knd-10q_20150930.htm

 

 

 

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 September 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 October 31, 2015

Common stock, $0.25 par value

  

     83,796,755 shares

 

 

 

 

1 of 85


 

KINDRED HEALTHCARE, INC.

FORM 10-Q

INDEX

 

 

 

Page

PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements (Unaudited):

 

 

Condensed Consolidated Statement of Operations – for the three months ended September 30, 2015 and 2014 and for the nine months ended September 30, 2015 and 2014

3

 

Condensed Consolidated Statement of Comprehensive Loss – for the three months ended September 30, 2015 and 2014 and for the nine months ended September 30, 2015 and 2014

4

 

Condensed Consolidated Balance Sheet – September 30, 2015 and December 31, 2014

5

 

Condensed Consolidated Statement of Cash Flows – for the three months ended September 30, 2015 and 2014 and for the nine months ended September 30, 2015 and 2014

6

 

Notes to Condensed Consolidated Financial Statements

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

46

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

81

Item 4.

Controls and Procedures

82

 

PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

83

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

83

Item 6.

Exhibits

84

 

 

 

2


 

KINDRED HEALTHCARE, INC.

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)

(In thousands, except per share amounts)

 

 

 

Three months ended

September 30,

 

Nine months ended

 

 

 

 

September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

$

1,764,516

 

 

$

1,228,918

 

 

$

5,273,958

 

 

$

3,762,925

 

Salaries, wages and benefits

 

922,140

 

 

 

601,813

 

 

 

2,704,920

 

 

 

1,826,602

 

Supplies

 

96,551

 

 

 

70,719

 

 

 

288,059

 

 

 

215,269

 

Rent

 

96,244

 

 

 

77,643

 

 

 

284,786

 

 

 

233,872

 

Other operating expenses

 

207,837

 

 

 

169,582

 

 

 

617,681

 

 

 

511,786

 

General and administrative expenses (exclusive of depreciation

      and amortization expense included below)

 

310,041

 

 

 

237,503

 

 

 

1,050,948

 

 

 

713,521

 

Other income

 

(650

)

 

 

(260

)

 

 

(1,699

)

 

 

(594

)

Litigation contingency expense

 

31,462

 

 

 

 

 

 

130,387

 

 

 

4,600

 

Impairment charges

 

 

 

 

 

 

 

6,726

 

 

 

 

Depreciation and amortization

 

39,329

 

 

 

38,748

 

 

 

116,889

 

 

 

117,012

 

Interest expense

 

56,440

 

 

 

22,515

 

 

 

176,128

 

 

 

128,844

 

Investment income

 

(432

)

 

 

(344

)

 

 

(2,203

)

 

 

(2,975

)

 

 

1,758,962

 

 

 

1,217,919

 

 

 

5,372,622

 

 

 

3,747,937

 

Income (loss) from continuing operations before income taxes

 

5,554

 

 

 

10,999

 

 

 

(98,664

)

 

 

14,988

 

Provision for income taxes

 

12,523

 

 

 

3,777

 

 

 

9,183

 

 

 

5,289

 

Income (loss) from continuing operations

 

(6,969

)

 

 

7,222

 

 

 

(107,847

)

 

 

9,699

 

Discontinued operations, net of income taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

2,269

 

 

 

(8,677

)

 

 

(1,744

)

 

 

(24,887

)

Gain (loss) on divestiture of operations

 

 

 

 

1,387

 

 

 

983

 

 

 

(3,637

)

Income (loss) from discontinued operations

 

2,269

 

 

 

(7,290

)

 

 

(761

)

 

 

(28,524

)

Net loss

 

(4,700

)

 

 

(68

)

 

 

(108,608

)

 

 

(18,825

)

(Earnings) loss attributable to noncontrolling interests:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

(9,900

)

 

 

(4,372

)

 

 

(30,482

)

 

 

(13,729

)

Discontinued operations

 

1

 

 

 

78

 

 

 

32

 

 

 

401

 

 

 

(9,899

)

 

 

(4,294

)

 

 

(30,450

)

 

 

(13,328

)

Loss attributable to Kindred

$

(14,599

)

 

$

(4,362

)

 

$

(139,058

)

 

$

(32,153

)

Amounts attributable to Kindred stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

$

(16,869

)

 

$

2,850

 

 

$

(138,329

)

 

$

(4,030

)

Income (loss) from discontinued operations

 

2,270

 

 

 

(7,212

)

 

 

(729

)

 

 

(28,123

)

Net loss

$

(14,599

)

 

$

(4,362

)

 

$

(139,058

)

 

$

(32,153

)

Earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

$

(0.20

)

 

$

0.04

 

 

$

(1.65

)

 

$

(0.07

)

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

0.03

 

 

 

(0.13

)

 

 

(0.02

)

 

 

(0.44

)

Gain (loss) on divestiture of operations

 

 

 

 

0.02

 

 

 

0.01

 

 

 

(0.06

)

Income (loss) from discontinued operations

 

0.03

 

 

 

(0.11

)

 

 

(0.01

)

 

 

(0.50

)

Net loss

$

(0.17

)

 

$

(0.07

)

 

$

(1.66

)

 

$

(0.57

)

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

$

(0.20

)

 

$

0.04

 

 

$

(1.65

)

 

$

(0.07

)

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

0.03

 

 

 

(0.13

)

 

 

(0.02

)

 

 

(0.44

)

Gain (loss) on divestiture of operations

 

 

 

 

0.02

 

 

 

0.01

 

 

 

(0.06

)

Income (loss) from discontinued operations

 

0.03

 

 

 

(0.11

)

 

 

(0.01

)

 

 

(0.50

)

Net loss

$

(0.17

)

 

$

(0.07

)

 

$

(1.66

)

 

$

(0.57

)

Shares used in computing earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

86,184

 

 

 

62,863

 

 

 

83,960

 

 

 

56,443

 

Diluted

 

86,184

 

 

 

62,902

 

 

 

83,960

 

 

 

56,443

 

Cash dividends declared and paid per common share

$

0.12

 

 

$

0.12

 

 

$

0.36

 

 

$

0.36

 

 

See accompanying notes.

3


 

KINDRED HEALTHCARE, INC.

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS

(Unaudited)

(In thousands)

 

 

 

Three months ended

September 30,

 

 

Nine months ended
September 30,

 

 

 

2015

 

 

 

2014

 

 

2015

 

 

2014

 

Net loss

$

(4,700

)

 

$

(68

 

$

(108,608

)

 

$

(18,825

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities (Note 9):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized investment gains (losses)

 

(978

)

 

 

93

  

 

 

(841

)

 

 

577

 

Reclassification of gains realized in net loss

 

 

 

 

(27

 

 

 

 

 

(2,130

)

Net change

 

(978

)

 

 

66

 

 

 

(841

)

 

 

(1,553

)

Interest rate swaps (Note 1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized gains (losses)

 

(909

)

 

 

2,162

 

 

 

(2,173

)

 

 

(884

)

Reclassification of ineffectiveness realized in net loss

 

59

 

 

 

 

 

 

88

 

 

 

84

 

Reclassification of losses realized in net loss, net of payments

 

12

 

 

 

12

 

 

 

 

 

 

809

 

Net change

 

(838

)

 

 

2,174

 

 

 

(2,085

)

 

 

9

 

Income tax (expense) benefit related to items of other comprehensive income (loss)

 

699

 

 

 

(846

 

 

1,149

 

 

 

891

 

Other comprehensive income (loss)

 

(1,117

)

 

 

1,394

 

 

 

(1,777

)

 

 

(653

)

Comprehensive income (loss)

 

(5,817

)

 

 

1,326

 

 

 

(110,385

)

 

 

(19,478

)

Earnings attributable to noncontrolling interests

 

(9,899

)

 

 

(4,294

 

 

(30,450

)

 

 

(13,328

)

Comprehensive loss attributable to Kindred

$

(15,716

)

 

$

(2,968

 

$

(140,835

)

 

$

(32,806

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

4


 

KINDRED HEALTHCARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited)

(In thousands, except per share amounts)

 

September 30,

 

 

December 31,

 

 

2015

 

 

2014

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

120,891

 

 

$

164,188

 

Insurance subsidiary investments

 

103,856

 

 

 

99,951

 

Accounts receivable less allowance for loss of $51,531 – September 30, 2015 and $52,855 – December 31, 2014

 

1,216,214

 

 

 

944,219

 

Inventories

 

27,252

 

 

 

25,702

 

Deferred tax assets

 

74,221

 

 

 

82,391

 

Income taxes

 

10,571

 

 

 

8,575

 

Interest deposit on senior unsecured notes held in escrow

 

 

 

 

23,438

 

Other

 

66,891

 

 

 

41,598

 

 

 

1,619,896

 

 

 

1,390,062

 

 

 

 

 

 

 

 

 

Property and equipment

 

2,120,809

 

 

 

1,978,153

 

Accumulated depreciation

 

(1,164,969

)

 

 

(1,076,049

)

 

 

955,840

 

 

 

902,104

 

 

 

 

 

 

 

 

 

Goodwill

 

2,646,766

 

 

 

997,597

 

Intangible assets less accumulated amortization of $88,779 – September 30, 2015 and $68,043 – December 31, 2014

 

783,774

 

 

 

400,700

 

Assets held for sale

 

1,526

 

 

 

3,475

 

Insurance subsidiary investments

 

201,026

 

 

 

166,045

 

Deferred tax assets

 

 

 

 

11,174

 

Proceeds from senior unsecured notes held in escrow

 

 

 

 

1,350,000

 

Acquisition deposit

 

 

 

 

195,000

 

Other

 

295,168

 

 

 

236,807

 

Total assets (a)

$

6,503,996

 

 

$

5,652,964

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

182,154

 

 

$

175,725

 

Salaries, wages and other compensation

 

442,730

 

 

 

358,857

 

Due to third party payors

 

59,498

 

 

 

43,957

 

Professional liability risks

 

62,020

 

 

 

64,137

 

Other accrued liabilities

 

346,309

 

 

 

189,980

 

Long-term debt due within one year

 

32,527

 

 

 

24,607

 

 

 

1,125,238

 

 

 

857,263

 

 

 

 

 

 

 

 

 

Long-term debt

 

3,126,359

 

 

 

2,852,531

 

Professional liability risks

 

273,874

 

 

 

243,614

 

Deferred tax liabilities

 

20,850

 

 

 

 

Deferred credits and other liabilities

 

307,164

 

 

 

213,584

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

Common stock, $0.25 par value; authorized 175,000 shares; issued 83,759 shares – September 30, 2015 and 69,977 shares – December 31, 2014

 

20,940

 

 

 

17,494

 

Capital in excess of par value

 

1,741,736

 

 

 

1,586,692

 

Accumulated other comprehensive loss

 

(4,328

)

 

 

(2,551

)

Accumulated deficit

 

(301,878

)

 

 

(159,768

)

 

 

1,456,470

 

 

 

1,441,867

 

Noncontrolling interests

 

194,041

 

 

 

44,105

 

Total equity

 

1,650,511

 

 

 

1,485,972

 

Total liabilities (a) and equity

$

6,503,996

 

 

$

5,652,964

 

 

(a)

The Company’s consolidated assets as of September 30, 2015 include total assets of variable interest entities of $376.2 million, which can only be used to settle the obligations of the variable interest entities. The Company’s consolidated liabilities as of September 30, 2015 include total liabilities of variable interest entities of $35.8 million. See note 1 of the notes to unaudited condensed consolidated financial statements.

 

See accompanying notes.

5


 

KINDRED HEALTHCARE, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

Three months ended

 

 

Nine months ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2015

 

 

 

2014

 

 

2015

 

 

2014

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

$

(4,700

))

 

$

(68

)

 

$

(108,608

)

 

$

(18,825

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

39,595

 

 

 

39,579

 

 

 

117,521

 

 

 

121,805

 

Amortization of stock-based compensation costs

 

3,194

 

 

 

694

 

 

 

15,764

 

 

 

9,657

 

Amortization of deferred financing costs

 

3,554

 

 

 

1,982

 

 

 

10,155

 

 

 

21,211

 

Payment of capitalized lender fees related to debt issuance

 

 

 

 

 

 

 

(28,012

)

 

 

(19,125

)

Provision for doubtful accounts

 

11,014

 

 

 

14,695

 

 

 

29,817

 

 

 

35,588

 

Deferred income taxes

 

3,556

 

 

 

(32,777

)

 

 

(894

)

 

 

(11,274

)

Impairment charges

 

 

 

 

9

 

 

 

6,726

 

 

 

673

 

(Gain) loss on divestiture of discontinued operations

 

 

 

 

(1,387

)

 

 

(983

)

 

 

3,637

 

Other

 

3,485

 

 

 

175

 

 

 

10,457

 

 

 

2,289

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

25,990

 

 

 

10,392

 

 

 

(13,399

)

 

 

(102,503

)

Inventories and other assets

 

8,767

 

 

 

(2,899

)

 

 

44,181

 

 

 

(12,886

)

Accounts payable

 

(353

)

 

 

(3,592

)

 

 

(12,788

)

 

 

(22,469

)

Income taxes

 

37,491

 

 

 

29,832

 

 

 

33,646

 

 

 

18,769

 

Due to third party payors

 

15,008

 

 

 

28,907

 

 

 

(3,965

)

 

 

14,540

 

Other accrued liabilities

 

(14,311

)

 

 

4,497

 

 

 

(6,551

)

 

 

(16,765

)

Net cash provided by operating activities

 

132,290

 

 

 

90,039

 

 

 

93,067

 

 

 

24,322

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Routine capital expenditures

 

(35,422

)

 

 

(21,263

)

 

 

(80,691

)

 

 

(67,425

)

Development capital expenditures

 

(5,760

)

 

 

(1,570

)

 

 

(12,066

)

 

 

(2,693

)

Acquisitions, net of cash acquired

 

(2,002

)

 

 

(38

)

 

 

(663,757

)

 

 

(24,136

)

Acquisition deposit

 

 

 

 

 

 

 

195,000

 

 

 

 

Sale of assets

 

3,884

 

 

 

8,948

 

 

 

7,061

 

 

 

22,909

 

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

 

(16,357

)

 

 

(74,101

)

 

 

(59,186

)

 

 

(97,394

)

Sale of insurance subsidiary investments

 

15,987

 

 

 

8,447

 

 

 

50,780

 

 

 

34,967

 

Net change in insurance subsidiary cash and cash equivalents

 

(2,633

)

 

 

65,928

 

 

 

(8,396

)

 

 

54,372

 

Proceeds from note receivable

 

25,000

 

 

 

 

 

 

25,000

 

 

 

 

Change in other investments

 

176

 

 

 

317

 

 

 

375

 

 

 

1,027

 

Other

 

1,383

 

 

 

(3

)

 

 

590

 

 

 

(537

)

Net cash provided by (used in) investing activities

 

(15,744

)

 

 

(13,335

)

 

 

828,148

 

 

 

(78,910

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from borrowings under revolving credit

 

259,700

 

 

 

311,500

 

 

 

1,414,850

 

 

 

1,468,515

 

Repayment of borrowings under revolving credit

 

(349,700

)

 

 

(355,100

)

 

 

(1,319,850

)

 

 

(1,724,615

)

Proceeds from issuance of term loan, net of discount

 

 

 

 

 

 

 

199,000

 

 

 

997,500

 

Proceeds from issuance of senior unsecured notes

 

 

 

 

 

 

 

 

 

 

500,000

 

Repayment of Gentiva debt

 

 

 

 

 

 

 

(1,177,363

)

 

 

 

Repayment of senior unsecured notes

 

 

 

 

 

 

 

 

 

 

(550,000

)

Repayment of term loan

 

(3,003

)

 

 

(2,500

)

 

 

(9,008

)

 

 

(786,063

)

Repayment of other long-term debt

 

(500

)

 

 

(58

)

 

 

(1,400

)

 

 

(215

)

Payment of deferred financing costs

 

(301

)

 

 

(504

)

 

 

(3,284

)

 

 

(3,152

)

Equity offering, net of offering costs

 

 

 

 

16,376

 

 

 

 

 

 

220,353

 

Issuance of common stock in connection with employee benefit plans

 

329

 

 

 

1,530

 

 

 

534

 

 

 

6,217

 

Payment of costs associated with issuance of common stock and tangible equity units

 

 

 

 

 

 

 

(915

)

 

 

 

Payment of dividend for mandatory redeemable preferred stock

 

(2,703

)

 

 

 

 

 

(8,135

)

 

 

 

Dividends paid

 

(10,065

)

 

 

(7,754

)

 

 

(30,067

)

 

 

(20,840

)

Contributions made by noncontrolling interests

 

1,492

 

 

 

 

 

 

1,492

 

 

 

 

Distributions to noncontrolling interests

 

(10,685

)

 

 

(4,009

)

 

 

(31,823

)

 

 

(9,604

)

Other

 

245

 

 

 

183

 

 

 

1,457

 

 

 

2,304

 

Net cash provided by (used in) financing activities

 

(115,191

)

 

 

(40,336

)

 

 

(964,512

)

 

 

100,400

 

Change in cash and cash equivalents

 

1,355

 

 

 

36,368

 

 

 

(43,297

)

 

 

45,812

 

Cash and cash equivalents at beginning of period

 

119,536

 

 

 

45,416

 

 

 

164,188

 

 

 

35,972

 

Cash and cash equivalents at end of period

$

120,891

 

 

$

81,784

 

 

$

120,891

 

 

$

81,784

 

Supplemental information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest payments

$

81,474

 

 

$

12,222

 

 

$

147,924

 

 

$

91,888

 

Income tax payments (refunds)

 

(27,414

)

 

 

909

 

 

 

(26,275

)

 

 

(20,656

)

Issuance of common stock in Gentiva Merger (see Note 2)

 

15

 

 

 

 

 

 

177,456

 

 

 

 

 

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 September 30, 2015, the Company’s hospital division operated 95 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 626 sites of service in 41 states. The Company’s rehabilitation division (now known as the Kindred Rehabilitation Services division) provided rehabilitation services primarily in hospitals and long-term care settings and operated 18 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 September 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 September 2015, the Financial Accounting Standards Board (the “FASB”) issued authoritative guidance that eliminates the requirement to restate prior period financial statements for measurement period adjustments. The new guidance requires that the cumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. The new guidance is effective for interim and annual periods beginning after December 15, 2015 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 April 2015, 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 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 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, other than those paid to the lender, be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts. In August 2015, the FASB issued an update based upon a Securities and Exchange Commission (“SEC”) Staff Announcement, which addresses the application of the guidance to line-of-credit arrangements. The SEC announcement confirms that these arrangements are not within the scope of the new guidance. The guidance is effective for interim and annual periods beginning

7


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 1 – BASIS OF PRESENTATION (Continued)

Recently issued accounting requirements (Continued)

on or after December 15, 2015. The 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.

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 interim and annual 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 nine months ended September 30, 2015 and 2014 (in thousands):

 

For the nine months ended September 30, 2015:

Amounts
attributable to
Kindred
stockholders

 

 

Noncontrolling
interests

 

 

Total
equity

 

Balance at December 31, 2014

$

1,441,867

 

 

$

44,105

 

 

$

1,485,972

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

(139,058

)

 

 

30,450

 

 

 

(108,608

)

Other comprehensive loss

 

(1,777

)

 

 

  

 

 

(1,777

)

 

 

(140,835

)

 

 

30,450

  

 

 

(110,385

)

Issuance of common stock in connection with employee benefit plans

 

534

 

 

 

 

 

 

534

 

Shares tendered by employees for statutory tax withholdings upon issuance of common stock

 

(10,055

)

 

 

 

 

 

(10,055

)

Income tax benefit in connection with the issuance of common stock under employee benefit plans

 

1,806

 

 

 

  

 

 

1,806

 

Stock-based compensation amortization

 

15,764

 

 

 

  

 

 

15,764

 

Dividends paid

 

(30,067

)

 

 

 

 

 

(30,067

)

Acquired noncontrolling interests

 

 

 

 

149,817

 

 

 

149,817

 

Contributions made by noncontrolling interests

 

 

 

 

1,492

 

 

 

1,492

 

Distributions to noncontrolling interests

 

 

 

 

(31,823

)

 

 

(31,823

)

Issuance of common stock in Gentiva Merger

 

177,456

 

 

 

 

 

 

177,456

 

Balance at September 30, 2015

$

1,456,470

 

 

$

194,041

 

 

$

1,650,511

 

 

For the nine months ended September 30, 2014:

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2013

$

1,082,657

  

 

$

38,559

  

 

$

1,121,216

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

(32,153

 

 

13,328

  

 

 

(18,825

)

Other comprehensive loss

 

(653

)

 

 

  

 

 

(653

)

 

 

(32,806

 

 

13,328

  

 

 

(19,478

)

Issuance of common stock in connection with employee benefit plans

 

6,217

  

 

 

  

 

 

6,217

 

Shares tendered by employees for statutory tax withholdings upon issuance of common stock

 

(6,129

)

 

 

  

 

 

(6,129

)

Income tax benefit in connection with the issuance of common stock under employee benefit plans

 

1,229

 

 

 

  

 

 

1,229

 

Stock-based compensation amortization

 

9,657

  

 

 

  

 

 

9,657

 

Equity offering, net of offering costs

 

220,353

 

 

 

 

 

 

220,353

 

Dividends paid

 

(20,840

)

 

 

 

 

 

(20,840

)

Contribution made by noncontrolling interests

 

  

 

 

833

 

 

 

833

 

Distributions to noncontrolling interests

 

 

 

 

(9,604

 

 

(9,604

)

Balance at September 30, 2014

$

1,260,338

  

 

$

43,116

  

 

$

1,303,454

 

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 $3 million ($2 million net of income taxes) in the third quarter of 2015 and approximately $11 million ($7 million net of income taxes) for the nine months ended September 30, 2015.

9


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 1 – BASIS OF PRESENTATION (Continued)

Goodwill

In connection with the preparation of the Company’s operating results for the third quarter of 2015, the Company determined that the impact of the regulatory changes announced on July 31, 2015 in connection with the LTAC Legislation (as defined) and related to the Company’s hospital reporting unit was an impairment triggering event. The regulatory changes create new Medicare criteria and payment rules for LTAC hospitals. The Company tested the recoverability of the hospital reporting unit goodwill and determined that goodwill was not impaired.

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 September 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 September 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 nine months ended September 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 $5.8 million and $3.7 million at September 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. During the third quarter of 2015, Kindred opened two additional 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 or opened 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 12 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 September 30, 2015 are as follows (in thousands):

 

Assets:

 

 

 

Current assets:

 

 

 

Cash and cash equivalents

$

41,310

 

Accounts receivable, net

 

30,662

 

Inventories

 

1,601

 

Other

 

3,330

 

 

 

76,903

 

Property and equipment, net

 

14,649

 

Goodwill

 

261,702

 

Intangible assets, net

 

22,884

 

Other

 

54

 

Total assets

$

376,192

 

Liabilities:

 

 

 

Current liabilities:

 

 

 

Accounts payable

$

20,860

 

Salaries, wages and other compensation

 

2,916

 

Other accrued liabilities

 

3,390

 

Long-term debt due within one year

 

2,660

 

 

 

29,826

 

Long-term debt

 

1,547

 

Deferred credits and other liabilities

 

4,434

 

Total liabilities

$

35,807

 

 

Other information

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions for quarterly reports on 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 SEC as Exhibit 99.1 to the Form 8-K on September 17, 2015. 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)

 

NOTE 2 – GENTIVA MERGER

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 third quarter of 2015 included transaction and integration costs totaling $1.1 million, and retention and severance costs totaling $1.9 million related to the Gentiva Merger. Operating results for the nine months ended September 30, 2015 included transaction and integration costs totaling $35.2 million, retention and severance costs totaling $58.8 million, a lease termination charge of $0.8 million and financing costs totaling $23.4 million related to the Gentiva Merger. Operating results in the third quarter of 2014 and for the nine months ended September 30, 2014 included transaction costs totaling $3.2 million and $5.3 million, respectively, 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).

A note receivable totaling $25 million was acquired in the Gentiva Merger. The note receivable was collected in full during the third quarter of 2015 and the Company received all of the cash proceeds.

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.


12


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 2 – GENTIVA MERGER (Continued)

Purchase price allocation (Continued)

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

 

31,535

 

Other current assets

 

123,429

 

Property and equipment

 

46,860

 

Identifiable intangible assets:

 

 

 

Certificates of need (indefinite life)

 

256,921

 

Medicare certifications (indefinite life)

 

94,500

 

Trade names (indefinite life)

 

22,200

 

Trade name

 

15,600

 

Non-compete agreements

 

1,820

 

Leasehold interests

 

1,439

 

Total identifiable intangible assets

 

392,480

 

Other assets

 

74,309

 

Current portion of long-term debt

 

(53,075

)

Accounts payable and other current liabilities

 

(289,205

)

Long-term debt, less current portion

 

(1,124,288

)

Deferred tax liabilities

 

(47,748

)

Other liabilities

 

(131,185

)

Noncontrolling interests

 

(3,992

)

Total identifiable net assets

 

(657,747

)

Goodwill

 

1,380,028

 

Net assets

$

722,281

 

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 ($610.8 million), hospice reporting unit ($604.7 million) and community care reporting unit ($164.5 million).


13


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 2 – GENTIVA MERGER (Continued)

Purchase price allocation (Continued)

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
September 30,

 

 

Nine months ended
September 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Revenues

$

1,764,516

 

 

$

1,726,924

 

 

$

5,435,657

 

 

$

5,246,476

 

Income (loss) from continuing operations attributable to Kindred

 

(14,501

)

 

 

3,913

 

 

 

(56,221

)

 

 

(46,119

)

Loss attributable to Kindred

 

(12,231

)

 

 

(3,299

)

 

 

(56,950

)

 

 

(74,242

)

Earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

(0.17

)

 

 

0.04

 

 

 

(0.66

)

 

 

(0.54

)

Net loss

 

(0.14

)

 

 

(0.04

)

 

 

(0.67

)

 

 

(0.87

)

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

(0.17

)

 

 

0.04

 

 

 

(0.66

)

 

 

(0.54

)

Net loss

 

(0.14

)

 

 

(0.04

)

 

 

(0.67

)

 

 

(0.87

)

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 $135.2 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 $525.0 million and $67.5 million, respectively, in the third quarter of 2015 and $1.4 billion and $168.7 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 third quarter of 2015, the Company acquired a home health business for $2.0 million.

In addition, during the nine months ended September 30, 2015, the Company acquired two home-based primary care practices for $12.1 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 nine months ended September 30, 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 nine months ended September 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).

 

 

14


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 September 30, 2015, the Company held for sale six 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. Through September 30, 2015, the Company transferred the operations of three 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 nine months ended September 30, 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 nine months ended September 30, 2014 related to these divestitures.

The Company allowed the lease to expire on a TC hospital during the nine months ended September 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 nine months ended September 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
September 30,

 

 

Nine months ended
September 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Revenues

$

12,935

 

 

$

25,182

 

 

$

36,934

 

 

$

278,360

 

Salaries, wages and benefits

 

5,306

 

 

 

13,563

 

 

 

17,877

 

 

 

117,945