10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 10-Q

 

 

 

þ  QUARTERLY

REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

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   þ     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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   þ     No   ¨

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

 

Large accelerated filer   ¨    Accelerated filer   þ
Non-accelerated filer   ¨      Smaller reporting company   ¨

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

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, 2011

Common stock, $0.25 par value    52,121,641 shares

 

 

 

1 of 73


Table of Contents

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,  2011 and 2010 and for the nine months ended September 30, 2011
and 2010

     3   
  

Condensed Consolidated Balance Sheet—September 30, 2011 and December 31, 2010

     4   
  

Condensed Consolidated Statement of Cash Flows—for the three months ended September  30, 2011 and 2010 and for the nine months ended September 30, 2011
and 2010

     5   
  

Notes to Condensed Consolidated Financial Statements

     6   

Item 2.

  

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

     39   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     69   

Item 4.

  

Controls and Procedures

     70   

PART II.

   OTHER INFORMATION   

Item 1.

  

Legal Proceedings

     71   

Item 6.

  

Exhibits

     72   

 

2


Table of Contents

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,
 
     2011     2010     2011     2010  

Revenues

   $ 1,514,062      $ 1,053,012      $ 3,999,075      $ 3,224,213   
  

 

 

   

 

 

   

 

 

   

 

 

 

Salaries, wages and benefits

     900,570        613,607        2,344,398        1,852,987   

Supplies

     107,514        83,753        294,254        255,094   

Rent

     105,511        89,295        292,641        266,595   

Other operating expenses

     332,017        234,968        878,518        707,859   

Other income

     (2,815     (2,794     (8,480     (8,735

Depreciation and amortization

     46,947        29,167        117,367        90,140   

Interest expense

     25,790        1,642        54,675        4,247   

Investment income

     (37     (403     (789     (903
  

 

 

   

 

 

   

 

 

   

 

 

 
     1,515,497        1,049,235        3,972,584        3,167,284   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

     (1,435     3,777        26,491        56,929   

Provision (benefit) for income taxes

     (2,342     (1,323     9,848        20,538   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     907        5,100        16,643        36,391   

Discontinued operations, net of income taxes:

        

Income (loss) from operations

     1,119        (260     1,527        (327

Gain on divestiture of operations

     —          86        —          3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from discontinued operations

     1,119        (174     1,527        (324
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     2,026        4,926        18,170        36,067   

(Earnings) loss attributable to noncontrolling interests

     (241     —          180        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Income attributable to Kindred

   $ 1,785      $ 4,926      $ 18,350      $ 36,067   
  

 

 

   

 

 

   

 

 

   

 

 

 

Amounts attributable to Kindred stockholders:

        

Income from continuing operations

   $ 666      $ 5,100      $ 16,823      $ 36,391   

Income (loss) from discontinued operations

     1,119        (174     1,527        (324
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 1,785      $ 4,926      $ 18,350      $ 36,067   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share:

        

Basic:

        

Income from continuing operations

   $ 0.01      $ 0.13      $ 0.37      $ 0.92   

Discontinued operations:

        

Income (loss) from operations

     0.02        (0.01     0.03        (0.01

Gain on divestiture of operations

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 0.03      $ 0.12      $ 0.40      $ 0.91   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted:

        

Income from continuing operations

   $ 0.01      $ 0.13      $ 0.37      $ 0.92   

Discontinued operations:

        

Income (loss) from operations

     0.02        (0.01     0.03        (0.01

Gain on divestiture of operations

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 0.03      $ 0.12      $ 0.40      $ 0.91   
  

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in computing earnings per common share:

        

Basic

     51,329        38,778        44,577        38,720   

Diluted

     51,406        38,838        44,934        38,855   

See accompanying notes.

 

3


Table of Contents

KINDRED HEALTHCARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited)

(In thousands, except per share amounts)

 

     September 30,
2011
    December 31,
2010
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 34,095      $ 17,168   

Cash—restricted

     5,402        5,494   

Insurance subsidiary investments

     64,846        76,753   

Accounts receivable less allowance for loss of $22,631—September 30, 2011 and $13,584—December 31, 2010

     972,340        631,877   

Inventories

     30,821        24,327   

Deferred tax assets

     28,799        13,439   

Income taxes

     18,039        42,118   

Other

     30,796        24,862   
  

 

 

   

 

 

 
     1,185,138        836,038   

Property and equipment

     1,926,726        1,754,170   

Accumulated depreciation

     (875,885     (857,623
  

 

 

   

 

 

 
     1,050,841        896,547   

Goodwill

     1,123,699        242,420   

Intangible assets less accumulated amortization of $11,169—September 30, 2011 and $3,731—December 31, 2010

     506,066        92,883   

Assets held for sale

     7,094        7,167   

Insurance subsidiary investments

     104,298        101,210   

Deferred tax assets

     —          88,816   

Other

     198,441        72,334   
  

 

 

   

 

 

 

Total assets

   $ 4,175,577      $ 2,337,415   
  

 

 

   

 

 

 
LIABILITIES AND EQUITY     

Current liabilities:

    

Accounts payable

   $ 218,523      $ 174,495   

Salaries, wages and other compensation

     392,297        291,116   

Due to third party payors

     41,436        27,115   

Professional liability risks

     41,728        41,555   

Other accrued liabilities

     140,840        87,012   

Long-term debt due within one year

     10,539        91   
  

 

 

   

 

 

 
     845,363        621,384   

Long-term debt

     1,489,359        365,556   

Professional liability risks

     224,903        207,669   

Deferred tax liabilities

     26,678        —     

Deferred credits and other liabilities

     189,814        111,047   

Noncontrolling interests-redeemable

     9,626        —     

Commitments and contingencies

    

Equity:

    

Stockholders’ equity:

    

Common stock, $0.25 par value; authorized 175,000 shares; issued 52,112 shares—September 30, 2011 and 39,495 shares—December 31, 2010

     13,028        9,874   

Capital in excess of par value

     1,135,032        828,593   

Accumulated other comprehensive income (loss)

     (1,000     135   

Retained earnings

     211,003        193,157   
  

 

 

   

 

 

 
     1,358,063        1,031,759   

Noncontrolling interests-nonredeemable

     31,771        —     
  

 

 

   

 

 

 

Total equity

     1,389,834        1,031,759   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 4,175,577      $ 2,337,415   
  

 

 

   

 

 

 

See accompanying notes.

 

4


Table of Contents

KINDRED HEALTHCARE, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

(In thousands)

 

    Three months ended
September 30,
    Nine months ended
September 30,
 
    2011     2010     2011     2010  

Cash flows from operating activities:

       

Net income

  $ 2,026      $ 4,926      $ 18,170      $ 36,067   

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

       

Depreciation and amortization

    46,947        29,167        117,367        90,140   

Amortization of stock-based compensation costs

    3,505        2,593        9,611        8,114   

Payment of lender fees related to debt issuance

    —          —          (46,232     —     

Provision for doubtful accounts

    7,793        6,110        22,049        18,387   

Deferred income taxes

    (2,286     (3,017     (4,975     (13,744

Impairment charges

    26,712        —          26,712        —     

Gain on divestiture of discontinued operations

    —          (86     —          (3

Other

    (922     (2,792     1,465        (1,866

Change in operating assets and liabilities:

       

Accounts receivable

    (27,497     8,146        (108,072     (21,379

Inventories and other assets

    6,304        (1,088     3,649        (7,574

Accounts payable

    (831     (7,515     386        (15,693

Income taxes

    (6,881     3,981        20,792        25,734   

Due to third party payors

    1,143        12,123        4,698        10,099   

Other accrued liabilities

    10,505        15,361        52,186        22,573   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

    66,518        67,909        117,806        150,855   
 

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

       

Routine capital expenditures

    (36,595     (28,623     (95,263     (69,108

Development capital expenditures

    (44,152     (20,364     (69,570     (40,219

Acquisitions, net of cash acquired

    (50,928     (38,379     (710,907     (87,869

Sale of assets

    —          —          1,714        —     

Purchase of insurance subsidiary investments

    (8,867     (10,566     (25,904     (34,684

Sale of insurance subsidiary investments

    10,398        11,138        37,587        72,971   

Net change in insurance subsidiary cash and cash equivalents

    (826     (3,111     (4,870     (10,612

Change in other investments

    —          —          1,000        2   

Other

    (663     698        (692     1,279   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

    (131,633     (89,207     (866,905     (168,240
 

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

       

Proceeds from borrowings under revolving credit

    533,200        457,900        1,633,300        1,109,900   

Repayment of borrowings under revolving credit

    (474,700     (432,800     (1,749,800     (1,092,400

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

    (2,545     (22     (348,233     (64

Payment of deferred financing costs

    (1,855     (1,361     (8,715     (1,414

Issuance of common stock

    —          —          3,019        35   

Purchase of noncontrolling interests in subsidiaries

    (7,292     —          (7,292     —     

Other

    3        —          747        346   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by financing activities

    46,811        23,717        766,026        16,403   
 

 

 

   

 

 

   

 

 

   

 

 

 

Change in cash and cash equivalents

    (18,304     2,419        16,927        (982

Cash and cash equivalents at beginning of period

    52,399        12,902        17,168        16,303   
 

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

  $ 34,095      $ 15,321      $ 34,095      $ 15,321   
 

 

 

   

 

 

   

 

 

   

 

 

 

Supplemental information:

       

Issuance of common stock in RehabCare acquisition

  $ —        $ —        $ 300,426      $ —     

Financing costs paid in connection with RehabCare acquisition

    —          —          13,074        —     

Interest payments

    5,839        1,110        12,783        3,376   

Income tax payments (refunds)

    10,848        468        (2,435     11,021   

See accompanying notes.

 

5


Table of Contents

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, nursing and rehabilitation centers, assisted living facilities and a contract rehabilitation services business across the United States (collectively, the “Company” or “Kindred”). At September 30, 2011, the Company’s hospital division operated 120 LTAC hospitals and five inpatient rehabilitation hospitals 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 provides rehabilitative services primarily in hospital and long-term care settings in 46 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 gains 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, 2011 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 September 2011, the Financial Accounting Standards Board (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. 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 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. Early adoption is permitted, but full retrospective application is required. 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 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

 

6


Table of Contents

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 1—BASIS OF PRESENTATION (Continued)

 

Recently issued accounting requirements (Continued)

 

statements. The guidance is effective for all interim and annual reporting periods beginning after December 15, 2011. Early adoption is permitted, but full retrospective application is required. The adoption of the guidance will 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 is not expected to have a material impact on the Company’s business, financial position, results of operations or liquidity.

In December 2010, the FASB issued authoritative guidance related to goodwill and other intangibles. The provisions of the guidance modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining if it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The guidance is effective for all interim and annual reporting periods beginning after December 15, 2010. The adoption of the guidance did not, and is not expected to, have a material impact on the Company’s business, financial position, results of operations or liquidity.

In December 2010, the FASB issued authoritative guidance related to business combinations. The provisions of the guidance specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during a particular year had occurred as of the beginning of the comparable prior year annual reporting period. Supplemental pro forma disclosures also have been expanded to include a description of the nature and amount of material, non-recurring pro forma adjustments included in the pro forma financial statements. The guidance is effective prospectively for business combinations with an acquisition date on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The adoption of the guidance did not have a material impact on the Company’s business, financial position, results of operations or liquidity.

In August 2010, the FASB issued authoritative guidance related to the presentation of insurance claims and related insurance recoveries, which addresses the diversity in practice related to the accounting by healthcare entities for medical malpractice claims and similar liabilities and their related anticipated insurance recoveries. The provisions clarify that a healthcare entity should not net insurance recoveries against the related claim liability and the amount of the claim liability should be determined without consideration of insurance recoveries. The guidance is effective for all interim periods beginning after December 15, 2010. The adoption of the guidance did not have a material impact on the Company’s business, financial position, results of operations or liquidity.

In January 2010, the FASB issued authoritative guidance related to fair value measurements and disclosures. The provisions of the guidance require new disclosures related to transfers in and out of Levels 1 and 2 classifications (as described in Note 14). The provisions also require a reconciliation of the activity in Level 3 recurring fair value measurements (as described in Note 14). Existing disclosures also were expanded to include Level 2 fair value measurement valuation techniques and inputs. The guidance is effective for all interim and

 

7


Table of Contents

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 1—BASIS OF PRESENTATION (Continued)

 

Recently issued accounting requirements (Continued)

 

annual reporting periods beginning after December 15, 2009, except for the disclosures for Level 3 activity which is effective for fiscal years beginning after December 15, 2010. The adoption of the guidance did not, and is not expected to, have a material impact on the Company’s business, financial position, results of operations or liquidity.

Comprehensive income

The following table sets forth the computation of comprehensive income (in thousands):

 

     Three months ended
September 30,
     Nine months ended
September 30,
 
        2011           2010         2011     2010  

Net income

   $ 2,026      $ 4,926       $ 18,170      $ 36,067   

Net unrealized investment gains (losses), net of income taxes

     (1,317     786         (1,135     585   
  

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income

     709        5,712         17,035        36,652   

Earnings attributable to noncontrolling interests—redeemable

     (374     —           (346     —     

Loss attributable to noncontrolling interests—nonredeemable

     133        —           526        —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income attributable to Kindred

   $ 468      $ 5,712       $ 17,215      $ 36,652   
  

 

 

   

 

 

    

 

 

   

 

 

 

Equity

The following table sets forth a reconciliation of the carrying amount of equity attributable to Kindred, equity attributable to nonredeemable noncontrolling interests and total equity (in thousands):

 

     Amounts
attributable to
Kindred
stockholders
    Nonredeemable
noncontrolling
interests
    Total
equity
 

Balance at December 31, 2010

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

Acquired noncontrolling interests—nonredeemable

     —          23,990        23,990   

Comprehensive income:

      

Net income (loss)

     18,350        (526     17,824   

Net unrealized investment losses, net of income taxes

     (1,135     —          (1,135
  

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

     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 acquisition (See Note 2)

     300,426        —          300,426   

Purchase of noncontrolling interests in subsidiaries

     (1,010     (6,282     (7,292

Reclassification from noncontrolling interests-redeemable

     —          14,589        14,589   
  

 

 

   

 

 

   

 

 

 

Balance at September 30, 2011

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

 

 

   

 

 

   

 

 

 

 

8


Table of Contents

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 1—BASIS OF PRESENTATION (Continued)

 

Equity (Continued)

 

The reclassification from noncontrolling interests-redeemable resulted from minority ownership interests containing put rights in connection with the Merger (as defined) that expired by September 30, 2011.

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, 2010 filed with the Securities and Exchange Commission (the “SEC”) on Form 10-K. The accompanying condensed consolidated balance sheet at December 31, 2010 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. (“RehabCare”) (the “Merger”). Upon consummation of the 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 Merger. The purchase price totaled $963 million and was comprised of $662 million in cash and $301 million of Kindred common stock at fair value. The Company also assumed $356 million of long-term debt in the Merger, of which $345 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 Merger date, the Company acquired 32 LTAC hospitals, five inpatient rehabilitation hospitals, approximately 1,200 rehabilitation therapy sites of service and 102 hospital-based inpatient rehabilitation units. The Merger expanded the Company’s service offerings, positioned the Company for future growth and should provide for significant operating synergies. RehabCare reported consolidated revenues of approximately $1.3 billion and net income from continuing operations of approximately $65 million in fiscal 2010.

 

9


Table of Contents

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 2—REHABCARE ACQUISITION (Continued)

 

Operating results for the third quarter of 2011 included transaction costs totaling $4.0 million and severance costs totaling $1.3 million related to the 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 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.

New credit facilities and notes

In connection with the Merger, the Company entered into a new $650 million senior secured asset-based revolving credit facility (the “ABL Facility”), a new $700 million senior secured term loan facility (the “Term Loan Facility”) and successfully completed the private placement of $550 million of senior notes due 2019 (the “Notes”). The Company used proceeds from the ABL Facility, the Term Loan Facility and the Notes to pay the Merger Consideration, repay all amounts outstanding under Kindred’s and RehabCare’s previous credit facilities and to pay transaction costs. The amounts outstanding under Kindred’s and RehabCare’s former credit facilities that were repaid at the Merger closing were $390 million and $345 million, respectively. The ABL Facility and the Term Loan Facility have incremental facility capacity in an aggregate amount between the two facilities of $200 million, subject to meeting certain conditions, including a specified senior secured leverage ratio. In connection with these new credit arrangements, the Company paid $46 million of lender fees related to debt issuance that were capitalized as deferred financing costs and paid $13 million of other financing costs that were charged to interest expense.

All obligations under the ABL Facility and the Term Loan Facility are fully and unconditionally guaranteed, subject to certain exceptions, by substantially all of the Company’s existing and future direct and indirect domestic 100% owned subsidiaries, as well as certain non-100% owned domestic subsidiaries as the Company may determine from time to time in its sole discretion. The Notes are guaranteed by substantially all of the Company’s domestic 100% owned subsidiaries.

The agreements governing the ABL Facility, the Term Loan Facility and the Notes include a number of restrictive covenants that, among other things and subject to certain exceptions and baskets, impose operating and financial restrictions on the Company and certain of its subsidiaries. In addition, the Company is required to comply with a minimum fixed charge coverage ratio and a maximum total leverage ratio. These financing agreements also contain customary affirmative covenants and events of default.

ABL Facility

The ABL Facility has a five-year tenor and is secured by a first priority lien on eligible accounts receivable, cash, deposit accounts, and certain other assets and property and proceeds from the foregoing (the “First Priority ABL Collateral”). The ABL Facility has a second priority lien on substantially all of the other assets and properties of the Company. As of September 30, 2011, the Company had $248.5 million outstanding under the ABL Facility. In addition, approximately $13 million of letters of credit were issued under the ABL Facility to backstop outstanding letters of credit previously issued by RehabCare under its terminated credit facility.

Borrowings under the ABL Facility bear interest at a rate per annum equal to the applicable margin plus, at the Company’s option, either (1) the London Interbank Offered Rate (“LIBOR”) determined by reference to the costs of funds for eurodollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs, or (2) a base rate determined by reference to the highest of (a) the prime rate of JPMorgan Chase

 

10


Table of Contents

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 2—REHABCARE ACQUISITION (Continued)

 

ABL Facility (Continued)

 

Bank, N.A., (b) the federal funds effective rate plus one-half of 1.00% and (c) LIBOR as described in subclause (1) plus 1.00%. The initial applicable margin for borrowings under the ABL Facility was 2.75% with respect to LIBOR borrowings and 1.75% with respect to base rate borrowings. The applicable margin is subject to adjustment each fiscal quarter, based upon average historical excess availability during the preceding quarter.

Term Loan Facility

The Term Loan Facility has a tenor of seven years and is secured by a first priority lien on substantially all of the Company’s assets and properties other than the First Priority ABL Collateral and a second priority lien on the First Priority ABL Collateral. The Term Loan Facility net proceeds totaled $693 million, net of a $7 million original issue discount that will be amortized over the tenor of the Term Loan Facility.

Borrowings under the Term Loan Facility bear interest at a rate per annum equal to an applicable margin plus, at the Company’s option, either (1) LIBOR determined by reference to the costs of funds for eurodollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs, or (2) a base rate determined by reference to the highest of (a) the prime rate of JPMorgan Chase Bank, N.A., (b) the federal funds effective rate plus one-half of 1.00% and (c) LIBOR described in subclause (1) plus 1.00%. LIBOR is subject to an interest rate floor of 1.50%. The initial applicable margin for borrowings under the Term Loan Facility was 3.75% with respect to LIBOR borrowings and 2.75% with respect to base rate borrowings.

Notes

In connection with the Merger, the Company completed a private placement of the Notes.

The Notes bear interest at an annual rate equal to 8.25% and are senior unsecured obligations of the Company and the subsidiary guarantors, ranking pari passu with all of their respective existing and future senior unsubordinated indebtedness. The indenture contains certain restrictive covenants that will, among other things, limit the Company and certain of its subsidiaries’ ability to incur, assume or guarantee additional indebtedness; pay dividends; make distributions or redeem or repurchase stock; restrict dividends, loans or asset transfers from its subsidiaries; sell or otherwise dispose of assets; and enter into transactions with affiliates. These covenants are subject to a number of limitations and exceptions. The indenture also contains customary events of default.

Pursuant to a registration rights agreement, the Company filed with the SEC a registration statement relating to an offer to exchange the Notes for an issue of SEC-registered notes with substantially identical terms. The exchange offer commenced on October 13, 2011 and is currently scheduled to expire on November 10, 2011.

Purchase price allocation

The Merger purchase price of $963 million was allocated on a preliminary basis to the estimated fair value of the tangible and intangible assets, and goodwill.

 

11


Table of Contents

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 2—REHABCARE ACQUISITION (Continued)

 

Purchase price allocation (Continued)

 

The following is the preliminary Merger purchase price allocation (in thousands):

 

Cash and cash equivalents

   $ 19,932   

Accounts receivable

     244,642   

Deferred income taxes and other current assets

     48,253   

Property and equipment

     114,079   

Identifiable intangible assets:

  

Customer relationships

     188,900   

Trade names (indefinite life)

     115,400   

Medicare certifications (indefinite life)

     75,900   

Trade name

     16,600   

Certificates of need (indefinite life)

     7,900   

Non-compete agreements

     2,800   
  

 

 

 

Total identifiable intangible assets

     407,500   

Other assets

     11,023   

Accounts payable and other current liabilities

     (169,512

Long-term debt, including amounts due within one year

     (355,650

Deferred income taxes and other liabilities

     (155,575

Noncontrolling interests—redeemable

     (23,869

Noncontrolling interests—nonredeemable

     (23,990
  

 

 

 

Total identifiable net assets

     116,833   

Goodwill

     845,975   
  

 

 

 

Net assets

   $ 962,808   
  

 

 

 

The fair value allocation was measured primarily using a discounted cash flows methodology, which is considered a Level 3 input (as described in Note 14).

The value of gross contractual accounts receivable before determining uncollectable amounts totaled $261 million. Accounts estimated to be uncollectable totaled $16 million.

The weighted average life of the definite lived intangible assets consisting primarily of customer relationships is 13 years.

The aggregate goodwill arising from the Merger is based upon the expected future cash flows of the RehabCare operations, which reflect both growth expectations and cost savings from combining the operations of the Company and RehabCare. Goodwill is not amortized and is not deductible for income tax purposes. Goodwill was preliminarily assigned to the Company’s hospital reporting unit ($587 million), skilled nursing rehabilitation services reporting unit ($121 million) and hospital rehabilitation services reporting unit ($138 million).

The valuation technique used to measure the value of the noncontrolling interests was an average of the implied equity value of the noncontrolling interests based upon the Merger Consideration and market multiple methodologies. Redeemable noncontrolling interests as of September 30, 2011 represent the minority ownership interests containing put rights in connection with the Merger.

 

12


Table of Contents

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 2—REHABCARE ACQUISITION (Continued)

 

Purchase price allocation (Continued)

 

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

 

     Three months ended
September 30,
     Nine months ended
September 30,
 
     2011      2010      2011      2010  

Revenues

   $ 1,514,062       $ 1,390,493       $ 4,604,597       $ 4,214,312   

Income (loss) from continuing operations attributable to Kindred

     4,509         5,951         66,536         (1,294

Income (loss) attributable to Kindred

     5,628         6,318         71,106         (1,054

Earnings (loss) per common share:

           

Basic:

           

Income (loss) from continuing operations

   $ 0.09       $ 0.12       $ 1.28       $ (0.02

Net income (loss)

   $ 0.11       $ 0.12       $ 1.37       $ (0.02

Diluted:

           

Income (loss) from continuing operations

   $ 0.09       $ 0.12       $ 1.27       $ (0.02

Net income (loss)

   $ 0.11       $ 0.12       $ 1.36       $ (0.02

The unaudited pro forma financial data has been derived by combining the historical financial results of the Company and the operations acquired in the Merger for the periods presented. The unaudited pro forma financial data includes transaction, financing and severance costs totaling $79.8 million incurred by both the Company and RehabCare related to the Merger. These costs have been eliminated from the results of operations for 2011 and have been reflected as expenses incurred as of January 1, 2010 for purposes of the pro forma financial presentation. Revenues and operating income associated with RehabCare aggregated $343 million and $56 million, respectively, for the three months ended September 30, 2011. Revenues and operating income associated with RehabCare aggregated $457 million and $73 million, respectively, since the date of the Merger.

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. All of these acquisitions were financed through operating cash flows or borrowings under the Company’s revolving credit 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.

In September 2011, the Company acquired a home health and hospice company for $50.9 million, including $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 taxes and other liabilities.

In April 2011, the Company acquired a home health company for $9.5 million, including $0.1 million of property and equipment, $7.5 million of goodwill and $1.9 million of identifiable intangible assets.

 

13


Table of Contents

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 3—OTHER ACQUISITIONS (Continued)

 

In March 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.

In September 2010, the Company acquired three nursing and rehabilitation centers for $37.7 million, including $30.4 million of property and equipment, $5.0 million of goodwill, $2.5 million of identifiable intangible assets and $0.2 million of other assets.

In March 2010, the Company acquired a combined nursing and rehabilitation center and assisted living facility for $16.6 million, including $0.2 million of goodwill, $2.2 million of identifiable intangible assets and $14.2 million of property and equipment and other assets.

In January 2010, the Company acquired the real estate of two previously leased hospitals and two previously leased nursing and rehabilitation centers for $31.1 million in cash and $2.4 million in unamortized prepaid rent. Annual rents associated with these four facilities aggregated $2.9 million.

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

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”). As a result of these rules, the Company tested the recoverability of its nursing and rehabilitation centers reporting unit goodwill and intangible assets and property and equipment within asset groups impacted by the reduced payments. The Company determined that pretax impairment charges aggregating $26.7 million were necessary. 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. These charges reflected the amount by which the carrying value of certain assets exceeded their estimated fair value. The impairment charges did not impact the Company’s cash flows or liquidity.

The impairment charges are recorded in other operating expenses in the accompanying unaudited condensed consolidated statement of operations.

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 gains related to these divestitures have been classified as discontinued operations, net of income taxes, in the accompanying unaudited condensed consolidated statement of operations. At September 30, 2011, the Company held for sale two hospitals reported as discontinued operations.

 

14


Table of Contents

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 5—DISCONTINUED OPERATIONS (Continued)

 

A summary of discontinued operations follows (in thousands):

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
         2011             2010             2011             2010      

Revenues

   $ 848      $ 2,508      $ 1,025      $ 9,956   
  

 

 

   

 

 

   

 

 

   

 

 

 

Salaries, wages and benefits

     (77     2,348        (393     7,359   

Supplies

     2        161        (1     556   

Rent

     28        31        86        103   

Other operating expenses (income)

     (924     390        (1,149     2,495   

Depreciation

     —          —          —          —     

Interest expense

     —          1       —          1   

Investment income

     —          (1     —          (27
  

 

 

   

 

 

   

 

 

   

 

 

 
     (971     2,930        (1,457     10,487   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations before income taxes

     1,819        (422     2,482        (531

Provision (benefit) for income taxes

     700        (162     955        (204
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     1,119        (260     1,527        (327

Gain on divestiture of operations, net of income taxes

     —          86        —          3   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 1,119      $ (174   $ 1,527      $ (324
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2011      2010     2011     2010  

Revenues:

         

Hospital division

   $ 846       $ (196   $ 822      $ (89

Nursing center division

     2         2,704        203        10,045   
  

 

 

    

 

 

   

 

 

   

 

 

 
   $ 848       $ 2,508      $ 1,025      $ 9,956   
  

 

 

    

 

 

   

 

 

   

 

 

 

Operating income (loss):

         

Hospital division

   $ 633       $ (348   $ (65   $ (1,185

Nursing center division

     1,214         (43     2,633        731   
  

 

 

    

 

 

   

 

 

   

 

 

 
   $ 1,847       $ (391   $ 2,568      $ (454
  

 

 

    

 

 

   

 

 

   

 

 

 

Rent:

         

Hospital division

   $ 28       $ 29      $ 86      $ 93   

Nursing center division

     —           2        —          10   
  

 

 

    

 

 

   

 

 

   

 

 

 
   $ 28       $ 31      $ 86      $ 103   
  

 

 

    

 

 

   

 

 

   

 

 

 

 

15


Table of Contents

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, including certain assets included in continuing operations, follows (in thousands):

 

     September 30,
2011
    December 31,
2010
 

Long-term assets:

    

Property and equipment, net

   $ 7,086      $ 7,062   

Other

     8        105   
  

 

 

   

 

 

 
     7,094        7,167   

Current liabilities (included in other accrued liabilities)

     (127     (72
  

 

 

   

 

 

 
   $ 6,967      $ 7,095   
  

 

 

   

 

 

 

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,
 
     2011     2010     2011     2010  

Medicare

   $ 629,279      $ 438,931      $ 1,761,847      $ 1,382,368   

Medicaid

     269,804        265,143        791,933        794,967   

Medicare Advantage

     111,322        82,116        304,777        255,939   

Other

     583,406        343,165        1,378,835        1,020,285   
  

 

 

   

 

 

   

 

 

   

 

 

 
     1,593,811        1,129,355        4,237,392        3,453,559   

Eliminations

     (79,749     (76,343     (238,317     (229,346
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 1,514,062      $ 1,053,012      $ 3,999,075      $ 3,224,213   
  

 

 

   

 

 

   

 

 

   

 

 

 

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.

 

16


Table of Contents

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,  
    2011     2010     2011     2010  
    Basic     Diluted     Basic     Diluted     Basic     Diluted     Basic     Diluted  

Earnings:

               

Amounts attributable to Kindred stockholders:

               

Income from continuing operations:

               

As reported in Statement of Operations

  $ 666      $ 666      $ 5,100      $ 5,100      $ 16,823      $ 16,823      $ 36,391      $ 36,391   

Allocation to participating unvested restricted stockholders

    (10     (10     (91     (91     (287     (284     (664     (662
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Available to common stockholders

  $ 656      $ 656      $ 5,009      $ 5,009      $ 16,536      $ 16,539      $ 35,727      $ 35,729   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Discontinued operations, net of income taxes:

               

Income (loss) from operations:

               

As reported in Statement of Operations

  $ 1,119      $ 1,119      $ (260   $ (260   $ 1,527      $ 1,527      $ (327   $ (327

Allocation to participating unvested restricted stockholders

    (17     (17     5        5        (26     (26     6        6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Available to common stockholders

  $ 1,102      $ 1,102      $ (255   $ (255   $ 1,501      $ 1,501      $ (321   $ (321
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gain on divestiture of operations:

               

As reported in Statement of Operations

  $ —        $ —        $ 86      $ 86      $ —        $ —        $ 3      $ 3   

Allocation to participating unvested restricted stockholders

    —          —          (2     (2     —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Available to common stockholders

  $ —        $ —        $ 84      $ 84      $ —        $ —        $ 3      $ 3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income:

               

As reported in Statement of Operations

  $ 1,785      $ 1,785      $ 4,926      $ 4,926      $ 18,350      $ 18,350      $ 36,067      $ 36,067   

Allocation to participating unvested restricted stockholders

    (27     (27     (88     (88     (313     (310     (658     (656
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Available to common stockholders

  $ 1,758      $ 1,758      $ 4,838      $ 4,838      $ 18,037      $ 18,040      $ 35,409      $ 35,411   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in the computation:

               

Weighted average shares outstanding—basic computation

    51,329        51,329        38,778        38,778        44,577        44,577        38,720        38,720   
 

 

 

     

 

 

     

 

 

     

 

 

   

Dilutive effect of employee stock options

      77         60          357          135   
   

 

 

     

 

 

     

 

 

     

 

 

 

Adjusted weighted average shares outstanding—diluted computation

      51,406          38,838          44,934          38,855   
   

 

 

     

 

 

     

 

 

     

 

 

 

Earnings per common share:

               

Income from continuing operations

  $ 0.01      $ 0.01      $ 0.13      $ 0.13      $ 0.37      $ 0.37      $ 0.92      $ 0.92   

Discontinued operations:

               

Income (loss) from operations

    0.02        0.02        (0.01     (0.01     0.03        0.03        (0.01     (0.01

Gain on divestiture of operations

    —          —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 0.03      $ 0.03      $ 0.12      $ 0.12      $ 0.40      $ 0.40      $ 0.91      $ 0.91   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

      2,769          2,959          1,226          2,496   

 

17


Table of Contents

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 8—BUSINESS SEGMENT DATA

At September 30, 2011, the Company operated three divisions consisting of hospitals, nursing centers and rehabilitation services. Based upon the authoritative guidance for business segments and after giving consideration to the Company’s business segments after the Merger, the divisions represent four reportable operating segments, which consist of (i) LTAC hospitals, (ii) skilled nursing and rehabilitation centers, (iii) skilled nursing-based rehabilitation contract therapy services, and (iv) hospital-based rehabilitation contract therapy services. The Company includes operating data for its home health and hospice businesses in the skilled nursing-based rehabilitation contract therapy services segment. These 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 segments are the same as those described in the summary of significant accounting policies. Prior period segment information has been conformed to 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 business segments excludes the allocation of corporate overhead.

Operating income for the three and nine months ended September 30, 2011 included impairment charges approximating $3.1 million for the hospital division and $23.6 million for the nursing center division.

Operating income for the nine months ended September 30, 2010 included severance and retirement costs approximating $1.1 million for the hospital division, $0.5 million for the nursing center division and $1.3 million for corporate.

Transaction costs for the three and nine months ended September 30, 2010 have been reclassified to conform with the current period presentation and are excluded from business segment operating income (loss).

 

18


Table of Contents

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,
 
     2011     2010     2011     2010  

Revenues:

        

Hospital division

   $ 684,781      $ 465,198      $ 1,837,180      $ 1,465,661   

Nursing center division

     571,226        539,914        1,706,897        1,621,450   

Rehabilitation division:

        

Skilled nursing rehabilitation services

     267,993        103,807        562,723        303,952   

Hospital rehabilitation services

     69,811        20,436        130,592        62,496   
  

 

 

   

 

 

   

 

 

   

 

 

 
     337,804        124,243        693,315        366,448   
  

 

 

   

 

 

   

 

 

   

 

 

 
     1,593,811        1,129,355        4,237,392        3,453,559   

Eliminations:

        

Skilled nursing rehabilitation services

     (59,221     (56,841     (175,858     (169,584

Hospital rehabilitation services

     (20,528     (19,502     (62,459     (59,762
  

 

 

   

 

 

   

 

 

   

 

 

 
     (79,749     (76,343     (238,317     (229,346
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 1,514,062      $ 1,053,012      $ 3,999,075      $ 3,224,213   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations:

        

Operating income (loss):

        

Hospital division

   $ 122,599      $ 75,784      $ 339,449      $ 263,014   

Nursing center division

     65,982        69,363        246,864        216,506   

Rehabilitation division:

        

Skilled nursing rehabilitation services

     28,682        9,486        53,362        28,330   

Hospital rehabilitation services

     15,606        4,728        28,971        14,667   
  

 

 

   

 

 

   

 

 

   

 

 

 
     44,288        14,214        82,333        42,997   

Corporate:

        

Overhead

     (48,806     (34,329     (130,922     (100,959

Insurance subsidiary

     (750     (783     (1,772     (2,054
  

 

 

   

 

 

   

 

 

   

 

 

 
     (49,556     (35,112     (132,694     (103,013

Transaction costs

     (6,537     (771     (45,567     (2,496
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     176,776        123,478        490,385        417,008   

Rent

     (105,511     (89,295     (292,641     (266,595

Depreciation and amortization

     (46,947     (29,167     (117,367     (90,140

Interest, net

     (25,753     (1,239     (53,886     (3,344
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

     (1,435     3,777        26,491        56,929   

Provision (benefit) for income taxes

     (2,342     (1,323     9,848        20,538   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 907      $ 5,100      $ 16,643      $ 36,391   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

19


Table of Contents

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,
 
     2011      2010      2011      2010  

Rent:

           

Hospital division

   $ 52,737       $ 38,122       $ 137,033       $ 113,580   

Nursing center division

     49,862         49,627         148,808         148,458   

Rehabilitation division:

           

Skilled nursing rehabilitation services

     2,169         1,474         5,658         4,368   

Hospital rehabilitation services

     95         28         156         79   
  

 

 

    

 

 

    

 

 

    

 

 

 
     2,264         1,502         5,814         4,447   

Corporate

     648         44         986         110   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 105,511       $ 89,295       $ 292,641       $ 266,595   
  

 

 

    

 

 

    

 

 

    

 

 

 

Depreciation and amortization:

           

Hospital division

   $ 21,612       $ 12,655       $ 52,462       $ 38,218   

Nursing center division

     12,655         10,527         37,486         33,825   

Rehabilitation division:

           

Skilled nursing rehabilitation services

     3,023         591         5,121         1,672   

Hospital rehabilitation services

     2,372         77         3,288         207   
  

 

 

    

 

 

    

 

 

    

 

 

 
     5,395         668         8,409         1,879   

Corporate

     7,285         5,317         19,010         16,218   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 46,947       $ 29,167       $ 117,367       $ 90,140   
  

 

 

    

 

 

    

 

 

    

 

 

 

Capital expenditures, excluding acquisitions (including discontinued operations):

           

Hospital division:

           

Routine

   $ 12,919       $ 9,113       $ 36,872       $ 23,132   

Development

     39,964         12,900         54,164         28,883   
  

 

 

    

 

 

    

 

 

    

 

 

 
     52,883         22,013         91,036         52,015   

Nursing center division:

           

Routine

     10,572         11,548         26,727         24,732   

Development

     4,113         7,464         15,140         11,336   
  

 

 

    

 

 

    

 

 

    

 

 

 
     14,685         19,012         41,867         36,068   

Rehabilitation division:

           

Skilled nursing rehabilitation services:

           

Routine

     296         328         768         814   

Development

     75         —           266         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     371         328         1,034         814   

Hospital rehabilitation services:

           

Routine

     81         23         178         85   

Development

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     81         23         178         85   

Corporate:

           

Information systems

     11,516         6,625         29,089         18,624   

Other

     1,211         986         1,629         1,721   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 80,747       $ 48,987       $ 164,833       $ 109,327   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

20


Table of Contents

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 8—BUSINESS SEGMENT DATA (Continued)

 

     September 30,
2011
     December 31,
2010
 

Assets at end of period:

     

Hospital division

   $ 2,151,650       $ 1,100,138   

Nursing center division

     629,734         647,355   

Rehabilitation division:

     

Skilled nursing rehabilitation services

     546,388         87,055   

Hospital rehabilitation services

     319,995         798   
  

 

 

    

 

 

 
     866,383         87,853   

Corporate

     527,810         502,069   
  

 

 

    

 

 

 
   $ 4,175,577       $ 2,337,415   
  

 

 

    

 

 

 

Goodwill:

     

Hospital division

   $ 800,053       $ 213,200   

Nursing center division

     —           6,080   

Rehabilitation division:

     

Skilled nursing rehabilitation services

     185,668         23,140   

Hospital rehabilitation services

     137,978         —     
  

 

 

    

 

 

 
     323,646         23,140   
  

 

 

    

 

 

 
   $ 1,123,699       $ 242,420   
  

 

 

    

 

 

 

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,
 
     2011     2010     2011     2010  

Professional liability:

        

Continuing operations

   $ 15,953      $ 13,123      $ 50,584      $ 45,961   

Discontinued operations

     (897     (934     (1,718     (1,763

Workers compensation:

        

Continuing operations

   $ 15,908      $ 10,049      $ 43,057      $ 31,763   

Discontinued operations

     (120     (103     (640     (1,104

 

21


Table of Contents

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, 2011      December 31, 2010  
     Professional
liability
     Workers
compensation
     Total      Professional
liability
     Workers
compensation
     Total  

Assets:

                 

Current:

                 

Insurance subsidiary investments

   $ 40,403       $ 24,443       $ 64,846       $ 54,162       $ 22,591       $ 76,753   

Reinsurance recoverables

     263         —           263         265         —           265   

Other

     —           319         319         —           319         319   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     40,666         24,762         65,428         54,427         22,910         77,337   

Non-current:

                 

Insurance subsidiary investments

     40,246         64,052         104,298         38,635         62,575         101,210   

Reinsurance and other recoverables

     43,778         63,775         107,553         41,752         3,222         44,974   

Deposits

     3,643         1,623         5,266         3,000         1,313         4,313   

Other

     —           43         43         —           44         44   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     87,667         129,493         217,160         83,387         67,154         150,541   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 128,333       $ 154,255       $ 282,588       $ 137,814       $ 90,064       $ 227,878   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

                 

Allowance for insurance risks:

                 

Current

   $ 41,728       $ 30,063       $ 71,791       $ 41,555       $ 24,676       $ 66,231   

Non-current

     224,903         136,315         361,218         207,669         59,504         267,173   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 266,631       $ 166,378       $ 433,009       $ 249,224       $ 84,180       $ 333,404   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 2011 and 2010 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 $269.5 million at September 30, 2011 and $252.6 million at December 31, 2010.

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 commercial paper 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.

 

22


Table of Contents

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 10—INSURANCE SUBSIDIARY INVESTMENTS (Continued)

 

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

 

    September 30, 2011     December 31, 2010  
    Amortized
cost
    Unrealized
gains
    Unrealized
losses
    Fair
value
    Amortized
cost
    Unrealized
gains
    Unrealized
losses
    Fair
value
 

Cash and cash equivalents (a)

  $ 109,534      $ —        $ —        $ 109,534      $ 104,664      $ —        $ —        $ 104,664   

Debt securities:

               

Corporate bonds

    23,115        192        (55     23,252        32,174        542        (40     32,676   

Debt securities issued by U.S. government agencies

    17,380        128        (6     17,502        17,906        113        (27     17,992   

U.S. Treasury notes

    2,864        12        (2     2,874        2,482        11        —          2,493   

Debt securities issued by foreign governments

    874        10        —          884        2,081        15        —          2,096   

Commercial mortgage-backed securities

    206        11        —          217        307        19        —          326   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    44,439        353        (63     44,729        54,950        700        (67     55,583   

Equities by industry:

               

Healthcare

    1,474        17        (148     1,343        1,572        20        (235     1,357   

Financial services

    1,150        42        (173     1,019        1,284        209        (66     1,427   

Oil and gas

    921        51        (165     807        921        142        (37     1,026   

Other

    7,594        453        (840     7,207        7,594        876        (269     8,201   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    11,139        563        (1,326     10,376        11,371        1,247        (607     12,011   

Commercial paper

    4,505        1        (1     4,505        5,705        2        (2     5,705   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 169,617      $ 917      $ (1,390   $ 169,144      $ 176,690      $ 1,949      $ (676   $ 177,963   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Includes $2.9 million and $2.6 million of money market funds at September 30, 2011 and December 31, 2010, respectively.

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, 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. The Company recognized a $0.7 million pretax other-than-temporary impairment for the nine months ended September 30, 2010 for various investments held in its insurance subsidiary investment portfolio.

As a result of improved professional liability underwriting results of the Company’s limited purpose insurance subsidiary, the Company received distributions of $3 million and $22 million during the nine months ended September 30, 2011 and 2010, respectively, from its limited purpose insurance subsidiary in accordance with applicable regulations. These distributions had no impact on earnings and the proceeds were used primarily to repay borrowings under the Company’s revolving credit facility.

 

23


Table of Contents

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 11—INCOME TAXES

The provision for income taxes for the third quarter and 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. As a result, the Company reduced its unrecognized tax benefits and related accrued interest by $3.5 million. The deferred tax asset associated with unrecognized tax benefits also was reduced by $0.2 million. As of September 30, 2011, the Company’s unrecognized tax benefits totaled $1.1 million and accrued interest related to uncertain tax positions totaled $0.1 million.

The provision for income taxes for the third quarter and nine months ended September 30, 2010 included a favorable adjustment of $2.9 million related to the resolution of certain income tax contingencies from prior years.

The federal statute of limitations remains open for tax years 2008 through 2010. In July 2011, the Company resolved federal income tax audits for the 2007 through 2009 tax years. The Company has been notified by the Internal Revenue Service (the “IRS”) that an examination will be conducted for the 2010 tax year.

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.

During the nine months ended September 30, 2010, the Company received approval from the IRS for an accounting method change for income tax purposes that resulted in a non-recurring reduction in income tax payments of approximately $25 million during 2010. The Company’s earnings were not impacted by this transaction.

NOTE 12—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. In addition, the Company is a party to a tax matters agreement with PharMerica Corporation, which sets forth the Company’s rights and obligations related to taxes for periods before and after the Company’s spin-off of its former institutional pharmacy business in 2007 and the related merger transaction which created PharMerica Corporation.

 

24


Table of Contents

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 12—CONTINGENCIES (Continued)

 

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.

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.

NOTE 13—CAPITAL STOCK

In May 2011, the shareholders of the Company approved an additional 3,000,000 shares of common stock that could be issued under the Company’s incentive compensation plans.

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.

 

25


Table of Contents

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, 2011:

              

Recurring:

              

Assets:

              

Available-for-sale debt securities:

              

Corporate bonds

   $ —         $ 23,252       $ —         $ 23,252       $ —     

Debt securities issued by U.S. government agencies

     —           17,502         —           17,502         —     

U.S. Treasury notes

     2,874         —           —           2,874         —     

Debt securities issued by foreign governments

     —           884         —           884         —     

Commercial mortgage-backed securities

     —           217         —           217         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     2,874         41,855         —           44,729         —     

Available-for-sale equity securities

     10,376         —           —           10,376         —     

Commercial paper

     —           4,505         —           4,505         —     

Money market funds

     6,787         —           —           6,787         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale investments

     20,037         46,360         —           66,397         —     

Deposits held in money market funds

     562         3,645         —           4,207         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 20,599       $ 50,005       $ —         $ 70,604       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

   $ —         $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Non-recurring:

              

Assets:

              

Goodwill—nursing and rehabilitation centers

   $ —         $ —         $ —         $ —         $ (6,080

Property and equipment

     —           —           6,372         6,372         (20,632
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ —         $ —         $ 6,372       $ 6,372       $ (26,712
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

   $ —         $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2010:

              

Recurring:

              

Assets:

              

Available-for-sale debt securities:

              

Corporate bonds

   $ —         $ 32,676       $ —         $ 32,676       $ —     

Debt securities issued by U.S. government agencies

     —           17,992         —           17,992         —     

U.S. Treasury notes

     2,493         —           —           2,493         —     

Debt securities issued by foreign governments

     —           2,096         —           2,096         —     

Commercial mortgage-backed securities

     —           326         —           326         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     2,493         53,090         —           55,583         —     

Available-for-sale equity securities

     12,011         —           —           12,011         —     

Commercial paper

     —           5,705         —           5,705         —     

Money market funds

     2,581         —           —           2,581         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale investments

     17,085         58,795         —           75,880         —     

Deposits held in money market funds

     7,238         3,001         —           10,239         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 24,323       $ 61,796       $ —         $ 86,119       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

   $ —         $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Non-recurring:

              

Assets:

              

Hospitals available for sale

   $ —         $ —         $ 5,605       $ 5,605       $ (1,880
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

   $ —         $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

26


Table of Contents

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 are primarily held by its limited purpose insurance subsidiary and consist of debt securities, equities, commercial paper and money market funds. These available-for-sale investments and the insurance subsidiary’s cash and cash equivalents of $106.6 million as of September 30, 2011 and $102.1 million as of December 31, 2010, 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 $3.9 million related to a deferred compensation plan that is maintained for certain of the Company’s current and former employees.

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 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 commercial paper 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, 2011 or September 30, 2010.

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.

 

     September 30, 2011      December 31, 2010  

(In thousands)

   Carrying
value
     Fair
value
     Carrying
value
     Fair
value
 

Cash and cash equivalents

   $ 34,095       $ 34,095       $ 17,168       $ 17,168   

Cash—restricted

     5,402         5,402         5,494         5,494   

Insurance subsidiary investments

     169,144         169,144         177,963         177,963   

Other marketable securities

     3,882         3,882         —           —     

Tax refund escrow investments

     214         214         213         213   

Long-term debt, including amounts due within one year (excluding capital lease obligations totaling $4.8 million at September 30, 2011)

     1,495,139         1,321,215         365,647         365,640   

Non-recurring measurements

On July 29, 2011, CMS issued the 2011 CMS Rules. As a result of these rules, the Company tested the recoverability of its nursing and rehabilitation centers reporting unit goodwill and intangible assets and property and equipment within asset groups impacted by the reduced payments. The Company determined that pretax impairment charges aggregating $26.7 million were necessary. 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. 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.

 

27


Table of Contents

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 15—CONDENSED CONSOLIDATING FINANCIAL INFORMATION

The accompanying 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 on an unsecured, joint and severally liable basis by substantially all of the Company’s domestic 100% owned subsidiaries. The equity method has been used with respect to the parent company’s (Kindred) investment in subsidiaries.

The following unaudited condensed, consolidating financial data present the composition of the parent company/issuer, the guarantor subsidiaries and the non-guarantor subsidiaries as of September 30, 2011 and December 31, 2010 for the balance sheet, and the results of operations and cash flows for the three and nine months ended September 30, 2011 and September 30, 2010.

 

28


Table of Contents

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 15—CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

 

Condensed Consolidating Statement of Operations

 

     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        311,310        43,116        (22,432     332,017   

Other income

     —          (2,815     —          —          (2,815

Depreciation and amortization

     —          43,865        3,082        —          46,947   

Management fees

     —          (3,469     3,469        —          —     

Intercompany interest (income) expense from affiliates

     (26,379     22,409        3,970        —          —     

Interest expense

     25,454        123        213        —          25,790   

Investment (income) loss

     —          (4,621     4,584        —          (37

Equity in net income of consolidating affiliates

     (1,282     —          —          1,282        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     (2,054     1,423,997        114,704        (21,150     1,515,497   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

     2,054        650        (2,857     (1,282     (1,435

Provision (benefit) for income taxes

     269        (2,621     10        —          (2,342
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     1,785        3,271        (2,867     (1,282     907   

Income from discontinued operations, net of income taxes

     —          1,119        —          —          1,119   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     1,785        4,390        (2,867     (1,282     2,026   

Earnings attributable to noncontrolling interest

     —          —          (241     —          (241
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) attributable to Kindred

   $ 1,785      $ 4,390      $ (3,108   $ (1,282   $ 1,785   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

29


Table of Contents

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 15—CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

 

Condensed Consolidating Statement of Operations (Continued)

 

    Three months ended September 30, 2010  

(In thousands)

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

Revenues

  $ —        $ 1,052,459      $ 19,342      $ (18,789   $ 1,053,012   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Salaries, wages and benefits

    77        613,530        —          —          613,607   

Supplies

    —          83,753        —          —          83,753   

Rent

    —          89,295        —          —          89,295   

Other operating expenses

    600        233,585        19,572        (18,789     234,968   

Other income

    —          (2,794     —          —          (2,794

Depreciation and amortization

    —          29,167        —          —          29,167   

Management fees

    32        (32     —          —          —     

Intercompany interest (income) expense from affiliates

    (7,960     7,960        —          —          —     

Interest expense

    1,606        36        —          —          1,642   

Investment income

    —          (23     (380     —          (403

Equity in net income of consolidating affiliates

    (1,455     —          —          1,455        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    (7,100     1,054,477        19,192        (17,334     1,049,235   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

    7,100        (2,018     150        (1,455     3,777   

Provision (benefit) for income taxes

    2,174        (3,570     73        —          (1,323
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

    4,926        1,552        77        (1,455     5,100   

Discontinued operations, net of income taxes:

         

Loss from operations

    —          (260     —          —          (260

Gain on divestiture of operations

    —          86        —          —          86   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations

    —          (174     —          —          (174
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 4,926      $ 1,378      $ 77      $ (1,455   $ 4,926   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

30


Table of Contents

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 15—CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

 

Condensed Consolidating Statement of Operations (Continued)

 

    Nine months ended September 30, 2011  

(In thousands)

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

Revenues

  $ —        $ 3,879,843      $ 184,025      $ (64,793   $ 3,999,075   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Salaries, wages and benefits

    401        2,290,765        53,232        —          2,344,398   

Supplies

    —          282,713        11,541        —          294,254   

Rent

    3        282,524        10,114        —          292,641   

Other operating expenses

    70        850,080        93,161        (64,793     878,518   

Other income

    —          (8,480     —          —          (8,480

Depreciation and amortization

    —          112,897        4,470        —          117,367   

Management fees

    —          (4,627     4,627        —          —     

Intercompany interest (income) expense from affiliates

    (61,317     56,017        5,300        —          —     

Interest expense

    54,228        144        303        —          54,675   

Investment (income) loss

    —          (6,212     5,423        —          (789

Equity in net income of consolidating affiliates

    (14,225     —          —          14,225        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    (20,840     3,855,821        188,171        (50,568     3,972,584   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

    20,840        24,022        (4,146     (14,225     26,491   

Provision for income taxes

    2,490        7,194        164        —          9,848   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

    18,350        16,828        (4,310     (14,225     16,643   

Income from discontinued operations, net of income taxes

    —          1,527        —          —