Integris Health, Inc
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INTEGRIS HEALTH, INC. AND CONTROLLED ENTITIES Consolidated Financial Statements and Supplemental Schedules June 30, 2015 and 2014 (With Independent Auditors’ Report Thereon) KPMG LLP 210 Park Avenue, Suite 2850 Oklahoma City, OK 73102-5683 Independent Auditors’ Report The Board of Directors INTEGRIS Health, Inc.: We have audited the accompanying consolidated financial statements of INTEGRIS Health, Inc. and controlled entities, which comprise the consolidated balance sheets as of June 30, 2015 and 2014, and the related consolidated statements of operations, changes in net assets, and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of INTEGRIS Health, Inc. and controlled entities as of June 30, 2015 and 2014, and the results of their operations and their cash flows for the years then ended in accordance with U.S. generally accepted accounting principles. KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative (“KPMG International”), a Swiss entity. Other Matter Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The supplementary information included in Schedules 1 and 2 is presented for purposes of additional analysis and is not a required part of the consolidated financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the consolidated financial statements as a whole. Oklahoma City, Oklahoma September 21, 2015 2 INTEGRIS HEALTH , INC. AND CONTROLLED ENTITIES Consolidated Balance Sheets June 30, 2015 and 2014 (In thousands) Assets 2015 2014 Current assets: Cash and cash equivalents $ 31,996 131,547 Short-term investments 239,818 193,909 Accounts receivable, net: Patients 157,836 147,671 Affiliates 714 146 Current portion of notes receivable 20 24 Inventories 27,753 24,698 Prepaid expenses and other current assets 14,332 11,614 Total current assets 472,469 509,609 Assets whose use is limited 971,549 954,671 Property and equipment: Land and improvements 61,703 61,067 Buildings and leasehold improvements 693,985 695,434 Equipment 740,209 717,960 ` 1,495,897 1,474,461 Less accumulated depreciation and amortization 950,057 918,360 545,840 556,101 Construction in progress 75,598 28,265 621,438 584,366 Other assets, net 112,900 116,437 Total assets $ 2,178,356 2,165,083 3 (Continued) INTEGRIS HEALTH , INC. AND CONTROLLED ENTITIES Consolidated Balance Sheets June 30, 2015 and 2014 (In thousands) Liabilities and Net Assets 2015 2014 Current liabilities: Accounts payable, accrued expenses, and other $ 316,442 199,277 Employee compensation and related liabilities 73,710 68,322 Current portion of long-term debt 13,615 18,560 Current portion of capital lease obligations 344 200 Due to affiliates 9,569 10,721 Total current liabilities 413,680 297,080 Long-term debt, less current portion 442,843 424,354 Capital lease obligations, less current portion 1,027 1,568 Other long-term liabilities 298,725 270,338 Total liabilities 1,156,275 993,340 Net assets: Unrestricted 975,892 1,135,675 Temporarily restricted 33,891 24,384 Permanently restricted 6,243 6,308 Total net assets of INTEGRIS Health 1,016,026 1,166,367 Noncontrolling ownership interest in equity of consolidated affiliates – unrestricted 6,055 5,376 Total net assets 1,022,081 1,171,743 Commitments and contingencies Total liabilities and net assets $ 2,178,356 2,165,083 See accompanying notes to consolidated financial statements. 4 INTEGRIS HEALTH , INC. AND CONTROLLED ENTITIES Consolidated Statements of Operations Years ended June 30, 2015 and 2014 (In thousands) 2015 2014 Operating revenues: Patient service revenue (net of contractual allowances and discounts) $ 1,476,190 1,406,813 Provision for bad debts (98,224) (121,454) Net patient service revenue prior to accrual of CMS Settlement 1,377,966 1,285,359 Accrual of CMS Settlement (140,000) — Net patient service revenue 1,237,966 1,285,359 Premium revenue 1,486 1,465 Other operating revenue 145,244 112,381 Total operating revenues 1,384,696 1,399,205 Operating expenses: Salaries and related expenses 741,689 703,621 Supplies and other expenses 584,635 517,604 Professional services 37,648 46,792 Depreciation and amortization 68,031 68,366 Provision for bad debts (nonpatient) 3 45 Interest expense 22,282 24,039 Total operating expenses 1,454,288 1,360,467 (Loss) income from operations (69,592) 38,738 Nonoperating revenue (expense): Investment income, net 17,136 59,522 Equity in income of affiliates, net (2,446) (2,574) Loss on extinguishment of debt (26,040) — Other, net (9,681) (1,773) Total nonoperating (expense) revenue, net (21,031) 55,175 Net (loss) income (90,623) 93,913 Net (loss) income attributable to noncontrolling interest (623) (649) Net (loss) income attributable to INTEGRIS Health $ (91,246) 93,264 See accompanying notes to consolidated financial statements. 5 INTEGRIS HEALTH , INC. AND CONTROLLED ENTITIES Consolidated Statements of Changes in Net Assets Years ended June 30, 2015 and 2014 (In thousands) 2015 2014 Changes in unrestricted net assets: Net (loss) income attributable to INTEGRIS Health $ (91,246) 93,264 Pension liability adjustment (56,351) (4,221) Net assets released from restrictions used for purchase of property and equipment 2,154 240 Contributions of long-lived assets 2,335 247 Other changes, net (16,675) 1,262 (Decrease) increase in unrestricted net assets (159,783) 90,792 Changes in temporarily restricted net assets: Contributions received for operations 2,230 2,111 Investment (expense) income (2,049) 228 Change in value of split-interest agreement (5) (14) Net assets released from restrictions (3,427) (1,611) Other changes, net 12,758 216 Increase in temporarily restricted net assets 9,507 930 Changes in permanently restricted net assets: Contributions received for operations 49 939 Investment income 22 465 Other changes, net (136) (118) (Decrease) increase in permanently restricted net assets (65) 1,286 (Decrease) increase in net assets of INTEGRIS Health (150,341) 93,008 Net assets of INTEGRIS Health , beginning of year 1,166,367 1,073,359 Net assets of INTEGRIS Health , end of year $ 1,016,026 1,166,367 See accompanying notes to consolidated financial statements. 6 INTEGRIS HEALTH , INC. AND CONTROLLED ENTITIES Consolidated Statements of Cash Flows Years ended June 30, 2015 and 2014 (In thousands) 2015 2014 Cash flows from operating activities: (Decrease) increase in net assets $ (150,341) 93,008 Adjustments to reconcile changes in net assets to net cash provided by operating activities: Pension liability adjustment 56,351 4,221 Net unrealized gain (loss) on investments 44,393 (24,849)