10-Q 1 d402348d10q.htm FORM 10-Q Form 10-Q

 

 

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, 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: 001-14057

 

 

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, 2012

Common stock, $0.25 par value   53,284,528 shares

 

 

 


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,  2012 and 2011 and for the nine months ended September 30, 2012 and 2011

     3   
  

Condensed Consolidated Statement of Comprehensive Income – for the three months ended September 30, 2012 and 2011 and for the nine months ended September 30, 2012 and 2011

     4   
  

Condensed Consolidated Balance Sheet – September 30, 2012 and December 31, 2011

     5   
  

Condensed Consolidated Statement of Cash Flows – for the three months ended September 30,  2012 and 2011 and for the nine months ended September 30, 2012 and 2011

     6   
  

Notes to Condensed Consolidated Financial Statements

     7   
Item 2.   

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

     41   
Item 3.   

Quantitative and Qualitative Disclosures About Market Risk

     72   
Item 4.   

Controls and Procedures

     73   
PART II.    OTHER INFORMATION   
Item 1.    Legal Proceedings      74   
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds      74   
Item 6.    Exhibits      75   

 

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,
 
     2012     2011     2012     2011  

Revenues

   $ 1,525,792      $ 1,514,062      $ 4,641,590      $ 3,999,075   
  

 

 

   

 

 

   

 

 

   

 

 

 

Salaries, wages and benefits

     912,924        900,570        2,765,332        2,344,398   

Supplies

     106,594        107,514        326,127        294,254   

Rent

     108,449        105,511        323,958        292,641   

Other operating expenses

     305,988        305,305        929,947        851,806   

Other income

     (2,775     (2,815     (8,221     (8,480

Impairment charges

     3,911        26,712        5,107        26,712   

Depreciation and amortization

     50,600        46,947        149,092        117,367   

Interest expense

     26,668        25,790        79,962        54,675   

Investment income

     (229     (37     (796     (789
  

 

 

   

 

 

   

 

 

   

 

 

 
     1,512,130        1,515,497        4,570,508        3,972,584   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

     13,662        (1,435     71,082        26,491   

Provision (benefit) for income taxes

     5,753        (2,342     29,364        9,848   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     7,909        907        41,718        16,643   

Discontinued operations, net of income taxes:

        

Income from operations

     47        1,119        143        1,527   

Loss on divestiture of operations

     (349     —          (349     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from discontinued operations

     (302     1,119        (206     1,527   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     7,607        2,026        41,512        18,170   

(Earnings) loss attributable to noncontrolling interests

     (41     (241     (253     180   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income attributable to Kindred

   $ 7,566      $ 1,785      $ 41,259      $ 18,350   
  

 

 

   

 

 

   

 

 

   

 

 

 

Amounts attributable to Kindred stockholders:

        

Income from continuing operations

   $ 7,868      $ 666      $ 41,465      $ 16,823   

Income (loss) from discontinued operations

     (302     1,119        (206     1,527   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 7,566      $ 1,785      $ 41,259      $ 18,350   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share:

        

Basic:

        

Income from continuing operations

   $ 0.15      $ 0.01      $ 0.79      $ 0.37   

Discontinued operations:

        

Income from operations

     —          0.02        —          0.03   

Loss on divestiture of operations

     (0.01     —          (0.01     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 0.14      $ 0.03      $ 0.78      $ 0.40   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted:

        

Income from continuing operations

   $ 0.15      $ 0.01      $ 0.79      $ 0.37   

Discontinued operations:

        

Income from operations

     —          0.02        —          0.03   

Loss on divestiture of operations

     (0.01     —          (0.01     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 0.14      $ 0.03      $ 0.78      $ 0.40   
  

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in computing earnings per common share:

        

Basic

     51,676        51,329        51,648        44,577   

Diluted

     51,709        51,406        51,675        44,934   

See accompanying notes.

 

3


KINDRED HEALTHCARE, INC.

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2012     2011     2012     2011  

Net income

   $ 7,607      $ 2,026      $ 41,512      $ 18,170   

Other comprehensive income (loss):

        

Available-for-sale securities:

        

Change in unrealized investment gains (losses)

     559        (2,220     1,562        (1,782

Reclassification of (gains) losses realized in net income

     —          195        (85     36   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change

     559        (2,025     1,477        (1,746

Interest rate swaps:

        

Change in unrealized loss

     (25     —          (1,288     —     

Reclassification of losses realized in net income, net of payments

     5        —          206        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change

     (20     —          (1,082     —     

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

     (186     708        (18     611   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     353        (1,317     377        (1,135
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     7,960        709        41,889        17,035   

(Earnings) loss attributable to noncontrolling interests

     (41     (241     (253     180   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Kindred

   $ 7,919      $ 468      $ 41,636      $ 17,215   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

4


KINDRED HEALTHCARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited)

(In thousands, except per share amounts)

 

     September 30,
2012
    December 31,
2011
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 35,695      $ 41,561   

Cash—restricted

     5,344        5,551   

Insurance subsidiary investments

     79,642        70,425   

Accounts receivable less allowance for loss of $31,630 – September 30, 2012 and $29,746 – December 31, 2011

     1,050,077        994,700   

Inventories

     31,787        31,060   

Deferred tax assets

     24,641        17,785   

Income taxes

     6,424        39,513   

Other

     32,477        32,687   
  

 

 

   

 

 

 
     1,266,087        1,233,282   

Property and equipment

     2,144,499        1,975,063   

Accumulated depreciation

     (1,041,036     (916,022
  

 

 

   

 

 

 
     1,103,463        1,059,041   

Goodwill

     1,146,801        1,084,655   

Intangible assets less accumulated amortization of $32,915 – September 30, 2012 and $16,581 – December 31, 2011

     446,165        447,207   

Assets held for sale

     4,103        5,612   

Insurance subsidiary investments

     118,256        110,227   

Other

     212,952        198,469   
  

 

 

   

 

 

 

Total assets

   $ 4,297,827      $ 4,138,493   
  

 

 

   

 

 

 
LIABILITIES AND EQUITY     

Current liabilities:

    

Accounts payable

   $ 208,213      $ 216,801   

Salaries, wages and other compensation

     392,564        407,493   

Due to third party payors

     39,820        37,306   

Professional liability risks

     48,931        46,010   

Other accrued liabilities

     148,882        130,693   

Long-term debt due within one year

     8,787        10,620   
  

 

 

   

 

 

 
     847,197        848,923   

Long-term debt

     1,610,888        1,531,882   

Professional liability risks

     236,296        217,717   

Deferred tax liabilities

     20,537        17,955   

Deferred credits and other liabilities

     211,109        191,771   

Noncontrolling interests-redeemable

     —          9,704   

Commitments and contingencies

    

Equity:

    

Stockholders’ equity:

    

Common stock, $0.25 par value; authorized 175,000 shares; issued 53,271 shares – September 30, 2012 and 52,116 shares – December 31, 2011

     13,318        13,029   

Capital in excess of par value

     1,142,923        1,138,189   

Accumulated other comprehensive loss

     (1,092     (1,469

Retained earnings

     180,426        139,172   
  

 

 

   

 

 

 
     1,335,575        1,288,921   

Noncontrolling interests-nonredeemable

     36,225        31,620   
  

 

 

   

 

 

 

Total equity

     1,371,800        1,320,541   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 4,297,827      $ 4,138,493   
  

 

 

   

 

 

 

See accompanying notes.

 

5


KINDRED HEALTHCARE, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

(In thousands)

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2012     2011     2012     2011  

Cash flows from operating activities:

        

Net income

   $ 7,607      $ 2,026      $ 41,512      $ 18,170   

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

        

Depreciation and amortization

     50,600        46,947        149,092        117,367   

Amortization of stock-based compensation costs

     3,132        3,505        8,011        9,611   

Amortization of deferred financing costs

     2,375        2,141        7,091        5,231   

Payment of lender fees related to debt issuance

     —          —          —          (46,232

Provision for doubtful accounts

     9,117        7,793        22,654        22,049   

Deferred income taxes

     (1,235     (2,286     (18,140     (4,975

Impairment charges

     3,911        26,712        5,107        26,712   

Loss on divestiture of discontinued operations

     349        —          349        —     

Other

     732        (3,063     3,077        (3,766

Change in operating assets and liabilities:

        

Accounts receivable

     13,175        (27,497     (67,913     (108,072

Inventories and other assets

     (5,490     6,304        (20,897     3,649   

Accounts payable

     5,281        (831     (7,252     386   

Income taxes

     6,366        (6,881     37,097        20,792   

Due to third party payors

     12,627        1,143        1,688        4,698   

Other accrued liabilities

     32,942        10,505        29,611        52,186   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     141,489        66,518        191,087        117,806   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

        

Routine capital expenditures

     (25,939     (36,595     (76,804     (95,263

Development capital expenditures

     (15,177     (44,152     (38,175     (69,570

Acquisitions, net of cash acquired

     (71,440     (50,928     (139,308     (710,907

Sale of assets

     —          —          1,110        1,714   

Purchase of insurance subsidiary investments

     (9,692     (8,867     (30,890     (25,904

Sale of insurance subsidiary investments

     8,063        10,398        30,073        37,587   

Net change in insurance subsidiary cash and cash equivalents

     (685     (826     (15,171     (4,870

Change in other investments

     1,003        —          1,454        1,000   

Other

     (25     (663     (1,029     (692
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (113,892     (131,633     (268,740     (866,905
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

        

Proceeds from borrowings under revolving credit

     364,600        533,200        1,329,300        1,633,300   

Repayment of borrowings under revolving credit

     (390,400     (474,700     (1,244,900     (1,749,800

Proceeds from issuance of senior unsecured notes

     —          —          —          550,000   

Proceeds from issuance of term loan, net of discount

     —          —          —          693,000   

Repayment of other long-term debt

     (2,665     (2,545     (7,976     (348,233

Payment of deferred financing costs

     (288     (1,855     (601     (8,715

Contribution made by noncontrolling interest

     —          —          200        —     

Distribution made to noncontrolling interests

     —          —          (3,521     —     

Purchase of noncontrolling interests

     (715     (7,292     (715     (7,292

Issuance of common stock

     —          —          —          3,019   

Other

     —          3        —          747   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (29,468     46,811        71,787        766,026   
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in cash and cash equivalents

     (1,871     (18,304     (5,866     16,927   

Cash and cash equivalents at beginning of period

     37,566        52,399        41,561        17,168   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 35,695      $ 34,095      $ 35,695      $ 34,095   
  

 

 

   

 

 

   

 

 

   

 

 

 

Supplemental information:

        

Interest payments

   $ 12,856      $ 5,839      $ 60,490      $ 12,783   

Income tax payments (refunds)

     472        10,848        10,318        (2,435

Issuance of common stock in RehabCare acquisition

     —          —          —          300,426   

Financing costs paid in connection with RehabCare acquisition

     —          —          —          13,074   

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 long-term acute care (“LTAC”) hospitals, inpatient rehabilitation hospitals (“IRFs”), nursing and rehabilitation centers, assisted living facilities, a contract rehabilitation services business and a home health and hospice business across the United States (collectively, the “Company” or “Kindred”). At September 30, 2012, the Company’s hospital division operated 117 LTAC hospitals and six IRFs in 26 states. The Company’s nursing center division operated 224 nursing and rehabilitation centers and six assisted living facilities in 27 states. The Company’s rehabilitation division provided rehabilitation services primarily in hospitals and long-term care settings. The Company’s home health and hospice division provided home health, hospice and private duty services from 102 locations in 10 states.

In recent years, the Company has completed several transactions related to the divestiture of unprofitable hospitals and nursing and rehabilitation centers to improve its future operating results. For accounting purposes, the operating results of these businesses and the losses associated with these transactions have been classified as discontinued operations in the accompanying unaudited condensed consolidated statement of operations for all periods presented. Assets not sold at September 30, 2012 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 5 for a summary of discontinued operations.

Recently issued accounting requirements

In July 2012, the Financial Accounting Standards Board (the “FASB”) issued authoritative guidance related to testing indefinite-lived intangible assets for impairment. The main provisions of the guidance state that an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. If an entity determines it is not more likely than not that the fair value of an indefinite-lived intangible is less than its carrying amount, then performing the one-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the indefinite-lived intangible asset impairment test. The guidance is effective for all interim and annual reporting periods beginning after September 15, 2012. Early adoption is permitted. The adoption of the guidance is not expected to have a material impact on the Company’s business, financial position, results of operations or liquidity.

In September 2011, the FASB issued authoritative guidance related to testing goodwill for impairment. The main provisions of the guidance state that an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step goodwill impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform Step 1 of the goodwill impairment test. The guidance is effective for all interim and annual reporting periods beginning after December 15, 2011. The adoption of the guidance is not expected to have a material impact on the Company’s business, financial position, results of operations or liquidity.

 

7


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 1 – BASIS OF PRESENTATION (Continued)

 

Recently issued accounting requirements (Continued)

 

In July 2011, the FASB issued authoritative guidance related to the presentation and disclosure of patient service revenue, provision for bad debts, and the allowance for doubtful accounts for certain healthcare entities. The provisions of the guidance require healthcare entities that recognize significant amounts of patient service revenue at the time services are rendered, even though they do not assess a patient’s ability to pay, to present the provision for bad debts related to those revenues as a deduction from patient service revenue (net of contractual allowances and discounts), as opposed to an operating expense. All other entities would continue to present the provision for bad debts as an operating expense. The guidance is effective for all interim and annual reporting periods beginning after December 15, 2011. The adoption of the guidance did not have an impact on the Company’s business, financial position, results of operations or liquidity.

In June 2011, the FASB issued authoritative guidance related to the presentation of other comprehensive income. The provisions of the guidance state that an entity has the option to present the total of comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The statement(s) should be presented with equal prominence to the other primary financial statements. The guidance is effective for all interim and annual reporting periods beginning after December 15, 2011. The adoption of the guidance did not have a material impact on the Company’s business, financial position, results of operations or liquidity.

In December 2011, the FASB amended its authoritative guidance issued in June 2011 related to the presentation of other comprehensive income. The provisions indefinitely defer the requirement to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented, for both interim and annual financial statements. All other requirements of the June 2011 update were not impacted by the amendment which remains effective for all interim and annual reporting periods beginning after December 15, 2011. The adoption of the guidance did not have a material impact on the Company’s business, financial position, results of operations or liquidity.

In May 2011, the FASB issued authoritative guidance related to fair value measurements. The provisions of the guidance result in applying common fair value measurement and disclosure requirements in both United States generally accepted accounting principles and International Financial Reporting Standards. The amendments primarily change the wording used to describe many of the requirements in generally accepted accounting principles for measuring and disclosing information about fair value measurements. The guidance is effective for all interim and annual reporting periods beginning after December 15, 2011. The adoption of the guidance did not have a material impact on the Company’s business, financial position, results of operations or liquidity.

 

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, 2012 and 2011 (in thousands):

 

For the nine months ended September 30, 2012:

   Redeemable
noncontrolling
interests
    Amounts
attributable to
Kindred
stockholders
    Nonredeemable
noncontrolling
interests
    Total
equity
 

Balance at December 31, 2011

   $ 9,704      $ 1,288,921      $ 31,620      $ 1,320,541   

Comprehensive income:

        

Net income

     140        41,259        113        41,372   

Other comprehensive income

     —          377        —          377   
  

 

 

   

 

 

   

 

 

   

 

 

 
     140        41,636        113        41,749   

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

     —          (1,856     —          (1,856

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

     —          (2,453     —          (2,453

Stock-based compensation amortization

     —          8,011        —          8,011   

Contribution made by noncontrolling interest

     —          —          200        200   

Distribution made to noncontrolling interests

     (571     —          (2,950     (2,950

Purchase of noncontrolling interests

     (2,031     1,316        —          1,316   

Reclassification of noncontrolling interests

     (7,242     —          7,242        7,242   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2012

   $ —        $ 1,335,575      $ 36,225      $ 1,371,800   
  

 

 

   

 

 

   

 

 

   

 

 

 
 

For the nine months ended September 30, 2011:

                        

Balance at December 31, 2010

   $ —        $ 1,031,759      $ —        $ 1,031,759   

Acquired noncontrolling interests

     23,869        —          23,990        23,990   

Comprehensive income (loss):

        

Net income (loss)

     346        18,350        (526     17,824   

Other comprehensive loss

     —          (1,135     —          (1,135
  

 

 

   

 

 

   

 

 

   

 

 

 
     346        17,215        (526     16,689   

Issuance of common stock in connection with employee benefit plans

     —          3,019        —          3,019   

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

     —          (3,360     —          (3,360

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

     —          403        —          403   

Stock-based compensation amortization

     —          9,611        —          9,611   

Equity consideration for RehabCare Merger (as defined in Note 2 below)

     —          300,426        —          300,426   

Purchase of noncontrolling interests

     —          (1,010     (6,282     (7,292

Reclassification of noncontrolling interests

     (14,589     —          14,589        14,589   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2011

   $ 9,626      $ 1,358,063      $ 31,771      $ 1,389,834   
  

 

 

   

 

 

   

 

 

   

 

 

 

The purchase of redeemable noncontrolling interests for the nine months ended September 30, 2012 resulted from a cash payment of $0.7 million and a gain of $1.3 million that was recorded as an increase to equity.

The reclassification between noncontrolling interests for the nine months ended September 30, 2012 and 2011 resulted from minority ownership interests containing put rights in connection with the RehabCare Merger (as defined in Note 2 below) that expired.

 

9


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 1 – BASIS OF PRESENTATION (Continued)

 

Derivative financial instruments

In December 2011, the Company entered into two interest rate swap agreements to hedge its floating interest rate on an aggregate of $225.0 million of outstanding Term Loan Facility (as defined in Note 2 below) debt. The interest rate swaps have an effective date of January 9, 2012, and 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 $225.0 million. In exchange, the Company will receive interest on $225.0 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 the interest rate swaps continue to be effective cash flow hedges at September 30, 2012. The fair value of the interest rate swaps recorded in other accrued liabilities was $2.1 million and $0.8 million at September 30, 2012 and December 31, 2011, respectively.

Other information

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q of Regulation S-X and do not include all of the disclosures normally required by generally accepted accounting principles 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, 2011 filed with the Securities and Exchange Commission (the “SEC”) on Form 10-K. The accompanying condensed consolidated balance sheet at December 31, 2011 was derived from audited consolidated financial statements, but does not include all disclosures required by generally accepted accounting principles.

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 presentation 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 generally accepted accounting principles 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.

NOTE 2 – REHABCARE ACQUISITION

On June 1, 2011, the Company completed the acquisition of RehabCare Group, Inc. and its subsidiaries (“RehabCare”) (the “RehabCare Merger”). Upon consummation of the RehabCare Merger, each issued and outstanding share of RehabCare common stock was converted into the right to receive 0.471 of a share of Kindred common stock and $26 per share in cash, without interest (the “Merger Consideration”). Kindred issued approximately 12 million shares of its common stock in connection with the RehabCare Merger. The purchase price totaled $962.8 million and was comprised of $662.4 million in cash and $300.4 million of Kindred common stock at fair value. The Company also assumed $355.7 million of long-term debt in the RehabCare Merger, of which $345.4 million was refinanced on June 1, 2011. The operating results of RehabCare have been included in the accompanying unaudited condensed consolidated financial statements of the Company since June 1, 2011.

At the RehabCare Merger date, the Company acquired 32 LTAC hospitals, five IRFs, approximately 1,200 rehabilitation therapy sites of service and 102 hospital-based inpatient rehabilitation units.

 

10


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 2 – REHABCARE ACQUISITION (Continued)

 

Operating results in the third quarter of 2011 included transaction costs totaling $4.0 million and severance costs totaling $1.3 million related to the RehabCare Merger. Operating results for the nine months ended September 30, 2011 included transaction costs totaling $27.0 million, financing costs totaling $13.8 million and severance costs totaling $16.2 million related to the RehabCare Merger. In the accompanying unaudited condensed consolidated statement of operations, transaction costs were included in other operating expenses, financing costs were included in interest expense and severance costs were included in salaries, wages and benefits.

In connection with the RehabCare Merger, the Company entered into a new $650 million senior secured asset-based revolving credit facility (the “ABL Facility”) and a new $700 million senior secured term loan facility (the “Term Loan Facility”) (collectively, the “New Credit Facilities”). The Company also completed the private placement of $550 million of senior notes due 2019 (the “Notes”). The Company used proceeds from the New Credit Facilities and the Notes to pay the Merger Consideration, repay all amounts outstanding under the Company’s and RehabCare’s previous credit facilities and to pay transaction costs. The amounts outstanding under the Company’s and RehabCare’s former credit facilities that were repaid at the RehabCare Merger closing were $390.0 million and $345.4 million, respectively. The New Credit Facilities had an incremental facility capacity in an aggregate amount between the two facilities of $200 million. The Company executed the incremental capacity of $200 million in October 2012. See Note 17.

In connection with the New Credit Facilities and the Notes, the Company paid $46.2 million of lender fees related to debt issuance that were capitalized as deferred financing costs during 2011 and paid $13.1 million of other financing costs that were charged to interest expense during 2011.

Pro forma information

The unaudited pro forma net effect of the RehabCare Merger assuming the acquisition occurred as of January 1, 2010 is as follows (in thousands, except per share amounts):

 

     Three months
ended
September 30,
2011
     Nine months
ended
September 30,
2011
 

Revenues

   $ 1,514,062       $ 4,604,597   

Income from continuing operations attributable to Kindred

     4,509         66,536   

Income attributable to Kindred

     5,628         71,106   

Earnings per common share:

     

Basic:

     

Income from continuing operations

   $ 0.09       $ 1.28   

Net income

   $ 0.11       $ 1.37   

Diluted:

     

Income from continuing operations

   $ 0.09       $ 1.27   

Net income

   $ 0.11       $ 1.36   

The unaudited pro forma financial data has been derived by combining the historical financial results of the Company and the operations acquired in the RehabCare Merger for the period presented. The unaudited pro forma financial data includes transaction, financing and severance costs totaling $79.8 million incurred by both the Company and RehabCare in connection with the RehabCare Merger. These costs have been eliminated from the results of operations for 2011 and were reflected as expenses incurred as of January 1, 2010 for purposes of the pro forma financial presentation. Revenues and earnings before interest, income taxes and transaction-related costs associated with RehabCare aggregated $1.1 billion and $92.5 million, respectively, for the nine months ended September 30, 2012 and aggregated $457.1 million and $40.1 million, respectively, from the date of the RehabCare Merger through September 30, 2011.

 

11


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 3 – OTHER ACQUISITIONS

The following is a summary of the Company’s other significant 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 the 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 or borrowings under the Company’s ABL Facility. 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 2012, the Company acquired two home health and hospice businesses for $71.4 million, which included $12.1 million of accounts receivable, $1.1 million of other assets, $1.4 million of property and equipment, $58.2 million of goodwill, $18.1 million of identifiable intangible assets, $10.4 million of current liabilities, $7.2 million of deferred income tax liabilities and $1.9 million of other long-term liabilities. During the third quarter of 2011, the Company acquired a home health and hospice business for $50.9 million, which included $9.8 million of accounts receivable, $1.4 million of other assets, $0.9 million of property and equipment, $33.9 million of goodwill, $11.2 million of identifiable intangible assets and $6.3 million of deferred income tax and other liabilities.

During the nine months ended September 30, 2012, the Company acquired the real estate of two previously leased hospitals for $67.9 million. Annual rent associated with the hospitals aggregated $5.5 million. During the nine months ended September 30, 2011, the Company acquired the real estate of a previously leased hospital for $8.0 million. Annual rent associated with the hospital aggregated $0.9 million. During the nine months ended September 30, 2011, the Company also acquired a home health company for $9.5 million, which included $0.1 million of property and equipment, $7.5 million of goodwill and $1.9 million of identifiable intangible assets.

The fair value of each of the acquisitions noted above was measured primarily using discounted cash flow methodologies which are considered Level 3 inputs (as described in Note 14).

NOTE 4 – IMPAIRMENT CHARGES

In connection with the planned divestiture of a LTAC hospital, a pretax impairment charge for intangible assets and property and equipment of $3.2 million was recorded in the third quarter of 2012. See Note 14.

On July 29, 2011, the Centers for Medicare and Medicaid Services (“CMS”) issued final rules which, among other things, significantly reduced Medicare payments to nursing centers and changed the reimbursement for the provision of group rehabilitation therapy services to Medicare beneficiaries beginning October 1, 2011 (the “2011 CMS Rules”). In connection with the preparation of the Company’s operating results for the third quarter of 2011, the Company determined that the impact of the 2011 CMS Rules was a triggering event in the third quarter of 2011 and accordingly tested the recoverability of its nursing and rehabilitation centers reporting unit goodwill, intangible assets and property and equipment asset groups impacted by the reduced Medicare payments. The Company recorded pretax impairment charges aggregating $26.7 million in the third quarter of 2011. The charges included $6.1 million of goodwill (which represented the entire nursing and rehabilitation centers reporting unit goodwill) and $20.6 million of property and equipment. The Company recorded pretax impairment charges aggregating $0.7 million and $1.9 million in the third quarter of 2012 and for the nine months ended September 30, 2012, respectively, for necessary property and equipment expenditures in impaired nursing and rehabilitation center asset groups.

These charges reflected the amount by which the carrying value of these assets exceeded their estimated fair value. The impairment charges did not impact the Company’s cash flows or liquidity.

 

12


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 5 – DISCONTINUED OPERATIONS

In accordance with the authoritative guidance for the impairment or disposal of long-lived assets, the divestitures of unprofitable businesses discussed in Note 1 have been accounted for as discontinued operations. Accordingly, the results of operations of these businesses for all periods presented and the losses associated with these transactions have been classified as discontinued operations, net of income taxes, in the accompanying unaudited condensed consolidated statement of operations. At September 30, 2012, the Company held for sale two hospitals.

A summary of discontinued operations follows (in thousands):

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2012     2011     2012     2011  

Revenues

   $ 185      $ 848      $ 519      $ 1,025   
  

 

 

   

 

 

   

 

 

   

 

 

 

Salaries, wages and benefits

     (6     (77     (198     (393

Supplies

     —          2        3        (1

Rent

     33        28        92        86   

Other operating expenses (income)

     82        (924     389        (1,149

Depreciation

     —          —          —          —     

Interest expense

     —          —          —          —     

Investment income

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 
     109        (971     286        (1,457
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations before income taxes

     76        1,819        233        2,482   

Provision for income taxes

     29        700        90        955   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     47        1,119        143        1,527   

Loss on divestiture of operations, net of income taxes

     (349     —          (349     —     
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ (302   $ 1,119      $ (206   $ 1,527   
  

 

 

   

 

 

   

 

 

   

 

 

 

The following table sets forth certain discontinued operating data by business segment (in thousands):

 

     Three months ended
September 30,
     Nine months ended
September 30,
 
     2012     2011      2012     2011  

Revenues:

         

Hospital division

   $ 18      $ 846       $ 219      $ 822   

Nursing center division

     167        2         300        203   
  

 

 

   

 

 

    

 

 

   

 

 

 
   $ 185      $ 848       $ 519      $ 1,025   
  

 

 

   

 

 

    

 

 

   

 

 

 

Operating income (loss):

         

Hospital division

   $ (249   $ 633       $ (620   $ (65

Nursing center division

     358        1,214         945        2,633   
  

 

 

   

 

 

    

 

 

   

 

 

 
   $ 109      $ 1,847       $ 325      $ 2,568   
  

 

 

   

 

 

    

 

 

   

 

 

 

Rent:

         

Hospital division

   $ 33      $ 28       $ 91      $ 86   

Nursing center division

     —          —           1        —     
  

 

 

   

 

 

    

 

 

   

 

 

 
   $ 33      $ 28       $ 92      $ 86   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

13


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 5 – DISCONTINUED OPERATIONS (Continued)

 

A summary of the net assets held for sale follows (in thousands):

 

     September 30,
2012
    December 31,
2011
 

Long-term assets:

    

Property and equipment, net

   $ 4,096      $ 5,607   

Other

     7        5   
  

 

 

   

 

 

 
     4,103        5,612   

Current liabilities (included in other accrued liabilities)

     (10     (118
  

 

 

   

 

 

 
   $ 4,093      $ 5,494   
  

 

 

   

 

 

 

NOTE 6 – REVENUES

Revenues are recorded based upon estimated amounts due from patients and third party payors for healthcare services provided, including anticipated settlements under reimbursement agreements with Medicare, Medicaid, Medicare Advantage and other third party payors.

A summary of revenues by payor type follows (in thousands):

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2012     2011     2012     2011  

Medicare

   $ 628,385      $ 629,279      $ 1,949,367      $ 1,761,847   

Medicaid

     268,869        269,804        798,291        791,933   

Medicare Advantage

     116,385        111,322        353,364        304,777   

Other

     596,588        583,406        1,800,100        1,378,835   
  

 

 

   

 

 

   

 

 

   

 

 

 
     1,610,227        1,593,811        4,901,122        4,237,392   

Eliminations

     (84,435     (79,749     (259,532     (238,317
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 1,525,792      $ 1,514,062      $ 4,641,590      $ 3,999,075   
  

 

 

   

 

 

   

 

 

   

 

 

 

NOTE 7 – EARNINGS PER SHARE

Earnings per common share are based upon the weighted average number of common shares outstanding during the respective periods. The diluted calculation of earnings per common share includes the dilutive effect of stock options. The Company follows the provisions of the authoritative guidance for determining whether instruments granted in share-based payment transactions are participating securities, which requires that unvested restricted stock that entitles the holder to receive nonforfeitable dividends before vesting be included as a participating security in the basic and diluted earnings per common share calculation pursuant to the two-class method.

 

14


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 7 – EARNINGS PER SHARE (Continued)

 

A computation of earnings per common share follows (in thousands, except per share amounts):

 

     Three months ended September 30,     Nine months ended September 30,  
     2012     2011     2012     2011  
     Basic     Diluted     Basic     Diluted     Basic     Diluted     Basic     Diluted  

Earnings:

                

Amounts attributable to Kindred stockholders:

                

Income from continuing operations:

                

As reported in Statement of Operations

   $ 7,868      $ 7,868      $ 666      $ 666      $ 41,465      $ 41,465      $ 16,823      $ 16,823   

Allocation to participating unvested restricted stockholders

     (200     (200     (10     (10     (874     (873     (287     (284
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Available to common stockholders

   $ 7,668      $ 7,668      $ 656      $ 656      $ 40,591      $ 40,592      $ 16,536      $ 16,539   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Discontinued operations, net of income taxes:

                

Income from operations:

                

As reported in Statement of Operations

   $ 47      $ 47      $ 1,119      $ 1,119      $ 143      $ 143      $ 1,527      $ 1,527   

Allocation to participating unvested restricted stockholders

     (1     (1     (17     (17     (3     (3     (26     (26
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Available to common stockholders

   $ 46      $ 46      $ 1,102      $ 1,102      $ 140      $ 140      $ 1,501      $ 1,501   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss on divestiture of operations:

                

As reported in Statement of Operations

   $ (349   $ (349   $ —        $ —        $ (349   $ (349   $ —        $ —     

Allocation to participating unvested restricted stockholders

     9        9        —          —          7        7        —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Available to common stockholders

   $ (340   $ (340   $ —        $ —        $ (342   $ (342   $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income:

                

As reported in Statement of Operations

   $ 7,566      $ 7,566      $ 1,785      $ 1,785      $ 41,259      $ 41,259      $ 18,350      $ 18,350   

Allocation to participating unvested restricted stockholders

     (192     (192     (27     (27     (870     (869     (313     (310
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Available to common stockholders

   $ 7,374      $ 7,374      $ 1,758      $ 1,758      $ 40,389      $ 40,390      $ 18,037      $ 18,040   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in the computation:

                

Weighted average shares outstanding–basic computation

     51,676        51,676        51,329        51,329        51,648        51,648        44,577        44,577   
  

 

 

     

 

 

     

 

 

     

 

 

   

Dilutive effect of employee stock options

       33          77          27          357   
    

 

 

     

 

 

     

 

 

     

 

 

 

Adjusted weighted average shares outstanding–diluted computation

       51,709          51,406          51,675          44,934   
    

 

 

     

 

 

     

 

 

     

 

 

 

Earnings per common share:

                

Income from continuing operations

   $ 0.15      $ 0.15      $ 0.01      $ 0.01      $ 0.79      $ 0.79      $ 0.37      $ 0.37   

Discontinued operations:

                

Income from operations

     —          —          0.02        0.02        —          —          0.03        0.03   

Loss on divestiture of operations

     (0.01     (0.01     —          —          (0.01     (0.01   $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 0.14      $ 0.14      $ 0.03      $ 0.03      $ 0.78      $ 0.78      $ 0.40      $ 0.40   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Number of antidilutive stock options excluded from shares used in the diluted earnings per common share computation

       1,710          2,769          1,710          1,226   

 

15


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 8 – BUSINESS SEGMENT DATA

The Company is organized into four operating divisions: the hospital division, the nursing center division, the rehabilitation division and the home health and hospice division. The expansion of the Company’s home health and hospice operations and changes to the Company’s organizational structure have led the Company to segregate its home health and hospice business into a separate division. The Company’s home health and hospice division was previously included in the rehabilitation division. Based upon the authoritative guidance for business segments and after giving consideration to the Company’s business segments after the RehabCare Merger, the operating divisions represent five reportable operating segments, including (1) hospitals, (2) skilled nursing and rehabilitation centers, (3) skilled nursing-based rehabilitation contract therapy services, (4) hospital-based rehabilitation contract therapy services and (5) home health and hospice services. These reportable operating segments are consistent with information used by the Company’s Chief Executive Officer and Chief Operating Officer to assess performance and allocate resources. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies. Prior period segment information has been restated to conform with the current period presentation.

For segment purposes, the Company defines operating income as earnings before interest, income taxes, depreciation, amortization and rent. Operating income reported for each of the Company’s operating segments excludes impairment charges, transaction costs and the allocation of corporate overhead.

Operating income for the hospital division for the nine months ended September 30, 2012 included severance costs of $2.6 million and other miscellaneous costs of $2.3 million incurred in connection with the closing of a regional office and four LTAC hospitals and the cancellation of a sub-acute unit project, and $5.0 million for employment-related lawsuits.

Operating income for the nursing center division in the third quarter of 2012 and for the nine months ended September 30, 2012 included employee retention costs of $0.6 million and $1.3 million, respectively, incurred in connection with the decision to allow the leases to expire for 54 nursing and rehabilitation centers leased from Ventas, Inc. (“Ventas”).

Rent expense for the hospital division included $0.6 million and $3.5 million in the third quarter of 2012 and for the nine months ended September 30, 2012, respectively, incurred in connection with the closing of four LTAC hospitals.

 

16


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 8 – BUSINESS SEGMENT DATA (Continued)

 

The following table sets forth certain data by business segment (in thousands):

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2012     2011     2012     2011  

Revenues:

        

Hospital division

   $ 714,738      $ 684,781      $ 2,209,980      $ 1,837,180   

Nursing center division

     534,188        571,226        1,614,151        1,706,897   

Rehabilitation division:

        

Skilled nursing rehabilitation services

     253,459        252,574        764,097        528,438   

Hospital rehabilitation services

     71,899        69,811        219,647        130,592   
  

 

 

   

 

 

   

 

 

   

 

 

 
     325,358        322,385        983,744        659,030   

Home health and hospice division

     35,943        15,419        93,247        34,285   
  

 

 

   

 

 

   

 

 

   

 

 

 
     1,610,227        1,593,811        4,901,122        4,237,392   

Eliminations:

        

Skilled nursing rehabilitation services

     (55,534     (57,922     (171,023     (172,590

Hospital rehabilitation services

     (27,097     (20,528     (83,169     (62,459

Nursing and rehabilitation centers

     (1,804     (1,299     (5,340     (3,268
  

 

 

   

 

 

   

 

 

   

 

 

 
     (84,435     (79,749     (259,532     (238,317
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 1,525,792      $ 1,514,062      $ 4,641,590      $ 3,999,075   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations:

        

Operating income (loss):

        

Hospital division

   $ 138,762      $ 125,701      $ 440,942      $ 342,551   

Nursing center division

     70,928        89,592        207,466        270,474   

Rehabilitation division:

        

Skilled nursing rehabilitation services

     19,659        27,575        56,794        52,712   

Hospital rehabilitation services

     16,977        15,606        50,953        28,971   
  

 

 

   

 

 

   

 

 

   

 

 

 
     36,636        43,181        107,747        81,683   

Home health and hospice division

     3,645        1,107        8,775        650   

Corporate:

        

Overhead

     (45,883     (48,806     (133,334     (130,922

Insurance subsidiary

     (545     (750     (1,627     (1,772
  

 

 

   

 

 

   

 

 

   

 

 

 
     (46,428     (49,556     (134,961     (132,694

Impairment charges

     (3,911     (26,712     (5,107     (26,712

Transaction costs

     (482     (6,537     (1,564     (45,567
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     199,150        176,776        623,298        490,385   

Rent

     (108,449     (105,511     (323,958     (292,641

Depreciation and amortization

     (50,600     (46,947     (149,092     (117,367

Interest, net

     (26,439     (25,753     (79,166     (53,886
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

     13,662        (1,435     71,082        26,491   

Provision (benefit) for income taxes

     5,753        (2,342     29,364        9,848   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 7,909      $ 907      $ 41,718      $ 16,643   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

17


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 8 – BUSINESS SEGMENT DATA (Continued)

 

     Three months ended
September 30,
     Nine months ended
September 30,
 
     2012      2011      2012      2011  

Rent:

           

Hospital division

   $ 55,391       $ 52,737       $ 165,477       $ 137,033   

Nursing center division

     50,290         49,862         150,457         148,808   

Rehabilitation division:

           

Skilled nursing rehabilitation services

     1,309         1,811         4,060         4,860   

Hospital rehabilitation services

     2         95         119         156   
  

 

 

    

 

 

    

 

 

    

 

 

 
     1,311         1,906         4,179         5,016   

Home health and hospice division

     805         358         2,029         798   

Corporate

     652         648         1,816         986   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 108,449       $ 105,511       $ 323,958       $ 292,641   
  

 

 

    

 

 

    

 

 

    

 

 

 

Depreciation and amortization:

           

Hospital division

   $ 23,110       $ 21,612       $ 68,579       $ 52,462   

Nursing center division

     13,564         12,655         39,534         37,486   

Rehabilitation division:

           

Skilled nursing rehabilitation services

     2,791         2,699         8,143         4,574   

Hospital rehabilitation services

     2,328         2,372         6,975         3,288   
  

 

 

    

 

 

    

 

 

    

 

 

 
     5,119         5,071         15,118         7,862   

Home health and hospice division

     1,137         324         2,960         547   

Corporate

     7,670         7,285         22,901         19,010   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 50,600       $ 46,947       $ 149,092       $ 117,367   
  

 

 

    

 

 

    

 

 

    

 

 

 

Capital expenditures, excluding acquisitions (including discontinued operations):

           

Hospital division:

           

Routine

   $ 9,015       $ 12,919       $ 28,455       $ 36,872   

Development

     14,334         39,964         35,572         54,164   
  

 

 

    

 

 

    

 

 

    

 

 

 
     23,349         52,883         64,027         91,036   

Nursing center division:

           

Routine

     4,965         10,572         12,611         26,727   

Development

     843         4,113         2,603         15,140   
  

 

 

    

 

 

    

 

 

    

 

 

 
     5,808         14,685         15,214         41,867   

Rehabilitation division:

           

Skilled nursing rehabilitation services:

           

Routine

     707         255         1,602         669   

Development

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     707         255         1,602         669   

Hospital rehabilitation services:

           

Routine

     125         81         231         178   

Development

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     125         81         231         178   

Home health and hospice division:

           

Routine

     160         41         429         99   

Development

     —           75         —           266   
  

 

 

    

 

 

    

 

 

    

 

 

 
     160         116         429         365   

Corporate:

           

Information systems

     10,842         11,516         32,901         29,089   

Other

     125         1,211         575         1,629   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 41,116       $ 80,747       $ 114,979       $ 164,833   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

18


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 8 – BUSINESS SEGMENT DATA (Continued)

 

     September 30,
2012
     December 31,
2011
 

Assets at end of period:

     

Hospital division

   $ 2,115,518       $ 2,056,103   

Nursing center division

     615,364         638,078   

Rehabilitation division:

     

Skilled nursing rehabilitation services

     452,105         425,499   

Hospital rehabilitation services

     338,614         347,491   
  

 

 

    

 

 

 
     790,719         772,990   

Home health and hospice division

     200,771         104,374   

Corporate

     575,455         566,948   
  

 

 

    

 

 

 
   $ 4,297,827       $ 4,138,493   
  

 

 

    

 

 

 

Goodwill:

     

Hospital division

   $ 747,777       $ 745,411   

Rehabilitation division:

     

Skilled nursing rehabilitation services

     107,899         107,026   

Hospital rehabilitation services

     168,019         167,753   
  

 

 

    

 

 

 
     275,918         274,779   

Home health and hospice division

     123,106         64,465   
  

 

 

    

 

 

 
   $ 1,146,801       $ 1,084,655   
  

 

 

    

 

 

 

NOTE 9 – INSURANCE RISKS

The Company insures a substantial portion of its professional liability risks and workers compensation risks through its wholly owned limited purpose insurance subsidiary. Provisions for loss for these risks are based upon management’s best available information including actuarially determined estimates.

The allowance for professional liability risks includes an estimate of the expected cost to settle reported claims and an amount, based upon past experiences, for losses incurred but not reported. These liabilities are necessarily based upon estimates and, while management believes that the provision for loss is adequate, the ultimate liability may be in excess of, or less than, the amounts recorded. To the extent that expected ultimate claims costs vary from historical provisions for loss, future earnings will be charged or credited.

The provision for loss for insurance risks, including the cost of coverage maintained with unaffiliated commercial insurance carriers, follows (in thousands):

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2012     2011     2012     2011  

Professional liability:

        

Continuing operations

   $ 19,261      $ 15,953      $ 58,828      $ 50,584   

Discontinued operations

     (128     (897     (372     (1,718

Workers compensation:

        

Continuing operations

   $ 15,633      $ 15,908      $ 46,428      $ 43,057   

Discontinued operations

     (55     (120     (343     (640

 

19


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 9 – INSURANCE RISKS (Continued)

 

A summary of the assets and liabilities related to insurance risks included in the accompanying unaudited condensed consolidated balance sheet follows (in thousands):

 

     September 30, 2012      December 31, 2011  
     Professional
liability
     Workers
compensation
     Total      Professional
liability
     Workers
compensation
     Total  

Assets:

                 

Current:

                 

Insurance subsidiary investments

   $ 47,898       $ 31,744       $ 79,642       $ 44,678       $ 25,747       $ 70,425   

Reinsurance recoverables

     3,632         —           3,632         323         —           323   

Other

     —           150         150         —           150         150   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     51,530         31,894         83,424         45,001         25,897         70,898   

Non-current:

                 

Insurance subsidiary investments

     51,934         66,322         118,256         39,048         71,179         110,227   

Reinsurance and other recoverables

     54,422         75,006         129,428         44,356         64,704         109,060   

Deposits

     3,977         1,574         5,551         3,643         1,623         5,266   

Other

     —           41         41         —           42         42   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     110,333         142,943         253,276         87,047         137,548         224,595   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 161,863       $ 174,837       $ 336,700       $ 132,048       $ 163,445       $ 295,493   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

                 

Allowance for insurance risks:

                 

Current

   $ 48,931       $ 36,095       $ 85,026       $ 46,010       $ 32,198       $ 78,208   

Non-current

     236,296         153,995         390,291         217,717         138,489         356,206   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 285,227       $ 190,090       $ 475,317       $ 263,727       $ 170,687       $ 434,414   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Provisions for loss for professional liability risks retained by the Company’s limited purpose insurance subsidiary have been discounted based upon actuarial estimates of claim payment patterns using a discount rate of 1% to 5% depending upon the policy year. The discount rate was 1% for the 2012 and 2011 policy years. The discount rates are based upon the risk free interest rate for the respective year. Amounts equal to the discounted loss provision are funded annually. The Company does not fund the portion of professional liability risks related to estimated claims that have been incurred but not reported. Accordingly, these liabilities are not discounted. If the Company did not discount any of the allowances for professional liability risks, these balances would have approximated $287.8 million at September 30, 2012 and $266.5 million at December 31, 2011.

Provisions for loss for workers compensation risks retained by the Company’s limited purpose insurance subsidiary are not discounted and amounts equal to the loss provision are funded annually.

NOTE 10 – INSURANCE SUBSIDIARY INVESTMENTS

The Company maintains investments, consisting principally of cash and cash equivalents, debt securities, equities and certificates of deposit for the payment of claims and expenses related to professional liability and workers compensation risks. These investments have been categorized as available-for-sale and are reported at fair value.

 

20


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 10 – INSURANCE SUBSIDIARY INVESTMENTS (Continued)

 

The cost for equities, amortized cost for debt securities and estimated fair value of the Company’s insurance subsidiary investments follows (in thousands):

 

     September 30, 2012      December 31, 2011  
     Cost      Unrealized
gains
     Unrealized
losses
    Fair
value
     Cost      Unrealized
gains
     Unrealized
losses
    Fair
value
 

Cash and cash equivalents (a)

   $ 134,048       $ —         $ —        $ 134,048       $ 118,877       $ —         $ —        $ 118,877   

Debt securities:

                     

Corporate bonds

     22,683         158         (12     22,829         23,134         163         (48     23,249   

Debt securities issued by U.S. government agencies

     17,509         116         —          17,625         18,173         120         (5     18,288   

U.S. Treasury notes

     4,320         5         —          4,325         3,867         10         —          3,877   

Debt securities issued by foreign governments

     625         1         —          626         625         8         —          633   

Commercial mortgage-backed securities

     —           —           —          —           137         6         —          143   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     45,137         280         (12     45,405         45,936         307         (53     46,190   

Equities by industry:

                     

Consumer

     2,171         797         (37     2,931         2,171         329         (45     2,455   

Industrials

     2,039         327         (82     2,284         2,039         248         (111     2,176   

Technology

     1,482         300         (103     1,679         1,482         215         (99     1,598   

Healthcare

     1,474         167         (16     1,625         1,474         77         (72     1,479   

Financial services

     1,419         250         (137     1,532         1,419         89         (227     1,281   

Other

     2,554         711         (175     3,090         2,554         345         (209     2,690   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     11,139         2,552         (550     13,141         11,139         1,303         (763     11,679   

Certificates of deposit

     5,302         2         —          5,304         3,905         3         (2     3,906   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ 195,626       $ 2,834       $ (562   $ 197,898       $ 179,857       $ 1,613       $ (818   $ 180,652   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(a) Includes $2.2 million of money market funds at both September 30, 2012 and December 31, 2011.

The Company’s investment policy governing insurance subsidiary investments precludes the investment portfolio managers from selling any security at a loss without prior authorization from the Company. The investment managers also limit the exposure to any one issue, issuer or type of investment. The Company intends, and has the ability, to hold insurance subsidiary investments for a long duration without the necessity of selling securities to fund the underwriting needs of its insurance subsidiary. This ability to hold securities allows sufficient time for recovery of temporary declines in the market value of equity securities and the par value of debt securities as of their stated maturity date.

The Company considered the severity and duration of its unrealized losses at September 30, 2012 for various investments held in its insurance subsidiary investment portfolio and determined that these unrealized losses were temporary and did not record any impairment losses related to these investments. The Company considered the severity and duration of its unrealized losses at September 30, 2011 and recognized a $0.2 million pretax other-than-temporary impairment in the third quarter of 2011 for various investments held in its insurance subsidiary investment portfolio.

As a result of deterioration in professional liability and workers compensation underwriting results of the Company’s limited purpose insurance subsidiary in 2011, the Company made a capital contribution of $8.6 million during the nine months ended September 30, 2012 to its limited purpose insurance subsidiary. Conversely, as a result of improved professional liability underwriting results of the Company’s limited purpose insurance subsidiary in 2010, the Company received a distribution of $3.5 million during the nine months ended September 30, 2011 from its limited purpose insurance subsidiary. These transactions were completed in accordance with applicable regulations. Neither the capital contribution nor the distribution had any impact on earnings.

 

21


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 11 – LEASES

On April 27, 2012, the Company provided Ventas with notices to renew the master lease agreements for 19 nursing and rehabilitation centers and six LTAC hospitals (collectively, the “Renewal Facilities”) for an additional five years. The current lease term for the Renewal Facilities is scheduled to expire in April 2013.

Under its master lease agreements with Ventas, the Company had 73 nursing and rehabilitation centers and 16 LTAC hospitals within ten separate renewal bundles subject to lease renewals. Each renewal bundle contains both nursing and rehabilitation centers and LTAC hospitals. The master lease agreements require that the Company renew all or none of the facilities within a renewal bundle.

The Company has renewed three renewal bundles containing the Renewal Facilities. The Renewal Facilities contain 2,178 licensed nursing and rehabilitation center beds and 616 licensed hospital beds and generated revenues of approximately $434 million for the year ended December 31, 2011. The current annual rent for the Renewal Facilities approximates $46 million.

The Company did not renew seven renewal bundles containing 54 nursing and rehabilitation centers and ten LTAC hospitals. These facilities contain 6,140 licensed nursing and rehabilitation center beds and 1,066 licensed hospital beds and generated revenues of approximately $790 million for the year ended December 31, 2011. The current annual rent for these facilities approximates $77 million.

On May 24, 2012, the Company entered into a new master lease agreement with Ventas for the ten LTAC hospitals that the Company had previously announced it did not intend to renew. The new master lease agreement will be effective on May 1, 2013 and will have a term of ten years with three five-year renewal options. The annual rent for the new lease will be $28 million and is subject to annual increases based on the increase in the consumer price index (subject to an annual 4% cap). The current annual rent for these ten LTAC hospitals approximates $22 million. These ten LTAC hospitals contain 1,066 licensed hospital beds and generated revenues of approximately $276 million for the year ended December 31, 2011. The terms of the new master lease agreement are substantially similar to the terms of the other master lease agreements between Kindred and Ventas.

On May 24, 2012, the Company and Ventas also entered into a separate agreement to provide Ventas with more flexibility to accelerate the transfer of the 54 nursing and rehabilitation centers currently leased by the Company that are scheduled to expire on April 30, 2013. The Company will continue to operate these nursing and rehabilitation centers and include them in its results from continuing operations through the expiration of the lease term in April 2013.

NOTE 12 – INCOME TAXES

The provision for income taxes in the third quarter of 2011 and for the nine months ended September 30, 2011 included a favorable adjustment of $3.3 million related to the resolution of certain income tax contingencies from prior years.

The federal statute of limitations remains open for tax years 2009 through 2011. In July 2011, the Company resolved federal income tax audits for the 2007 through 2009 tax years. The Company is currently under examination by the Internal Revenue Service (the “IRS”) for the 2010 through 2012 tax years. The Company has been accepted into the IRS’s Compliance Assurance Process (“CAP”) for the 2012 tax year. CAP is an enhanced, real-time review of a company’s tax positions and compliance. The Company expects participation in CAP to improve the timeliness of its federal tax examinations.

State jurisdictions generally have statutes of limitations ranging from three to five years. The state impact of federal income tax changes remains subject to examination by various states for a period of up to one year after formal notification to the states. Currently, the Company has various state income tax returns under examination.

 

22


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 13 – CONTINGENCIES

Management continually evaluates contingencies based upon the best available information. In addition, allowances for losses are provided currently for disputed items that have continuing significance, such as certain third party reimbursements and deductions that continue to be claimed in current cost reports and tax returns.

Management believes that allowances for losses have been provided to the extent necessary and that its assessment of contingencies is reasonable.

Principal contingencies are described below:

Revenues—Certain third party payments are subject to examination by agencies administering the various reimbursement programs. The Company is contesting certain issues raised in audits of prior year cost reports.

Professional liability risks—The Company has provided for losses for professional liability risks based upon management’s best available information including actuarially determined estimates. Ultimate claims costs may differ from the provisions for loss. See Note 9.

Income taxes—The Company is subject to various federal and state income tax audits in the ordinary course of business. Such audits could result in increased tax payments, interest and penalties.

Litigation—The Company is a party to various legal actions (some of which are not insured), and regulatory and other governmental audits and investigations in the ordinary course of business. The Company cannot predict the ultimate outcome of pending litigation and regulatory and other governmental audits and investigations. These matters could potentially subject the Company to sanctions, damages, recoupments, fines and other penalties. The U.S. Department of Justice (the “DOJ”), CMS or other federal and state enforcement and regulatory agencies may conduct additional investigations related to the Company’s businesses in the future which may, either individually or in the aggregate, have a material adverse effect on the Company’s business, financial position, results of operations and liquidity. See Note 16.

Other indemnifications—In the ordinary course of business, the Company enters into contracts containing standard indemnification provisions and indemnifications specific to a transaction, such as a disposal of an operating facility. These indemnifications may cover claims related to employment-related matters, governmental regulations, environmental issues and tax matters, as well as patient, third party payor, supplier and contractual relationships. Obligations under these indemnities generally are initiated by a breach of the terms of a contract or by a third party claim or event.

 

23


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 14 – FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

The Company follows the provisions of the authoritative guidance for fair value measurements, which addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under generally accepted accounting principles.

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The guidance related to fair value measures establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes three levels of inputs that may be used to measure fair value:

 

Level 1    Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as certain U.S. Treasury, other U.S. Government and agency asset backed debt securities that are highly liquid and are actively traded in over-the-counter markets.
Level 2    Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3    Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

 

24


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 14 – FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS (Continued)

 

The Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis and any associated losses are summarized below (in thousands):

 

     Fair value measurements      Assets/liabilities
at fair value
    Total
losses
 
     Level 1      Level 2     Level 3       

September 30, 2012:

            

Recurring:

            

Assets:

            

Available-for-sale debt securities:

            

Corporate bonds

   $ —         $ 22,829      $ —         $ 22,829      $ —     

Debt securities issued by U.S. government agencies

     —           17,625        —           17,625        —     

U.S. Treasury notes

     4,325         —          —           4,325        —     

Debt securities issued by foreign governments

     —           626        —           626        —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
     4,325         41,080        —           45,405        —     

Available-for-sale equity securities

     13,141         —          —           13,141        —     

Money market funds

     5,974         —          —           5,974        —     

Certificates of deposit

     —           5,304        —           5,304        —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total available-for-sale investments

     23,440         46,384        —           69,824        —     

Deposits held in money market funds

     348         3,977        —           4,325        —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
   $ 23,788       $ 50,361      $ —         $ 74,149      $ —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Liabilities:

            

Interest rate swaps

   $ —         $ (2,103   $ —         $ (2,103   $ —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Non-recurring:

            

Assets:

            

Hospital available for sale

   $ —         $ —        $ 107       $ 107      $ (569

Property and equipment

     —           —          366         366        (2,577

Intangible assets—Medicare license

     —           —          632         632        (2,530
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
   $ —         $ —        $ 1,105       $ 1,105      $ (5,676
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Liabilities

   $ —         $ —        $ —         $ —        $ —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

December 31, 2011:

            

Recurring:

            

Assets:

            

Available-for-sale debt securities:

            

Corporate bonds

   $ —         $ 23,249      $ —         $ 23,249      $ —     

Debt securities issued by U.S. government agencies

     —           18,288        —           18,288        —     

U.S. Treasury notes

     3,877         —          —           3,877        —     

Debt securities issued by foreign governments

     —           633        —           633        —     

Commercial mortgage-backed securities

     —           143        —           143        —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
     3,877         42,313        —           46,190        —     

Available-for-sale equity securities

     11,679         —          —           11,679        —     

Money market funds

     6,263         —          —           6,263        —     

Certificates of deposit

     —           3,906        —           3,906        —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total available-for-sale investments

     21,819         46,219        —           68,038        —     

Deposits held in money market funds

     353         3,643        —           3,996        —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
   $ 22,172       $ 49,862      $ —         $ 72,034      $ —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Liabilities:

            

Interest rate swaps

   $ —         $ (815   $ —         $ (815   $ —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Non-recurring:

            

Assets:

            

Hospital available for sale

   $ —         $ —        $ 1,200       $ 1,200      $ (1,490

Property and equipment

     —           —          6,604         6,604        (22,836

Goodwill—nursing and rehabilitation centers

     —           —          —           —          (6,080

Goodwill—skilled nursing rehabilitation services

     —           —          107,026         107,026        (45,999

Intangible assets—certificates of need

     —           —          1,000         1,000        (54,366
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
   $ —         $ —        $ 115,830       $ 115,830      $ (130,771
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Liabilities

   $ —         $ —        $ —         $ —        $ —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

25


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 14 – FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS (Continued)

 

Recurring measurements

The Company’s available-for-sale investments held by its limited purpose insurance subsidiary consist of debt securities, equities, money market funds and certificates of deposit. These available-for-sale investments and the insurance subsidiary’s cash and cash equivalents of $131.8 million as of September 30, 2012 and $116.7 million as of December 31, 2011, classified as insurance subsidiary investments, are maintained for the payment of claims and expenses related to professional liability and workers compensation risks.

The Company also has available-for-sale investments totaling $3.7 million related to a deferred compensation plan that is maintained for certain of the Company’s current and former employees.

The fair value of actively traded debt and equity securities and money market funds are based upon quoted market prices and are generally classified as Level 1. The fair value of inactively traded debt securities and certificates of deposit are based upon either quoted market prices of similar securities or observable inputs such as interest rates using either a market or income valuation approach and are generally classified as Level 2. The Company’s investment advisors obtain and review pricing for each security. The Company is responsible for the determination of fair value and as such the Company reviews the pricing information from its advisors in determining reasonable estimates of fair value. Based upon the Company’s internal review procedures, there were no adjustments to the prices during the three or nine months ended September 30, 2012 or September 30, 2011.

The Company’s deposits held in money market funds consist primarily of cash and cash equivalents held for general corporate purposes.

The fair value of the derivative liability associated with the interest rate swaps is estimated using industry-standard valuation models, which are Level 2 measurements. Such models project future cash flows and discount the future amounts to a present value using market-based observable inputs, including interest rate curves.

The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments. The carrying value is equal to fair value for financial instruments that are based upon quoted market prices or current market rates. The Company’s long-term debt is based upon Level 2 inputs.

 

     September 30, 2012      December 31, 2011  

(In thousands)

   Carrying
value
     Fair
value
     Carrying
value
     Fair
value
 

Cash and cash equivalents

   $ 35,695       $ 35,695       $ 41,561       $ 41,561   

Cash–restricted

     5,344         5,344         5,551         5,551   

Insurance subsidiary investments

     197,898         197,898         180,652         180,652   

Tax refund escrow investments

     207         207         211         211   

Long-term debt, including amounts due within one year (excluding capital lease obligations totaling $1.5 million and $3.9 million at September 30, 2012 and December 31, 2011, respectively)

     1,618,211         1,599,741         1,538,557         1,406,751   

 

 

26


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 14 – FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS (Continued)

 

Non-recurring measurements

At September 30, 2012, the Company reviewed the indefinite-lived and long-lived assets related to the planned divestiture and pending offer for a LTAC hospital and determined its indefinite-lived Medicare license and property and equipment were impaired. As a result, the Company recorded a pretax impairment charge of $3.2 million in the third quarter of 2012. The impairment charge did not impact the Company’s cash flows or liquidity. The fair value of the assets were measured using a Level 3 input of the pending offer.

In September 2012, the Company reduced the fair value of a hospital held for sale based upon a pending offer, which resulted in a pretax loss of $0.5 million recorded in discontinued operations. The primary reason for the reduction was the general deterioration in the real estate market where the hospital is located. The fair value of the asset was measured using a Level 3 input of the pending offer.

On July 29, 2011, CMS issued the 2011 CMS Rules. In connection with the preparation of the Company’s operating results for the third quarter of 2011, the Company determined that the impact of the 2011 CMS Rules was a triggering event in the third quarter of 2011 and accordingly tested the recoverability of its nursing and rehabilitation centers reporting unit goodwill, intangible assets and property and equipment asset groups impacted by the reduced Medicare payments. The Company recorded pretax impairment charges aggregating $26.7 million in the third quarter of 2011. The charges included $6.1 million of goodwill (which represented the entire nursing and rehabilitation centers reporting unit goodwill) and $20.6 million of property and equipment. The Company recorded pretax impairment charges aggregating $0.7 million and $1.9 million in the third quarter of 2012 and for the nine months ended September 30, 2012, respectively, for necessary property and equipment expenditures in impaired nursing and rehabilitation center asset groups. These charges reflected the amount by which the carrying value of certain assets exceeded their estimated fair value. The fair value of goodwill was measured using both Level 2 and Level 3 inputs such as discounted cash flows, market multiple analysis, replacement costs and sales comparison methodologies. The fair value of property and equipment was measured using Level 3 inputs such as replacement costs factoring in depreciation, economic obsolesce and inflation trends.

NOTE 15 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION

The accompanying unaudited condensed consolidating financial information has been prepared and presented pursuant to SEC Regulation S-X, Rule 3-10, “Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered.” The Company’s Notes issued on June 1, 2011 are fully and unconditionally guaranteed, subject to certain customary release provisions, by substantially all of the Company’s domestic 100% owned subsidiaries. The equity method has been used with respect to the parent company’s investment in subsidiaries.

 

27


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 15 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

 

The following unaudited condensed consolidating financial data presents the financial position of the parent company/issuer, the guarantor subsidiaries and the non-guarantor subsidiaries as of September 30, 2012 and December 31, 2011, and the respective results of operations and cash flows for the three and nine months ended September 30, 2012 and September 30, 2011.

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)

 

     Three months ended September 30, 2012  

(In thousands)

   Parent
company/
issuer
    Guarantor
subsidiaries
    Non-guarantor
subsidiaries
    Consolidating
and
eliminating
adjustments
    Consolidated  

Revenues

   $ —        $ 1,432,310      $ 118,594      $ (25,112   $ 1,525,792   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Salaries, wages and benefits

     —          866,926        45,998        —          912,924   

Supplies

     —          97,762        8,832        —          106,594   

Rent

     —          100,877        7,572        —          108,449   

Other operating expenses

     1        283,278        47,821        (25,112     305,988   

Other income

     —          (2,775     —          —          (2,775

Impairment charges

     —          3,911        —          —          3,911   

Depreciation and amortization

     —          48,015        2,585        —          50,600   

Management fees

     —          (2,994     2,994        —          —     

Intercompany interest (income) expense from affiliates

     (26,840     23,556        3,284        —          —     

Interest expense (income)

     26,544        (4,895     5,019        —          26,668   

Investment income

     —          (39     (190     —          (229

Equity in net income of consolidating affiliates

     (7,356     —          —          7,356        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     (7,651     1,413,622        123,915        (17,756     1,512,130   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

     7,651        18,688        (5,321     (7,356     13,662   

Provision for income taxes

     85        5,484        184        —          5,753   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     7,566        13,204        (5,505     (7,356     7,909   

Discontinued operations, net of income taxes:

          

Income from operations

     —          47        —          —          47   

Loss on divestiture of operations

     —          (349     —          —          (349
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations

     —          (302     —          —          (302
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     7,566        12,902        (5,505     (7,356     7,607   

Earnings attributable to noncontrolling interests

     —          —          (41     —          (41
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) attributable to Kindred

   $ 7,566      $ 12,902      $ (5,546   $ (7,356   $ 7,566   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 7,919      $ 12,902      $ (5,142   $ (7,719   $ 7,960   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to Kindred

   $ 7,919      $ 12,902      $ (5,183   $ (7,719   $ 7,919   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

28


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 15 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

 

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss) (Continued)

 

 

     Three months ended September 30, 2011  

(In thousands)

   Parent
company/
issuer
    Guarantor
subsidiaries
    Non-guarantor
subsidiaries
    Consolidating
and
eliminating
adjustments
    Consolidated  

Revenues

   $ —        $ 1,424,647      $ 111,847      $ (22,432   $ 1,514,062   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Salaries, wages and benefits

     130        860,448        39,992        —          900,570   

Supplies

     —          98,846        8,668        —          107,514   

Rent

     —          97,901        7,610        —          105,511   

Other operating expenses

     23        284,598        43,116        (22,432     305,305   

Other income

     —          (2,815     —          —          (2,815

Impairment charges

     —          26,712        —          —          26,712   

Depreciation and amortization

     —          43,865        3,082        —          46,947   

Management fees

     —          (3,469     3,469        —          —     

Intercompany interest (income) expense from affiliates