UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014

OR

¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     .

Commission file number: 001-14057

 

KINDRED HEALTHCARE, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

61-1323993

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

680 South Fourth Street Louisville, KY

 

40202-2412

(Address of principal executive offices)

 

(Zip Code)

(502) 596-7300

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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

 

Large accelerated filer

 

x

  

Accelerated filer

 

¨

 

 

 

Non-accelerated filer

 

¨

  

Smaller reporting company

 

¨

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class of Common Stock

 

Outstanding at October 31, 2014

Common stock, $0.25 par value

 

64,623,953 shares

 

 

 

 

 

 

1 of 88


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, 2014 and 2013 and for the nine months ended September 30, 2014 and 2013

  

3

 

  

Condensed Consolidated Statement of Comprehensive Loss – for the three months ended September 30, 2014 and 2013 and for the nine months ended September 30, 2014 and 2013

  

4

 

  

Condensed Consolidated Balance Sheet – September 30, 2014 and December 31, 2013

  

5

 

  

Condensed Consolidated Statement of Cash Flows – for the three months ended September 30, 2014 and 2013 and for the nine months ended September 30, 2014 and 2013

  

6

 

  

Notes to Condensed Consolidated Financial Statements

  

7

Item 2.

  

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

  

43

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

  

80

Item 4.

  

Controls and Procedures

  

81

 

PART II. OTHER INFORMATION

  

 

Item 1.

  

Legal Proceedings

  

82

Item 1A.

 

Risk Factors

 

82

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

  

86

Item 6.

  

Exhibits

  

87

 

 

 

2


KINDRED HEALTHCARE, INC.

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)

(In thousands, except per share amounts)

 

 

  

Three months ended
September 30,

 

 

Nine months ended
September 30,

 

 

  

2014

 

  

2013

 

 

2014

 

  

2013

 

Revenues

  

$

1,243,313

  

  

$

1,175,445

  

 

$

3,806,019

  

  

$

3,625,909

  

Salaries, wages and benefits

  

 

756,434

 

  

 

718,227

  

 

 

2,300,567

 

  

 

2,215,711

 

Supplies

  

 

79,394

 

  

 

79,498

  

 

 

242,176

 

  

 

244,247

  

Rent

  

 

80,192

 

  

 

76,762

  

 

 

 241,449

 

  

 

230,605

  

Other operating expenses

  

 

257,225

 

  

 

261,842

  

 

 

768,247

 

  

 

720,498

  

Other (income) expense

  

 

(353

)

  

 

51

 

 

 

 (741

)

  

 

(984

Impairment charges

  

 

 

  

 

441

  

 

 

 −

 

  

 

1,066

  

Depreciation and amortization

  

 

39,023

 

  

 

36,507

  

 

 

 117,802

 

  

 

116,659

  

Interest expense

  

 

22,516

 

  

 

25,624

  

 

 

 128,845

 

  

 

82,857

  

Investment income

  

 

(343

)

  

 

(1,235

 

 

 (2,975

)

  

 

(2,794

 

  

 

1,234,088

 

  

 

1,197,717

  

 

 

 3,795,370

 

  

 

3,607,865

  

Income (loss) from continuing operations before income taxes

  

 

9,225

 

  

 

(22,272

 

 

 10,649

 

  

 

18,044

  

Provision (benefit) for income taxes

  

 

3,079

 

  

 

(6,510

 

 

 3,582

 

  

 

9,203

  

Income (loss) from continuing operations

  

 

6,146

 

  

 

(15,762

 

 

 7,067

 

  

 

8,841

  

Discontinued operations, net of income taxes:

  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

Loss from operations

  

 

(7,601

)

  

 

(25,466

 

 

 (22,255

)

  

 

(31,892

Gain (loss) on divestiture of operations

  

 

1,387

 

  

 

(65,016

 

 

 (3,637

)

  

 

(77,893

Loss from discontinued operations

  

 

(6,214

)

  

 

(90,482

 

 

 (25,892

)

  

 

(109,785

Net loss

  

 

(68

)

  

 

(106,244

 

 

 (18,825

)

  

 

(100,944

(Earnings) loss attributable to noncontrolling interests:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

  

 

(4,372

)

  

 

(841

 

 

 (13,729

)

  

 

(1,424

Discontinued operations

  

 

78

 

  

 

87

 

 

 

 401

 

  

 

172

 

 

  

 

(4,294

)

  

 

(754

 

 

 (13,328

)

  

 

(1,252

Loss attributable to Kindred

  

$

(4,362

)

  

$

(106,998

 

$

 (32,153

)

  

$

(102,196

 Amounts attributable to Kindred stockholders:

  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

Income (loss) from continuing operations

  

$

1,774

 

  

$

(16,603

 

$

 (6,662

)

  

$

7,417

  

Loss from discontinued operations

  

 

(6,136

)

  

 

(90,395

 

 

 (25,491

)

  

 

(109,613

Net loss

  

$

(4,362

  

$

(106,998

 

$

 (32,153

)

  

$

(102,196

 Loss per common share:

  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

Basic:

  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

Income (loss) from continuing operations

  

$

0.03

 

  

$

(0.31

 

$

 (0.12

)

  

$

0.14

  

Discontinued operations:

  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

Loss from operations

  

 

(0.12

)

  

 

(0.49

 

 

 (0.39

)

  

 

(0.59

Gain (loss) on divestiture of operations

  

 

0.02

 

  

 

(1.24

 

 

 (0.06

)

  

 

(1.44

Loss from discontinued operations

  

 

(0.10

)

  

 

(1.73

 

 

 (0.45

)

  

 

(2.03

Net loss

  

$

 (0.07

  

$

(2.04

 

$

 (0.57

)

  

$

(1.89

 Diluted:

  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

Income (loss) from continuing operations

  

$

0.03

 

  

$

(0.31

 

$

 (0.12

)

  

$

0.14

  

Discontinued operations:

  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

Loss from operations

  

 

(0.12

)

  

 

(0.49

 

 

 (0.39

)

  

 

(0.59

Gain (loss) on divestiture of operations

  

 

0.02

 

  

 

(1.24

 

 

 (0.06

)

  

 

(1.44

Loss from discontinued operations

  

 

(0.10

)

  

 

(1.73

 

 

 (0.45

)

  

 

(2.03

Net loss

  

$

 (0.07

  

$

(2.04

 

$

 (0.57

)

  

$

(1.89

Shares used in computing loss per common share:

  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

Basic

  

 

62,863

 

  

 

52,323

  

 

 

 56,443

 

  

 

52,218

  

Diluted

  

 

62,902

 

  

 

52,323

  

 

 

 56,443

 

  

 

52,234

  

 Cash dividends declared and paid per common share

  

$

0.12

  

  

$

0.12

  

 

$

 0.36

  

  

$

0.12

  

 

 

 

See accompanying notes.

 

 

3


KINDRED HEALTHCARE, INC.

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS

(Unaudited)

(In thousands)

 

 

  

Three months ended
September 30,

 

 

Nine months ended
September 30,

 

 

  

2014

 

  

2013

 

 

2014

 

  

2013

 

Net loss

  

$

 (68

  

$

(106,244

 

$

 (18,825

  

$

(100,944

Other comprehensive income (loss):

  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

Available-for-sale securities (Note 8):

  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

Change in unrealized investment gains

  

 

93

 

  

 

416

  

 

 

 577

 

  

 

2,044

  

Reclassification of gains realized in net loss

  

 

 (27

)

  

 

(1,026

 

 

 (2,130

  

 

(2,135

Net change

  

 

 66

 

  

 

(610

 

 

 (1,553

  

 

(91

Interest rate swaps (Note 1):

  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

Change in unrealized gains (losses)

  

 

2,162

 

  

 

(183

 

 

 (884

  

 

1,133

  

Reclassification of ineffectiveness realized in net loss

  

 

 −

 

  

 

(104

 

 

 84

 

  

 

(380

Reclassification of losses realized in net loss, net of payments

  

 

 12

 

  

 

2

  

 

 

 809

 

  

 

 

Net change

  

 

 2,174

 

  

 

(285

 

 

 9

 

  

 

753

  

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

  

 

 (846

  

 

286

  

 

 

 891

 

  

 

(412

Other comprehensive income (loss)

  

 

 1,394

 

  

 

(609

 

 

 (653

  

 

250

  

Comprehensive income (loss)

  

 

 1,326

 

  

 

(106,853

 

 

 (19,478

  

 

(100,694

Earnings attributable to noncontrolling interests

  

 

 (4,294

  

 

(754

 

 

 (13,328

  

 

(1,252

Comprehensive loss attributable to Kindred

  

$

 (2,968

  

$

(107,607

 

$

 (32,806

  

$

(101,946

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

 

4


KINDRED HEALTHCARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited)

(In thousands, except per share amounts)

 

 

  

September 30,

 

  

December 31,

 

 

  

2014

 

  

2013

 

ASSETS

  

 

 

 

  

 

 

 

Current assets:

  

 

 

 

  

 

 

 

Cash and cash equivalents

  

$

81,784

  

  

$

35,972

  

Cash – restricted

  

 

2,390

 

  

 

3,713

  

Insurance subsidiary investments

  

 

95,425

 

  

 

96,295

  

Accounts receivable less allowance for loss of $57,898 – September 30, 2014 and $41,025 – December 31, 2013

  

 

980,723

 

  

 

916,529

  

Inventories

  

 

25,952

 

  

 

25,780

  

Deferred tax assets

  

 

57,577

 

  

 

37,920

  

Income taxes

  

 

35,779

 

  

 

36,846

  

Other

  

 

42,727

 

  

 

43,673

  

 

  

 

1,322,357

 

  

 

1,196,728

  

Property and equipment

  

 

1,962,492

 

  

  

 1,906,366

   

Accumulated depreciation

  

 

(1,056,524

  

 

(979,791

 

  

 

 905,968

 

  

 

926,575

  

Goodwill

  

 

 995,240

 

  

  

 992,102

   

Intangible assets less accumulated amortization of $67,941 – September 30, 2014 and $52,211 – December 31, 2013

  

 

 405,900

 

  

 

423,303

  

Assets held for sale

  

 

 2,222

 

  

 

20,978

  

Insurance subsidiary investments

  

 

 158,394

 

  

 

149,094

  

Deferred tax assets

  

 

 −

 

  

 

17,043

  

Other

  

 

234,707

 

  

 

220,046

  

Total assets

  

$

 4,024,788

  

  

$

3,945,869

  

LIABILITIES AND EQUITY

  

 

 

 

  

 

 

 

Current liabilities:

  

 

 

 

  

 

 

 

Accounts payable

  

$

 158,397

  

  

$

181,772

  

Salaries, wages and other compensation

  

 

 346,957

 

  

 

361,192

  

Due to third party payors

  

 

 47,320

 

  

 

33,747

  

Professional liability risks

  

 

 66,974

 

  

 

60,993

  

Other accrued liabilities

  

 

 138,620

 

  

 

146,495

  

Long-term debt due within one year

  

 

 10,233

 

  

 

8,222

  

 

  

 

 768,501

 

  

 

792,421

  

Long-term debt

  

 

 1,484,436

 

  

  

 1,579,391

   

Professional liability risks

  

 

243,496

 

  

 

246,230

  

Deferred tax liabilities

 

 

7,683

 

 

 

 

Deferred credits and other liabilities

  

 

 217,218

 

  

 

206,611

  

Commitments and contingencies (Note 10)

  

 

 

 

  

 

 

 

Equity:

  

 

 

 

  

 

 

 

Stockholders’ equity:

  

 

 

 

  

 

 

 

Common stock, $0.25 par value; authorized 175,000 shares; issued 64,612 shares – September 30, 2014 and 54,165 shares – December 31, 2013

  

 

 16,153

 

  

 

13,541

  

Capital in excess of par value

  

 

 1,357,134

 

  

 

1,146,193

  

Accumulated other comprehensive loss

  

 

 (905

  

 

(252

Accumulated deficit

  

 

 (112,044

  

 

(76,825

 

  

 

 1,260,338

 

  

 

1,082,657

  

Noncontrolling interests

  

 

 43,116

 

  

 

38,559

  

Total equity

  

 

 1,303,454

 

  

 

1,121,216

  

Total liabilities and equity

  

$

 4,024,788

  

  

$

3,945,869

  

 

See accompanying notes.

 

5


KINDRED HEALTHCARE, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

  

Three months ended
September 30,

 

 

Nine months ended
September 30,

 

 

  

2014

 

  

2013

 

 

2014

 

  

2013

 

Cash flows from operating activities:

  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

Net loss

  

$

 (68

  

$

(106,244

 

$

 (18,825

  

$

(100,944

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

  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

Depreciation and amortization

  

 

39,579

 

  

 

42,831

  

 

 

 121,805

 

  

 

142,745

  

Amortization of stock-based compensation costs

  

 

694

 

  

 

1,553

  

 

 

 9,657

 

  

 

7,641

  

Amortization of deferred financing costs

  

 

 1,982

 

  

 

2,509

  

 

 

 21,211

 

  

 

9,529

  

Payment of capitalized lender fees related to debt issuance

  

 

 −

 

  

 

(4,589

 

 

 (19,125

)

  

 

(6,189

Provision for doubtful accounts

  

 

14,695

 

  

 

13,152

  

 

 

 35,588

 

  

 

34,489

  

Deferred income taxes

  

 

 (32,777

  

 

2,336

 

 

 

 (11,274

  

 

(22,985

Impairment charges

  

 

 9

 

  

 

8,995

  

 

 

673

 

  

 

10,077

  

Gain (loss) on divestiture of discontinued operations

  

 

 (1,387

  

 

65,016

  

 

 

 3,637

 

  

 

77,893

  

Other

  

 

 175

 

  

 

6,316

 

 

 

 2,289

 

  

 

5,452

 

Change in operating assets and liabilities:

  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

Accounts receivable

  

 

 10,392

 

  

 

45,862

  

 

 

 (102,503

  

 

26,745

 

Inventories and other assets

  

 

 (2,899

  

 

3,467

  

 

 

 (12,886

  

 

67

 

Accounts payable

  

 

 (3,592

  

 

(12,901

 

 

 (22,469

  

 

(31,979

Income taxes

  

 

 29,832

 

  

 

(27,969

 

 

 18,769

 

  

 

(5,269

Due to third party payors

  

 

 28,907

 

  

 

25,931

 

 

 

 14,540

 

  

 

16,716

 

Other accrued liabilities

  

 

 4,497

 

  

 

44,485

 

 

 

 (16,765

  

 

25,229

 

Net cash provided by operating activities

  

 

 90,039

 

  

 

110,750

  

 

 

 24,322

 

  

 

189,217

  

Cash flows from investing activities:

  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

Routine capital expenditures

  

 

 (21,263

  

 

(23,152

 

 

 (67,425

  

 

(62,952

Development capital expenditures

  

 

 (1,570

  

 

(3,235

 

 

 (2,693

  

 

(10,709

Acquisitions, net of cash acquired

  

 

 (38

  

 

(12,173

 

 

 (24,136

  

 

(39,106

Acquisition deposit

 

 

 

 

 

(14,675

)

 

 

 

 

 

(14,675

)

Sale of assets

  

 

8,948

 

  

 

236,397

  

 

 

 22,909

 

  

 

248,700

  

Purchase of insurance subsidiary investments

  

 

 (74,101

  

 

(7,765

 

 

 (97,394

  

 

(30,360

Sale of insurance subsidiary investments

  

 

 8,447

 

  

 

9,899

  

 

 

 34,967

 

  

 

35,427

  

Net change in insurance subsidiary cash and cash equivalents

  

 

 65,928

 

  

 

(1,416

)

 

 

 54,372

 

  

 

(44,294

Change in other investments

  

 

 317

 

  

 

(140

 

 

 1,027

 

  

 

218

  

Other

  

 

 (3

  

 

79

 

 

  

 (537

  

 

(142

Net cash provided by (used in) investing activities

  

 

 (13,335

  

 

183,819

 

 

 

 (78,910

  

 

82,107

 

Cash flows from financing activities:

  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

Proceeds from borrowings under revolving credit

  

 

 311,500

 

  

 

238,900

  

 

 

 1,468,515

 

  

 

1,100,300

  

Repayment of borrowings under revolving credit

  

 

 (355,100

  

 

(519,200

)

 

 

 (1,724,615

  

 

(1,363,600

Proceeds from issuance of senior unsecured notes

  

 

 –

 

  

 

  

 

 

500,000

 

  

 

  

Proceeds from issuance of term loan, net of discount

  

 

 –

 

  

 

  

 

 

997,500

 

  

 

  

Repayment of senior unsecured notes

  

 

 –

 

  

 

  

 

 

(550,000

  

 

  

Repayment of term loan

  

 

 (2,500

  

 

 

 

 

(786,063

  

 

(3,969

Repayment of other long-term debt

  

 

 (58

  

 

(92

)

 

 

(215

  

 

(849

Payment of deferred financing costs

  

 

 (504

  

 

(683

)

 

 

(3,152

  

 

(1,340

Equity offering, net of offering costs

  

 

 16,376

 

  

 

  

 

 

220,353

 

  

 

  

Issuance of common stock in connection with employee benefit plans

  

 

 1,530

 

  

 

222

  

 

 

6,217

 

  

 

429

  

Dividends paid

  

 

 (7,754

  

 

(6,499

)

 

 

 (20,840

  

 

(6,499

Distributions to noncontrolling interests

  

 

 (4,009

  

 

(118

 

 

(9,604

  

 

(1,628

Other

  

 

 183

 

  

 

53

  

 

 

 2,304

 

  

 

404

  

Net cash provided by (used in) financing activities

  

 

 (40,336

  

 

(287,417

 

 

 100,400

 

  

 

(276,752

Change in cash and cash equivalents

  

 

 36,368

 

  

 

7,152

 

 

 

 45,812

 

  

 

(5,428

Cash and cash equivalents at beginning of period

  

 

 45,416

 

  

 

37,427

  

 

 

 35,972

 

  

 

50,007

  

Cash and cash equivalents at end of period

  

$

 81,784

  

  

$

44,579

  

 

$

 81,784

  

  

$

44,579

  

Supplemental information:

  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

Interest payments

  

$

 12,222

  

  

$

7,899

  

 

$

 91,888

  

  

$

63,744

  

Income tax payments (refunds)

  

 

 909

 

  

 

2,886

  

 

 

 (20,656

)

  

 

16,716

  

 

See accompanying notes.

 

6


 

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 – BASIS OF PRESENTATION

Business

Kindred Healthcare, Inc. is a healthcare services company that through its subsidiaries operates transitional care (“TC”) hospitals, inpatient rehabilitation hospitals (“IRFs”), nursing centers, assisted living facilities, a contract rehabilitation services business and a home health and hospice business across the United States (collectively, the “Company” or “Kindred”). At September 30, 2014, the Company’s hospital division operated 97 TC hospitals (certified as long-term acute care (“LTAC”) hospitals under the Medicare program) and five IRFs in 22 states. The Company’s nursing center division operated 99 nursing centers and six assisted living facilities in 21 states. The Company’s rehabilitation division provided rehabilitation services primarily in hospitals and long-term care settings. The Company’s care management division (formerly known as the Company’s home health and hospice division) primarily provided home health, hospice and private duty services from 152 locations in 13 states.

The Company has completed several transactions related to the divestiture or planned divestiture of unprofitable hospitals and nursing centers to improve its future operating results. For accounting purposes, the operating results of these businesses and the gains, losses or impairments associated with these transactions have been classified as discontinued operations in the accompanying unaudited condensed consolidated statement of operations for all periods presented. Assets held for sale at September 30, 2014 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 2 for a summary of discontinued operations.

Recently issued accounting requirements

In June 2014, the Financial Accounting Standards Board (the “FASB”) issued authoritative guidance which changes the requirements for accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. This guidance is effective for annual and interim periods beginning on or after December 15, 2015. The adoption of this standard is not expected to have a material impact on the Company’s business, financial position, net income or liquidity.

In May 2014, the FASB issued authoritative guidance which changes the requirements for recognizing revenue when entities enter into contracts with customers. Under the new provisions, an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. It also requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. This guidance is effective for annual and interim periods beginning on or after December 15, 2016 and early adoption is not permitted. The Company is still assessing this guidance.

In April 2014, the FASB issued authoritative guidance which changes the requirements for reporting discontinued operations. A disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when any of the following occurs: (1) the component or group of components meets the criteria to be classified as held for sale, (2) the component or group of components is disposed of by sale, or (3) the component or group of components is disposed of other than by sale (for example, abandonment). The entity shall present separately, for each comparative period, the assets and liabilities of the discontinued operation in the statement of financial position. In addition to the required disclosures for discontinued operations, entities also will be required to provide disclosures about a disposal of an individually significant component of an entity that does not qualify for discontinued operations presentation in the financial statements. The guidance also states an entity shall expand disclosures about significant continuing involvement with a discontinued operation, until the results of operations of the discontinued operation are no longer presented in the statement of operations. The guidance is applicable prospectively for all disposals that occur within annual periods beginning on or after December 15, 2014 and early adoption is permitted. The adoption of the guidance is not expected to have a material impact on the Company’s business, financial position, net income or liquidity but may have a material impact on the Company’s income from continuing operations if planned or completed disposals of components of the Company’s business do not qualify for discontinued operations under the new guidance.

 

7


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 1 – BASIS OF PRESENTATION (Continued)

Equity

The following table sets forth the changes in equity attributable to noncontrolling interests and equity attributable to Kindred stockholders for the nine months ended September 30, 2014 and 2013 (in thousands):

 

For the nine months ended September 30, 2014:

  

Amounts
attributable to
Kindred
stockholders

 

 



Noncontrolling
interests

 

 



Total
equity

 

Balance at December 31, 2013

  

$

1,082,657

  

 

$

38,559

  

 

$

1,121,216

  

Comprehensive income (loss):

  

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

  

 

(32,153

 

 

13,328

  

 

 

(18,825

Other comprehensive loss

  

 

(653

 

 

  

 

 

(653

 

  

 

(32,806

 

 

13,328

  

 

 

(19,478

Issuance of common stock in connection with employee benefit plans

  

 

6,217

  

 

 

  

 

 

6,217

  

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

  

 

(6,129

)

 

 

  

 

 

(6,129

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

  

 

1,229

  

 

 

  

 

 

1,229

  

Stock-based compensation amortization

  

 

9,657

  

 

 

  

 

 

9,657

  

Equity offering, net of offering costs

  

 

220,353

  

 

 

 

 

 

220,353

 

Dividends paid

  

 

(20,840

)

 

 

  

 

 

(20,840

Contribution made by noncontrolling interests

  

 

  

 

 

833

  

 

 

833

  

Distributions to noncontrolling interests

  

 

  

 

 

(9,604

)

 

 

(9,604

Balance at September 30, 2014

  

$

1,260,338

  

 

$

43,116

  

 

$

1,303,454

  

 

For the nine months ended September 30, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2012

  

$

1,256,159

  

 

$

36,685

  

 

$

1,292,844

  

Comprehensive income (loss):

  

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

  

 

(102,196

 

 

1,252

  

 

 

(100,944

Other comprehensive income

  

 

250

  

 

 

  

 

 

250

  

 

  

 

(101,946

 

 

1,252

  

 

 

(100,694

Issuance of common stock in connection with employee benefit plans

  

 

429

  

 

 

  

 

 

429

  

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

  

 

(2,987

)

 

 

  

 

 

(2,987

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

  

 

(1,646

)

 

 

  

 

 

(1,646

Stock-based compensation amortization

  

 

7,641

  

 

 

  

 

 

7,641

  

Distributions to noncontrolling interests

  

 

  

 

 

(1,628

)

 

 

(1,628

Purchase of noncontrolling interests

  

 

  

 

 

268

 

 

 

268

 

Dividends paid

  

 

(6,499

 

 

 

 

 

(6,499

Balance at September 30, 2013

  

$

1,151,151

  

 

$

36,577

  

 

$

1,187,728

  

On July 1, 2013, the Company entered into an agreement to manage seven nursing centers under an inter-governmental payment program partnership with county-owned hospitals in the state of Indiana. The Company began managing another eight nursing centers on January 1, 2014. The 15 nursing centers were consolidated by the Company for all periods presented and the income attributable to noncontrolling interest related to this program was $4.7 million in the third quarter of 2014 and $12.7 million for the nine months ended September 30, 2014. These nursing centers were wholly owned subsidiaries of the Company prior to entering into the new payment program.


8


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 1 – BASIS OF PRESENTATION (Continued)

Derivative financial instruments

In December 2011, the Company entered into two interest rate swap agreements to hedge its floating interest rate on an aggregate of $225 million of debt outstanding under its senior secured term loan facility entered into in June 2011 (the “Prior Term Loan Facility”). The interest rate swaps had an effective date of January 9, 2012, and will expire on January 11, 2016 and continue to apply to the Amended Term Loan Facility (as defined). The Company is required to make payments based upon a fixed interest rate of 1.8925% calculated on the notional amount of $225 million. In exchange, the Company will receive interest on $225 million at a variable interest rate that is based upon the three-month London Interbank Offered Rate (“LIBOR”), subject to a minimum rate of 1.5%. The Company determined these interest rate swaps qualify for cash flow hedge accounting treatment at September 30, 2014. However, an amendment to the Prior Term Loan Facility completed in May 2013 reduced the LIBOR floor from 1.5% to 1.0%, therefore some partial ineffectiveness will result through the expiration of the interest rate swap agreement.

In March 2014, the Company entered into an additional interest rate swap agreement to hedge its floating interest rate on an aggregate of $400 million of debt outstanding under the Amended Term Loan Facility (as defined). On April 8, 2014, the Company completed a novation of a portion of its $400 million swap agreement to two new counterparties, each in the amount of $125 million. The original swap contract was not amended, terminated or otherwise modified. The interest rate swap had an effective date of April 9, 2014 and will expire on April 9, 2018. The Company is required to make payments based upon a fixed interest rate of 1.867% calculated on the notional amount of $400 million. In exchange, the Company will receive interest on $400 million at a variable interest rate that is based upon the three-month LIBOR, subject to a minimum rate of 1.0%. The Company determined these interest rate swaps qualify for cash flow hedge accounting treatment at September 30, 2014.

The Company records the effective portion of the gain or loss on these derivative financial instruments in accumulated other comprehensive income (loss) as a component of stockholders equity and records the ineffective portion of the gain or loss on these derivative financial instruments as interest expense. For the three months and nine months ended September 30, 2014, the ineffectiveness related to the interest rate swaps was immaterial.

The aggregate fair value of the interest rate swaps recorded in other accrued liabilities was $2.3 million and $1.4 million at September 30, 2014 and December 31, 2013, respectively. See Note 9.

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, 2013 filed with the Securities and Exchange Commission (the “SEC”) on Form 10-K. The accompanying condensed consolidated balance sheet at December 31, 2013 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 statement 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.

 


9


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 2 – DISCONTINUED OPERATIONS

In accordance with the authoritative guidance for the impairment or disposal of long-lived assets, the divestitures or planned divestiture of unprofitable businesses discussed in Note 1 has been accounted for as discontinued operations. Accordingly, the results of operations of these businesses for all periods presented and the gains, losses or impairments associated with these transactions have been classified as discontinued operations, net of income taxes, in the accompanying unaudited condensed consolidated statement of operations. At September 30, 2014, the Company held for sale one hospital and four nursing centers reported as discontinued operations.

In April 2014, the Company acquired for resale the real estate of a previously leased nursing center for $1.2 million.

During the nine months ended September 30, 2014, the Company reclassified as discontinued for all periods presented the operations of three TC hospitals and two nursing centers that were either closed or divested through a planned sale of such facility or the expiration of a lease. The Company recorded a loss on divestiture of $2.9 million ($1.7 million net of income taxes) for the nine months ended September 30, 2014 related to these divestitures.

The Company allowed the lease to expire on a TC hospital during the nine months ended September 30, 2014 resulting in a loss on divestiture primarily related to a write-off of an indefinite-lived intangible asset of $3.4 million ($2.1 million net of income taxes) for the nine months ended September 30, 2014. The Company reflected the operating results of this TC hospital as discontinued operations in the accompanying unaudited condensed consolidated statement of operations for all historical periods.

On September 30, 2013, the Company entered into agreements with Ventas, Inc. (“Ventas”) to exit 60 nursing centers (collectively, the “2013 Expiring Facilities”). The lease term for the 2013 Expiring Facilities was initially scheduled to expire in April 2015. Under the terms of the agreements, the lease term for the 2013 Expiring Facilities was scheduled to expire on September 30, 2014 unless the Company and Ventas were able to transfer the operations earlier; provided, however, that the Company is obligated to continue to operate any 2013 Expiring Facility not transferred by September 30, 2014 for a limited amount of time and under certain reduced rent obligations provided for in the agreements. Through September 30, 2014, the Company has transferred the operations of 55 of the 2013 Expiring Facilities to new operators. Another facility was closed and its operating license and equipment were sold during the nine months ended September 30, 2014. Proceeds from the sale of equipment and inventory for the 2013 Expiring Facilities totaled $2.6 million and $14.1 million for the three months and nine months ended September 30, 2014, respectively. For accounting purposes, the 2013 Expiring Facilities qualified as assets held for sale at September 30, 2013 and the Company reflected the operating results as discontinued operations in the accompanying unaudited condensed consolidated statement of operations for all historical periods.

During the third quarter of 2013, the Company completed the sale of 16 non-strategic facilities (the “Vibra Facilities”) for

$187 million to an affiliate of Vibra Healthcare, LLC (“Vibra”). The net proceeds of $180 million from this transaction were used to reduce the Company’s borrowings under its prior $750 million senior secured asset-based revolving credit facility.

The Vibra Facilities consist of 14 TC hospitals containing 1,002 licensed beds, one IRF containing 44 licensed beds and one nursing center containing 135 licensed beds. Six of the TC hospitals and the one nursing center were owned facilities. The remaining Vibra Facilities were leased.

The Company recorded a loss on divestiture of $76 million ($63 million net of income taxes) and $94 million ($74 million net of income taxes) during the third quarter of 2013 and for the nine months ended September 30, 2013, respectively, related to the Vibra Facilities. The loss on divestiture included a $68.7 million write-off of goodwill, which was allocated based upon the relative fair value of the Vibra Facilities, and a $21.0 million write-off of intangible assets.

During the third quarter of 2013, the Company completed the sale of seven non-strategic nursing centers (the “Signature Facilities”) for $47 million to affiliates of Signature Healthcare, LLC (“Signature”). The proceeds from this transaction were used to reduce the Company’s borrowings under its prior $750 million senior secured asset-based revolving credit facility.

The Signature Facilities contain 900 licensed beds. Five of the Signature Facilities were owned facilities and the remaining Signature Facilities were leased.

10


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 2 – DISCONTINUED OPERATIONS (Continued)

The Company recorded a loss on divestiture of $2 million ($1 million net of income taxes) during the third quarter of 2013 related to the Signature Facilities.

The results of operations and losses on divestiture of operations, net of income taxes, for the Signature Facilities and the Vibra Facilities were reclassified to discontinued operations in the third quarter of 2013.

A summary of discontinued operations follows (in thousands):

 

 

  

Three months ended
September 30,

 

  

Nine months ended
September 30,

 

 

  

2014

 

  

2013

 

  

2014

 

 

2013

 

Revenues

  

$

 9,518

  

  

$

 197,514

  

  

$

231,566

  

 

$

822,696

  

Salaries, wages and benefits

  

 

 8,542

 

  

 

 96,375

 

  

 

123,088

  

 

 

405,426

  

Supplies

  

 

 579

 

  

 

 14,712

 

  

 

13,718

  

 

 

57,259

  

Rent

  

 

 3,164

 

  

 

 39,404

 

  

 

31,980

  

 

 

96,601

  

Other operating expenses

  

 

 9,206

 

  

 

 74,066

 

  

 

94,893

  

 

 

280,659

  

Other (income) expense

  

 

 −

 

  

 

 (10

)

  

 

363

  

 

 

145

  

Impairment charges

  

 

 9

 

  

 

 8,554

 

  

 

673

  

 

 

9,011

  

Depreciation

  

 

 556

 

  

 

 6,324

 

  

 

4,003

  

 

 

26,086

  

Interest expense

  

 

 1

 

  

 

 11

 

  

 

16

  

 

 

41

  

Investment income

  

 

 (6

)

  

 

 (2

)

  

 

(474

)

 

 

(33

 

  

 

 22,051

 

  

 

 239,434

 

  

 

268,260

  

 

 

875,195

  

Loss from operations before income taxes

  

 

 (12,533

)

  

 

 (41,920

)

  

 

(36,694

 

 

(52,499

Income tax benefit

  

 

 (4,932

)

  

 

(16,454

)

  

 

(14,439

 

 

(20,607

Loss from operations

  

 

 (7,601

)

  

 

 (25,466

)

  

 

(22,255

 

 

(31,892

Gain (loss) on divestiture of operations

  

 

1,387

 

  

 

(65,016

)

  

 

(3,637

 

 

(77,893

Loss from discontinued operations

  

 

 (6,214

)

  

 

 (90,482

)

  

 

(25,892

 

 

(109,785

Loss attributable to noncontrolling interests

  

 

78

 

  

 

87

 

  

 

401

 

 

 

172

 

Loss from discontinued operations

  

$

 (6,136

)

  

$

 (90,395

  

$

(25,491

 

$

(109,613

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

 

 

  

Three months ended
September 30,

 

  

Nine months ended
September 30,

 

 

  

2014

 

  

2013

 

  

2014

 

 

2013

 

Revenues:

  

 

 

 

  

 

 

 

  

 

 

 

 

 

 

 

Hospital division

  

$

242

  

  

$

 57,349

  

  

$

25,936

  

 

$

232,344

  

Nursing center division

  

 

 9,276

 

  

 

 140,165

 

  

 

205,630

  

 

 

590,352

  

 

  

$

 9,518

  

  

$

 197,514

  

  

$

231,566

  

 

$

822,696

  

Operating income (loss):

  

 

 

 

  

 

 

 

  

 

 

 

 

 

 

 

Hospital division

  

$

 (3,399