Form 10-Q
Table of Contents

 

 

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 June 30, 2013

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 July 31, 2013

Common stock, $0.25 par value   54,156,725 shares

 

 

 


Table of Contents

KINDRED HEALTHCARE, INC.

FORM 10-Q

INDEX

 

           Page  

PART I.

   FINANCIAL INFORMATION   

Item 1.

   Financial Statements (Unaudited):   
  

Condensed Consolidated Statement of Operations – for the three months ended June 30,  2013 and 2012 and for the six months ended June 30, 2013 and 2012

     3   
  

Condensed Consolidated Statement of Comprehensive Income – for the three months ended June  30, 2013 and 2012 and for the six months ended June 30, 2013 and 2012

     4   
   Condensed Consolidated Balance Sheet – June 30, 2013 and December 31, 2012      5   
  

Condensed Consolidated Statement of Cash Flows – for the three months ended June 30,  2013 and 2012 and for the six months ended June 30, 2013 and 2012

     6   
   Notes to Condensed Consolidated Financial Statements      7   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      39   

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      70   

Item 4.

   Controls and Procedures      71   

PART II.

   OTHER INFORMATION   

Item 1.

   Legal Proceedings      72   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      72   

Item 6.

   Exhibits      73   

 

2


Table of Contents

KINDRED HEALTHCARE, INC.

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)

(In thousands, except per share amounts)

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2013     2012     2013     2012  

Revenues

   $ 1,410,360      $ 1,424,918      $ 2,896,678      $ 2,891,603   
  

 

 

   

 

 

   

 

 

   

 

 

 

Salaries, wages and benefits

     829,407        848,342        1,735,413        1,732,580   

Supplies

     97,818        101,648        199,698        206,279   

Rent

     97,741        96,420        194,542        191,594   

Other operating expenses

     284,538        282,256        572,396        561,371   

Other income

     (24     (3,154     (1,022     (6,292

Impairment charges

     16,228        279        16,588        1,053   

Depreciation and amortization

     46,338        46,499        95,651        91,751   

Interest expense

     29,086        26,715        57,260        53,292   

Investment income

     (1,481     (265     (1,571     (550
  

 

 

   

 

 

   

 

 

   

 

 

 
     1,399,651        1,398,740        2,868,955        2,831,078   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     10,709        26,178        27,723        60,525   

Provision for income taxes

     4,409        10,837        10,770        24,814   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     6,300        15,341        16,953        35,711   

Discontinued operations, net of income taxes:

        

Income (loss) from operations

     (3,533     278        (9,469     (280

Loss on divestiture of operations

     (940     (356     (2,184     (1,526
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations

     (4,473     (78     (11,653     (1,806
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     1,827        15,263        5,300        33,905   

(Earnings) loss attributable to noncontrolling interests

     (82     239        (498     (212
  

 

 

   

 

 

   

 

 

   

 

 

 

Income attributable to Kindred

   $ 1,745      $ 15,502      $ 4,802      $ 33,693   
  

 

 

   

 

 

   

 

 

   

 

 

 

Amounts attributable to Kindred stockholders:

        

Income from continuing operations

   $ 6,218      $ 15,580      $ 16,455      $ 35,499   

Loss from discontinued operations

     (4,473     (78     (11,653     (1,806
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 1,745      $ 15,502      $ 4,802      $ 33,693   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share:

        

Basic:

        

Income from continuing operations

   $ 0.12      $ 0.29      $ 0.31      $ 0.67   

Discontinued operations:

        

Income (loss) from operations

     (0.07     0.01        (0.18     —     

Loss on divestiture of operations

     (0.02     (0.01     (0.04     (0.03
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations

     (0.09     —          (0.22     (0.03
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 0.03      $ 0.29      $ 0.09      $ 0.64   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted:

        

Income from continuing operations

   $ 0.12      $ 0.29      $ 0.31      $ 0.67   

Discontinued operations:

        

Income (loss) from operations

     (0.07     0.01        (0.18     —     

Loss on divestiture of operations

     (0.02     (0.01     (0.04     (0.03
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations

     (0.09     —          (0.22     (0.03
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 0.03      $ 0.29      $ 0.09      $ 0.64   
  

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in computing earnings per common share:

        

Basic

     52,265        51,664        52,164        51,633   

Diluted

     52,284        51,675        52,184        51,657   

See accompanying notes.

 

3


Table of Contents

KINDRED HEALTHCARE, INC.

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2013     2012     2013     2012  

Net income

   $ 1,827      $ 15,263      $ 5,300      $ 33,905   

Other comprehensive income (loss):

        

Available-for-sale securities (Note 9):

        

Change in unrealized investment gains (losses)

     15        (199     1,628        1,003   

Reclassification of gains realized in net income

     (1,228     (8     (1,109     (85
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change

     (1,213     (207     519        918   

Interest rate swaps (Note 1):

        

Change in unrealized gains (losses)

     472        (1,132     1,316        (1,263

Reclassification of ineffectiveness realized in net income

     (276     —          (276     —     

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

     3        —          (2     201   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change

     199        (1,132     1,038        (1,062

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

     239        588        (698     168   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     (775     (751     859        24   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     1,052        14,512        6,159        33,929   

(Earnings) loss attributable to noncontrolling interests

     (82     239        (498     (212
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Kindred

   $ 970      $ 14,751      $ 5,661      $ 33,717   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

4


Table of Contents

KINDRED HEALTHCARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited)

(In thousands, except per share amounts)

 

     June 30,
2013
    December 31,
2012
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 37,427      $ 50,007   

Cash—restricted

     5,046        5,197   

Insurance subsidiary investments

     93,952        86,168   

Accounts receivable less allowance for loss of $33,916 – June 30, 2013 and $23,959 – December 31, 2012

     1,036,562        1,038,605   

Inventories

     30,723        32,021   

Deferred tax assets

     20,433        12,663   

Income taxes

     14,901        13,573   

Other

     32,725        35,532   
  

 

 

   

 

 

 
     1,271,769        1,273,766   

Property and equipment

     2,168,640        2,226,903   

Accumulated depreciation

     (1,071,595     (1,083,777
  

 

 

   

 

 

 
     1,097,045        1,143,126   

Goodwill

     1,041,796        1,041,266   

Intangible assets less accumulated amortization of $46,228 – June 30, 2013 and $34,854 – December 31, 2012

     429,752        439,767   

Assets held for sale

     2,803        4,131   

Insurance subsidiary investments

     150,034        116,424   

Other

     221,452        219,466   
  

 

 

   

 

 

 

Total assets

   $ 4,214,651      $ 4,237,946   
  

 

 

   

 

 

 
LIABILITIES AND EQUITY     

Current liabilities:

    

Accounts payable

   $ 190,279      $ 210,668   

Salaries, wages and other compensation

     370,082        389,009   

Due to third party payors

     26,205        35,420   

Professional liability risks

     59,362        54,088   

Other accrued liabilities

     123,824        137,204   

Long-term debt due within one year

     8,356        8,942   
  

 

 

   

 

 

 
     778,108        835,331   

Long-term debt

     1,662,286        1,648,706   

Professional liability risks

     246,386        236,630   

Deferred tax liabilities

     10,622        9,764   

Deferred credits and other liabilities

     218,072        214,671   

Commitments and contingencies (Note 11)

    

Equity:

    

Stockholders’ equity:

    

Common stock, $0.25 par value; authorized 175,000 shares; issued 54,052 shares – June 30, 2013 and 53,280 shares – December 31, 2012

     13,513        13,320   

Capital in excess of par value

     1,147,787        1,145,922   

Accumulated other comprehensive loss

     (1,023     (1,882

Retained earnings

     103,227        98,799   
  

 

 

   

 

 

 
     1,263,504        1,256,159   

Noncontrolling interests

     35,673        36,685   
  

 

 

   

 

 

 

Total equity

     1,299,177        1,292,844   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 4,214,651      $ 4,237,946   
  

 

 

   

 

 

 

See accompanying notes.

 

5


Table of Contents

KINDRED HEALTHCARE, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

(In thousands)

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2013     2012     2013     2012  

Cash flows from operating activities:

        

Net income

   $ 1,827      $ 15,263      $ 5,300      $ 33,905   

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

        

Depreciation and amortization

     46,960        49,802        99,914        98,492   

Amortization of stock-based compensation costs

     3,840        3,077        6,088        4,879   

Amortization of deferred financing costs

     4,407        2,359        7,020        4,716   

Payment of lender fees related to debt issuance

     (1,600     —          (1,600     —     

Provision for doubtful accounts

     10,071        6,041        21,337        13,537   

Deferred income taxes

     (24,977     (13,243     (25,321     (16,905

Impairment charges

     16,279        329        16,715        1,196   

Loss on divestiture of discontinued operations

     940        356        2,184        1,526   

Other

     (1,284     1,690        (864     1,967   

Change in operating assets and liabilities:

        

Accounts receivable

     48,294        (23,891     (19,117     (81,088

Inventories and other assets

     4,747        498        (3,400     (15,407

Accounts payable

     (3,288     (2,983     (19,078     (12,533

Income taxes

     3,622        455        15,792        31,697   

Due to third party payors

     (8,187     (1,963     (9,215     (10,939

Other accrued liabilities

     (48,017     15,233        (17,288     (5,445
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     53,634        53,023        78,467        49,598   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

        

Routine capital expenditures

     (17,430     (28,759     (39,800     (50,865

Development capital expenditures

     (5,086     (12,376     (7,474     (22,998

Acquisitions, net of cash acquired

     (26,933     (17,420     (26,933     (67,868

Acquisition deposit

     —          16,866        —          —     

Sale of assets

     7,243        —          12,303        1,110   

Purchase of insurance subsidiary investments

     (11,759     (7,425     (22,595     (21,198

Sale of insurance subsidiary investments

     15,526        8,004        25,528        22,010   

Net change in insurance subsidiary cash and cash equivalents

     (9,782     (1,363     (42,878     (14,486

Change in other investments

     39        182        358        451   

Other

     (77     (255     (221     (1,004
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (48,259     (42,546     (101,712     (154,848
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

        

Proceeds from borrowings under revolving credit

     377,900        449,300        861,400        964,700   

Repayment of borrowings under revolving credit

     (385,200     (457,500     (844,400     (854,500

Repayment of other long-term debt

     (2,060     (2,645     (4,726     (5,311

Payment of deferred financing costs

     (455     (270     (657     (313

Contribution made by noncontrolling interests

     —          200        —          200   

Distribution made to noncontrolling interests

     (1,019     (2,133     (1,510     (3,521

Issuance of common stock

     203        —          207        —     

Other

     19        —          351        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (10,612     (13,048     10,665        101,255   
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in cash and cash equivalents

     (5,237     (2,571     (12,580     (3,995

Cash and cash equivalents at beginning of period

     42,664        40,137        50,007        41,561   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 37,427      $ 37,566      $ 37,427      $ 37,566   
  

 

 

   

 

 

   

 

 

   

 

 

 

Supplemental information:

        

Interest payments

   $ 42,753      $ 35,526      $ 55,845      $ 47,634   

Income tax payments

     23,461        23,802        13,830        9,846   

See accompanying notes.

 

6


Table of Contents

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 – BASIS OF PRESENTATION

Business

Kindred Healthcare, Inc. is a healthcare services company that through its subsidiaries operates 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 June 30, 2013, the Company’s hospital division operated 116 TC hospitals (licensed as long-term acute care (“LTAC”) hospitals under the Medicare program) and six IRFs in 26 states. The Company’s nursing center division operated 169 nursing centers and six assisted living facilities in 26 states. The Company’s rehabilitation division provided rehabilitation services primarily in hospitals and long-term care settings. The Company’s home health and hospice division provided home health, hospice and private duty services from 105 locations in ten states.

In recent years, the Company has completed several transactions related to the 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 June 30, 2013 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 Notes 2 and 3 for a summary of divestitures and discontinued operations.

Recently issued accounting requirements

In July 2013, the Financial Accounting Standards Board (the “FASB”) issued authoritative guidance related to financial statement presentation of an unrecognized tax benefit. The main provisions of the guidance state that an entity must present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. The guidance is effective for all interim and annual reporting periods beginning after December 15, 2014. Early adoption is permitted for all entities. The adoption of the guidance is not expected to have a material impact on the Company’s business, financial position, results of operations or liquidity.

In February 2013, the FASB amended its authoritative guidance issued in December 2011 related to the deferral of the requirement to present reclassification adjustments out of accumulated other comprehensive income in both the statement in which net income is presented and the statement in which other comprehensive income is presented. The amended provisions require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under United States generally accepted accounting principles to be reclassified to net income in its entirety in the same reporting period. For all other amounts, an entity is required to cross-reference to other disclosures that provide additional details about these amounts. All other requirements of the original June 2011 update were not impacted by the amendment which became effective for all interim and annual reporting periods beginning after December 15, 2012. The adoption of the guidance did not have a material impact on the Company’s business, financial position, results of operations or liquidity.

 

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Table of Contents

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 six months ended June 30, 2013 and 2012 (in thousands):

 

For the six months ended June 30, 2013:

   Redeemable
noncontrolling
interests
    Amounts
attributable to
Kindred
stockholders
    Nonredeemable
noncontrolling
interests
    Total
equity
 

Balance at December 31, 2012

   $ —        $ 1,256,159      $ 36,685      $ 1,292,844   

Comprehensive income:

        

Net income

     —          4,802        498        5,300   

Other comprehensive income

     —          859        —          859   
  

 

 

   

 

 

   

 

 

   

 

 

 
     —          5,661        498        6,159   

Issuance of common stock in connection with employee benefit plans

     —          207        —          207   

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

     —          (2,964     —          (2,964

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

     —          (1,647     —          (1,647

Stock-based compensation amortization

     —          6,088        —          6,088   

Distribution made to noncontrolling interests

     —          —          (1,510     (1,510
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2013

   $ —        $ 1,263,504      $ 35,673      $ 1,299,177   
  

 

 

   

 

 

   

 

 

   

 

 

 
 

For the six months ended June 30, 2012:

                        

Balance at December 31, 2011

   $ 9,704      $ 1,288,921      $ 31,620      $ 1,320,541   

Comprehensive income (loss):

        

Net income (loss)

     240        33,693        (28     33,665   

Other comprehensive income

     —          24        —          24   
  

 

 

   

 

 

   

 

 

   

 

 

 
     240        33,717        (28     33,689   

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

     —          (1,821     —          (1,821

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

     —          (2,210     —          (2,210

Stock-based compensation amortization

     —          4,879        —          4,879   

Contribution made by noncontrolling interests

     —          —          200        200   

Distribution made to noncontrolling interests

     (571     —          (2,950     (2,950
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2012

   $ 9,373      $ 1,323,486      $ 28,842      $ 1,352,328   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

8


Table of Contents

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 outstanding senior secured term loan facility debt (the “Term Loan Facility”) entered into in June 2011. The interest rate swaps have an effective date of January 9, 2012, and 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 the interest rate swaps continue to qualify for cash flow hedge accounting treatment at June 30, 2013. However, the Term Loan Facility amendment completed in May 2013 reduces the LIBOR floor from 1.5% to 1.0%, therefore some partial ineffectiveness will result through the expiration of the interest rate swap agreement. For the three and six months ended June 30, 2013, there was $0.3 million of ineffectiveness recognized related to the interest rate swaps and recorded in interest expense. The fair value of the interest rate swaps recorded in other accrued liabilities was $1.3 million and $2.6 million at June 30, 2013 and December 31, 2012, respectively. See Note 10.

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, 2012 filed with the Securities and Exchange Commission (the “SEC”) on Form 10-K. The accompanying condensed consolidated balance sheet at December 31, 2012 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.

NOTE 2 – DIVESTITURES

On July 31, 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 Signature Facilities contain 900 licensed beds. Five of the Signature Facilities were owned facilities and the remaining Signature Facilities were leased. The Signature Facilities generated revenues of approximately $63 million and segment operating income of approximately $11 million (excluding the allocation of approximately $2 million of overhead costs) for the year ended December 31, 2012. The Signature Facilities had aggregate rent expense of approximately $2 million for the year ended December 31, 2012.

 

9


Table of Contents

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 2 – DIVESTITURES (Continued)

 

The results of operations for the Signature Facilities will be reclassified to discontinued operations in the third quarter of 2013. The Signature Facilities did not meet the conditions of discontinued operations at June 30, 2013.

On April 25, 2013, the Company announced that it signed a definitive agreement to sell 17 non-strategic facilities (the “Vibra Facilities”) for $187 million to an affiliate of Vibra Healthcare, LLC (“Vibra”).

The Vibra Facilities consist of 15 TC hospitals containing 1,052 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 are owned facilities. The remaining Vibra Facilities are leased. The Vibra Facilities generated revenues of approximately $289 million and segment operating income of approximately $43 million (excluding the allocation of approximately $9 million of overhead costs) for the year ended December 31, 2012. The Vibra Facilities had aggregate rent expense of approximately $14 million for the year ended December 31, 2012.

The transaction is subject to Vibra finalizing its financing for the transaction and to regulatory approvals and other conditions to closing. The Company expects to complete the transaction through one or more closings occurring during the third and fourth quarters of 2013 as these conditions are satisfied.

The results of operations for the Vibra Facilities will be reclassified to discontinued operations when they meet the conditions of discontinued operations.

During the second quarter of 2013, the Company recorded an asset impairment charge of $15.6 million related to the planned sale of the Vibra Facilities. These charges reflect the amount by which the carrying value of certain property and equipment exceeded its estimated fair value.

On April 27, 2012, the Company announced that it would not renew seven renewal bundles containing 54 nursing centers (the “Expiring Facilities”) under operating leases with Ventas, Inc. (“Ventas”) that expired on April 30, 2013. The Expiring Facilities contain 6,140 licensed nursing center beds and generated revenues of approximately $475 million for the year ended December 31, 2012. The annual rent for these facilities approximated $57 million. The Company may be required to pay for additional capital obligations for the Expiring Facilities under the master lease agreements with Ventas. The Company transferred the operations of all of the 54 nursing centers to new operators during the six months ended June 30, 2013. The Company reclassified the results of operations and losses associated with the Expiring Facilities to discontinued operations, net of income taxes, for all periods presented. The Company received cash proceeds of $7.2 million and $12.3 million for the three months and six months ended June 30, 2013, respectively, for the sale of property and equipment and inventory related to the Expiring Facilities.

NOTE 3 – DISCONTINUED OPERATIONS

In accordance with the authoritative guidance for the impairment or disposal of long-lived assets, the divestitures of unprofitable businesses discussed in Note 1 have been accounted for as discontinued operations. Accordingly, the results of operations of these businesses for all periods presented and the losses associated with these transactions have been classified as discontinued operations, net of income taxes, in the accompanying unaudited condensed consolidated statement of operations. At June 30, 2013, the Company held for sale one hospital.

 

10


Table of Contents

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 3 – DISCONTINUED OPERATIONS (Continued)

 

A summary of discontinued operations follows (in thousands):

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2013     2012     2013     2012  

Revenues

   $ 34,418      $ 122,759      $ 138,432      $ 248,231   
  

 

 

   

 

 

   

 

 

   

 

 

 

Salaries, wages and benefits

     17,743        58,570        71,121        119,536   

Supplies

     1,957        6,593        7,599        13,257   

Rent

     3,651        14,514        16,499        29,037   

Other operating expenses

     16,189        39,277        54,284        79,987   

Other (income) expense

     30        6        142        1   

Impairment charges

     51        50        127        143   

Depreciation

     622        3,303        4,263        6,741   

Interest expense

     —          1        2        2   

Investment income

     (9     (10     (19     (17
  

 

 

   

 

 

   

 

 

   

 

 

 
     40,234        122,304        154,018        248,687   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations before income taxes

     (5,816     455        (15,586     (456

Provision (benefit) for income taxes

     (2,283     177        (6,117     (176
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (3,533     278        (9,469     (280

Loss on divestiture of operations

     (940     (356     (2,184     (1,526
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations

   $ (4,473   $ (78   $ (11,653   $ (1,806
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2013     2012     2013     2012  

Revenues:

        

Hospital division

   $ (61   $ 2,884      $ (117   $ 6,669   

Nursing center division

     34,479        119,875        138,549        241,562   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 34,418      $ 122,759      $ 138,432      $ 248,231   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss):

        

Hospital division

   $ (281   $ (726   $ (954   $ (2,472

Nursing center division

     (1,271     18,989        6,113        37,779   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ (1,552   $ 18,263      $ 5,159      $ 35,307   
  

 

 

   

 

 

   

 

 

   

 

 

 

Rent:

        

Hospital division

   $ —        $ 265      $ 16      $ 640   

Nursing center division

     3,651        14,249        16,483        28,397   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 3,651      $ 14,514      $ 16,499      $ 29,037   
  

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation:

        

Hospital division

   $ —        $ 58      $ 4      $ 315   

Nursing center division

     622        3,245        4,259        6,426   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 622      $ 3,303      $ 4,263      $ 6,741   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

11


Table of Contents

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 3 – DISCONTINUED OPERATIONS (Continued)

 

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

 

     June 30,
2013
    December 31,
2012
 

Long-term assets:

    

Property and equipment, net

   $ 2,803      $ 4,126   

Other

     —          5   
  

 

 

   

 

 

 
     2,803        4,131   

Current liabilities (included in other accrued liabilities)

     (57     —     
  

 

 

   

 

 

 
   $ 2,746      $ 4,131   
  

 

 

   

 

 

 

NOTE 4 – ACQUISITIONS

In May 2013, the Company acquired the real estate of a previously leased hospital for $25.2 million. Annual rent associated with the hospital aggregated $2.5 million.

In May 2013, the Company acquired two home health and hospice businesses for $1.7 million.

During the six months ended June 30, 2012, the Company acquired the real estate of two previously leased hospitals for $67.9 million. Annual rent associated with the hospitals aggregated $5.5 million.

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

The fair value of each of the acquisitions noted above was measured using discounted cash flow methodologies which are considered Level 3 inputs (as described in Note 12).

 

12


Table of Contents

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

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 and other third party payors.

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

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2013     2012     2013     2012  

Medicare

   $ 593,557      $ 601,890      $ 1,243,279      $ 1,238,172   

Medicaid

     209,145        214,120        418,684        427,201   

Medicare Advantage

     110,611        106,737        223,187        213,891   

Other

     570,859        574,995        1,160,094        1,159,493   
  

 

 

   

 

 

   

 

 

   

 

 

 
     1,484,172        1,497,742        3,045,244        3,038,757   

Eliminations

     (73,812     (72,824     (148,566     (147,154
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 1,410,360      $ 1,424,918      $ 2,896,678      $ 2,891,603   
  

 

 

   

 

 

   

 

 

   

 

 

 

NOTE 6 – EARNINGS PER SHARE

Earnings per common share are based upon the weighted average number of common shares outstanding during the respective periods. The diluted calculation of earnings per common share includes the dilutive effect of stock options. The Company follows the provisions of the authoritative guidance for determining whether instruments granted in share-based payment transactions are participating securities, which requires that unvested restricted stock that entitles the holder to receive nonforfeitable dividends before vesting be included as a participating security in the basic and diluted earnings per common share calculation pursuant to the two-class method.

 

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Table of Contents

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 6 – EARNINGS PER SHARE (Continued)

 

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

 

     Three months ended June 30,     Six months ended June 30,  
     2013     2012     2013     2012  
     Basic     Diluted     Basic     Diluted     Basic     Diluted     Basic     Diluted  

Earnings:

                

Amounts attributable to Kindred stockholders:

                

Income from continuing operations:

                

As reported in Statement of Operations

   $ 6,218      $ 6,218      $ 15,580      $ 15,580      $ 16,455      $ 16,455      $ 35,499      $ 35,499   

Allocation to participating unvested restricted stockholders

     (205     (205     (374     (373     (504     (504     (669     (669
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Available to common stockholders

   $ 6,013      $ 6,013      $ 15,206      $ 15,207      $ 15,951      $ 15,951      $ 34,830      $ 34,830   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Discontinued operations, net of income taxes:

                

Income (loss) from operations:

                

As reported in Statement of Operations

   $ (3,533   $ (3,533   $ 278      $ 278      $ (9,469   $ (9,469   $ (280   $ (280

Allocation to participating unvested restricted stockholders

     117        117        (7     (7     290        290        5        5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Available to common stockholders

   $ (3,416   $ (3,416   $ 271      $ 271      $ (9,179   $ (9,179   $ (275   $ (275
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss on divestiture of operations:

                

As reported in Statement of Operations

   $ (940   $ (940   $ (356   $ (356   $ (2,184   $ (2,184   $ (1,526   $ (1,526

Allocation to participating unvested restricted stockholders

     31        31        9        9        67        67        29        29   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Available to common stockholders

   $ (909   $ (909   $ (347   $ (347   $ (2,117   $ (2,117   $ (1,497   $ (1,497
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations:

                

As reported in Statement of Operations

   $ (4,473   $ (4,473   $ (78   $ (78   $ (11,653   $ (11,653   $ (1,806   $ (1,806

Allocation to participating unvested restricted stockholders

     148        148        2        2        357        357        34        34   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Available to common stockholders

   $ (4,325   $ (4,325   $ (76   $ (76   $ (11,296   $ (11,296   $ (1,772   $ (1,772
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income:

                

As reported in Statement of Operations

   $ 1,745      $ 1,745      $ 15,502      $ 15,502      $ 4,802      $ 4,802      $ 33,693      $ 33,693   

Allocation to participating unvested restricted stockholders

     (57     (57     (372     (371     (147     (147     (635     (635
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Available to common stockholders

   $ 1,688      $ 1,688      $ 15,130      $ 15,131      $ 4,655      $ 4,655      $ 33,058      $ 33,058   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in the computation:

                

Weighted average shares outstanding – basic computation

     52,265        52,265        51,664        51,664        52,164        52,164        51,633        51,633   
  

 

 

     

 

 

     

 

 

     

 

 

   

Dilutive effect of employee stock options

       19          11          20          24   
    

 

 

     

 

 

     

 

 

     

 

 

 

Adjusted weighted average shares outstanding – diluted computation

       52,284          51,675          52,184          51,657   
    

 

 

     

 

 

     

 

 

     

 

 

 

Earnings per common share:

                

Income from continuing operations

   $ 0.12      $ 0.12      $ 0.29      $ 0.29      $ 0.31      $ 0.31      $ 0.67      $ 0.67   

Discontinued operations:

                

Income (loss) from operations

     (0.07     (0.07     0.01        0.01        (0.18     (0.18     —          —     

Loss on divestiture of operations

     (0.02     (0.02     (0.01     (0.01     (0.04     (0.04     (0.03     (0.03
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations

     (0.09     (0.09     —          —          (0.22     (0.22     (0.03     (0.03
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 0.03      $ 0.03      $ 0.29      $ 0.29      $ 0.09      $ 0.09      $ 0.64      $ 0.64   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

       1,235          2,296          1,270          2,296   

 

 

14


Table of Contents

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 7 – BUSINESS SEGMENT DATA

The Company is organized into four operating divisions: the hospital division, the nursing center division, the rehabilitation division and the home health and hospice division. Based upon the authoritative guidance for business segments, the operating divisions represent five reportable operating segments, including (1) hospitals, (2) nursing centers, (3) skilled nursing rehabilitation services, (4) hospital rehabilitation services and (5) home health and hospice services. These reportable operating segments are consistent with information used by the Company’s President and Chief Operating Officer to assess performance and allocate resources. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies. Prior period segment information has been reclassified to conform with the current period presentation.

For segment purposes, the Company defines operating income as earnings before interest, income taxes, depreciation, amortization and rent. Segment operating income reported for each of the Company’s operating segments excludes impairment charges, transaction costs and the allocation of corporate overhead.

On January 1, 2013, the Company transferred the operations of its hospital-based sub-acute unit business from the hospital division to the nursing center division. Historical amounts have been reclassified to conform with the current period presentation.

Segment operating income for the six months ended June 30, 2013 included one-time bonus costs paid to employees who do not participate in the Company’s incentive compensation program of $24.5 million (hospital division – $8.8 million, nursing center division – $8.3 million, rehabilitation division – $6.3 million (skilled nursing rehabilitation services – $5.0 million and hospital rehabilitation services – $1.3 million), home health and hospice division – $0.8 million and corporate – $0.3 million).

Segment operating income for the hospital division also included employee retention costs of $0.2 million and $0.5 million for the three months ended June 30, 2013 and for the six months ended June 30, 2013, respectively, incurred in connection with the planned divestiture of the Vibra Facilities.

Segment operating income for the hospital division for the three months ended June 30, 2012 included severance ($0.5 million) and other miscellaneous costs ($0.9 million) incurred in connection with the closing of two TC hospitals and $5.0 million for employment-related lawsuits. Operating income for the hospital division for the six months ended June 30, 2012 included severance ($2.5 million) and other miscellaneous costs ($1.0 million) incurred in connection with the closing of a regional office and two TC hospitals, and $5.0 million for employment-related lawsuits.

Segment operating income for the nursing center division for both the three months ended June 30, 2012 and the six months ended June 30, 2012 included $0.9 million incurred in connection with the cancellation of a sub-acute unit project.

Rent expense for the hospital division included $0.9 million in both the three months ended June 30, 2012 and the six months ended June 30, 2012 incurred in connection with the closing of a TC hospital.

Interest expense for corporate included $1.4 million in both the three months ended June 30, 2013 and the six months ended June 30, 2013 related to charges associated with the modification of certain of the Company’s senior debt. See Note 10.

 

15


Table of Contents

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 7 – BUSINESS SEGMENT DATA (Continued)

 

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

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2013     2012     2013     2012  

Revenues:

        

Hospital division

   $ 691,316      $ 714,517      $ 1,439,530      $ 1,463,900   

Nursing center division

     419,497        425,812        846,691        859,220   

Rehabilitation division:

        

Skilled nursing rehabilitation services

     250,543        255,139        510,063        510,562   

Hospital rehabilitation services

     69,777        73,402        144,300        147,771   
  

 

 

   

 

 

   

 

 

   

 

 

 
     320,320        328,541        654,363        658,333   

Home health and hospice division

     53,039        28,872        104,660        57,304   
  

 

 

   

 

 

   

 

 

   

 

 

 
     1,484,172        1,497,742        3,045,244        3,038,757   

Eliminations:

        

Skilled nursing rehabilitation services

     (44,958     (43,353     (89,659     (87,880

Hospital rehabilitation services

     (27,308     (27,646     (55,302     (55,807

Nursing centers

     (1,546     (1,825     (3,605     (3,467
  

 

 

   

 

 

   

 

 

   

 

 

 
     (73,812     (72,824     (148,566     (147,154
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 1,410,360      $ 1,424,918      $ 2,896,678      $ 2,891,603   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations:

        

Operating income (loss):

        

Hospital division

   $ 142,907      $ 142,668      $ 304,726      $ 304,494   

Nursing center division

     54,034        56,952        97,180        109,471   

Rehabilitation division:

        

Skilled nursing rehabilitation services

     22,519        21,477        36,528        34,209   

Hospital rehabilitation services

     19,573        17,860        37,705        33,976   
  

 

 

   

 

 

   

 

 

   

 

 

 
     42,092        39,337        74,233        68,185   

Home health and hospice division

     3,961        2,789        6,747        5,130   

Corporate:

        

Overhead

     (43,199     (44,723     (88,781     (87,451

Insurance subsidiary

     (384     (600     (893     (1,082
  

 

 

   

 

 

   

 

 

   

 

 

 
     (43,583     (45,323     (89,674     (88,533

Impairment charges

     (16,228     (279     (16,588     (1,053

Transaction costs

     (790     (597     (3,019     (1,082
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     182,393        195,547        373,605        396,612   

Rent

     (97,741     (96,420     (194,542     (191,594

Depreciation and amortization

     (46,338     (46,499     (95,651     (91,751

Interest, net

     (27,605     (26,450     (55,689     (52,742
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     10,709        26,178        27,723        60,525   

Provision for income taxes

     4,409        10,837        10,770        24,814   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 6,300      $ 15,341      $ 16,953      $ 35,711   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

16


Table of Contents

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 7 – BUSINESS SEGMENT DATA (Continued)

 

 

     Three months ended
June 30,
     Six months ended
June 30,
 
     2013      2012      2013      2012  

Rent:

           

Hospital division

   $ 53,855       $ 54,079       $ 107,003       $ 107,230   

Nursing center division

     40,890         39,699         81,479         79,011   

Rehabilitation division:

           

Skilled nursing rehabilitation services

     1,197         1,408         2,432         2,848   

Hospital rehabilitation services

     19         39         36         117   
  

 

 

    

 

 

    

 

 

    

 

 

 
     1,216         1,447         2,468         2,965   

Home health and hospice division

     1,155         609         2,341         1,224   

Corporate

     625         586         1,251         1,164   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 97,741       $ 96,420       $ 194,542       $ 191,594   
  

 

 

    

 

 

    

 

 

    

 

 

 

Depreciation and amortization:

           

Hospital division

   $ 21,752       $ 22,807       $ 45,693       $ 45,153   

Nursing center division

     10,371         9,957         21,208         19,485   

Rehabilitation division:

           

Skilled nursing rehabilitation services

     2,878         2,752         5,990         5,412   

Hospital rehabilitation services

     2,319         2,323         4,650         4,647   
  

 

 

    

 

 

    

 

 

    

 

 

 
     5,197         5,075         10,640         10,059   

Home health and hospice division

     1,615         925         3,141         1,823   

Corporate

     7,403         7,735         14,969         15,231   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 46,338       $ 46,499       $ 95,651       $ 91,751   
  

 

 

    

 

 

    

 

 

    

 

 

 

Capital expenditures, excluding acquisitions (including discontinued operations):

           

Hospital division:

           

Routine

   $ 5,593       $ 9,095       $ 15,864       $ 19,440   

Development

     5,079         11,289         7,467         21,238   
  

 

 

    

 

 

    

 

 

    

 

 

 
     10,672         20,384         23,331         40,678   

Nursing center division:

           

Routine

     4,259         3,417         10,078         7,646   

Development

     7         1,087         7         1,760   
  

 

 

    

 

 

    

 

 

    

 

 

 
     4,266         4,504         10,085         9,406   

Rehabilitation division:

           

Skilled nursing rehabilitation services:

           

Routine

     464         569         1,069         895   

Development

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     464         569         1,069         895   

Hospital rehabilitation services:

           

Routine

     45         60         77         106   

Development

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     45         60         77         106   

Home health and hospice division:

           

Routine

     339         145         534         269   

Development

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     339         145         534         269   

Corporate:

           

Routine:

           

Information systems

     6,436         15,195         11,725         22,059   

Other

     294         278         453         450   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 22,516       $ 41,135       $ 47,274       $ 73,863   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

17


Table of Contents

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 7 – BUSINESS SEGMENT DATA (Continued)

 

 

     June 30,
2013
     December 31,
2012
 

Assets at end of period:

     

Hospital division

   $ 2,111,019       $ 2,129,303   

Nursing center division

     587,382         626,016   

Rehabilitation division:

     

Skilled nursing rehabilitation services

     354,427         336,445   

Hospital rehabilitation services

     333,721         340,668   
  

 

 

    

 

 

 
     688,148         677,113   

Home health and hospice division

     208,774         202,156   

Corporate

     619,328         603,358   
  

 

 

    

 

 

 
   $ 4,214,651       $ 4,237,946   
  

 

 

    

 

 

 

Goodwill:

     

Hospital division

   $ 747,065       $ 747,065   

Rehabilitation division:

     

Skilled nursing rehabilitation services

     —           —     

Hospital rehabilitation services

     168,019         168,019   
  

 

 

    

 

 

 
     168,019         168,019   

Home health and hospice division

     126,712         126,182   
  

 

 

    

 

 

 
   $ 1,041,796       $ 1,041,266   
  

 

 

    

 

 

 

NOTE 8 – INSURANCE RISKS

The Company insures a substantial portion of its professional liability risks and workers compensation risks through its wholly owned limited purpose insurance subsidiary. Provisions for loss for these risks are based upon management’s best available information including actuarially determined estimates.

The allowance for professional liability risks includes an estimate of the expected cost to settle reported claims and an amount, based upon past experiences, for losses incurred but not reported. These liabilities are necessarily based upon estimates and, while management believes that the provision for loss is adequate, the ultimate liability may be in excess of, or less than, the amounts recorded. To the extent that expected ultimate claims costs vary from historical provisions for loss, future earnings will be charged or credited.

The provision for loss for insurance risks, including the cost of coverage maintained with unaffiliated commercial insurance carriers, follows (in thousands):

 

     Three months ended
June 30,
     Six months ended
June 30,
 
     2013      2012      2013      2012  

Professional liability:

           

Continuing operations

   $ 20,217       $ 18,152       $ 40,641       $ 34,867   

Discontinued operations

     1,503         2,422         6,544         4,456   

Workers compensation:

           

Continuing operations

   $ 13,353       $ 13,911       $ 27,099       $ 27,265   

Discontinued operations

     1,244         1,625         2,970         3,242   

 

18


Table of Contents

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 8 – INSURANCE RISKS (Continued)

 

A summary of the assets and liabilities related to insurance risks included in the accompanying unaudited condensed consolidated balance sheet follows (in thousands):

 

     June 30, 2013      December 31, 2012  
     Professional
liability
     Workers
compensation
     Total      Professional
liability
     Workers
compensation
     Total  

Assets:

                 

Current:

                 

Insurance subsidiary investments

   $ 58,500       $ 35,452       $ 93,952       $ 53,133       $ 33,035       $ 86,168   

Reinsurance recoverables

     4,814         —           4,814         5,382         —           5,382   

Other

     —           150         150         —           150         150   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     63,314         35,602         98,916         58,515         33,185         91,700   

Non-current:

                 

Insurance subsidiary investments

     72,101         77,933         150,034         46,546         69,878         116,424   

Reinsurance and other recoverables

     66,549         74,911         141,460         58,025         76,794         134,819   

Deposits

     4,238         1,489         5,727         3,977         1,574         5,551   

Other

     —           40         40         —           40         40   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     142,888         154,373         297,261         108,548         148,286         256,834   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 206,202       $ 189,975       $ 396,177       $ 167,063       $ 181,471       $ 348,534   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

                 

Allowance for insurance risks:

                 

Current

   $ 59,362       $ 39,567       $ 98,929       $ 54,088       $ 37,096       $ 91,184   

Non-current

     246,386         158,840         405,226         236,630         156,265         392,895   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 305,748       $ 198,407       $ 504,155       $ 290,718       $ 193,361       $ 484,079   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Provisions for loss for professional liability risks retained by the Company’s limited purpose insurance subsidiary have been discounted based upon actuarial estimates of claim payment patterns using a discount rate of 1% to 5% depending upon the policy year. The discount rate was 1% for the 2013 and 2012 policy years. The discount rates are based upon the risk free interest rate for the respective year. Amounts equal to the discounted loss provision are funded annually. The Company does not fund the portion of professional liability risks related to estimated claims that have been incurred but not reported. Accordingly, these liabilities are not discounted. If the Company did not discount any of the allowances for professional liability risks, these balances would have approximated $308.6 million at June 30, 2013 and $293.3 million at December 31, 2012.

Provisions for loss for workers compensation risks retained by the Company’s limited purpose insurance subsidiary are not discounted and amounts equal to the loss provision are funded annually.

NOTE 9 – INSURANCE SUBSIDIARY INVESTMENTS

The Company maintains investments, consisting principally of cash and cash equivalents, debt securities, equities and certificates of deposit for the payment of claims and expenses related to professional liability and workers compensation risks. These investments have been categorized as available-for-sale and are reported at fair value.

 

19


Table of Contents

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 9 – INSURANCE SUBSIDIARY INVESTMENTS (Continued)

 

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

 

     June 30, 2013      December 31, 2012  
    
Cost
     Unrealized
gains
     Unrealized
losses
    Fair
value
    
Cost
     Unrealized
gains
     Unrealized
losses
    Fair
value
 

Cash and cash equivalents (a)

   $ 183,040       $ —         $ —        $ 183,040       $ 140,162       $ —         $ —        $ 140,162   

Debt securities:

                     

Corporate bonds

     19,030         37         (38     19,029         21,352         118         (16     21,454   

Debt securities issued by U.S. government agencies

     18,987         47         (22     19,012         16,624         89         —          16,713   

U.S. Treasury notes

     7,108         3         (4     7,107         6,131         3         —          6,134   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     45,125         87         (64     45,148         44,107         210         (16     44,301   

Equities by industry:

                     

Consumer

     1,472         727         —          2,199         2,171         599         (15     2,755   

Industrials

     1,578         363         (26     1,915         2,039         331         (53     2,317   

Financial services

     1,049         362         (54     1,357         1,419         284         (86     1,617   

Technology

     1,002         286         —          1,288         1,482         268         (70     1,680   

Healthcare

     979         285         —          1,264         1,474         179         (14     1,639   

Other

     1,839         705         (73     2,471         2,554         706         (243     3,017   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     7,919         2,728         (153     10,494         11,139         2,367         (481     13,025   

Certificates of deposit

     5,300         4         —          5,304         5,101         3         —          5,104   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ 241,384       $ 2,819       $ (217   $ 243,986       $ 200,509       $ 2,580       $ (497   $ 202,592   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(a) Includes $7.2 million and $3.7 million of money market funds at June 30, 2013 and December 31, 2012, respectively.

The Company’s investment policy governing insurance subsidiary investments precludes the investment portfolio managers from selling any security at a loss without prior authorization from the Company. The investment managers also limit the exposure to any one issue, issuer or type of investment. The Company intends, and has the ability, to hold insurance subsidiary investments for a long duration without the necessity of selling securities to fund the underwriting needs of its insurance subsidiary. This ability to hold securities allows sufficient time for recovery of temporary declines in the market value of equity securities and the par value of debt securities as of their stated maturity date.

The Company considered the severity and duration of its unrealized losses at June 30, 2013 and recognized a $0.1 million pretax-other-than-temporary impairment during the six months ended June 30, 2013 for various investments held in its insurance subsidiary investment portfolio. The Company considered the severity and duration of its unrealized losses at June 30, 2012 for various investments held in its insurance subsidiary investment portfolio and determined that these unrealized losses were temporary and did not record any impairment losses related to these investments.

As a result of deterioration in professional liability and workers compensation underwriting results of the Company’s limited purpose insurance subsidiary in 2012 and 2011, the Company made capital contributions of $14.2 million and $8.6 million during the six months ended June 30, 2013 and 2012, respectively, to its limited purpose insurance subsidiary. These transactions were completed in accordance with applicable regulations. Neither capital contribution had any impact on earnings.

 

20


Table of Contents

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 10 – LONG-TERM DEBT

During the second quarter of 2013, the Company completed an amendment and restatement of its Term Loan Facility to reduce its annual interest cost by 100 basis points. The applicable interest rate on the Term Loan Facility, which matures on June 1, 2018, was reduced by 50 basis points to LIBOR plus 325 basis points (previously LIBOR plus 375 basis points). In addition, the LIBOR floor was reduced to 1.00% from 1.50%. The Company recorded charges associated with the amendment and restatement of $1.4 million during the second quarter of 2013 which is included in interest expense in the accompanying unaudited condensed consolidated statement of operations.

NOTE 11 – CONTINGENCIES

Management continually evaluates contingencies based upon the best available information. In addition, allowances for losses are provided currently for disputed items that have continuing significance, such as certain third party reimbursements and deductions that continue to be claimed in current cost reports and tax returns.

Management believes that allowances for losses have been provided to the extent necessary and that its assessment of contingencies is reasonable.

Principal contingencies are described below:

Revenues—Certain third party payments are subject to examination by agencies administering the various reimbursement programs. The Company is contesting certain issues raised in audits of prior year cost reports.

Professional liability risks—The Company has provided for losses for professional liability risks based upon management’s best available information including actuarially determined estimates. Ultimate claims costs may differ from the provisions for loss. See Note 8.

Income taxes—The Company is subject to various federal and state income tax audits in the ordinary course of business. Such audits could result in increased tax payments, interest and penalties.

Legal and regulatory proceedings—The Company is a party to various legal actions (some of which are not insured), and regulatory and other governmental and internal audits and investigations in the ordinary course of business (including investigations resulting from the Company’s obligation to self-report suspected violations of law by the Company). The Company cannot predict the ultimate outcome of pending litigation and regulatory and other governmental audits and investigations. These matters could potentially subject the Company to sanctions, damages, recoupments, fines and other penalties. The U.S. Department of Justice (the “DOJ”), the Centers for Medicare and Medicaid Services (“CMS”) or other federal and state enforcement and regulatory agencies may conduct additional investigations related to the Company’s businesses in the future which may, either individually or in the aggregate, have a material adverse effect on the Company’s business, financial position, results of operations and liquidity. See Note 14.

Other indemnifications—In the ordinary course of business, the Company enters into contracts containing standard indemnification provisions and indemnifications specific to a transaction, such as a disposal of an operating facility. These indemnifications may cover claims related to employment-related matters, governmental regulations, environmental issues and tax matters, as well as patient, third party payor, supplier and contractual relationships. Obligations under these indemnities generally are initiated by a breach of the terms of a contract or by a third party claim or event.

 

21


Table of Contents

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 12 – FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

The Company follows the provisions of the authoritative guidance for fair value measurements, which addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under generally accepted accounting principles.

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The guidance related to fair value measures establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes three levels of inputs that may be used to measure fair value:

 

Level 1    Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as certain U.S. Treasury, other U.S. Government and agency asset backed debt securities that are highly liquid and are actively traded in over-the-counter markets.
Level 2    Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3    Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

 

22


Table of Contents

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 12 – FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS (Continued)

 

The Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis and any associated losses are summarized below (in thousands):

 

     Fair value measurements      Assets/liabilities
at fair value
    Total
losses
 
     Level 1      Level 2     Level 3       

June 30, 2013:

            

Recurring:

            

Assets:

            

Available-for-sale debt securities:

            

Corporate bonds

   $ —         $ 19,029      $ —         $ 19,029      $ —     

Debt securities issued by U.S. government agencies

     —           19,012        —           19,012        —     

U.S. Treasury notes

     7,107         —          —           7,107        —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
     7,107         38,041        —           45,148        —     

Available-for-sale equity securities

     10,494         —          —           10,494        —     

Money market funds

     10,541         —          —           10,541        —     

Certificates of deposit

     —           5,304        —           5,304        —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total available-for-sale investments

     28,142         43,345        —           71,487        —     

Deposits held in money market funds

     346         4,239        —           4,585        —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
   $ 28,488       $ 47,584      $ —         $ 76,072      $ —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Liabilities:

            

Interest rate swaps

   $ —        $ (1,333   $ —         $ (1,333   $ —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Non-recurring:

            

Assets:

            

Hospital available for sale

   $ —         $ —        $ 3,250       $ 3,250      $ (1,250

Property and equipment

     —           —          3,307         3,307        (16,715
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
   $ —         $ —        $ 6,557       $ 6,557      $ (17,965
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Liabilities

   $ —        $ —       $ —         $ —        $ —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

December 31, 2012:

            

Recurring:

            

Assets:

            

Available-for-sale debt securities:

            

Corporate bonds

   $ —         $ 21,454      $ —         $ 21,454      $ —     

Debt securities issued by U.S. government agencies

     —           16,713        —           16,713        —     

U.S. Treasury notes

     6,134         —          —           6,134        —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
     6,134         38,167        —           44,301        —     

Available-for-sale equity securities

     13,025         —          —           13,025        —     

Money market funds

     7,438         —          —           7,438        —     

Certificates of deposit

     —           5,104        —           5,104        —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total available-for-sale investments

     26,597         43,271        —           69,868        —     

Deposits held in money market funds

     347         3,978        —           4,325        —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
   $ 26,944       $ 47,249      $ —         $ 74,193      $ —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Liabilities:

            

Interest rate swaps

   $ —         $ (2,649   $ —         $ (2,649   $ —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Non-recurring:

            

Assets:

            

Hospital available for sale

   $ —         $ —        $ 105       $ 105      $ (569

Property and equipment

     —           —          286         286        (3,630

Goodwill—skilled nursing rehabilitation services

     —           —          —           —          (107,899

Intangible assets—Medicare license

     —           —          —           —          (2,530
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
   $ —         $ —        $ 391       $ 391      $ (114,628
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Liabilities

   $ —         $ —        $ —         $ —        $ —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

23


Table of Contents

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 12 – FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS (Continued)

 

Recurring measurements

The Company’s available-for-sale investments held by its limited purpose insurance subsidiary consist of debt securities, equities, money market funds and certificates of deposit. These available-for-sale investments and the insurance subsidiary’s cash and cash equivalents of $175.8 million as of June 30, 2013 and $136.5 million as of December 31, 2012, classified as insurance subsidiary investments, are maintained for the payment of claims and expenses related to professional liability and workers compensation risks.

The Company also has available-for-sale investments totaling $3.4 million as of June 30, 2013 and $3.7 million as of December 31, 2012 related to a deferred compensation plan that is maintained for certain of the Company’s current and former employees.

The fair value of actively traded debt and equity securities and money market funds are based upon quoted market prices and are generally classified as Level 1. The fair value of inactively traded debt securities and certificates of deposit are based upon either quoted market prices of similar securities or observable inputs such as interest rates using either a market or income valuation approach and are generally classified as Level 2. The Company’s investment advisors obtain and review pricing for each security. The Company is responsible for the determination of fair value and as such the Company reviews the pricing information from its advisors in determining reasonable estimates of fair value. Based upon the Company’s internal review procedures, there were no adjustments to the prices during the three or six months ended June 30, 2013 or June 30, 2012.

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

The fair value of the derivative liability associated with the interest rate swaps is estimated using industry-standard valuation models, which are Level 2 measurements. Such models project future cash flows and discount the future amounts to a present value using market-based observable inputs, including interest rate curves.

The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments. The carrying value is equal to fair value for financial instruments that are based upon quoted market prices or current market rates. The Company’s long-term debt is based upon Level 2 inputs.

 

     June 30, 2013      December 31, 2012  

(In thousands)

   Carrying
value
     Fair
value
     Carrying
value
     Fair
value
 

Cash and cash equivalents

   $ 37,427       $ 37,427       $ 50,007       $ 50,007   

Cash–restricted

     5,046         5,046         5,197         5,197   

Insurance subsidiary investments

     243,986         243,986         202,592         202,592   

Tax refund escrow investments

     207         207         207         207   

Long-term debt, including amounts due within one year (excluding capital lease obligations totaling $18,000 and $0.6 million at June 30, 2013 and December 31, 2012, respectively)

     1,670,624         1,679,193         1,657,039         1,630,649   

 

 

24


Table of Contents

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 12 – FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS (Continued)

 

Non-recurring measurements

In the second quarter of 2013, the Company recorded an asset impairment charge of $15.6 million related to the planned sale of the Vibra Facilities. These charges reflect the amount by which the carrying value of certain property and equipment exceeded its estimated fair value. The fair value of property and equipment was measured using a Level 3 input of the pending offer and replacement costs adjusted for depreciation, economic obsolescence and inflation.

During the six months ended June 30, 2013, the Company reduced the fair value of a hospital held for sale based upon a pending offer, which resulted in a pretax loss of $1.3 million recorded in discontinued operations. The primary reason for the reduction was to compensate for certain real estate restrictions associated with the property. The fair value of the asset was measured using a Level 3 input of the pending offer.

CMS issued final rules which, among other things, significantly reduced Medicare payments to nursing centers and changed the reimbursement for the provision for group rehabilitation therapy services to Medicare beneficiaries beginning October 1, 2011 (the “2011 CMS Rules”). The Company recorded pretax impairment charges aggregating $0.6 million and $1.0 million in the second quarter of 2013 and for the six months ended June 30, 2013, respectively, for property and equipment expenditures in the nursing center asset groups that were determined to be impaired by the 2011 CMS Rules. These charges reflected the amount by which the carrying value of certain assets exceeded their estimated fair value. The fair value of property and equipment was measured using Level 3 inputs such as replacement costs factoring in depreciation, economic obsolesce and inflation trends.

NOTE 13 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION

The accompanying unaudited condensed consolidating financial information has been prepared and presented pursuant to SEC Regulation S-X, Rule 3-10, “Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered.” The Company’s private placement of $550 million of senior notes due 2019 (the “Notes”) issued on June 1, 2011 are fully and unconditionally guaranteed, subject to certain customary release provisions, by substantially all of the Company’s domestic 100% owned subsidiaries. The equity method has been used with respect to the parent company’s investment in subsidiaries.

 

25


Table of Contents

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 13 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

 

The following unaudited condensed consolidating financial data present the financial position of the parent company/issuer, the guarantor subsidiaries and the non-guarantor subsidiaries as of June 30, 2013 and December 31, 2012, and the respective results of operations and cash flows for the three and six months ended June 30, 2013 and June 30, 2012.

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)

 

     Three months ended June 30, 2013  

(In thousands)

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

Revenues

   $ —        $ 1,320,072      $ 119,310      $ (29,022   $ 1,410,360   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Salaries, wages and benefits

     —          785,604        43,803        —          829,407   

Supplies

     —          89,834        7,984        —          97,818   

Rent

     —          89,278        8,463        —          97,741   

Other operating expenses

     —          262,247        51,313        (29,022     284,538   

Other (income) expense

     —          199        (223     —          (24

Impairment charges

     —          16,228        —          —          16,228   

Depreciation and amortization

     —          43,516        2,822        —          46,338   

Management fees

     —          (3,217     3,217        —          —     

Intercompany interest (income) expense from affiliates

     (25,976     17,362        8,614        —          —     

Interest expense

     29,025        12        49        —          29,086   

Investment income

     —          (93     (1,388     —          (1,481

Equity in net income of consolidating affiliates

     (3,569     —          —          3,569        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     (520     1,300,970        124,654        (25,453     1,399,651   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

     520        19,102        (5,344     (3,569     10,709   

Provision (benefit) for income taxes

     (1,225     4,860        774        —          4,409   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     1,745        14,242        (6,118     (3,569     6,300   

Discontinued operations, net of income taxes:

          

Loss from operations

     —          (3,533     —          —          (3,533

Loss on divestiture of operations

     —          (940     —          —          (940
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations

     —          (4,473     —          —          (4,473
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     1,745        9,769        (6,118     (3,569     1,827   

Earnings attributable to noncontrolling interests

     —          —          (82     —          (82
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) attributable to Kindred

   $ 1,745      $ 9,769      $ (6,200   $ (3,569   $ 1,745   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 970      $ 9,769      $ (6,907   $ (2,780   $ 1,052   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to Kindred

   $ 970      $ 9,769      $ (6,989   $ (2,780   $ 970   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

26


Table of Contents

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 13 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

 

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss) (Continued)

 

     Three months ended June 30, 2012  

(In thousands)

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

Revenues

   $ —        $ 1,334,705      $ 115,324      $ (25,111   $ 1,424,918   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Salaries, wages and benefits

     —          807,388        40,954        —          848,342   

Supplies

     —          92,506        9,142        —          101,648   

Rent

     —          88,929        7,491        —          96,420   

Other operating expenses

     —          259,247        48,120        (25,111     282,256   

Other income

     —          (2,497     (657     —          (3,154

Impairment charges

     —          279        —          —          279   

Depreciation and amortization

     —          43,686        2,813        —          46,499   

Management fees

     —          (3,029     3,029        —          —     

Intercompany interest (income) expense from affiliates

     (28,340     20,215        8,125        —          —     

Interest expense

     26,568        26        121        —          26,715   

Investment income

     —          (55     (210     —          (265

Equity in net income of consolidating affiliates

     (14,026     —          —          14,026        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     (15,798     1,306,695        118,928        (11,085     1,398,740   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

     15,798        28,010        (3,604     (14,026     26,178   

Provision for income taxes

     296        10,313        228        —          10,837   
  

 

 

   

 

 

   

 

 

   </