knd-10q_20160930.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

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

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016

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

(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      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      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

 

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  

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, 2016

Common stock, $0.25 par value

  

     85,160,436 shares

 

 

 

1 of 90


 

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, 2016 and 2015 and for the nine months ended September 30, 2016 and 2015

3

 

Condensed Consolidated Statement of Comprehensive Income (Loss) – for the three months ended September 30, 2016 and 2015 and for the nine months ended September 30, 2016 and 2015

4

 

Condensed Consolidated Balance Sheet – September 30, 2016 and December 31, 2015

5

 

Condensed Consolidated Statement of Cash Flows – for the three months ended September 30, 2016 and 2015 and for the nine months ended September 30, 2016 and 2015

6

 

Notes to Condensed Consolidated Financial Statements

7

Item 2.

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

52

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

86

Item 4.

Controls and Procedures

87

 

PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

88

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

88

Item 6.

Exhibits

89

 

 

 

2


 

KINDRED HEALTHCARE, INC.

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)

(In thousands, except per share amounts)

 

 

Three months ended

 

 

Nine months ended

 

 

September 30,

 

 

September 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenues

$

1,793,527

 

 

$

1,764,516

 

 

$

5,473,568

 

 

$

5,273,958

 

Salaries, wages and benefits

 

957,644

 

 

 

922,140

 

 

 

2,812,812

 

 

 

2,704,920

 

Supplies

 

95,500

 

 

 

96,551

 

 

 

294,326

 

 

 

288,059

 

Rent

 

98,415

 

 

 

95,436

 

 

 

296,025

 

 

 

282,955

 

Other operating expenses

 

217,364

 

 

 

207,837

 

 

 

649,915

 

 

 

617,681

 

General and administrative expenses (exclusive of depreciation and

     amortization expense included below)

 

310,407

 

 

 

307,500

 

 

 

998,559

 

 

 

1,043,986

 

Other income

 

(446

)

 

 

(650

)

 

 

(1,909

)

 

 

(1,699

)

Litigation contingency expense

 

-

 

 

 

31,462

 

 

 

2,840

 

 

 

130,387

 

Impairment charges

 

324,289

 

 

 

-

 

 

 

338,208

 

 

 

6,726

 

Restructuring charges

 

81,463

 

 

 

3,349

 

 

 

88,223

 

 

 

8,793

 

Depreciation and amortization

 

40,382

 

 

 

39,329

 

 

 

121,320

 

 

 

116,889

 

Interest expense

 

59,862

 

 

 

56,440

 

 

 

175,417

 

 

 

176,128

 

Investment income

 

(1,810

)

 

 

(432

)

 

 

(2,561

)

 

 

(2,203

)

 

 

2,183,070

 

 

 

1,758,962

 

 

 

5,773,175

 

 

 

5,372,622

 

Income (loss) from continuing operations before income taxes

 

(389,543

)

 

 

5,554

 

 

 

(299,607

)

 

 

(98,664

)

Provision for income taxes

 

281,752

 

 

 

12,523

 

 

 

311,470

 

 

 

9,183

 

Loss from continuing operations

 

(671,295

)

 

 

(6,969

)

 

 

(611,077

)

 

 

(107,847

)

Discontinued operations, net of income taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

(12

)

 

 

2,269

 

 

 

2,422

 

 

 

(1,744

)

Gain on divestiture of operations

 

-

 

 

 

-

 

 

 

179

 

 

 

983

 

Income (loss) from discontinued operations

 

(12

)

 

 

2,269

 

 

 

2,601

 

 

 

(761

)

Net loss

 

(671,307

)

 

 

(4,700

)

 

 

(608,476

)

 

 

(108,608

)

(Earnings) loss attributable to noncontrolling interests:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

(14,305

)

 

 

(9,900

)

 

 

(40,341

)

 

 

(30,482

)

Discontinued operations

 

(1

)

 

 

1

 

 

 

(6

)

 

 

32

 

 

 

(14,306

)

 

 

(9,899

)

 

 

(40,347

)

 

 

(30,450

)

Loss attributable to Kindred

$

(685,613

)

 

$

(14,599

)

 

$

(648,823

)

 

$

(139,058

)

Amounts attributable to Kindred stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations

$

(685,600

)

 

$

(16,869

)

 

$

(651,418

)

 

$

(138,329

)

Income (loss) from discontinued operations

 

(13

)

 

 

2,270

 

 

 

2,595

 

 

 

(729

)

Net loss

$

(685,613

)

 

$

(14,599

)

 

$

(648,823

)

 

$

(139,058

)

Loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations

$

(7.89

)

 

$

(0.20

)

 

$

(7.51

)

 

$

(1.65

)

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

-

 

 

 

0.03

 

 

 

0.03

 

 

 

(0.02

)

Gain on divestiture of operations

 

-

 

 

 

-

 

 

 

-

 

 

 

0.01

 

Income (loss) from discontinued operations

 

-

 

 

 

0.03

 

 

 

0.03

 

 

 

(0.01

)

Net loss

$

(7.89

)

 

$

(0.17

)

 

$

(7.48

)

 

$

(1.66

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations

$

(7.89

)

 

$

(0.20

)

 

$

(7.51

)

 

$

(1.65

)

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

-

 

 

 

0.03

 

 

 

0.03

 

 

 

(0.02

)

Gain on divestiture of operations

 

-

 

 

 

-

 

 

 

-

 

 

 

0.01

 

Income (loss) from discontinued operations

 

-

 

 

 

0.03

 

 

 

0.03

 

 

 

(0.01

)

Net loss

$

(7.89

)

 

$

(0.17

)

 

$

(7.48

)

 

$

(1.66

)

Shares used in computing loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

86,869

 

 

 

86,184

 

 

 

86,766

 

 

 

83,960

 

Diluted

 

86,869

 

 

 

86,184

 

 

 

86,766

 

 

 

83,960

 

Cash dividends declared and paid per common share

$

0.12

 

 

$

0.12

 

 

$

0.36

 

 

$

0.36

 

 

See accompanying notes.

3


 

KINDRED HEALTHCARE, INC.

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In thousands)

 

 

Three months ended

 

 

Nine months ended

 

 

September 30,

 

 

September 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net loss

$

(671,307

)

 

$

(4,700

)

 

$

(608,476

)

 

$

(108,608

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities (Note 12):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized investment gains (losses)

 

278

 

 

 

(978

)

 

 

1,461

 

 

 

(841

)

Reclassification of gains realized in net loss

 

(1,333

)

 

 

-

 

 

 

(1,202

)

 

 

-

 

Net change

 

(1,055

)

 

 

(978

)

 

 

259

 

 

 

(841

)

Interest rate swaps (Note 1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized gain (losses)

 

2,022

 

 

 

(909

)

 

 

(3,761

)

 

 

(2,173

)

Reclassification of ineffectiveness realized in net loss

 

-

 

 

 

59

 

 

 

-

 

 

 

88

 

Reclassification of losses realized in net loss, net of payments

 

18

 

 

 

12

 

 

 

411

 

 

 

-

 

Net change

 

2,040

 

 

 

(838

)

 

 

(3,350

)

 

 

(2,085

)

Income tax expense (benefit) related to items of other

    comprehensive income (loss)

 

(427

)

 

 

699

 

 

 

1,389

 

 

 

1,149

 

Other comprehensive income (loss)

 

558

 

 

 

(1,117

)

 

 

(1,702

)

 

 

(1,777

)

Comprehensive loss

 

(670,749

)

 

 

(5,817

)

 

 

(610,178

)

 

 

(110,385

)

Earnings attributable to noncontrolling interests

 

(14,306

)

 

 

(9,899

)

 

 

(40,347

)

 

 

(30,450

)

Comprehensive loss attributable to Kindred

$

(685,055

)

 

$

(15,716

)

 

$

(650,525

)

 

$

(140,835

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

4


 

KINDRED HEALTHCARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited)

(In thousands, except per share amounts)

 

 

September 30,

 

 

December 31,

 

 

2016

 

 

2015

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

139,430

 

 

$

98,758

 

Insurance subsidiary investments

 

105,346

 

 

 

106,638

 

Accounts receivable less allowance for loss of $67,761 ─ September 30, 2016 and $62,896 ─ December 31, 2015

 

1,266,545

 

 

 

1,194,868

 

Inventories

 

25,262

 

 

 

27,791

 

Income taxes

 

12,416

 

 

 

11,790

 

Other

 

94,876

 

 

 

61,054

 

 

 

1,643,875

 

 

 

1,500,899

 

 

 

 

 

 

 

 

 

Property and equipment

 

2,070,421

 

 

 

2,162,398

 

Accumulated depreciation

 

(1,192,870

)

 

 

(1,190,402

)

 

 

877,551

 

 

 

971,996

 

 

 

 

 

 

 

 

 

Goodwill

 

2,422,473

 

 

 

2,669,810

 

Intangible assets less accumulated amortization of $96,854 ─  September 30, 2016 and $94,221 ─ December 31, 2015

 

804,602

 

 

 

755,655

 

Insurance subsidiary investments

 

195,517

 

 

 

204,498

 

Deferred tax assets

 

-

 

 

 

104,130

 

Acquisition deposit

 

-

 

 

 

18,489

 

Other

 

283,322

 

 

 

242,782

 

Total assets (a)

$

6,227,340

 

 

$

6,468,259

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

203,426

 

 

$

187,061

 

Salaries, wages and other compensation

 

390,743

 

 

 

404,925

 

Due to third party payors

 

57,945

 

 

 

36,251

 

Professional liability risks

 

61,036

 

 

 

64,099

 

Other accrued liabilities

 

280,305

 

 

 

394,246

 

Long-term debt due within one year

 

27,889

 

 

 

24,630

 

 

 

1,021,344

 

 

 

1,111,212

 

 

 

 

 

 

 

 

 

Long-term debt

 

3,316,174

 

 

 

3,086,348

 

Professional liability risks

 

283,048

 

 

 

263,273

 

Deferred tax liabilities

 

200,334

 

 

 

-

 

Deferred credits and other liabilities

 

354,246

 

 

 

301,379

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 14)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

Stockholder's equity:

 

 

 

 

 

 

 

Common stock, $0.25 par value; authorized 175,000 shares; issued 85,187 shares ─ September 30, 2016 and

   83,792 shares December 31, 2015

 

21,297

 

 

 

20,948

 

Capital in excess of par value

 

1,717,165

 

 

 

1,737,747

 

Accumulated other comprehensive loss

 

(4,334

)

 

 

(2,632

)

Accumulated deficit

 

(905,137

)

 

 

(256,209

)

 

 

828,991

 

 

 

1,499,854

 

Noncontrolling interests

 

223,203

 

 

 

206,193

 

Total equity

 

1,052,194

 

 

 

1,706,047

 

Total liabilities (a) and equity

$

6,227,340

 

 

$

6,468,259

 

 

 

(a)

The Company’s consolidated assets as of September 30, 2016 and December 31, 2015 include total assets of variable interest entities of $405.6 million and $389.0 million, respectively, which can only be used to settle the obligations of the variable interest entities. The Company’s consolidated liabilities as of September 30, 2016 and December 31, 2015 include total liabilities of variable interest entities of $48.9 million and $39.7 million, respectively. 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

 

 

Nine months ended

 

 

September 30,

 

 

September 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

$

(671,307

)

 

$

(4,700

)

 

$

(608,476

)

 

$

(108,608

)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation expense

 

34,914

 

 

 

31,867

 

 

 

103,306

 

 

 

95,325

 

Amortization of intangible assets

 

5,468

 

 

 

7,728

 

 

 

18,251

 

 

 

22,196

 

Amortization of stock-based compensation costs

 

3,015

 

 

 

3,194

 

 

 

13,058

 

 

 

15,764

 

Amortization of deferred financing costs

 

3,987

 

 

 

3,554

 

 

 

11,262

 

 

 

10,155

 

Payment of capitalized lender fees related to debt issuance

 

(42

)

 

 

-

 

 

 

(7,375

)

 

 

(28,012

)

Provision for doubtful accounts

 

10,009

 

 

 

11,014

 

 

 

30,955

 

 

 

29,817

 

Deferred income taxes

 

(84,173

)

 

 

3,556

 

 

 

(54,875

)

 

 

(894

)

Impairment charges

 

324,289

 

 

 

-

 

 

 

338,208

 

 

 

6,726

 

Gain on divestiture of discontinued operations

 

-

 

 

 

-

 

 

 

(179

)

 

 

(983

)

Other

 

6,303

 

 

 

3,485

 

 

 

7,262

 

 

 

10,457

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

(42,832

)

 

 

25,990

 

 

 

(143,953

)

 

 

(13,399

)

Inventories and other assets

 

11,871

 

 

 

8,767

 

 

 

(3,522

)

 

 

44,181

 

Accounts payable

 

11,995

 

 

 

(353

)

 

 

24,451

 

 

 

(12,788

)

Income taxes

 

364,925

 

 

 

37,491

 

 

 

365,705

 

 

 

33,646

 

Due to third party payors

 

24,809

 

 

 

15,008

 

 

 

20,317

 

 

 

(3,965

)

Other accrued liabilities

 

32,851

 

 

 

(14,311

)

 

 

(76,347

)

 

 

(6,551

)

Net cash provided by operating activities

 

36,082

 

 

 

132,290

 

 

 

38,048

 

 

 

93,067

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Routine capital expenditures

 

(21,873

)

 

 

(35,422

)

 

 

(68,703

)

 

 

(80,691

)

Development capital expenditures

 

(8,386

)

 

 

(5,760

)

 

 

(27,112

)

 

 

(12,066

)

Acquisitions, net of cash acquired

 

(49,329

)

 

 

(2,002

)

 

 

(77,040

)

 

 

(663,757

)

Acquisition deposits

 

-

 

 

 

-

 

 

 

18,489

 

 

 

195,000

 

Sale of assets

 

3,739

 

 

 

3,884

 

 

 

4,962

 

 

 

7,061

 

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

 

(22,427

)

 

 

(16,357

)

 

 

(75,422

)

 

 

(59,186

)

Sale of insurance subsidiary investments

 

31,875

 

 

 

15,987

 

 

 

78,478

 

 

 

50,780

 

Net change in insurance subsidiary cash and cash equivalents

 

(14,680

)

 

 

(2,633

)

 

 

8,479

 

 

 

(8,396

)

Proceeds from note receivable

 

-

 

 

 

25,000

 

 

 

-

 

 

 

25,000

 

Net change in other investments

 

51

 

 

 

176

 

 

 

(33,347

)

 

 

375

 

Other

 

(150

)

 

 

1,383

 

 

 

(1,277

)

 

 

590

 

Net cash provided by (used in) investing activities

 

(81,180

)

 

 

(15,744

)

 

 

(172,493

)

 

 

828,148

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from borrowings under revolving credit

 

489,200

 

 

 

259,700

 

 

 

1,267,200

 

 

 

1,414,850

 

Repayment of borrowings under revolving credit

 

(388,100

)

 

 

(349,700

)

 

 

(1,215,800

)

 

 

(1,319,850

)

Proceeds from issuance of term loan, net of discount

 

-

 

 

 

-

 

 

 

198,100

 

 

 

199,000

 

Proceeds from other long-term debt

 

-

 

 

 

-

 

 

 

750

 

 

 

-

 

Repayment of Gentiva debt

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,177,363

)

Repayment of term loan

 

(3,508

)

 

 

(3,003

)

 

 

(10,019

)

 

 

(9,008

)

Repayment of other long-term debt

 

(276

)

 

 

(500

)

 

 

(826

)

 

 

(1,400

)

Payment of deferred financing costs

 

(50

)

 

 

(301

)

 

 

(342

)

 

 

(3,284

)

Issuance of common stock in connection with employee benefit plans

 

-

 

 

 

329

 

 

 

-

 

 

 

534

 

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

 

-

 

 

 

-

 

 

 

-

 

 

 

(915

)

Payment of dividend for mandatory redeemable preferred stock

 

(2,904

)

 

 

(2,703

)

 

 

(8,558

)

 

 

(8,135

)

Dividends paid

 

(10,224

)

 

 

(10,065

)

 

 

(30,517

)

 

 

(30,067

)

Contributions made by noncontrolling interests

 

4,993

 

 

 

1,492

 

 

 

11,261

 

 

 

1,492

 

Distributions to noncontrolling interests

 

(4,694

)

 

 

(10,685

)

 

 

(35,240

)

 

 

(31,823

)

Purchase of noncontrolling interests

 

-

 

 

 

-

 

 

 

(1,000

)

 

 

-

 

Other

 

35

 

 

 

245

 

 

 

108

 

 

 

1,457

 

Net cash provided by (used in) financing activities

 

84,472

 

 

 

(115,191

)

 

 

175,117

 

 

 

(964,512

)

Change in cash and cash equivalents

 

39,374

 

 

 

1,355

 

 

 

40,672

 

 

 

(43,297

)

Cash and cash equivalents at beginning of period

 

100,056

 

 

 

119,536

 

 

 

98,758

 

 

 

164,188

 

Cash and cash equivalents at end of period

$

139,430

 

 

$

120,891

 

 

$

139,430

 

 

$

120,891

 

Supplemental information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest payments

$

73,755

 

 

$

81,474

 

 

$

181,227

 

 

$

147,924

 

Income tax payments (refunds)

 

1,075

 

 

 

(27,414

)

 

 

2,184

 

 

 

(26,275

)

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

 

-

 

 

 

15