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 March 31, 2015

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 April 30, 2015

Common stock, $0.25 par value

  

     83,454,332 shares

 

 

 

 

1 of 77


 

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 March 31, 2015 and 2014

3

 

Condensed Consolidated Statement of Comprehensive Income – for the three months ended March 31, 2015 and 2014

4

 

Condensed Consolidated Balance Sheet – March 31, 2015 and December 31, 2014

5

 

Condensed Consolidated Statement of Cash Flows – for the three months ended March 31, 2015 and 2014

6

 

Notes to Condensed Consolidated Financial Statements

7

Item 2.

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

40

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

71

Item 4.

Controls and Procedures

72

 

PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

73

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

74

Item 6.

Exhibits

75

 

 

 

2


 

KINDRED HEALTHCARE, INC.

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)

(In thousands, except per share amounts)

 

Three months ended

 

 

March 31,

 

 

2015

 

 

2014

 

 

 

 

 

 

 

 

 

Revenues

$

1,675,967

 

 

$

1,272,610

 

Salaries, wages and benefits

 

847,093

 

 

 

618,694

 

Supplies

 

93,271

 

 

 

72,965

 

Rent

 

92,140

 

 

 

78,530

 

Other operating expenses

 

197,727

 

 

 

169,530

 

General and administrative expenses (exclusive of depreciation and amortization expense included below)

 

406,102

 

 

 

231,272

 

Other income

 

(480

)

 

 

(212

)

Litigation contingency expense

 

95,000

 

 

 

 

Impairment charges

 

6,726

 

 

 

 

Depreciation and amortization

 

38,935

 

 

 

39,092

 

Interest expense

 

62,518

 

 

 

25,799

 

Investment income

 

(741

)

 

 

(182

)

 

 

1,838,291

 

 

 

1,235,488

 

Income (loss) from continuing operations before income taxes

 

(162,324

)

 

 

37,122

 

Provision (benefit) for income taxes

 

(27,736

)

 

 

14,195

 

Income (loss) from continuing operations

 

(134,588

)

 

 

22,927

 

Discontinued operations, net of income taxes:

 

 

 

 

 

 

 

Loss from operations

 

(3,424

)

 

 

(7,442

)

Loss on divestiture of operations

 

 

 

 

(3,006

)

Loss from discontinued operations

 

(3,424

)

 

 

(10,448

)

Net income (loss)

 

(138,012

)

 

 

12,479

 

(Earnings) loss attributable to noncontrolling interests:

 

 

 

 

 

 

 

Continuing operations

 

(8,847

)

 

 

(4,529

)

Discontinued operations

 

29

 

 

 

70

 

 

 

(8,818

)

 

 

(4,459

)

Income (loss) attributable to Kindred

$

(146,830

)

 

$

8,020

 

Amounts attributable to Kindred stockholders:

 

 

 

 

 

 

 

Income (loss) from continuing operations

$

(143,435

)

 

$

18,398

 

Loss from discontinued operations

 

(3,395

)

 

 

(10,378

)

Net income (loss)

$

(146,830

)

 

$

8,020

 

Earnings (loss) per common share:

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

Income (loss) from continuing operations

$

(1.80

)

 

$

0.34

 

Discontinued operations:

 

 

 

 

 

 

 

Loss from operations

 

(0.04

)

 

 

(0.13

)

Loss on divestiture of operations

 

 

 

 

(0.06

)

Loss from discontinued operations

 

(0.04

)

 

 

(0.19

)

Net income (loss)

$

(1.84

)

 

$

0.15

 

Diluted:

 

 

 

 

 

 

 

Income (loss) from continuing operations

$

(1.80

)

 

$

0.34

 

Discontinued operations:

 

 

 

 

 

 

 

Loss from operations

 

(0.04

)

 

 

(0.13

)

Loss on divestiture of operations

 

 

 

 

(0.06

)

Loss from discontinued operations

 

(0.04

)

 

 

(0.19

)

Net income (loss)

$

(1.84

)

 

$

0.15

 

Shares used in computing earnings (loss) per common share:

 

 

 

 

 

 

 

Basic

 

79,575

 

 

 

52,641

 

Diluted

 

79,575

 

 

 

52,711

 

Cash dividends declared and paid per common share

$

0.12

 

 

$

0.12

 

 

 

 

 

 

 

 

 

See accompanying notes.

 

3


 

KINDRED HEALTHCARE, INC.

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

 

 

Three months ended
March 31,

 

 

2015

 

 

2014

 

Net income (loss)

$

(138,012

)

 

$

12,479

  

Other comprehensive income (loss):

 

 

 

 

 

 

 

Available-for-sale securities (Note 9):

 

 

 

 

 

 

 

Change in unrealized investment gains

 

281

 

 

 

137

  

Reclassification of gains realized in net income (loss)

 

(5

)

 

 

(8

)  

Net change

 

276

 

 

 

129

  

Interest rate swaps (Note 1):

 

 

 

 

 

 

 

Change in unrealized losses

 

(1,992

)

 

 

(1,080

)  

Reclassification of ineffectiveness realized in net income (loss)

 

(3

)

 

 

32

 

Reclassification of gains realized in net income (loss), net of payments

 

(24

)

 

 

(5

Net change

 

(2,019

)

 

 

(1,053

)  

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

 

687

 

 

 

379

 

Other comprehensive loss

 

(1,056

)

 

 

(545

)  

Comprehensive income (loss)

 

(139,068

)

 

 

11,934

  

Earnings attributable to noncontrolling interests

 

(8,818

)

 

 

(4,459

Comprehensive income (loss) attributable to Kindred

$

(147,886

)

 

$

7,475

  

See accompanying notes.

4


 

KINDRED HEALTHCARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited)

(In thousands, except per share amounts)

 

March 31,

 

 

December 31,

 

 

2015

 

 

2014

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

96,525

 

 

$

164,188

 

Insurance subsidiary investments

 

110,700

 

 

 

99,951

 

Accounts receivable less allowance for loss of $51,247 – March 31, 2015 and $52,855 – December 31, 2014

 

1,255,450

 

 

 

944,219

 

Inventories

 

27,151

 

 

 

25,702

 

Deferred tax assets

 

93,449

 

 

 

82,391

 

Income taxes

 

17,805

 

 

 

8,575

 

Interest deposit on senior unsecured notes held in escrow

 

 

 

 

23,438

 

Other

 

72,788

 

 

 

41,598

 

 

 

1,673,868

 

 

 

1,390,062

 

 

 

 

 

 

 

 

 

Property and equipment

 

2,061,373

 

 

 

1,978,153

 

Accumulated depreciation

 

(1,107,611

)

 

 

(1,076,049

)

 

 

953,762

 

 

 

902,104

 

 

 

 

 

 

 

 

 

Goodwill

 

2,633,661

 

 

 

997,597

 

Intangible assets less accumulated amortization of $72,596 – March 31, 2015 and $68,043 – December 31, 2014

 

809,597

 

 

 

400,700

 

Assets held for sale

 

2,432

 

 

 

3,475

 

Insurance subsidiary investments

 

183,122

 

 

 

166,045

 

Deferred tax assets

 

10,509

 

 

 

11,174

 

Proceeds from senior unsecured notes held in escrow

 

 

 

 

1,350,000

 

Acquisition deposit

 

 

 

 

195,000

 

Other

 

314,380

 

 

 

236,807

 

Total assets (a)

$

6,581,331

 

 

$

5,652,964

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

195,397

 

 

$

175,725

 

Salaries, wages and other compensation

 

451,564

 

 

 

358,857

 

Due to third party payors

 

48,044

 

 

 

43,957

 

Professional liability risks

 

66,752

 

 

 

64,137

 

Other accrued liabilities

 

340,846

 

 

 

189,980

 

Long-term debt due within one year

 

33,240

 

 

 

24,607

 

 

 

1,135,843

 

 

 

857,263

 

 

 

 

 

 

 

 

 

Long-term debt

 

3,242,780

 

 

 

2,852,531

 

Professional liability risks

 

260,781

 

 

 

243,614

 

Deferred credits and other liabilities

 

293,271

 

 

 

213,584

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

Common stock, $0.25 par value; authorized 175,000 shares; issued 83,424 shares – March 31, 2015 and 69,977 shares – December 31, 2014

 

20,856

 

 

 

17,494

 

Capital in excess of par value

 

1,748,599

 

 

 

1,586,692

 

Accumulated other comprehensive loss

 

(3,607

)

 

 

(2,551

)

Accumulated deficit

 

(308,616

)

 

 

(159,768

)

 

 

1,457,232

 

 

 

1,441,867

 

Noncontrolling interests

 

191,424

 

 

 

44,105

 

Total equity

 

1,648,656

 

 

 

1,485,972

 

Total liabilities (a) and equity

$

6,581,331

 

 

$

5,652,964

 

(a)

The Company’s consolidated assets as of March 31, 2015 include total assets of variable interest entities of $357.3 million, which can only be used to settle the obligations of the VIEs. The Company’s consolidated liabilities as of March 31, 2015 include total liabilities of variable interest entities of $29.0 million. See note 1 of the notes to unaudited condensed consolidated financial statements.

 

See accompanying notes.

5


 

KINDRED HEALTHCARE, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

(In thousands)

 

Three months ended

 

 

March 31,

 

 

2015

 

 

2014

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income (loss)

$

(138,012

)

 

$

12,479

 

Adjustments to reconcile net income (loss) to net cash used in operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

39,077

 

 

 

41,304

 

Amortization of stock-based compensation costs

 

5,824

 

 

 

2,585

 

Amortization of deferred financing costs

 

3,062

 

 

 

2,397

 

Payment of capitalized lender fees related to debt issuance

 

(28,012

)

 

 

 

Provision for doubtful accounts

 

8,292

 

 

 

8,760

 

Deferred income taxes

 

(25,580

)

 

 

3,975

 

Impairment charges

 

6,726

 

 

 

444

 

Loss on divestiture of discontinued operations

 

 

 

 

3,006

 

Other

 

1,997

 

 

 

2,044

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

(31,656

)

 

 

(71,829

)

Inventories and other assets

 

53,022

 

 

 

(6,218

)

Accounts payable

 

465

 

 

 

(13,452

)

Income taxes

 

(5,768

)

 

 

29,413

 

Due to third party payors

 

(15,419

)

 

 

(2,013

)

Other accrued liabilities

 

(13,620

)

 

 

(28,649

)

Net cash used in operating activities

 

(139,602

)

 

 

(15,754

)

Cash flows from investing activities:

 

 

 

 

 

 

 

Routine capital expenditures

 

(20,769

)

 

 

(21,677

)

Development capital expenditures

 

(5,788

)

 

 

(751

)

Acquisitions, net of cash acquired

 

(659,071

)

 

 

(22,715

)

Acquisition deposit

 

195,000

 

 

 

 

Sale of assets

 

948

 

 

 

5,034

 

Proceeds from senior unsecured notes offering held in escrow

 

1,350,000

 

 

 

 

Interest in escrow for senior unsecured notes

 

23,438

 

 

 

 

Purchase of insurance subsidiary investments

 

(25,918

)

 

 

(10,114

)

Sale of insurance subsidiary investments

 

22,029

 

 

 

8,762

 

Net change in insurance subsidiary cash and cash equivalents

 

(558

)

 

 

(6,599

)

Change in other investments

 

24

 

 

 

640

 

Other

 

5

 

 

 

(551

)

Net cash provided by (used in) investing activities

 

879,340

 

 

 

(47,971

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from borrowings under revolving credit

 

807,450

 

 

 

508,700

 

Repayment of borrowings under revolving credit

 

(610,050

)

 

 

(425,800

)

Proceeds from issuance of term loan, net of discount

 

199,000

 

 

 

 

Repayment of Gentiva debt

 

(1,177,363

)

 

 

 

Repayment of term loan

 

 

 

 

(1,969

)

Repayment of other long-term debt

 

(441

)

 

 

(90

)

Payment of deferred financing costs

 

(2,538

)

 

 

(270

)

Issuance of common stock in connection with employee benefit plans

 

66

 

 

 

3,804

 

Payment of costs associated with issuance of common stock and tangible equity units

 

(915

)

 

 

 

Payment of dividend for mandatory redeemable preferred stock

 

(2,778

)

 

 

 

Dividends paid

 

(9,975

)

 

 

(6,514

)

Distributions to noncontrolling interests

 

(11,019

)

 

 

(2,933

)

Other

 

1,162

 

 

 

1,873

 

Net cash provided by (used in) financing activities

 

(807,401

)

 

 

76,801

 

Change in cash and cash equivalents

 

(67,663

)

 

 

13,076

 

Cash and cash equivalents at beginning of period

 

164,188

 

 

 

35,972

 

Cash and cash equivalents at end of period

$

96,525

 

 

$

49,048

 

Supplemental information:

 

 

 

 

 

 

 

Interest payments

$

34,810

 

 

$

11,601

 

Income tax payments (refunds)

 

230

 

 

 

(25,894

)

Issuance of common stock in Gentiva Merger (see Note 2)

 

175,088

 

 

 

 

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, a home health, hospice and community care business, inpatient rehabilitation hospitals (“IRFs”), a contract rehabilitation services business, nursing centers and assisted living facilities across the United States (collectively, the “Company” or “Kindred”). At March 31, 2015, the Company’s hospital division operated 97 TC hospitals (certified as long-term acute care (“LTAC”) hospitals under the Medicare program) in 22 states. The Company’s Kindred at Home division (formerly known as the care management division) primarily provided home health, hospice and community care services from 664 sites of service in 41 states. The Company’s rehabilitation division provided rehabilitation services primarily in hospitals and long-term care settings and operated 16 IRFs. The Company’s nursing center division operated 90 nursing centers and seven assisted living facilities in 18 states.

Gentiva Merger

On October 9, 2014, the Company entered into an Agreement and Plan of Merger (the “Gentiva Merger Agreement”) with Gentiva Health Services, Inc. (“Gentiva”), providing for the Company’s acquisition of Gentiva (the “Gentiva Merger”). On February 2, 2015, the Company consummated the Gentiva Merger, with Gentiva continuing as the surviving company and the Company’s wholly owned subsidiary.

Discontinued operations

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 losses associated with these transactions have been classified as discontinued operations in the accompanying unaudited condensed consolidated statement of operations for all periods presented. Assets held for sale at March 31, 2015 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 4 for a summary of discontinued operations.

Recently issued accounting requirements

In April 2015, the Financial Accounting Standards Board (the “FASB”) issued authoritative guidance which changes the balance sheet presentation requirements for debt issuance costs. To simplify presentation of debt issuance costs, the amendments require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This guidance is effective for annual and interim periods beginning on or after December 15, 2015. The new guidance should be applied on a retrospective basis, and early adoption is permitted.  The adoption of this standard is not expected to have a material impact on the Company’s business, financial position, results of operations or liquidity.

In February 2015, the FASB issued authoritative guidance which changes the evaluation of certain legal entities for consolidation. Specifically, the guidance (i) modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interest entities, (ii) eliminates the presumption that a general partner should consolidate a limited partnership, (iii) affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships and (iv) provides a scope exception from consolidation guidance for reporting entities with interest in legal entities in certain investment funds. The guidance is effective for all interim and annual reporting periods beginning after December 15, 2015. Early adoption is permitted for all entities. The guidance is not expected to have an impact on the Company’s business, financial position, results of operations or liquidity.  


7


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 1 – BASIS OF PRESENTATION (Continued)

Recently issued accounting requirements (Continued)

In January 2015, the FASB issued authoritative guidance which eliminated from United States generally accepted accounting principles (“GAAP”) the concept of extraordinary items. The FASB issued this update as part of its initiative to reduce complexity in accounting standards, also referred to as the Simplification Initiative. The guidance is effective for all interim and annual reporting periods beginning after December 15, 2015. Early adoption is permitted for all entities. The guidance is not expected to have an impact on the Company’s business, financial position, results of operations 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.

 

8


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 1 – BASIS OF PRESENTATION (Continued)

Equity

The following table sets forth the changes in equity attributable to noncontrolling interests and equity attributable to Kindred stockholders for the three months ended March 31, 2015 and 2014 (in thousands):

 

For the three months ended March 31, 2015:

Amounts
attributable to
Kindred
stockholders

 

 

Noncontrolling
interests

 

 

Total
equity

 

Balance at December 31, 2014

$

1,441,867

  

 

$

44,105

  

 

$

1,485,972

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

(146,830

)

 

 

8,818

  

 

 

(138,012

)

Other comprehensive loss

 

(1,056

)

 

 

  

 

 

(1,056

)

 

 

(147,886

)

 

 

8,818

  

 

 

(139,068

)

Issuance of common stock in connection with employee benefit plans

 

66

 

 

 

  

 

 

66

 

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

 

(7,058

)

 

 

  

 

 

(7,058

)

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

 

(694

)

 

 

  

 

 

(694

)

Stock-based compensation amortization

 

5,824

 

 

 

  

 

 

5,824

 

Dividends paid

 

(9,975

)

 

 

 

 

 

(9,975

)

Acquired noncontrolling interests

 

 

 

 

149,520

 

 

 

149,520

 

Distributions to noncontrolling interests

 

 

 

 

(11,019

)

 

 

(11,019

)

Issuance of common stock in Gentiva Merger

 

175,088

 

 

 

 

 

 

175,088

 

Balance at March 31, 2015

$

1,457,232

  

 

$

191,424

  

 

$

1,648,656

 

 

For the three months ended March 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2013

$

1,082,657

  

 

$

38,559

  

 

$

1,121,216

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Net income

 

8,020

 

 

 

4,459

  

 

 

12,479

 

Other comprehensive loss

 

(545

)

 

 

  

 

 

(545

)

 

 

7,475

 

 

 

4,459

  

 

 

11,934

 

Issuance of common stock in connection with employee benefit plans

 

3,804

  

 

 

  

 

 

3,804

 

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

 

(5,319

)

 

 

  

 

 

(5,319

)

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

 

1,128

 

 

 

  

 

 

1,128

 

Stock-based compensation amortization

 

2,585

  

 

 

  

 

 

2,585

 

Distributions to noncontrolling interests

 

  

 

 

(2,933

)

 

 

(2,933

)

Dividends paid

 

(6,514

)

 

 

  

 

 

(6,514

)

Balance at March 31, 2014

$

1,085,816

  

 

$

40,085

  

 

$

1,125,901

 

Property and equipment

In the first quarter of 2015, the Company changed the estimated useful life of certain technology and medical equipment based upon a detailed review of actual utilization. The change in estimate extended the expected useful life by two to three years depending on the equipment category and has been accounted for prospectively beginning January 1, 2015. The impact from this change in accounting estimate for the first quarter of 2015 was an increase to income (loss) from continuing operations before income taxes of $4.4 million ($2.7 million net of income taxes).

9


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 1 – BASIS OF PRESENTATION (Continued)

Derivative financial instruments

In December 2011, the Company entered into two interest rate swap agreements to hedge its floating interest rate on an aggregate of $225 million of debt outstanding under its senior secured term loan facility (the “Prior Term Loan Facility”) entered into in June 2011. The interest rate swaps had an effective date of January 9, 2012, and will expire on January 11, 2016. The Company is required to make payments based upon a fixed interest rate of 1.8925% calculated on the notional amount of $225 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 continue to qualify for cash flow hedge accounting treatment at March 31, 2015. 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 agreements.

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 Term Loan Facility (as defined in Note 10). 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 and continues to apply to the Term Loan Facility. 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 this interest rate swap continues to qualify for cash flow hedge accounting treatment at March 31, 2015.

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 ended March 31, 2015 and 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 $5.7 million and $3.7 million at March 31, 2015 and December 31, 2014, respectively. See Note 13.

Variable Interest Entities

The Company follows the provisions of the authoritative guidance for determining whether an entity is a VIE.  In order to determine if the Company is a primary beneficiary of a VIE for financial reporting purposes, it must consider whether it has the power to direct activities of the VIE that most significantly impact the performance of the VIE and whether the Company has the obligation to absorb losses or the right to receive returns that would be significant to the VIE. The Company consolidates a VIE when it is the primary beneficiary.  

In January 2015, the Company completed the acquisition of Centerre Healthcare Corporation (“Centerre”), which operates 11 IRFs, each of which is subject to a partnership and a management services agreement with the Company. Under GAAP, the Company determined that all of the entities acquired qualify as VIEs and that the Company is the primary beneficiary in all but one arrangement. The Company holds an equity interest and acts as manager in each of the entities. Through the management agreement, the Company is delegated necessary responsibilities to provide management services, administrative services and direction of the day-to-day operations. Based on the Company’s assessment of the most significant activities of the IRFs, the manager has the ability to direct the majority of those activities in ten of the entities.    

The analysis upon which the consolidation determination rests is complex, involves uncertainties, and requires significant judgment on various matters, some of which could be subject to different interpretations.


10


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 1 – BASIS OF PRESENTATION (Continued)

Variable Interest Entities (Continued)

The carrying amounts and classifications of the assets and liabilities of the consolidated VIEs as of March 31, 2015 are as follows (in thousands):

 

Assets:

 

 

 

Current assets:

 

 

 

Cash and cash equivalents

$

26,906

 

Accounts receivable, net

 

32,854

 

Inventories

 

1,459

 

Other

 

1,855

 

 

 

63,074

 

Property and equipment, net

 

14,181

 

Goodwill

 

256,666

 

Intangible assets, net

 

23,302

 

Other

 

49

 

Total assets

$

357,272

 

Liabilities:

 

 

 

Current liabilities:

 

 

 

Accounts payable

$

15,433

 

Salaries, wages and other compensation

 

1,976

 

Other accrued liabilities

 

3,076

 

Long-term debt due within one year

 

3,679

 

 

 

24,164

 

Long-term debt

 

1,371

 

Deferred credits and other liabilities

 

3,502

 

Total liabilities

$

29,037

 

 

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 GAAP 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, 2014 filed with the Securities and Exchange Commission (the “SEC”) on Form 10-K. The accompanying condensed consolidated balance sheet at December 31, 2014 was derived from audited consolidated financial statements, but does not include all disclosures required by GAAP.

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 GAAP 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.


11


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 2 – GENTIVA MERGER

On October 9, 2014, the Company entered into the Gentiva Merger Agreement, providing for the Company’s acquisition of Gentiva. On February 2, 2015, the Company consummated the Gentiva Merger, with Gentiva continuing as the surviving company and the Company’s wholly owned subsidiary.

At the effective time of the Gentiva Merger, each share of common stock, par value $0.10 per share, of Gentiva (“Gentiva Common Stock”) issued and outstanding immediately prior to the effective time of the Gentiva Merger (other than shares held by Kindred, Gentiva and any wholly owned subsidiaries (which were cancelled) and shares owned by stockholders who properly exercised and perfected a demand for appraisal rights under Delaware law), including each deferred share unit, were converted into the right to receive (i) $14.50 in cash (the “Cash Consideration”), without interest, and (ii) 0.257 of a validly issued, fully paid and nonassessable share of Kindred common stock, par value $0.25 per share (the “Stock Consideration”). Kindred issued 9.6 million shares of common stock as the Stock Consideration. The purchase price totaled $719.9 million and was comprised of $544.8 million of Cash Consideration and $175.1 million of Stock Consideration. The Company also assumed $1.2 billion of long-term debt, which was paid off upon consummation of the Gentiva Merger.

The Company used the net proceeds from the Financing Transactions (as defined in Note 10), to fund the Cash Consideration for the Gentiva Merger, repay Gentiva’s existing debt and pay related transaction fees and expenses.

Operating results for the first quarter of 2015 included transaction and integration costs totaling $32.1 million, retention and severance costs totaling $54.5 million, a lease termination charge of $0.6 million and financing costs totaling $23.4 million related to the Gentiva Merger. Transaction, integration, retention and severance costs were recorded as general and administrative expenses, the lease termination charge was recorded as rent expense and financing costs were recorded as general and administrative expenses ($6.0 million) and as interest expense ($17.4 million).

As of December 31, 2014, Gentiva provided home health services, hospice services and community care services serving patients through approximately 491 locations in 40 states.

Purchase price allocation

The Gentiva Merger purchase price of $719.9 million was allocated on a preliminary basis to the estimated fair value of the tangible and intangible assets, and goodwill.

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

 

Cash and cash equivalents

$

64,695

 

Accounts receivable

 

258,438

 

Deferred tax assets

 

26,234

 

Other current assets

 

54,509

 

Property and equipment

 

46,684

 

Identifiable intangible assets:

 

 

 

Certificates of need (indefinite life)

 

255,660

 

Medicare certifications (indefinite life)

 

103,080

 

Trade names (indefinite life)

 

22,200

 

Trade name

 

15,600

 

Non-compete agreements

 

1,820

 

Leasehold interests

 

1,439

 

Total identifiable intangible assets

 

399,799

 

Other assets

 

133,241

 

Current portion of long-term debt

 

(53,075

)

Accounts payable and other current liabilities

 

(280,631

)

Long-term debt, less current portion

 

(1,124,288

)

Deferred tax liabilities

 

(47,787

)

Other liabilities

 

(130,739

)

Noncontrolling interests

 

(3,695

)

Total identifiable net assets

 

(656,615

)

Goodwill

 

1,376,528

 

Net assets

$

719,913

 

12


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 2 – GENTIVA MERGER (Continued)

Purchase price allocation (Continued)

The fair value allocation was measured primarily using a discounted cash flows methodology, which is considered a Level 3 input (as described in Note 13).

The value of gross contractual accounts receivable before determining uncollectable amounts totaled $272.3 million. Accounts estimated to be uncollectable totaled $13.9 million.

The weighted average life of the definite lived intangible assets consisting primarily of a trade name is three years.

The aggregate goodwill arising from the Gentiva Merger is based upon the expected future cash flows of the Gentiva operations, which reflect both growth expectations and cost savings from combining the operations of the Company and Gentiva. Goodwill is not amortized and is not deductible for income tax purposes. Goodwill was preliminarily assigned to the Company’s home health reporting unit ($604.5 million), hospice reporting unit ($607.2 million) and community care reporting unit ($164.8 million).

The unaudited pro forma net effect of the Gentiva Merger assuming the acquisition occurred as of January 1, 2014 is as follows (in thousands, except per share amounts):

 

Three months ended
March 31,

 

 

2015

 

 

2014

 

Revenues

$

1,837,666

 

 

$

1,760,115

 

Loss from continuing operations attributable to Kindred

 

(34,779

)

 

 

(60,423

)

Loss attributable to Kindred

 

(38,174

)

 

 

(70,801

Loss per common share:

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

Loss from continuing operations

 

(0.42

)

 

 

(0.71

)

Net loss

 

(0.46

)

 

 

(0.83

Diluted:

 

 

 

 

 

 

 

Loss from continuing operations

 

(0.42

)

 

 

(0.71

Net loss

 

(0.46

)

 

 

(0.83

The unaudited pro forma financial data has been derived by combining the historical financial results of the Company and the operations acquired in the Gentiva Merger for the periods presented. The unaudited pro forma financial data includes transaction, integration, retention and severance costs, a lease cancellation charge and financing costs totaling $127.6 million incurred by both the Company and Gentiva in connection with the Gentiva Merger. These costs have been eliminated from the results of operations for 2015 and have been reflected as expenses incurred as of January 1, 2014 for purposes of the pro forma financial presentation. Revenues associated with Gentiva aggregated $334.9 million since the date of the Gentiva Merger.

 

NOTE 3 – OTHER ACQUISITIONS

The following is a summary of the Company’s other 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 acquired businesses and acquired leased facilities resulted from negotiations with each of the sellers that were based upon both the historical and expected future cash flows of the respective businesses and real estate values. Each of these acquisitions was financed through operating cash flows and borrowings under the Company’s ABL Facility (as defined in Note 10). 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.

On January 1, 2015, the Company completed the acquisition of Centerre for a purchase price of approximately $195 million in cash (the “Centerre Acquisition”). Centerre operated 11 IRFs with 614 beds through partnerships.

On March 2, 2015, the Company acquired a home-based primary care practice for $4.1 million.

During the three months ended March 31, 2014, the Company acquired the real estate of two previously leased nursing centers for $22.3 million. Annual rent associated with the nursing centers aggregated $2.0 million. The fair value of the assets acquired was measured using discounted cash flow methodologies which are considered Level 3 inputs (as described in Note 13).


13


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 4 – 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 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 March 31, 2015, the Company held for sale nine nursing centers reported as discontinued operations.

On December 27, 2014, the Company entered into an agreement with Ventas, Inc. (“Ventas”) to transition the operations under the leases for nine non-strategic nursing centers (the “2014 Expiring Facilities”). Each lease will terminate when the operation of such nursing center is transferred to a new operator, which is expected to occur during 2015. The current lease term for eight of these nursing centers is scheduled to expire on April 30, 2018. The current lease term for the ninth of theses nursing centers is scheduled to expire on April 30, 2020. The Company will continue to operate these facilities until operations are transferred. For accounting purposes, the 2014 Expiring Facilities qualified as assets held for sale and the Company reflected the operating results as discontinued operations in the accompanying unaudited condensed consolidated statement of operations for all historical periods. Under the terms of the agreement, the Company incurred a $40 million termination fee in exchange for the early termination of the leases, which was paid to Ventas in January 2015.

The Company allowed the lease to expire on a TC hospital during the three months ended March 31, 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 three months ended March 31, 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.

A summary of discontinued operations follows (in thousands):

 

Three months ended
March 31,

 

 

2015

 

 

2014

 

Revenues

$

11,717

 

 

$

156,679

 

Salaries, wages and benefits

 

6,592

 

 

 

63,658

 

Supplies

 

700

 

 

 

8,073

 

Rent

 

2,654

 

 

 

19,136

 

Other operating expenses

 

2,391

 

 

 

30,550

 

General and administrative expenses

 

4,885

 

 

 

44,865

 

Other expense

 

 

 

 

 

Impairment charges

 

 

 

 

444

 

Depreciation

 

142

 

 

 

2,212

 

Interest expense

 

 

 

 

10

 

Investment (income) expense

 

(2

)

 

 

1

 

 

 

17,362

 

 

 

168,949

 

Loss from operations before income taxes

 

(5,645

)

 

 

(12,270

)

Income tax benefit

 

(2,221

)

 

 

(4,828

)

Loss from operations

 

(3,424

)

 

 

(7,442

)

Loss on divestiture of operations

 

 

 

 

(3,006

)

          Loss from discontinued operations

$

(3,424

)

 

$

(10,448

)

Loss attributable to noncontrolling interests

 

29

 

 

 

70

 

Loss attributable to Kindred

$

(3,395

)

 

$

(10,378

)


14


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 4 – DISCONTINUED OPERATIONS (Continued)

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

 

 

Three months ended
March 31,

 

 

2015

 

  

2014

 

Revenues:

 

 

 

 

 

 

 

Hospital division

$

            508

 

 

$

15,422

 

Nursing center division

 

11,209

 

 

 

141,257

 

 

$

11,717

 

 

$

156,679

 

Operating income (loss):

 

 

 

 

 

 

 

Hospital division

$

(78

)

 

$

881

 

Nursing center division

 

(2,773

 

 

8,208

 

 

$

(2,851

 

$

9,089

 

Rent:

 

 

 

 

 

 

 

Hospital division

$

563

 

 

$

1,688

 

Nursing center division

 

2,091

 

 

 

17,448

 

 

$

2,654

 

 

$

19,136

 

Depreciation:

 

 

 

 

 

 

 

Hospital division

$

 

 

$

518

 

Nursing center division

 

142

 

 

 

1,694

 

 

$

142

 

 

$

2,212

 

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

 

 

March 31,
2015

 

 

December 31,
2014

 

Long-term assets:

 

 

 

 

 

 

 

Property and equipment, net

$

2,263

 

 

$

3,306

  

Other

 

169

 

 

 

169

  

 

 

2,432

 

 

 

3,475

  

Current liabilities (included in other accrued liabilities)

 

 

 

 

 

 

$

2,432

 

 

$

3,475

  

 

 

NOTE 5 – 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, Medicaid Managed and other third party payors. Revenues under third party agreements are subject to examination and retroactive adjustment. Provisions for estimated third party adjustments are provided in the period the related services are rendered. Differences between the amounts accrued and subsequent settlements are recorded in the periods the interim or final settlements are determined.

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

 

 

Three months ended
March 31,

 

 

2015

 

 

2014

 

Medicare

$

820,591

  

 

$

541,563

  

Medicaid

 

187,414

  

 

 

151,573

  

Medicare Advantage

 

133,419

  

 

 

98,381

  

Medicaid Managed

 

43,637

 

 

 

23,648

 

Other

 

553,813

  

 

 

509,494

  

 

 

1,738,874

  

 

 

1,324,659

  

Eliminations

 

(62,907

 

 

(52,049

 

$

1,675,967

  

 

$

1,272,610

  

15


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

 

NOTE 6 – EARNINGS (LOSS) PER SHARE

Earnings (loss) per common share are based upon the weighted average number of common shares outstanding during the respective periods. Because the Company is reporting a loss from continuing operations attributable to the Company for the three months ended March 31, 2015, the diluted calculation of earnings per common share excludes the dilutive impact of stock options and tangible equity units. 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.

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

 

 

Three months ended March 31,

 

 

2015

 

 

2014

 

 

Basic

 

 

Diluted

 

 

Basic

 

 

Diluted

 

Earnings (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts attributable to Kindred stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As reported in Statement of Operations

$

(143,435

)

 

$

(143,435

)

 

$

18,398

 

 

$

18,398

 

Allocation to participating unvested restricted stockholders

 

 

 

 

 

 

 

(571

)

 

 

(571

)

Available to common stockholders

$

(143,435

)

 

$

(143,435

)

 

$

17,827

 

 

$

17,827

 

Discontinued operations, net of income taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As reported in Statement of Operations

$

(3,395

)

 

$

(3,395

)

 

$

(7,372

)

 

$

(7,372

)

Allocation to participating unvested restricted stockholders

 

 

 

 

 

 

 

229

 

 

 

229

 

Available to common stockholders

$

(3,395

)

 

$

(3,395

)

 

$

(7,143

)

 

$

(7,143

)

Loss on divestiture of operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As reported in Statement of Operations

$

 

 

$

 

 

$

(3,006

)

 

$

(3,006

)

Allocation to participating unvested restricted stockholders

 

 

 

 

 

 

 

93

 

 

 

93

 

Available to common stockholders

$

 

 

$

 

 

$

(2,913

)

 

$

(2,913

)

Loss from discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As reported in Statement of Operations

$

(3,395

)

 

$

(3,395

)

 

$

(10,378

)

 

$

(10,378

)

Allocation to participating unvested restricted stockholders

 

 

 

 

 

 

 

322

 

 

 

322

 

Available to common stockholders

$

(3,395

)

 

$

(3,395

)

 

$

(10,056

)

 

$

(10,056

)

Net income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As reported in Statement of Operations

$

(146,830

)

 

$

(146,830

)

 

$

8,020

 

 

$

8,020

 

Allocation to participating unvested restricted stockholders

 

 

 

 

 

 

 

(249

)

 

 

(249

)

Available to common stockholders

$

(146,830

)

 

$

(146,830

)

 

$

7,771

 

 

$

7,771

 

Shares used in the computation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding − basic computation

 

79,575

 

 

 

79,575

 

 

 

52,641

 

 

 

52,641

 

Dilutive effect of employee stock options

 

 

 

 

 

 

 

 

 

 

 

 

70

 

Dilutive effect of tangible equity units

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted weighted average shares outstanding − diluted computation

 

 

 

 

 

79,575

 

 

 

 

 

 

 

52,711

 

Earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

$

(1.80

)

 

$

(1.80

)

 

$

0.34

 

 

$

0.34

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

(0.04

)

 

 

(0.04

)

 

 

(0.13

)

 

 

(0.13

)

Loss on divestiture of operations

 

 

 

 

 

 

 

(0.06

)