NOTE 18 – 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 GAAP.

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.

NOTE 18 – 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 for the years ended December 31, 2015 and 2014 are summarized below (in thousands):

	Fair value measurements								Assets/ liabilities at fair value			Total losses
	Level 1		Level 2			Level 3			Assets/ liabilities at fair value			Total losses
December 31, 2015:
Recurring:
Assets:
Available-for-sale debt securities:
Corporate bonds	$	−	$	46,823		$	−		$	46,823		$	−
Debt securities issued by U.S. government agencies		−		22,454			−			22,454			−
U.S. Treasury notes		33,331		−			−			33,331			−
		33,331		69,277			−			102,608			−
Available-for-sale equity securities		14,251		−			−			14,251			−
Money market funds		31,429		−			−			31,429			−
Certificates of deposit		−		8,248			−			8,248			−
Total available-for-sale investments		79,011		77,525			−			156,536			−
Deposits held in money market funds		100		3,880			−			3,980			−
	$	79,111	$	81,405		$	−		$	160,516		$	−
Liabilities:
Contingent consideration liability	$	−	$	−		$	(6,437	)	$	(6,437	)	$	−
Interest rate swaps		−		(4,472	)		−			(4,472	)		−
	$		$	(4,472	)	$	(6,437	)	$	(10,909	)	$
Non-recurring:
Assets:
Intangible assets – trade names	$	−	$	−		$	98,774		$	98,774		$	(24,757	)
Liabilities	$	−	$	−		$	−		$	−		$	−
December 31, 2014:
Recurring:
Assets:
Available-for-sale debt securities:
Corporate bonds	$	−	$	49,036		$	−		$	49,036		$	−
Debt securities issued by U.S. government agencies		−		25,313			−			25,313			−
U.S. Treasury notes		25,809		−			−			25,809			−
		25,809		74,349			−			100,158			−
Available-for-sale equity securities		8,229		−			−			8,229			−
Money market funds		17,787		−			−			17,787			−
Certificates of deposit		−		7,053			−			7,053			−
Total available-for-sale investments		51,825		81,402			−			133,227			−
Deposits held in money market funds		105,140		3,883			−			109,023			−
	$	156,965	$	85,285		$	−		$	242,250		$	−
Liabilities:
Interest rate swaps	$	−	$	(3,673	)	$	−		$	(3,673	)	$	−
Non-recurring:
Assets:
Property and equipment	$	−	$	−		$	19		$	19		$	(673	)
Liabilities	$	−	$	−		$	−		$	−		$	−

NOTE 18 – 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 $156.4 million as of December 31, 2015 and $135.0 million as of December 31, 2014, 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 $1.8 million as of December 31, 2015 and $2.2 million as of December 31, 2014 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 2015 or 2014.

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

The Company acquired a contingent consideration liability in the Gentiva Merger from a prior acquisition by Gentiva with an initial estimated fair value of $7.9 million. The fair value is determined using a discounted cash flow approach utilizing Level 2 and Level 3 inputs which includes observable market discount rates, fixed payment schedules, and assumptions based on achieving certain predefined performance criteria. As of December 31, 2015, the fair value of the Level 2 and 3 contingent consideration liability was $6.4 million. The change in fair value for the year ended December 31, 2015 consists of $1.8 million in fixed payments and $0.3 million in accrued interest included in interest expense in the accompanying consolidated statement of operations. A one percent change in the discount rate used to calculate the accretion of the present value of the contingent consideration liability would have an impact on the fair value of approximately $0.1 million.

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. See Note 12.

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.

	2015				2014
(In thousands)	Carrying value		Fair value		Carrying value		Fair value
Cash and cash equivalents	$	98,758	$	98,758	$	164,188	$	164,188
Insurance subsidiary investments		311,136		311,136		265,996		265,996
Long-term debt, including amounts due within one year (excluding capital lease obligations totaling $0.8 million at December 31, 2015)		3,160,807		2,978,890		2,877,138		2,930,815

Non-recurring measurements

During the first quarter of 2015, the Company recorded an asset impairment charge of $6.7 million related to previously acquired home health and hospice trade names after the decision in the first quarter of 2015 to rebrand to the Kindred at Home trade name. These charges reflect the amount by which the carrying value exceeded its estimated fair value. The fair value of the trade names was measured using Level 3 unobservable inputs, primarily economic obsolescence.

NOTE 18 – FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS (Continued)

Non-recurring measurements (Continued)

During the fourth quarter of 2015, the Company recorded an asset impairment charge of $18.0 million related to the previously acquired RehabCare trade name due to the cancellation of contracts associated with one large customer in the fourth quarter of 2015 and a reduction in projected revenue in 2016. The charge reflects the amount by which the carrying value exceeded its estimated fair value. The fair value of the trade name was measured using Level 3 inputs such as projected revenue and the industry specific royalty rate.

In July 2011, CMS issued the 2011 CMS Rules. The Company recorded pretax impairment charges aggregating $0.7 million for the year ended December 31, 2014 for property and equipment expenditures in the nursing center asset groups that were determined to be impaired by the 2011 CMS Rules. These charges reflected the amount by which the carrying value of certain assets exceeded their estimated fair value. 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.