knd-10q_20170630.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2017

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

(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      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      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company,  or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

 

  

Accelerated filer

 

 

Emerging growth company

 

 

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

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, 2017

Common stock, $0.25 par value

  

     87,019,018 shares

 

 

 

1 of 79


 

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 June 30, 2017 and 2016 and for the six months ended June 30, 2017 and 2016

3

 

Condensed Consolidated Statement of Comprehensive Income (Loss) – for the three months ended June 30, 2017 and 2016 and for the six months ended June 30, 2017 and 2016

4

 

Condensed Consolidated Balance Sheet – June 30, 2017 and December 31, 2016

5

 

Condensed Consolidated Statement of Cash Flows – for the three months ended June 30, 2017 and 2016 and for the six months ended June 30, 2017 and 2016

6

 

Notes to Condensed Consolidated Financial Statements

7

Item 2.

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

45

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

75

Item 4.

Controls and Procedures

76

 

PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

77

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

77

Item 6.

Exhibits

78

 

 

 

2


 

KINDRED HEALTHCARE, INC.

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)

(In thousands, except per share amounts)

 

 

Three months ended

 

 

Six months ended

 

 

June 30,

 

 

June 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenues

$

1,532,022

 

 

$

1,605,374

 

 

$

3,067,740

 

 

$

3,205,862

 

Salaries, wages and benefits

 

833,703

 

 

 

842,840

 

 

 

1,673,516

 

 

 

1,678,420

 

Supplies

 

77,784

 

 

 

89,151

 

 

 

157,885

 

 

 

178,210

 

Building rent

 

64,861

 

 

 

67,025

 

 

 

129,517

 

 

 

133,010

 

Equipment rent

 

8,861

 

 

 

11,211

 

 

 

17,748

 

 

 

21,369

 

Other operating expenses

 

182,161

 

 

 

167,607

 

 

 

340,985

 

 

 

333,334

 

General and administrative expenses (exclusive of depreciation and

     amortization expense included below)

 

266,156

 

 

 

283,610

 

 

 

541,659

 

 

 

586,894

 

Other income

 

(2,287

)

 

 

(505

)

 

 

(2,257

)

 

 

(2,338

)

Litigation contingency expense

 

-

 

 

 

930

 

 

 

-

 

 

 

2,840

 

Impairment charges

 

135,829

 

 

 

6,131

 

 

 

136,303

 

 

 

13,919

 

Restructuring charges

 

5,050

 

 

 

798

 

 

 

15,056

 

 

 

2,750

 

Depreciation and amortization

 

25,651

 

 

 

33,198

 

 

 

55,471

 

 

 

66,752

 

Interest expense

 

60,801

 

 

 

58,053

 

 

 

120,129

 

 

 

115,542

 

Investment income

 

(2,228

)

 

 

(486

)

 

 

(2,737

)

 

 

(722

)

 

 

1,656,342

 

 

 

1,559,563

 

 

 

3,183,275

 

 

 

3,129,980

 

Income (loss) from continuing operations before income taxes

 

(124,320

)

 

 

45,811

 

 

 

(115,535

)

 

 

75,882

 

Provision (benefit) for income taxes

 

(16,116

)

 

 

17,851

 

 

 

(13,882

)

 

 

28,261

 

Income (loss) from continuing operations

 

(108,204

)

 

 

27,960

 

 

 

(101,653

)

 

 

47,621

 

Discontinued operations, net of income taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

8,870

 

 

 

9,437

 

 

 

17,701

 

 

 

15,031

 

Gain (loss) on divestiture of operations

 

(294,039

)

 

 

(83

)

 

 

(300,205

)

 

 

179

 

Income (loss) from discontinued operations

 

(285,169

)

 

 

9,354

 

 

 

(282,504

)

 

 

15,210

 

Net income (loss)

 

(393,373

)

 

 

37,314

 

 

 

(384,157

)

 

 

62,831

 

Earnings attributable to noncontrolling interests:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

(10,791

)

 

 

(8,847

)

 

 

(21,274

)

 

 

(16,698

)

Discontinued operations

 

(4,954

)

 

 

(4,678

)

 

 

(9,435

)

 

 

(9,343

)

 

 

(15,745

)

 

 

(13,525

)

 

 

(30,709

)

 

 

(26,041

)

Income (loss) attributable to Kindred

$

(409,118

)

 

$

23,789

 

 

$

(414,866

)

 

$

36,790

 

Amounts attributable to Kindred stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

$

(118,995

)

 

$

19,113

 

 

$

(122,927

)

 

$

30,923

 

Income (loss) from discontinued operations

 

(290,123

)

 

 

4,676

 

 

 

(291,939

)

 

 

5,867

 

Net income (loss)

$

(409,118

)

 

$

23,789

 

 

$

(414,866

)

 

$

36,790

 

Earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

$

(1.36

)

 

$

0.22

 

 

$

(1.41

)

 

$

0.35

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

0.04

 

 

 

0.05

 

 

 

0.10

 

 

 

0.07

 

Gain (loss) on divestiture of operations

 

(3.36

)

 

 

-

 

 

 

(3.44

)

 

 

-

 

Income (loss) from discontinued operations

 

(3.32

)

 

 

0.05

 

 

 

(3.34

)

 

 

0.07

 

Net income (loss)

$

(4.68

)

 

$

0.27

 

 

$

(4.75

)

 

$

0.42

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

$

(1.36

)

 

$

0.21

 

 

$

(1.41

)

 

$

0.35

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

0.04

 

 

 

0.05

 

 

 

0.10

 

 

 

0.06

 

Gain (loss) on divestiture of operations

 

(3.36

)

 

 

-

 

 

 

(3.44

)

 

 

-

 

Income (loss) from discontinued operations

 

(3.32

)

 

 

0.05

 

 

 

(3.34

)

 

 

0.06

 

Net income (loss)

$

(4.68

)

 

$

0.26

 

 

$

(4.75

)

 

$

0.41

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

87,506

 

 

 

86,836

 

 

 

87,297

 

 

 

86,713

 

Diluted

 

87,506

 

 

 

87,500

 

 

 

87,297

 

 

 

87,374

 

Cash dividends declared and paid per common share

$

-

 

 

$

0.12

 

 

$

0.12

 

 

$

0.24

 

See accompanying notes.

3


 

KINDRED HEALTHCARE, INC.

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In thousands)

 

 

Three months ended

 

 

Six months ended

 

 

June 30,

 

 

June 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net income (loss)

$

(393,373

)

 

$

37,314

 

 

$

(384,157

)

 

$

62,831

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities (Note 12):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized investment gains

 

460

 

 

 

573

 

 

 

1,409

 

 

 

1,183

 

Reclassification of (gains) losses realized in net income

   (loss)

 

(1,654

)

 

 

(4

)

 

 

(1,655

)

 

 

131

 

Net change

 

(1,194

)

 

 

569

 

 

 

(246

)

 

 

1,314

 

Interest rate swaps (Note 1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized gains (losses)

 

(194

)

 

 

313

 

 

 

832

 

 

 

(5,783

)

Reclassification of (gains) losses realized in net income

   (loss), net of payments

 

(220

)

 

 

2

 

 

 

(323

)

 

 

393

 

Net change

 

(414

)

 

 

315

 

 

 

509

 

 

 

(5,390

)

Income tax (expense) benefit related to items of other

    comprehensive income (loss)

 

-

 

 

 

(322

)

 

 

-

 

 

 

1,816

 

Other comprehensive income (loss)

 

(1,608

)

 

 

562

 

 

 

263

 

 

 

(2,260

)

Comprehensive income (loss)

 

(394,981

)

 

 

37,876

 

 

 

(383,894

)

 

 

60,571

 

Earnings attributable to noncontrolling interests

 

(15,745

)

 

 

(13,525

)

 

 

(30,709

)

 

 

(26,041

)

Comprehensive income (loss) attributable to Kindred

$

(410,726

)

 

$

24,351

 

 

$

(414,603

)

 

$

34,530

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

4


 

KINDRED HEALTHCARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited)

(In thousands, except per share amounts)

 

 

June 30,

 

 

December 31,

 

 

2017

 

 

2016

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

130,047

 

 

$

137,061

 

Insurance subsidiary investments

 

97,076

 

 

 

108,966

 

Accounts receivable less allowance for loss of $100,737 ─ June 30, 2017 and $71,070 ─ December 31, 2016

 

1,224,442

 

 

 

1,172,078

 

Inventories

 

21,951

 

 

 

22,438

 

Income taxes

 

5,718

 

 

 

10,067

 

Assets held for sale

 

282,341

 

 

 

289,450

 

Other

 

61,990

 

 

 

63,693

 

 

 

1,823,565

 

 

 

1,803,753

 

 

 

 

 

 

 

 

 

Property and equipment

 

1,537,821

 

 

 

1,531,598

 

Accumulated depreciation

 

(938,054

)

 

 

(912,978

)

 

 

599,767

 

 

 

618,620

 

 

 

 

 

 

 

 

 

Goodwill

 

2,427,668

 

 

 

2,427,074

 

Intangible assets less accumulated amortization of $76,986 ─  June 30, 2017 and $101,612 ─ December 31, 2016

 

623,454

 

 

 

770,108

 

Insurance subsidiary investments

 

207,427

 

 

 

204,929

 

Other

 

296,088

 

 

 

288,240

 

Total assets (a)

$

5,977,969

 

 

$

6,112,724

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

180,618

 

 

$

203,925

 

Salaries, wages and other compensation

 

372,090

 

 

 

397,486

 

Due to third party payors

 

28,177

 

 

 

41,320

 

Professional liability risks

 

55,330

 

 

 

65,284

 

Accrued lease termination fees

 

267,804

 

 

 

5,224

 

Other accrued liabilities

 

281,984

 

 

 

264,512

 

Long-term debt due within one year

 

21,539

 

 

 

27,977

 

 

 

1,207,542

 

 

 

1,005,728

 

 

 

 

 

 

 

 

 

Long-term debt

 

3,303,539

 

 

 

3,215,062

 

Professional liability risks

 

310,516

 

 

 

295,311

 

Deferred tax liabilities

 

185,960

 

 

 

201,808

 

Deferred credits and other liabilities

 

354,361

 

 

 

353,294

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 14)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

Stockholder's equity:

 

 

 

 

 

 

 

Common stock, $0.25 par value; authorized 175,000 shares; issued 87,025 shares ─ June 30, 2017 and

   85,166 shares December 31, 2016

 

21,756

 

 

 

21,291

 

Capital in excess of par value

 

1,705,228

 

 

 

1,710,231

 

Accumulated other comprehensive income

 

1,836

 

 

 

1,573

 

Accumulated deficit

 

(1,335,410

)

 

 

(920,544

)

 

 

393,410

 

 

 

812,551

 

Noncontrolling interests

 

222,641

 

 

 

228,970

 

Total equity

 

616,051

 

 

 

1,041,521

 

Total liabilities (a) and equity

$

5,977,969

 

 

$

6,112,724

 

 

 

(a)

The Company’s consolidated assets as of June 30, 2017 and December 31, 2016 include total assets of variable interest entities of $403.1 million and $394.1 million, respectively, which can only be used to settle the obligations of the variable interest entities. The Company’s consolidated liabilities as of June 30, 2017 and December 31, 2016 include total liabilities of variable interest entities of $42.7 million and $38.9 million, respectively. 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

 

 

Six months ended

 

 

June 30,

 

 

June 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

$

(393,373

)

 

$

37,314

 

 

$

(384,157

)

 

$

62,831

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation expense

 

26,005

 

 

 

34,435

 

 

 

56,305

 

 

 

68,392

 

Amortization of intangible assets

 

4,360

 

 

 

5,957

 

 

 

9,020

 

 

 

12,783

 

Amortization of stock-based compensation costs

 

4,855

 

 

 

5,639

 

 

 

7,987

 

 

 

10,043

 

Amortization of deferred financing costs

 

4,352

 

 

 

3,708

 

 

 

8,484

 

 

 

7,275

 

Payment of capitalized lender fees related to debt amendment

 

-

 

 

 

(7,333

)

 

 

(5,403

)

 

 

(7,333

)

Provision for doubtful accounts

 

35,966

 

 

 

9,221

 

 

 

47,184

 

 

 

20,946

 

Deferred income taxes

 

(17,047

)

 

 

17,802

 

 

 

(15,820

)

 

 

29,298

 

Impairment charges

 

136,415

 

 

 

6,131

 

 

 

137,572

 

 

 

13,919

 

(Gain) loss on divestiture of discontinued operations

 

294,039

 

 

 

83

 

 

 

300,205

 

 

 

(179

)

Other

 

762

 

 

 

656

 

 

 

6,812

 

 

 

959

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

(13,390

)

 

 

(13,229

)

 

 

(99,223

)

 

 

(101,121

)

Inventories and other assets

 

1,939

 

 

 

(10,161

)

 

 

(2,518

)

 

 

(15,393

)

Accounts payable

 

2,187

 

 

 

23,077

 

 

 

(22,310

)

 

 

12,456

 

Income taxes

 

2,058

 

 

 

707

 

 

 

4,349

 

 

 

853

 

Due to third party payors

 

(6,304

)

 

 

351

 

 

 

(13,143

)

 

 

(4,492

)

Other accrued liabilities

 

9,845

 

 

 

20,850

 

 

 

(35,313

)

 

 

(106,369

)

Net cash provided by operating activities

 

92,669

 

 

 

135,208

 

 

 

31

 

 

 

4,868

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Routine capital expenditures

 

(17,396

)

 

 

(28,724

)

 

 

(29,337

)

 

 

(46,830

)

Development capital expenditures

 

(5,857

)

 

 

(8,707

)

 

 

(11,296

)

 

 

(18,726

)

Acquisitions, net of cash acquired

 

(3,500

)

 

 

(1,372

)

 

 

(6,650

)

 

 

(27,711

)

Acquisition deposits

 

-

 

 

 

-

 

 

 

-

 

 

 

18,489

 

Sale of assets

 

-

 

 

 

142

 

 

 

-

 

 

 

1,223

 

Purchase of insurance subsidiary investments

 

(68,300

)

 

 

(20,154

)

 

 

(90,608

)

 

 

(52,995

)

Sale of insurance subsidiary investments

 

49,077

 

 

 

15,713

 

 

 

67,776

 

 

 

46,603

 

Net change in insurance subsidiary cash and cash equivalents

 

27,113

 

 

 

13,201

 

 

 

33,525

 

 

 

23,159

 

Net change in other investments

 

(273

)

 

 

583

 

 

 

(244

)

 

 

(33,398

)

Other

 

(108

)

 

 

792

 

 

 

46

 

 

 

(1,127

)

Net cash used in investing activities

 

(19,244

)

 

 

(28,526

)

 

 

(36,788

)

 

 

(91,313

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from borrowings under revolving credit

 

309,000

 

 

 

244,300

 

 

 

787,600

 

 

 

778,000

 

Repayment of borrowings under revolving credit

 

(349,900

)

 

 

(524,600

)

 

 

(693,300

)

 

 

(827,700

)

Proceeds from issuance of term loan, net of discount

 

-

 

 

 

198,100

 

 

 

-

 

 

 

198,100

 

Proceeds from other long-term debt

 

-

 

 

 

-

 

 

 

-

 

 

 

750

 

Repayment of term loan

 

(3,508

)

 

 

(3,508

)

 

 

(7,017

)

 

 

(6,511

)

Repayment of other long-term debt

 

(339

)

 

 

(270

)

 

 

(623

)

 

 

(550

)

Payment of deferred financing costs

 

(50

)

 

 

(141

)

 

 

(129

)

 

 

(292

)

Issuance of common stock in connection with employee benefit plans

 

32

 

 

 

-

 

 

 

32

 

 

 

-

 

Payment of dividend for mandatory redeemable preferred stock

 

(3,065

)

 

 

(2,853

)

 

 

(6,075

)

 

 

(5,654

)

Dividends paid

 

-

 

 

 

(10,225

)

 

 

(10,228

)

 

 

(20,293

)

Contributions made by noncontrolling interests

 

113

 

 

 

1,900

 

 

 

113

 

 

 

6,268

 

Distributions to noncontrolling interests

 

(12,500

)

 

 

(14,231

)

 

 

(38,301

)

 

 

(30,546

)

Purchase of noncontrolling interests

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,000

)

Payroll tax payments for equity awards issuance

 

(74

)

 

 

(180

)

 

 

(2,329

)

 

 

(2,829

)

Net cash provided by (used in) financing activities

 

(60,291

)

 

 

(111,708

)

 

 

29,743

 

 

 

87,743

 

Change in cash and cash equivalents

 

13,134

 

 

 

(5,026

)

 

 

(7,014

)

 

 

1,298

 

Cash and cash equivalents at beginning of period

 

116,913

 

 

 

105,082

 

 

 

137,061

 

 

 

98,758

 

Cash and cash equivalents at end of period

$

130,047

 

 

$

100,056

 

 

$

130,047

 

 

$

100,056

 

Supplemental information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest payments

$

35,151

 

 

$

33,796

 

 

$

109,990

 

 

$

107,472

 

Income tax (refunds) payments

 

(1,077

)

 

 

1,297

 

 

 

(2,317

)

 

 

1,109

 

Non-cash contributions made by noncontrolling interests

 

1,150

 

 

 

-

 

 

 

1,150

 

 

 

2,800

 

 

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 a home health, hospice and community care business, transitional care (“TC”) hospitals, inpatient rehabilitation hospitals (“IRFs”), and a contract rehabilitation services business across the United States (collectively, the “Company” or “Kindred”). At June 30, 2017, the Company’s Kindred at Home division primarily provided home health, hospice, and community care services from 614 sites of service in 40 states. The Company’s hospital division operated 81 TC hospitals (certified as long-term acute care (“LTAC”) hospitals under the Medicare program) in 18 states. The Company’s Kindred Rehabilitation Services division operated 19 IRFs and 102 hospital-based acute rehabilitation units (“ARUs”) (certified as IRFs), and provided rehabilitation services primarily in hospitals and long-term care settings in 45 states.

Discontinued operations

The Company has completed several transactions related to the divestiture of unprofitable hospitals and nursing centers to improve its future operating results. The Company is also currently in the process of completing the SNF Divestiture (as defined and described more fully in Note 4.) For accounting purposes, the operating results of these businesses and the gains or losses 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. See Notes 4 and 5.

Recently issued accounting requirements

In May 2017, the Financial Accounting Standards Board (the “FASB”) issued authoritative guidance to provide clarity and reduce diversity in practice when accounting for changes to terms or conditions of a share-based payment award under United States generally accepted accounting principles (“GAAP”). The new guidance is effective for annual and interim periods beginning after December 15, 2017 and early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s financial position, results of operations or liquidity.

In January 2017, the FASB issued authoritative guidance that simplifies the measurement of goodwill impairment to a single-step test. The guidance removes step two of the goodwill impairment test, which required a hypothetical purchase price allocation. The measurement of goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Under the revised guidance, failing step one will always result in goodwill impairment. The new guidance is effective for annual and interim periods beginning after December 15, 2019 and early adoption is permitted. The Company adopted the new guidance on January 1, 2017 on a prospective basis. If the Company fails step one of the goodwill impairment test under the new guidance, the results could materially impact the Company’s financial position and results of operations but not its business or liquidity.

In January 2017, the FASB issued authoritative guidance that revises the definition of a business, which affects accounting for acquisitions, disposals, goodwill impairment, and consolidation. The guidance is intended to help entities evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The revision provides a more robust framework to use in determining when a set of assets and activities is a business. The new guidance is effective for annual and interim periods beginning after December 15, 2017 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 November 2016, the FASB issued authoritative guidance that simplifies the disclosure of restricted cash within the statement of cash flows. The guidance is intended to reduce diversity when reporting restricted cash and requires entities to explain changes in the combined total of restricted and unrestricted balances in the statement of cash flows. The new guidance is effective for annual and interim periods beginning after December 15, 2017 and early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated statement of cash flows.

In August 2016, the FASB issued authoritative guidance to eliminate diversity in practice related to the cash flow statement classification of eight specific cash flow issues, which include debt prepayment or extinguishment costs, maturity of a zero coupon bond, settlement of contingent consideration liabilities after a business combination, proceeds from insurance settlements and distribution from certain equity method investees. The new guidance is effective for annual and interim periods beginning after December 15, 2017 and early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated statement of cash flows.

7


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 1 – BASIS OF PRESENTATION (Continued)

Recently issued accounting requirements (Continued)

In June 2016, the FASB issued authoritative guidance for accounting for credit losses on financial instruments. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments and modifies the impairment model for available-for-sale debt securities. The new guidance is effective for annual periods beginning after December 15, 2019 and early adoption is permitted beginning after December 15, 2018. The adoption of this standard is not expected to have a material impact on the Company’s business, financial position, results of operations, and liquidity.

In February 2016, the FASB issued amended authoritative guidance on accounting for leases. The new provisions require that a lessee of operating leases recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The lease liability will be equal to the present value of lease payments, with the right-of-use asset based upon the lease liability. The classification criteria for distinguishing between finance (or capital) leases and operating leases are substantially similar to the previous lease guidance, but with no explicit bright lines. As such, operating leases will result in straight-line rent expense similar to current practice. For short-term leases (term of 12 months or less), a lessee is permitted to make an accounting election not to recognize lease assets and lease liabilities, which would generally result in lease expense being recognized on a straight-line basis over the lease term. The guidance is effective for annual and interim periods beginning after December 15, 2018, and will require application of the new guidance at the beginning of the earliest comparable period presented. The Company will not elect early adoption and will apply the modified retrospective approach as required. The adoption of this standard is expected to have a material impact on the Company’s financial position. The Company does not expect an impact on its results of operations or liquidity.

In January 2016, the FASB issued amended authoritative guidance which makes targeted improvements for financial instruments. The new provisions impact certain aspects of recognition, measurement, presentation and disclosure requirements of financial instruments. Specifically, the guidance will (1) require equity investments to be measured at fair value with changes in fair value recognized in net income, (2) simplify the impairment assessment of equity investments without readily determinable fair values, (3) eliminate the requirement to disclose the method and assumptions used to estimate fair value for financial instruments measured at amortized cost, and (4) require separate presentation of financial assets and financial liabilities by measurement category. The guidance is effective for annual and interim periods beginning after December 15, 2017, and early adoption is not 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 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.

 

In March 2016, the FASB finalized its amendments to the guidance in the new revenue standard on assessing whether an entity is a principal or an agent in a revenue transaction. Under the new amendments, the FASB confirmed that a principal in an arrangement controls a good or service before it is transferred to a customer but revised the structure of indicators when an entity is the principal. The amendments have the same effective date and transition requirements as the new revenue standard.

 

In May 2016, the FASB finalized its amendments to the guidance in the new revenue standard on contracts with customers and specifically, collectability, non-cash consideration, presentation of sales taxes, and completed contracts. The amendments are intended to reduce the risk of diversity in practice and the cost and complexity of applying certain aspects of the revenue standard. The amendments have the same effective date and transition requirements as the new revenue standard, which is effective for interim and annual periods beginning on or after December 15, 2017, with early adoption permitted on or after December 15, 2016.