UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission file number: 001-14057
KINDRED HEALTHCARE, INC.
(Exact name of registrant as specified in its charter)
Delaware |
|
61-1323993 |
(State or other jurisdiction of incorporation or organization) |
|
(I.R.S. Employer Identification No.) |
680 South Fourth Street Louisville, KY |
|
40202-2412 |
(Address of principal executive offices) |
|
(Zip Code) |
(502) 596-7300
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
|
x |
|
Accelerated filer |
|
¨ |
Non-accelerated filer |
|
¨ |
|
Smaller reporting company |
|
¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class of Common Stock |
|
Outstanding at July 31, 2015 |
Common stock, $0.25 par value |
|
83,876,488 shares |
1 of 83
FORM 10-Q
INDEX
|
|
Page |
PART I. FINANCIAL INFORMATION |
|
|
Item 1. |
Financial Statements (Unaudited): |
|
|
3 |
|
|
4 |
|
|
Condensed Consolidated Balance Sheet – June 30, 2015 and December 31, 2014 |
5 |
|
6 |
|
|
7 |
|
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
45 |
Item 3. |
79 |
|
Item 4. |
80 |
|
PART II. OTHER INFORMATION |
|
|
Item 1. |
81 |
|
Item 2. |
81 |
|
Item 6. |
82 |
2
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
|
|
Three months ended June 30, |
|
Six months ended |
|
||||||||||
|
|
|
June 30, |
|
|||||||||||
|
|
2015 |
|
|
2014 |
|
|
2015 |
|
|
2014 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
$ |
1,833,475 |
|
|
$ |
1,261,397 |
|
|
$ |
3,509,442 |
|
|
$ |
2,534,007 |
|
Salaries, wages and benefits |
|
935,687 |
|
|
|
606,095 |
|
|
|
1,782,780 |
|
|
|
1,224,789 |
|
Supplies |
|
98,237 |
|
|
|
71,585 |
|
|
|
191,508 |
|
|
|
144,550 |
|
Rent |
|
96,402 |
|
|
|
77,699 |
|
|
|
188,542 |
|
|
|
156,229 |
|
Other operating expenses |
|
212,117 |
|
|
|
172,674 |
|
|
|
409,844 |
|
|
|
342,204 |
|
General and administrative expenses (exclusive of depreciation and amortization expense included below) |
|
334,805 |
|
|
|
244,746 |
|
|
|
740,907 |
|
|
|
476,018 |
|
Other income |
|
(569 |
) |
|
|
(122 |
) |
|
|
(1,049 |
) |
|
|
(334 |
) |
Litigation contingency expense |
|
3,925 |
|
|
|
4,600 |
|
|
|
98,925 |
|
|
|
4,600 |
|
Impairment charges |
|
− |
|
|
|
− |
|
|
|
6,726 |
|
|
|
− |
|
Depreciation and amortization |
|
38,625 |
|
|
|
39,172 |
|
|
|
77,560 |
|
|
|
78,264 |
|
Interest expense |
|
57,170 |
|
|
|
80,530 |
|
|
|
119,688 |
|
|
|
106,329 |
|
Investment income |
|
(1,030 |
) |
|
|
(2,449 |
) |
|
|
(1,771 |
) |
|
|
(2,631 |
) |
|
|
1,775,369 |
|
|
|
1,294,530 |
|
|
|
3,613,660 |
|
|
|
2,530,018 |
|
Income (loss) from continuing operations before income taxes |
|
58,106 |
|
|
|
(33,133 |
) |
|
|
(104,218 |
) |
|
|
3,989 |
|
Provision (benefit) for income taxes |
|
24,396 |
|
|
|
(12,683 |
) |
|
|
(3,340 |
) |
|
|
1,512 |
|
Income (loss) from continuing operations |
|
33,710 |
|
|
|
(20,450 |
) |
|
|
(100,878 |
) |
|
|
2,477 |
|
Discontinued operations, net of income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
(589 |
) |
|
|
(8,768 |
) |
|
|
(4,013 |
) |
|
|
(16,210 |
) |
Gain (loss) on divestiture of operations |
|
983 |
|
|
|
(2,018 |
) |
|
|
983 |
|
|
|
(5,024 |
) |
Income (loss) from discontinued operations |
|
394 |
|
|
|
(10,786 |
) |
|
|
(3,030 |
) |
|
|
(21,234 |
) |
Net income (loss) |
|
34,104 |
|
|
|
(31,236 |
) |
|
|
(103,908 |
) |
|
|
(18,757 |
) |
(Earnings) loss attributable to noncontrolling interests: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
(11,735 |
) |
|
|
(4,828 |
) |
|
|
(20,582 |
) |
|
|
(9,357 |
) |
Discontinued operations |
|
2 |
|
|
|
253 |
|
|
|
31 |
|
|
|
323 |
|
|
|
(11,733 |
) |
|
|
(4,575 |
) |
|
|
(20,551 |
) |
|
|
(9,034 |
) |
Income (loss) attributable to Kindred |
$ |
22,371 |
|
|
$ |
(35,811 |
) |
|
$ |
(124,459 |
) |
|
$ |
(27,791 |
) |
Amounts attributable to Kindred stockholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
$ |
21,975 |
|
|
$ |
(25,278 |
) |
|
$ |
(121,460 |
) |
|
$ |
(6,880 |
) |
Income (loss) from discontinued operations |
|
396 |
|
|
|
(10,533 |
) |
|
|
(2,999 |
) |
|
|
(20,911 |
) |
Net income (loss) |
$ |
22,371 |
|
|
$ |
(35,811 |
) |
|
$ |
(124,459 |
) |
|
$ |
(27,791 |
) |
Earnings (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
$ |
0.25 |
|
|
$ |
(0.47 |
) |
|
$ |
(1.47 |
) |
|
$ |
(0.13 |
) |
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
(0.01 |
) |
|
|
(0.16 |
) |
|
|
(0.05 |
) |
|
|
(0.30 |
) |
Gain (loss) on divestiture of operations |
|
0.01 |
|
|
|
(0.04 |
) |
|
|
0.01 |
|
|
|
(0.09 |
) |
Income (loss) from discontinued operations |
|
− |
|
|
|
(0.20 |
) |
|
|
(0.04 |
) |
|
|
(0.39 |
) |
Net income (loss) |
$ |
0.25 |
|
|
$ |
(0.67 |
) |
|
$ |
(1.51 |
) |
|
$ |
(0.52 |
) |
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
$ |
0.25 |
|
|
$ |
(0.47 |
) |
|
$ |
(1.47 |
) |
|
$ |
(0.13 |
) |
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
(0.01 |
) |
|
|
(0.16 |
) |
|
|
(0.05 |
) |
|
|
(0.30 |
) |
Gain (loss) on divestiture of operations |
|
0.01 |
|
|
|
(0.04 |
) |
|
|
0.01 |
|
|
|
(0.09 |
) |
Income (loss) from discontinued operations |
|
− |
|
|
|
(0.20 |
) |
|
|
(0.04 |
) |
|
|
(0.39 |
) |
Net income (loss) |
$ |
0.25 |
|
|
$ |
(0.67 |
) |
|
$ |
(1.51 |
) |
|
$ |
(0.52 |
) |
Shares used in computing earnings (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
86,045 |
|
|
|
53,714 |
|
|
|
82,828 |
|
|
|
53,180 |
|
Diluted |
|
86,402 |
|
|
|
53,714 |
|
|
|
82,828 |
|
|
|
53,180 |
|
Cash dividends declared and paid per common share |
$ |
0.12 |
|
|
$ |
0.12 |
|
|
$ |
0.24 |
|
|
$ |
0.24 |
|
See accompanying notes.
3
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands)
|
|
Three months ended June 30, |
|
|
Six months ended |
|
|||||||||
|
|
2015 |
|
|
|
2014 |
|
|
2015 |
|
|
2014 |
|
||
Net income (loss) |
$ |
34,104 |
|
|
$ |
(31,236 |
) |
|
$ |
(103,908 |
) |
|
$ |
(18,757 |
) |
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities (Note 9): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized investment gains (losses) |
|
(144 |
) |
|
|
347 |
|
|
|
137 |
|
|
|
484 |
|
Reclassification of (gains) losses realized in net income (loss) |
|
5 |
|
|
|
(2,095 |
) |
|
|
− |
|
|
|
(2,103 |
) |
Net change |
|
(139 |
) |
|
|
(1,748 |
) |
|
|
137 |
|
|
|
(1,619 |
) |
Interest rate swaps (Note 1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses) |
|
728 |
|
|
|
(1,966 |
) |
|
|
(1,264 |
) |
|
|
(3,046 |
) |
Reclassification of ineffectiveness realized in net income (loss) |
|
32 |
|
|
|
52 |
|
|
|
29 |
|
|
|
84 |
|
Reclassification of (gains) losses realized in net income (loss), net of payments |
|
12 |
|
|
|
802 |
|
|
|
(12 |
) |
|
|
797 |
|
Net change |
|
772 |
|
|
|
(1,112 |
) |
|
|
(1,247 |
) |
|
|
(2,165 |
) |
Income tax expense (benefit) related to items of other comprehensive income (loss) |
|
(237 |
) |
|
|
1,358 |
|
|
|
450 |
|
|
|
1,737 |
|
Other comprehensive income (loss) |
|
396 |
|
|
|
(1,502 |
) |
|
|
(660 |
) |
|
|
(2,047 |
) |
Comprehensive income (loss) |
|
34,500 |
|
|
|
(32,738 |
) |
|
|
(104,568 |
) |
|
|
(20,804 |
) |
Earnings attributable to noncontrolling interests |
|
(11,733 |
) |
|
|
(4,575 |
) |
|
|
(20,551 |
) |
|
|
(9,034 |
) |
Comprehensive income (loss) attributable to Kindred |
$ |
22,767 |
|
|
$ |
(37,313 |
) |
|
$ |
(125,119 |
) |
|
$ |
(29,838 |
) |
See accompanying notes.
4
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
(In thousands, except per share amounts)
|
June 30, |
|
|
December 31, |
|
||
|
2015 |
|
|
2014 |
|
||
ASSETS |
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
Cash and cash equivalents |
$ |
119,536 |
|
|
$ |
164,188 |
|
Insurance subsidiary investments |
|
104,534 |
|
|
|
99,951 |
|
Accounts receivable less allowance for loss of $52,441 – June 30, 2015 and $52,855 – December 31, 2014 |
|
1,253,218 |
|
|
|
944,219 |
|
Inventories |
|
27,120 |
|
|
|
25,702 |
|
Deferred tax assets |
|
92,786 |
|
|
|
82,391 |
|
Income taxes |
|
15,996 |
|
|
|
8,575 |
|
Interest deposit on senior unsecured notes held in escrow |
|
− |
|
|
|
23,438 |
|
Other |
|
78,172 |
|
|
|
41,598 |
|
|
|
1,691,362 |
|
|
|
1,390,062 |
|
|
|
|
|
|
|
|
|
Property and equipment |
|
2,084,349 |
|
|
|
1,978,153 |
|
Accumulated depreciation |
|
(1,134,817 |
) |
|
|
(1,076,049 |
) |
|
|
949,532 |
|
|
|
902,104 |
|
|
|
|
|
|
|
|
|
Goodwill |
|
2,643,328 |
|
|
|
997,597 |
|
Intangible assets less accumulated amortization of $80,759 – June 30, 2015 and $68,043 – December 31, 2014 |
|
799,902 |
|
|
|
400,700 |
|
Assets held for sale |
|
2,384 |
|
|
|
3,475 |
|
Insurance subsidiary investments |
|
198,410 |
|
|
|
166,045 |
|
Deferred tax assets |
|
− |
|
|
|
11,174 |
|
Proceeds from senior unsecured notes held in escrow |
|
− |
|
|
|
1,350,000 |
|
Acquisition deposit |
|
− |
|
|
|
195,000 |
|
Other |
|
321,009 |
|
|
|
236,807 |
|
Total assets (a) |
$ |
6,605,927 |
|
|
$ |
5,652,964 |
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
Accounts payable |
$ |
183,843 |
|
|
$ |
175,725 |
|
Salaries, wages and other compensation |
|
467,693 |
|
|
|
358,857 |
|
Due to third party payors |
|
44,490 |
|
|
|
43,957 |
|
Professional liability risks |
|
61,550 |
|
|
|
64,137 |
|
Other accrued liabilities |
|
347,230 |
|
|
|
189,980 |
|
Long-term debt due within one year |
|
32,354 |
|
|
|
24,607 |
|
|
|
1,137,160 |
|
|
|
857,263 |
|
|
|
|
|
|
|
|
|
Long-term debt |
|
3,222,443 |
|
|
|
2,852,531 |
|
Professional liability risks |
|
267,503 |
|
|
|
243,614 |
|
Deferred tax liabilities |
|
8,422 |
|
|
|
− |
|
Deferred credits and other liabilities |
|
298,124 |
|
|
|
213,584 |
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 12) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity: |
|
|
|
|
|
|
|
Stockholders' equity: |
|
|
|
|
|
|
|
Common stock, $0.25 par value; authorized 175,000 shares; issued 83,693 shares – June 30, 2015 and 69,977 shares – December 31, 2014 |
|
20,923 |
|
|
|
17,494 |
|
Capital in excess of par value |
|
1,747,585 |
|
|
|
1,586,692 |
|
Accumulated other comprehensive loss |
|
(3,211 |
) |
|
|
(2,551 |
) |
Accumulated deficit |
|
(286,357 |
) |
|
|
(159,768 |
) |
|
|
1,478,940 |
|
|
|
1,441,867 |
|
Noncontrolling interests |
|
193,335 |
|
|
|
44,105 |
|
Total equity |
|
1,672,275 |
|
|
|
1,485,972 |
|
Total liabilities (a) and equity |
$ |
6,605,927 |
|
|
$ |
5,652,964 |
|
(a) |
The Company’s consolidated assets as of June 30, 2015 include total assets of variable interest entities of $367.1 million, which can only be used to settle the obligations of the variable interest entities. The Company’s consolidated liabilities as of June 30, 2015 include total liabilities of variable interest entities of $32.0 million. See note 1 of the notes to unaudited condensed consolidated financial statements. |
See accompanying notes.
5
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In thousands)
|
|
Three months ended |
|
|
Six months ended |
|
|||||||||
|
|
June 30, |
|
|
June 30, |
|
|||||||||
|
|
2015 |
|
|
|
2014 |
|
|
2015 |
|
|
2014 |
|
||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
$ |
34,104 |
|
|
$ |
(31,236 |
) |
|
$ |
(103,908 |
) |
|
$ |
(18,757 |
) |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
38,849 |
|
|
|
40,922 |
|
|
|
77,926 |
|
|
|
82,226 |
|
Amortization of stock-based compensation costs |
|
6,746 |
|
|
|
6,378 |
|
|
|
12,570 |
|
|
|
8,963 |
|
Amortization of deferred financing costs |
|
3,539 |
|
|
|
16,832 |
|
|
|
6,601 |
|
|
|
19,229 |
|
Payment of capitalized lender fees related to debt issuance |
|
− |
|
|
|
(19,125 |
) |
|
|
(28,012 |
) |
|
|
(19,125 |
) |
Provision for doubtful accounts |
|
10,511 |
|
|
|
12,133 |
|
|
|
18,803 |
|
|
|
20,893 |
|
Deferred income taxes |
|
21,130 |
|
|
|
17,528 |
|
|
|
(4,450 |
) |
|
|
21,503 |
|
Impairment charges |
|
− |
|
|
|
220 |
|
|
|
6,726 |
|
|
|
664 |
|
(Gain) loss on divestiture of discontinued operations |
|
(983 |
) |
|
|
2,018 |
|
|
|
(983 |
) |
|
|
5,024 |
|
Other |
|
4,975 |
|
|
|
70 |
|
|
|
6,972 |
|
|
|
2,114 |
|
Change in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
(7,733 |
) |
|
|
(41,066 |
) |
|
|
(39,389 |
) |
|
|
(112,895 |
) |
Inventories and other assets |
|
(17,608 |
) |
|
|
(3,769 |
) |
|
|
35,414 |
|
|
|
(9,987 |
) |
Accounts payable |
|
(12,900 |
) |
|
|
(5,425 |
) |
|
|
(12,435 |
) |
|
|
(18,877 |
) |
Income taxes |
|
1,923 |
|
|
|
(40,476 |
) |
|
|
(3,845 |
) |
|
|
(11,063 |
) |
Due to third party payors |
|
(3,554 |
) |
|
|
(12,354 |
) |
|
|
(18,973 |
) |
|
|
(14,367 |
) |
Other accrued liabilities |
|
21,380 |
|
|
|
7,387 |
|
|
|
7,760 |
|
|
|
(21,262 |
) |
Net cash provided by (used in) operating activities |
|
100,379 |
|
|
|
(49,963 |
) |
|
|
(39,223 |
) |
|
|
(65,717 |
) |
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Routine capital expenditures |
|
(24,500 |
) |
|
|
(24,485 |
) |
|
|
(45,269 |
) |
|
|
(46,162 |
) |
Development capital expenditures |
|
(518 |
) |
|
|
(372 |
) |
|
|
(6,306 |
) |
|
|
(1,123 |
) |
Acquisitions, net of cash acquired |
|
(2,684 |
) |
|
|
(1,383 |
) |
|
|
(661,755 |
) |
|
|
(24,098 |
) |
Acquisition deposit |
|
− |
|
|
|
− |
|
|
|
195,000 |
|
|
|
− |
|
Sale of assets |
|
2,229 |
|
|
|
8,927 |
|
|
|
3,177 |
|
|
|
13,961 |
|
Proceeds from senior unsecured notes offering held in escrow |
|
− |
|
|
|
− |
|
|
|
1,350,000 |
|
|
|
− |
|
Interest in escrow for senior unsecured notes |
|
− |
|
|
|
− |
|
|
|
23,438 |
|
|
|
− |
|
Purchase of insurance subsidiary investments |
|
(16,911 |
) |
|
|
(13,179 |
) |
|
|
(42,829 |
) |
|
|
(23,293 |
) |
Sale of insurance subsidiary investments |
|
12,764 |
|
|
|
17,758 |
|
|
|
34,793 |
|
|
|
26,520 |
|
Net change in insurance subsidiary cash and cash equivalents |
|
(5,205 |
) |
|
|
(4,957 |
) |
|
|
(5,763 |
) |
|
|
(11,556 |
) |
Change in other investments |
|
175 |
|
|
|
70 |
|
|
|
199 |
|
|
|
710 |
|
Other |
|
(798 |
) |
|
|
17 |
|
|
|
(793 |
) |
|
|
(534 |
) |
Net cash provided by (used in) investing activities |
|
(35,448 |
) |
|
|
(17,604 |
) |
|
|
843,892 |
|
|
|
(65,575 |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from borrowings under revolving credit |
|
347,700 |
|
|
|
648,315 |
|
|
|
1,155,150 |
|
|
|
1,157,015 |
|
Repayment of borrowings under revolving credit |
|
(360,100 |
) |
|
|
(943,715 |
) |
|
|
(970,150 |
) |
|
|
(1,369,515 |
) |
Proceeds from issuance of term loan, net of discount |
|
− |
|
|
|
997,500 |
|
|
|
199,000 |
|
|
|
997,500 |
|
Proceeds from issuance of senior unsecured notes |
|
− |
|
|
|
500,000 |
|
|
|
− |
|
|
|
500,000 |
|
Repayment of Gentiva debt |
|
− |
|
|
|
− |
|
|
|
(1,177,363 |
) |
|
|
− |
|
Repayment of senior unsecured notes |
|
− |
|
|
|
(550,000 |
) |
|
|
− |
|
|
|
(550,000 |
) |
Repayment of term loan |
|
(6,005 |
) |
|
|
(781,594 |
) |
|
|
(6,005 |
) |
|
|
(783,563 |
) |
Repayment of other long-term debt |
|
(459 |
) |
|
|
(67 |
) |
|
|
(900 |
) |
|
|
(157 |
) |
Payment of deferred financing costs |
|
(445 |
) |
|
|
(2,378 |
) |
|
|
(2,983 |
) |
|
|
(2,648 |
) |
Equity offering, net of offering costs |
|
− |
|
|
|
203,977 |
|
|
|
− |
|
|
|
203,977 |
|
Issuance of common stock in connection with employee benefit plans |
|
139 |
|
|
|
883 |
|
|
|
205 |
|
|
|
4,687 |
|
Payment of costs associated with issuance of common stock and tangible equity units |
|
− |
|
|
|
− |
|
|
|
(915 |
) |
|
|
− |
|
Payment of dividend for mandatory redeemable preferred stock |
|
(2,654 |
) |
|
|
− |
|
|
|
(5,432 |
) |
|
|
− |
|
Dividends paid |
|
(10,027 |
) |
|
|
(6,572 |
) |
|
|
(20,002 |
) |
|
|
(13,086 |
) |
Distributions to noncontrolling interests |
|
(10,119 |
) |
|
|
(2,662 |
) |
|
|
(21,138 |
) |
|
|
(5,595 |
) |
Other |
|
50 |
|
|
|
248 |
|
|
|
1,212 |
|
|
|
2,121 |
|
Net cash provided by (used in) financing activities |
|
(41,920 |
) |
|
|
63,935 |
|
|
|
(849,321 |
) |
|
|
140,736 |
|
Change in cash and cash equivalents |
|
23,011 |
|
|
|
(3,632 |
) |
|
|
(44,652 |
) |
|
|
9,444 |
|
Cash and cash equivalents at beginning of period |
|
96,525 |
|
|
|
49,048 |
|
|
|
164,188 |
|
|
|
35,972 |
|
Cash and cash equivalents at end of period |
$ |
119,536 |
|
|
$ |
45,416 |
|
|
$ |
119,536 |
|
|
$ |
45,416 |
|
Supplemental information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest payments |
$ |
31,640 |
|
|
$ |
68,065 |
|
|
$ |
66,450 |
|
|
$ |
79,666 |
|
Income tax payments (refunds) |
|
909 |
|
|
|
4,329 |
|
|
|
1,139 |
|
|
|
(21,565 |
) |
Issuance of common stock in Gentiva Merger (see Note 2) |
|
2,353 |
|
|
|
− |
|
|
|
177,441 |
|
|
|
− |
|
See accompanying notes.
6
KINDRED HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – BASIS OF PRESENTATION
Business
Kindred Healthcare, Inc. is a healthcare services company that through its subsidiaries operates transitional care (“TC”) hospitals, a home health, hospice and community care business, inpatient rehabilitation hospitals (“IRFs”), a contract rehabilitation services business, nursing centers and assisted living facilities across the United States (collectively, the “Company” or “Kindred”). At June 30, 2015, the Company’s hospital division operated 96 TC hospitals (certified as long-term acute care (“LTAC”) hospitals under the Medicare program) in 22 states. The Company’s Kindred at Home division (formerly known as the care management division) primarily provided home health, hospice and community care services from 656 sites of service in 41 states. The Company’s rehabilitation division (now known as Kindred Rehabilitation Services) provided rehabilitation services primarily in hospitals and long-term care settings and operated 16 IRFs. The Company’s nursing center division operated 90 nursing centers and seven assisted living facilities in 18 states.
Gentiva Merger
On October 9, 2014, the Company entered into an Agreement and Plan of Merger (the “Gentiva Merger Agreement”) with Gentiva Health Services, Inc. (“Gentiva”), providing for the Company’s acquisition of Gentiva (the “Gentiva Merger”). On February 2, 2015, the Company consummated the Gentiva Merger, with Gentiva continuing as the surviving company and the Company’s wholly owned subsidiary.
Discontinued operations
The Company has completed several transactions related to the divestiture or planned divestiture of unprofitable hospitals and nursing centers to improve its future operating results. For accounting purposes, the operating results of these businesses and the gains, losses or impairments associated with these transactions were classified as discontinued operations in the accompanying unaudited condensed consolidated statement of operations for all periods presented in accordance with the authoritative guidance in effect through December 31, 2014. Effective January 1, 2015, the authoritative guidance modified the requirements for reporting discontinued operations. A disposal is now required to be reported in discontinued operations only if the disposal represents a strategic shift that has (or will have) a major effect on the Company’s operations and financial results.
Assets held for sale at June 30, 2015 have been measured at the lower of carrying value or estimated fair value less costs of disposal and have been classified as held for sale in the accompanying unaudited condensed consolidated balance sheet. See Note 4 for a summary of discontinued operations.
Recently issued accounting requirements
In April 2015, the Financial Accounting Standards Board (the “FASB”) issued authoritative guidance on accounting for fees paid in a cloud computing arrangement. The new provisions will help entities determine whether a cloud computing arrangement contains a software license that should be accounted for as internal-use software and capitalized or as a service contract. For public companies, the new standard is effective for annual periods, including interim periods, beginning after December 15, 2015. Early adoption is permitted and transition may be elected retrospectively or prospectively. The Company is still assessing this guidance.
In April 2015, the FASB issued authoritative guidance which changes the balance sheet presentation requirements for debt issuance costs. To simplify presentation of debt issuance costs, the amendments require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This guidance is effective for annual and interim periods beginning on or after December 15, 2015. The new guidance should be applied on a retrospective basis, and early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s business, financial position, results of operations or liquidity.
In February 2015, the FASB issued authoritative guidance which changes the evaluation of certain legal entities for consolidation. Specifically, the guidance (i) modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interest entities, (ii) eliminates the presumption that a general partner should consolidate a limited partnership, (iii) affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships and (iv) provides a scope exception from consolidation guidance for reporting entities with interest in legal entities in certain investment funds. The guidance is effective for all interim and annual reporting periods beginning after December 15, 2015. Early adoption is permitted for all entities. The guidance is not expected to have an impact on the Company’s business, financial position, results of operations or liquidity.
7
KINDRED HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 1 – BASIS OF PRESENTATION (Continued)
Recently issued accounting requirements (Continued)
In January 2015, the FASB issued authoritative guidance which eliminated from United States generally accepted accounting principles (“GAAP”) the concept of extraordinary items. The FASB issued this update as part of its initiative to reduce complexity in accounting standards, also referred to as the Simplification Initiative. The guidance is effective for all interim and annual reporting periods beginning after December 15, 2015. Early adoption is permitted for all entities. The guidance is not expected to have an impact on the Company’s business, financial position, results of operations or liquidity.
In May 2014, the FASB issued authoritative guidance which changes the requirements for recognizing revenue when entities enter into contracts with customers. Under the new provisions, an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. It also requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In July 2015, the FASB finalized a one year deferral of the new revenue standard with an updated effective date for annual and interim periods beginning on or after December 15, 2017. Entities are not permitted to adopt the standard earlier than the original effective date, which was on or after December 15, 2016. The Company is still assessing this guidance.
8
KINDRED HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 1 – BASIS OF PRESENTATION (Continued)
Equity
The following table sets forth the changes in equity attributable to noncontrolling interests and equity attributable to Kindred stockholders for the six months ended June 30, 2015 and 2014 (in thousands):
For the six months ended June 30, 2015: |
Amounts |
|
|
Noncontrolling |
|
|
Total |
|
|||
Balance at December 31, 2014 |
$ |
1,441,867 |
|
|
$ |
44,105 |
|
|
$ |
1,485,972 |
|
Comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
(124,459 |
) |
|
|
20,551 |
|
|
|
(103,908 |
) |
Other comprehensive loss |
|
(660 |
) |
|
|
– |
|
|
|
(660 |
) |
|
|
(125,119 |
) |
|
|
20,551 |
|
|
|
(104,568 |
) |
Issuance of common stock in connection with employee benefit plans |
|
205 |
|
|
|
– |
|
|
|
205 |
|
Shares tendered by employees for statutory tax withholdings upon issuance of common stock |
|
(7,357 |
) |
|
|
– |
|
|
|
(7,357 |
) |
Income tax provision in connection with the issuance of common stock under employee benefit plans |
|
(665 |
) |
|
|
– |
|
|
|
(665 |
) |
Stock-based compensation amortization |
|
12,570 |
|
|
|
– |
|
|
|
12,570 |
|
Dividends paid |
|
(20,002 |
) |
|
|
– |
|
|
|
(20,002 |
) |
Acquired noncontrolling interests |
|
– |
|
|
|
149,817 |
|
|
|
149,817 |
|
Distributions to noncontrolling interests |
|
– |
|
|
|
(21,138 |
) |
|
|
(21,138 |
) |
Issuance of common stock in Gentiva Merger |
|
177,441 |
|
|
|
– |
|
|
|
177,441 |
|
Balance at June 30, 2015 |
$ |
1,478,940 |
|
|
$ |
193,335 |
|
|
$ |
1,672,275 |
|
For the six months ended June 30, 2014: |
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2013 |
$ |
1,082,657 |
|
|
$ |
38,559 |
|
|
$ |
1,121,216 |
|
Comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
(27,791 |
) |
|
|
9,034 |
|
|
|
(18,757 |
) |
Other comprehensive loss |
|
(2,047 |
) |
|
|
– |
|
|
|
(2,047 |
) |
|
|
(29,838 |
) |
|
|
9,034 |
|
|
|
(20,804 |
) |
Issuance of common stock in connection with employee benefit plans |
|
4,687 |
|
|
|
– |
|
|
|
4,687 |
|
Shares tendered by employees for statutory tax withholdings upon issuance of common stock |
|
(5,790 |
) |
|
|
– |
|
|
|
(5,790 |
) |
Income tax benefit in connection with the issuance of common stock under employee benefit plans |
|
1,311 |
|
|
|
– |
|
|
|
1,311 |
|
Stock-based compensation amortization |
|
8,963 |
|
|
|
– |
|
|
|
8,963 |
|
Equity offering, net of offering costs |
|
203,977 |
|
|
|
– |
|
|
|
203,977 |
|
Dividends paid |
|
(13,086 |
) |
|
|
– |
|
|
|
(13,086 |
) |
Contribution made by noncontrolling interests |
|
– |
|
|
|
833 |
|
|
|
833 |
|
Distributions to noncontrolling interests |
|
– |
|
|
|
(5,595 |
) |
|
|
(5,595 |
) |
Balance at June 30, 2014 |
$ |
1,252,881 |
|
|
$ |
42,831 |
|
|
$ |
1,295,712 |
|
Property and equipment
Beginning January 1, 2015, the Company changed the estimated useful life of certain technology and medical equipment based upon a detailed review of actual utilization. The change in estimate extended the expected useful life by two to three years depending on the equipment category and has been accounted for prospectively. The impact from this change in accounting estimate was an increase to income (loss) from continuing operations before income taxes of approximately $4 million ($2 million net of income taxes) in the second quarter of 2015 and approximately $8 million ($5 million net of income taxes) for the six months ended June 30, 2015.
9
KINDRED HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 1 – BASIS OF PRESENTATION (Continued)
Derivative financial instruments
In December 2011, the Company entered into two interest rate swap agreements to hedge its floating interest rate on an aggregate of $225 million of debt outstanding under its senior secured term loan facility (the “Prior Term Loan Facility”) entered into in June 2011. The interest rate swaps had an effective date of January 9, 2012, and will expire on January 11, 2016. The Company is required to make payments based upon a fixed interest rate of 1.8925% calculated on the notional amount of $225 million. In exchange, the Company will receive interest on $225 million at a variable interest rate that is based upon the three-month London Interbank Offered Rate (“LIBOR”), subject to a minimum rate of 1.5%. The Company determined these interest rate swaps continue to qualify for cash flow hedge accounting treatment at June 30, 2015. However, an amendment to the Prior Term Loan Facility completed in May 2013 reduced the LIBOR floor from 1.5% to 1.0%, therefore some partial ineffectiveness will result through the expiration of the interest rate swap agreements.
In March 2014, the Company entered into an additional interest rate swap agreement to hedge its floating interest rate on an aggregate of $400 million of debt outstanding under the Term Loan Facility (as defined in Note 10). On April 8, 2014, the Company completed a novation of a portion of its $400 million swap agreement to two new counterparties, each in the amount of $125 million. The original swap contract was not amended, terminated or otherwise modified. The interest rate swap had an effective date of April 9, 2014 and will expire on April 9, 2018 and continues to apply to the Term Loan Facility. The Company is required to make payments based upon a fixed interest rate of 1.867% calculated on the notional amount of $400 million. In exchange, the Company will receive interest on $400 million at a variable interest rate that is based upon the three-month LIBOR, subject to a minimum rate of 1.0%. The Company determined this interest rate swap continues to qualify for cash flow hedge accounting treatment at June 30, 2015.
The Company records the effective portion of the gain or loss on these derivative financial instruments in accumulated other comprehensive income (loss) as a component of stockholders’ equity and records the ineffective portion of the gain or loss on these derivative financial instruments as interest expense. For the three months and six months ended June 30, 2015 and 2014, the ineffectiveness related to the interest rate swaps was immaterial.
The aggregate fair value of the interest rate swaps recorded in other accrued liabilities was $4.9 million and $3.7 million at June 30, 2015 and December 31, 2014, respectively. See Note 13.
Variable interest entities
The Company follows the provisions of the authoritative guidance for determining whether an entity is a VIE. In order to determine if the Company is a primary beneficiary of a VIE for financial reporting purposes, it must consider whether it has the power to direct activities of the VIE that most significantly impact the performance of the VIE and whether the Company has the obligation to absorb losses or the right to receive returns that would be significant to the VIE. The Company consolidates a VIE when it is the primary beneficiary.
In January 2015, the Company completed the acquisition of Centerre Healthcare Corporation (“Centerre”), which operated 11 IRFs. Each entity operating one of the IRFs is subject to a partnership and a management services agreement with the Company. Under GAAP, the Company determined that all of the entities acquired qualify as VIEs and that the Company is the primary beneficiary in all but one arrangement. The Company holds an equity interest and acts as manager in each of the entities. Through the management services agreement, the Company is delegated necessary responsibilities to provide management services, administrative services and direction of the day-to-day operations. Based on the Company’s assessment of the most significant activities of the IRFs, the manager has the ability to direct the majority of those activities in ten of the entities.
The analysis upon which the consolidation determination rests is complex, involves uncertainties, and requires significant judgment on various matters, some of which could be subject to different interpretations.
10
KINDRED HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 1 – BASIS OF PRESENTATION (Continued)
Variable interest entities (Continued)
The carrying amounts and classifications of the assets and liabilities of the consolidated VIEs as of June 30, 2015 are as follows (in thousands):
Assets: |
|
|
|
Current assets: |
|
|
|
Cash and cash equivalents |
$ |
31,972 |
|
Accounts receivable, net |
|
31,303 |
|
Inventories |
|
1,459 |
|
Other |
|
3,938 |
|
|
|
68,672 |
|
Property and equipment, net |
|
13,989 |
|
Goodwill |
|
261,278 |
|
Intangible assets, net |
|
23,093 |
|
Other |
|
49 |
|
Total assets |
$ |
367,081 |
|
Liabilities: |
|
|
|
Current liabilities: |
|
|
|
Accounts payable |
$ |
17,111 |
|
Salaries, wages and other compensation |
|
2,512 |
|
Other accrued liabilities |
|
3,738 |
|
Long-term debt due within one year |
|
2,851 |
|
|
|
26,212 |
|
Long-term debt |
|
1,798 |
|
Deferred credits and other liabilities |
|
3,972 |
|
Total liabilities |
$ |
31,982 |
|
Other information
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q of Regulation S-X and do not include all of the disclosures normally required by GAAP or those normally required in annual reports on Form 10-K. Accordingly, these financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended December 31, 2014 filed with the Securities and Exchange Commission (the “SEC”) on Form 10-K. The accompanying condensed consolidated balance sheet at December 31, 2014 was derived from audited consolidated financial statements, but does not include all disclosures required by GAAP.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the Company’s customary accounting practices. Management believes that financial information included herein reflects all adjustments necessary for a fair statement of interim results and, except as otherwise disclosed, all such adjustments are of a normal and recurring nature.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP and include amounts based upon the estimates and judgments of management. Actual amounts may differ from those estimates.
Reclassifications
Certain prior period amounts have been reclassified to conform with the current period presentation.
11
KINDRED HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
On October 9, 2014, the Company entered into the Gentiva Merger Agreement, providing for the Company’s acquisition of Gentiva. On February 2, 2015, the Company consummated the Gentiva Merger, with Gentiva continuing as the surviving company and the Company’s wholly owned subsidiary.
At the effective time of the Gentiva Merger, each share of common stock, par value $0.10 per share, of Gentiva (“Gentiva Common Stock”) issued and outstanding immediately prior to the effective time of the Gentiva Merger (other than shares held by Kindred, Gentiva and any wholly owned subsidiaries (which were cancelled) and shares owned by stockholders who properly exercised and perfected a demand for appraisal rights under Delaware law), including each deferred share unit, were converted into the right to receive (i) $14.50 in cash (the “Cash Consideration”), without interest, and (ii) 0.257 of a validly issued, fully paid and nonassessable share of Kindred common stock, par value $0.25 per share (the “Stock Consideration”). Kindred issued 9.7 million shares of common stock as the Stock Consideration. The purchase price totaled $722.3 million and was comprised of $544.8 million of Cash Consideration and $177.5 million of Stock Consideration. The Company also assumed $1.2 billion of long-term debt, which was paid off upon consummation of the Gentiva Merger.
The Company used the net proceeds from the Financing Transactions (as defined in Note 10), to fund the Cash Consideration for the Gentiva Merger, repay Gentiva’s existing debt and pay related transaction fees and expenses.
Operating results in the second quarter of 2015 included transaction and integration costs totaling $2.0 million, retention and severance costs totaling $2.4 million and a lease termination charge of $0.2 million related to the Gentiva Merger. Operating results for the six months ended June 30, 2015 included transaction and integration costs totaling $34.1 million, retention and severance costs totaling $56.9 million, a lease termination charge of $0.8 million and financing costs totaling $23.4 million related to the Gentiva Merger. Operating results in both the second quarter of 2014 and for the six months ended June 30, 2014 included transaction costs totaling $2.1 million related to the Gentiva Merger. Transaction, integration, retention and severance costs were recorded as general and administrative expenses, the lease termination charge was recorded as rent expense and financing costs were recorded as general and administrative expenses ($6.0 million) and as interest expense ($17.4 million).
As of December 31, 2014, Gentiva provided home health services, hospice services and community care services serving patients through approximately 491 locations in 40 states.
Purchase price allocation
The Gentiva Merger purchase price of $722.3 million was allocated on a preliminary basis to the estimated fair value of the tangible and intangible assets, and goodwill. During the second quarter of 2015, Kindred received approximately $10 million in cash related to a settlement of an escrow account from a prior Gentiva acquisition, which resulted in an increase to other current assets.
The following is the preliminary Gentiva Merger purchase price allocation (in thousands):
Cash and cash equivalents |
$ |
64,695 |
|
Accounts receivable |
|
258,438 |
|
Deferred tax assets |
|
28,483 |
|
Other current assets |
|
64,195 |
|
Property and equipment |
|
46,860 |
|
Identifiable intangible assets: |
|
|
|
Certificates of need (indefinite life) |
|
255,660 |
|
Medicare certifications (indefinite life) |
|
103,080 |
|
Trade names (indefinite life) |
|
22,200 |
|
Trade name |
|
15,600 |
|
Non-compete agreements |
|
1,820 |
|
Leasehold interests |
|
1,439 |
|
Total identifiable intangible assets |
|
399,799 |
|
Other assets |
|
133,240 |
|
Current portion of long-term debt |
|
(53,075 |
) |
Accounts payable and other current liabilities |
|
(289,002 |
) |
Long-term debt, less current portion |
|
(1,124,288 |
) |
Deferred tax liabilities |
|
(47,748 |
) |
Other liabilities |
|
(130,739 |
) |
Noncontrolling interests |
|
(3,992 |
) |
Total identifiable net assets |
|
(653,134 |
) |
Goodwill |
|
1,375,400 |
|
Net assets |
$ |
722,266 |
|
12
KINDRED HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 2 – GENTIVA MERGER (Continued)
Purchase price allocation (Continued)
The preliminary fair value allocation was measured primarily using a discounted cash flows methodology, which is considered a Level 3 input (as described in Note 13).
The value of gross contractual accounts receivable before determining uncollectable amounts totaled $272.3 million. Accounts estimated to be uncollectable totaled $13.9 million.
The weighted average life of the definite lived intangible assets consisting primarily of a trade name is three years.
The aggregate goodwill arising from the Gentiva Merger is based upon the expected future cash flows of the Gentiva operations, which reflect both growth expectations and cost savings from combining the operations of the Company and Gentiva. Goodwill is not amortized and is not deductible for income tax purposes. Goodwill was preliminarily assigned to the Company’s home health reporting unit ($603.8 million), hospice reporting unit ($606.8 million) and community care reporting unit ($164.8 million).
The unaudited pro forma net effect of the Gentiva Merger assuming the acquisition occurred as of January 1, 2014 is as follows (in thousands, except per share amounts):
|
Three months ended |
|
|
Six months ended |
|
||||||||||
|
2015 |
|
|
2014 |
|
|
2015 |
|
|
2014 |
|
||||
Revenues |
$ |
1,833,475 |
|
|
$ |
1,759,437 |
|
|
$ |
3,671,141 |
|
|
$ |
3,519,552 |
|
Income (loss) from continuing operations attributable to Kindred |
|
25,011 |
|
|
|
14,369 |
|
|
|
(9,768 |
) |
|
|
(46,054 |
) |
Income (loss) attributable to Kindred |
|
25,407 |
|
|
|
3,836 |
|
|
|
(12,767 |
) |
|
|
(66,965 |
) |
Earnings (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
0.29 |
|
|
|
0.16 |
|
|
|
(0.11 |
) |
|
|
(0.54 |
) |
Net income (loss) |
|
0.29 |
|
|
|
0.04 |
|
|
|
(0.15 |
) |
|
|
(0.78 |
) |
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
0.29 |
|
|
|
0.16 |
|
|
|
(0.11 |
) |
|
|
(0.54 |
) |
Net income (loss) |
|
0.29 |
|
|
|
0.04 |
|
|
|
(0.15 |
) |
|
|
(0.78 |
) |
The unaudited pro forma financial data has been derived by combining the historical financial results of the Company and the operations acquired in the Gentiva Merger for the periods presented. The unaudited pro forma financial data includes transaction, integration, retention and severance costs, a lease termination charge and financing costs totaling $132.2 million incurred by both the Company and Gentiva in connection with the Gentiva Merger. These costs have been eliminated from the results of operations for 2015 and have been reflected as expenses incurred as of January 1, 2014 for purposes of the pro forma financial presentation. Revenues and earnings before interest, income taxes, transaction, integration, retention and severance costs associated with Gentiva aggregated $520.1 million and $64.7 million, respectively, in the second quarter of 2015 and $855.0 million and $101.2 million, respectively, since the date of the Gentiva Merger.
NOTE 3 – OTHER ACQUISITIONS
The following is a summary of the Company’s other acquisition activities. The operating results of the acquired businesses have been included in the accompanying unaudited condensed consolidated financial statements of the Company from the respective acquisition dates. The purchase price of acquired businesses and acquired leased facilities resulted from negotiations with each of the sellers that were based upon both the historical and expected future cash flows of the respective businesses and real estate values. Each of these acquisitions was financed through operating cash flows and borrowings under the Company’s ABL Facility (as defined in Note 10). Unaudited pro forma financial data related to the acquired businesses have not been presented because the acquisitions are not material, either individually or in the aggregate, to the Company’s consolidated financial statements.
During the second quarter of 2015, the Company acquired a home-based primary care practice for $8.0 million and another home-based primary care practice was acquired during the six months ended June 30, 2015 for $4.1 million.
On January 1, 2015, the Company completed the acquisition of Centerre for a purchase price of approximately $195 million in cash (the “Centerre Acquisition”). During the second quarter of 2015, the Company paid approximately $4 million in cash for a working capital settlement. Centerre operated 11 IRFs with 614 beds through partnerships.
During the six months ended June 30, 2014, the Company acquired the real estate of two previously leased nursing centers for $22.3 million. Annual rent associated with the nursing centers aggregated $2.0 million. The fair value of the assets acquired was measured using discounted cash flow methodologies which are considered Level 3 inputs (as described in Note 13).
13
KINDRED HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 4 – DISCONTINUED OPERATIONS
In accordance with the authoritative guidance for the impairment or disposal of long-lived assets, the divestitures or planned divestiture of unprofitable businesses discussed in Note 1 has been accounted for as discontinued operations. Accordingly, the results of operations of these businesses for all periods presented and the gains, losses or impairments associated with these transactions have been classified as discontinued operations, net of income taxes, in the accompanying unaudited condensed consolidated statement of operations based upon the authoritative guidance which was in effect through December 31, 2014. Effective January 1, 2015, the authoritative guidance modified the requirements for reporting discontinued operations. A disposal is now required to be reported in discontinued operations only if the disposal represents a strategic shift that has (or will have) a major effect on the Company’s operations and financial results. At June 30, 2015, the Company held for sale seven nursing centers reported as discontinued operations.
On December 27, 2014, the Company entered into an agreement with Ventas, Inc. (“Ventas”) to transition the operations under the leases for nine non-strategic nursing centers (the “2014 Expiring Facilities”). Each lease will terminate when the operation of such nursing center is transferred to a new operator, which is expected to occur during 2015. The current lease term for eight of these nursing centers is scheduled to expire on April 30, 2018. The current lease term for the ninth of these nursing centers is scheduled to expire on April 30, 2020. The Company will continue to operate these facilities until operations are transferred. During the second quarter of 2015, the Company transferred the operations of two of the 2014 Expiring Facilities, resulting in a gain on divestiture of $1.6 million ($1.0 million net of income taxes). For accounting purposes, the 2014 Expiring Facilities qualified as assets held for sale and the Company reflected the operating results as discontinued operations in the accompanying unaudited condensed consolidated statement of operations for all historical periods. Under the terms of the agreement, the Company incurred a $40 million termination fee in exchange for the early termination of the leases, which was paid to Ventas in January 2015.
During the second quarter of 2014, the Company reclassified as discontinued for all periods presented the operations of three TC hospitals and two nursing centers that were either closed or divested through a planned sale of such facility or the expiration of a lease. The Company recorded a loss on divestiture of $2.9 million ($1.7 million net of income taxes) for the three months ended June 30, 2014 related to these divestitures.
The Company allowed the lease to expire on a TC hospital during the six months ended June 30, 2014 resulting in a loss on divestiture primarily related to a write-off of an indefinite-lived intangible asset of $3.4 million ($2.1 million net of income taxes) for the six months ended June 30, 2014. The Company reflected the operating results of this TC hospital as discontinued operations in the accompanying unaudited condensed consolidated statement of operations for all historical periods.
A summary of discontinued operations follows (in thousands):
|
Three months ended |
|
|
Six months ended |
|
||||||||||
|
2015 |
|
|
2014 |
|
|
2015 |
|
|
2014 |
|
||||
Revenues |
$ |
12,282 |
|
|
$ |
96,499 |
|
|
$ |
23,999 |
|
|
$ |
253,178 |
|
Salaries, wages and benefits |
|
5,979 |
|
|
|
40,724 |
|
|
|
12,571 |
|
|
|
104,382 |
|
Supplies |
|
700 |
|
|
|
5,185 |
|
|
|
1,400 |
|
|
|
13,258 |
|
Rent |
|
2,003 |
|
|
|
14,708 |
|
|
|
4,657 |
|
|
|
33,844 |
|
Other operating expenses |
|
2,616 |
|
|
|
18,517 |
|
|
|
5,007 |
|
|
|
49,067 |
|
General and administrative expenses |
|
1,734 |
|
|
|
30,316 |
|
|
|
6,619 |
|
|
|
75,181 |
|
Other expense |
|
− |
|
|
|
− |
|
|
|
− |