XNYS:SKH Skilled Healthcare Group Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
 
(Mark One)
R
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2012.
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: 001-33459
 
Skilled Healthcare Group, Inc.
(Exact name of registrant as specified in its charter)
  
 
Delaware
 
20-3934755
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
 
 
27442 Portola Parkway, Suite 200
 
 
Foothill Ranch, California
 
92610
(Address of principal executive offices)
 
(Zip Code)
(949) 282-5800
(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  þ    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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    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
£
 
Accelerated filer
þ
 
 
 
 
 
Non-accelerated filer
£
(do not check if smaller reporting company)
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  þ
The number of shares outstanding of each of the issuer’s classes of common stock, as of the close of business on August 6, 2012, was:
Class A common stock, $0.001 par value – 22,485,366 shares
Class B common stock, $0.001 par value – 16,051,280 shares
 



Skilled Healthcare Group, Inc.
Form 10-Q
For the Quarterly Period Ended June 30, 2012
Index
 
 
 
Page
Number
Part I.
 
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
Part II.
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 




PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
Skilled Healthcare Group, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
 
June 30, 2012
 
December 31, 2011
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
5,572

 
$
16,017

Accounts receivable, less allowance for doubtful accounts of $14,989 and $15,238 at June 30, 2012 and December 31, 2011, respectively
108,792

 
99,764

Deferred income taxes
12,644

 
11,404

Prepaid expenses
5,255

 
6,943

Other current assets
10,127

 
11,402

Total current assets
142,390

 
145,530

Property and equipment, less accumulated depreciation of $107,090 and $95,954 at June 30, 2012 and December 31, 2011, respectively
370,266

 
375,502

Leased facility assets, less accumulated depreciation of $3,670 and $3,398 at June 30, 2012 and December 31, 2011, respectively
10,178

 
10,792

Other assets:
 
 
 
Notes receivable
3,952

 
5,092

Deferred financing costs, net
7,437

 
9,837

Goodwill
85,609

 
84,299

Intangible assets, less accumulated amortization of $4,034 and $7,060 at June 30, 2012 and December 31, 2011, respectively
22,219

 
22,413

Deferred income taxes
10,381

 
11,615

Other assets
36,701

 
32,119

Total other assets
166,299

 
165,375

Total assets
$
689,133

 
$
697,199

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued liabilities
$
53,192

 
$
58,713

Employee compensation and benefits
40,104

 
41,067

Current portion of long-term debt
11,925

 
4,414

Total current liabilities
105,221

 
104,194

Long-term liabilities:
 
 
 
Insurance liability risks
29,437

 
30,567

Other long-term liabilities
17,503

 
17,773

Long-term debt, less current portion
451,452

 
471,069

Total liabilities
603,613

 
623,603

Stockholders’ equity:
 
 
 
Class A common stock, 175,000 shares authorized, $0.001 par value per share; 22,485 and 21,064 at June 30, 2012 and December 31, 2011, respectively
22

 
21

Class B common stock, 30,000 shares authorized, $0.001 par value per share; 16,051 and 16,937 at June 30, 2012 and December 31, 2011, respectively
16

 
17

Additional paid-in-capital
373,653

 
371,753

Accumulated deficit
(287,871
)
 
(297,705
)
Accumulated other comprehensive loss
(300
)
 
(490
)
Total stockholders’ equity
85,520

 
73,596

Total liabilities and stockholders’ equity
$
689,133

 
$
697,199

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3


Skilled Healthcare Group, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Revenue:
 
 
 
 
 
 
 
Net patient service revenue
$
216,607

 
$
214,497

 
$
435,266

 
$
436,777

Leased facility revenue
768

 
746

 
1,522

 
746

 
217,375

 
215,243

 
436,788

 
437,523

Expenses:
 
 
 
 
 
 
 
Cost of services (exclusive of rent cost of revenue and depreciation and amortization shown below)
180,215

 
171,249

 
363,346

 
346,710

Rent cost of revenue
4,539

 
4,547

 
9,095

 
9,117

General and administrative
6,427

 
7,237

 
12,527

 
14,130

Depreciation and amortization
6,591

 
6,432

 
12,866

 
12,577

 
197,772

 
189,465

 
397,834

 
382,534

Other (expenses) income:
 
 
 
 
 
 
 
Interest expense
(10,521
)
 
(9,662
)
 
(20,086
)
 
(19,608
)
Interest income
132

 
208

 
277

 
383

Other income (expense)
106

 
(30
)
 
77

 
(354
)
Equity in earnings of joint venture
490

 
557

 
961

 
1,111

Debt retirement costs
(3,958
)
 

 
(3,958
)
 

Total other (expenses) income, net
(13,751
)
 
(8,927
)
 
(22,729
)
 
(18,468
)
Income before provision for income taxes
5,852

 
16,851

 
16,225

 
36,521

Provision for income taxes
2,355

 
6,467

 
6,391

 
14,476

Net income
$
3,497

 
$
10,384

 
$
9,834

 
$
22,045

 
 
 
 
 
 
 
 
Income per share, basic
$
0.09

 
$
0.28

 
$
0.26

 
$
0.59

Income per share, diluted
$
0.09

 
$
0.28

 
$
0.26

 
$
0.59

 
 
 
 
 
 
 
 
Weighted-average common shares outstanding, basic
37,400

 
37,154

 
37,343

 
37,117

Weighted-average common shares outstanding, diluted
37,497

 
37,354

 
37,489

 
37,377

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.



4


Skilled Healthcare Group, Inc.
Condensed Consolidated Statements of Comprehensive Income
(In thousands)
(Unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
 
 
 
 
 
 
 
 
Net income
$
3,497

 
$
10,384

 
$
9,834

 
$
22,045

Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized loss on interest rate swap
(4
)
 
(343
)
 
(37
)
 
(325
)
Investment available for sale
7

 

 
69

 

Reclassification adjustments:
 
 
 
 
 
 
 
Interest expense on interest rate swap
141

 

 
279

 

Other comprehensive income (loss), before taxes
144

 
(343
)
 
311

 
(325
)
Income tax expense (benefit) related to items of other comprehensive income
56

 
(133
)
 
121

 
(126
)
Other comprehensive income (loss), net of tax
88

 
(210
)
 
190

 
(199
)
Comprehensive income
$
3,585

 
$
10,174

 
$
10,024

 
$
21,846


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


5


Skilled Healthcare Group, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
 
Six Months Ended June 30,
 
2012
 
2011
Cash Flows from Operating Activities
 
 
 
Net Income
9,834

 
22,045

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
12,866

 
12,577

Provision for doubtful accounts
3,562

 
4,395

Non-cash stock-based compensation
2,371

 
2,187

Excess tax benefits from stock-based payment arrangements
242

 
(309
)
Disposal of property and equipment
(145
)
 
293

Amortization of deferred financing costs
1,643

 
1,651

Deferred income taxes
(369
)
 
10,117

Amortization of discount on debt
432

 
292

Debt retirement costs
3,958

 

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(12,801
)
 
(11,380
)
Payments on notes receivable
1,482

 
1,886

Other current and non-current assets
(1,172
)
 
7,973

Accounts payable and accrued liabilities
(5,330
)
 
(1,665
)
Employee compensation and benefits
(1,488
)
 
(3,744
)
Insurance liability risks
(3
)
 
(1,097
)
Other long-term liabilities
(962
)
 
9

Net cash provided by operating activities
14,120

 
45,230

Cash Flows from Investing Activities
 
 
 
Additions to property and equipment
(7,097
)
 
(6,223
)
Acquisitions
(1,053
)
 
(350
)
Proceeds from sale of property and equipment
1,050

 
400

Net cash used in investing activities
(7,100
)
 
(6,173
)
Cash Flows from Financing Activities
 
 
 
Borrowings under line of credit
162,500

 
66,500

Repayments under line of credit
(117,000
)
 
(92,500
)
Repayments of long-term debt
(157,494
)
 
(1,870
)
Proceeds from issuance of long-term debt
98,000

 

Additions to deferred financing costs
(3,000
)
 

Exercise of stock options

 
26

Excess tax benefits from stock-based payment arrangements
(242
)
 
309

Taxes paid related to net share settlement of equity awards
(229
)
 
(699
)
Net cash used in financing activities
(17,465
)
 
(28,234
)
(Decrease) increase in cash and cash equivalents
(10,445
)
 
10,823

Cash and cash equivalents at beginning of period
16,017

 
4,192

Cash and cash equivalents at end of period
$
5,572

 
$
15,015

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

6


 
Six Months Ended June 30,
 
2012
 
2011
Supplemental cash flow information
 
 
 
Cash paid for:
 
 
 
Interest expense, net of capitalized interest
$
23,660

 
$
19,980

Income taxes, net
$
7,211

 
$
778

Non-cash activities:
 
 
 
Conversion of accounts receivable into notes receivable
$
359

 
$
1,529

Insurance premium financed
$
1,107

 
$
1,123

Liabilities issued as purchase consideration for purchase of business
$
261

 
$

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

7

SKILLED HEALTHCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


1. Description of Business

Current Business
Skilled Healthcare Group, Inc. ("Skilled") is a holding company that owns subsidiaries that operate long-term care facilities and provide a wide range of post-acute care services, with a strategic emphasis on sub-acute specialty medical care. Skilled and its consolidated wholly-owned companies are collectively referred to as the "Company." As of June 30, 2012, the Company operated facilities in California, Iowa, Kansas, Missouri, Nevada, Nebraska, New Mexico and Texas, including 74 skilled nursing facilities ("SNFs"), which offer sub-acute care and rehabilitative and specialty healthcare skilled nursing care, and 22 assisted living facilities ("ALFs"), which provide room and board and assistance with activities of daily living. The Company leases five skilled nursing facilities in California to an unaffiliated third party operator. In addition, through its Hallmark Rehabilitation subsidiary ("Hallmark"), the Company provides a variety of rehabilitative services such as physical, occupational and speech therapy in Company-operated facilities and unaffiliated facilities. Furthermore, as of June 30, 2012, the Company provided hospice care and home health services in Arizona, California, Idaho, Montana, Nevada and New Mexico. The Company has an administrative services company that provides a full complement of administrative and consultative services that allows affiliated operators and third-party facility operators with whom the Company contracts to better focus on delivery of healthcare services. The Company currently has one such service agreement with an unrelated skilled nursing facility operator. The Company is also a member in a joint venture located in Texas that provides institutional pharmacy services, which currently serves eight of the Company’s SNFs and other facilities unaffiliated with the Company.

2. Correction of Previously Issued Consolidated Financial Statements
The Company recently identified errors related to certain claims under Medicare Part B for blood glucose testing at certain of the Company's affiliated companies. Although blood glucose tests are routinely ordered by physicians to safely monitor vulnerable patients' blood glucose levels, effective January 1, 2007, CMS redefined the criteria for "medical necessity" before a Medicare claim for such a test is payable. The new criteria specifies the nature of a physician order for the blood glucose test, the frequency of a physician's review of the test results and the frequency of a physician's utilization of the test results in a patient's plan of care or treatments. The documentation and other requirements for Medicare Part B billing of blood glucose testing that took effect in January 2007 significantly limited the number of blood glucose tests that are reimbursable compared to those that were previously reimbursable. The Company's internal policies changed at the time to be consistent with new Medicare regulations. Subsequent to January 1, 2007, a number of the Company's affiliated companies incorrectly continued to bill Medicare under the rules that existed prior to January 1, 2007. The billing errors resulted in a cumulative overstatement of consolidated revenue in the amount of $5.8 million for the period from January 1, 2007 to December 31, 2011. The affiliated companies submitted approximately 30,000 claims related to blood glucose testing in the affected period that were not reimbursable under the revised standard. The affected providers have refunded all previously paid, post-2006 Medicare Part B claims for blood glucose tests.
In accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") No. 250-10-S99 ("ASC 250-10-S99"), the Company evaluated these refunds and, based on an analysis of quantitative and qualitative factors, determined that they were not material to any of the prior reporting periods affected and, therefore, amendment of previously filed reports with the Securities and Exchange Commission was not required. However, if the adjustments to correct the cumulative effect of the aforementioned refunds had been recorded in the three and six months ended June 30, 2012, the impact would have been material to those two periods. Therefore, as required by Staff Accounting Bulletin ("SAB") 108, the Company has revised in this filing previously reported financial information for the fiscal years ended December 31, 2011, 2010, 2009, 2008, and 2007, and for the quarterly periods in fiscal years 2011 and 2010. Also, in accordance with SAB 108, the Company will include this revised financial information when the Company files subsequent reports on Form 10-Q and Form 10-K or files a registration statement under the Securities Act of 1933, as amended.
The prior period financial statements included in this filing have been revised to reflect the revisions related to the refunds, the effects of which have been summarized below. The tables below show the previously reported, adjusted, and restated amounts for those line items in the Company's condensed consolidated balance sheets as of December 31, 2011 and 2010, and its condensed consolidated statements of operations for the years ended December 31, 2011, 2010, 2009, 2008, and 2007, as well as for the quarterly periods in fiscal years 2011 and 2010, which were effected by the prior period change. The condensed consolidated statement of operations for the quarter ended March 31, 2012 has not been restated. Revenue for the quarter ended March 31, 2012 was overstated by $0.3 million. This correction has been recorded as an adjustment to revenue in the quarter ended June 30, 2012, as this amount was not material to the operating results for the period then ended.
Despite the fact that the Company's affected subsidiaries have refunded all of the reimbursements they received in

8

SKILLED HEALTHCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

connection with the Medicare Part B claims for all blood glucose tests after January 1, 2007, some refunded claims could nonetheless potentially lead to allegations that any of the affected subsidiaries are subject to sanctions under the Federal False Claims Act ("FFCA") or the Federal Civil Monetary Penalties Law. Such sanctions could lead to any combination of a variety of criminal, civil and administrative penalties, which could be material both individually and in the aggregate. The Company cannot determine the likelihood that any penalties might be imposed related to this refund and has not accrued for any such penalties. The FFCA provides for civil fines ranging from $5,500 to $11,000 per claim plus treble damages. The Civil Monetary Penalties Law similarly provides for civil monetary penalties of up to $10,000 per claim plus up to treble damages. The Company and/or certain operating companies could also be subject to exclusion from participation in the Medicare or Medicaid programs in some circumstances as well, in addition to any monetary or other fines, penalties or sanctions that it may incur under applicable federal and/or state law. See "Revenue we receive from Medicare and Medicaid is subject to potential retroactive reduction or repayment" in Part II, Item 1A of this report for additional information.

 
December 31, 2011
 
December 31, 2010
 
In thousands
Condensed consolidated balance sheet
 
 
 
As previously reported
 
 
 
Other current assets
$
9,203

 
$
17,524

Total current assets
143,331

 
150,530

Total assets
695,000

 
944,290

Accounts payable and accrued liabilities
52,897

 
52,602

Total liabilities
617,787

 
666,710

Accumulated deficit
(294,088
)
 
(90,822
)
Total stockholders' equity
77,213

 
277,580

Total liabilities and stockholders' equity
695,000

 
944,290

 
 
 
 
Adjustment
 
 
 
Other current assets
2,199

 
1,708

Total current assets
2,199

 
1,708

Total assets
2,199

 
1,708

Accounts payable and accrued liabilities
5,816

 
4,548

Total liabilities
5,816

 
4,548

Accumulated deficit
(3,617
)
 
(2,840
)
Total stockholders' equity
(3,617
)
 
(2,840
)
Total liabilities and stockholders' equity
2,199

 
1,708

 
 
 
 
As corrected
 
 
 
Other current assets
11,402

 
19,232

Total current assets
145,530

 
152,238

Total assets
697,199

 
945,998

Accounts payable and accrued liabilities
58,713

 
57,150

Total liabilities
623,603

 
671,258

Accumulated deficit
(297,705
)
 
(93,662
)
Total stockholders' equity
73,596

 
274,740

Total liabilities and stockholders' equity
697,199

 
945,998



9

SKILLED HEALTHCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
Three Months Ended,
 
March 31, 2011
 
June 30, 2011
 
September 30, 2011
 
December 31, 2011
 
In thousands (except per share data)
Condensed consolidated statements of income
 
 
 
 
 
 
 
As previously reported
 
 
 
 
 
 
 
Net patient service revenue
$
222,578

 
$
214,801

 
$
216,409

 
$
213,675

Total revenue
222,578

 
215,547

 
217,155

 
214,421

Income (loss) before provision for income taxes
19,968

 
17,155

 
(247,870
)
 
10,997

Provision (benefit) for income taxes
8,124

 
6,584

 
(15,259
)
 
4,067

Net income (loss)
11,844

 
10,571

 
(232,611
)
 
6,930

Basic earnings (loss) per share
0.32

 
0.28

 
(6.26
)
 
0.19

Diluted earnings (loss) per share
0.32

 
0.28

 
(6.26
)
 
0.19

 
 
 
 
 
 
 
 
Adjustment
 
 
 
 
 
 
 
Net patient service revenue
(298
)
 
(304
)
 
(331
)
 
(335
)
Total revenue
(298
)
 
(304
)
 
(331
)
 
(335
)
Income (loss) before provision for income taxes
(298
)
 
(304
)
 
(331
)
 
(335
)
Provision (benefit) for income taxes
(115
)
 
(117
)
 
(128
)
 
(131
)
Net income (loss)
(183
)
 
(187
)
 
(203
)
 
(204
)
Basic earnings (loss) per share
(0.01
)
 

 

 
(0.01
)
Diluted earnings (loss) per share
(0.01
)
 

 

 
(0.01
)
 
 
 
 
 
 
 
 
As corrected
 
 
 
 
 
 
 
Net patient service revenue
222,280

 
214,497

 
216,078

 
213,340

Total revenue
222,280

 
215,243

 
216,824

 
214,086

Income (loss) before provision for income taxes
19,670

 
16,851

 
(248,201
)
 
10,662

Provision (benefit) for income taxes
8,009

 
6,467

 
(15,387
)
 
3,936

Net income (loss)
11,661

 
10,384

 
(232,814
)
 
6,726

Basic earnings (loss) per share
0.31

 
0.28

 
(6.26
)
 
0.18

Diluted earnings (loss) per share
0.31

 
0.28

 
(6.26
)
 
0.18

 
 
 
 
 
 
 
 
 
Three months ended
 
March 31, 2010
 
June 30, 2010
 
September 30, 2010
 
December 31, 2010
 
In thousands (except per share data)
Condensed consolidated statements of income
 
 
 
 
 
 
 
As previously reported
 
 
 
 
 
 
 
Net patient service revenue
$
189,319

 
$
200,971

 
$
209,199

 
$
220,749

Total revenue
189,319

 
200,971

 
209,199

 
220,749

Income (loss) before provision for income taxes
14,475

 
7,311

 
(39,073
)
 
18,718

Provision (benefit) for income taxes
5,594

 
2,766

 
(13,766
)
 
7,878

Net income (loss)
8,881

 
4,545

 
(25,307
)
 
10,840

Basic earnings (loss) per share
0.24

 
0.12

 
(0.68
)
 
0.29

Diluted earnings (loss) per share
0.24

 
0.12

 
(0.68
)
 
0.29

 
 
 
 
 
 
 
 
Adjustment
 
 
 
 
 
 
 

10

SKILLED HEALTHCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Net patient service revenue
(310
)
 
(314
)
 
(326
)
 
(326
)
Total revenue
(310
)
 
(314
)
 
(326
)
 
(326
)
Income (loss) before provision for income taxes
(310
)
 
(314
)
 
(326
)
 
(326
)
Provision (benefit) for income taxes
(116
)
 
(117
)
 
(122
)
 
(122
)
Net income (loss)
(194
)
 
(197
)
 
(204
)
 
(204
)
Basic earnings (loss) per share
(0.01
)
 

 
(0.01
)
 

Diluted earnings (loss) per share
(0.01
)
 

 
(0.01
)
 

 
 
 
 
 
 
 
 
As corrected
 
 
 
 
 
 
 
Net patient service revenue
189,009

 
200,657

 
208,873

 
220,423

Total revenue
189,009

 
200,657

 
208,873

 
220,423

Income (loss) before provision for income taxes
14,165

 
6,997

 
(39,399
)
 
18,392

Provision (benefit) for income taxes
5,478

 
2,649

 
(13,888
)
 
7,756

Net income (loss)
8,687

 
4,348

 
(25,511
)
 
10,636

Basic earnings (loss) per share
0.23

 
0.12

 
(0.69
)
 
0.29

Diluted earnings (loss) per share
0.23

 
0.12

 
(0.69
)
 
0.29



11

SKILLED HEALTHCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
Twelve months ended December 31,
 
2007
 
2008
 
2009
 
2010
 
2011
 
In thousands (except per share data)
Condensed consolidated statements of income
 
 
 
 
 
 
 
 
 
As previously reported
 
 
 
 
 
 
 
 
 
Net patient service revenue
$
634,607

 
$
729,390

 
$
756,065

 
$
820,238

 
$
867,462

Total revenue
634,607

 
729,390

 
756,065

 
820,238

 
869,701

Income (loss) before provision for income taxes
27,083

 
52,177

 
(114,949
)
 
1,431

 
(199,750
)
Provision (benefit) for income taxes
11,801

 
18,081

 
17,842

 
2,472

 
3,516

Net income (loss)
7,928

 
34,096

 
(133,181
)
 
(1,041
)
 
(203,266
)
Basic earnings (loss) per share
0.29

 
0.92

 
(3.61
)
 
(0.03
)
 
(5.47
)
Diluted earnings (loss) per share
0.29

 
0.92

 
(3.61
)
 
(0.03
)
 
(5.47
)
 
 
 
 
 
 
 
 
 
 
Adjustment
 
 
 
 
 
 
 
 
 
Net patient service revenue
(1,080
)
 
(1,040
)
 
(1,152
)
 
(1,276
)
 
(1,268
)
Total revenue
(1,080
)
 
(1,040
)
 
(1,152
)
 
(1,276
)
 
(1,268
)
Income (loss) before provision for income taxes
(1,080
)
 
(1,040
)
 
(1,152
)
 
(1,276
)
 
(1,268
)
Provision (benefit) for income taxes
(407
)
 
(392
)
 
(432
)
 
(477
)
 
(491
)
Net income (loss)
(673
)
 
(648
)
 
(720
)
 
(799
)
 
(777
)
Basic earnings (loss) per share
(0.02
)
 
(0.02
)
 
(0.02
)
 
(0.02
)
 
(0.02
)
Diluted earnings (loss) per share
(0.02
)
 
(0.02
)
 
(0.02
)
 
(0.02
)
 
(0.02
)
 
 
 
 
 
 
 
 
 
 
As corrected
 
 
 
 
 
 
 
 
 
Net patient service revenue
633,527

 
728,350

 
754,913

 
818,962

 
866,194

Total revenue
633,527

 
728,350

 
754,913

 
818,962

 
868,433

Income (loss) before provision for income taxes
26,003

 
51,137

 
(116,101
)
 
155

 
(201,018
)
Provision (benefit) for income taxes
11,394

 
17,689

 
17,410

 
1,995

 
3,025

Net income (loss)
7,255

 
33,448

 
(133,901
)
 
(1,840
)
 
(204,043
)
Basic earnings (loss) per share
0.27

 
0.90

 
(3.63
)
 
(0.05
)
 
(5.49
)
Diluted earnings (loss) per share
0.27

 
0.90

 
(3.63
)
 
(0.05
)
 
(5.49
)
 
Six months ended June 30, 2011
 
As previously reported
 
Adjustment
 
As corrected
 
In thousands
Condensed consolidated statements of cash flows
 
 
 
 
 
Net income
$
22,415

 
$
(370
)
 
$
22,045

Other current and non-current assets
8,205

 
(232
)
 
7,973

Accounts payable and accrued liabilities
(2,267
)
 
602

 
(1,665
)

For the years ended December 31, 2011, 2010, 2009, 2008 and 2007, the Condensed Consolidated Statement of Cash Flow would have been impacted by the adjustments to net income as noted above. The impact to the annual cash flow for those periods would have been a decrease in net income and change in other current and non-current assets and an increase to accounts payable and accrued liabilities, with no net impact to cash provided by operating activities.
By August 3, 2012, the Company's affiliates completed the filing of voluntary disclosure requests with their applicable Medicare Administrative Contractors and refunded all reimbursements that had been collected since January 1, 2007 related to Medicare Part B blood glucose testing.

12

SKILLED HEALTHCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


3. Summary of Significant Accounting Policies

Basis of Presentation
The accompanying condensed consolidated financial statements as of June 30, 2012 and for the three and six months ended June 30, 2012 and 2011 (collectively, the "Interim Financial Statements"), are unaudited. Certain information and footnote disclosures normally included in the Company’s annual consolidated financial statements have been condensed or omitted, as permitted under applicable rules and regulations. Readers of the Interim Financial Statements should refer to the Company's audited consolidated financial statements and notes thereto for the year ended December 31, 2011, which are included in the Company's 2011 Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC"). Management believes that the Interim Financial Statements reflect all adjustments that are of a normal and recurring nature necessary to fairly present the Company's financial position and results of operations and cash flows in all material respects as of the dates and for the periods presented. The results of operations presented in the Interim Financial Statements are not necessarily representative of operations for the entire year.
The accompanying Interim Financial Statements include the accounts of Skilled and its consolidated wholly-owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation.
Estimates and Assumptions
The preparation of the Interim Financial Statements in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") requires management to consolidate subsidiary financial information and make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The most significant estimates in the Interim Financial Statements relate to revenue, allowance for doubtful accounts, the self-insured portion of general and professional liability and workers' compensation claims and income taxes. Actual results could differ materially from those estimates.
Information regarding the Company's significant accounting policies is contained in Note 2 - "Summary of Significant Accounting Policies" in the Company's 2011 Annual Report on Form 10-K filed with the SEC.
Notes Receivable
As of June 30, 2012 and December 31, 2011, net notes receivable were approximately $7.0 million and $8.1 million, respectively, of which $3.0 million was reflected as current assets as of June 30, 2012 and December 31, 2011, with the remaining balances reflected as long-term assets. Interest rates on these notes approximate market rates as of the date the notes were originated.
As of June 30, 2012, two of the Company's rehabilitation therapy services business customers were responsible for $6.5 million, or 93.5% of the total notes receivable balance. These notes receivable, as well as the trade receivables from these customers and one additional customer, are secured by the assets of the customers as well as a personal guaranty by the principal owners of the customers. As of June 30, 2012, these three customers represented 65.5% of the net accounts receivable of $21.5 million for the Company's rehabilitation therapy services business and approximately 55.4% of the external revenue of the rehabilitation therapy services business for the six months ended June 30, 2012. The remaining notes receivable of $0.5 million, or 6.5% of the aggregate notes receivable balance, are primarily past due accounts converted from accounts receivable to notes receivable.
The notes receivable allowance for uncollectibility as of June 30, 2012 and December 31, 2011 were $0.3 million and $0.2 million, respectively.
Recent Accounting Pronouncements
In May 2011, the FASB issued Accounting Standards Update ("ASU") No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS ("ASU 2011-04"). This ASU represents the converged guidance of the FASB and the International Accounting Standards Board on fair value measurement. ASU 2011-04 sets forth common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term "fair value." The adoption of ASU 2011-04 became effective for the Company's interim and annual periods beginning January 1, 2012. and did not have a material impact on the Company's consolidated financial statements as the changes relate only to additional disclosures.
In June 2011, the FASB issued ASU No 2011-05, Presentation of Comprehensive Income ("ASU 2011-05"), which revises the manner in which companies present comprehensive income in their financial statements. The new guidance

13

SKILLED HEALTHCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

removes the current option to report other comprehensive income and its components in the statement of changes in equity and instead requires presenting in one continuous statement of comprehensive income or two separate but consecutive statements. The adoption of ASU 2011-05 became effective for the Company's interim and annual periods beginning January 1, 2012. The Company applied the two-statement approach, presenting components of net income in the statement of income and the components and total of other comprehensive income along with a total for comprehensive income in the statement of comprehensive income.
In July 2011, the Emerging Issues Task Force (EITF) of the FASB reached a consensus that would require health care entities to separately present bad debt expense related to patient service revenue as a reduction of patient service revenue (net of contractual allowances and discounts) on the income statement for entities that do not assess a patient's ability to pay prior to rendering services.  Further, it was determined, net presentation of bad debt expense in revenue would only apply to bad debts that are not related to patient service revenue, to entities that do not provide services prior to assessing a patient's ability to pay, or to entities that recognize revenue only after deciding that collection is reasonably assured.  In addition, the final consensus requires health care entities to disclose information about the activity in the allowance for doubtful accounts, such as recoveries and write-offs, by using a mixture of qualitative and quantitative data.  It also requires disclosure of our policies for (i) assessing the timing and amount of uncollectible revenue recognized as bad debt expense; and (ii) assessing collectability in the timing and amount of revenue (net of contractual allowances and discounts).  The adoption of this guidance became effective for the Company's interim and annual periods beginning January 1, 2012. As the Company assesses the collectability of revenues at the time of admission, there was no impact to the Company's consolidated financial statements.
In September 2011, the FASB issued ASU 2011-08, Testing Goodwill for Impairment, ("ASU 2011-08"), which amends the guidance in Accounting Standard Codification ("ASC') 350-20, "Intangibles - Goodwill and Other." Under ASU 2011-08, entities have the option, under certain circumstances, of performing a qualitative assessment before calculating the fair value of the reporting unit when testing goodwill for impairment. If the fair value of the reporting unit is determined, based on qualitative factors, to be more likely than not less than the carrying amount of the reporting unit, then entities are required to perform the two-step goodwill impairment test. The adoption of ASU 2011-08 became effective for the Company's interim and annual periods beginning January 1, 2012. The Company has not yet determined which method it will use for its annual impairment test at October 1, 2012.
In November 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities, ("ASU 2011-11"). This ASU require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The adoption of ASU 2011-11 becomes effective for the Company's interim and annual periods beginning on or after January 1, 2013. The Company does not believe the adoption of this guidance will have a material impact on its consolidated financial statements.

4. Income Per Share of Class A Common Stock and Class B Common Stock
The Company computes income per share of Class A common stock and Class B common stock in accordance with FASB ASC Topic 260, Earnings per Share, using the two-class method. The Company's Class A common stock and Class B common stock are identical in all respects, except with respect to voting rights and except that each share of Class B common stock is convertible into one share of Class A common stock under certain circumstances. Net income is allocated on a proportionate basis to each class of common stock in the determination of income per share.
Basic income per share was computed by dividing net income by the weighted-average number of outstanding shares for the period. Dilutive earnings per share is computed by dividing net income plus the effect of assumed conversions (if applicable) by the weighted-average number of outstanding shares after giving effect to all potential dilutive common stock, including options, warrants, common stock subject to repurchase and convertible preferred stock, if any. The following table sets forth the computation of basic and diluted income per share of Class A common stock and Class B common stock for the three and six months ended June 30, 2012 and 2011 (amounts in thousands, except per share data):
 
Three months ended June 30, 2012
 
Three months ended June 30, 2011
 
Six months ended June 30, 2012
 
Six months ended June 30, 2011
 
Class A
 
Class B
 
Total
 
Class A
 
Class B
 
Total
 
Class A
 
Class B
 
Total
 
Class A
 
Class B
 
Total
Income per share, basic
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allocation of net income
$
1,950

 
$
1,547

 
$
3,497

 
$
5,645

 
$
4,739

 
$
10,384

 
$
5,425

 
$
4,409

 
$
9,834

 
$
11,964

 
$
10,081

 
$
22,045

Income per share, diluted
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allocation of net income
$
1,954

 
$
1,543

 
$
3,497

 
$
5,670

 
$
4,714

 
$
10,384

 
$
5,442

 
$
4,392

 
$
9,834

 
$
12,034

 
$
10,011

 
$
22,045

Denominator for basic and diluted income per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding, basic
20,852

 
16,548

 
37,400

 
20,197

 
16,957

 
37,154

 
20,600

 
16,743

 
37,343

 
20,143

 
16,974

 
37,117

Plus: incremental shares related to dilutive effect of stock options and restricted stock, if applicable
97

 

 
97

 
200

 

 
200

 
146

 

 
146

 
260

 

 
260

Adjusted weighted-average common shares outstanding, diluted
20,949

 
16,548

 
37,497

 
20,397

 
16,957

 
37,354

 
20,746

 
16,743

 
37,489

 
20,403

 
16,974

 
37,377

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income per share, basic
$
0.09

 
$
0.09

 
$
0.09

 
$
0.28

 
$
0.28

 
$
0.28

 
$
0.26

 
$
0.26

 
$
0.26

 
$
0.59

 
$
0.59

 
$
0.59

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income per share, diluted
$
0.09

 
$
0.09

 
$
0.09

 
$
0.28

 
$
0.28

 
$
0.28

 
$
0.26

 
$
0.26

 
$
0.26

 
$
0.59

 
$
0.59

 
$
0.59

The following were excluded from the weighted-average diluted shares computation for the three and six months ended June 30, 2012 and 2011, as their inclusion would have been anti-dilutive (shares in thousands):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Options to purchase common shares
464

 
38

 
464

 
939

Non-vested common shares
1,018

 
261

 
898

 
5

Total excluded
1,482

 
299

 
1,362

 
944

 


5. Business Segments
The Company has three reportable operating segments: (i) long-term care services ("LTC"), which includes the operation of SNFs and ALFs which is the most significant portion of the Company's business, the Company's administrative services provided to an unrelated SNF operator, and the facility lease revenue from a third-party operator; (ii) the Company's rehabilitation therapy services business; and (iii) the Company's hospice and home health businesses. The "other" column in the table below includes general and administrative items. The Company's reporting segments are business units that offer different services, and that are managed differently due to the nature of the services provided.
At June 30, 2012, LTC services included 74 wholly-owned SNF operating companies that offer post-acute, rehabilitative custodial and specialty skilled nursing care, as well as 22 wholly-owned ALF operating companies that provide room and board and social services. Therapy services included rehabilitative services such as physical, occupational and speech therapy provided in the Company's facilities and in unaffiliated facilities. Hospice and home health services were provided by the Company's wholly owned subsidiaries to patients.

14

SKILLED HEALTHCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The Company evaluates performance and allocates capital resources to each segment based on an operating model that is designed to maximize the quality of care provided and profitability. Accordingly, earnings from operations before net interest, tax, depreciation and amortization, non-core expenses ("Adjusted EBITDA") and rent cost of revenue ("Adjusted EBITDAR") is used as the primary measure of each segment’s operating results because it does not include such costs as interest expense, income taxes, depreciation, amortization and rent cost of revenue which may vary from segment to segment depending upon various factors, including the method used to finance the original purchase of assets within a segment or the tax law of the states in which a segment operates. By excluding these items, the Company is better able to evaluate operating performance of the segment by focusing on more controllable measures. Adjusted EBITDA and Adjusted EBITDAR are non‑GAAP financial measures. For a full discussion of the definitions of these terms and the reasons why the Company utilizes such measures, see Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, of this filing. General and administrative expenses are not allocated to any segment for purposes of determining segment profit or loss, and are included in the "other" category in the selected segment financial data that follows. The accounting policies of the reporting segments are the same as those described in Note 3, "Summary of Significant Accounting Policies." Intersegment sales and transfers are recorded at cost plus standard mark-up; intersegment transactions have been eliminated in consolidation.
The following table sets forth selected financial data consolidated by business segment (dollars in thousands): 
 
Long-Term
Care Services
 
Therapy Services
 
Hospice & Home Health Services
 
Other
 
Elimination
 
Total
Three months ended June 30, 2012
 
 
 
 
 
 
 
 
 
 
 
Net patient service revenue from external customers
$
163,287

 
$
26,385

 
$
26,935

 
$

 
$

 
$
216,607

Leased facility revenue
768

 

 

 

 

 
768

Intersegment revenue
601

 
15,818

 

 

 
(16,419
)
 

Total revenue
$
164,656

 
$
42,203

 
$
26,935

 
$

 
$
(16,419
)
 
$
217,375

Operating income (loss)
$
18,126

 
$
3,543

 
$
4,521

 
$
(6,587
)
 
$

 
$
19,603

Interest expense, net of interest income
 
 
 
 
 
 
 
 
 
 
(10,389
)
Other income
 
 
 
 
 
 
 
 
 
 
106

Equity in earnings of joint venture
 
 
 
 
 
 
 
 
 
 
490

Debt retirement costs
 
 
 
 
 
 
 
 
 
 
(3,958
)
Income before provision for income taxes
 
 
 
 
 
 
 
 
 
 
$
5,852

Depreciation and amortization
$
5,630

 
$
164

 
$
644

 
$
153

 
$

 
$
6,591

Segment capital expenditures
$
2,894

 
$
269

 
$
114

 
$
345

 
$

 
$
3,622

Adjusted EBITDA
$
23,719

 
$
3,850

 
$
5,255

 
$
(6,034
)
 
$

 
$
26,790

Adjusted EBITDAR
$
27,940

 
$
3,850

 
$
5,565

 
$
(6,026
)
 
$

 
$
31,329

Three months ended June 30, 2011
 
 
 
 
 
 
 
 
 
 
 
Net patient service revenue from external customers
$
171,927

 
$
23,703

 
$
18,867

 
$

 
$

 
$
214,497

Leased facility revenue
746

 

 

 

 

 
746

Intersegment revenue
501

 
16,045

 

 

 
(16,546
)
 

Total revenue
$
173,174

 
$
39,748

 
$
18,867

 
$

 
$
(16,546
)
 
$
215,243

Operating income (loss)
$
25,109

 
$
5,111

 
$
2,979

 
$
(7,421
)
 
$

 
$
25,778

Interest expense, net of interest income
 
 
 
 
 
 
 
 
 
 
(9,454
)
Other expense
 
 
 
 
 
 
 
 
 
 
(30
)
Equity in earnings of joint venture
 
 
 
 
 
 
 
 
 
 
557

Income before provision for income taxes
 
 
 
 
 
 
 
 
 
 
$
16,851

Depreciation and amortization
$
5,673

 
$
106

 
$
483

 
$
170

 
$

 
$
6,432

Segment capital expenditures
$
3,381

 
$
88

 
$
111

 
$
76

 
$

 
$
3,656

Adjusted EBITDA
$
31,192

 
$
5,217

 
$
3,574

 
$
(6,334
)
 
$

 
$
33,649

Adjusted EBITDAR
$
35,491

 
$
5,217

 
$
3,810

 
$
(6,322
)
 
$

 
$
38,196


15

SKILLED HEALTHCARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
Long-Term
Care Services
 
Therapy Services
 
Hospice & Home Health Services
 
Other
 
Elimination
 
Total
Six months ended June 30, 2012
 
 
 
 
 
 
 
 
 
 
 
Net patient service revenue from external customers
$
329,625

 
$
52,501

 
$
53,140

 
$

 
$

 
$
435,266

Leased facility revenue
1,522

 

 

 

 

 
1,522

Intersegment revenue
1,355

 
31,799

 

 

 
(33,154
)
 

Total revenue
$
332,502

 
$
84,300

 
$
53,140

 
$

 
$
(33,154
)
 
$
436,788

Operating income (loss)
$
36,264

 
$
6,491

 
$
9,053

 
$
(12,854
)
 
$

 
$
38,954

Interest expense, net of interest income
 
 
 
 
 
 
 
 
 
 
(19,809
)
Other income
 
 
 
 
 
 
 
 
 
 
77

Equity in earnings of joint venture
 
 
 
 
 
 
 
 
 
 
961

Debt retirement costs
 
 
 
 
 
 
 
 
 
 
(3,958
)
Income before provision for income taxes
 
 
 
 
 
 
 
 
 
 
$
16,225

Depreciation and amortization
$
11,301

 
$
332

 
$
921

 
$
312

 
$

 
$
12,866

Segment capital expenditures
$
5,299

 
$
546

 
$
317

 
$
935

 
$

 
$
7,097

Adjusted EBITDA
$
47,499

 
$
6,966

 
$
10,123

 
$
(11,730
)
 
$

 
$
52,858

Adjusted EBITDAR
$
55,955

 
$
6,966

 
$
10,747

 
$
(11,715
)
 
$

 
$
61,953

Six months ended June 30, 2011
 
 
 
 
 
 
 
 
 
 
 
Net patient service revenue from external customers
$
353,952

 
$
45,893

 
36,932

 
$

 
$

 
$
436,777

Leased facility revenue
746

 

 

 

 

 
746

Intersegment revenue
891

 
33,166

 

 

 
(34,057
)
 

Total revenue
$
355,589

 
$
79,059

 
36,932

 
$

 
$
(34,057
)
 
$
437,523

Operating income (loss)
$
52,087

 
$
11,070

 
6,311

 
$
(14,479
)
 
$

 
$
54,989

Interest expense, net of interest income
 
 
 
 
 
 
 
 
 
 
(19,225
)
Other expense
 
 
 
 
 
 
 
 
 
 
(354
)
Equity in earnings of joint venture
 
 
 
 
 
 
 
 
 
 
1,111

Income before provision for income taxes
 
 
 
 
 
 
 
 
 
 
$
36,521

Depreciation and amortization
$
11,366

 
$
204

 
$
686

 
$
321

 
$

 
$
12,577

Segment capital expenditures
$
5,449

 
$
208

 
$
338

 
$
228

 
$

 
$
6,223

Adjusted EBITDA
$
64,211

 
$
11,274

 
$
7,158

 
$
(12,491
)
 
$

 
$
70,152

Adjusted EBITDAR
$
72,829

 
$
11,274

 
$
7,629

 
$
(12,463
)
 
$

 
$