for these services is generally private-pay. In addition to the license procedure, or in some
provinces in place of, LTC operators in Alberta, Manitoba, Ontario and Saskatchewan are required to sign service contracts
that incorporate service expectations with the applicable provincial health authority.
The People’s Health Care Act, 2019 (Ontario) (Bill 74)
On February 26, 2019, the Ontario government tabled Bill 74, The People’s Health Care Act, 2019 (Ontario), which
proposes to create an agency called Ontario Health to act as a central point of accountability and oversight for the
province’s public health care system. Organizations to be integrated into Ontario Health include Cancer Care Ontario,
Health Quality Ontario, eHealth Ontario, Health Shared Services Ontario, and the Local Health Integrated Networks. The
government has indicated that the transition will roll out in phases to ensure continuity of care.
The government also announced its intent to create local Ontario Health Teams to guide patients and families between
providers and through transitions. These teams of local health care providers would implement a community-based health
care delivery model that connects care and includes providers such as primary care and hospitals, home care and long-term
care, and mental health and addictions supports. Working as a coordinated group, they would share responsibility for care
plans, service provision and outcomes.
The details as to how these Ontario Health Teams will be constituted have yet to be released. Given that all the government
funded ParaMed business in Ontario is contracted through the LHINs today, the ParaMed LHIN contracts will have to be
assigned or reissued by Ontario Health or its assigns as the LHINs are integrated into the new agency.
Although this represents a significant change in the contracting mechanism for the home care business in Ontario, the
underlying market demand is such that it is likely Extendicare will be able to transition services into the new business
model with minimal interruption. The Company is unable to predict the nature and extent such changes will have on the
Company’s business, results of operations and financial condition.
Fair Workplaces, Better Jobs Act, 2017 (Ontario) (Bill 148)
In November 2017, Bill 148, Fair Workplaces, Better Jobs Act, 2017 (Ontario), received Royal Assent, and came into
effect in 2018. The Act contains a number of amendments to both the Employment Standards Act (ESA) and the Labour
Relations Act (LRA), as part of the Ontario government’s efforts to overhaul workplace laws. These changes included,
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 that was to take effect on January 1, 2019; revisions to vacation, public holiday pay and personal
leave entitlements that took effect on January 1, 2018; equal pay for equal work standards that took effect on April 1, 2018;
amendments to schedule change notifications and minimum “on call” payments that were to take effect on January 1, 2019;
and lower voting thresholds for unionization. In May 2018, the government filed Ontario Regulation 375/18, which
prescribed a return to the method of determining public holiday pay using the formula that applied prior to Bill 148,
effective July 1, 2018. In November 2018, legislation was enacted that amended or reversed many of the changes enforced
by Bill 148, refer to the discussion under the heading “Making Ontario Open for Business Act, 2018 (Bill 47)”.
Operationally, the Act necessitated changes in the manner in which the Company manages its workforce in a number of
business areas and could result in increased unionization. Financially, the impact of Bill 148 on the Company’s private-pay
and long-term care businesses has not been significant.
Extendicare Inc. – 2018 Management’s Discussion and Analysis
25
With respect to the Company’s government-funded home health care operations, the Company has recorded $5.3 million of
enhanced funding in 2018 to offset costs related to Bill 148, of which $2.0 million was received in respect of quarter ended
March 31, 2018. While the government has yet to announce continued funding post March 31, 2018, it has indicated its
intentions to continue to engage with the Local Health Integration Networks (LHINs), contracted service provider
organizations, and home care employer associations to evaluate the legislation and to assess the costs associated with Bill
148 for fiscal 2018/2019. The Company believes that the funding it has accrued for the period April 1, 2018 to December
31, 2018 is a reasonable estimation. There can, however, be no assurance that any such government funding will be
received, or to the extent any funding is received that it will be commensurate with the Company’s additional costs
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 86% 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 offset
by 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 it anticipates that
the government will comply with its contractual obligations relating thereto.
Making Ontario Open for Business Act, 2018 (Bill 47)
In November 2018, Bill 47, Making Ontario Open for Business Act, 2018 (Ontario), received Royal Assent and came into
force the same day. The Act makes many changes to various pieces of legislation governing employment and labour
relations in Ontario, principally the ESA and LRA, and reverses many of the changes to the ESA and LRA that were
enacted by Bill 148. Bill 47, among other things: freezes the minimum wage at $14 an hour until October 1, 2020,
following which it will be adjusted annually by the rate of inflation; removes the entitlement to two paid personal leave
days; cancels a range of scheduling change protections that were to come into force in 2019; eliminates changes to the
equal pay for equal work standards impacting part-time, contract, and temporary workers; and repeals the new public
holiday pay calculations. As a result, Bill 47 reduces some of the operational and financial impacts resulting from Bill 148
on the Company’s financial results, as discussed above.
Strengthening Quality and Accountability for Patients Act, 2017 (Ontario)
Bill 160, Strengthening Quality and Accountability for Patients Act, 2017 (Ontario), received Royal Assent in December
2017. The Act, 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. The Act, 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. In December 2018, the government notified the
sector that the in-force date of January 1, 2019 for the financial penalties associated with this Act had been delayed and that
no new in-force date had been set. 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, the Act 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. In addition, as part of a stated commitment to “improve the transparency of
public information related to the Long-Term Care Home Quality Inspection Program in Ontario”, the Ontario Ministry of
Health and Long-term Care (MOHLTC) released information on the performance of every LTC centre in the province in
April 2018.
Ontario LTC Redevelopment and Expansion
Extendicare continues to advance the redevelopment of its 21 Class C LTC centres (3,287 beds) in Ontario under the
MOHLTC’s enhanced redevelopment program.
In October 2018, the MOHLTC announced that it is moving forward with building 6,000 new LTC beds across the
province following a call for applications (CFA) in February 2018, stating that these represented the first wave of more than
15,000 new LTC beds that the government has committed to build over the next five years. The MOHLTC indicated that
applications for new beds that had not advanced in this first round will be considered in future CFAs.
Extendicare Inc. – 2018 Management’s Discussion and Analysis
26
Extendicare plans to participate in requests for new beds to enhance its redevelopment projects and in new developments
where market opportunity exists as part of its approach to campus of care. In 2018, the Company was awarded 158 new
beds in connection with three of its redevelopment projects. To date, the MOHLTC has approved the licensing applications
for two of our LTC centres, one in Stittsville and one in Sudbury, and we have a further five applications that have
advanced past the initial stage of the MOHLTC’s review process. Each project is unique and the overall plan involves a
combination of new construction and retrofits. While factors could arise that affect the timing or sequence of our
redevelopment plans, we are working closely with the MOHLTC with a goal to accelerating redevelopment of these seven
centres. As these redevelopment projects are completed, we expect to realize the benefit of improved performance and
extended license terms. Other projects will move forward provided they meet our investment objectives.
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 2018, 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 funding envelopes increased by 2% on April 1, 2018.
Extendicare estimates that these funding enhancements, along with our case mix index and re-indexing adjustments,
represent additional annual revenue of approximately $2.7 million to offset additional costs for resident care and services
within the NPC and PSS flow-through funding envelopes (April 2017 – $3.4 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, 2018 funding enhancements increased the daily rates for the non flow-
through component of the accommodation envelope by $0.91 (1.6%) and by $0.54 (6.0%) for the flow-through food
component. Extendicare estimates that this enhanced funding represents additional annual revenue of approximately
$2.7 million in total, of which approximately $1.0 million is flow-through funding (2017 – $2.5 million in total, of which
$1.0 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
on July 1, 2018, by $0.13 to $8.33 per day for a semi-private room and by $0.29 to $18.74 per day for a private room. For
beds that are classified as “New” and “A” beds, the maximum preferred accommodation premiums increased on July 1,
2018, by $0.19 to $12.49 per day for a semi-private room and by $0.41 to $26.04 per day for a private room. Extendicare
has 13 “New” LTC centres in Ontario with 1,847 beds, of which 1,106 are private beds, from which it will benefit from this
premium increase as new residents are admitted.
Extendicare Inc. – 2018 Management’s Discussion and Analysis
27
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
have been implemented during 2016; however, following receipt of public input to inform new or revised legislation, the
provincial government has yet to release its strategy related to continuing care and its approach to long-term care for the
future.
The April 1, 2018 funding adjustments for long-term care and designated supportive living for fiscal 2018/2019 represent
additional annual revenue of approximately $1.2 million. Last year, the April 1, 2017 funding changes for fiscal 2017/2018
represented additional annual revenue of approximately $0.9 million. In addition, in the 2017 first quarter, AHS provided
retroactive funding adjustments for fiscal 2015/2016 and 2016/2017 in recognition of labour contract settlements of
$0.8 million and an ongoing annual revenue increase of approximately $0.5 million.
On July 1, 2018, 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 $0.7 million (July 2017 – $0.6 million).
Ontario Home Health Care Funding
Extendicare’s ParaMed Home Health Care division operates in six provinces across Canada, currently providing
approximately 10.9 million hours of service annually, which we believe makes ParaMed the largest private-sector provider
of publicly funded home health care in Canada, and the largest in Ontario. The Ontario market currently 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. The Company is unable to predict whether the
government will adopt changes in its funding or budget priorities, and if adopted and implemented, the impact, if any, such
changes will have on the Company’s business, results of operations and financial condition.
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 that began in fiscal
2017/2018, include targeted funding for home health care. For Ontario alone, targeted home health care funding has been
reported to be an additional $2.3 billion over the next decade. In addition, as part of its initiative to improve and make the
health care system more efficient, the Ontario government has noted that insufficient capacity in the health care system, like
home care, is contributing to the problem of hallway health care in the province (refer to the discussion under the heading
“The People’s Health Care Act, 2019 (Ontario) (Bill 74)”). As governments continue to recognize the benefits of this
segment of the Canadian health care system, we believe that ParaMed is well-positioned to take advantage of the significant
organic growth opportunity that exists today, and that steps we are taking to position ParaMed as the employer of choice for
caregivers will further enhance our position. In addition, ParaMed continues to assess private-pay home health care
opportunities that may enable it to further leverage its platform.
As part of the 2018 Ontario Budget, the government announced funding enhancements effective April 1, 2018, to provide
contract rate increases of 2% for nursing and therapies contracts, 1% for harmonized personal support service contracts and
2% for other personal support contracts. These rate increases are estimated to provide additional revenue for ParaMed of
approximately $5.2 million annually based on volumes experienced since April 1, 2018. More generally under the 2018
Ontario Budget, the government announced plans to invest an additional $650 million on home care over the next three
years, that would include $180 million in new funding for 2.8 million more personal support hours, 284,000 more nursing
visits and 58,000 more therapy visits. Over the next three years, the Budget allocates $45 million to improve working
conditions and contract rates for PSWs, registered practical nurses, registered nurses and therapists; $23 million to add an
estimated 5,500 PSWs to the workforce; $38 million in education and training for new and existing PSWs; and $65 million
for a pilot program to establish a tax-free savings account on behalf of eligible PSWs.
In August 2018, the MOHLTC announced that it was winding down the Self-Directed Personal Support Services Ontario
agency, which was still in its set-up phase, in order to reduce the administrative burden of delivering home health care. The
program, initially announced in October 2017, was intended to provide personal support services from a new provincial
agency.
Extendicare Inc. – 2018 Management’s Discussion and Analysis
28
LIQUIDITY AND CAPITAL RESOURCES
Sources and Uses of Cash
The following summarizes the sources and uses of cash between our continuing and discontinued operations for 2018 and
2017.
(thousands of dollars unless otherwise noted)
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 gain (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
Continuing Discontinued
2018
Total
Continuing Discontinued
2017
Total
94,668
(8,172)
(536)
2,210
(6,498)
(28,383)
3,785
(8,862)
–
(33,460)
54,710
(70,289)
(48,763)
–
2,079
(62,263)
128,156
–
–
–
–
–
–
–
–
(15,237)
(15,237)
(15,237)
15,237
–
–
94,668
99,333
–
99,333
(8,172)
(536)
2,210
(6,498)
(28,383)
3,785
(8,862)
(15,237)
(48,697)
39,473
(55,052)
(48,763)
–
2,079
9,569
4,283
(6,144)
7,708
(29,560)
3,932
(10,093)
–
(35,721)
71,320
(18,564)
(23,612)
–
(2,570)
–
–
–
–
–
–
–
(24,160)
(24,160)
(24,160)
24,160
–
–
–
9,569
4,283
(6,144)
7,708
(29,560)
3,932
(10,093)
(24,160)
(59,881)
47,160
5,596
(23,612)
–
(2,570)
–
(62,263)
26,574
–
26,574
128,156
101,582
65,893
–
65,893
1.2957
128,156
–
101,582
128,156
1.2986
As at December 31, 2018, Extendicare had cash and short-term investments on hand of $65.9 million reflecting a decrease
in cash of $62.3 million from the beginning of the year, primarily related to the acquisition completed in the 2018 second
quarter, growth capital expenditures and the purchase of Common Shares for cancellation. Cash flow generated from the
operating activities of our continuing operations of $54.7 million was in excess of cash dividends paid of $37.4 million by
$17.3 million, and was used to support maintenance capex and principal debt repayments.
Discontinued operations reflect the payment of claims for U.S. self-insured liabilities as a component of net cash from
operating activities, which payments are funded by the Captive’s investments held for self-insured liabilities. Changes in
the Captive’s investments are reported as a component of net cash from investing activities, as those invested funds are not
included in cash and short-term investments.
Net cash from operating activities of the continuing operations was a source of cash of $54.7 million in 2018 compared to
$71.3 million in 2017, primarily due to a $14.2 million net decline in the change in operating assets and liabilities between
periods.
Net cash from investing activities of the continuing operations was a use of cash of $70.3 million in 2018 compared to
$18.6 million in 2017. The 2018 activity included the Lynde Creek Acquisition of $33.8 million and purchases of property,
equipment and other intangible assets, as set out in the table below, partially offset by funds of $9.7 million repatriated
from the Captive, and the collection of other assets. The 2017 activity included the repatriation of funds from the Captive in
the amount of $21.1 million and the collection of other assets, offset by capital expenditures. 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 development of retirement communities and
redevelopment of LTC centres in Ontario. Maintenance capex relates to our actual capital expenditures incurred to sustain
and upgrade existing property and equipment. 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 2019, we are
Extendicare Inc. – 2018 Management’s Discussion and Analysis
29
projecting to spend in the range of $10 million to $12 million in maintenance capex, and in the range of $50 million to
$55 million in growth capex related primarily to the retirement development and LTC redevelopment projects.
(thousands of dollars)
Growth capex
Deduct: capitalized interest
Growth capex, excluding capitalized interest
Maintenance capex
2018
39,291
(1,318)
37,973
12,675
50,648
2017
33,521
(1,197)
32,324
8,813
41,137
Net cash from financing activities of the continuing operations was a use of cash of $48.8 million in 2018 compared to a
use of cash of $23.6 million in 2017. The 2018 activity included debt repayments of $32.4 million, cash dividends paid of
$37.4 million, Common Shares acquired for cancellation under a normal course issuer bid at a cost of $6.3 million, and
financing costs primarily related to the issuance and redemption of convertible debentures, partially offset by draws on
construction financing of $23.0 million and mortgage financing of $10.5 million secured on a retirement community. The
2017 activity included debt repayments of $22.0 million, cash dividends paid of $37.5 million, and Common Shares
acquired for cancellation of $6.5 million, partially offset by the refinancing of long-term debt for a net issuance of
$26.4 million, and draws on construction financing of $17.3 million. For information on the change in long-term debt, refer
to “Liquidity and Capital Resources – Long-term Debt”.
Capital Structure
SHAREHOLDERS’ EQUITY
The following summarizes our shareholders’ equity for 2018 and 2017.
(thousands of dollars unless otherwise noted)
Shareholders’ Equity
Common Shares
Equity portion of convertible debentures
Contributed surplus
Accumulated deficit at beginning of year
Adoption of new standard on financial instruments
Net earnings for the period
Dividends declared
Equity portion of redeemed convertible debentures
Purchase of Common Shares in excess of book value and other
Accumulated deficit at end of period
Accumulated other comprehensive loss
Shareholders’ Equity
U.S./Canadian dollar exchange rate at end of period
Au
Share Information (thousands)
Common Shares (TSX symbol: EXE) (1)
(1) Closing market value per the TSX on February 27, 2019, was $7.56.
2018
2017
492,064
7,085
2,706
501,855
(365,084)
4,334
31,738
(42,351)
5,573
(2,357)
(368,147)
(7,717)
125,991
1.3637
490,881
5,573
2,437
498,891
(322,025)
–
2,132
(42,583)
(2,608)
(365,084)
(4,851)
128,956
1.2571
February 27,
2019
88,615.0
December 31,
2018
88,490.0
December 31,
2017
88,523.3
The retrospective adoption of the new standard on financial instruments resulted in the reclassification of $4.3 million to
the opening accumulated deficit in connection with unrealized gains on the investments held for self-insured liabilities that
had been recorded as part of accumulated other comprehensive loss as at December 31, 2017. The net increase in the equity
portion of convertible debentures reflects the classification of the equity portion of the 2025 Debentures issued this year,
partially offset by the reclassification of the equity portion of the 2019 Debentures to the accumulated deficit upon their
redemption.
Extendicare Inc. – 2018 Management’s Discussion and Analysis
30
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.
The Company declared cash dividends of $0.48 per share in 2018 and 2017, for total dividends of $42.3 million and $42.6
million, respectively. The portion of dividends paid in cash in 2018 was $37.4 million (2017 – $37.5 million), and $4.9
million (2017 – $5.1 million) was by way of Common Shares issued under a dividend reinvestment plan (2018 – 650,361
shares and 2017 – 535,025 shares).
Net cash from operating activities was $39.5 million in 2018 and $47.2 million in 2017, and included payments of $15.2
million and $24.2 million, respectively, for U.S. self-insured liabilities that were funded by investments held by the
Captive that are reported as a source of cash from investing activities. 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 – Sources and Uses of Cash”.
Compared to our AFFO of $57.8 million in 2018, dividends declared of $42.3 million represented a payout ratio of
approximately 73% (2017 – 73%). For further information on our AFFO, refer to the discussion under the heading
“Adjusted Funds from Operations”.
NORMAL COURSE ISSUER BID
During 2018, under a normal course issuer bid that commenced on January 15, 2018 and ended on January 14, 2019, the
Company acquired and cancelled 703,585 Common Shares at a weighted average price of $8.89 per share, for a total cost of
$6.3 million. During 2017, under a previous normal course issuer bid, the Company acquired and cancelled 696,220
Common Shares at a weighted average price of $9.27 per share, for a total cost of $6.5 million.
In January 2019, Extendicare received the approval of the TSX to renew its normal course issuer bid (the “Bid”) to
purchase for cancellation up to 8,830,000 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, 2019, and provides Extendicare
with flexibility to purchase Common Shares for cancellation until January 14, 2020, 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
54,852 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.
Long-term Debt
CONTINUITY OF LONG-TERM DEBT
Long-term debt totalled $529.0 million as at December 31, 2018, compared with $536.1 million as at December 31, 2017,
representing a decrease of $7.1 million, primarily due to debt repayments and a change in the equity component of the
convertible debentures following the refinancing this year, partially offset by draws on construction loans and mortgage
financing of $10.5 million secured on a retirement community. The long-term debt activity for 2017 included a net $26.4
million refinancing of $3.6 million of mortgages on nine Alberta LTC centres with a $30.0 million term loan with the
Canadian Imperial Bank of Commerce (the “CIBC Term Loan”), draws on construction loans and an increase in finance
lease obligations for customized cloud-based software, partially offset by scheduled debt repayments. Extendicare and its
subsidiaries are in compliance with all of their respective financial covenants as at December 31, 2018. Details of the
components, terms and conditions of long-term debt are provided in note 12 of the audited consolidated financial
statements.
Extendicare Inc. – 2018 Management’s Discussion and Analysis
31
The following summarizes the changes in the carrying amounts of long-term debt for 2018 and 2017.
(millions of dollars)
Long-term debt at beginning of year,
prior to deferred financing costs
Issue of long-term debt
2025 Debentures at face value
Construction loans
Mortgages
CIBC Term Loan
Finance lease obligations
Redemption of 2019 Debentures at face value
Repayment of long-term debt
Change in equity component of convertible debentures and other
Deferred financing costs at end of year
Long-term debt at end of year
Less: current portion
CREDIT FACILITIES
2018
541.8
126.5
23.0
10.5
–
–
(126.5)
(32.4)
(5.5)
537.4
(8.4)
529.0
(74.7)
454.3
2017
510.3
–
17.3
–
26.4
8.9
–
(22.0)
0.9
541.8
(5.7)
536.1
(59.7)
476.4
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
entire $65.0 million was available and unutilized as at December 31, 2018.
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, 2018, Extendicare had letters of credit totalling $45.0 million issued under the RBC
Credit Facility, of which $38.0 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.
LONG-TERM DEBT MATURITIES AND WEIGHTED AVERAGE INTEREST RATES
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, 2018. The Company had an aggregate of $52.9 million
drawn on construction loans at year end, which are repayable on demand and, in any event, are to be fully repaid by the
earlier of achieving stabilized occupancy as defined by the agreements and specified dates between late 2019 and 2023.
Consequently, these loans are reflected as current and due in 2019 in the following table. Permanent financing will be
sought for each upon maturity.
(millions of dollars)
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
2019
2020
2021
2022
2023
After
2023
Total
–
–
–
–
–
–
–
–
–
–
126.5
5.00%
126.5
5.00%
15.4
4.23%
52.9
4.71%
60.1
4.08%
–
–
15.1
4.29%
–
–
58.7
3.98%
–
–
45.7
4.54%
–
–
88.8
5.59%
–
–
283.8
4.28%
52.9
4.71%
Fair
Value
125.6
286.0
52.9
7.7
6.15%
9.1
6.19%
9.6
6.22%
8.6
7.00%
9.2
7.01%
36.8
6.98%
81.0
6.72%
92.3
Extendicare Inc. – 2018 Management’s Discussion and Analysis
32
Management has limited the amount of debt that may be subject to changes in interest rates, with all of the debt currently at
fixed rates, other than the construction loans of $52.9 million. The Company’s variable-rate mortgages on its retirement
communities and the CIBC Term Loan, aggregating $84.8 million at year end, have effectively been converted to fixed rate
financing with interest rate swaps over the full term. As at December 31, 2018, the net carrying value of the interest rate
swaps was an asset of $2.0 million.
The following summarizes key metrics of our consolidated long-term debt as at December 31, 2018 and 2017.
December 31, 2018
4.9%
7.4 yrs
December 31, 2017
5.0%
7.1 yrs
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
(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 deferred financing costs.
896,324
226,416
18,509
1,141,249
544,111
47.7%
7.3 yrs
3.7 X
3.2 X
6.7 yrs
3.8 X
3.3 X
934,281
214,889
12,229
1,161,399
543,446
46.8%
Future Liquidity and Capital Resources
Extendicare’s consolidated cash and short-term investments on hand was $65.9 million as at December 31, 2018, compared
with $128.2 million at the beginning of the year, and excluded restricted cash of $2.3 million, and $67.9 million
(US$49.8 million) of investments held by our Captive to support the accrual for U.S. self-insured liabilities of $37.1 million
(US$27.2 million). In addition, the Company has $65.0 million available to draw under its ParaMed Credit Facility.
The Company has three unencumbered retirement communities (Lynde Creek, West Park and Yorkton). In addition,
construction financings in the aggregate of up to $77.7 million have been secured on the three retirement communities that
were under construction during 2018 (Douglas Crossing, Bolton and Barrie), of which $43.9 million was drawn at year end.
As at December 31, 2018, the Company had incurred approximately $79.8 million of the estimated $104.9 million of
Adjusted Development Costs for these three retirement communities.
Management believes that cash from operating activities and future debt financings will be available and sufficient to
support Extendicare’s ongoing business operations, maintenance capex, and debt repayment obligations. Growth through
redevelopment of our LTC centres over the next few years, strategic acquisitions and developments will necessitate the
raising of funds through debt financings and the capital markets. Decisions will be made on a specific transaction basis and
will depend on market and economic conditions at the time.
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, 2018. Due to the uncertainty as to the timing of payments to be made with respect to certain obligations, the
table excludes the accrual for U.S. self-insured liabilities of $37.1 million and the decommissioning provisions of
$9.4 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
2019
3.5
16.0
19.5
2020
1.7
–
1.7
2021
1.4
–
1.4
2022
1.0
–
1.0
2023
0.3
–
0.3
After
2023
–
–
–
Extendicare Inc. – 2018 Management’s Discussion and Analysis
Total
7.9
16.0
23.9
33
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, 2018 was $36.1 million (2017 – $36.6 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 $2.6 million with plan assets of
$5.1 million and accrued benefit obligations of $7.7 million at year end (2017 – an actuarial deficit of $2.5 million with
plan assets of $5.4 million and accrued benefit obligations of $7.9 million). The accrued benefit obligations of the
supplementary plan were $33.5 million at year end (2017 – $34.1 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 $38.0 million as at December 31, 2018 (2017 – $39.9 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 continue 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. The most recent independent actuarial review was
conducted at the end of 2018, which confirmed the adequacy of our reserves.
As at December 31, 2018, the accrual for U.S. self-insured general and professional liabilities was $37.1 million (US$27.2
million) compared to $61.1 million (US$48.6 million) at the beginning of the year. The decline of US$21.4 million
reflected claim payments of US$11.8 million, a release of reserves of $13.0 million (US$9.9 million) and an adjustment to
the discount factor of US$0.9 million, partially offset by accretion of the discounted liability. Since the sale of the U.S.
operations in 2015, US$29.6 million of the Captive’s reserves have been released and reflected in discontinued operations.
During 2017, payments for self-insured liabilities were $24.2 million (US$18.6 million) and $5.7 million (US$4.4 million)
in reserves were released and 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, 2018, management estimated that
approximately $12.3 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.
The Captive holds 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 $67.9 million (US$49.8 million)
as at December 31, 2018, compared to $86.3 million (US$68.6 million) at the beginning of the year. Since the sale of the
U.S. operations in 2015, the Captive has transferred US$28.5 million of its funds previously held for investment to the
Company for general corporate use, of which US$7.5 million was transferred in 2018 (2017 – US$16.0 million).
Management believes there are sufficient invested funds held to meet estimated current claims payment obligations.
Extendicare Inc. – 2018 Management’s Discussion and Analysis
34
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.
As previously disclosed, in April 2018, the Company was served with a statement of claim alleging negligence by the
Company in the operation of its long-term care centres and its provision of care to residents and seeking $150 million in
damages. The claim sought an order certifying the claim as a class action pursuant to the Class Proceedings Act (Ontario).
By order of the Ontario Superior Court of Justice the class proceeding was discontinued on October 25, 2018. Following
the discontinuance, the plaintiff who commenced the class proceeding still has the option to pursue a claim on her own
behalf while others may also do so separately on their own behalf. The Company intends to defend itself against any and all
such individual claims and does not believe the outcome on any or all such claims would have a material adverse impact on
its business, results of operations or financial condition and in any event believes that any potential liability would be
resolved within the limits of its insurance coverage.
On September 19, 2018, the Company was served with a statement of claim that seeks an order certifying the claim as a
class action pursuant to the Class Proceedings Act (Ontario). The claim alleges that the Company failed to properly apply
certain required medical equipment sterilization protocols at one or more of its home health care clinics and seeks
$20 million in damages. The Company does not believe that the lawsuit or the damages sought have merit. The Company
intends to vigorously defend itself against the claim and does not believe the outcome will have a material adverse impact
on its business, results of operations or financial condition and in any event believes that any potential liability would be
resolved within the limits of its insurance coverage.
The provision of health care services is subject to complex government regulations. Every effort is made by the Company
to prevent deficiencies in the quality of patient care through quality assurance strategies and to remedy any such
deficiencies cited by government inspections within the applicable prescribed period of time. 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
As previously announced, Extendicare’s former President and Chief Executive Officer, Tim Lukenda stepped down from
his position on October 22, 2018. In connection with his separation agreement, Mr. Lukenda was entitled to receive a cash
payment in the amount of $2.9 million, and was required to forfeit, for no consideration, all of the performance share units
(PSUs) credited to his account under the Company’s long-term incentive plan. The terms of Mr. Lukenda’s departure from
the Company took into account the payments that Mr. Lukenda would have been entitled to receive upon a termination of
his employment by the Company without cause or by the employee for good reason and a deduction based on the full
amount of the $2.0 million cash retention bonus that was paid to Mr. Lukenda in September 2017. The Company reflected a
charge in the 2018 third quarter for the cash payment of $2.9 million, partially offset by the reversal of $1.2 million in
connection with the forfeiture of the PSUs.
During Mr. Lukenda’s employment with Extendicare, the Company provided management services to a long-term care
centre and group purchasing services to retirement centre owned by Mr. Lukenda and members of his family through a
company in which Mr. Lukenda had an approximate 7.1% direct and indirect ownership interest. Mr. Lukenda’s
employment contract provided a mechanism and process that effectively removed him from the decision-making process in
situations where a conflict of interest may have arisen on any matter between the two companies.
RISKS AND UNCERTAINTIES
The risks and uncertainties described below could adversely affect the business, results of operations and financial
condition of Extendicare, cause the trading price of the Company's securities to decline and cause the actual outcome of
matters to differ materially from the expectations of the Company regarding future results, performance or achievements
reflected in information in this MD&A and other information provided by Extendicare from time to time. The risks and
uncertainties described below, which is not an exhaustive description of the risks and uncertainties faced by Extendicare,
should be carefully considered by investors.
Extendicare Inc. – 2018 Management’s Discussion and Analysis
35
General Business Risks
Extendicare is subject to general business risks inherent in the senior care industry, including: changes in government
regulation and oversight; changing consumer preferences; fluctuations in occupancy levels and business volumes; changes
in government funding and reimbursement programs, including the inability to achieve adequate government funding
increases; increases in labour costs and other operating costs; changes in labour relations; competition from other senior
care providers, including from, or the oversupply of, other similar centres; 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 accommodation 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 Company location which may result in injury or death, negligent or inappropriate acts by
employees or others who come into contact with our residents and clients, and unforeseen events at locations at which the
Company operates that result in damage to the Company’s brand or reputation or to the industry as a whole.
Risks Related to Growth and Redevelopment Activities
The Company expects that it will continue to have opportunities to acquire businesses and properties, develop properties,
redevelop or expand existing centres, and grow its home health care, private-pay retirement, management/consulting and
group purchasing businesses, but there can be no assurance that this will be the case.
The number of licensed LTC beds are restricted by the provinces and any new licenses are awarded through a request for
proposal process. The provinces also regulate the manner in which LTC centres are developed and redeveloped. If
regulatory approvals are required in order to expand operations (via development or otherwise) or redevelop operations of
the Company, the inability of the Company 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 or redevelop and, accordingly, to maintain or increase its revenue and earnings.
Approximately 40% of Extendicare’s owned LTC beds are in older Ontario centres that are subject to redevelopment.
Licenses for LTC centres in Ontario are issued for a fixed term of not more than 30 years, after which the license may or
may not be renewed. 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. The significant backlog in demand for long-term care and the lack of alternative
care environments makes it likely that licenses will be extended until redevelopment can be completed. The Company has
21 Class C LTC centres with 3,287 beds that it plans to redevelop under the government’s enhanced redevelopment
program (see “Ontario LTC 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 an adverse effect on the
business, results of operations and financial condition of the Company.
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, successfully complete
development projects, secure financing, or operate the acquired and developed businesses effectively may have an adverse
effect on the future growth, results of operations and financial condition of the Company.
Extendicare Inc. – 2018 Management’s Discussion and Analysis
36
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 residents and clients, and hire, retain and motivate key personnel.
Changes in government funding policies and regulatory changes, the risks related to which are described below under
“Risks Related to Government Funding and Regulatory Changes”, in addition to the financial performance of these
businesses, also impact Extendicare’s 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 large publicly held companies, privately held companies, 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. An inability 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
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.
See “Update of Regulatory and Funding Changes Affecting Results”. Given that the Company operates in a labour-
intensive industry, where labour costs account for a significant portion of the Company’s operating costs (approximately
86% in 2018), 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. The Company is unable to
predict whether governments will adopt changes in their funding and regulatory programs, and if adopted and implemented,
the impact, if any, such changes will have on the Company’s business, results of operations and financial condition and the
Company’s ability to grow.
Health 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
operators and publicly funded home health care providers must comply with applicable regulations that, depending on the
jurisdiction in which they operate, may relate to such matters as staffing levels, client care related operating standards,
occupational health and safety, client 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 deficiencies.
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. The
Company has never had such a license or service contract revoked in Canada.
Non-compliance with applicable laws and licensure requirements governing health care providers 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 reimbursement of government funding, or exclusion from participation
in government funded programs, or one or more third-party payor networks, and damage to our reputation. These penalties
could have a material adverse effect on the business, results of operations and financial condition of the Company.
Every effort is made by the Company to prevent deficiencies in the quality of patient care through quality assurance
strategies and to remedy any such deficiencies cited by government inspections within the applicable prescribed period of
time. 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 associated costs can be made; however, there can
be no assurance that such accruals are accurate or sufficient.
Extendicare Inc. – 2018 Management’s Discussion and Analysis
37
With respect to home health care services, 98% of ParaMed’s revenue is from contracts tendered by locally administered
provincial agencies, at specified billing rates and, among other things, quality operating and performance standards. Home
health care service providers must ensure their key performance indicators are meeting or exceeding provincial targets in
order to continue to receive their allocated funding volumes and/or retain their contracts. Contracts with qualified service
providers are generally awarded through a competitive bidding model. In Ontario, where 83% of ParaMed’s business
volumes were generated in 2018, the government implemented new open-ended contracts in 2012 that are evergreen
contracts provided that the service provider remains in good standing. New contracts in Ontario are awarded under a
bidding process to prequalified service providers. Under this new regime, all of ParaMed’s government contracts in Ontario
have remained in effect. In British Columbia and Alberta, where 11% and 4% of ParaMed’s business volumes were
generated in 2018, respectively, government contracts have specified termination dates and or/renewal periods, following
which they are put out to tender. Any failure by ParaMed to retain its government contracts, including in connection with
any regulatory or other funding changes, may have an 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.
CONFLICTS OF INTEREST
Extendicare’s Board of Directors may, from time to time, in their individual capacities deal with parties with whom
Extendicare may be dealing, or may be seeking investments similar to those desired by Extendicare. The relevant constating
documents of the Company contain conflict of interest provisions requiring the Directors to disclose material interests in
material contracts and transactions and to refrain from voting thereon.
Risks Related to Labour Intensive Business
PERSONNEL COSTS
The senior care industry is labour intensive, with approximately 86% of the Company’s operating costs represented by
labour costs. 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. This shortage along with general inflationary pressures may require the Company to enhance its pay and
benefits package to compete effectively for qualified 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 the Company’s staff and its residents and clients; and an increased
risk of the Company 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 provided in some of its centres. Should the
Company become dissatisfied with the quality or cost of such contracted services, it may have to terminate the related
contracts and recruit replacement staff at an incremental cost.
Extendicare Inc. – 2018 Management’s Discussion and Analysis
38
WORKPLACE HEALTH AND SAFETY
The Company recognizes that ensuring a healthy and safe workplace minimizes injuries and other risks its employees may
face in carrying out their duties, improves productivity and helps to minimize any liability or penalties which could be
incurred in connection with workplace injuries. The Company has health and workplace safety programs in place and has
established policies and procedures aimed at ensuring compliance with applicable legislative requirements. Failure to
comply with appropriate and established workplace health and safety policies and procedures or applicable legislative
requirements could result in increased workplace injury-related liability and penalties, which in turn could adversely affect
the reputation of the Company and have a material adverse effect on the business, results of operations and financial
condition of the Company.
LABOUR RELATIONS
The Company employs approximately 23,000 persons, of whom approximately 68% are represented by labour unions.
Labour relations with the unions are governed by numerous collective bargaining agreements with different unions. Upon
expiration of the collective bargaining agreements, the Company may not be able to negotiate collective agreements on
satisfactory terms. 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, the result of which could increase the Company’s labour costs, which could have a material adverse effect on the
business, results of operations and financial condition of the Company.
Risks Related to Liability and Insurance
Operating in the senior care industry exposes Extendicare to an inherent risk of wrongful death, personal injury,
professional malpractice and other potential claims brought by the Company’s residents, clients, and employees. From time
to time, Extendicare is subject to lawsuits alleging, among other claims, that the Company did not properly treat or care for
a client or resident, that the Company failed to follow internal or external procedures that resulted in harm to a client or
resident, or that the Company’s employees mistreated the Company’s residents or clients resulting in harm. In addition,
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” 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 and clients,
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 continue to fund through the Captive.
Extendicare Inc. – 2018 Management’s Discussion and Analysis
39
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 residents, clients and
employees, Extendicare is exposed to the potential loss, misuse or theft of any such information. If the Company were
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.
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.
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 additional
equity, debt or other financing.
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, 2018,
Extendicare had letters of credit totalling $45.0 million issued under the RBC Credit Facility, of which $38.0 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 Extendicare’s subsidiaries 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 on a
temporary basis 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.
Extendicare Inc. – 2018 Management’s Discussion and Analysis
40
DEBT COVENANTS
The Company is in compliance with all of its financial covenants as at December 31, 2018. 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 construction loans that had an aggregate balance of $52.9 million drawn as at
December 31, 2018. 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 Company’s variable-rate mortgages on its
retirement communities and the CIBC Term Loan, aggregating $84.8 million as at December 31, 2018, 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 Real Property Ownership
REAL PROPERTY OWNERSHIP
All real property investments are subject to a degree of risk. They are affected by various factors, including geographic
concentration, 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 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 nine of the Company’s sixty-seven centres owned by it at December 31, 2018, are government-funded
senior care centres. The value of the real property depends, in part, on government funding, license terms, 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 2018, the
company incurred $12.7 million in maintenance capex, and expects to spend in the range of $10 million to $12 million in
2019 to sustain and upgrade its existing centres. In addition to recurring maintenance capex, the Company invests in
enhancements of existing centres aimed at earnings growth and improved profitability, including redevelopment of centres
under provincial programs. See “Risks and Uncertainties – Risks Related to Growth and Redevelopment Activities ”.
These, as well as other future capital requirements, could adversely impact the amount of cash available to the Company
and have a material adverse effect on the business, results of operations and financial condition of the Company.
Extendicare Inc. – 2018 Management’s Discussion and Analysis
41
Risks Related to Environmental, Health and Safety Laws
The Company is subject to various environmental, health and safety laws and regulations, both as an owner of real property
and as a provider of health care services, governing the storage, handling, use, and disposal of equipment, materials and
waste products. 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 or other service locations, 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 operations or 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.
With respect to the Company’s pre-1980 properties, management has determined that future costs could be incurred for
possible asbestos remediation at these sites. 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 $9.4 million discounted, as at December 31, 2018,
refer to note 11 of the audited consolidated financial statements.
Environmental, health and safety laws may change and the Company may become subject to more stringent laws in the
future. Compliance with more stringent environmental, health and safety 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.
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, 2018, 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 ALLOCATION 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.
Extendicare Inc. – 2018 Management’s Discussion and Analysis
42
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 and equipment represents approximately 57% of the Company’s total assets as at December
31, 2018, and goodwill and other intangibles represent approximately 11%. 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 the home health care segment and each individual LTC centre and retirement community 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.
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 2018, the Company performed the impairment assessment of its operations and recognized a pre-tax impairment charge
of property and equipment in the amount of $16.2 million in respect of certain of its Saskatchewan retirement communities
($15.9 million) and of its LTC centres ($0.3 million). In 2017, the Company performed the impairment assessment of its
operations and determined there was no impairment.
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, 2018, the remaining provisions totalled
$13.7 million or US$10.1 million (2017 – $22.7 million or US$18.0 million) and an indemnification receivable of
$2.0 million (2017 – $2.8 million). 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 2018, favourable changes to the indemnifications
totalled $3.8 million (2017 – unfavourable changes of $4.8 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 July
2015 closing of the U.S. Sale Transaction, including claims incurred but yet to be reported, remains with Extendicare,
which it intends to continue 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.
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; 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
Extendicare Inc. – 2018 Management’s Discussion and Analysis
43
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.
As at December 31, 2018, the accrual for self-insured general and professional liabilities was $37.1 million or
US$27.2 million (2017 – $61.1 million or US$48.6 million) supported by investments held by the Captive of $67.9 million
or US$49.8 million (2017 – $86.3 million or US$68.6 million). 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, 2018, would
have impacted our net earnings from discontinued operations by approximately $0.4 million (US$0.3 million). For further
information refer to the discussion under the heading “Other Contractual Obligations and Contingencies – 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.
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 values as well as available tax
loss 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, 2018, the Company had recognized
deferred tax assets totalling $9.7 million (2017 – $13.9 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, 2018, there were
capital losses available for Canadian income tax purposes of $42.1 million (2017 – $16.5 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, 2018, and have been applied in preparing the financial
results for the year ended December 31, 2018. These accounting standards are summarized below, and are more fully
described in note 4 of the audited consolidated financial statements.
REVENUE RECOGNITION
IFRS 15 “Revenue from Contracts with Customers” 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.
Under IFRS 15, revenue is recognized when a customer obtains control of the goods or services. The Company adopted
IFRS 15 using the cumulative effect method, which does not require restatement of comparative information. Adoption of
the standard did not result in material changes to the timing or measurement of revenue recognition, and therefore, there
was no cumulative effect adjustment recorded to accumulated deficit on January 1, 2018. However, under the new standard,
accommodation revenue recognized under IAS 17 “Leases” is disclosed separately from services revenue recognized under
IFRS 15 (refer to note 29 of the audited consolidated financial statements).
Extendicare Inc. – 2018 Management’s Discussion and Analysis
44
FINANCIAL INSTRUMENTS
IFRS 9 “Financial Instruments” (IFRS 9) addresses the recognition, classification and measurement (including impairment)
of financial assets and financial liabilities. This standard replaces IAS 39 “Financial Instruments: Recognition and
Measurement”.
Under IFRS 9, financial assets are classified based on the business model in which they are managed and the characteristics
of their contractual cash flows. Financial assets are classified as measured at fair value through profit or loss (FVTPL), fair
value through other comprehensive income (FVOCI), or amortized cost. The new standard eliminates the previous
categories for financial assets held to maturity, loans and receivables and available for sale. There are no changes in the
measurement basis of financial assets and liabilities upon adoption of IFRS 9, and therefore, there are no differences in
carrying amounts.
In addition, IFRS 9 replaces the current “incurred loss” impairment model with a new “expected credit loss” model, which
requires timely recognition of expected credit losses. The Company has elected to use the simplified approach and
calculates impairment loss on accounts and notes receivable as lifetime expected credit loss.
The Company adopted this standard retrospectively with no restatement of prior periods. There was no material impact on
adoption of the standard with the exception of a reclassification of $4.3 million from opening accumulated other
comprehensive income to opening accumulated deficit, as investments held for U.S. self-insured liabilities were classified
as FVTPL under IFRS 9. These investments include equity securities as well as money market funds that do not have
contractual cash flows that are solely payments of principal and interest on the principal amount outstanding; therefore,
they are classified as measured at FVTPL under IFRS 9.
Future Changes in Accounting Policies
The following new standard and interpretation are effective for future annual periods, and have not been applied in
preparing the financial results for the year ended December 31, 2018. These are summarized below, and are more fully
described in note 5 of the audited 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 has
assessed the impact of this new standard and its adoption is not expected to have a material impact on the consolidated
financial statements. A retrospective adjustment to opening retained earnings is not expected. Based on the operating leases
as at January 1, 2019, the Company will recognize a right-of-use asset and lease liability ranging between $7 million and
$9 million, using a simplified approach where the asset and liability would be identical.
INCOME TAXES
On June 7, 2017, the IASB issued IFRIC Interpretation 23 “Uncertainty over Income Tax Treatments”. The Interpretation
provides guidance on the accounting for current and deferred tax liabilities and assets in circumstances in which there is
uncertainty over income tax treatments. The interpretation is applicable for annual periods beginning on or after January 1,
2019. The Company intends to adopt the Interpretation in its financial statements for the annual period beginning on
January 1, 2019. The adoption of the IFRIC Interpretation 23 is not expected to have a material impact on the consolidated
financial statements.
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.
Extendicare Inc. – 2018 Management’s Discussion and Analysis
45
An evaluation of the effectiveness of the DC&P was conducted as at December 31, 2018, by management under the
supervision of the Company’s CEO and CFO. Based on this evaluation, the CEO and CFO have concluded that the
Company’s 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, 2018.
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 the Company’s ICFR as at December 31, 2018.
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.
Extendicare Inc. – 2018 Management’s Discussion and Analysis
46
... helping people live better
CCONSOLIDATED FINANCIAL STATEMENTS AND NOTES
Year Ended December 31, 2018
Extendicare Inc.
Dated: February 28, 2019
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.
MICHAEL GUERRIERE
President and Chief Executive Officer
February 28, 2019
ELAINE E. EVERSON
Vice President and
Chief Financial Officer
Extendicare Inc. – 2018 Annual Consolidated Financial Statements
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Basis for Opinion (cid:3)
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(cid:179)Auditors’ Responsibilities for the Audit of the Financial Statements(cid:180)(cid:3) (cid:86)(cid:72)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3) (cid:82)(cid:73)(cid:3) (cid:82)(cid:88)(cid:85)(cid:3)
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Extendicare Inc. – 2018 Annual Consolidated Financial Statements
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Other Information(cid:3)
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Responsibilities of Management and Those Charged with Governance
for the Financial Statements
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Extendicare Inc. – 2018 Annual Consolidated Financial Statements
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3
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Auditors’ Responsibilities for the Audit of the Financial Statements
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Extendicare Inc. – 2018 Annual Consolidated Financial Statements
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(cid:120)(cid:3) (cid:50)(cid:69)(cid:87)(cid:68)(cid:76)(cid:81)(cid:3) (cid:86)(cid:88)(cid:73)(cid:73)(cid:76)(cid:70)(cid:76)(cid:72)(cid:81)(cid:87)(cid:3) (cid:68)(cid:83)(cid:83)(cid:85)(cid:82)(cid:83)(cid:85)(cid:76)(cid:68)(cid:87)(cid:72)(cid:3) (cid:68)(cid:88)(cid:71)(cid:76)(cid:87)(cid:3) (cid:72)(cid:89)(cid:76)(cid:71)(cid:72)(cid:81)(cid:70)(cid:72)(cid:3) (cid:85)(cid:72)(cid:74)(cid:68)(cid:85)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:76)(cid:81)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)
(cid:72)(cid:81)(cid:87)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3) (cid:82)(cid:85)(cid:3) (cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3) (cid:68)(cid:70)(cid:87)(cid:76)(cid:89)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3) (cid:90)(cid:76)(cid:87)(cid:75)(cid:76)(cid:81)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:74)(cid:85)(cid:82)(cid:88)(cid:83)(cid:3) (cid:40)(cid:81)(cid:87)(cid:76)(cid:87)(cid:92)(cid:3) (cid:87)(cid:82)(cid:3) (cid:72)(cid:91)(cid:83)(cid:85)(cid:72)(cid:86)(cid:86)(cid:3) (cid:68)(cid:81)(cid:3) (cid:82)(cid:83)(cid:76)(cid:81)(cid:76)(cid:82)(cid:81)(cid:3) (cid:82)(cid:81)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3)
(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:17)(cid:3)(cid:58)(cid:72)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:85)(cid:72)(cid:86)(cid:83)(cid:82)(cid:81)(cid:86)(cid:76)(cid:69)(cid:79)(cid:72)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:71)(cid:76)(cid:85)(cid:72)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:15)(cid:3)(cid:86)(cid:88)(cid:83)(cid:72)(cid:85)(cid:89)(cid:76)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:83)(cid:72)(cid:85)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)
(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:74)(cid:85)(cid:82)(cid:88)(cid:83)(cid:3)(cid:68)(cid:88)(cid:71)(cid:76)(cid:87)(cid:17)(cid:3)(cid:58)(cid:72)(cid:3)(cid:85)(cid:72)(cid:80)(cid:68)(cid:76)(cid:81)(cid:3)(cid:86)(cid:82)(cid:79)(cid:72)(cid:79)(cid:92)(cid:3)(cid:85)(cid:72)(cid:86)(cid:83)(cid:82)(cid:81)(cid:86)(cid:76)(cid:69)(cid:79)(cid:72)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:68)(cid:88)(cid:71)(cid:76)(cid:87)(cid:3)(cid:82)(cid:83)(cid:76)(cid:81)(cid:76)(cid:82)(cid:81)(cid:17)(cid:3)
(cid:3)
(cid:3)
(cid:38)(cid:75)(cid:68)(cid:85)(cid:87)(cid:72)(cid:85)(cid:72)(cid:71)(cid:3)(cid:51)(cid:85)(cid:82)(cid:73)(cid:72)(cid:86)(cid:86)(cid:76)(cid:82)(cid:81)(cid:68)(cid:79)(cid:3)(cid:36)(cid:70)(cid:70)(cid:82)(cid:88)(cid:81)(cid:87)(cid:68)(cid:81)(cid:87)(cid:86)(cid:15)(cid:3)(cid:47)(cid:76)(cid:70)(cid:72)(cid:81)(cid:86)(cid:72)(cid:71)(cid:3)(cid:51)(cid:88)(cid:69)(cid:79)(cid:76)(cid:70)(cid:3)(cid:36)(cid:70)(cid:70)(cid:82)(cid:88)(cid:81)(cid:87)(cid:68)(cid:81)(cid:87)(cid:86)(cid:3)
(cid:55)(cid:75)(cid:72)(cid:3)(cid:72)(cid:81)(cid:74)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:83)(cid:68)(cid:85)(cid:87)(cid:81)(cid:72)(cid:85)(cid:3)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:68)(cid:88)(cid:71)(cid:76)(cid:87)(cid:3)(cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:76)(cid:86)(cid:3)(cid:68)(cid:88)(cid:71)(cid:76)(cid:87)(cid:82)(cid:85)(cid:86)(cid:182)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:3)(cid:76)(cid:86)(cid:3)(cid:51)(cid:68)(cid:82)(cid:79)(cid:68)(cid:3)(cid:38)(cid:76)(cid:83)(cid:82)(cid:79)(cid:79)(cid:68)(cid:3)
(cid:57)(cid:68)(cid:88)(cid:74)(cid:75)(cid:68)(cid:81)(cid:15)(cid:3)(cid:38)(cid:68)(cid:81)(cid:68)(cid:71)(cid:68)(cid:3)
(cid:41)(cid:72)(cid:69)(cid:85)(cid:88)(cid:68)(cid:85)(cid:92)(cid:3)(cid:21)(cid:27)(cid:15)(cid:3)(cid:21)(cid:19)(cid:20)(cid:28)(cid:3)
Extendicare Inc. – 2018 Annual Consolidated Financial Statements
(cid:3)
5
Extendicare Inc.
Consolidated Statements of Financial Position
As at December 31
(in thousands of Canadian dollars)
notes
2018
2017
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 loss
Shareholders’ equity
Total liabilities and equity
7
10
8
9
10
23
12
11
12
11
13
23
15
12
14
65,893
2,290
50,570
17,316
21,465
157,534
514,849
95,200
118,996
9,745
738,790
896,324
133,654
1,073
74,626
17,621
226,974
454,344
42,595
35,077
11,343
543,359
770,333
492,064
7,085
2,706
(368,147)
(7,717)
125,991
896,324
128,156
2,300
42,491
7,194
20,634
200,775
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
See accompanying notes to consolidated financial statements.
Commitments and contingencies (note 24).
Approved by the Board
Alan D. Torrie
Chairman
Michael Guerriere
President and Chief Executive Officer
Extendicare Inc. – 2018 Annual Consolidated Financial Statements
6
Extendicare Inc.
Consolidated Statements of Earnings
Years ended December 31
(in thousands of Canadian dollars except for per share amounts)
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
Gains on foreign exchange and investments
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
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.
notes
2018
2017
616,887
632,533
20,673
33,412
435,718
431,343
24,053
22,719
17, 29 1,120,007 1,097,331
961,509
31,467
6,758
999,734
97,597
31,379
–
66,218
28,082
2,812
(864)
986,023
33,004
6,742
18 1,025,769
94,238
35,270
20,195
38,773
27,584
2,878
(1,203)
19
20
(3,761)
956
26,454
12,319
(3,902)
(2,474)
23,654
42,564
8,129
(3,894)
4,235
8,084
10,149
703
10,852
31,712
23,654
31,738
(29,580)
2,132
0.09
0.36
0.36
0.02
20
23
22
21
21
Extendicare Inc. – 2018 Annual Consolidated Financial Statements
7
Extendicare Inc.
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:
Defined benefit plan actuarial losses, net of taxes
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
Net change in foreign currency translation adjustment
Total items that are or may be reclassified subsequently to profit or loss
Other comprehensive income (loss), net of tax
Total comprehensive income (loss)
See accompanying notes to consolidated financial statements.
notes
2018
31,738
2017
2,132
23, 25
(373)
(311)
–
–
1,841
1,841
1,468
33,206
4,955
(7,012)
(3,097)
(5,154)
(5,465)
(3,333)
16
23
Extendicare Inc. – 2018 Annual Consolidated Financial Statements
8
Extendicare Inc.
Consolidated Statements of Changes in Equity
Years ended December 31
Number of
Shares
88,523,290
650,361
(703,585)
19,918
88,489,984
(in thousands of Canadian dollars)
Share Capital (note 15)
Balance at January 1
DRIP
Purchase of shares for cancellation
Share-based compensation (note 14)
Balance at end of period
Equity Portion of Convertible Debentures
Balance at January 1
Redemption of convertible debentures (note 12)
Issuance of convertible debentures (note 12)
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, previously reported
Adoption of new standard on financial instruments (note 4)
Balance at January 1
Net earnings
Dividends declared
Purchase of shares for cancellation in excess of book value (note 15)
Equity portion of redeemed convertible debentures (note 12)
Balance at end of year
Accumulated Other Comprehensive Income (Loss)
Foreign currency translation on investments and accrual for self-insured liabilities
Balance at January 1
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, previously reported
Adoption of new standard on financial instruments (note 4)
Balance at January 1
Unrealized change in the year
Net change reclassified to profit or loss
Balance at end of period
Defined benefit plan actuarial losses, net of tax
Balance at January 1
Change in the year
Balance at end of year
Accumulated other comprehensive loss
Shareholders’ equity
See accompanying notes to consolidated financial statements.
Number of
Shares
88,684,485
535,025
(696,220)
–
88,523,290
2018
Amount
490,881
4,928
(3,903)
158
492,064
5,573
(5,573)
7,085
7,085
2,437
269
2,706
(365,084)
4,334
(360,750)
31,738
(42,351)
(2,357)
5,573
(368,147)
678
1,841
2,519
4,334
(4,334)
–
–
–
–
(9,863)
(373)
(10,236)
(7,717)
125,991
2017
Amount
489,656
5,081
(3,856)
–
490,881
5,573
–
–
5,573
941
1,496
2,437
(322,025)
–
(322,025)
2,132
(42,583)
(2,608)
–
(365,084)
3,775
(3,097)
678
6,391
–
6,391
4,955
(7,012)
4,334
(9,552)
(311)
(9,863)
(4,851)
128,956
Extendicare Inc. – 2018 Annual Consolidated Financial Statements
9
Extendicare Inc.
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
Gain on foreign exchange, investments and fair value adjustments
Net change in operating assets and liabilities
Accounts receivable
Other assets
Accounts payable and accrued liabilities
Payments for 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)
Decrease in investments held for self-insured liabilities
Decrease in other assets
Net cash from (used in) investing activities
Financing Activities
Issue of long-term debt
Repayment of long-term debt
Decrease (increase) in restricted cash
Purchase of securities for cancellation
Dividends paid
Financing costs
Other
Net cash used in financing activities
Increase (decrease) in cash and short-term investments
Cash and short-term investments at beginning of year
Foreign exchange gain (loss) on cash held in foreign currency
Cash and short-term investments at end of year
See accompanying notes to consolidated financial statements.
2018
2017
31,738
2,132
35,270
430
1,936
(3,600)
26,701
2,440
(247)
94,668
(8,172)
(536)
2,210
88,170
(15,237)
(28,383)
3,785
(8,862)
39,473
(50,648)
(33,767)
24,163
5,200
(55,052)
159,998
(158,858)
10
(6,258)
(37,424)
(5,886)
(345)
(48,763)
(64,342)
128,156
2,079
65,893
31,379
1,496
(5,063)
8,919
26,992
36,816
(3,338)
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)
(577)
(625)
(23,612)
29,144
101,582
(2,570)
128,156
Extendicare Inc. – 2018 Annual Consolidated Financial Statements
10
Notes to Consolidated Financial Statements
YEARS ENDED DECEMBER 31, 2018 AND 2017
(Tabular amounts in thousands of Canadian dollars, unless otherwise noted)
1 General Information and Nature of the Business…………………………………………………………….…. 12
2
3
4
5
6
7
8
Basis of Preparation……………………………………………………………………………………………….. 12
Significant Accounting Policies………………………………………………………………………………..….. 13
New Accounting Policies Adopted…………………………………………………………………………..……. 21
Future Changes in Accounting Policies…………………………………………………………………….……. 22
Acquisition………………………………………………………………………………………………………... 22
Accounts Receivable…………………………………………………………………………………………….… 23
Property and Equipment…………………………………………………………………………………………. 23
9 Goodwill and Other Intangible Assets…………………………………………………………………………… 24
10 Other Assets……………………………………………………………………………………………………….. 24
11 Provisions…………………………………………………………………………………………………………. 25
12 Long-term Debt……………………………………………………………………………………………………. 26
13 Other Long-term Liabilities………………………………………………………………………………………. 29
14 Share-based Compensation……………………………………………………………………………………….. 30
15 Share Capital………………………………………………………………………………………………………. 31
16 Equity Reserves……………………………………………………………………………………………………. 32
17 Revenue…………………………………………………………………………………………………………… 33
18 Expenses by Nature……………………………………………………………………………………………….. 33
19 Other Expense……………………………………………………………………………………………………... 33
20 Foreign Exchange and Investment Gain and Fair Value Adjustments…………………………………...…… 34
21 Earnings per Share………………………………………………………………………………………………... 34
22 Discontinued Operations………………………………………………………………………………………….. 35
23
Income Taxes………………………………………………………………………………………………………. 36
24 Commitments and Contingencies………………………………………………………………………………… 38
25 Employee Benefits…………………………………………………………………………………………………. 39
26 Management of Risks and Financial Instruments………………………………………………………………. 41
27 Capital Management………………………………………………………………………………………………. 46
28 Related Party Transactions……………………………………………………………………………………….. 47
29 Segmented Information…………………………………………………………………………………………… 48
30 Significant Subsidiaries…………………………………………………………………………………………… 50
Extendicare Inc. – 2018 Annual Consolidated Financial Statements
11
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 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.
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, 2019.
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 in 2017. 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:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
valuation of purchase price allocation for acquisition (note 6);
valuation of indemnification provisions (note 11);
valuation of self-insured liabilities (note 11);
valuation of equity portion of convertible debentures (note 12);
valuation of financial assets and liabilities (note 26(b));
valuation of share-based compensation (note 14);
determination of the recoverable amount of cash generating units (CGUs) subject to an impairment test (note 19);
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.
Extendicare Inc. – 2018 Annual Consolidated Financial Statements
12
Notes to Consolidated Financial Statements
3. SIGNIFICANT ACCOUNTING POLICIES
The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial
statements, except for those detailed in note 4.
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
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.
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 were recognized in other comprehensive income (OCI) prior to 2018. 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. (cid:3)
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
under construction 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
Extendicare Inc. – 2018 Annual Consolidated Financial Statements
13
Notes to Consolidated Financial Statements
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 long-term care (LTC) centres or retirement communities 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.
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
10 to 25 years
50 years
25 years
15 to 25 years
5 to 15 years
1 to 3 years
5 to 30 years
Furniture and equipment:
Furniture and equipment
Computer equipment
Leasehold improvements
e) Government Grants
5 to 15 years
3 to 5 years
Term of the lease and renewal that is reasonably certain to be exercised
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.
Extendicare Inc. – 2018 Annual Consolidated Financial Statements
14
Notes to Consolidated Financial Statements
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 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.
h) Impairment
Impairment of financial and non-financial assets is assessed on a regular basis. All impairment losses are charged to other
expense 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 to determine the
extent of the impairment, if any. 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 the home health care segment and each individual LTC centre and retirement
community 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.
Extendicare Inc. – 2018 Annual Consolidated Financial Statements
15
Notes to Consolidated Financial Statements
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 (note 3(m)).
FINANCIAL ASSETS
A financial asset 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. Impairment loss is measured based on an expected credit loss (ECL) impairment model (note
3(m)).
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. Past service costs are recognized during the period in which they are incurred, 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 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
Prior to 2016, the Company awarded share appreciation rights (SARs) with a three-year vesting period, the last of which
was settled in cash in 2018. The Company reported any liability on a pro rata basis at fair value at each reporting date,
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 exceeded the grant price, plus “Accrued Distributions”. “Fair Market
Value” of a Common Share, on any particular date, meant the volume-weighted average trading price of the Common
Share on the TSX for the 10 trading days immediately preceding such date. “Accrued Distributions” meant the product of
Extendicare Inc. – 2018 Annual Consolidated Financial Statements
16
Notes to Consolidated Financial Statements
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 were
recognized in net earnings in the period during which they were incurred.
EQUITY-SETTLED LONG-TERM INCENTIVE PLANS
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 are 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 are 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.
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.
Extendicare Inc. – 2018 Annual Consolidated Financial Statements
17
Notes to Consolidated Financial Statements
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
Prior to January 1, 2018, Extendicare classified financial assets and liabilities according to their characteristics and the
related management’s intention for use on an ongoing basis. Financial assets and liabilities were 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.
Effective January 1, 2018, the Company adopted IFRS 9 “Financial Instruments” where financial assets are classified as
measured at fair value through profit and loss (FVTPL), fair value through other comprehensive income (FVOCI), or
amortized cost. The classification depends on the Company’s business model for managing its financial instruments and the
characteristics of the contractual cash flows associated with the instruments. The new standard eliminates the previous
categories for financial assets of held to maturity, loans and receivables and available for sale.
Financial assets and liabilities classified as measured at amortized cost are initially recognized at fair value (net of any
transaction costs) and are subsequently measured at amortized cost using the effective interest method less allowance for
credit losses for financial assets (note 4).
Financial assets classified as measured at FVOCI are initially recognized at fair value and transaction costs are recognized
in net earnings. Subsequently, unrealized gains and losses are recognized in other comprehensive income. Upon
derecognition, realized gains and losses are reclassified from other comprehensive income and are recognized in net
earnings for debt instruments and remain in other comprehensive income for equity investments. Interest income, foreign
exchange gains/losses and impairments from debt instruments as well as dividends from equity investments are recognized
in net earnings.
Financial assets and liabilities classified as measured at FVTPL are initially recognized at fair value and transaction costs
are recognized in net earnings, along with gains and losses arising from changes in fair value.
A financial asset is classified as amortized cost if it is not designated as at FVTPL, is held within a business model with the
purpose of holding assets to collect contractual cash flows; and its contractual terms give rise on specified dates to cash
flows that are solely payments of principal and interest on the principal amount outstanding.
Extendicare Inc. – 2018 Annual Consolidated Financial Statements
18
Notes to Consolidated Financial Statements
A debt instrument is classified as FVOCI if is not designated as at FVTPL, is held within a business model with the purpose
of holding assets to collect contractual cash flows and selling prior to maturity; and its contractual terms give rise on
specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.
Financial assets not classified as amortized cost or FVOCI, as described above, are measured at FVTPL, including
derivative financial assets.
Financial liabilities are measured as FVTPL if they are classified as held for trading or are designated as such. Other non-
derivative financial liabilities are classified as amortized cost. Derivative financial liabilities are classified as FVTPL.
The ECL impairment model applies to all financial assets except for investments in equity securities, and to contract assets,
lease receivables, loan commitments and financial guarantee contracts.
Loss allowances are measured on either a 12-month ECL basis where ECLs represent possible default events within the 12
months after the reporting date, or a lifetime ECL basis where ECLs represents all possible default events over the expected
life of the instrument.
The Company has elected to use the simplified approach and calculates impairment loss on accounts and notes receivable
as lifetime ECL. The other ECL models applied to other financial assets also require judgement, assumptions and
estimations on changes in credit risks, forecasts of future economic conditions and historical information on the credit
quality of the financial asset.
Impairment losses are recorded in operating expenses in the consolidated statement of earnings with the carrying amount of
the financial asset reduced through the use of impairment allowance accounts.
Summary of Financial Instruments and Classification
Below is a classification summary of the Company’s financial instruments upon adoption of IFRS 9:
Cash and short-term investments
Restricted cash
Amounts receivable and other assets
Investments held for self-insured liabilities
Interest rate swaps
Accounts payable and accrued liabilities
Long-term debt
Classification
prior to
January 1, 2018
Loans and receivables
Loans and receivables
Loans and receivables
Available for sale
FVTPL
Other financial liabilities
Other financial liabilities
Measurement
prior to
January 1, 2018
Amortized cost
Amortized cost
Amortized cost
FVOCI
FVTPL
Amortized cost
Amortized cost
Classification
and measurement
under IFRS 9
Amortized cost
Amortized cost
Amortized cost
FVTPL
FVTPL
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.
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
Extendicare recognizes revenue for the transfer of goods or services to customers at an amount that reflects the
consideration expected to be received for those goods or services. The Company generates revenue primarily from the
provision of services to residents, rental income, home health care services, and management and consulting services.
Extendicare Inc. – 2018 Annual Consolidated Financial Statements
19
Notes to Consolidated Financial Statements
i. Long-term Care
Services provided to residents include the provision of accommodation and meals, assistance with activities of daily living
and continuing care. Programs and services are offered to all residents and specialty programs are offered for those with
behavioural needs. Revenue from our LTC segment is regulated by provincial authorities and provincial programs fund a
substantial portion of these fees with a co-payment for accommodation being paid by the residents. Accommodation and
services are delivered as a bundle and revenue is recognized over time, typically on a monthly basis, which reflects when
the services are provided. The frequency that funding is received depends on the jurisdiction in which the LTC centre
operates and it varies between a monthly or more frequent basis; and payments from residents are typically due at the
beginning of each month.
In some cases, Extendicare’s funding is based on occupancy levels achieved or certain policy conditions being met such as
spending or staffing hour requirements. In these cases, the Company estimates the amount of funding that it expects to be
entitled to for the services provided.
ii. Home Health Care
Home health care services provided include complex nursing care, occupational, physical and speech therapy, and
assistance with daily activities to accommodate clients living at home. Revenue from the home health care segment is also
regulated by provincial authorities. Revenue is derived from both government and private-pay clients. Performance
obligations are satisfied as services are delivered and revenue is therefore recognized over time, typically as the services
provided to the customer. Private-pay services provided are invoiced at the end of each month based on the services
provided, and the billing frequency of government-funded services varies between monthly and bi-weekly depending on the
jurisdiction in which we operate.
iii. Retirement Living
Retirement living revenue is primarily derived from private-pay residents. Residents are charged monthly fixed fees based
on the type of accommodation, level of care and services chosen by the resident, and the location of the retirement
community. These fixed fees are allocated to the lease and the service components. Payments are due at the beginning of
each month.
Accommodation revenue is recognized on a straight-line basis over the lease term, beginning when a resident has the right
to use the retirement community. Revenue allocated to the services is recognized over time, typically on a monthly basis, as
this corresponds to the period in which services are provided. Extendicare may also provide additional services to residents
on an as-requested basis, at rates established by the Company based upon market conditions. Revenue for such services is
recognized as the services are provided to the residents.
iv. Other Services
Extendicare also offers management, consulting, group purchasing, accounting and administrative services to third parties.
Rates are set by the contracts, and these contracts are typically accounted for as a single performance obligation because
goods or services are delivered concurrently. Revenue is recognized over time, typically on a monthly basis, which reflects
when the services are provided.
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 assets and 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 assets and
liabilities designated as FVTPL, accretion on deferred consideration and gains/losses in foreign exchange on non-Canadian
based financial assets.
p) Income Taxes
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.
Extendicare Inc. – 2018 Annual Consolidated Financial Statements
20
Notes to Consolidated Financial Statements
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.
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.
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.
4. NEW ACCOUNTING POLICIES ADOPTED
Effective January 1, 2018, Extendicare adopted the following new standards and amendments to standards issued by the
IASB: IFRS 15 “Revenue from Contracts with Customers”, and IFRS 9 “Financial Instruments” (IFRS 9), both of which
are discussed below.
Revenue Recognition
IFRS 15 “Revenue from Contracts with Customers” 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.
Extendicare adopted IFRS 15 using the cumulative effect method, which does not require restatement of comparative
information. Adoption of the standard did not result in material changes to the timing or measurement of revenue
recognition, and therefore, there was no cumulative effect adjustment recorded to accumulated deficit on January 1, 2018.
However, under the new standard, accommodation revenue recognized under IAS 17 “Leases” is disclosed separately from
services revenue recognized under IFRS 15 (note 29).
The Company’s revised revenue recognition policy is detailed in note 3(n).
Extendicare Inc. – 2018 Annual Consolidated Financial Statements
21
Notes to Consolidated Financial Statements
Financial Instruments
IFRS 9 “Financial Instruments” (IFRS 9) addresses the recognition, classification and measurement (including impairment)
of financial assets and financial liabilities. This standard replaces IAS 39 “Financial Instruments: Recognition and
Measurement”.
In addition, IFRS 9 replaces the current “incurred loss” impairment model with a new ECL model, which requires timely
recognition of expected credit losses.
The standard largely retains the existing accounting requirements for financial liabilities. However, fair value changes
attributable to changes in an entity’s own credit risk are required to be presented in other comprehensive income for
financial liabilities that are designated as FVTPL. IFRS 9 also includes a new general hedge accounting standard which
aligns hedge accounting more closely with risk management.
The Company adopted this standard retrospectively with no restatement of prior periods. There was no material impact on
adoption of the standard with the exception of a reclassification of $4.3 million from opening accumulated other
comprehensive income to opening accumulated deficit, as investments held for self-insured liabilities were classified as
FVTPL under IFRS 9. These investments include equity securities as well as money market funds that do not have
contractual cash flows that are solely payments of principal and interest on the principal amount outstanding; therefore,
they are classified as measured at FVTPL under IFRS 9 (see note 3(m)).
5. FUTURE CHANGES IN ACCOUNTING POLICIES
The following new standard and interpretation are effective for future annual periods, and have not been applied in
preparing the financial results for the year ended December 31, 2018.
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. Lessor accounting, however, remains largely unchanged and the distinction between
operating and finance leases is retained. IFRS 16 supersedes IAS 17 “Leases” and related interpretations and 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 has assessed the impact of this new standard and its adoption is not
expected to have a material impact on the consolidated financial statements. A retrospective adjustment to opening retained
earnings is not expected. Based on the operating leases as at January 1, 2019, the Company will recognize a right-of-use
asset and lease liability ranging between $7 million and $9 million, using a simplified approach where the asset and liability
would be identical.
Income Taxes
On June 7, 2017, the IASB issued IFRIC Interpretation 23 “Uncertainty over Income Tax Treatments”. The interpretation
provides guidance on the accounting for current and deferred tax liabilities and assets in circumstances in which there is
uncertainty over income tax treatments. The Interpretation is applicable for annual periods beginning on or after January 1,
2019. Earlier application is permitted. The Company intends to adopt the Interpretation in its financial statements for the
annual period beginning on January 1, 2019. The adoption of the IFRIC Interpretation 23 is not expected to have a material
impact on the consolidated financial statements.
6. ACQUISITIONS
On April 11, 2018, the Company completed the acquisition of the Lynde Creek Retirement Community for $33.8 million,
which included an adjustment for working capital. The acquired community, located in Whitby, Ontario, consists of Lynde
Creek Manor, a retirement residence offering 93 independent and assisted living suites; Lynde Creek Village, a life lease
seniors community of 113 townhomes; and 3.7 acres of adjacent land for expansion. This acquisition was funded by cash
on hand, and is accounted for as a business combination.
Extendicare Inc. – 2018 Annual Consolidated Financial Statements
22
Notes to Consolidated Financial Statements
The final purchase price allocation outlined below is based on management’s best estimate of fair values.
Net assets acquired:
Property and equipment
Intangible assets
Trade payables and accrued liabilities
Total net assets acquired
Consideration:
Consideration
Working capital adjustment
Cash paid
Manor
Village
93 suites 113 townhomes
Excess
Land
29.2
–
(0.3)
28.9
29.2
(0.3)
28.9
–
2.9
–
2.9
2.9
–
2.9
2.0
–
–
2.0
2.0
–
2.0
Total
31.2
2.9
(0.3)
33.8
34.1
(0.3)
33.8
The allocation of property and equipment was based on the fair value considering the nature and age of these assets.
The fair value estimate of $2.9 million allocated to identifiable intangible assets acquired, primarily consisted of life lease
contracts. The Company has estimated the fair value of life lease contracts based upon expected discounted cash flows
generated from these assets; the estimated useful lives for these assets are between 10 to 15 years.
The acquired operations would have contributed revenue of $5.1 million and nominal net loss if the acquisition had taken
place on January 1, 2018. For the eight and a half months of ownership ending December 31, 2018, the acquisition
contributed revenue of $3.8 million and net loss of $0.1 million.
7. ACCOUNTS RECEIVABLE
Trade receivables
Other receivables
Accounts receivable - net of allowance (note 26(a))
8. PROPERTY AND EQUIPMENT
Cost or Deemed Cost
January 1, 2017
Additions
Disposals
Write-off of fully-depreciated assets
Transfer from CIP
December 31, 2017
Additions
Acquisitions (note 6)
Write-off of fully-depreciated assets
Impairment loss (note 19)
Transfer from CIP
December 31, 2018
Land & Land
Improvements
48,575
185
–
(180)
2,548
51,128
58
4,401
(70)
(1,123)
3,886
58,280
Buildings
518,972
3,228
–
(4,487)
26,797
544,510
7,579
26,309
(7,828)
(14,566)
31,157
587,161
2018
39,894
10,676
50,570
2017
33,466
9,025
42,491
Furniture &
Leasehold
Equipment Improvements
Construction
in Progress
(CIP)
63,631
3,654
–
(4,834)
2,637
65,088
5,628
490
(8,966)
(469)
1,276
63,047
2,395
108
–
(124)
(42)
2,337
32
–
(442)
–
–
1,927
29,336
34,634
(236)
–
(31,940)
31,794
35,376
–
–
–
(36,319)
30,851
Total
662,909
41,809
(236)
(9,625)
–
694,857
48,673
31,200
(17,306)
(16,158)
–
741,266
Extendicare Inc. – 2018 Annual Consolidated Financial Statements
23
Notes to Consolidated Financial Statements
Accumulated Depreciation
January 1, 2017
Additions
Write-off of fully-depreciated assets
December 31, 2017
Additions
Write-off of fully-depreciated assets
December 31, 2018
Carrying amounts
At December 31, 2017
At December 31, 2018
Land & Land
Improvements
3,733
543
(180)
4,096
554
(70)
4,580
Buildings
162,579
19,836
(4,487)
177,928
21,680
(7,828)
191,780
Furniture &
Leasehold
Equipment Improvements
Construction
in Progress
(CIP)
29,728
6,119
(4,834)
31,013
6,204
(8,966)
28,251
1,436
540
(124)
1,852
396
(442)
1,806
–
–
–
–
–
–
–
Total
197,476
27,038
(9,625)
214,889
28,834
(17,306)
226,417
47,032
53,700
366,582
395,381
34,075
34,796
485
121
31,794
30,851
479,968
514,849
The cost of assets included in property and equipment under finance leases was $81.0 million (2017 – $81.5 million) with
accumulated depreciation of $32.2 million (2017 – $30.3 million) (note 12).
During 2018, the Company capitalized $1.5 million of borrowing costs related to development projects under construction
at an average capitalization rate of 4.9% (2017 – $1.2 million at 5.3%).
9. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
Balance at beginning of year
Balance at end of year
Other Intangible Assets
Gross carrying value at beginning of year
Additions
Acquisitions (note 6)
Disposal
Write-off of fully amortized assets
Gross carrying value at end of year
Accumulated amortization at beginning of year
Amortization
Write-off of fully amortized assets
Accumulated amortization at end of year
Net carrying value
Goodwill and other intangible assets
10. OTHER ASSETS
Investments held for self-insured liabilities
Amounts receivable and other assets
Interest rate swaps
less: current portion
2018
2017
51,675
51,675
51,675
51,675
56,455
3,292
2,925
(484)
(154)
62,034
12,229
6,434
(154)
18,509
43,525
95,200
46,000
10,490
–
–
(35)
56,455
7,905
4,359
(35)
12,229
44,226
95,901
2018
67,938
69,967
2,556
140,461
21,465
118,996
2017
86,296
74,625
3,459
164,380
20,634
143,746
Investments Held for Self-insured Liabilities
After the sale of our U.S. business in 2015 (the “U.S. Sale Transaction”) (note 22), as part of its continuing operations,
Extendicare retained its wholly owned Bermuda-based captive insurance company, Laurier Indemnity Company, Ltd. (the
Extendicare Inc. – 2018 Annual Consolidated Financial Statements
24
Notes to Consolidated Financial Statements
“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.
Extendicare holds investments within the Captive for settlements of the self-insured liabilities that are subject to insurance
regulatory requirements (note 11).
As at December 31, 2018, the investment portfolio comprises U.S. dollar-denominated cash of $2.2 million (2017 –
$0.7 million), money market funds of $57.4 million (2017 – $74.4 million), and investment-grade corporate securities of
$8.3 million (2017 – $11.2 million). Certain of these investments in the amount of $35.1 million (US$25.7 million) (2017 –
$45.4 million or US$36.1 million), have been pledged as collateral for letters of credit issued by the banker of the Captive
in favour of ceding companies. As at December 31, 2018, all investments were carried at fair value, with changes in fair
value reflected in earnings. (2017 – unrealized changes in fair value were reflected in OCI (note 4)).
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 $53.3 million (2017 – $58.5 million) of which
$5.5 million (2017 – $5.2 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.
Also included in amounts receivable and other assets is a $2.0 million receivable as at December 31, 2018 (2017 –
$2.8 million), resulting from the U.S. Sale Transaction (note 22), as well as prepaid expenses and deposits.
The Company uses the simplified approach and calculates impairment loss on accounts and notes receivable as lifetime
ECL.
Interest Rate Swaps
The interest rate swaps include swap contracts relating to mortgages, totalling $84.8 million, to lock in the rates between
3.11% and 5.04% for the full term of the loans being five to ten years (note 12).
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, 2018, the interest rate swaps
were valued as a net asset of $2.0 million, including a liability of $0.5 million (notes 12 and 13) (2017 – asset of
$3.5 million).
11. PROVISIONS
January 1, 2017
Provisions recorded (released)
Provisions used
Accretion
Effect of movements in exchange rates
December 31, 2017
Less: current portion
January 1, 2018
Provisions recorded (released)
Provisions used
Accretion
Effect of movements in exchange rates
December 31, 2018
Less: current portion
Accrual for Self-
insured Liabilities
94,841
(5,718)
(24,160)
1,283
(5,111)
61,135
22,659
38,476
61,135
(14,132)
(15,237)
1,631
3,741
37,138
12,286
24,852
Indemnification Decommissioning
Provisions
8,137
699
–
349
–
9,185
–
9,185
9,185
–
(15)
195
–
9,365
–
9,365
Provisions
28,447
4,885
(8,817)
–
(1,836)
22,679
7,278
15,401
22,679
(3,832)
(6,587)
–
1,453
13,713
5,335
8,378
Total
131,425
(134)
(32,977)
1,632
(6,947)
92,999
29,937
63,062
92,999
(17,964)
(21,839)
1,826
5,194
60,216
17,621
42,595
Extendicare Inc. – 2018 Annual Consolidated Financial Statements
25
Notes to Consolidated Financial Statements
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.
The accrual for self-insured liabilities is based on management’s best estimate of the ultimate cost to resolve general and
professional liability claims. 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, 2018, the accrual for self-insured general and professional liabilities was $37.1 million
(US$27.2 million) compared to $61.1 million (US$48.6 million) at the beginning of the year. The decline of $24.0 million
represented claim payments of $15.2 million (US$11.8 million) (2017 – $24.2 million or US$18.6 million), the release of
reserves of $13.0 million (US$9.9 million) (2017 – $5.7 million or US$4.4 million), and an adjustment totalling
$1.1 million (US$0.9 million) for discounting resulting from a change in discount rate (2017 – nil), reflected as other
expense (income) in discontinued operations (note 22), partially offset by foreign exchange of $3.7 million (2017 –
$5.1 million), and accretion of $1.6 million (US$1.2 million) (2017 – $1.3 million or US$1.0 million).
Indemnification Provisions
As a result of the U.S. Sale Transaction (note 22), the Company 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, 2018, the remaining provisions
totalled $13.7 million (US$10.1 million) (2017 – $22.7 million or US$18.0 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. 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 7 years. This represents management’s best estimate and actual amounts may differ.
12. LONG-TERM DEBT
Convertible unsecured subordinated debentures
Convertible unsecured subordinated debentures
CMHC mortgages
Non-CMHC mortgages
Construction loans
Finance lease obligations
Deferred financing costs
Total debt, net of deferred financing costs
Less: current portion
Long-term debt, net of deferred financing costs
Interest Rate Year of Maturity
2025
2019
2020 - 2037
2020 - 2038
on demand
2022 - 2028
5.0%
6.0%
2.93% - 7.7%
3.11% - 5.637%
variable
2.28% - 7.19%
2018
119,775
–
114,083
169,670
52,866
80,992
537,386
(8,416)
528,970
74,626
454,344
2017
–
124,800
123,911
172,844
29,868
90,323
541,746
(5,678)
536,068
59,664
476,404
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”), with interest
payable semi-annually in March and September. These debentures were redeemable 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. On March 26, 2018, the Company issued a notice of intention to redeem
the 2019 Debentures.
Extendicare Inc. – 2018 Annual Consolidated Financial Statements
26
Notes to Consolidated Financial Statements
In April 2018, the Company issued $126.5 million aggregate principal amount of 5.00% convertible unsecured
subordinated debentures due April 30, 2025 (the “2025 Debentures”), with a conversion price of $12.25 per Common Share
(the “Offering”). The initial offering for $110.0 million of the 2025 Debentures closed on April 17, 2018, and the exercise
of the over-allotment option for $16.5 million debentures closed on April 25, 2018. The debt and equity components of the
2025 Debentures were bifurcated as the financial instrument is considered a compound instrument with $119.2 million
classified as a liability and the residual $7.3 million classified as equity attributable to the conversion option. The liability
portion of the 2025 Debentures is recorded at amortized cost. The fees and transaction costs allocated to the debt
component are amortized over the term of the 2025 Debentures using the effective interest rate method and are recognized
as part of net finance costs.
Interest on the 2025 Debentures is payable semi-annually in April and October. The 2025 Debentures may not be redeemed
by the Company prior to April 30, 2021, except in the event of the satisfaction of certain conditions after a change of
control has occurred. On or after May 1, 2021 but prior to April 30, 2023, 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, provided that the volume-weighted
average trading price of the Common Shares on the TSX for the 20 consecutive trading days ending on the fifth trading day
immediately preceding the date on which notice of redemption is given is not less than 125% of the conversion price. On
and after May 1, 2023, 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 2025 Debentures may require the Company to purchase their
debentures at 101% of the principal plus accrued and unpaid interest. If 90% or more of the debentureholders do so, the
Company has the right, but not the obligation, to redeem all the remaining outstanding 2025 Debentures.
The net proceeds from the Offering of $120.9 million, together with cash on hand, was used by the Company to finance the
redemption of its 2019 Debentures on April 30, 2018. The redemption price of the 2019 Debentures was equal to the sum
of the outstanding aggregate principal amount of $126.5 million and all accrued and unpaid interest thereon for a total of
$127.1 million. As a result of the early redemption of the 2019 Debentures, the unaccreted liability of $1.4 million was
expensed (note 19), and the related equity portion of $5.6 million was classified as part of accumulated deficit.
CMHC Mortgages
The Company has 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, originally scheduled to mature 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.
In August 2018, the Company renewed maturing mortgages of $8.3 million. These renewed mortgages bear an interest rate
of 2.96% for a term of four years to August 2022.
Non-CMHC Mortgages
The Company has 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 September 2018, the Company secured financing of $10.5 million on a retirement community in Ontario. This financing
has a 10-year term. In conjunction with securing this financing, the Company entered into an interest rate swap contract to
Extendicare Inc. – 2018 Annual Consolidated Financial Statements
27
Notes to Consolidated Financial Statements
lock in the interest rate at 5.04% for the full term of this financing. Also, during the 2018 third quarter, the Company
reduced the balances on mortgages of three communities by a total of $8.6 million.
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, 2018, the interest rate swaps
were valued as an asset of $2.6 million, which is included as part of other assets (note 10), and a liability of $0.5 million,
which is included as part of long-term liability (note 13).
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 variable rate of 30-day banker’s acceptance (BA) plus
2.5%, with no standby fee. The construction loans are repayable on demand and, in any event, are to be fully repaid by the
earlier of achieving stabilized occupancy as defined by the agreements and specified dates between late 2019 and 2022.
Construction financing of $27.2 million was secured in the 2018 third quarter for a retirement community in Barrie with an
additional letter of credit facility of $1.0 million. Loan payments are interest-only based on a variable rate of 30-day BA
plus 2.25%, with no standby fee. The construction loan is repayable on demand and, in any event, is to be fully repaid by
the earlier of September 2023 and three months following stabilized occupancy as defined by the agreement.
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, 2018, an aggregate of $52.9 million was drawn on the construction loans, and letters of credit totalling
$1.2 million were issued under credit facilities.
Finance Lease Obligations
The finance lease obligations outstanding at December 31, 2018 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 of
five years.
Finance lease obligations are payable as follows:
Future
Minimum Lease
Payments
12,904
51,648
41,386
105,938
2018
Present Value of
Minimum Lease
Payments
7,722
36,553
36,717
80,992
Interest
5,182
15,095
4,669
24,946
Future
Minimum Lease
Payments
14,256
53,353
53,488
121,097
2017
Present Value of
Minimum Lease
Payments
8,515
35,864
45,944
90,323
Interest
5,741
17,489
7,544
30,774
Less than one year
Between one and five years
More than five years
Credit Facilities
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 of its subsidiaries of
Extendicare. As at December 31, 2018, Extendicare had letters of credit totalling approximately $45.0 million issued under
the RBC Credit Facility, of which $38.0 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
unutilized portion of the credit facility was $2.3 million as at December 31, 2018. 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.
Extendicare Inc. – 2018 Annual Consolidated Financial Statements
28
Notes to Consolidated Financial Statements
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, 2018.
Restricted Cash
In connection with certain financing, funds totalling $2.3 million as at December 31, 2018 (2017 – $2.3 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 increase of $2.7 million in 2018 related primarily to the costs associated with the issuance of
the 2025 Debentures, partially offset by the write-off of the unamortized finance costs of $1.1 million upon the early
redemption of the 2019 Debentures (note 19) and the amortization of finance costs.
Below is a summary of the deferred financing costs:
Convertible unsecured subordinated debentures
CMHC mortgages
Non-CMHC mortgages
Finance lease obligations
Total deferred financing costs
Less: current portion
Principal Repayments
Principal repayments on long-term debt, exclusive of finance lease obligations, are as follows:
Year
2019
2020
2021
2022
2023
2024 and beyond
Interest Rates
2018
4,774
2,017
1,419
206
8,416
1,404
7,012
2017
1,387
2,465
1,595
231
5,678
1,463
4,215
Amount
68,308
60,077
15,108
58,643
45,656
215,327
463,119
The weighted average interest rate of all long-term debt at December 31, 2018, was approximately 4.9% (2017 – 5.0%). At
December 31, 2018, 90.2% of the long-term debt, including interest rate swaps, was at fixed rates (2017 – 94.5%).
13. OTHER LONG-TERM LIABILITIES
Accrued pension plan obligation (note 25)
Interest rate swaps (note 12)
Other
2018
33,486
523
1,068
35,077
2017
34,072
–
950
35,022
Extendicare Inc. – 2018 Annual Consolidated Financial Statements
29
Notes to Consolidated Financial Statements
14. SHARE-BASED COMPENSATION
The Company’s share-based compensation, which includes SARs, DSUs and PSUs, was an expense of $0.2 million for
2018 (2017 – expense of $2.0 million), and includes the reversal of $1.2 million in connection with the forfeiture of PSUs
upon the departure of the former CEO in October 2018 (note 28).
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
Contributed surplus – DSUs
Contributed surplus – PSUs
Cash-settled Share Appreciation Rights Plan
2018
–
1,914
792
2017
1,146
1,220
1,217
Prior to 2016, the Company awarded SARs to eligible employees and directors of Extendicare. No further awards will be
granted under the SARs plan, and as of December 31, 2018, all SARs have vested or been forfeited.
A summary of the Company’s SARs activity is as follows:
Outstanding, beginning of year
Vested
Forfeited
Outstanding, end of year
Average remaining contractual life
Share
Appreciation
Rights
372,000
(354,000)
(18,000)
–
–
2018
Weighted
Average
Vesting Price
$7.14
7.11
7.69
2017
Weighted
Average
Vesting Price
$7.05
6.88
7.69
$7.14
Share
Appreciation
Rights
597,000
(216,000)
(9,000)
372,000
0.2 years
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%
(cid:20)(cid:17)(cid:19)(cid:19)(cid:8)(cid:3)(cid:3013)(cid:3)(cid:20)(cid:17)(cid:21)(cid:20)(cid:8)
(cid:7)(cid:25)(cid:17)(cid:24)(cid:24)(cid:3)(cid:3013)(cid:3)(cid:7)(cid:26)(cid:17)(cid:25)(cid:28)
(cid:19)(cid:17)(cid:20)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:86)(cid:3)(cid:3013)(cid:3)(cid:19)(cid:17)(cid:23)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:86)
Equity-settled Long-term Incentive Plan
The Board implemented a LTIP in 2016 to provide for a share-based component of executive and director compensation
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 do not carry any voting rights. DSUs vest immediately upon grant and PSUs vest
three years from the date of grant. During 2018, the Company settled 14,886 DSUs and 5,032 PSUs, resulting in the
issuance from treasury of 19,918 Common Shares. An aggregate of 4,387,974 Common Shares are reserved and available
for issuance pursuant to the LTIP.
Extendicare Inc. – 2018 Annual Consolidated Financial Statements
30
Notes to Consolidated Financial Statements
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
Deferred Share Units
2017
61,124
72,742
4,137
–
(3,634)
134,369
2018
134,369
109,744
10,498
–
(14,886)
239,725
Performance Share Units
2017
2018
173,550
342,944
173,329
192,116
10,616
26,007
(14,551)
(367,126)
–
(5,032)
342,944
188,909
period at grant date
$7.36
$9.68
$9.33
$11.63
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.
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
Share-based compensation
Balance at end of year
Authorized Capital
Twelve months ended
December 31, 2018
Twelve months ended December 31, 2017
March 15, 2018
March 15, 2017
May 25, 2017
March 15, 2021
192,116
$4.36
4.97
$9.33
23.66%
12.20%
1.84%
nil
March 15, 2020
160,689
$5.24
6.42
$11.66
23.09%
13.41%
0.92%
nil
Shares
88,523,290
2018
Amount
490,881
Shares
88,684,485
650,361
(703,585)
19,918
88,489,984
4,928
(3,903)
158
492,064
535,025
(696,220)
–
88,523,290
May 25, 2020
12,640
$5.11
6.12
$11.23
24.90%
13.60%
0.75%
nil
2017
Amount
489,656
5,081
(3,856)
–
490,881
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 2018 and 2017, the
Company declared cash dividends of $0.48 per share.
Extendicare Inc. – 2018 Annual Consolidated Financial Statements
31
Notes to Consolidated Financial Statements
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 2018, the Company issued 0.7 million Common
Shares at a value of $4.9 million in connection with the DRIP (2017 – $0.5 million Common Shares at a value of
$5.1 million).
Normal Course Issuer Bid
During 2018, under a normal course issuer bid that commenced on January 15, 2018 and ended on January 14, 2019, the
Company acquired and cancelled 703,585 Common Shares at an average price of $8.89 per share, for a total cost of
$6.3 million. During 2017, under a previous normal course issuer bid, the Company acquired and cancelled 696,220
Common Shares at a weighted average price of $9.27 per share, for a total cost of $6.5 million.
In January, 2019, Extendicare received the approval of the TSX to renew its normal course issuer bid (the “Bid”) to
purchase for cancellation up to 8,830,000 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, 2019, and provides
Extendicare with flexibility to purchase Common Shares for cancellation until January 14, 2020, 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 54,852 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.
16. EQUITY RESERVES
Equity reserves are included in AOCI and comprise fair value, and translation reserves, as follows:
Unrealized
Gains/Losses on
AFS Securities
13,494
4,955
18,449
Realized
Gains/Losses on
AFS Securities
Transferred to
Net Earnings
(7,103)
(7,012)
(14,115)
Total Fair
Value Reserve
6,391
(2,057)
4,334
Translation
Reserve
3,775
(3,097)
678
Total Equity
Reserves
10,166
(5,154)
5,012
(18,449)
–
–
14,115
–
–
(4,334)
–
–
–
1,841
2,519
(4,334)
1,841
2,519
Balance, January 1, 2017
Recognized during the year
Balance, December 31, 2017
Adoption of new standard on financial instruments
(note 4)
Recognized during the year
Balance, December 31, 2018
Fair Value Reserve
Prior to 2018, the fair value reserve comprised 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 was recognized in net
earnings. Upon the adoption of IFRS 9 in 2018, the fair value reserve balances accumulated as at January 1, 2018, was
reclassified to opening accumulated deficit, and any change in the fair value of these securities going forward is recognized
in net earnings in the period as incurred (note 4).
Translation Reserve
The translation reserve comprises all foreign currency differences arising from the translation of the investments and
accrual for self-insured liabilities that are held in a foreign operation. When funds are repatriated, the cumulative change in
foreign currency differences are recognized in net earnings (notes 10 and 11).
Extendicare Inc. – 2018 Annual Consolidated Financial Statements
32
Notes to Consolidated Financial Statements
17. REVENUE
Long-term care
Retirement living
Home health care
Management, consulting and other
Total revenue
2018
632,533
33,412
431,343
22,719
1,120,007
2017
616,887
20,673
435,718
24,053
1,097,331
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
(2017 – 70%), and approximately 98% of Extendicare’s home health care revenue for both 2018 and 2017.
Retirement living includes accommodation revenue of approximately $13.5 million and services revenue of approximately
$19.9 million for 2018. Service revenue represents a combination of monthly service fees paid by the residents, including
proceeds retained by Extendicare upon the sale of homes in the life lease community.
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
Acquisition costs
Loss on early redemption of convertible debt
Impairment
Other
Other expense
Impairment
2018
868,089
52,181
98,757
1,019,027
6,742
1,025,769
2017
851,318
48,566
93,092
992,976
6,758
999,734
2018
1,042
2,511
16,158
484
20,195
2017
–
–
–
–
–
In the 2018 fourth quarter, the Company recorded a pre-tax impairment charge of $16.2 million ($11.8 million after tax), in
respect of certain of its retirement communities ($15.9 million), and LTC centres ($0.3 million).
The impairment charge for the retirement living operations relates to the write down of the carrying value of the property
and equipment of three Saskatchewan retirement communities that were acquired in late 2015 and early 2016; two of which
were newly opened at that time and are still in lease up. These communities have not performed as expected, primarily due
to competitive market conditions, impacting rates, occupancy and labour and benefit costs.
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 for both the retirement
communities and LTC centres were based upon information that was known at the time, along with the future outlook. The
Company completes the assessment of the impairment amount of each of these properties (each being a CGU), by
comparing the recoverable amount (in this case the value in use) of each CGU, determined using the direct capitalization
method, to their carrying values. The direct capitalization method divides the estimated stabilized net operating income,
after adjusting for management fee and capital maintenance, by appropriate market capitalization rates, ranging from 5.5%
and 7.25%, derived from a combination of third-party information and industry trends. The fair value is a Level 3 valuation
(note 26(b)).
Extendicare Inc. – 2018 Annual Consolidated Financial Statements
33
Notes to Consolidated Financial Statements
Other
In April 2018, the Company acquired the Lynde Creek Retirement Community (note 6), and incurred transaction costs of
$1.0 million, most of which were incurred during the 2018 second quarter.
Upon the early redemption of the 2019 Debentures on April 30, 2018 (note 12), the unaccreted liability of $1.4 million and
the associated unamortized finance costs of $1.1 million were expensed.
20. FOREIGN EXCHANGE AND INVESTMENT GAIN AND FAIR VALUE ADJUSTMENTS
Gain on Foreign Exchange and Investments
Gains on foreign exchange and investments was $1.2 million for 2018 (2017 – $0.9 million). These include: gain (loss)
related to deferred consideration and other balances in connection with the U.S. Sale Transaction that are denominated in
U.S. dollars (note 22); gain (loss) on fair value adjustments on investments held for self-insured liabilities (notes 4 and 10);
and a foreign exchange gain recognized upon repatriation of funds from the Captive.
Fair Value Adjustments
Fair value adjustments relate to interest rate swap contracts that lock in the interest rates for certain mortgages. The fair
value of these contracts as at December 31, 2018, resulted in a loss of $1.0 million 2018 (2017 – gain of $2.5 million)
(notes 10).
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 convertible debentures and equity-settled compensation arrangements would be antidilutive and as such, these
are not included in the calculation of diluted EPS.
The following table reconciles the numerator and denominator of the basic and diluted earnings per share computation.
Numerator for Basic and Diluted Earnings (Loss) 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
Gain (loss) from discontinued operations
Net earnings
Extendicare Inc. – 2018 Annual Consolidated Financial Statements
2018
2017
31,738
23,654
8,084
6,681
14,765
31,738
6,681
38,419
2,132
(29,580)
31,712
7,342
39,054
2,132
7,342
9,474
88,233,092
170,363
88,403,455
10,326,531
22,844
88,720,572
84,786
88,805,358
11,244,444
38,121
98,752,830 100,087,923
0.09
0.27
0.36
0.36
(0.34)
0.02
34
Notes to Consolidated Financial Statements
22. DISCONTINUED OPERATIONS
Earnings (Loss) from Discontinued Operations
Earnings (loss) before income taxes
Income tax recovery
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
2018
2017
17,755
(5,899)
23,654
(36,576)
(6,996)
(29,580)
2018
2017
(15,237)
15,237
–
–
(24,160)
24,160
–
–
In connection with the U.S. Sale Transaction, 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, 2018, the Company had
remaining provisions totalling $13.7 million (US$10.1 million) (note 11), and a receivable of $2.0 million (US$1.4 million)
(note 10) (December 31, 2017 – provisions of $22.7 million and receivable of $2.8 million). Favourable changes to
indemnification provisions totalled $3.8 million for 2018. The change in 2017 included a $5.1 million charge related to the
increase of estimated costs in connection with the CIA. In addition, the proceeds from the U.S. Sale Transaction included
an element of deferred consideration; the remaining balance of $37.5 million was written off in 2017.
Earnings (loss) from discontinued operations in 2018 also includes the release of accrual for self-insured liabilities,
including adjustments to discount rate applied, totalling $14.1 million (US$10.8 million) (note 11). The release of accrual
for self-insured liabilities in 2017 was $5.7 million (US$4.4 million).
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).
In December 2018, the Company sold one of the remaining U.S. legal entities and realized a capital loss for U.S. tax
purposes of approximately US$20 million available to carryback against a 2015 capital gain, resulting in a tax recovery of
$9.7 million (US$7.1 million).
Extendicare Inc. – 2018 Annual Consolidated Financial Statements
35
Notes to Consolidated Financial Statements
23. INCOME TAXES
Tax Recognized in Net Earnings
Current Tax Expense (Recovery)
Current year
Items related to discontinued operations (note 22)
Utilization of losses
Other adjustments
Deferred Tax Expense (Recovery)
Origination and reversal of temporary difference
Items related to discontinued operations (note 22)
Utilization of losses
Other adjustments
Total tax expense
Tax expense from continuing operations
Tax recovery from discontinued operations
Tax Recognized in Other Comprehensive Income
Foreign currency translation
difference for
i
f
Available-for-sale financial assets
Defined benefit plan actuarial gains
i
Before Tax
Tax
Recovery
Net of Tax
Before Tax
2018
1,841
–
(507)
1,334
–
–
134
134
1,841
–
(373)
1,468
(3,097)
(2,057)
(423)
(5,577)
2018
2017
8,921
(11,729)
(924)
132
(3,600)
(4,406)
5,830
629
(117)
1,936
(1,664)
4,235
(5,899)
(1,664)
Tax
Recovery
–
–
112
112
10,191
(1,230)
(87)
45
8,919
1,079
(5,766)
–
(376)
(5,063)
3,856
10,852
(6,996)
3,856
2017
Net of Tax
(3,097)
(2,057)
(311)
(5,465)
Investments held for self-insured liabilities, included in other assets, were previously classified as available for sale and
measured at FVOCI, with unrealized changes in fair value recognized in AOCI. On adoption of IFRS 9 effective January 1,
2018, these investments are classified and measured as FVTPL with changes in fair value recognized in net earnings
(note 4).
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
Other items
2018
12,319
3,265
610
517
(107)
42
(92)
4,235
2017
42,564
11,279
(1,173)
1,033
(17)
(331)
61
10,852
Extendicare Inc. – 2018 Annual Consolidated Financial Statements
36
Notes to Consolidated Financial Statements
Summary of Operating and Capital Loss Carryforwards
Extendicare’s Canadian corporate subsidiaries have recorded a tax benefit of $5.7 million for available net operating loss
carryforwards as at December 31, 2018 (2017 – $7.2 million), which expire in the years 2035 through 2038, and capital loss
carryforwards of $42.1 million (2017 – $16.5 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, 2018, were $9.7 million (2017 – $13.9 million). Net deferred tax
liabilities increased in 2018 to $1.6 million from $0.4 million at December 31, 2017.
Recognized Deferred Tax Assets and Liabilities
Net deferred tax liabilities comprise the following:
Property and equipment
Intangible assets
Other assets
Deferred financing costs
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
Deferred tax liabilities, net
Assets
6,410
73
–
67
–
254
2,357
9,599
1,519
3,348
2,482
1,335
(17,699)
9,745
Liabilities
20,339
5,933
683
1,379
545
–
–
–
–
48
–
115
(17,699)
11,343
2018
Net
13,929
5,860
683
1,312
545
(254)
(2,357)
(9,599)
(1,519)
(3,300)
(2,482)
(1,220)
–
1,598
Assets
981
73
–
1,833
–
276
7,939
10,013
1,922
4,380
2,248
248
(16,022)
13,891
Liabilities
21,031
5,505
963
1,553
908
–
–
–
–
42
–
336
(16,022)
14,316
2017
Net
20,050
5,432
963
(280)
908
(276)
(7,939)
(10,013)
(1,922)
(4,338)
(2,248)
88
–
425
Certain comparative information in the table above have been restated to conform to the current year presentation.
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.
The significant components of deferred income tax assets and liabilities and the movement in these balances during the year
were as follows:
Recognized in
Property and equipment
Other assets
Deferred financing costs
Financial assets at fair value
Self-insurance reserves
Indemnification provisions
Intangible assets
Employee benefit accruals
Operating loss carryforwards
Deferred revenue
Decommissioning provision
Other
Deferred tax liabilities, net
Balance
Other Recognized in
January 1, Recognized in Comprehensive Discontinued
Operations
–
–
–
–
–
5,830
–
–
–
–
–
–
5,830
2018 Net Earnings
(6,121)
(217)
1,678
(363)
22
232
428
548
403
1,038
(234)
(1,308)
(3,894)
Income/Other
–
–
(86)
–
–
–
–
(134)
–
–
–
–
(220)
20,050
963
(280)
908
(276)
(7,939)
5,432
(10,013)
(1,922)
(4,338)
(2,248)
88
425
Change in
Balance
Foreign December 31,
2018
13,929
683
1,312
545
(254)
(2,357)
5,860
(9,599)
(1,519)
(3,300)
(2,482)
(1,220)
1,598
Exchange
–
(63)
–
–
–
(480)
–
–
–
–
–
–
(543)
Certain comparative information in the table above have been restated to conform to the current year presentation.
Extendicare Inc. – 2018 Annual Consolidated Financial Statements
37
Notes to Consolidated Financial Statements
Recognized in
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
Decommissioning provision
Other
Deferred tax liabilities, net
Balance
Other Recognized in
January 1, Recognized in Comprehensive Discontinued
Operations
–
(7,120)
–
–
–
–
1,354
–
–
–
–
–
–
(5,766)
2017 Net Earnings
(1,723)
95
(2,120)
(520)
644
(20)
–
3,617
504
42
99
(91)
176
703
Income/Other
–
–
–
–
–
–
–
–
(112)
–
–
–
–
(112)
21,773
8,271
1,840
520
264
(256)
(9,957)
1,815
(10,405)
(1,964)
(4,437)
(2,157)
(88)
5,219
Change in
Balance
Foreign December 31,
2017
20,050
963
(280)
–
908
(276)
(7,939)
5,432
(10,013)
(1,922)
(4,338)
(2,248)
88
425
Exchange
–
(283)
–
–
–
–
664
–
–
–
–
–
–
381
Certain comparative information in the table above have been restated to conform to the current year presentation.
24. COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments
At December 31, 2018, the Company was committed under non-cancellable leases requiring future minimum rentals as
follows:
2019
2020
2021
2022
2023
2024 and beyond
Total minimum payments
Operating Leases
3,507
1,665
1,389
1,014
296
3
7,874
Property and Equipment Commitments
Extendicare has outstanding commitments of $16.0 million at December 31, 2018, in connection with private-pay
retirement communities under development in Ontario, which will be substantially financed with a combination of
construction financing and cash on hand. These are expected to be incurred over the next year.
Legal Proceedings 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.
As previously disclosed, in April 2018, the Company was served with a statement of claim alleging negligence by the
Company in the operation of its long-term care centres and its provision of care to residents and seeking $150 million in
damages. The claim sought an order certifying the claim as a class action pursuant to the Class Proceedings Act (Ontario).
By order of the Ontario Superior Court of Justice, a request from the plaintiff for discontinuance of the class proceeding
was approved on October 25, 2018. Following the discontinuance, the plaintiff who commenced the class proceeding still
has the option to pursue a claim on her own behalf while others may also do so separately on their own behalf. The
Company intends to defend itself against any and all such individual claims and does not believe the outcome on any or all
such claims would have a material adverse impact on its business, results of operations or financial condition and in any
event believes that any potential liability would be resolved within the limits of its insurance coverage.
Extendicare Inc. – 2018 Annual Consolidated Financial Statements
38
Notes to Consolidated Financial Statements
On September 19, 2018, the Company was served with a statement of claim that seeks an order certifying the claim as a
class action pursuant to the Class Proceedings Act (Ontario). The claim alleges that the Company failed to properly apply
certain required medical equipment sterilization protocols at one or more of its home health care clinics and seeks $20
million in damages. The Company does not believe that the lawsuit or the damages sought have merit. The Company
intends to vigorously defend itself against the claim and does not believe the outcome will have a material adverse impact
on its business, results of operations or financial condition and in any event believes that any potential liability would be
resolved within the limits of its insurance coverage.
The provision of health care services is subject to complex government regulations. Every effort is made by the Company
to prevent 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.
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.
Funded
Defined Benefit Plan
2018
5,066
7,666
(2,600)
2017
5,443
7,913
(2,470)
Unfunded Supplementary
Defined Benefit Plan
2017
–
34,168
(34,168)
2018
–
33,523
(33,523)
2018
5,066
41,189
(36,123)
Total
2017
5,443
42,081
(36,638)
Fair value of plan assets
Present value of obligations
Deficit
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 next
actuarial review will be performed effective October 1, 2018, for completion in early 2019.
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.
Extendicare Inc. – 2018 Annual Consolidated Financial Statements
39
Notes to Consolidated Financial Statements
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
Balance at end of year
Plan assets
Fair value at beginning of year
Employer contributions
Actual return on plan assets
Interest income on plan assets
Benefits paid
Fair value at end of year
Defined benefit obligations
2018
2017
42,081
104
(2,680)
1,330
354
41,189
5,443
88
(241)
172
(396)
5,066
36,123
42,430
225
(2,603)
1,447
582
42,081
5,416
83
160
184
(400)
5,443
36,638
The expected contribution to the supplementary plan for the coming year is approximately $2.2 million.
Current accrued liabilities
Other long-term liabilities (note 13)
Accrued benefit liability at end of year
EFFECT OF CHANGES TO DEFINED BENEFIT OBLIGATIONS
Expense Recognized in Net Earnings
Annual benefit plan expense
Current service cost
Interest costs
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 liability experience and assumption changes
Return on assets
Income tax recovery on actuarial losses
Amount recognized in accumulated deficit at December 31
PLAN ASSETS
Equities
Fixed income securities
Real estate / commercial mortgage
2018
2,637
33,486
36,123
2017
2,566
34,072
36,638
2018
2017
104
1,158
225
1,263
1,262
1,488
(9,863)
(266)
(241)
134
(10,236)
(9,552)
(583)
160
112
(9,863)
2018
42%
38%
20%
100%
2017
45%
37%
18%
100%
Extendicare Inc. – 2018 Annual Consolidated Financial Statements
40
Notes to Consolidated Financial Statements
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
2018
3.50%
3.25%
2.0%
3.0%
2
2017
3.25%
3.50%
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.
Changes to the following actuarial assumptions, while holding the other assumptions constant, would have affected the
defined benefit obligation and related expense for 2018 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
Defined Contribution Plans
Increase (Decrease) in
Benefit Obligation
Increase (Decrease) in
Net Earnings
(3,829)
4,534
31
(31)
–
–
(946)
1,039
(166)
221
(2)
2
–
–
35
(39)
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 2018 and 2017 were $16.7 million and $16.5 million, respectively.
26. MANAGEMENT OF RISKS AND FINANCIAL INSTRUMENTS
(a) Management of Risks
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. In April 2018, the Company successfully
refinanced the 2019 Debentures by issuing a new series of debentures which mature in 2025 (note 12).
Extendicare Inc. – 2018 Annual Consolidated Financial Statements
41
Notes to Consolidated Financial Statements
The following are the contractual maturities of financial liabilities, including estimated interest payments:
As at December 31, 2018
Convertible debentures
CMHC mortgages
Non-CMHC mortgages
Construction loans
Finance lease obligations
Accounts payable and accrued
liabilities
Income taxes payable
Operating lease obligations
Carrying
Amount
119,775
114,083
169,670
52,866
80,992
133,654
1,073
–
672,113
Contractual
Cash Flows
166,558
140,639
227,155
54,735
105,938
133,654
1,073
7,874
837,626
Less than
1 Year
6,325
14,935
12,521
54,735
12,904
133,654
1,073
3,507
239,654
1-2 Years
6,325
37,596
33,439
–
13,720
–
–
1,665
92,745
2-5 Years
18,975
50,060
92,069
–
37,928
–
–
2,699
201,731
More than
5 Years
134,933
38,048
89,126
–
41,386
–
–
3
303,496
The gross outflows presented above represent the contractual undiscounted cash flows.
In addition to cash generated from its operations, the Company has available undrawn credit facilities totalling
$69.1 million (note 12).
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)
2018
65,893
2,290
50,570
67,938
53,341
240,032
Carrying Amount
2017
128,156
2,300
42,491
86,296
58,541
317,784
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. The
Company 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.
Extendicare Inc. – 2018 Annual Consolidated Financial Statements
42
Notes to Consolidated Financial Statements
Trade receivables
Other receivables
2018
Carrying Amount
2017
Carrying Amount
U.S.
Dollar
–
–
–
Canadian
Dollar
39,894
10,676
50,570
Total
39,894
10,676
50,570
U.S.
Dollar
–
1,544
1,544
Canadian
Dollar
33,466
7,481
40,947
Total
33,466
9,025
42,491
As at December 31, 2018, receivables from government agencies represented approximately 85% of the total receivables
(2017 – 91%). 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, 2018, the Company had trade receivables of $39.9 million (2017 – $33.5 million). All the receivables
were fully performing and collectible in the amounts outlined above. The Company estimates the ECL based on historical
experience of collectability and aging of accounts by payor type and on an individual basis. Receivables that are considered
uncollectible are written off as a charge to net earnings, and any subsequent recoveries of previously written off amounts
are recognized in net earnings when they occur.
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
At December 31
2018
28,889
10,122
1,767
712
(1,596)
39,894
2017
22,800
6,846
1,779
3,638
(1,597)
33,466
2018
1,597
2,910
(2,911)
1,596
2017
1,818
1,710
(1,931)
1,597
Any change 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 $53.3 million (2017 – $58.5 million) of discounted amounts
receivable due from government agencies. These represent amounts funded by the Ontario government for a portion of
LTC centre construction costs over a 20-year or 25-year period (note 10). The Company does not believe there is any credit
exposure for these amounts due from government agencies.
Extendicare Inc. – 2018 Annual Consolidated Financial Statements
43
Notes to Consolidated Financial Statements
CURRENCY RISK
Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes
in foreign exchange rates. Cross-border transactions are subject to exchange rate fluctuations that may result in realized
gains or losses as and when payments are made.
As a result of the U.S. Sale Transaction, our exposure to foreign currency risk has been significantly reduced. The
following table outlines the net asset exposure to both the U.S. continuing operations and other items retained from the U.S.
Sale Transaction as at December 31, 2018 (note 22).
(in thousands of US$)
Assets
Current assets
Investments held for self-insured liabilities
Liabilities
Current liabilities
Indemnification provisions
Non-current liabilities
Net asset exposure
Net Earnings Sensitivity Analysis
2018
16,644
49,818
10,262
10,053
18,276
27,871
Prior to the U.S. Sale Transaction, the majority of the Company’s operations were conducted in the United States. As at
December 31, 2018, U.S. operations accounted for less than 1% of its revenue from continuing operations (2017 – less than
1%).
Every one cent strengthening of the Canadian dollar against the U.S. dollar in 2018 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.
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, 2018, construction loans of $52.9 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. The Company does not account for any
fixed-rate liabilities at FVTPL; consequently, changes in interest rates have no impact on our fixed-rate debt and therefore,
would not impact net earnings.
Below is the interest rate profile of our interest-bearing financial instruments, which reflects the impact of the interest rate
swaps (notes 10):
Fixed-rate instruments:
Long-term debt (1)
Total liability in fixed-rate instruments
Variable-rate instruments:
Long-term debt (1)
(1) Includes current portion and excludes netting of deferred financing costs.
Carrying Amount
2017
2018
484,520
484,520
511,878
511,878
52,866
52,866
29,868
29,868
Extendicare Inc. – 2018 Annual Consolidated Financial Statements
44
Notes to Consolidated Financial Statements
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 or net earnings with
respect to variable-rate debt. As at December 31, 2018, long-term debt with variable rates represented 9.8% 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 $0.4 million and a decrease of
100 basis points in interest rates would have increased net earnings by $0.4 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.
(b) Fair values of Financial Instruments
As at December 31, 2018
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
Interest rate swaps
Long-term debt excluding convertible
debentures (3) (4)
Convertible debentures
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
Fair Value
Amortized through Profit
and Loss
Cost
65,893
2,290
442
50,570
–
53,341
2,242
174,778
6,239
–
417,611
119,775
543,625
–
–
–
–
2,556
–
65,696
68,252
–
523
–
–
523
Loans and
Receivables
Fair Value
Available through Profit
and Loss
for Sale
Other
Financial
Liabilities
128,156
2,300
442
42,491
–
58,541
–
231,930
–
–
–
–
–
–
–
–
–
–
86,296
86,296
–
–
–
–
–
–
–
–
3,459
–
–
3,459
–
–
–
–
–
–
–
–
–
–
–
–
Total
Carrying
Amount
65,893
2,290
442
50,570
2,556
53,341
67,938
243,030
6,239
523
417,611
119,775
544,148
Total
Carrying
Amount
128,156
2,300
442
42,491
3,459
58,541
86,296
321,685
Fair
Value
65,907
2,290
442
50,570
2,556
55,142
67,938
244,845
6,239
523
444,092
125,551
576,405
Fair
Value
128,166
2,300
442
42,491
3,459
62,300
86,296
325,454
4,272
4,272
4,272
416,946
124,800
546,018
416,946
124,800
546,018
432,259
129,650
566,181
(1) Included in other assets.
(2) Includes primarily amounts receivable from government.
(3) Includes current portion.
(4) Excludes netting of deferred financing costs.
Extendicare Inc. – 2018 Annual Consolidated Financial Statements
45
Notes to Consolidated Financial Statements
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 FVTPL (2017 – 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, where carrying value is not a reasonable approximation of fair
value, are as follows:
As at December 31, 2018:
Investments held for self-insured liabilities
Amounts receivable and other assets
Interest rate swaps
Long-term debt excluding convertible debentures
Convertible debentures
As at December 31, 2017:
Investments held for self-insured liabilities
Amounts receivable and other assets
Interest rate swaps
Long-term debt excluding convertible debentures
Convertible debentures
27. CAPITAL MANAGEMENT
Level 1
Level 2
Level 3
Total
67,938
–
–
–
125,551
86,296
–
–
–
129,650
–
55,142
2,556
444,092
–
–
62,300
3,459
432,259
–
–
–
–
–
–
–
–
–
–
–
67,938
55,142
2,556
444,092
125,551
86,296
62,300
3,459
432,259
129,650
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
Extendicare Inc. – 2018 Annual Consolidated Financial Statements
46
Notes to Consolidated Financial Statements
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, 2019, Extendicare received the approval of the TSX for the Bid (note 15). During 2018, under a similar
normal course issuer bid that commenced on January 15, 2018 and ended on January 14, 2019, the Company acquired and
cancelled 703,585 Common Shares at an average price of $8.89 per share, for a total cost of $6.3 million.
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.
Dividends
2018
2017
74,626
59,664
454,344
528,970
(65,893)
463,077
492,064
955,141
476,404
536,068
(128,156)
407,912
490,881
898,793
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, 2018.
28. RELATED PARTY TRANSACTIONS
a) Transactions with Key Management Personnel
As previously announced, Extendicare’s former President and Chief Executive Officer, Tim Lukenda stepped down from
his position on October 22, 2018. In connection with his separation agreement, Mr. Lukenda was entitled to receive a cash
payment in the amount of $2.9 million, and was required to forfeit, for no consideration, all of the PSUs credited to his
account under the Company’s LTIP. The Company reflected a charge in the 2018 third quarter for the cash payment of
$2.9 million, partly offset by the reversal of $1.2 million in connection with the forfeiture of the PSUs, reflected below as
part of short-term benefits (2017 – $2.0 million).
During Mr. Lukenda’s employment with Extendicare, the Company provided management services to a long-term care
centre and group purchasing services to a retirement centre owned by Mr. Lukenda and members of his family through a
company in which Mr. Lukenda had an approximate 7.1% direct and indirect ownership interest. Mr. Lukenda’s
employment contract provided a mechanism and process that effectively removed him from the decision-making process in
situations where a conflict of interest may have arisen on any matter between the two companies.
Extendicare Inc. – 2018 Annual Consolidated Financial Statements
47
Notes to Consolidated Financial Statements
b) Compensation of Key Management Personnel
The remuneration of directors and other key management personnel of the Company during the years ended
December 31, 2018 and 2017, was as follows:
Short-term benefits
Post-employment benefits
Share-based compensation
2018
3,318
2,917
(106)
6,129
2017
4,555
137
1,773
6,465
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
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 seven acquired retirement communities, and two communities that were newly
constructed and opened in the fourth quarters of 2016 and 2017. The retirement communities provide accommodation and
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.
Extendicare Inc. – 2018 Annual Consolidated Financial Statements
48
Notes to Consolidated Financial Statements
Long-term
Care
Retirement
Living
Home
Health Care
Other
Canadian
Operations
Corporate
Canada
Total
Canada
Total
U.S.
(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
Gain on foreign exchange and investments
Interest revenue
Fair value adjustments
Net finance costs
Earnings (loss) before income taxes
Income tax expense
Current
Deferred
Total income tax expense
Earnings (loss) from continuing
632,533
–
–
–
632,533
559,489
–
–
559,489
73,044
–
–
73,044
–
–
–
–
–
–
73,044
–
–
–
–
33,412
–
–
33,412
24,430
–
–
24,430
8,982
–
–
8,982
–
–
–
–
–
–
8,982
–
–
–
–
–
431,343
–
431,343
393,354
–
4,877
398,231
33,112
–
–
33,112
–
–
–
–
–
–
33,112
–
–
–
22,291
22,291
8,750
–
–
8,750
13,541
–
–
13,541
–
–
–
–
–
–
13,541
–
–
–
23
23
–
31,828
1,865
33,693
632,533
33,412
431,343
22,314
1,119,602
986,023
31,828
6,742
1,024,593
(33,670)
35,270
20,195
(89,135)
27,584
1,250
(1,105)
(3,761)
956
24,924
(114,059)
95,009
35,270
20,195
39,544
27,584
1,250
(1,105)
(3,761)
956
24,924
14,620
8,129
(3,894)
4,235
–
–
–
–
–
–
8,129
(3,894)
4,235
2018
Total
632,533
33,412
431,343
22,719
1,120,007
986,023
33,004
6,742
1,025,769
94,238
35,270
20,195
38,773
27,584
2,878
(1,203)
(3,761)
956
26,454
12,319
8,129
(3,894)
4,235
–
–
–
405
405
–
1,176
–
1,176
(771)
–
–
(771)
–
1,628
(98)
–
–
1,530
(2,301)
–
–
–
operations
73,044
8,982
33,112
13,541
(118,294)
10,385
(2,301)
8,084
DISCONTINUED OPERATIONS
Earnings from discontinued operations, net
of income taxes
Net earnings (loss)
–
–
–
–
–
–
23,654
23,654
73,044
8,982
33,112
13,541
(118,294)
10,385
21,353
31,738
Extendicare Inc. – 2018 Annual Consolidated Financial Statements
49
Notes to 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 and
amortization
Depreciation and amortization
Earnings (loss) before net finance costs
and income taxes
Interest expense
Accretion
Loss (gain) on foreign exchange and
investments
Interest revenue
Fair value adjustments
Net finance costs (income)
Earnings (loss) before income taxes
Income tax expense
Current
Deferred
Total income tax expense
Earnings (loss) from continuing
operations
DISCONTINUED OPERATIONS
Loss from discontinued operations, net of
income taxes
Net earnings (loss)
Long-term
Care
Retirement
Living
Home
Health Care
Other
Canadian
Operations
Corporate
Canada
Total
Canada
Total
U.S.
616,887
–
–
–
616,887
542,965
–
–
542,965
73,922
–
73,922
–
–
–
–
–
–
73,922
–
–
–
–
20,673
–
–
20,673
18,290
–
–
18,290
2,383
–
2,383
–
–
–
–
–
–
2,383
–
–
–
–
–
435,718
–
435,718
391,867
–
4,778
396,645
–
–
–
18,789
18,789
8,387
–
–
8,387
–
–
–
15
15
–
30,333
1,980
32,313
616,887
20,673
435,718
18,804
1,092,082
961,509
30,333
6,758
998,600
39,073
–
10,402
–
(32,298)
31,379
93,482
31,379
39,073
–
–
–
–
–
–
39,073
–
–
–
10,402
–
–
–
–
–
–
10,402
(63,677)
28,082
1,529
666
(3,695)
(2,474)
24,108
(87,785)
–
–
–
10,149
603
10,752
62,103
28,082
1,529
666
(3,695)
(2,474)
24,108
37,995
10,149
603
10,752
–
–
–
5,249
5,249
–
1,134
–
1,134
4,115
–
4,115
–
1,283
(1,530)
(207)
–
(454)
4,569
–
100
100
2017
Total
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
2,812
(864)
(3,902)
(2,474)
23,654
42,564
10,149
703
10,852
73,922
2,383
39,073
10,402
(98,537)
27,243
4,469
31,712
–
–
–
–
–
–
(29,580)
(29,580)
73,922
2,383
39,073
10,402
(98,537)
27,243
(25,111)
2,132
30. SIGNIFICANT SUBSIDIARIES
The following is a list of the significant subsidiaries as at December 31, 2018, 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.
9623523 Canada Inc.
Douglas Crossing Retirement Community Inc.
Lynde Creek Manor Retirement Community Inc.
9994165 Canada Inc.
Riverbend Crossing Retirement Community Inc.
Cedar Crossing Retirement Community Inc.
Laurier Indemnity Company, Ltd.
Jurisdiction of Incorporation
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Bermuda
Extendicare Inc. – 2018 Annual Consolidated Financial Statements
50
EXTENDICARE INC. BOARD OF DIRECTORS
Alan D. Torrie HR, GN
Chairman of the Board
Alan R. Hibben A, AQ, GN
Corporate Director and Advisor
Michael Guerriere
President and Chief Executive Officer
Donna E. Kingelin AQ, HR, QR
Corporate Director and Consultant
Margery O. Cunningham A
Corporate Director and Consultant
Sandra L. Hanington A, GN, QR
Corporate Director and Advisor
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
Audit
AQ Acquisitions
GN Governance and Nominating
HR Human Resources
QR Quality and Risk
EXTENDICARE EXECUTIVES
Michael Guerriere
President and Chief Executive Officer
Michael A. Harris
Vice President, Long-term Care
Operations
Tracey L. Mulcahy
Vice President, Quality, Risk and
Innovation
Elaine E. Everson
Vice President and Chief Financial
Officer
Christopher J. Dennis
President, ParaMed Inc.
Jillian E. Fountain
Vice President, Investor Relations
Gary M. Loder
Vice President, Extendicare Assist
and SGP Purchasing Partner
Network
Mark A. Lugowski
Vice President, Esprit Lifestyle
Communities
Karen A. Scanlan
Vice President, People and Culture
Brandon L. Parent
Vice President, General Counsel &
Corporate Secretary
SECURITYHOLDER INFORMATION
Stock Exchange Listing
Toronto Stock Exchange
Symbols:
Common Shares – EXE
2025 Convertible Debt (5.0%) – EXE.DB.C
Transfer Agent
Computershare Trust Company of Canada
Tel: (800) 564-6253
Fax: (866) 249-7775
email: service@computershare.com
www.computershare.com
Published Information
Additional information about Extendicare, including this report, is available for viewing or printing on its website, in
addition to news releases, quarterly reports and other filings with the securities commissions.
Printed copies are available upon request.
Visit Extendicare’s website at www.extendicare.com
... helping people live better
3000 Steeles Avenue East, Suite 103, Markham, Ontario, Canada L3R 4T9
Tel: (905) 470-4000 | Fax: (905) 470-5588 | www.extendicare.com