UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

      

FORM 10-Q

      

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

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 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 October 31, 2013

Common stock, $0.25 par value

      

54,186,774 shares

   

      

      

   

   

       


   

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, 2013 and 2012 and for the nine months ended September 30, 2013 and 2012  

 

 3

   

Condensed Consolidated Statement of Comprehensive Income (Loss) – for the three months ended September 30, 2013 and 2012 and for the nine months ended September 30, 2013 and 2012  

 

 4

   

Condensed Consolidated Balance Sheet – September 30, 2013 and December 31, 2012  

 

 5

   

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

 

 69

Item 4.

Controls and Procedures  

 

 70

   

   

PART II. OTHER INFORMATION

   

Item 1.

Legal Proceedings  

 

 71

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds  

 

 72

Item 6.

Exhibits  

 

 73

   

   

   

       

 

 2 


   

KINDRED HEALTHCARE, INC.

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)

(In thousands, except per share amounts)

   

 

   

Three months ended
September 30,

   

   

Nine months ended
September 30,

   

   

2013

   

   

2012

   

   

2013

   

   

2012

   

Revenues

$

1,198,473

   

   

$

1,226,159

   

   

$

3,705,456

   

   

$

3,725,151

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Salaries, wages and benefits

   

733,605

   

   

   

754,761

   

   

   

2,264,525

   

   

   

2,282,803

   

Supplies

   

81,812

   

   

   

85,129

   

   

   

251,672

   

   

   

261,586

   

Rent

   

79,269

   

   

   

79,312

   

   

   

238,115

   

   

   

234,445

   

Other operating expenses

   

269,927

   

   

   

230,076

   

   

   

745,556

   

   

   

699,692

   

Other (income) expense

   

52

   

   

   

(3,178

)

   

   

(983

)

   

   

(9,479

)

Impairment charges

   

441

   

   

   

406

   

   

   

1,085

   

   

   

1,015

   

Depreciation and amortization

   

37,591

   

   

   

41,304

   

   

   

119,872

   

   

   

121,429

   

Interest expense

   

25,633

   

   

   

26,663

   

   

   

82,888

   

   

   

79,946

   

Investment income

   

(1,235

)

   

   

(212

)

   

   

(2,798

)

   

   

(753

)

   

   

1,227,095

   

   

   

1,214,261

   

   

   

3,699,932

   

   

   

3,670,684

   

Income (loss) from continuing operations before income taxes

   

(28,622

)

   

   

11,898

   

   

   

5,524

   

   

   

54,467

   

Provision (benefit) for income taxes

   

(9,003

)

   

   

5,070

   

   

   

4,288

   

   

   

22,926

   

Income (loss) from continuing operations

   

(19,619

)

   

   

6,828

   

   

   

1,236

   

   

   

31,541

   

Discontinued operations, net of income taxes:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Income (loss) from operations

   

(21,609

)

   

   

3,059

   

   

   

(24,287

)

   

   

13,777

   

Loss on divestiture of operations

   

(65,016

)

   

   

(2,280

)

   

   

(77,893

)

   

   

(3,806

)

Income (loss) from discontinued operations

   

(86,625

)

   

   

779

   

   

   

(102,180

)

   

   

9,971

   

Net income (loss)

   

(106,244

)

   

   

7,607

   

   

   

(100,944

)

   

   

41,512

   

Earnings attributable to noncontrolling interests

   

(754

)

   

   

(41

)

   

   

(1,252

)

   

   

(253

)

Income (loss) attributable to Kindred

$

(106,998

)

   

$

7,566

   

   

$

(102,196

)

   

$

41,259

   

Amounts attributable to Kindred stockholders:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Income (loss) from continuing operations

$

(20,373

)

   

$

6,787

   

   

$

(16

)

   

$

31,288

   

Income (loss) from discontinued operations

   

(86,625

)

   

   

779

   

   

   

(102,180

)

   

   

9,971

   

Net income (loss)

$

(106,998

)

   

$

7,566

   

   

$

(102,196

)

   

$

41,259

   

Earnings (loss) per common share:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Basic:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Income (loss) from continuing operations

$

(0.39

)

   

$

0.13

   

   

$

   

   

$

0.59

   

Discontinued operations:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Income (loss) from operations

   

(0.41

)

   

   

0.05

   

   

   

(0.47

)

   

   

0.26

   

Loss on divestiture of operations

   

(1.24

)

   

   

(0.04

)

   

   

(1.49

)

   

   

(0.07

)

Income (loss) from discontinued operations

   

(1.65

)

   

   

0.01

   

   

   

(1.96

)

   

   

0.19

   

Net income (loss)

$

(2.04

)

   

$

0.14

   

   

$

(1.96

)

   

$

0.78

   

Diluted:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Income (loss) from continuing operations

$

(0.39

)

   

$

0.13

   

   

$

   

   

$

0.59

   

Discontinued operations:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Income (loss) from operations

   

(0.41

)

   

   

0.05

   

   

   

(0.47

)

   

   

0.26

   

Loss on divestiture of operations

   

(1.24

)

   

   

(0.04

)

   

   

(1.49

)

   

   

(0.07

)

Income (loss) from discontinued operations

   

(1.65

)

   

   

0.01

   

   

   

(1.96

)

   

   

0.19

   

Net income (loss)

$

(2.04

)

   

$

0.14

   

   

$

(1.96

)

   

$

0.78

   

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

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Basic

   

52,323

   

   

   

51,676

   

   

   

52,218

   

   

   

51,648

   

Diluted

   

52,323

   

   

   

51,709

   

   

   

52,218

   

   

   

51,675

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Cash dividends declared and paid per common share

$

0.12

   

   

$

   

   

$

0.12

   

   

$

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

See accompanying notes.

 

 3 


   

KINDRED HEALTHCARE, INC.

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In thousands)

   

 

   

Three months ended
September 30,

   

   

Nine months ended
September 30,

   

   

2013

   

   

2012

   

   

2013

   

   

2012

   

Net income (loss)

$

(106,244

)

   

$

7,607

   

   

$

(100,944

)

   

$

41,512

   

Other comprehensive income (loss):

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Available-for-sale securities (Note 9):

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Change in unrealized investment gains

   

416

   

   

   

559

   

   

   

2,044

   

   

   

1,562

   

Reclassification of gains realized in net income (loss)

   

(1,026

)

   

   

   

   

   

(2,135

)

   

   

(85

)

Net change

   

(610

)

   

   

559

   

   

   

(91

)

   

   

1,477

   

Interest rate swaps (Note 1):

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Change in unrealized gains (losses)

   

(183

)

   

   

(25

)

   

   

1,133

   

   

   

(1,288

)

Reclassification of ineffectiveness realized in net income (loss)

   

(104

)

   

   

   

   

   

(380

)

   

   

   

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

   

2

   

   

   

5

   

   

   

   

   

   

206

   

Net change

   

(285

)

   

   

(20

)

   

   

753

   

   

   

(1,082

)

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

   

286

   

   

   

(186

)

   

   

(412

)

   

   

(18

)

Other comprehensive income (loss)

   

(609

)

   

   

353

   

   

   

250

   

   

   

377

   

Comprehensive income (loss)

   

(106,853

)

   

   

7,960

   

   

   

(100,694

)

   

   

41,889

   

Earnings attributable to noncontrolling interests

   

(754

)

   

   

(41

)

   

   

(1,252

)

   

   

(253

)

Comprehensive income (loss) attributable to Kindred

$

(107,607

)

   

$

7,919

   

   

$

(101,946

)

   

$

41,636

   

   

   

   

   

See accompanying notes.

 

 4 


   

KINDRED HEALTHCARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited)

(In thousands, except per share amounts)

   

 

   

September 30,
2013

   

   

December 31,
2012

   

ASSETS

   

   

   

   

   

   

   

Current assets:

   

   

   

   

   

   

   

Cash and cash equivalents

$

44,579

   

   

$

50,007

   

Cash–restricted

   

3,953

   

   

   

5,197

   

Insurance subsidiary investments

   

93,686

   

   

   

86,168

   

Accounts receivable less allowance for loss of $39,847 – September 30, 2013 and $23,959 – December 31, 2012

   

929,931

   

   

   

1,038,605

   

Inventories

   

26,291

   

   

   

32,021

   

Deferred tax assets

   

16,543

   

   

   

12,663

   

Income taxes

   

43,309

   

   

   

13,573

   

Other

   

40,032

   

   

   

35,532

   

   

   

1,198,324

   

   

   

1,273,766

   

Property and equipment

   

1,862,049

   

   

   

2,226,903

   

Accumulated depreciation

   

(997,057

)

   

   

(1,083,777

)

   

   

864,992

   

   

   

1,143,126

   

Goodwill

   

976,611

   

   

   

1,041,266

   

Intangible assets less accumulated amortization of $50,264 – September 30, 2013 and $34,854 – December 31, 2012

   

405,771

   

   

   

439,767

   

Assets held for sale

   

22,092

   

   

   

4,131

   

Insurance subsidiary investments

   

149,916

   

   

   

116,424

   

Deferred tax assets

   

6,250

   

   

   

   

Other

   

240,653

   

   

   

219,466

   

Total assets

$

3,864,609

   

   

$

4,237,946

   

LIABILITIES AND EQUITY

   

   

   

   

   

   

   

Current liabilities:

   

   

   

   

   

   

   

Accounts payable

$

169,217

   

   

$

210,668

   

Salaries, wages and other compensation

   

354,016

   

   

   

389,009

   

Due to third party payors

   

52,134

   

   

   

35,420

   

Professional liability risks

   

59,439

   

   

   

54,088

   

Other accrued liabilities

   

184,781

   

   

   

137,204

   

Long-term debt due within one year

   

8,225

   

   

   

8,942

   

   

   

827,812

   

   

   

835,331

   

Long-term debt

   

1,382,385

   

   

   

1,648,706

   

Professional liability risks

   

246,482

   

   

   

236,630

   

Deferred tax liabilities

   

   

   

   

9,764

   

Deferred credits and other liabilities

   

220,202

   

   

   

214,671

   

Commitments and contingencies (Note 12)

   

   

   

   

   

   

   

Equity:

   

   

   

   

   

   

   

Stockholders’ equity:

   

   

   

   

   

   

   

Common stock, $0.25 par value; authorized 175,000 shares; issued 54,149 shares – September 30, 2013 and 53,280 shares – December 31, 2012

   

13,537

   

   

   

13,320

   

Capital in excess of par value

   

1,149,521

   

   

   

1,145,922

   

Accumulated other comprehensive loss

   

(1,632

)

   

   

(1,882

)

Retained earnings (deficit)

   

(10,275

   

   

98,799

   

   

   

1,151,151

   

   

   

1,256,159

   

Noncontrolling interests

   

36,577

   

   

   

36,685

   

Total equity

   

1,187,728

   

   

   

1,292,844

   

Total liabilities and equity

$

3,864,609

   

   

$

4,237,946

   

See accompanying notes.

   

 

 5 


   

KINDRED HEALTHCARE, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

(In thousands)

   

 

   

Three months ended
September 30,

   

   

Nine months ended
September 30,

   

   

2013

   

   

2012

   

   

2013

   

   

2012

   

Cash flows from operating activities:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Net income (loss)

$

(106,244

)  

   

$

7,607

      

   

$

(100,944

)  

   

$

41,512

      

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Depreciation and amortization

   

42,831

      

   

   

50,600

      

   

   

142,745

      

   

   

149,092

      

Amortization of stock-based compensation costs

   

1,553

      

   

   

3,132

      

   

   

7,641

      

   

   

8,011

      

Amortization of deferred financing costs

   

2,509

      

   

   

2,375

      

   

   

9,529

      

   

   

7,091

      

Payment of lender fees related to senior debt modifications

   

(4,589

   

   

      

   

   

(6,189

   

   

      

Provision for doubtful accounts

   

13,152

      

   

   

9,117

      

   

   

34,489

      

   

   

22,654

      

Deferred income taxes

   

2,336

   

   

   

(1,235

   

   

(22,985

   

   

(18,140

Impairment charges

   

8,995

      

   

   

708

      

   

   

10,077

      

   

   

1,904

      

Loss on divestiture of discontinued operations

   

65,016

      

   

   

2,280

      

   

   

77,893

      

   

   

3,806

      

Other

   

6,316

   

   

   

786

      

   

   

5,452

   

   

   

2,753

      

Change in operating assets and liabilities:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Accounts receivable

   

45,862

      

   

   

13,175

      

   

   

26,745

   

   

   

(67,913

Inventories and other assets

   

3,467

      

   

   

(5,490

   

   

67

   

   

   

(20,897

Accounts payable

   

(12,901

   

   

5,281

      

   

   

(31,979

   

   

(7,252

Income taxes

   

(27,969

)  

   

   

7,588

      

   

   

(5,269

)  

   

   

39,285

      

Due to third party payors

   

25,931

   

   

   

12,627

      

   

   

16,716

   

   

   

1,688

      

Other accrued liabilities

   

44,485

   

   

   

32,938

      

   

   

25,229

   

   

   

27,493

      

Net cash provided by operating activities

   

110,750

      

   

   

141,489

      

   

   

189,217

      

   

   

191,087

      

Cash flows from investing activities:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Routine capital expenditures

   

(23,152

   

   

(25,939

   

   

(62,952

   

   

(76,804

Development capital expenditures

   

(3,235

   

   

(15,177

   

   

(10,709

   

   

(38,175

Acquisitions, net of cash acquired

   

(12,173

   

   

(71,440

   

   

(39,106

   

   

(139,308

Acquisition deposit

   

(14,675

)

   

   

   

   

   

(14,675

)

   

   

   

Sale of assets

   

236,397

      

   

   

      

   

   

248,700

      

   

   

1,110

      

Purchase of insurance subsidiary investments

   

(7,765

   

   

(9,692

   

   

(30,360

   

   

(30,890

Sale of insurance subsidiary investments

   

9,899

      

   

   

8,063

      

   

   

35,427

      

   

   

30,073

      

Net change in insurance subsidiary cash and cash equivalents

   

(1,416

   

   

(685

   

   

(44,294

   

   

(15,171

Change in other investments

   

(140

)  

   

   

1,003

      

   

   

218

      

   

   

1,454

      

Other

   

79

   

   

   

(25

   

   

(142

   

   

(1,029

Net cash provided by (used in) investing activities

   

183,819

   

   

   

(113,892

   

   

82,107

   

   

   

(268,740

Cash flows from financing activities:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Proceeds from borrowings under revolving credit

   

238,900

      

   

   

364,600

      

   

   

1,100,300

      

   

   

1,329,300

      

Repayment of borrowings under revolving credit

   

(519,200

   

   

(390,400

   

   

(1,363,600

   

   

(1,244,900

Repayment of other long-term debt

   

(92

   

   

(2,665

   

   

(4,818

   

   

(7,976

Payment of deferred financing costs

   

(683

   

   

(288

   

   

(1,340

   

   

(601

Contribution made by noncontrolling interests

   

      

   

   

      

   

   

      

   

   

200

      

Distribution made to noncontrolling interests

   

(118

   

   

      

   

   

(1,628

   

   

(3,521

Purchase of noncontrolling interests

   

      

   

   

(715

   

   

      

   

   

(715

Issuance of common stock

   

222

      

   

   

      

   

   

429

      

   

   

      

Dividends paid

   

(6,499

)

   

   

   

   

   

(6,499

)

   

   

   

Other

   

53

      

   

   

      

   

   

404

      

   

   

      

Net cash provided by (used in) financing activities

   

(287,417

   

   

(29,468

   

   

(276,752

)  

   

   

71,787

      

Change in cash and cash equivalents

   

7,152

   

   

   

(1,871

   

   

(5,428

   

   

(5,866

Cash and cash equivalents at beginning of period

   

37,427

      

   

   

37,566

      

   

   

50,007

      

   

   

41,561

      

Cash and cash equivalents at end of period

$

44,579

      

   

$

35,695

      

   

$

44,579

      

   

$

35,695

      

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Supplemental information:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Interest payments

$

7,899

      

   

$

12,856

      

   

$

63,744

      

   

$

60,490

      

Income tax payments

   

2,886

      

   

   

472

      

   

   

16,716

      

   

   

10,318

      

   

See accompanying notes.

   

               

 

 6 


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

   

   

NOTE 1 – BASIS OF PRESENTATION

Business

Kindred Healthcare, Inc. is a healthcare services company that through its subsidiaries operates transitional care (“TC”) hospitals, inpatient rehabilitation hospitals (“IRFs”), nursing centers, assisted living facilities, a contract rehabilitation services business and a home health and hospice business across the United States (collectively, the “Company” or “Kindred”). At September 30, 2013, the Company’s hospital division operated 102 TC hospitals (certified as long-term acute care (“LTAC”) hospitals under the Medicare program) and five IRFs in 22 states. The Company’s nursing center division operated 102 nursing centers and six assisted living facilities in 22 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 11 states.

In 2013 and in recent years, the Company has completed several transactions related to the divestiture or planned divestiture of unprofitable hospitals and nursing centers to improve its future operating results. For accounting purposes, the operating results of these businesses and the losses associated with these transactions have been classified as discontinued operations in the accompanying unaudited condensed consolidated statement of operations for all periods presented. Assets held for sale at September 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, 2013. 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.

 

 7 


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

   

NOTE 1 – BASIS OF PRESENTATION (Continued)

Equity

The following table sets forth the changes in equity attributable to noncontrolling interests and equity attributable to Kindred stockholders for the nine months ended September 30, 2013 and 2012 (in thousands):

   

 

For the nine months ended September 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 (loss):

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Net income (loss)

   

   

   

   

   

(102,196

)

   

   

1,252

   

   

   

(100,944

)

Other comprehensive income

   

   

   

   

   

250

   

   

   

   

   

   

250

   

   

   

   

   

   

   

(101,946

)

   

   

1,252

   

   

   

(100,694

)

Issuance of common stock in connection with employee benefit plans

   

   

   

   

   

429

   

   

   

   

   

   

429

   

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

   

   

   

   

   

(2,987

)

   

   

   

   

   

(2,987

)

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

   

   

   

   

   

(1,646

)

   

   

   

   

   

(1,646

)

Stock-based compensation amortization

   

   

   

   

   

7,641

   

   

   

   

   

   

7,641

   

Distribution made to noncontrolling interests

   

   

   

   

   

   

   

   

(1,628

)

   

   

(1,628

)

Purchase of noncontrolling interests

   

   

   

   

   

   

   

   

268

   

   

   

268

   

Dividends paid

   

   

   

   

   

(6,499

)

   

   

   

   

   

(6,499

)

Balance at September 30, 2013

   

$

   

   

$

1,151,151

   

   

$

36,577

   

   

$

1,187,728

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

For the nine months ended September 30, 2012:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Balance at December 31, 2011

   

$

9,704

   

   

$

1,288,921

   

   

$

31,620

   

   

$

1,320,541

   

Comprehensive income:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Net income

   

   

140

   

   

   

41,259

   

   

   

113

   

   

   

41,372

   

Other comprehensive income

   

   

   

   

   

377

   

   

   

   

   

   

377

   

   

   

   

140

   

   

   

41,636

   

   

   

113

   

   

   

41,749

   

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

   

   

   

   

   

(1,856

)

   

   

   

   

   

(1,856

)

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

   

   

   

   

   

(2,453

)

   

   

   

   

   

(2,453

)

Stock-based compensation amortization

   

   

   

   

   

8,011

   

   

   

   

   

   

8,011

   

Contribution made by noncontrolling interests

   

   

   

   

   

   

   

   

200

   

   

   

200

   

Distribution made to noncontrolling interests

   

   

(571

)

   

   

   

   

   

(2,950

)

   

   

(2,950

)

Purchase of noncontrolling interests

   

   

(2,031

)

   

   

1,316

   

   

   

   

   

   

1,316

   

Reclassification of noncontrolling interests

   

   

(7,242

)

   

   

   

   

   

7,242

   

   

   

7,242

   

Balance at September 30, 2012

   

$

   

   

$

1,335,575

   

   

$

36,225

   

   

$

1,371,800

   

The purchase of redeemable noncontrolling interests for the nine months ended September 30, 2012 resulted from a cash payment of $0.7 million and a gain of $1.3 million that was recorded as an increase to equity.

The reclassification between noncontrolling interests for the nine months ended September 30, 2012 resulted from minority ownership interests containing put rights in connection with the RehabCare Merger (as defined) that expired.

Income taxes

The Company’s effective income tax rate was 31.5% and 42.6% for the third quarter of 2013 and 2012, respectively, and 77.6% and 42.1% for the nine months ended September 30, 2013 and 2012, respectively. The change in the effective income tax rate for both periods was primarily related to a non-deductible litigation charge that increased the provision for income taxes by approximately $3 million for both periods.

 

 8 


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

   

NOTE 1 – BASIS OF PRESENTATION (Continued)

Derivative financial instruments

In December 2011, the Company entered into two interest rate swap agreements to hedge its floating interest rate on an aggregate of $225 million of debt outstanding under its $785.5 million senior secured term loan facility (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 September 30, 2013. However, a Term Loan Facility amendment completed in May 2013 reduced the LIBOR floor from 1.5% to 1.0%, therefore some partial ineffectiveness will result through the expiration of the interest rate swap agreement. For the three and nine months ended September 30, 2013, there was $0.1 million and $0.4 million, respectively, of ineffectiveness recognized related to the interest rate swaps recorded in interest expense. The fair value of the interest rate swaps recorded in other accrued liabilities was $1.5 million and $2.6 million at September 30, 2013 and December 31, 2012, respectively. See Note 11.

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

During the third quarter of 2013, the Company completed the sale of 16 non-strategic facilities (the “Vibra Facilities”) for $187 million to an affiliate of Vibra Healthcare, LLC (“Vibra”). The net proceeds of $180 million from this transaction were used to reduce the Company’s borrowings under its $750 million senior secured asset-based revolving credit facility (the “ABL Facility”).

The Vibra Facilities consist of 14 TC hospitals containing 1,002 licensed beds, one IRF containing 44 licensed beds and one nursing center containing 135 licensed beds. Six of the TC hospitals and the one nursing center were owned facilities. The remaining Vibra Facilities were leased. The Vibra Facilities generated revenues of approximately $272 million and segment operating income of approximately $40 million (excluding the allocation of approximately $8 million of overhead costs) for the year ended December 31, 2012. The Vibra Facilities had aggregate rent expense of approximately $12 million for the year ended December 31, 2012.

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

 

 9 


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

   

NOTE 2 – DIVESTITURES (Continued)

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 proceeds from this transaction were used to reduce the Company’s borrowings under its ABL Facility.

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.

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

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

On April 27, 2012, the Company announced that it would not renew seven renewal bundles containing 54 nursing centers (the “2012 Expiring Facilities”) under operating leases with Ventas, Inc. (“Ventas”) that expired on April 30, 2013. The 2012 Expiring Facilities contained 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 transferred the operations of all of the 2012 Expiring Facilities to new operators during the nine months ended September 30, 2013. The Company reclassified the results of operations and losses associated with the 2012 Expiring Facilities to discontinued operations, net of income taxes, for all periods presented. The Company received cash proceeds of $13.5 million for the nine months ended September 30, 2013 for the sale of property and equipment and inventory related to the 2012 Expiring Facilities.

   

NOTE 3 – DISCONTINUED OPERATIONS

In accordance with the authoritative guidance for the impairment or disposal of long-lived assets, the divestitures or planned divestiture of unprofitable businesses discussed in Notes 1 and 2 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 September 30, 2013, the Company held for sale one hospital and 59 nursing centers reported as discontinued operations.

On September 30, 2013, the Company entered into agreements to renew early its leases with Ventas for 22 TC hospitals and 26 nursing centers (collectively, the “Renewal Facilities”) and exit 59 nursing centers and close another facility (collectively, the “2013 Expiring Facilities”). The current lease term for the Renewal Facilities and the 2013 Expiring Facilities was scheduled to expire in April 2015. See Note 10. Under the terms of the agreements, the lease term for the 2013 Expiring Facilities will expire on September 30, 2014. For accounting purposes, 59 of the 2013 Expiring Facilities qualified as assets held for sale and the Company reflected the operating results as discontinued operations in the accompanying unaudited condensed consolidated statement of operations for all historical periods and will reflect the facility scheduled for closure as a discontinued operation upon completion of the exit process. Under the terms of the agreements, the Company will pay $20 million to Ventas in exchange for the early termination of certain leases. The disposal group was measured at its fair value less cost to sell and the Company recorded an asset impairment charge of $7.9 million related to leasehold improvements in the 2013 Expiring Facilities. These charges were recorded in discontinued operations in the third quarter of 2013 in the accompanying unaudited condensed consolidated statement of operations.

 

 10 


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
September 30,

   

   

Nine months ended
September 30,

   

   

2013

   

   

2012

   

   

2013

   

   

2012

   

Revenues

$

171,190

   

   

$

328,247

   

   

$

732,757

   

   

$

1,003,994

   

Salaries, wages and benefits

   

80,997

   

   

   

158,157

   

   

   

356,612

   

   

   

482,231

   

Supplies

   

12,398

   

   

   

21,466

   

   

   

49,834

   

   

   

64,545

   

Rent

   

36,897

   

   

   

32,705

   

   

   

89,091

   

   

   

98,204

   

Other operating expenses

   

62,685

   

   

   

101,315

   

   

   

245,209

   

   

   

307,962

   

Other (income) expense

   

(11

)

   

   

24

   

   

   

144

   

   

   

33

   

Impairment charges

   

8,554

   

   

   

302

   

   

   

8,992

   

   

   

889

   

Depreciation

   

5,240

   

   

   

9,296

   

   

   

22,873

   

   

   

27,663

   

Interest expense

   

2

   

   

   

6

   

   

   

10

   

   

   

17

   

Investment income

   

(2

)

   

   

(18

)

   

   

(29

)

   

   

(43

)

   

   

206,760

   

   

   

323,253

   

   

   

772,736

   

   

   

981,501

   

Income (loss) from operations before income taxes

   

(35,570

)

   

   

4,994

   

   

   

(39,979

)

   

   

22,493

   

Provision (benefit) for income taxes

   

(13,961

)

   

   

1,935

   

   

   

(15,692

)

   

   

8,716

   

Income (loss) from operations

   

(21,609

)

   

   

3,059

   

   

   

(24,287

)

   

   

13,777

   

Loss on divestiture of operations

   

(65,016

)

   

   

(2,280

)

   

   

(77,893

)

   

   

(3,806

)

Income (loss) from discontinued operations

$

(86,625

)

   

$

779

   

   

$

(102,180

)

   

$

9,971

   

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

   

 

   

Three months ended
September 30,

   

   

Nine months ended
September 30,

   

   

2013

   

   

2012

   

   

2013

   

   

2012

   

Revenues:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Hospital division

$

42,998

   

   

$

64,634

   

   

$

181,287

   

   

$

203,982

   

Nursing center division

   

128,192

   

   

   

263,613

   

   

   

551,470

   

   

   

800,012

   

   

$

171,190

   

   

$

328,247

   

   

$

732,757

   

   

$

1,003,994

   

Operating income:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Hospital division

$

4,344

   

   

$

6,566

   

   

$

26,514

   

   

$

25,164

   

Nursing center division

   

2,223

   

   

   

40,417

   

   

   

45,452

   

   

   

123,170

   

   

$

6,567

   

   

$

46,983

   

   

$

71,966

   

   

$

148,334

   

Rent:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Hospital division

$

1,797

   

   

$

3,095

   

   

$

6,723

   

   

$

9,371

   

Nursing center division

   

35,100

   

   

   

29,610

   

   

   

82,368

   

   

   

88,833

   

   

$

36,897

   

   

$

32,705

   

   

$

89,091

   

   

$

98,204

   

Depreciation:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Hospital division

$

2,349

   

   

$

3,049

   

   

$

9,327

   

   

$

9,331

   

Nursing center division

   

2,891

   

   

   

6,247

   

   

   

13,546

   

   

   

18,332

   

   

$

5,240

   

   

$

9,296

   

   

$

22,873

   

   

$

27,663

   

 

 11 


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):

   

 

   

September 30,
2013

   

   

December 31,
2012

   

Long-term assets:

   

   

   

   

   

   

   

Property and equipment, net

$

20,738

   

   

$

4,126

   

Other

   

1,354

   

   

   

5

   

   

   

22,092

   

   

   

4,131

   

Current liabilities (included in other accrued liabilities)

   

(61

)

   

   

   

   

$

22,031

   

   

$

4,131

   

   

   

NOTE 4 – ACQUISITIONS

The following is a summary of the Company’s acquisition activities. The operating results of the acquired businesses have been included in the accompanying unaudited condensed consolidated financial statements of the Company from the respective acquisition dates. The purchase price of acquired businesses and acquired leased facilities resulted from negotiations with each of the sellers that were based upon both the historical and expected future cash flows of the respective businesses and real estate values. Each of these acquisitions was financed through operating cash flows and borrowings under the Company’s ABL Facility. Unaudited pro forma financial data related to the acquired businesses have not been presented because the acquisitions are not material, either individually or in the aggregate, to the Company’s consolidated financial statements.

During the third quarter of 2013, the Company acquired three home health and hospice businesses for $7.2 million and acquired a TC hospital for $5.0 million.

Also, during the nine months ended September 30, 2013, the Company acquired two home health and hospice businesses for $1.7 million and acquired the real estate of a previously leased hospital for $25.2 million. Annual rent associated with the previously leased hospital aggregated $2.5 million.

Acquisition deposits of $14.7 million were made on September 30, 2013, primarily related to the purchase of a hospital rehabilitation services company on October 1, 2013.

During the third quarter of 2012, the Company acquired two home health and hospice businesses for $71.4 million, which included $12.1 million of accounts receivable, $1.1 million of other assets, $1.4 million of property and equipment, $58.2 million of goodwill, $18.1 million of identifiable intangible assets, $10.4 million of current liabilities, $7.2 million of deferred income tax liabilities and $1.9 million of other long-term liabilities.

During the nine months ended September 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 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 13).

 

 12 


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
September 30,

   

   

Nine months ended
September 30,

   

   

2013

   

   

2012

   

   

2013

   

   

2012

   

Medicare

$

490,312

   

   

$

508,563

   

   

$

1,560,265

   

   

$

1,572,906

   

Medicaid

   

153,822

   

   

   

145,358

   

   

   

437,071

   

   

   

433,190

   

Medicare Advantage

   

91,453

   

   

   

91,784

   

   

   

284,028

   

   

   

277,277

   

Other

   

516,652

   

   

   

533,024

   

   

   

1,588,836

   

   

   

1,602,812

   

   

   

1,252,239

   

   

   

1,278,729

   

   

   

3,870,200

   

   

   

3,886,185

   

Eliminations

   

(53,766

)

   

   

(52,570

)

   

   

(164,744

)

   

   

(161,034

)

   

$

1,198,473

   

   

$

1,226,159

   

   

$

3,705,456

   

   

$

3,725,151

   

   

NOTE 6 – EARNINGS (LOSS) PER SHARE AND DIVIDENDS

Earnings (loss) 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.

The Company’s Board of Directors approved a quarterly cash dividend to its shareholders of $0.12 per common share that was paid on September 9, 2013 to shareholders of record as of the close of business on August 19, 2013. Future declarations of quarterly dividends will be subject to the approval of Kindred’s Board of Directors.

 

 13 


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

   

NOTE 6 – EARNINGS (LOSS) PER SHARE AND DIVIDENDS (Continued)

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

   

 

   

Three months ended September 30,

   

   

Nine months ended September 30,

   

   

2013

   

   

2012

   

   

2013

   

   

2012

   

   

Basic

   

   

Diluted

   

   

Basic

   

   

Diluted

   

   

Basic

   

   

Diluted

   

   

Basic

   

   

Diluted

   

Earnings (loss):

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Amounts attributable to Kindred stockholders:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Income (loss) from continuing operations:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

As reported in Statement of Operations

$

(20,373

)

   

$

(20,373

)

   

$

6,787

   

   

$

6,787

   

   

$

(16

)

   

$

(16

)

   

$

31,288

   

   

$

31,288

   

Allocation to participating unvested restricted stockholders

   

   

   

   

   

   

   

(173

)

   

   

(172

)

   

   

   

   

   

   

   

   

(660

)

   

   

(659

)

Available to common stockholders

$

(20,373

)

   

$

(20,373

)

   

$

6,614

   

   

$

6,615

   

   

$

(16

)

   

$

(16

)

   

$

30,628

   

   

$

30,629

   

Discontinued operations, net of income taxes:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Income (loss) from operations:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

As reported in Statement of Operations

$

(21,609

)

   

$

(21,609

)

   

$

3,059

   

   

$

3,059

   

   

$

(24,287

)

   

$

(24,287

)

   

$

13,777

   

   

$

13,777

   

Allocation to participating unvested restricted stockholders

   

   

   

   

   

   

   

(78

)

   

   

(78

)

   

   

   

   

   

   

   

   

(290

)

   

   

(290

)

Available to common stockholders

$

(21,609

)

   

$

(21,609

)

   

$

2,981

   

   

$

2,981

   

   

$

(24,287

)

   

$

(24,287

)

   

$

13,487

   

   

$

13,487

   

Loss on divestiture of operations:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

As reported in Statement of Operations

$

(65,016

)

   

$

(65,016

)

   

$

(2,280

)

   

$

(2,280

)

   

$

(77,893

)

   

$

(77,893

)

   

$

(3,806

)

   

$

(3,806

)

Allocation to participating unvested restricted stockholders

   

   

   

   

   

   

   

58

   

   

   

58

   

   

   

   

   

   

   

   

   

80

   

   

   

80

   

Available to common stockholders

$

(65,016

)

   

$

(65,016

)

   

$

(2,222

)

   

$

(2,222

)

   

$

(77,893

)

   

$

(77,893

)

   

$

(3,726

)

   

$

(3,726

)

Income (loss) from discontinued operations:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

As reported in Statement of Operations

$

(86,625

)

   

$

(86,625

)

   

$

779

   

   

$

779

   

   

$

(102,180

)

   

$

(102,180

)

   

$

9,971

   

   

$

9,971

   

Allocation to participating unvested restricted stockholders

   

   

   

   

   

   

   

(20

)

   

   

(20

)

   

   

   

   

   

   

   

   

(210

)

   

   

(210

)

Available to common stockholders

$

(86,625

)

   

$

(86,625

)

   

$

759

   

   

$

759

   

   

$

(102,180

)

   

$

(102,180

)

   

$

9,761

   

   

$

9,761

   

Net income (loss):

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

As reported in Statement of Operations

$

(106,998

)

   

$

(106,998

)

   

$

7,566

   

   

$

7,566

   

   

$

(102,196

)

   

$

(102,196

)

   

$

41,259

   

   

$

41,259

   

Allocation to participating unvested restricted stockholders

   

   

   

   

   

   

   

(193

)

   

   

(192

)

   

   

   

   

   

   

   

   

(870

)

   

   

(869

)

Available to common stockholders

$

(106,998

)

   

$

(106,998

)

   

$

7,373

   

   

$

7,374

   

   

$

(102,196

)

   

$

(102,196

)

   

$

40,389

   

   

$

40,390

   

Shares used in the computation:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Weighted average shares outstanding – basic computation

   

52,323

   

   

   

52,323

   

   

   

51,676

   

   

   

51,676

   

   

   

52,218

   

   

   

52,218

   

   

   

51,648

   

   

   

51,648

   

Dilutive effect of employee stock options

   

   

   

   

   

   

   

   

   

   

   

   

33

   

   

   

   

   

   

   

   

   

   

   

   

   

   

27

   

Adjusted weighted average shares outstanding – diluted computation

   

   

   

   

   

52,323

   

   

   

   

   

   

   

51,709

   

   

   

   

   

   

   

52,218

   

   

   

   

   

   

   

51,675

   

Earnings (loss) per common share:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Income (loss) from continuing operations

$

(0.39

)

   

$

(0.39

)

   

$

0.13

   

   

$

0.13

   

   

$

   

   

$

   

   

$

0.59

   

   

$

0.59

   

Discontinued operations:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Income (loss) from operations

   

(0.41

)

   

   

(0.41

)

   

   

0.05

   

   

   

0.05

   

   

   

(0.47

)

   

   

(0.47

)

   

   

0.26

   

   

   

0.26

   

Loss on divestiture of operations

   

(1.24

)

   

   

(1.24

)

   

   

(0.04

)

   

   

(0.04

)

   

   

(1.49

)

   

   

(1.49

)

   

   

(0.07

)

   

   

(0.07

)

Income (loss) from discontinued operations

   

(1.65

)

   

   

(1.65

)

   

   

0.01

   

   

   

0.01

   

   

   

(1.96

)

   

   

(1.96

)

   

   

0.19

   

   

   

0.19

   

Net income (loss)

$

(2.04

)

   

$

(2.04

)

   

$

0.14

   

   

$

0.14

   

   

$

(1.96

)

   

$

(1.96

)

   

$

0.78

   

   

$

0.78

   

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

   

   

   

   

   

1,157

   

   

   

   

   

   

   

1,710

   

   

   

   

   

   

   

1,179

   

   

   

   

   

   

   

1,710

   

   

 

 14 


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 nine months ended September 30, 2013 included one-time bonus costs paid to employees who do not participate in the Company’s incentive compensation program of $20.4 million (hospital division – $8.0 million, nursing center division – $5.0 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 for the three months ended September 30, 2013 included costs of $5.5 million in connection with the closing of a TC hospital and a litigation charge of $0.7 million.

Segment operating income for the hospital division for the nine months ended September 30, 2012 included severance ($2.5 million) and other miscellaneous costs ($1.1 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 the nine months ended September 30, 2012 included $0.9      million incurred in connection with the cancellation of a sub-acute unit project.

Segment operating income for the rehabilitation division for the three months ended September 30, 2013 included $23.1 million of litigation charges (skilled nursing rehabilitation services) and $0.3 million of severance and retirement costs (hospital rehabilitation services).

Segment operating income for the home health and hospice division for the three months ended September 30, 2013 included $0.6 million of severance and retirement costs and $0.5 million of costs associated with closing a home health location.

Segment operating income for corporate for the three months ended September 30, 2013 included $1.0 million of severance and retirement costs and $0.5 million of fees associated with the modification of certain of the Company’s senior debt. See Note 11.

Rent expense for the hospital division included $0.6 million and $1.5 million for the three and nine months ended September 30, 2012, respectively, incurred in connection with the closing of two TC hospitals.

Interest expense for corporate included $0.1 million and $1.5 million for the three and nine months ended September 30, 2013, respectively, related to charges associated with the modification of certain of the Company’s senior debt. See Note 11.

 

 15 


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
September 30,

   

   

Nine months ended
September 30,

   

   

2013

   

   

2012

   

   

2013

   

   

2012

   

Revenues:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Hospital division

$

608,506

   

   

$

636,463

   

   

$

1,909,629

   

   

$

1,967,683

   

Nursing center division

   

277,668

   

   

   

282,223

   

   

   

839,630

   

   

   

846,608

   

Rehabilitation division:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Skilled nursing rehabilitation services

   

243,968

   

   

   

252,201

   

   

   

749,884

   

   

   

758,977

   

Hospital rehabilitation services

   

68,296

   

   

   

71,899

   

   

   

212,596

   

   

   

219,670

   

   

   

312,264

   

   

   

324,100

   

   

   

962,480

   

   

   

978,647

   

Home health and hospice division

   

53,801

   

   

   

35,943

   

   

   

158,461

   

   

   

93,247

   

   

   

1,252,239

   

   

   

1,278,729

   

   

   

3,870,200

   

   

   

3,886,185

   

Eliminations:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Skilled nursing rehabilitation services

   

(29,414

)

   

   

(27,805

)

   

   

(89,697

)

   

   

(85,239

)

Hospital rehabilitation services

   

(23,191

)

   

   

(23,904

)

   

   

(71,672

)

   

   

(73,423

)

Nursing centers

   

(1,161

)

   

   

(861

)

   

   

(3,375

)

   

   

(2,372

)

   

   

(53,766

)

   

   

(52,570

)

   

   

(164,744

)

   

   

(161,034

)

   

$

1,198,473

   

   

$

1,226,159

   

   

$

3,705,456

   

   

$

3,725,151

   

Income (loss) from continuing operations:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Operating income (loss):

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Hospital division

$

112,290

   

   

$

130,798

   

   

$

393,892

   

   

$

414,222

   

Nursing center division

   

30,304

   

   

   

37,865

   

   

   

94,204

   

   

   

105,705

   

Rehabilitation division:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Skilled nursing rehabilitation services

   

(8,571

)

   

   

16,996

   

   

   

23,810

   

   

   

47,419

   

Hospital rehabilitation services

   

18,215

   

   

   

16,977

   

   

   

55,920

   

   

   

50,953

   

   

   

9,644

   

   

   

33,973

   

   

   

79,730

   

   

   

98,372

   

Home health and hospice division

   

1,085

   

   

   

3,645

   

   

   

7,832

   

   

   

8,775

   

Corporate:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Overhead

   

(39,151

)

   

   

(45,883

)

   

   

(127,932

)

   

   

(133,334

)

Insurance subsidiary

   

(482

)

   

   

(545

)

   

   

(1,375

)

   

   

(1,627

)

   

   

(39,633

)

   

   

(46,428

)

   

   

(129,307

)

   

   

(134,961

)

Impairment charges

   

(441

)

   

   

(406

)

   

   

(1,085

)

   

   

(1,015

)

Transaction costs

   

(613

)

   

   

(482

)

   

   

(1,665

)

   

   

(1,564

)

Operating income

   

112,636

   

   

   

158,965

   

   

   

443,601

   

   

   

489,534

   

Rent

   

(79,269

)

   

   

(79,312

)

   

   

(238,115

)

   

   

(234,445

)

Depreciation and amortization

   

(37,591

)

   

   

(41,304

)

   

   

(119,872

)

   

   

(121,429

)

Interest, net

   

(24,398

)

   

   

(26,451

)

   

   

(80,090

)

   

   

(79,193

)

Income (loss) from continuing operations before income taxes

   

(28,622

)

   

   

11,898

   

   

   

5,524

   

   

   

54,467

   

Provision (benefit) for income taxes

   

(9,003

)

   

   

5,070

   

   

   

4,288

   

   

   

22,926

   

   

$

(19,619

)

   

$

6,828

   

   

$

1,236

   

   

$

31,541

   

   

 

 16 


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

   

NOTE 7 – BUSINESS SEGMENT DATA (Continued)

   

 

   

Three months ended
September 30,

   

   

Nine months ended
September 30,

   

   

2013

   

   

2012

   

   

2013

   

   

2012

   

Rent:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Hospital division

$

50,929

   

   

$

52,197

   

   

$

153,021

   

   

$

153,790

   

Nursing center division

   

25,450

   

   

   

24,300

   

   

   

76,144

   

   

   

72,487

   

Rehabilitation division:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Skilled nursing rehabilitation services

   

1,123

   

   

   

1,356

   

   

   

3,555

   

   

   

4,204

   

Hospital rehabilitation services

   

19

   

   

   

2

   

   

   

55

   

   

   

119

   

   

   

1,142

   

   

   

1,358

   

   

   

3,610

   

   

   

4,323

   

Home health and hospice division

   

1,193

   

   

   

805

   

   

   

3,534

   

   

   

2,029

   

Corporate

   

555

   

   

   

652

   

   

   

1,806

   

   

   

1,816

   

   

$

79,269

   

   

$

79,312

   

   

$

238,115

   

   

$

234,445

   

Depreciation and amortization:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Hospital division

$

17,483

   

   

$

20,060

   

   

$

56,202

   

   

$

59,247

   

Nursing center division

   

6,830

   

   

   

7,298

   

   

   

21,642

   

   

   

21,123

   

Rehabilitation division:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Skilled nursing rehabilitation services

   

2,461

   

   

   

2,811

   

   

   

8,451

   

   

   

8,223

   

Hospital rehabilitation services

   

2,281

   

   

   

2,328

   

   

   

6,931

   

   

   

6,975

   

   

   

4,742

   

   

   

5,139

   

   

   

15,382

   

   

   

15,198

   

Home health and hospice division

   

1,638

   

   

   

1,137

   

   

   

4,779

   

   

   

2,960

   

Corporate

   

6,898

   

   

   

7,670

   

   

   

21,867

   

   

   

22,901

   

   

$

37,591

   

   

$

41,304

   

   

$

119,872

   

   

$

121,429

   

Capital expenditures, excluding acquisitions (including discontinued operations):

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Hospital division:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Routine

$

6,421

   

   

$

9,015

   

   

$

22,285

   

   

$

28,455

   

Development

   

3,235

   

   

   

14,334

   

   

   

10,702

   

   

   

35,572

   

   

   

9,656

   

   

   

23,349

   

   

   

32,987

   

   

   

64,027

   

Nursing center division:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Routine

   

5,584

   

   

   

4,965

   

   

   

15,662

   

   

   

12,611

   

Development

   

   

   

   

843

   

   

   

7

   

   

   

2,603

   

   

   

5,584

   

   

   

5,808

   

   

   

15,669

   

   

   

15,214

   

Rehabilitation division:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Skilled nursing rehabilitation services:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Routine

   

860

   

   

   

707

   

   

   

1,929

   

   

   

1,602

   

Development

   

   

   

   

   

   

   

   

   

   

   

   

   

860

   

   

   

707

   

   

   

1,929

   

   

   

1,602

   

Hospital rehabilitation services:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Routine

   

31

   

   

   

125

   

   

   

108

   

   

   

231

   

Development

   

   

   

   

   

   

   

   

   

   

   

   

   

31

   

   

   

125

   

   

   

108

   

   

   

231

   

Home health and hospice division:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Routine

   

522

   

   

   

160

   

   

   

1,056

   

   

   

429

   

Development

   

   

   

   

   

   

   

   

   

   

   

   

   

522

   

   

   

160

   

   

   

1,056

   

   

   

429

   

Corporate:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Routine:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Information systems

   

7,298

   

   

   

10,842

   

   

   

19,023

   

   

   

32,901

   

Other

   

2,436

   

   

   

125

   

   

   

2,889

   

   

   

575

   

   

$

26,387

   

   

$

41,116

   

   

$

73,661

   

   

$

114,979

   

 

 17 


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

   

NOTE 7 – BUSINESS SEGMENT DATA (Continued)

   

 

   

   

   

   

September 30,
2013

   

   

December 31,
2012

   

Assets at end of period:

   

   

   

   

   

   

   

Hospital division

$

1,806,718

   

   

$

2,129,303

   

Nursing center division

   

485,353

   

   

   

626,016

   

Rehabilitation division:

   

   

   

   

   

   

   

Skilled nursing rehabilitation services

   

345,616

   

   

   

336,445

   

Hospital rehabilitation services

   

343,561

   

   

   

340,668

   

   

   

689,177

   

   

   

677,113

   

Home health and hospice division

   

216,117

   

   

   

202,156

   

Corporate

   

667,244

   

   

   

603,358

   

   

$

3,864,609

   

   

$

4,237,946

   

Goodwill:

   

   

   

   

   

   

   

Hospital division

$

677,557

   

   

$

747,065

   

Rehabilitation division:

   

   

   

   

   

   

   

Skilled nursing rehabilitation services

   

   

   

   

   

Hospital rehabilitation services

   

168,019

   

   

   

168,019

   

   

   

168,019

   

   

   

168,019

   

Home health and hospice division

   

131,035

   

   

   

126,182

   

   

$

976,611

   

   

$

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
September 30,

   

   

Nine months ended
September 30,

   

   

2013

   

   

2012

   

   

2013

   

   

2012

   

Professional liability:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Continuing operations

$

12,476

   

   

$

13,536

   

   

$

45,239

   

   

$

41,655

   

Discontinued operations

   

7,387

   

   

   

5,597

   

   

   

21,809

   

   

   

16,801

   

Workers compensation:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Continuing operations

$

7,689

   

   

$

11,286

   

   

$

29,633

   

   

$

33,387

   

Discontinued operations

   

1,157

   

   

   

4,292

   

   

   

9,282

   

   

   

12,698

   

 

 18 


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):

   

 

   

September 30, 2013

   

   

December 31, 2012

   

   

Professional
liability

   

   

Workers
compensation

   

   

Total

   

   

Professional
liability

   

   

Workers
compensation

   

   

Total

   

Assets:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Current:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Insurance subsidiary investments

$

58,579

   

   

$

35,107

   

   

$

93,686

   

   

$

53,133

   

   

$

33,035

   

   

$

86,168

   

Reinsurance recoverables

   

6,981

   

   

   

   

   

   

6,981

   

   

   

5,382

   

   

   

   

   

   

5,382

   

Other

   

   

   

   

150

   

   

   

150

   

   

   

   

   

   

150

   

   

   

150

   

   

   

65,560

   

   

   

35,257

   

   

   

100,817

   

   

   

58,515

   

   

   

33,185

   

   

   

91,700

   

Non-current:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Insurance subsidiary investments

   

69,382

   

   

   

80,534

   

   

   

149,916

   

   

   

46,546

   

   

   

69,878

   

   

   

116,424

   

Reinsurance and other recoverables

   

66,950

   

   

   

78,027

   

   

   

144,977

   

   

   

58,025

   

   

   

76,794

   

   

   

134,819

   

Deposits

   

4,238

   

   

   

1,489

   

   

   

5,727

   

   

   

3,977

   

   

   

1,574

   

   

   

5,551

   

Other

   

   

   

   

39

   

   

   

39

   

   

   

   

   

   

40

   

   

   

40

   

   

   

140,570

   

   

   

160,089

   

   

   

300,659

   

   

   

108,548

   

   

   

148,286

   

   

   

256,834

   

   

$

206,130

   

   

$

195,346

   

   

$

401,476

   

   

$

167,063

   

   

$

181,471

   

   

$

348,534

   

Liabilities:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Allowance for insurance risks:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Current

$

59,439

   

   

$

39,158

   

   

$

98,597

   

   

$

54,088

   

   

$

37,096

   

   

$

91,184

   

Non-current

   

246,482

   

   

   

161,551

   

   

   

408,033

   

   

   

236,630

   

   

   

156,265

   

   

   

392,895

   

   

$

305,921

   

   

$

200,709

   

   

$

506,630

   

   

$

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 $308.7 million at September 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.

   

 

 19 


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

   

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.

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

   

 

   

September 30, 2013

   

   

December 31, 2012

   

   


Cost

   

   

Unrealized
gains

   

   

Unrealized
losses

   

   

Fair
value

   

   


Cost

   

   

Unrealized
gains

   

   

Unrealized
losses

   

   

Fair
value

   

Cash and cash equivalents (a)

$

184,456

   

   

$

   

   

$

   

   

$

184,456

   

   

$

140,162

   

   

$

   

   

$

   

   

$

140,162

   

Debt securities:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Corporate bonds

   

19,080

   

   

   

46

   

   

   

(11

)

   

   

19,115

   

   

   

21,352

   

   

   

118

   

   

   

(16

)

   

   

21,454

   

Debt securities issued by U.S. government agencies

   

20,058

   

   

   

47

   

   

   

(10

)

   

   

20,095

   

   

   

16,624

   

   

   

89

   

   

   

   

   

   

16,713

   

U.S. Treasury notes

   

7,096

   

   

   

5

   

   

   

(2

)

   

   

7,099

   

   

   

6,131

   

   

   

3

   

   

   

   

   

   

6,134

   

   

   

46,234

   

   

   

98

   

   

   

(23

)

   

   

46,309

   

   

   

44,107

   

   

   

210

   

   

   

(16

)

   

   

44,301

   

Equities by industry:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Industrials

   

1,096

   

   

   

317

   

   

   

   

   

   

1,413

   

   

   

2,039

   

   

   

331

   

   

   

(53

)

   

   

2,317

   

Consumer

   

948

   

   

   

454

   

   

   

   

   

   

1,402

   

   

   

2,171

   

   

   

599

   

   

   

(15

)

   

   

2,755

   

Financial services

   

814

   

   

   

236

   

   

   

(27

)

   

   

1,023

   

   

   

1,419

   

   

   

284

   

   

   

(86

)

   

   

1,617

   

Healthcare

   

660

   

   

   

226

   

   

   

   

   

   

886

   

   

   

1,474

   

   

   

179

   

   

   

(14

)

   

   

1,639

   

Technology

   

619

   

   

   

215

   

   

   

   

   

   

834

   

   

   

1,482

   

   

   

268

   

   

   

(70

)

   

   

1,680

   

Other

   

1,433

   

   

   

516

   

   

   

(25

)

   

   

1,924

   

   

   

2,554

   

   

   

706

   

   

   

(243

)

   

   

3,017

   

   

   

5,570

   

   

   

1,964

   

   

   

(52

)

   

   

7,482

   

   

   

11,139

   

   

   

2,367

   

   

   

(481

)

   

   

13,025

   

Certificates of deposit

   

5,350

   

   

   

5

   

   

   

   

   

   

5,355

   

   

   

5,101

   

   

   

3

   

   

   

   

   

   

5,104

   

   

$

241,610

   

   

$

2,067

   

   

$

(75

)

   

$

243,602

   

   

$

200,509

   

   

$

2,580

   

   

$

(497

)

   

$

202,592

   

   

 

   

 

(a)

Includes $9.5 million and $3.7 million of money market funds at September 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 September 30, 2013 and recognized a $0.1 million pretax other-than-temporary impairment during the nine months ended September 30, 2013 for various investments held in its insurance subsidiary investment portfolio. The Company considered the severity and duration of its unrealized losses at September 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 nine months ended September 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 


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

   

NOTE 10 – LEASES

On September 30, 2013, the Company entered into agreements to renew early its leases with Ventas for the Renewal Facilities. The current lease term for the Renewal Facilities was scheduled to expire in April 2015.

The Company will renew the existing leases for three TC hospitals and 15 nursing centers for an additional five year term effective May 1, 2015. The annual rents for these facilities will increase by $4.0 million on October 1, 2014 and are subject to various rent escalators contained within the existing master leases. In addition, the Company will renew the leases for 19 TC hospitals and 11 nursing centers for a term of 10 years and seven months effective October 1, 2014. The annual rents for these facilities will increase by $11.0 million on October 1, 2014 and are subject to annual increases based upon the change in the consumer price index (subject to an annual 4% cap). For accounting purposes, the Company will record the additional rents over the new lease term on a straight-line basis beginning on October 1, 2013, the effective date of the agreements.

The current aggregate annual rent for the Renewal Facilities approximates $79 million. The 22 TC hospitals contain 1,753 licensed beds and generated revenues and segment operating income (excluding the allocation of approximately $17 million of overhead costs) of approximately $572 million and $115 million, respectively, for the year ended December 31, 2012. The 26 nursing centers contain 3,134 licensed beds and generated revenues and segment operating income (excluding the allocation of approximately $8 million of overhead costs) of approximately $271 million and $56 million, respectively, for the year ended December 31, 2012. The terms of the new leases are substantially similar to the terms of the existing master lease agreements between the Company and Ventas.

The agreements with Ventas also provided for the Company’s exit from 59 nursing centers and the closure of another facility. Under the terms of the agreements, the lease term for the 2013 Expiring Facilities will expire on September 30, 2014. For accounting purposes, 59 of the 2013 Expiring Facilities qualified as assets held for sale and the Company reflected the operating results as discontinued operations in the accompanying unaudited condensed consolidated statement of operations for all historical periods and will reflect the facility scheduled for closure as a discontinued operation upon completion of the exit process. See Note 3.

Under the terms of the agreements, the Company will pay $20 million to Ventas in exchange for the early termination of certain leases. The disposal group was measured at its fair value less cost to sell and the Company recorded an asset impairment charge of $7.9 million related to leasehold improvements in the 2013 Expiring Facilities. These charges were recorded in discontinued operations in the third quarter of 2013 in the accompanying unaudited condensed consolidated statement of operations.

   

NOTE 11 – LONG-TERM DEBT

In August 2013, the Company completed amendments and restatements to its ABL Facility and its Term Loan Facility (collectively, the “Credit Facilities”) to increase its borrowing capacity and improve its financial flexibility. The amendments include, among other things, the following changes: (a) refreshing the option to increase the credit capacity in the aggregate between the Credit Facilities by $250 million; (b) establishing the option to further increase the credit capacity between the Credit Facilities upon satisfaction of a secured leverage ratio; (c) extending the maturity of the ABL Facility by two years to June 2018; (d) eliminating the annual and cumulative limitations on acquisitions; (e) raising to $150 million the Company’s ability to pay cash dividends, buy back stock and make other restricted payments; and (f) easing the restrictions on the Company’s ability to make investments and enter into other joint venture arrangements. The interest rate pricing levels were not changed in connection with the amendments.

In May 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 fees associated with the amendments of $0.5 million during the three months ended September 30, 2013, which are included in other operating expenses in the accompanying unaudited condensed consolidated statement of operations. The Company also recorded charges associated with the amendments and restatements of $0.1 million and $1.5 million during the three and nine months ended September 30, 2013, respectively, which are included in interest expense in the accompanying unaudited condensed consolidated statement of operations.

 

 21 


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

   

NOTE 12 – CONTINGENCIES

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

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

Principal contingencies are described below:

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

Professional liability risks—The Company has provided for losses for professional liability risks based upon management’s best available information including actuarially determined estimates. Ultimate claims costs may differ from the provisions for loss. See Note 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 and internal 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 15.

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

NOTE 13 – 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.

 

 22 


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

   

NOTE 13 – FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS (Continued)

   

 

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.

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

   

 

   

Fair value measurements

   

   

Assets/liabilities
at fair value

   

   

Total
losses

   

   

Level 1

   

   

Level 2

   

   

Level 3

   

   

   

September 30, 2013:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Recurring:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Assets:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Available-for-sale debt securities:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Corporate bonds

$

   

   

$

19,115

   

   

$

   

   

$

19,115

   

   

$

   

Debt securities issued by U.S. government agencies

   

   

   

   

20,095

   

   

   

   

   

   

20,095

   

   

   

   

U.S. Treasury notes

   

7,099

   

   

   

   

   

   

   

   

   

7,099

   

   

   

   

   

   

7,099

   

   

   

39,210

   

   

   

   

   

   

46,309

   

   

   

   

Available-for-sale equity securities

   

7,482

   

   

   

   

   

   

   

   

   

7,482

   

   

   

   

Money market funds

   

13,039

   

   

   

   

   

   

   

   

   

13,039

   

   

   

   

Certificates of deposit

   

   

   

   

5,355

   

   

   

   

   

   

5,355

   

   

   

   

Total available-for-sale investments

   

27,620

   

   

   

44,565

   

   

   

   

   

   

72,185

   

   

   

   

Deposits held in money market funds

   

944

   

   

   

4,238

   

   

   

   

   

   

5,182

   

   

   

   

   

$

28,564

   

   

$

48,803

   

   

$

   

   

$

77,367

   

   

$

   

Liabilities:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Interest rate swaps

$

   

   

$

(1,516

)

   

$

   

   

$

(1,516

)

   

$

   

Non-recurring:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Assets:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Hospitals available for sale

$

   

   

$

   

   

$

4,828

   

   

$

4,828

   

   

$

(3,164

)

Property and equipment

   

   

   

   

   

   

   

2,820

   

   

   

2,820

   

   

   

(10,077

)

   

$

   

   

$

   

   

$

7,648

   

   

$

7,648

   

   

$

(13,241

)

Liabilities

$

   

   

$

   

   

$

   

   

$

   

   

$

   

   

 

 23 


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

   

NOTE 13 – FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS (Continued)

   

 

   

Fair value measurements

   

   

Assets/liabilities
at fair value

   

   

Total
losses

   

   

Level 1

   

   

Level 2

   

   

Level 3

   

   

   

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

$

   

   

$

   

   

$

   

   

$

   

   

$

   

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 $174.9 million as of September 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 $3.5 million as of September 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 nine months ended September 30, 2013 or September 30, 2012.

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

 

 24 


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

   

NOTE 13 – FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS (continued)

Recurring measurements (Continued)

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.

   

 

   

   

September 30, 2013

   

   

December 31, 2012

   

(In thousands)

   

Carrying
value

   

   

Fair
value

   

   

Carrying
value

   

   

Fair
value

   

Cash and cash equivalents

   

$

44,579

   

   

$

44,579

   

   

$

50,007

   

   

$

50,007

   

Cash–restricted

   

   

3,953

   

   

   

3,953

   

   

   

5,197

   

   

   

5,197

   

Insurance subsidiary investments

   

   

243,602

   

   

   

243,602

   

   

   

202,592

   

   

   

202,592

   

Tax refund escrow investments

   

   

204

   

   

   

204

   

   

   

207

   

   

   

207

   

Long-term debt, including amounts due within one year (excluding capital lease obligations totaling $10,000 and $0.6 million at September 30, 2013 and December 31, 2012, respectively)

   

   

1,390,600

   

   

   

1,432,470

   

   

   

1,657,039

   

   

   

1,630,649

   

Non-recurring measurements

In the third quarter of 2013, the Company recorded an asset impairment charge of $7.9 million related to leasehold improvements of the 2013 Expiring Facilities. These charges reflect the amount by which the carrying value exceeded its estimated fair value. The fair value of property and equipment was measured using Level 3 inputs such as replacement costs adjusted for depreciation, economic obsolescence and inflation.

In the third quarter of 2013, the Company reviewed the long-lived assets related to the planned divestiture and pending offer for a closed TC hospital held for sale and determined its property and equipment was impaired. As a result, the Company recorded a pretax impairment charge of $0.9 million in other operating expenses in continuing operations in the third quarter of 2013. The fair value of the assets were measured using a Level 3 input of the pending offer.  

During the three and nine months ended September 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 $1.0 million and $2.3 million, respectively, 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 $1.1 million and $2.2 million in the third quarter of 2013 and for the nine months ended September 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.

 

 25 


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

   

NOTE 14 – 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 $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.

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 September 30, 2013 and December 31, 2012, and the respective results of operations and cash flows for the three and nine months ended September 30, 2013 and September 30, 2012.

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)

   

 

   

Three months ended September 30, 2013

   

(In thousands)

Parent
company/
issuer

   

   

Guarantor
subsidiaries

   

   

Non-guarantor
subsidiaries

   

   

Consolidating
and
eliminating
adjustments

   

   

Consolidated

   

Revenues

$

   

   

$

1,087,228

   

   

$

140,267

   

   

$

(29,022

)

   

$

1,198,473

   

Salaries, wages and benefits

   

   

   

   

683,376

   

   

   

50,229

   

   

   

   

   

   

733,605

   

Supplies

   

   

   

   

73,057

   

   

   

8,755

   

   

   

   

   

   

81,812

   

Rent

   

   

   

   

68,467

   

   

   

10,802

   

   

   

   

   

   

79,269

   

Other operating expenses

   

   

   

   

234,857

   

   

   

64,092

   

   

   

(29,022

)

   

   

269,927

   

Other (income) expense

   

   

   

   

373

   

   

   

(321

)

   

   

   

   

   

52

   

Impairment charges

   

   

   

   

441

   

   

   

   

   

   

   

   

   

441

   

Depreciation and amortization

   

   

   

   

35,092

   

   

   

2,499

   

   

   

   

   

   

37,591

   

Management fees

   

   

   

   

(3,379

)

   

   

3,379

   

   

   

   

   

   

   

Intercompany interest (income) expense from  affiliates

   

(24,404

)

   

   

15,215

   

   

   

9,189

   

   

   

   

   

   

   

Interest expense

   

25,567

   

   

   

18

   

   

   

48

   

   

   

   

   

   

25,633

   

Investment income

   

   

   

   

(69

)

   

   

(1,166

)

   

   

   

   

   

(1,235

)

Equity in net loss of consolidating affiliates

   

106,237

   

   

   

   

   

   

   

   

   

(106,237

   

   

   

   

   

107,400

   

   

   

1,107,448

   

   

   

147,506

   

   

   

(135,259

)

   

   

1,227,095

   

Loss from continuing operations before income taxes

   

(107,400

   

   

(20,220

   

   

(7,239

)

   

   

106,237

   

   

   

(28,622

Provision (benefit) for income taxes

   

(402

)

   

   

(8,774

   

   

173

   

   

   

   

   

   

(9,003

Loss from continuing operations

   

(106,998

   

   

(11,446

   

   

(7,412

)

   

   

106,237

   

   

   

(19,619

Discontinued operations, net of income taxes:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Loss from operations

   

   

   

   

(21,609

)

   

   

   

   

   

   

   

   

(21,609

)

Loss on divestiture of operations

   

   

   

   

(65,016

)

   

   

   

   

   

   

   

   

(65,016

)

Loss from discontinued operations

   

   

   

   

(86,625

)

   

   

   

   

   

—  

   

   

   

(86,625

)

Net loss

   

(106,998

   

   

(98,071

   

   

(7,412

)

   

   

106,237

   

   

   

(106,244

Earnings attributable to noncontrolling interests

   

   

   

   

   

   

   

(754

)

   

   

   

   

   

(754

)

Loss attributable to Kindred

$

(106,998

   

$

(98,071

   

$

(8,166

)

   

$

106,237

   

   

$

(106,998

Comprehensive loss

$

(107,607

   

$

(98,071

   

$

(7,808

)

   

$

106,633

   

   

$

(106,853

Comprehensive loss attributable to Kindred

$

(107,607

   

$

(98,071

   

$

(8,562

)

   

$

106,633

   

   

$

(107,607

 

 26 


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

   

NOTE 14 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

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

   

 

   

Three months ended September 30, 2012

   

(In thousands)

Parent
company/
issuer

   

   

Guarantor
subsidiaries

   

   

Non-guarantor
subsidiaries

   

   

Consolidating
and
eliminating
adjustments

   

   

Consolidated

   

Revenues

$

   

   

$

1,131,519

   

   

$

119,752

   

   

$

(25,112

)

   

$

1,226,159

   

Salaries, wages and benefits

   

   

   

   

708,763

   

   

   

45,998

   

   

   

   

   

   

754,761

   

Supplies

   

   

   

   

76,297

   

   

   

8,832

   

   

   

   

   

   

85,129

   

Rent

   

   

   

   

71,740

   

   

   

7,572

   

   

   

   

   

   

79,312

   

Other operating expenses

   

   

   

   

207,367

   

   

   

47,821

   

   

   

(25,112

)

   

   

230,076

   

Other (income) expense

   

   

   

   

(4,336

)

   

   

1,158

   

   

   

   

   

   

(3,178

)

Impairment charges

   

   

   

   

406

   

   

   

   

   

   

   

   

   

406

   

Depreciation and amortization

   

   

   

   

38,719

   

   

   

2,585

   

   

   

   

   

   

41,304

   

Management fees

   

   

   

   

(2,994

)

   

   

2,994

   

   

   

   

   

   

   

Intercompany interest (income) expense from  affiliates

   

(26,840

)

   

   

18,696

   

   

   

8,144

   

   

   

   

   

   

   

Interest expense (income)

   

26,544

   

   

   

(40

)

   

   

159

   

   

   

   

   

   

26,663

   

Investment income

   

   

   

   

(22

)

   

   

(190

)

   

   

   

   

   

(212

)

Equity in net income of consolidating affiliates

   

(7,355

)

   

   

   

   

   

   

   

   

7,355

   

   

   

   

   

   

(7,651

)

   

   

1,114,596

   

   

   

125,073

   

   

   

(17,757

)

   

   

1,214,261

   

Income (loss) from continuing operations before income taxes

   

7,651

   

   

   

16,923

   

   

   

(5,321

)

   

   

(7,355

)

   

   

11,898

   

Provision for income taxes

   

85

   

   

   

4,801

   

   

   

184

   

   

   

   

   

   

5,070

   

Income (loss) from continuing operations

   

7,566

   

   

   

12,122

   

   

   

(5,505

)

   

   

(7,355

)

   

   

6,828

   

Discontinued operations, net of income taxes:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Income from operations

   

   

   

   

3,059

   

   

   

   

   

   

   

   

   

3,059

   

Loss on divestiture of operations

   

   

   

   

(2,280

)

   

   

   

   

   

   

   

   

(2,280

)

Income from discontinued operations

   

   

   

   

779

   

   

   

   

   

   

   

   

   

779

   

Net income (loss)

   

7,566

   

   

   

12,901

   

   

   

(5,505

)

   

   

(7,355

)

   

   

7,607

   

Earnings attributable to noncontrolling interests

   

   

   

   

   

   

   

(41

)

   

   

   

   

   

(41

)

Income (loss) attributable to Kindred

$

7,566

   

   

$

12,901

   

   

$

(5,546

)

   

$

(7,355

)

   

$

7,566

   

Comprehensive income (loss)

$

7,919

   

   

$

12,901

   

   

$

(5,142

)

   

$

(7,718

)

   

$

7,960

   

Comprehensive income (loss) attributable to Kindred

$

7,919

   

   

$

12,901

   

   

$

(5,183

)

   

$

(7,718

)

   

$

7,919

   

 

 27 


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

   

NOTE 14 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

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

   

 

   

Nine months ended September 30, 2013

   

(In thousands)

Parent
company/
issuer

   

   

Guarantor
subsidiaries

   

   

Non-guarantor
subsidiaries

   

   

Consolidating
and
eliminating
adjustments

   

   

Consolidated

   

Revenues

$

   

   

$

3,405,073

   

   

$

387,448

   

   

$

(87,065

)

   

$

3,705,456

   

Salaries, wages and benefits

   

   

   

   

2,125,173

   

   

   

139,352

   

   

   

   

   

   

2,264,525

   

Supplies

   

   

   

   

226,090

   

   

   

25,582

   

   

   

   

   

   

251,672

   

Rent

   

   

   

   

210,822

   

   

   

27,293

   

   

   

   

   

   

238,115

   

Other operating expenses

   

   

   

   

664,836

   

   

   

167,785

   

   

   

(87,065

)

   

   

745,556

   

Other (income) expense

   

   

   

   

191

   

   

   

(1,174

)

   

   

   

   

   

(983

)

Impairment charges

   

   

   

   

1,085

   

   

   

   

   

   

   

   

   

1,085

   

Depreciation and amortization

   

   

   

   

111,437

   

   

   

8,435

   

   

   

   

   

   

119,872

   

Management fees

   

   

   

   

(9,655

)

   

   

9,655

   

   

   

   

   

   

   

Intercompany interest (income) expense from  affiliates

   

(78,315

)

   

   

51,816

   

   

   

26,499

   

   

   

   

   

   

   

Interest expense

   

82,686

   

   

   

49

   

   

   

153

   

   

   

   

   

   

82,888

   

Investment income

   

   

   

   

(195

)

   

   

(2,603

)

   

   

   

   

   

(2,798

)

Equity in net loss of consolidating affiliates

   

99,545

   

   

   

   

   

   

   

   

   

(99,545

   

   

   

   

   

103,916

   

   

   

3,381,649

   

   

   

400,977

   

   

   

(186,610

)

   

   

3,699,932

   

Income (loss) from continuing operations before income taxes

   

(103,916

   

   

23,424

   

   

   

(13,529

)

   

   

99,545

   

   

   

5,524

   

Provision (benefit) for income taxes

   

(1,720

)

   

   

4,935

   

   

   

1,073

   

   

   

   

   

   

4,288

   

Income (loss) from continuing operations

   

(102,196

   

   

18,489

   

   

   

(14,602

)

   

   

99,545

   

   

   

1,236

   

Discontinued operations, net of income taxes:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Loss from operations

   

   

   

   

(24,287

)

   

   

   

   

   

   

   

   

(24,287

)

Loss on divestiture of operations

   

   

   

   

(77,893

)

   

   

   

   

   

   

   

   

(77,893

)

Loss from discontinued operations

   

—  

   

   

   

(102,180

)

   

   

   

   

   

   

   

   

(102,180

)

Net loss

   

(102,196

   

   

(83,691

   

   

(14,602

)

   

   

99,545

   

   

   

(100,944

Earnings attributable to noncontrolling interests

   

   

   

   

   

   

   

(1,252

)

   

   

   

   

   

(1,252

)

Loss attributable to Kindred

$

(102,196

   

$

(83,691

   

$

(15,854

)

   

$

99,545

   

   

$

(102,196

Comprehensive loss

$

(101,946

   

$

(83,691

   

$

(14,661

)

   

$

99,604

   

   

$

(100,694

Comprehensive loss attributable to Kindred

$

(101,946

   

$

(83,691

   

$

(15,913

)

   

$

99,604

   

   

$

(101,946

 

 28 


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

   

NOTE 14 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

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

   

 

   

Nine months ended September 30, 2012

   

(In thousands)

Parent
company/
issuer

   

   

Guarantor
subsidiaries

   

   

Non-guarantor
subsidiaries

   

   

Consolidating
and
eliminating
adjustments

   

   

Consolidated

   

Revenues

$

   

   

$

3,439,095

   

   

$

361,391

   

   

$

(75,335

)

   

$

3,725,151

   

Salaries, wages and benefits

   

   

   

   

2,152,031

   

   

   

130,772

   

   

   

   

   

   

2,282,803

   

Supplies

   

   

   

   

233,615

   

   

   

27,971

   

   

   

   

   

   

261,586

   

Rent

   

   

   

   

211,469

   

   

   

22,976

   

   

   

   

   

   

234,445

   

Other operating expenses

   

   

   

   

629,172

   

   

   

145,855

   

   

   

(75,335

)

   

   

699,692

   

Other income

   

   

   

   

(9,447

)

   

   

(32

)

   

   

   

   

   

(9,479

)

Impairment charges

   

   

   

   

1,015

   

   

   

   

   

   

   

   

   

1,015

   

Depreciation and amortization

   

   

   

   

112,650

   

   

   

8,779

   

   

   

   

   

   

121,429

   

Management fees

   

   

   

   

(9,371

)

   

   

9,371

   

   

   

   

   

   

   

Intercompany interest (income) expense from affiliates

   

(83,087

)

   

   

58,283

   

   

   

24,804

   

   

   

   

   

   

   

Interest expense (income)

   

79,405

   

   

   

119

   

   

   

422

   

   

   

   

   

   

79,946

   

Investment income

   

   

   

   

(88

)

   

   

(665

)

   

   

   

   

   

(753

)

Equity in net income of consolidating affiliates

   

(38,527

)

   

   

   

   

   

   

   

   

38,527

   

   

   

   

   

   

(42,209

)

   

   

3,379,448

   

   

   

370,253

   

   

   

(36,808

)

   

   

3,670,684

   

Income (loss) from continuing operations before income taxes

   

42,209

   

   

   

59,647

   

   

   

(8,862

)

   

   

(38,527

)

   

   

54,467

   

Provision for income taxes

   

950

   

   

   

21,457

   

   

   

519

   

   

   

   

   

   

22,926

   

Income (loss) from continuing operations

   

41,259

   

   

   

38,190

   

   

   

(9,381

)

   

   

(38,527

)

   

   

31,541

   

Discontinued operations, net of income taxes:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Income from operations

   

   

   

   

13,777

   

   

   

   

   

   

   

   

   

13,777

   

Loss on divestiture of operations

   

   

   

   

(3,806

)

   

   

   

   

   

   

   

   

(3,806

)

Income from discontinued operations

   

   

   

   

9,971

   

   

   

   

   

   

   

   

   

9,971

   

Net income (loss)

   

41,259

   

   

   

48,161

   

   

   

(9,381

)

   

   

(38,527

)

   

   

41,512

   

Earnings attributable to noncontrolling interests

   

   

   

   

   

   

   

(253

)

   

   

   

   

   

(253

)

Income (loss) attributable to Kindred

$

41,259

   

   

$

48,161

   

   

$

(9,634

)

   

$

(38,527

)

   

$

41,259

   

Comprehensive income (loss)

$

41,636

   

   

$

48,161

   

   

$

(8,421

)

   

$

(39,487

)

   

$

41,889

   

Comprehensive income (loss) attributable to Kindred

$

41,636

   

   

$

48,161

   

   

$

(8,674

)

   

$

(39,487

)

   

$

41,636

   

 

 29 


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

   

NOTE 14 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

Condensed Consolidating Balance Sheet

   

 

   

As of September 30, 2013

   

(In thousands)

Parent
company/
issuer

   

      

Guarantor
subsidiaries

   

   

Non-guarantor
subsidiaries

   

   

Consolidating
and
eliminating
adjustments

   

   

Consolidated

   

ASSETS

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Current assets:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Cash and cash equivalents

$

   

   

$

33,063

   

   

$

11,516

   

   

$

   

   

$

44,579

   

Cash–restricted

   

   

   

   

3,953

   

   

   

   

   

   

   

   

   

3,953

   

Insurance subsidiary investments

   

   

   

   

   

   

   

93,686

   

   

   

   

   

   

93,686

   

Accounts receivable, net

   

   

   

   

839,397

   

   

   

90,534

   

   

   

   

   

   

929,931

   

Inventories

   

   

   

   

23,358

   

   

   

2,933

   

   

   

   

   

   

26,291

   

Deferred tax assets

   

   

   

   

16,543

   

   

   

   

   

   

   

   

   

16,543

   

Income taxes

   

   

   

   

42,451

   

   

   

858

   

   

   

   

   

   

43,309

   

Other

   

   

   

   

33,764

   

   

   

6,268

   

   

   

   

   

   

40,032

   

   

   

   

   

   

992,529

   

   

   

205,795

   

   

   

   

   

   

1,198,324

   

Property and equipment, net

   

   

   

   

815,847

   

   

   

49,145

   

   

   

   

   

   

864,992

   

Goodwill

   

   

   

   

684,623

   

   

   

291,988

   

   

   

   

   

   

976,611

   

Intangible assets, net

   

   

   

   

382,781

   

   

   

22,990

   

   

   

   

   

   

405,771

   

Assets held for sale

   

   

   

   

22,092

   

   

   

   

   

   

   

   

   

22,092

   

Insurance subsidiary investments

   

   

   

   

   

   

   

149,916

   

   

   

   

   

   

149,916

   

Deferred tax assets

   

   

   

   

   

   

   

13,964

   

   

   

(7,714

)

   

   

6,250

   

Investment in subsidiaries

   

122,195

   

   

   

   

   

   

   

   

   

(122,195

)

   

   

   

Intercompany

   

2,394,306

   

   

   

   

   

   

   

   

   

(2,394,306

)

   

   

   

Other

   

45,379

   

   

   

126,743

   

   

   

68,531

   

   

   

   

   

   

240,653

   

   

$

2,561,880

   

   

$

3,024,615

   

   

$

802,329

   

   

$

(2,524,215

)

   

$

3,864,609

   

LIABILITIES AND EQUITY

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Current liabilities:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Accounts payable

$

   

   

$

148,330

   

   

$

20,887

   

   

$

   

   

$

169,217

   

Salaries, wages and other compensation

   

   

   

   

309,721

   

   

   

44,295

   

   

   

   

   

   

354,016

   

Due to third party payors

   

   

   

   

52,134

   

   

   

   

   

   

   

   

   

52,134

   

Professional liability risks

   

   

   

   

3,427

   

   

   

56,012

   

   

   

   

   

   

59,439

   

Other accrued liabilities

   

24,524

   

   

   

149,052

   

   

   

11,205

   

   

   

   

   

   

184,781

   

Long-term debt due within one year

   

7,875

   

   

   

107

   

   

   

243

   

   

   

   

   

   

8,225

   

   

   

32,399

   

   

   

662,771

   

   

   

132,642

   

   

   

   

   

   

827,812

   

Long-term debt

   

1,378,330

   

   

   

277

   

   

   

3,778

   

   

   

   

   

   

1,382,385

   

Intercompany

   

   

   

   

2,035,738

   

   

   

358,568

   

   

   

(2,394,306

)

   

   

   

Professional liability risks

   

   

   

   

76,854

   

   

   

169,628

   

   

   

   

   

   

246,482

   

Deferred tax liabilities

   

   

   

   

7,714

   

   

   

   

   

   

(7,714

)

   

   

   

Deferred credits and other liabilities

   

   

   

   

137,266

   

   

   

82,936

   

   

   

   

   

   

220,202

   

Commitments and contingencies

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Equity:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Stockholders’ equity

   

1,151,151

   

   

   

103,995

   

   

   

18,200

   

   

   

(122,195

)

   

   

1,151,151

   

Noncontrolling interests

   

   

   

   

   

   

   

36,577

   

   

   

   

   

   

36,577

   

   

   

1,151,151

   

   

   

103,995

   

   

   

54,777

   

   

   

(122,195

)

   

   

1,187,728

   

   

$

2,561,880

   

   

$

3,024,615

   

   

$

802,329

   

   

$

(2,524,215

)

   

$

3,864,609

   

 

 30 


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

   

NOTE 14 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

Condensed Consolidating Balance Sheet (Continued)

   

 

   

As of December 31, 2012

   

(In thousands)

Parent
company/
issuer

   

   

Guarantor
subsidiaries

   

   

Non-guarantor
subsidiaries

   

   

Consolidating
and
eliminating
adjustments

   

   

Consolidated

   

ASSETS

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Current assets:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Cash and cash equivalents

$

   

   

$

37,370

   

   

$

12,637

   

   

$

   

   

$

50,007

   

Cash–restricted

   

   

   

   

5,197

   

   

   

   

   

   

   

   

   

5,197

   

Insurance subsidiary investments

   

   

   

   

   

   

   

86,168

   

   

   

   

   

   

86,168

   

Accounts receivable, net

   

   

   

   

940,524

   

   

   

98,081

   

   

   

   

   

   

1,038,605

   

Inventories

   

   

   

   

29,023

   

   

   

2,998

   

   

   

   

   

   

32,021

   

Deferred tax assets

   

   

   

   

12,663

   

   

   

   

   

   

   

   

   

12,663

   

Income taxes

   

   

   

   

13,187

   

   

   

386

   

   

   

   

   

   

13,573

   

Other

   

   

   

   

15,118

   

   

   

20,414

   

   

   

   

   

   

35,532

   

   

   

   

   

   

1,053,082

   

   

   

220,684

   

   

   

   

   

   

1,273,766

   

Property and equipment, net

   

   

   

   

1,090,523

   

   

   

52,603

   

   

   

   

   

   

1,143,126

   

Goodwill

   

   

   

   

771,533

   

   

   

269,733

   

   

   

   

   

   

1,041,266

   

Intangible assets, net

   

   

   

   

417,092

   

   

   

22,675

   

   

   

   

   

   

439,767

   

Assets held for sale

   

   

   

   

4,131

   

   

   

   

   

   

   

   

   

4,131

   

Insurance subsidiary investments

   

   

   

   

   

   

   

116,424

   

   

   

   

   

   

116,424

   

Investment in subsidiaries

   

221,799

   

   

   

   

   

   

   

   

   

(221,799

)

   

   

   

Intercompany

   

2,655,242

   

   

   

   

   

   

   

   

   

(2,655,242

)

   

   

   

Deferred tax assets

   

1,040

   

   

   

   

   

   

13,932

   

   

   

(14,972

)

   

   

   

Other

   

47,364

   

   

   

108,143

   

   

   

63,959

   

   

   

   

   

   

219,466

   

   

$

2,925,445

   

   

$

3,444,504

   

   

$

760,010

   

   

$

(2,892,013

)

   

$

4,237,946

   

LIABILITIES AND EQUITY

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Current liabilities:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Accounts payable

$

168

   

   

$

195,268

   

   

$

15,232

   

   

$

   

   

$

210,668

   

Salaries, wages and other compensation

   

   

   

   

345,223

   

   

   

43,786

   

   

   

   

   

   

389,009

   

Due to third party payors

   

   

   

   

35,420

   

   

   

   

   

   

   

   

   

35,420

   

Professional liability risks

   

   

   

   

3,623

   

   

   

50,465

   

   

   

   

   

   

54,088

   

Other accrued liabilities

   

16,724

   

   

   

111,113

   

   

   

9,367

   

   

   

   

   

   

137,204

   

Long-term debt due within one year

   

8,000

   

   

   

102

   

   

   

840

   

   

   

   

   

   

8,942

   

   

   

24,892

   

   

   

690,749

   

   

   

119,690

   

   

   

   

   

   

835,331

   

Long-term debt

   

1,644,394

   

   

   

358

   

   

   

3,954

   

   

   

   

   

   

1,648,706

   

Intercompany

   

   

   

   

2,328,711

   

   

   

326,531

   

   

   

(2,655,242

)

   

   

   

Professional liability risks

   

   

   

   

68,116

   

   

   

168,514

   

   

   

   

   

   

236,630

   

Deferred tax liabilities

   

   

   

   

24,736

   

   

   

   

   

   

(14,972

)

   

   

9,764

   

Deferred credits and other liabilities

   

   

   

   

143,722

   

   

   

70,949

   

   

   

   

   

   

214,671

   

Commitments and contingencies

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Equity:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Stockholders’ equity

   

1,256,159

   

   

   

188,112

   

   

   

33,687

   

   

   

(221,799

)

   

   

1,256,159

   

Noncontrolling interests

   

   

   

   

   

   

   

36,685

   

   

   

   

   

   

36,685

   

   

   

1,256,159

   

   

   

188,112

   

   

   

70,372

   

   

   

(221,799

)

   

   

1,292,844

   

   

$

2,925,445

   

   

$

3,444,504

   

   

$

760,010

   

   

$

(2,892,013

)

   

$

4,237,946

   

   

 

 31 


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

   

NOTE 14 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

Condensed Consolidating Statement of Cash Flows

   

 

   

Three months ended September 30, 2013

   

(In thousands)

Parent
company/
issuer

   

   

Guarantor
subsidiaries

   

   

Non-guarantor
subsidiaries

   

   

Consolidating
and
eliminating
adjustments

   

   

Consolidated

   

Net cash provided by operating activities

$

12,387

   

   

$

90,534

   

   

$

7,829

   

   

$

   

   

$

110,750

   

Cash flows from investing activities:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Routine capital expenditures

   

   

   

   

(22,520

)

   

   

(632

)

   

   

   

   

   

(23,152

)

Development capital expenditures

   

   

   

   

(3,135

)

   

   

(100

)

   

   

   

   

   

(3,235

)

Acquisitions, net of cash acquired

   

   

   

   

(11,771

)

   

   

(402

   

   

   

   

   

(12,173

)

Acquisition deposit

   

   

   

   

(14,675

)

   

   

   

   

   

   

   

   

(14,675

)

Sale of assets

   

   

   

   

236,397

   

   

   

   

   

   

   

   

   

236,397

   

Purchase of insurance subsidiary investments

   

   

   

   

   

   

   

(7,765

)

   

   

   

   

   

(7,765

)

Sale of insurance subsidiary investments

   

   

   

   

   

   

   

9,899

   

   

   

   

   

   

9,899

   

Net change in insurance subsidiary cash and cash equivalents

   

   

   

   

   

   

   

(1,416

)

   

   

   

   

   

(1,416

)

Change in other investments

   

   

   

   

(140

   

   

   

   

   

   

   

   

(140

Other

   

   

   

   

79

   

   

   

   

   

   

   

   

   

79

   

Net cash provided by (used in) investing activities

   

   

   

   

184,235

   

   

   

(416

)

   

   

   

   

   

183,819

   

Cash flows from financing activities:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Proceeds from borrowings under revolving credit

   

238,900

   

   

   

   

   

   

   

   

   

   

   

   

238,900

   

Repayment of borrowings under revolving  credit

   

(519,200

)

   

   

   

   

   

   

   

   

   

   

   

(519,200

)

Repayment of other long-term debt

   

   

   

   

(25

)

   

   

(67

)

   

   

   

   

   

(92

)

Payment of deferred financing costs

   

(683

)

   

   

   

   

   

   

   

   

   

   

   

(683

)

Distribution made to noncontrolling interests

   

   

   

   

   

   

   

(118

)

   

   

   

   

   

(118

)

Issuance of common stock

   

222

   

   

   

   

   

   

   

   

   

   

   

   

222

   

Dividends paid

   

(6,499

)

   

   

   

   

   

   

   

   

   

   

   

(6,499

)

Other

   

   

   

   

53

   

   

   

   

   

   

   

   

   

53

   

Net change in intercompany accounts

   

274,873

   

   

   

(270,921

)

   

   

(3,952

)

   

   

   

   

   

   

Net cash provided by (used in) financing activities

   

(12,387

   

   

(270,893

)

   

   

(4,137

)

   

   

   

   

   

(287,417

)

Change in cash and cash equivalents

   

   

   

   

3,876

   

   

   

3,276

   

   

   

   

   

   

7,152

   

Cash and cash equivalents at beginning of period

   

   

   

   

29,187

   

   

   

8,240

   

   

   

   

   

   

37,427

   

Cash and cash equivalents at end of period

$

   

   

$

33,063

   

   

$

11,516

   

   

$

   

   

$

44,579

   

 

 32 


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

   

NOTE 14 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

Condensed Consolidating Statement of Cash Flows (Continued)

   

 

   

Three months ended September 30, 2012

   

(In thousands)

Parent
company/
issuer

   

   

Guarantor
subsidiaries

   

   

Non-guarantor
subsidiaries

   

   

Consolidating
and
eliminating
adjustments

   

   

Consolidated

   

Net cash provided by operating activities

$

918

   

   

$

126,935

   

   

$

13,636

   

   

$

   

   

$

141,489

   

Cash flows from investing activities:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Routine capital expenditures

   

   

   

   

(24,140

)

   

   

(1,799

)

   

   

   

   

   

(25,939

)

Development capital expenditures

   

   

   

   

(13,702

)

   

   

(1,475

)

   

   

   

   

   

(15,177

)

Acquisitions, net of cash acquired

   

   

   

   

(71,440

)

   

   

   

   

   

   

   

   

(71,440

)

Purchase of insurance subsidiary investments

   

   

   

   

   

   

   

(9,692

)

   

   

   

   

   

(9,692

)

Sale of insurance subsidiary investments

   

   

   

   

   

   

   

8,063

   

   

   

   

   

   

8,063

   

Net change in insurance subsidiary cash and cash equivalents

   

   

   

   

   

   

   

(685

)

   

   

   

   

   

(685

)

Change in other investments

   

   

   

   

1,003

   

   

   

   

   

   

   

   

   

1,003

   

Other

   

   

   

   

(25

)

   

   

   

   

   

   

   

   

(25

)

Net cash used in investing activities

   

   

   

   

(108,304

)

   

   

(5,588

)

   

   

   

   

   

(113,892

)

Cash flows from financing activities:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Proceeds from borrowings under revolving credit

   

364,600

   

   

   

   

   

   

   

   

   

   

   

   

364,600

   

Repayment of borrowings under revolving  credit

   

(390,400

)

   

   

   

   

   

   

   

   

   

   

   

(390,400

)

Repayment of other long-term debt

   

(1,750

)

   

   

(24

)

   

   

(891

)

   

   

   

   

   

(2,665

)

Payment of deferred financing costs

   

(288

)

   

   

   

   

   

   

   

   

   

   

   

(288

)

Purchase of noncontrolling interests

   

   

   

   

   

   

   

(715

)

   

   

   

   

   

(715

)

Net change in intercompany accounts

   

26,920

   

   

   

(22,053

)

   

   

(4,867

)

   

   

   

   

   

   

Net cash used in financing activities

   

(918

)

   

   

(22,077

)

   

   

(6,473

)

   

   

   

   

   

(29,468

)

Change in cash and cash equivalents

   

   

   

   

(3,446

)

   

   

1,575

   

   

   

   

   

   

(1,871

)

Cash and cash equivalents at beginning of period

   

   

   

   

30,773

   

   

   

6,793

   

   

   

   

   

   

37,566

   

Cash and cash equivalents at end of period

$

   

   

$

27,327

   

   

$

8,368

   

   

$

   

   

$

35,695

   

 

 33 


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

   

NOTE 14 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

Condensed Consolidating Statement of Cash Flows (Continued)

   

 

   

Nine months ended September 30, 2013

   

(In thousands)

Parent
company/
issuer

   

   

Guarantor
subsidiaries

   

   

Non-guarantor
subsidiaries

   

   

Consolidating
and
eliminating
adjustments

   

   

Consolidated

   

Net cash provided by operating activities

$

6,102

   

   

$

162,621

   

   

$

20,494

   

   

$

   

   

$

189,217

   

Cash flows from investing activities:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Routine capital expenditures

   

   

   

   

(59,203

)

   

   

(3,749

)

   

   

   

   

   

(62,952

)

Development capital expenditures

   

   

   

   

(10,091

)

   

   

(618

)

   

   

   

   

   

(10,709

)

Acquisitions, net of cash acquired

   

   

   

   

(38,704

)

   

   

(402

   

   

   

   

   

(39,106

)

Acquisition deposit

   

   

   

   

(14,675

)

   

   

   

   

   

   

   

   

(14,675

)

Sale of assets

   

   

   

   

248,700

   

   

   

   

   

   

   

   

   

248,700

   

Purchase of insurance subsidiary investments

   

   

   

   

   

   

   

(30,360

)

   

   

   

   

   

(30,360

)

Sale of insurance subsidiary investments

   

   

   

   

   

   

   

35,427

   

   

   

   

   

   

35,427

   

Net change in insurance subsidiary cash and cash equivalents

   

   

   

   

   

   

   

(44,294

)

   

   

   

   

   

(44,294

)

Change in other investments

   

   

   

   

218

   

   

   

   

   

   

   

   

   

218

   

Capital contribution to insurance subsidiary

   

   

   

   

(14,220

)

   

   

   

   

   

14,220

   

   

   

   

Other

   

   

   

   

(142

)

   

   

   

   

   

   

   

   

(142

)

Net cash provided by (used in) investing activities

   

   

   

   

111,883

   

   

   

(43,996

)

   

   

14,220

   

   

   

82,107

   

Cash flows from financing activities:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Proceeds from borrowings under revolving credit

   

1,100,300

   

   

   

   

   

   

   

   

   

   

   

   

1,100,300

   

Repayment of borrowings under revolving credit

   

(1,363,600

)

   

   

   

   

   

   

   

   

   

   

   

(1,363,600

)

Repayment of other long-term debt

   

(3,969

)

   

   

(76

)

   

   

(773

)

   

   

   

   

   

(4,818

)

Payment of deferred financing costs

   

(1,340

)

   

   

   

   

   

   

   

   

   

   

   

(1,340

)

Distribution made to noncontrolling interests

   

   

   

   

   

   

   

(1,628

)

   

   

   

   

   

(1,628

)

Issuance of common stock

   

429

   

   

   

   

   

   

   

   

   

   

   

   

429

   

Capital contribution to insurance subsidiary

   

   

   

   

   

   

   

14,220

   

   

   

(14,220

)

   

   

   

Dividends paid

   

(6,499

)

   

   

   

   

   

   

   

   

   

   

   

(6,499

)

Other

   

   

   

   

404

   

   

   

   

   

   

   

   

   

404

   

Net change in intercompany accounts

   

268,577

   

   

   

(279,139

)

   

   

10,562

   

   

   

   

   

   

   

Net cash provided by (used in) financing activities

   

(6,102

   

   

(278,811

)

   

   

22,381

   

   

   

(14,220

)

   

   

(276,752

Change in cash and cash equivalents

   

   

   

   

(4,307

)

   

   

(1,121

)

   

   

   

   

   

(5,428

)

Cash and cash equivalents at beginning of period

   

   

   

   

37,370

   

   

   

12,637

   

   

   

   

   

   

50,007

   

Cash and cash equivalents at end of period

$

   

   

$

33,063

   

   

$

11,516

   

   

$

   

   

$

44,579

   

 

 34 


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

   

NOTE 14 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

Condensed Consolidating Statement of Cash Flows (Continued)

   

 

   

Nine months ended September 30, 2012

   

(In thousands)

Parent
company/
issuer

   

   

Guarantor
subsidiaries

   

   

Non-guarantor
subsidiaries

   

   

Consolidating
and
eliminating
adjustments

   

   

Consolidated

   

Net cash provided by operating activities

$

7,966

   

   

$

163,765

   

   

$

19,356

   

   

$

   

   

$

191,087

   

Cash flows from investing activities:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Routine capital expenditures

   

   

   

   

(71,211

)

   

   

(5,593

)

   

   

   

   

   

(76,804

)

Development capital expenditures

   

   

   

   

(34,734

)

   

   

(3,441

)

   

   

   

   

   

(38,175

)

Acquisitions, net of cash acquired

   

   

   

   

(139,308

)

   

   

   

   

   

   

   

   

(139,308

)

Sale of assets

   

   

   

   

1,110

   

   

   

   

   

   

   

   

   

1,110

   

Purchase of insurance subsidiary investments

   

   

   

   

   

   

   

(30,890

)

   

   

   

   

   

(30,890

)

Sale of insurance subsidiary investments

   

   

   

   

   

   

   

30,073

   

   

   

   

   

   

30,073

   

Net change in insurance subsidiary cash and cash equivalents

   

   

   

   

   

   

   

(15,171

)

   

   

   

   

   

(15,171

)

Change in other investments

   

   

   

   

1,454

   

   

   

   

   

   

   

   

   

1,454

   

Capital contribution to insurance subsidiary

   

   

   

   

(8,600

)

   

   

   

   

   

8,600

   

   

   

   

Other

   

   

   

   

(1,029

)

   

   

   

   

   

   

   

   

(1,029

)

Net cash used in investing activities

   

   

   

   

(252,318

)

   

   

(25,022

)

   

   

8,600

   

   

   

(268,740

)

Cash flows from financing activities:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Proceeds from borrowings under revolving credit

   

1,329,300

   

   

   

   

   

   

   

   

   

   

   

   

1,329,300

   

Repayment of borrowings under revolving  credit

   

(1,244,900

)

   

   

   

   

   

   

   

   

   

   

   

(1,244,900

)

Repayment of other long-term debt

   

(5,250

)

   

   

(70

)

   

   

(2,656

)

   

   

   

   

   

(7,976

)

Payment of deferred financing costs

   

(601

)

   

   

   

   

   

   

   

   

   

   

   

(601

)

Contribution made by noncontrolling interests

   

   

   

   

   

   

   

200

   

   

   

   

   

   

200

   

Distribution made to noncontrolling interests

   

   

   

   

   

   

   

(3,521

)

   

   

   

   

   

(3,521

)

Purchase of noncontrolling interests

   

   

   

   

   

   

   

(715

)

   

   

   

   

   

(715

)

Net change in intercompany accounts

   

(86,515

)

   

   

94,125

   

   

   

(7,610

)

   

   

   

   

   

   

Capital contribution to insurance subsidiary

   

   

   

   

   

   

   

8,600

   

   

   

(8,600

)

   

   

   

Net cash provided by (used in) financing activities

   

(7,966

)

   

   

94,055

   

   

   

(5,702

)

   

   

(8,600

)

   

   

71,787

   

Change in cash and cash equivalents

   

   

   

   

5,502

   

   

   

(11,368

)

   

   

   

   

   

(5,866

)

Cash and cash equivalents at beginning of period

   

   

   

   

21,825

   

   

   

19,736

   

   

   

   

   

   

41,561

   

Cash and cash equivalents at end of period

$

   

   

$

27,327

   

   

$

8,368

   

   

$

   

   

$

35,695

   

   

   

 

 35 


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

   

NOTE 15 – LEGAL AND REGULATORY PROCEEDINGS

The Company provides services in a highly regulated industry and is subject to various legal actions (some of which are not insured) and regulatory and other governmental and internal audits and investigations from time to time. These matters could (1) require the Company to pay substantial damages, fines, penalties or amounts in judgments or settlements, which individually or in the aggregate could exceed amounts, if any, that may be recovered under the Company’s insurance policies where coverage applies and is available; (2) cause the Company to incur substantial expenses; (3) require significant time and attention from the Company’s management; (4) subject the Company to sanctions including possible exclusions from the Medicare and Medicaid programs; and (5) cause the Company to close or sell one or more facilities or otherwise modify the way the Company conducts business. The ultimate resolution of these matters, whether as a result of litigation or settlement, could have a material adverse effect on the Company’s business, financial position, results of operations and liquidity.

In accordance with authoritative accounting guidance related to loss contingencies, the Company records an accrued liability for litigation and regulatory matters that are both probable and can be reasonably estimated. Additional losses in excess of amounts accrued may be reasonably possible. The Company reviews loss contingencies that are reasonably possible and determines whether an estimate of the possible loss or range of loss, individually or in aggregate, can be disclosed in the Company’s consolidated financial statements. These estimates are based upon currently available information for those legal and regulatory proceedings in which the Company is involved, taking into account the Company’s best estimate of losses for those matters for which such estimate can be made. The Company’s estimates involve significant judgment, given that (1) these legal and regulatory proceedings are in early stages; (2) discovery may not be completed; (3) damages sought in these legal and regulatory proceedings can be unsubstantiated or indeterminate; (4) the matters present legal uncertainties or evolving areas of law; (5) there are often significant facts in dispute; and/or (6) there is a wide range of possible outcomes. Accordingly, the Company’s estimated loss or range of loss may change from time to time, and actual losses may be more or less than the current estimate. At this time, except as otherwise specifically noted, no estimate of the possible loss or range of loss, individually or in the aggregate, in excess of the amounts accrued, if any, can be made regarding the matters described below.

Set forth below are descriptions of the Company’s significant legal proceedings.

Medicare and Medicaid payment reviews, audits and investigations—as a result of the Company’s participation in the Medicare and Medicaid programs, the Company faces and is currently subject to various governmental and internal reviews, audits and investigations to verify the Company’s compliance with these programs and applicable laws and regulations. The Company is routinely subject to audits under various government programs, such as the CMS Recovery Audit Contractor program, in which third party firms engaged by CMS conduct extensive reviews of claims data and medical and other records to identify potential improper payments to healthcare providers under the Medicare program. In addition, the Company, like other hospitals, nursing center operators and rehabilitation therapy service contractors, is subject to ongoing investigations by the U.S. Department of Health and Human Services Office of Inspector General (the “OIG”) into the billing of rehabilitation services provided to Medicare patients and general compliance with conditions of participation in the Medicare and Medicaid programs. Private pay sources such as third party insurance and managed care entities also often reserve the right to conduct audits. The Company’s costs to respond to and defend any such reviews, audits and investigations can be significant and are likely to increase in the current enforcement environment. These audits and investigations may require the Company to refund or retroactively adjust amounts that have been paid under the relevant government program or by other payors. Further, an adverse review, audit or investigation also could result in other adverse consequences, particularly if the underlying conduct is found to be pervasive or systemic. These consequences include (1) state or federal agencies imposing fines, penalties and other sanctions on the Company; (2) loss of the Company’s right to participate in the Medicare or Medicaid programs or one or more third party payor networks; and/or (3) damage to the Company’s reputation in various markets, which could adversely affect the Company’s ability to attract patients, residents and employees.

Whistleblower lawsuits—the Company is also subject to qui tam or “whistleblower” lawsuits under the False Claims Act and comparable state laws for allegedly submitting fraudulent bills for services to the Medicare and Medicaid programs. These lawsuits involve monetary damages, fines, attorneys’ fees and the award of bounties to private qui tam plaintiffs who successfully bring these lawsuits and to the respective government programs. The Company also could be subject to civil penalties (including the loss of the Company’s licenses to operate one or more facilities or healthcare activities), criminal penalties (for violations of certain laws and regulations), and exclusion of one or more facilities or healthcare activities from participation in the Medicare, Medicaid and other federal and state healthcare programs. The lawsuits are in various stages of adjudication or investigation and involve a wide variety of claims and potential outcomes.

 

 36 


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

   

NOTE 15 – LEGAL AND REGULATORY PROCEEDINGS (Continued)

A whistleblower lawsuit is currently pending against RehabCare Group, Inc. (“RehabCare”), a therapy services company acquired by the Company on June 1, 2011, in federal district court for the Eastern District of Missouri. The lawsuit pertains to a subcontractor arrangement entered into in 2006 by RehabCare and another therapy services provider, and fees paid under and in connection with the transaction. The complaint alleges violations of the federal civil False Claims Act based upon an underlying claim that the transaction violated the federal Anti-Kickback Statute. In July 2013, all parties filed motions for summary judgment, which were denied on August 30, 2013. The trial on the matter began on September 23, 2013, but has been recessed until February 3, 2014 while the parties continue settlement discussions.  Any potential settlement of this lawsuit would be subject to, among other items, the negotiation and execution of a definitive settlement agreement, any necessary approvals by the parties, approval of the OIG (which may include other remedial actions), and final court approval of the related settlement agreement. The Company disputes the allegations in the complaint and continues to defend this lawsuit vigorously. The United States is seeking single damages in the amount of approximately $226 million, treble damages, per claim penalties of $5,500 to $11,000 for each claim submitted, other unspecified damages, attorneys’ fees and costs. Based upon the results of certain pre-trial motions, new facts associated with the case and settlement discussions occurring in September 2013, the Company recorded an additional $23 million loss provision in the third quarter of 2013 (for a total loss reserve of $25 million) related to this matter. The Company continues to evaluate the loss provision in light of potentially relevant factual and legal developments, including information learned through rulings on dispositive motions, settlement discussions and other rulings. The expected loss reserve is based upon currently available information and is subject to significant judgment and a variety of assumptions, and known and unknown uncertainties. Given the uncertainty of litigation, the actual loss may vary significantly from the current reserve, which does not represent the Company’s maximum loss exposure. At this time, no estimate of the possible loss or range of loss, in excess of the amount accrued, can be made regarding this lawsuit.

Employment-related lawsuits—the Company’s operations are subject to a variety of federal and state employment-related laws and regulations, including but not limited to the U.S. Fair Labor Standards Act, regulations of the Equal Employment Opportunity Commission, the Office of Civil Rights and state attorneys general, federal and state wage and hour laws and a variety of laws enacted by the federal and state governments that govern these and other employment-related matters. Accordingly, the Company is currently subject to employee-related claims, class action and other lawsuits and proceedings in connection with the Company’s operations, including but not limited to those related to alleged wrongful discharge, illegal discrimination and violations of equal employment and federal and state wage and hour laws. Because labor represents such a large portion of the Company’s operating costs, non-compliance with these evolving federal and state laws and regulations could subject the Company to significant back pay awards, fines and additional lawsuits and proceedings. These claims, lawsuits and proceedings are in various stages of adjudication or investigation and involve a wide variety of claims and potential outcomes.

Four wage and hour class action lawsuits are currently pending against the Company in federal district court for the Central District of California, and are being addressed together by the court. Each case pertains to alleged errors made by the Company with respect to regular pay and overtime pay calculations, waiting times, meal period waivers and wage statements under California law. On March 13, 2013, the court conditionally certified five classes of the seven total classes sought for certification for discovery purposes and declined to certify two others. Notice of class action certification and class members’ right to opt out of the lawsuit was mailed to all of the Company’s current and former California hospital employees with an opt-out deadline of July 27, 2013. The Company intends to vigorously defend these claims and has taken affirmative steps to ensure compliance with applicable California laws.

A wage and hour class action lawsuit against the Company alleging violations of federal and state wage and hour laws is pending in federal district court for the Northern District of Illinois. This lawsuit pertains to the Company’s previous automatic meal break deduction practice for non-exempt employees in the Company’s hospitals located outside California. The court granted conditional class certification in part on June 11, 2013. This lawsuit has been settled in principle by the Company’s agreement to pay $0.7 million to claimants from the Company’s five Illinois hospitals, plaintiffs’ attorney’s fees and certain administrative costs, subject to reaching a written settlement agreement and obtaining court approval.

Based upon available information, the Company recorded an additional $0.7 million loss provision in the third quarter of 2013 (for a total loss reserve of $5.7 million) related to these wage and hour lawsuits. The Company continues to evaluate the loss provision in light of potentially relevant factual and legal developments, including information learned through rulings on dispositive motions, settlement discussions and other rulings. The expected loss reserve is based upon currently available information and is subject to significant judgment and a variety of assumptions, and known and unknown uncertainties. Given the uncertainty of litigation, the actual loss may vary significantly from the current reserve, which does not represent the Company’s maximum loss exposure. At this time, no estimate of the possible loss or range of loss, in excess of the amount accrued, can be made regarding these lawsuits.

 

 37 


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

   

NOTE 15 – LEGAL AND REGULATORY PROCEEDINGS (Continued)

Minimum staffing lawsuits—various states in which the Company operates hospitals and nursing centers have established minimum staffing requirements or may establish minimum staffing requirements in the future. While the Company seeks to comply with all applicable staffing requirements, the regulations in this area are complex and the Company may experience compliance issues from time to time. Failure to comply with such minimum staffing requirements may result in one or more facilities failing to meet the conditions of participation under relevant federal and state healthcare programs and the imposition of significant fines, damages or other sanctions.

Ordinary course matters—in addition to the matters described above, the Company is subject to investigations, claims and lawsuits in the ordinary course of business, including professional liability claims and investigations resulting from the Company’s obligation to self-report suspected violations of law by the Company, particularly in the Company’s hospital and nursing center operations. In many of these claims, plaintiffs’ attorneys are seeking significant fines and compensatory and punitive damages, along with attorneys’ fees. The Company maintains professional and general liability insurance in amounts and coverage that management believes are sufficient for the Company’s operations. However, the Company’s insurance may not cover all claims against the Company or the full extent of the Company’s liability.

   

NOTE 16 – SUBSEQUENT EVENTS

On November 4, 2013, the Company announced that it has signed a definitive agreement to acquire Senior Home Care, Inc. (“Senior Home Care”) for a purchase price of $95 million. The Company expects to finance the transaction with operating cash flows and proceeds from its ABL Facility.

Senior Home Care is a home health provider that operates through 47 locations in Florida and Louisiana.

The transaction with Senior Home Care is subject to several regulatory approvals and other customary conditions to closing. The Company expects to close the transaction in the fourth quarter of 2013.

On November 5, 2013, the Company announced that its subsidiary has signed a definitive agreement with HCP, Inc. and its affiliates (“HCP”) to acquire the real estate associated with nine nursing centers that it currently leases from HCP for approximately $83 million. The annual lease payments for these nursing centers are approximately $9 million. The transaction with HCP is subject to several conditions to closing. The Company expects to close the transaction in the fourth quarter of 2013.

On November 5, 2013, the Company announced that its Board of Directors approved the payment of a quarterly cash dividend to its shareholders of $0.12 per common share to be paid on December 9, 2013 to shareholders of record as of the close of business on November 18, 2013. Future declarations of quarterly dividends will be subject to the approval of Kindred’s Board of Directors.

   

   

   

       

 

 38 


ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

   

Cautionary Statement

This Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements regarding the Company’s expected future financial position, results of operations, cash flows, financing plans, business strategy, budgets, capital expenditures, competitive positions, growth opportunities, plans and objectives of management and statements containing the words such as “anticipate,” “approximate,” “believe,” “plan,” “estimate,” “expect,” “project,” “could,” “should,” “will,” “intend,” “may” and other similar expressions, are forward-looking statements.

Such forward-looking statements are inherently uncertain, and stockholders and other potential investors must recognize that actual results may differ materially from the Company’s expectations as a result of a variety of factors, including, without limitation, those discussed below. Such forward-looking statements are based upon management’s current expectations and include known and unknown risks, uncertainties and other factors, many of which the Company is unable to predict or control, that may cause the Company’s actual results or performance to differ materially from any future results or performance expressed or implied by such forward-looking statements. These statements involve risks, uncertainties and other factors discussed below and detailed from time to time in the Company’s filings with the SEC. Factors that may affect the Company’s plans, results or stock price include, without limitation:

 

the impact of healthcare reform, which will initiate significant changes to the United States healthcare system, including potential material changes to the delivery of healthcare services and the reimbursement paid for such services by the government or other third party payors, including reforms resulting from the Patient Protection and Affordable Care Act and the Healthcare Education and Reconciliation Act (collectively, the “ACA”) or future deficit reduction measures adopted at the federal or state level. Healthcare reform is affecting each of the Company’s businesses in some manner. Potential future efforts in the U.S. Congress to repeal, amend, modify or retract funding for various aspects of the ACA create additional uncertainty about the ultimate impact of the ACA on the Company and the healthcare industry. Due to the substantial regulatory changes that will need to be implemented by CMS and others, and the numerous processes required to implement these reforms, the Company cannot predict which healthcare initiatives will be implemented at the federal or state level, the timing of any such reforms, or the effect such reforms or any other future legislation or regulation will have on the Company’s business, financial position, results of operations and liquidity,

 

the impact of final rules issued by CMS on August 1, 2012 (the “2012 CMS Rules”) which, among other things, will reduce Medicare reimbursement to the Company’s TC hospitals in 2013 and beyond by imposing a budget neutrality adjustment and modifying the short-stay outlier rules,

 

the impact of the 2011 CMS Rules which significantly reduced Medicare reimbursement to the Company’s nursing centers and changed payments for the provision of group therapy services effective October 1, 2011,

 

the impact of the Budget Control Act of 2011 (as amended by the American Taxpayer Relief Act of 2012 (the “Taxpayer Relief Act”)) which will automatically reduce federal spending by approximately $1.2 trillion split evenly between domestic and defense spending. An automatic 2% reduction on each claim submitted to Medicare began on April 1, 2013,

 

the impact of the Taxpayer Relief Act which, among other things, reduces Medicare payments by 50% for subsequent procedures when multiple therapy services are provided on the same day. At this time, the Company believes that the rules related to multiple therapy services will reduce its Medicare revenues by $25 million to $30 million on an annual basis,

 

changes in the reimbursement rates or the methods or timing of payment from third party payors, including commercial payors and the Medicare and Medicaid programs, changes arising from and related to the Medicare prospective payment system for LTAC hospitals, including potential changes in the Medicare payment rules, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, and changes in Medicare and Medicaid reimbursement for the Company’s TC hospitals, nursing centers, IRFs and home health and hospice operations, and the expiration of the Medicare Part B therapy cap exception process,

 

the effects of additional legislative changes and government regulations, interpretation of regulations and changes in the nature and enforcement of regulations governing the healthcare industry,

 

the ability of the Company’s hospitals to adjust to potential LTAC certification and medical necessity reviews,

 

the costs of defending and insuring against alleged professional liability and other claims (including those related to pending whistleblower and wage and hour class action lawsuits against the Company) and the Company’s ability to predict the estimated costs and reserves related to such claims, including the impact of differences in actuarial assumptions and estimates compared to eventual outcomes,

   

       

 

 39 


ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

   

Cautionary Statement (Continued)

 

the impact of the Company’s significant level of indebtedness on its funding costs, operating flexibility and ability to fund ongoing operations, development capital expenditures or other strategic acquisitions with additional borrowings,

 

the Company’s ability to successfully redeploy its capital and proceeds of asset sales in pursuit of its business strategy and pursue its development activities, including through acquisitions, and successfully integrate new operations, including the realization of anticipated revenues, economies of scale, cost savings and productivity gains associated with such operations, as and when planned, including the potential impact of unanticipated issues, expenses and liabilities associated with those activities,

 

the Company’s ability to pay a dividend as, when and if declared by the Board of Directors, in compliance with applicable laws and the Company’s debt and other contractual arrangements,

 

the failure of the Company’s facilities to meet applicable licensure and certification requirements,

 

the further consolidation and cost containment efforts of managed care organizations and other third party payors,

 

the Company’s ability to meet its rental and debt service obligations,

 

the Company’s ability to operate pursuant to the terms of its debt obligations, and comply with its covenants thereunder, and its ability to operate pursuant to its master lease agreements with Ventas,

 

the condition of the financial markets, including volatility and weakness in the equity, capital and credit markets, which could limit the availability and terms of debt and equity financing sources to fund the requirements of the Company’s businesses, or which could negatively impact the Company’s investment portfolio,

 

the Company’s ability to control costs, particularly labor and employee benefit costs,

 

the Company’s ability to successfully reduce or mitigate (by divestiture of operations or otherwise) its exposure to professional liability and other claims,

 

the Company’s obligations under various laws to self-report suspected violations of law by the Company to various government agencies, including any associated obligation to refund overpayments to government payors, fines and other sanctions,

 

the potential for diversion of management time and resources in seeking to transfer the operations of 60 non-strategic nursing centers currently leased from Ventas,

 

national and regional economic, financial, business and political conditions, including their effect on the availability and cost of labor, credit, materials and other services,

 

increased operating costs due to shortages in qualified nurses, therapists and other healthcare personnel,

 

the Company’s ability to attract and retain key executives and other healthcare personnel,

 

the Company’s ability to successfully dispose of unprofitable facilities,

 

events or circumstances which could result in the impairment of an asset or other charges, such as the impact of the Medicare reimbursement regulations that resulted in the Company recording significant impairment charges in 2012 and 2011,

 

changes in generally accepted accounting principles or practices, and changes in tax accounting or tax laws (or authoritative interpretations relating to any of these matters), and

 

the Company’s ability to maintain an effective system of internal control over financial reporting.

Many of these factors are beyond the Company’s control. The Company cautions investors that any forward-looking statements made by the Company are not guarantees of future performance. The Company disclaims any obligation to update any such factors or to announce publicly the results of any revisions to any of the forward-looking statements to reflect future events or developments.

 

 40 


ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

   

General

The accompanying unaudited condensed consolidated financial statements, including the notes thereto, should be read in conjunction with the following discussion and analysis.

The Company is a healthcare services company that through its subsidiaries operates TC hospitals, IRFs, nursing centers, assisted living facilities, a contract rehabilitation services business and a home health and hospice business across the United States. At September 30, 2013, the Company’s hospital division operated 102 TC hospitals (7,394 licensed beds) and five IRFs (215 licensed beds) in 22 states. The Company’s nursing center division operated 102 nursing centers (13,226 licensed beds) and six assisted living facilities (341 licensed beds) in 22 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 11 states.

RehabCare Merger

On June 1, 2011, the Company completed the acquisition of RehabCare (the “RehabCare Merger”). Upon consummation of the RehabCare Merger, each issued and outstanding share of RehabCare common stock was converted into the right to receive 0.471 of a share of the Company’s common stock and $26 per share in cash, without interest (the “Merger Consideration”). Kindred issued approximately 12 million shares of its common stock in connection with the RehabCare Merger. The purchase price totaled $963 million and was comprised of $662 million in cash and $301 million of Kindred common stock at fair value. The Company also assumed $356 million of long-term debt in the RehabCare Merger, of which $345 million was refinanced on June 1, 2011. The operating results of RehabCare have been included in the accompanying unaudited condensed consolidated financial statements of the Company since June 1, 2011.

Divestitures

During the third quarter of 2013, the Company completed the sale of the Vibra Facilities for $187 million to an affiliate of Vibra. The net proceeds of $180 million from this transaction were used to reduce the Company’s borrowings under its ABL Facility.

The Vibra Facilities consist of 14 TC hospitals containing 1,002 licensed beds, one IRF containing 44 licensed beds and one nursing center containing 135 licensed beds. Six of the TC hospitals and the one nursing center were owned facilities. The remaining Vibra Facilities were leased. The Vibra Facilities generated revenues of approximately $272 million and segment operating income of approximately $40 million (excluding the allocation of approximately $8 million of overhead costs) for the year ended December 31, 2012. The Vibra Facilities had aggregate rent expense of approximately $12 million for the year ended December 31, 2012.

The Company recorded a loss on divestiture of $76 million ($63 million net of income taxes) and $94 million ($74 million net of income taxes) during the third quarter of 2013 and for the nine months ended September 30, 2013, respectively, related to the Vibra Facilities. The loss on divestiture included a $69 million write-off of goodwill, which was allocated based upon the relative fair value of the Vibra Facilities, and a $21 million write-off of intangible assets.

On July 31, 2013, the Company completed the sale of the Signature Facilities for $47 million to affiliates of Signature. The proceeds from this transaction were used to reduce the Company’s borrowings under its ABL Facility.

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.

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

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

 

 41 


ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

   

General (Continued)

Divestitures (Continued)

On April 27, 2012, the Company announced that it would not renew the 2012 Expiring Facilities under operating leases with Ventas that expired on April 30, 2013. The 2012 Expiring Facilities contained 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 transferred the operations of all of the 2012 Expiring Facilities to new operators during the nine months ended September 30, 2013. The Company reclassified the results of operations and losses associated with the 2012 Expiring Facilities to discontinued operations, net of income taxes, for all periods presented. The Company received cash proceeds of $13 million for the nine months ended September 30, 2013 for the sale of property and equipment and inventory related to the 2012 Expiring Facilities.

Discontinued operations

In 2013 and in recent years, the Company has completed several strategic divestitures or planned divestitures 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 September 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.

On September 30, 2013, the Company entered into agreements to renew early its leases with Ventas for the Renewal Facilities and exit the 2013 Expiring Facilities. The current lease term for the Renewal Facilities and the 2013 Expiring Facilities was scheduled to expire in April 2015. Under the terms of the agreements, the lease term for the 2013 Expiring Facilities will expire on September 30, 2014. For accounting purposes, 59 of the 2013 Expiring Facilities qualified as assets held for sale and the Company reflected the operating results as discontinued operations in the accompanying unaudited condensed consolidated statement of operations for all historical periods and will reflect the facility scheduled for closure as a discontinued operation upon completion of the exit process. Under the terms of the agreements, the Company will pay $20 million to Ventas in exchange for the early termination of certain leases. The disposal group was measured at its fair value less cost to sell and the Company recorded an asset impairment charge of $8 million related to leasehold improvements in the 2013 Expiring Facilities. These charges were recorded in discontinued operations in the third quarter of 2013 in the accompanying unaudited condensed consolidated statement of operations.

Critical Accounting Policies

Management’s discussion and analysis of financial condition and results of operations are based upon the Company’s consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the use of estimates and judgments that affect the reported amounts and related disclosures of commitments and contingencies. The Company relies on historical experience and on various other assumptions that management believes to be reasonable under the circumstances to make judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates.

The Company believes the following critical accounting policies, among others, affect the more significant judgments and estimates used in the preparation of its consolidated financial statements.

Revenue recognition

The Company has agreements with third party payors that provide for payments to each of its operating divisions. These payment arrangements may be based upon prospective rates, reimbursable costs, established charges, discounted charges or per diem payments. Net patient service revenue is recorded at the estimated net realizable amounts from Medicare, Medicaid, Medicare Advantage, other third party payors and individual patients for services rendered. Retroactive adjustments that are likely to result from future examinations by third party payors are accrued on an estimated basis in the period the related services are rendered and adjusted as necessary in future periods based upon new information or final settlements.

 

 42 


ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

   

Critical Accounting Policies (Continued)

Collectibility of accounts receivable

Accounts receivable consist primarily of amounts due from the Medicare and Medicaid programs, other government programs, managed care health plans, commercial insurance companies, skilled nursing and hospital customers, and individual patients and other customers. Estimated provisions for doubtful accounts are recorded to the extent it is probable that a portion or all of a particular account will not be collected.

In evaluating the collectibility of accounts receivable, the Company considers a number of factors, including the age of the accounts, changes in collection patterns, the composition of patient accounts by payor type, the status of ongoing disputes with third party payors and general industry conditions. Actual collections of accounts receivable in subsequent periods may require changes in the estimated provision for loss. Changes in these estimates are charged or credited to the results of operations in the period of the change.

The provision for doubtful accounts totaled $8 million and $6 million for the third quarter of 2013 and 2012, respectively, and $20 million and $13 million for the nine months ended September 30, 2013 and 2012, respectively.

Allowances for insurance risks

The Company insures a substantial portion of its professional liability risks and workers compensation risks through its 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.

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. The allowance for professional liability risks aggregated $306 million at September 30, 2013 and $291 million at December 31, 2012. If the Company did not discount any of the allowances for professional liability risks, these balances would have approximated $309 million at September 30, 2013 and $293 million at December 31, 2012.

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 million and $9 million during the nine months ended September 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.

Changes in the number of professional liability claims and the cost to settle these claims significantly impact the allowance for professional liability risks. A relatively small variance between the Company’s estimated and actual number of claims or average cost per claim could have a material impact, either favorable or unfavorable, on the adequacy of the allowance for professional liability risks. For example, a 1% variance in the allowance for professional liability risks at September 30, 2013 would impact the Company’s operating income by approximately $3 million.

The provision for professional liability risks (continuing operations), including the cost of coverage maintained with unaffiliated commercial insurance carriers, aggregated $12 million and $14 million for the third quarter of 2013 and 2012, respectively, and $45 million and $42 million for the nine months ended September 30, 2013 and 2012, respectively.

 

 43 


ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

   

Critical Accounting Policies (Continued)

Allowances for insurance risks (Continued)

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. The allowance for workers compensation risks aggregated $201 million at September 30, 2013 and $193 million at December 31, 2012. The provision for workers compensation risks (continuing operations), including the cost of coverage maintained with unaffiliated commercial insurance carriers, aggregated $8 million and $11 million for the third quarter of 2013 and 2012, respectively, and $30 million and $33 million for the nine months ended September 30, 2013 and 2012, respectively.

Accounting for income taxes

The provision for income taxes is based upon the Company’s estimate of annual taxable income or loss for each respective accounting period. The Company recognizes an asset or liability for the deferred tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. These temporary differences will result in taxable or deductible amounts in future years when the reported amounts of the assets are recovered or liabilities are settled. The Company also recognizes as deferred tax assets the future tax benefits from net operating losses and capital loss carryforwards. A valuation allowance is provided for these deferred tax assets if it is more likely than not that some portion or all of the net deferred tax assets will not be realized.

The Company’s effective income tax rate was 31.5% and 42.6% for the third quarter of 2013 and 2012, respectively, and 77.6% and 42.1% for the nine months ended September 30, 2013 and 2012, respectively. The change in the effective tax rate for both periods was primarily related to a non-deductible litigation charge that increased the provision for income taxes by approximately $3 million for both periods.

The Company has recognized deferred tax assets to the extent it is more likely than not they will be realized and a valuation allowance is provided for deferred tax assets to the extent that it is uncertain that the deferred tax asset will be realized. The Company recognized net deferred tax assets totaling $23 million and $3 million at September 30, 2013 and December 31, 2012, respectively.

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. While the Company believes its tax positions are appropriate, there can be no assurance that the various authorities engaged in the examination of its income tax returns will not challenge the Company’s positions.

Valuation of long-lived assets, goodwill and intangible assets

The Company reviews the carrying value of certain long-lived assets and finite lived intangible assets with respect to any events or circumstances that indicate an impairment or an adjustment to the amortization period is necessary. If circumstances suggest that the recorded amounts cannot be recovered based upon estimated future undiscounted cash flows, the carrying values of such assets are reduced to fair value.

In assessing the carrying values of long-lived assets, the Company estimates future cash flows at the lowest level for which there are independent, identifiable cash flows. For this purpose, these cash flows are aggregated based upon the contractual agreements underlying the operation of the facility or group of facilities. Generally, an individual facility is considered the lowest level for which there are independent, identifiable cash flows. However, to the extent that groups of facilities are leased under a master lease agreement in which the operations of a facility and compliance with the lease terms are interdependent upon other facilities in the agreement (including the Company’s ability to renew the lease or divest a particular property), the Company defines the group of facilities under a master lease agreement as the lowest level for which there are independent, identifiable cash flows. Accordingly, the estimated cash flows of all facilities within a master lease agreement are aggregated for purposes of evaluating the carrying values of long-lived assets.

The Company’s intangible assets with finite lives are amortized in accordance with the authoritative guidance for goodwill and other intangible assets using the straight-line method over their estimated useful lives ranging from two to 20 years.

 

 44 


ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

   

Critical Accounting Policies (Continued)

Valuation of long-lived assets, goodwill and intangible assets (Continued)

During the third quarter of 2013, the disposal group was measured at its fair value less cost to sell and the Company recorded an asset impairment charge of $8 million ($5 million net of income taxes) related to leasehold improvements in the 2013 Expiring Facilities.

During the nine months ended September 30, 2013, the Company recorded an asset impairment charge of $16 million ($9 million net of income taxes) related to the sale of the Vibra Facilities. In connection with the sale of the Vibra Facilities, the Company also reviewed indefinite-lived intangible assets associated with the Vibra Facilities and the goodwill of the hospital division reporting unit and determined there were no asset impairments on these assets.

In connection with the 2011 CMS Rules, the Company determined that the impact of the 2011 CMS Rules was a triggering event in the third quarter of 2011 and accordingly tested the recoverability of its nursing centers reporting unit goodwill, intangible assets and property and equipment asset groups impacted by the reduced Medicare payments. The Company recorded pretax impairment charges aggregating $1 million ($0.7 million net of income taxes) and $1 million ($0.4 million net of income taxes) in the third quarter of 2013 and 2012, respectively, for property and equipment expenditures in the nursing center asset groups that were determined to be impaired by the 2011 CMS Rules. The Company also recorded pretax impairment charges aggregating $2 million ($1 million net of income taxes) for each of the nine months ended September 30, 2013 and 2012.

All of the previously discussed charges reflected the amount by which the carrying value of certain assets exceeded their estimated fair value.

The loss on divestiture of the Vibra Facilities included a $69 million write-off of goodwill which was allocated based upon the relative fair value of the Vibra Facilities.

In connection with the closing of a TC hospital, the Company recorded a write-off of $1 million of goodwill allocable to the ceased operations.

None of the previously discussed impairment charges or write-offs impacted the Company’s cash flows or liquidity.

In accordance with the authoritative guidance for goodwill and other intangible assets, the Company is required to perform an impairment test for goodwill and indefinite-lived intangible assets at least annually or more frequently if adverse events or changes in circumstances indicate that the asset may be impaired. The Company performs its annual goodwill impairment test at the end of each fiscal year for each of its reporting units. A reporting unit is either an operating segment or one level below the operating segment, referred to as a component. When the components within the Company’s operating segments have similar economic characteristics, the Company aggregates the components of its operating segments into one reporting unit. Accordingly, the Company has determined that its reporting units are hospitals, nursing centers, skilled nursing rehabilitation services, hospital rehabilitation services, home health and hospice. The carrying value of goodwill for each of the Company’s reporting units at September 30, 2013 and December 31, 2012 follows (in thousands):

   

 

   

September 30,
2013

   

      

December 31,
2012

   

Hospitals

$

677,557

      

      

$

747,065

      

Nursing centers

   

      

      

   

      

Rehabilitation division:

   

   

   

      

   

   

   

Skilled nursing rehabilitation services

   

      

      

   

      

Hospital rehabilitation services

   

168,019

      

      

   

168,019

      

   

   

168,019

      

      

   

168,019

      

Home health and hospice division:

   

   

   

      

   

   

   

Home health

   

104,125

      

      

   

99,317

      

Hospice

   

26,910

      

      

   

26,865

      

   

   

131,035

      

      

   

126,182

      

   

$

976,611

      

      

$

1,041,266

      

 

 45 


ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

   

Critical Accounting Policies (Continued)

Valuation of long-lived assets, goodwill and intangible assets (Continued)

The goodwill impairment test involves a two-step process. The first step is a comparison of each reporting unit’s fair value to its carrying value. If the carrying value of the reporting unit is greater than its fair value, there is an indication that impairment may exist and the second step must be performed to measure the amount of impairment loss, if any. Based upon the results of the step one impairment test for goodwill for hospitals, hospital rehabilitation services, home health and hospice reporting units for the year ended December 31, 2012, no goodwill impairment charges were recorded in connection with the Company’s annual impairment test.

Since quoted market prices for the Company’s reporting units are not available, the Company applies judgment in determining the fair value of these reporting units for purposes of performing the goodwill impairment test. The Company relies on widely accepted valuation techniques, including discounted cash flow and market multiple analyses approaches, which capture both the future income potential of the reporting unit and the market behaviors and actions of market participants in the industry that includes the reporting unit. These types of analyses require the Company to make assumptions and estimates regarding future cash flows, industry-specific economic factors and the profitability of future business strategies. The discounted cash flow approach uses a projection of estimated operating results and cash flows that are discounted using a weighted average cost of capital. Under the discounted cash flow approach, the projection uses management’s best estimates of economic and market conditions over the projected period for each reporting unit including growth rates in the number of admissions, patient days, reimbursement rates, operating costs, rent expense and capital expenditures. Other significant estimates and assumptions include terminal value growth rates, changes in working capital requirements and weighted average cost of capital. The market multiple analysis estimates fair value by applying cash flow multiples to the reporting unit’s operating results. The multiples are derived from comparable publicly traded companies with similar operating and investment characteristics to the reporting units.

The Company has determined that during the nine months ended September 30, 2013, other than the previously discussed decision to terminate the 2013 Expiring Facilities and the sale of the Vibra Facilities, there were no other events or changes in circumstances since December 31, 2012 requiring an interim impairment test. Although the Company has determined that there was no other goodwill or other indefinite-lived intangible asset impairments as of September 30, 2013, adverse changes in the operating environment and related key assumptions used to determine the fair value of the Company’s reporting units and indefinite-lived intangible assets or declines in the value of the Company’s common stock may result in future impairment charges for a portion or all of these assets. Specifically, if the rate of growth of government and commercial revenues earned by the Company’s reporting units were to be less than projected or if healthcare reforms were to negatively impact the Company’s business, an impairment charge of a portion or all of these assets may be required.

On July 3, 2013, CMS issued proposed regulations to reduce Medicare reimbursement for home health services by as much as 3.5% in each of the next four years beginning January 1, 2014. A final rule is expected in the fourth quarter of 2013. Subject to the terms of the final rule, the Company may be required to record asset impairments for goodwill and other intangible assets in its home health reporting unit in the fourth quarter of 2013. At September 30, 2013, goodwill associated with this business aggregated $104 million.

An impairment charge could have a material adverse effect on the Company’s business, financial position and results of operations, but would not be expected to have an impact on the Company’s cash flows or liquidity.

The Company’s indefinite-lived intangible assets consist of trade names, Medicare certifications and certificates of need. The fair values of the Company’s indefinite-lived intangible assets are derived from current market data and projections at a facility level which include management’s best estimates of economic and market conditions over the projected period including growth rates in the number of admissions, patient days, reimbursement rates, operating costs, rent expense and capital expenditures. Other significant estimates and assumptions include terminal value growth rates, changes in working capital requirements and weighted average cost of capital. Certificates of need intangible assets are estimated primarily using both a replacement cost methodology and an excess earnings method, a form of discounted cash flows, which is based upon the concept that net after-tax cash flows provide a return supporting all of the assets of a business enterprise.

The loss on divestiture of the Vibra Facilities included a $21 million write-off of certain indefinite-lived intangible assets allocable to the disposed operations.

In connection with the closing of a TC hospital and a home health location, the Company recorded write-offs for certain indefinite-lived intangible assets of $4 million and $0.5 million, respectively, allocable to the ceased operations.

 

 46 


ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

   

Critical Accounting Policies (Continued)

Valuation of long-lived assets, goodwill and intangible assets (Continued)

The annual impairment tests for certain of the Company’s indefinite-lived intangible assets are performed as of May 1, July 1 and September 1 while all others are performed as of December 31. No impairment charges were recorded in connection with the annual impairment test as of September 1, 2013, July 1, 2013, May 1, 2013 or December 31, 2012. However, the impairment test at May 1, 2013 for the hospital rehabilitation services operating segment trade name indicated that the excess fair value was only 5% higher than the carrying value of $32 million. A significant assumption in determining the fair value of the trade name is revenue growth. Assuming all other assumptions remain the same, if the rate of revenue growth assumption for the hospital rehabilitation services were to be reduced by 200 basis points, an impairment charge of approximately $1 million would be required.

Recently Issued Accounting Requirements

In July 2013, 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, 2013. 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.

Results of Operations – Continuing Operations

Hospital division

Revenues declined 4% to $609 million in the third quarter of 2013 compared to $637 million for the same period in 2012 and declined 3% to $1.9 billion for the nine months ended September 30, 2013 from $2.0 billion for the same period in 2012. The decline in revenue in the third quarter of 2013 and for the nine months ended September 30, 2013 was primarily a result of Medicare reimbursement reductions which began on April 1, 2013 under the Budget Control Act of 2011 and a decline in admissions. Aggregate same-facility admissions declined 7% and 5% in the third quarter of 2013 and for the nine months ended September 30, 2013 compared to the respective prior year periods. Same-facility average daily census declined 5% and 3% in the third quarter of 2013 and for the nine months ended September 30, 2013 compared to the respective prior year periods.

Operating income for the three months ended September 30, 2013 included $5 million of costs incurred in connection with the closing of a TC hospital and a litigation charge of $0.7 million. Operating income for the nine months ended September 30, 2013 also included $8 million related to one-time bonus costs. Operating income for the nine months ended September 30, 2012 included $9 million related to severance and other costs incurred in connection with the closing of a regional office and two TC hospitals, and employment-related lawsuits. Excluding these charges, hospital operating margins decreased in the third quarter of 2013 as a result of the previously discussed reimbursement reductions and admission declines, and were relatively unchanged for the nine months ended September 30, 2013 compared to the respective prior year periods.

Average hourly wage rates declined 1% for both the third quarter of 2013 and for the nine months ended September 30, 2013 compared to the respective prior year periods. Employee benefit costs decreased 6% and 7% in the third quarter of 2013 and for the nine months ended September 30, 2013 compared to the respective prior year periods, primarily as a result of a reduction in workers compensation and compensated absences expense in the third quarter of 2013 and a reduction in workers compensation, health, retirement plan and compensated absences expense for the nine months ended September 30, 2013.

 

 47 


ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

   

Results of Operations – Continuing Operations (Continued)

Hospital division (Continued)

Professional liability costs were $7 million and $9 million in the third quarter of 2013 and 2012, respectively, and $23 million and $29 million for the nine months ended September 30, 2013 and 2012, respectively. The decrease in professional liability costs was attributable to improvement in the frequency and severity of claims.

Nursing center division

Revenues declined 2% to $278 million in the third quarter of 2013 compared to $282 million in the same period in 2012 and declined 1% to $840 million for the nine months ended September 30, 2013 from $846 million for the same period in 2012. The decline in revenue for both periods was primarily a result of a decline in average daily census and to a lesser extent, Medicare reimbursement reductions which began on April 1, 2013 under the Budget Control Act of 2011. Average daily census declined 4% and 3% in the third quarter of 2013 and for the nine months ended September 30, 2013, respectively, compared to the respective prior year periods, primarily as a result of the decline in Medicare average length of stay. Admissions declined 1% in the third quarter of 2013 and were relatively unchanged for the nine months ended September 30, 2013 compared to the respective prior year periods.

Operating income for the nine months ended September 30, 2013 included $5 million related to one-time bonus costs. Operating income for the nine months ended September 30, 2012 included $1 million incurred in connection with the cancellation of a sub-acute unit project. Excluding these charges, nursing center operating margins declined in both the third quarter of 2013 and for the nine months ended September 30, 2013 compared to the respective prior year periods, primarily as a result of a decline in average daily census and related cost inefficiencies, and the previously discussed reimbursement reductions.

Average hourly wage rates increased 2% in the third quarter of 2013 and increased 1% for the nine months ended September 30, 2013 compared to the respective prior year periods. Employee benefit costs decreased 8% in both the third quarter of 2013 and for the nine months ended September 30, 2013 compared to the respective prior year periods, primarily as a result of a reduction in workers compensation and compensated absences expense in the third quarter of 2013 and a reduction in workers compensation, health and compensated absences expense for the nine months ended September 30, 2013.

Professional liability costs were $5 million and $4 million in the third quarter of 2013 and 2012, respectively, and $20 million and $11 million for the nine months ended September 30, 2013 and 2012, respectively. The increase in professional liability costs was attributable to continued deterioration in the frequency and severity of claims.

Rehabilitation division

Skilled nursing rehabilitation services

Revenues declined 3% to $244 million in the third quarter of 2013 compared to $252 million for the same period in 2012 and declined 1% at $750 million for the nine months ended September 30, 2013 compared to $759 million for the same period in 2012. Revenue decline in the third quarter of 2013 was primarily attributable to Medicare reimbursement reductions under the Taxpayer Relief Act that became effective April 1, 2013. Revenues derived from non-affiliated customers aggregated $214 million and $224 million in the third quarter of 2013 and 2012, respectively, and $660 million and $674 million for the nine months ended September 30, 2013 and 2012, respectively.

Operating income for the three months ended September 30, 2013 included $23 million related to a litigation charge. Operating income for the nine months ended September 30, 2013 also included $5 million related to one-time bonus costs. Excluding these charges, operating margins declined in the third quarter of 2013 compared to the respective prior year period, primarily attributable to Medicare reimbursement reductions discussed above, however operating margins increased for the nine months ended September 30, 2013 compared to the respective prior year period, primarily as a result of increased operating efficiencies.

Hospital rehabilitation services

Revenues declined 5% to $68 million in the third quarter of 2013 compared to $72 million for the same period in 2012 and declined 3% to $212 million for the nine months ended September 30, 2013 from $220 million for the same period in 2012. Revenue decline in both periods was primarily attributable to contracts terminated during the nine months ended September 30, 2013. Revenues derived from non-affiliated customers aggregated $45 million and $48 million in the third quarter of 2013 and 2012, respectively, and $140 million and $146 million for the nine months ended September 30, 2013 and 2012, respectively.

 

 48 


ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

   

Results of Operations – Continuing Operations (Continued)

Rehabilitation division (Continued)

Hospital rehabilitation services (Continued)

Operating margins increased in both the third quarter of 2013 and for the nine months ended September 30, 2013 compared to the respective prior year period, primarily as a result of increased operating efficiencies. Operating income for the three months ended September 30, 2013 included $0.3 million related to severance and retirement costs. Operating income for the nine months ended September 30, 2013 also included $1 million related to one-time bonus costs.

Home health and hospice division

Revenues increased 50% to $53 million in the third quarter of 2013 compared to $36 million for the same period in 2012 and increased 70% to $158 million for the nine months ended September 30, 2013 from $93 million for the same period in 2012. Revenue growth in both periods was primarily attributable to acquisitions completed during 2012 and 2013.

Operating margins declined in both the third quarter of 2013 and for the nine months ended September 30, 2013 compared to the respective prior year period, primarily due to start-up costs and the migration to standard operating systems in connection with the development of this business segment. Operating income in the third quarter of 2013 included $0.6 million of severance and retirement costs and $0.5 million of costs associated with closing a home health location. Operating income for the nine months ended September 30, 2013 also included $1 million related to one-time bonus costs.

Corporate overhead

Operating income for the Company’s operating divisions excludes allocations of corporate overhead. These costs aggregated $39 million and $46 million in the third quarter of 2013 and 2012, respectively, and $128 million and $133 million for the nine months ended September 30, 2013 and 2012, respectively. The decline in corporate overhead in both periods was primarily attributable to lower incentive compensation costs. As a percentage of consolidated revenues, corporate overhead totaled 3.3% and 3.7% in the third quarter of 2013 and 2012, respectively, and totaled 3.5% and 3.6% for the nine months ended September 30, 2013 and 2012, respectively. Operating income in the third quarter of 2013 included $1 million of severance and retirement costs and $1 million of fees associated with the modification of certain of the Company’s senior debt.

Transaction costs

Operating results included transaction costs totaling $1 million in the third quarter of both 2013 and 2012, and $2 million for each of the nine months ended September 30, 2013 and 2012. Transaction costs in all periods were included in other operating expenses.

Capital costs

Rent expense was relatively unchanged at $79 million in the third quarter of 2013 compared to the same period in 2012 and increased 2% to $238 million for the nine months ended September 30, 2013 from $234 million for the same period in 2012. The increase for the nine months ended September 30, 2013 resulted primarily from contractual inflation and contingent rent increases. Rent expense in the third quarter of 2012 and for the nine months ended September 30, 2012 included lease cancellation charges of $1 million and $2 million, respectively, incurred in connection with the closing of two TC hospitals.

Depreciation and amortization expense decreased 9% to $38 million in the third quarter of 2013 compared to $41 million for the same period in 2012 and decreased 1% to $120 million for the nine months ended September 30, 2013 from $121 million for the same period in 2012. The decrease in both periods resulted from an increase in assets becoming fully depreciated as compared to the same periods a year ago.

Interest expense decreased 4% to $26 million in the third quarter of 2013 compared to $27 million for the same period in 2012 and increased 4% to $83 million for the nine months ended September 30, 2013 from $80 million for the same period in 2012. The decrease in the third quarter of 2013 was primarily attributable to a reduction in both interest rates and borrowing levels. The increase for the nine months ended September 30, 2013 was primarily attributable to increased borrowings under the Term Loan Facility and $1 million of charges associated with the modification of certain of the Company’s senior debt.

 

 49 


ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

   

Results of Operations – Continuing Operations (Continued)

Consolidated results

Loss from continuing operations before income taxes aggregated $29 million in the third quarter of 2013 compared to income of $12 million for the same period in 2012. Income from continuing operations before income taxes aggregated $5 million for the nine months ended September 30, 2013 compared to $55 million for the same period in 2012. Loss from continuing operations aggregated $20 million in the third quarter of 2013 compared to income of $7 million for the same period in 2012. Income from continuing operations aggregated $1 million for the nine months ended September 30, 2013 compared to $32 million for the same period in 2012. Litigation charges, costs associated with the closing of a TC hospital and a home health location, severance and retirement costs, senior debt modification charges and transaction costs negatively impacted the consolidated pretax operating results by $33 million ($23 million net of income taxes) in the third quarter of 2013. These costs as well as one-time bonus costs also negatively impacted the consolidated pretax operating results by $56 million ($37 million net of income taxes) for the nine months ended September 30, 2013. Severance costs, lease cancellation charges and other miscellaneous costs related to the closing of a regional office and two TC hospitals, the cancellation of a sub-acute unit project, employment-related lawsuits and transaction costs negatively impacted the consolidated pretax operating results by $1 million ($1 million net of income taxes) in the third quarter of 2012 and $13 million ($8 million net of income taxes) for the nine months ended September 30, 2012.

Results of Operations – Discontinued Operations

Loss from discontinued operations aggregated $21 million in the third quarter of 2013 compared to income of $3 million for the same period in 2012. Loss from discontinued operations aggregated $24 million for the nine months ended September 30, 2013 compared to income of $14 million for the same period in 2012. The Company recorded a net loss of $65 million and $2 million in the third quarter of 2013 and 2012, respectively, and $78 million and $4 million for the nine months ended September 30, 2013 and 2012, respectively, related to the divestiture of discontinued operations.

On September 30, 2013, the Company entered into agreements to renew early its leases with Ventas for the Renewal Facilities and exit the 2013 Expiring Facilities. The current lease term for the Renewal Facilities and the 2013 Expiring Facilities was scheduled to expire in April 2015. Under the terms of the agreements, the lease term for the 2013 Expiring Facilities will expire on September 30, 2014. For accounting purposes, 59 of the 2013 Expiring Facilities qualified as assets held for sale and the Company reflected the operating results as discontinued operations in the accompanying unaudited condensed consolidated statement of operations for all historical periods and will reflect the facility scheduled for closure as a discontinued operation upon completion of the exit process. Under the terms of the agreements, the Company will pay $20 million to Ventas in exchange for the early termination of certain leases. The disposal group was measured at its fair value less cost to sell and the Company recorded an asset impairment charge of $8 million related to leasehold improvements in the 2013 Expiring Facilities. These charges were recorded in discontinued operations in the third quarter of 2013 in the accompanying unaudited condensed consolidated statement of operations.

The Company recorded a loss on divestiture of $76 million ($63 million net of income taxes) and $94 million ($74 million net of income taxes) during the third quarter of 2013 and for the nine months ended September 30, 2013, respectively, related to the Vibra Facilities. The loss on divestiture included a $69 million write-off of goodwill, which was based upon the relative fair value, and a $21 million write-off of intangible assets.

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

On April 27, 2012, the Company announced that it would not renew the 2012 Expiring Facilities under operating leases with Ventas that expired on April 30, 2013. The 2012 Expiring Facilities contained 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 transferred the operations of all of the 2012 Expiring Facilities to new operators during the nine months ended September 30, 2013. The Company reclassified the results of operations and losses associated with the 2012 Expiring Facilities to discontinued operations, net of income taxes, for all periods presented.

 

 50 


ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

   

Liquidity

Operating cash flows

Cash flows provided by operations (including discontinued operations) aggregated $189 million for the nine months ended September 30, 2013 compared to $191 million for the same period in 2012. Operating cash flows for the nine months ended September 30, 2013 and September 30, 2012 included net federal income tax payments of $13 million and $5 million, respectively.

The Company utilizes its ABL Facility to meet working capital needs and finance its acquisition and development activities. As a result, the Company typically carries minimal amounts of cash on its consolidated balance sheet. Based upon the Company’s expected operating cash flows and the availability of borrowings under the Company’s ABL Facility ($587 million at September 30, 2013), management believes that the Company has the necessary financial resources to satisfy its expected short-term and long-term liquidity needs.

Dividend declaration

The Company’s Board of Directors approved a quarterly cash dividend to its shareholders of $0.12 per common share (approximately $6 million) that was paid on September 9, 2013 to shareholders of record as of the close of business on August 19, 2013. On November 5, 2013, the Company announced that its Board of Directors approved the payment of a quarterly cash dividend to its shareholders of $0.12 per common share to be paid on December 9, 2013 to shareholders of record as of the close of business on November 18, 2013. Future declarations of quarterly dividends will be subject to the approval of Kindred’s Board of Directors. The cash dividend funding will require the use of approximately $6 million in the fourth quarter of 2013 and would require approximately $26 million on an annual basis.

Credit facilities and notes

In connection with the RehabCare Merger, the Company entered into the Credit Facilities and issued the Notes. In 2011, the Company used proceeds from the Credit Facilities and the Notes to pay the Merger Consideration, repay all amounts outstanding under the Company’s and RehabCare’s previous credit facilities and to pay transaction costs. The amounts outstanding under the Company’s and RehabCare’s former credit facilities that were repaid at the RehabCare Merger closing were $390 million and $345 million, respectively.

In August 2013, the Company completed amendments and restatements to the Credit Facilities to increase its borrowing capacity and improve its financial flexibility. The amendments include, among other things, the following changes: (a) refreshing the option to increase the credit capacity in the aggregate between the Credit Facilities by $250 million; (b) establishing the option to further increase the credit capacity between the Credit Facilities upon satisfaction of a secured leverage ratio; (c) extending the maturity of the ABL Facility by two years to June 2018; (d) eliminating the annual and cumulative limitations on acquisitions; (e) raising to $150 million the Company’s ability to pay cash dividends, buy back stock and make other restricted payments; and (f) easing the restrictions on the Company’s ability to make investments and enter into other joint venture arrangements. The interest rate pricing levels were not changed in connection with the amendments.

In May 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 expects that these changes will result in annualized interest savings of approximately $8 million.

The Company recorded fees associated with the amendments of $0.5 million during the three months ended September 30, 2013, which are included in other operating expenses in the accompanying unaudited condensed consolidated statement of operations. The Company also recorded charges associated with the amendments and restatements of $0.1 million and $1.5 million during the three and nine months ended September 30, 2013, respectively, which are included in interest expense in the accompanying unaudited condensed consolidated statement of operations.

 

 51 


ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

   

Liquidity (Continued)

Credit facilities and notes (Continued)

The Credit Facilities previously had an incremental facility capacity in an aggregate amount between the two facilities of $200 million. In October 2012, the Company executed the incremental capacity by completing modifications to increase by $100 million its Term Loan Facility and expand by $100 million the borrowing capacity under its ABL Facility. The additional Term Loan Facility borrowings were issued at 97.5% and the net proceeds were used to pay down a portion of the outstanding balance under the ABL Facility. The aggregate amount outstanding under the Term Loan Facility at September 30, 2013 approximated $786 million. In connection with the $100 million expansion of the borrowing capacity under its ABL Facility, the Company also modified the accounts receivable borrowing base which will allow the Company to more easily access the full amount of the available credit. The other terms of the Term Loan Facility and the ABL Facility were unchanged.

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

The agreements governing the Credit Facilities and the indenture governing the Notes include a number of restrictive covenants that, among other things and subject to certain exceptions and baskets, impose operating and financial restrictions on the Company and certain of its subsidiaries. The Company’s ability to pay dividends is limited to certain restricted payment baskets, which may expand based upon accumulated earnings. In addition, the Company is required to comply with a minimum fixed charge coverage ratio and a maximum total leverage ratio under the Credit Facilities. The financing agreements governing the Credit Facilities and the indenture governing the Notes also contain customary affirmative covenants and events of default. The Company was in compliance with the terms of the Credit Facilities and the indenture governing the Notes at September 30, 2013.

Interest rate swaps

In December 2011, the Company entered into two interest rate swap agreements to hedge its floating interest rate on an aggregate of $225 million of debt outstanding under its Term Loan Facility. 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 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 September 30, 2013. However, the Term Loan Facility amendment completed in May 2013 reduced the LIBOR floor from 1.5% to 1.0%, therefore some partial ineffectiveness will result through the expiration of the interest rate swap agreement. For the three and nine months ended September 30, 2013, there was $0.1 million and $0.4 million, respectively, of ineffectiveness recognized related to the interest rate swaps recorded in interest expense. The fair value of the interest rate swaps recorded in other accrued liabilities was $2 million and $3 million at September 30, 2013 and December 31, 2012, respectively.

Other financing activities

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 million and $9 million during the nine months ended September 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.

Divestiture of facilities

During the third quarter of 2013, the Company completed the sale of the Vibra Facilities for $187 million to an affiliate of Vibra. The net proceeds of $180 million from this transaction were used to reduce the Company’s borrowings under its ABL Facility.

On July 31, 2013, the Company completed the sale of the Signature Facilities for $47 million to affiliates of Signature. The proceeds from the transaction were used to reduce the Company’s borrowings under its ABL Facility.

The Company received cash proceeds of $13 million for the nine months ended September 30, 2013 for the sale of property and equipment and inventory related to the 2012 Expiring Facilities.

 

 52 


ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

   

Capital Resources

Capital expenditures and acquisitions

Excluding acquisitions, routine capital expenditures (expenditures necessary to maintain existing facilities that generally do not increase capacity or add services) totaled $63 million for the nine months ended September 30, 2013 compared to $77 million for the same period in 2012. Hospital development capital expenditures (primarily new and replacement facility construction) totaled $11 million for the nine months ended September 30, 2013 compared to $35 million for the same period in 2012. Nursing center development capital expenditures (primarily the addition of transitional care services for higher acuity patients) were immaterial for the nine months ended September 30, 2013 and totaled $3 million for the same period in 2012. Excluding acquisitions, the Company anticipates that routine capital spending for 2013 should approximate $105 million to $115 million and development capital spending should approximate $12 million. Management expects that substantially all of these expenditures will be financed through internal sources. Management believes that its capital expenditure program is adequate to improve and equip existing facilities. At September 30, 2013, the estimated cost to complete and equip construction in progress approximated $11 million.

Acquisition expenditures totaled $39 million for the nine months ended September 30, 2013 compared to $139 million for the same period in 2012. Acquisition deposits totaled $15 million in the third quarter of 2013, primarily related to the purchase of a hospital rehabilitation services company. The Company financed these acquisitions with its operating cash flows and its ABL Facility.

On November 4, 2013, the Company announced that it has signed a definitive agreement to acquire Senior Home Care for a purchase price of $95 million. The Company expects to finance the transaction with operating cash flows and proceeds from its ABL Facility. The transaction with Senior Home Care is subject to several regulatory approvals and other customary conditions to closing. The Company expects to close the transaction in the fourth quarter of 2013.

On November 5, 2013, the Company announced that its subsidiary has signed a definitive agreement with HCP to acquire the real estate associated with nine nursing centers that it currently leases from HCP for approximately $83 million. The annual lease payments for these nursing centers are approximately $9 million. The transaction with HCP is subject to several conditions to closing. The Company expects to close the transaction in the fourth quarter of 2013.

Renewal of Ventas facilities

On September 30, 2013, the Company entered into agreements to renew early its leases with Ventas for the Renewal Facilities. The current lease term for the Renewal Facilities was scheduled to expire in April 2015.

The Company will renew the existing leases for three TC hospitals and 15 nursing centers for an additional five year term effective May 1, 2015. The annual rents for these facilities will increase by $4 million on October 1, 2014 and are subject to various rent escalators contained within the existing master leases. In addition, the Company will renew the leases for 19 TC hospitals and 11 nursing centers for a term of 10 years and seven months effective October 1, 2014. The annual rents for these facilities will increase by $11 million on October 1, 2014 and are subject to annual increases based upon the change in the consumer price index (subject to an annual 4% cap). For accounting purposes, the Company will record the additional rents over the new lease term on a straight-line basis beginning on October 1, 2013, the effective date of the agreements.

The current aggregate annual rent for the Renewal Facilities approximates $79 million. The 22 TC hospitals contain 1,753 licensed beds and generated revenues and segment operating income (excluding the allocation of approximately $17 million of overhead costs) of approximately $572 million and $115 million, respectively, for the year ended December 31, 2012. The 26 nursing centers contain 3,134 licensed beds and generated revenues and segment operating income (excluding the allocation of approximately $8 million of overhead costs) of approximately $271 million and $56 million, respectively, for the year ended December 31, 2012. The terms of the new leases are substantially similar to the terms of the existing master lease agreements between the Company and Ventas.

 

 53 


ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

   

Other Information

Effects of inflation and changing prices

The Company derives a substantial portion of its revenues from the Medicare and Medicaid programs. Congress and certain state legislatures have enacted or may enact additional significant cost containment measures limiting the Company’s ability to recover its cost increases through increased pricing of its healthcare services. Medicare revenues in TC hospitals and nursing centers are subject to fixed payments under the Medicare prospective payment systems.

Medicaid reimbursement rates in many states in which the Company operates nursing centers also are based upon fixed payment systems. Generally, these rates are adjusted annually for inflation. However, these adjustments may not reflect the actual increase in the costs of providing healthcare services.

Various healthcare reform provisions became law upon the enactment of the ACA. The reforms contained in the ACA have affected each of the Company’s businesses in some manner and are directed in large part at increased quality and cost reductions. Several of the reforms are very significant and could ultimately change the nature of the Company’s services, the methods of payment for the Company’s services and the underlying regulatory environment. These reforms include possible modifications to the conditions of qualification for payment, bundling of payments to cover both acute and post-acute care and the imposition of enrollment limitations on new providers.

The ACA also provides for: (1) reductions to the annual market basket payment updates for LTAC hospitals, IRFs, home health agencies and hospice providers which could result in lower reimbursement than in the preceding year; (2) additional annual “productivity adjustment” reductions to the annual market basket payment update as determined by CMS for LTAC hospitals, IRFs, and nursing centers (beginning in federal fiscal year 2012), home health agencies (beginning in federal fiscal year 2015) and hospice providers (beginning in federal fiscal year 2013); (3) new transparency, reporting and certification requirements for skilled nursing facilities, including disclosures regarding organizational structure, officers, directors, trustees, managing employees and financial, clinical and other related data; (4) a quality reporting system for hospitals (including LTAC hospitals and IRFs) beginning in federal fiscal year 2014; and (5) reductions in Medicare payments to hospitals (including LTAC hospitals and IRFs) beginning in federal fiscal year 2014 for failure to meet certain quality reporting standards or to comply with standards in new value based purchasing demonstration project programs.

The healthcare reforms and changes resulting from the ACA, as well as other similar healthcare reforms, could have a material adverse effect on the Company’s business, financial position, results of operations and liquidity.

Under the Budget Control Act of 2011, $1.2 trillion in domestic and defense spending reductions automatically began February 1, 2013, split evenly between domestic and defense spending. Payments to Medicare providers are subject to these automatic spending reductions, subject to a 2% cap. As discussed below, the Taxpayer Relief Act subsequently delayed by two months the automatic budget sequestration cuts established by the Budget Control Act of 2011. The automatic 2% reduction on each claim submitted to Medicare began on April 1, 2013. Reductions to Medicare and Medicaid reimbursement resulting from the Budget Control Act of 2011 could have a material adverse effect on the Company’s business, financial position, results of operations and liquidity.

The Taxpayer Relief Act was enacted on January 2, 2013. As noted above, this Act delayed by two months the automatic budget sequestration cuts established by the Budget Control Act of 2011. The Taxpayer Relief Act also: (1) reduces Medicare payments by 50% for subsequent procedures when multiple therapy services are provided on the same day; (2) extends the Medicare Part B outpatient therapy cap exception process to December 31, 2013; (3) suspends until December 31, 2013 the sustainable growth rate adjustment (“SGR”) reduction applicable to the Medicare Physician Fee Schedule (“MPFS”) for certain services provided under Medicare Part B; (4) increases the statute of limitations to recover Medicare overpayments from three years to five years; and (5) creates a new federal Commission on Long-Term Care to provide recommendations on the establishment, implementation and financing of a comprehensive, coordinated and high-quality system that ensures the availability of long-term care services. The Company believes that the new rules related to multiple therapy services will reduce its Medicare revenues by $25 million to $30 million on an annual basis.

The Company believes that its operating margins will continue to be under pressure as the growth in operating expenses, particularly professional liability, labor and employee benefits costs, exceeds payment increases from Medicare, Medicaid and third party payors. In addition, as a result of competitive pressures, the Company’s ability to maintain operating margins through price increases to private patients is limited.

For additional information regarding Medicare and Medicaid reimbursement and other government regulations impacting the Company, see the Company’s Annual Report on Form 10-K for 2012 as filed with the SEC.

 

 54 


ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

   

Other Information (Continued)

Effects of inflation and changing prices (Continued)

Hospital division

The Long-Term Acute Care Prospective Payment System (“LTAC PPS”) maintains LTAC hospitals as a distinct provider type, separate from short-term acute care hospitals. Only providers certified as LTAC hospitals may be paid under this system. All of the Company’s TC hospitals are certified as LTAC hospitals. To maintain certification under LTAC PPS, the average length of stay of fee-for-service Medicare patients must be greater than 25 days. Medicare Advantage patients are included with Medicare fee-for-service patients in order to determine compliance with the 25-day average length of stay requirement.

CMS has, for a number of years, considered the development of facility and patient certification criteria for LTAC hospitals, potentially as an alternative to the current 25-day length of stay certification system. In 2004, the Medicare Payment Advisory Commission, a commission chartered by Congress to advise it on Medicare payment issues (“MedPAC”), recommended the adoption by CMS of new facility staffing and services criteria and patient clinical characteristics and treatment requirements for LTAC hospitals in order to ensure that only appropriate patients are admitted to these facilities. Since the MedPAC recommendation, CMS has initiated studies to examine such recommendations and those studies are ongoing. Implementation of additional criteria that may limit the population of patients eligible for the Company’s hospital services or change the basis on which the Company is paid could have a material adverse effect on the Company’s business, financial position, results of operations and liquidity.

On August 2, 2013, CMS issued final regulations regarding Medicare reimbursement for LTAC hospitals for the federal fiscal year beginning October 1, 2013. Included in the final regulations are: (1) a market basket increase to the standard federal payment rate of 2.5%; (2) offsets to the standard federal payment rate mandated by the ACA of: (a) 0.5% to account for the effect of a productivity adjustment, and (b) 0.3% as required by statute; (3) a wage level budget neutrality factor of 1.0010531 applied to the adjusted standard federal payment rate; (4) adjustments to area wage indexes; and (5) a decrease in the high cost outlier threshold per discharge to $13,314. In addition, the final regulations also would implement the second year of a three-year phase-in of a 3.75% budget neutrality adjustment which would reduce LTAC hospital rates by 1.3% in 2014. CMS has projected the impact of these changes will result in a 1.3% increase to average Medicare payments to LTAC hospitals. These final regulations also allow for the expiration of the existing moratorium on the “25 Percent Rule,” which dictates that LTAC hospitals are to be paid under LTAC PPS for admissions from a single referral source up to 25% of aggregate Medicare admissions. Admissions beyond the 25% threshold are to be paid at a lower amount based upon the Medicare prospective payment system applicable to general short-term acute care hospitals (“IPPS”). CMS has indicated that the impact of the expiration of the “25 Percent Rule” will result in approximately a 1.6% reduction in payments to LTAC hospitals.

In addition, CMS published preliminary findings regarding patient and facility-level criteria for LTAC hospitals, with proposed specific recommendations expected in the spring of 2014 which could potentially be implemented in the federal fiscal year beginning October 1, 2014. CMS is considering payment options that would limit the full payment under LTAC PPS to patients that are defined as chronically critically ill (“CCI”). CMS’s research suggests that CCI patients be defined as having at least one of five medically complex conditions combined with a stay of at least eight days in an intensive care or cardiac care unit in a general short-term acute care hospital. For those patients not meeting the CCI criteria, CMS suggests that payments could be made to the LTAC hospital at an amount comparable to what a general short-term hospital would receive under IPPS.

On August 1, 2012, CMS issued the 2012 CMS Rules, which, among other things, will reduce Medicare reimbursement to the Company’s TC hospitals in 2013 and beyond by imposing a budget neutrality adjustment and modifying the short-stay outlier rules. Included in the 2012 CMS Rules are: (1) a market basket increase to the standard federal payment rate of 2.6%; (2) offsets to the standard federal payment rate mandated by the ACA of: (a) 0.7% to account for the effect of a productivity adjustment, and (b) 0.1% as required by statute; (3) a wage level budget neutrality factor of 0.999265 applied to the adjusted standard federal payment rate; (4) adjustments to area wage indexes; and (5) a decrease in the high cost outlier threshold per discharge to $15,408. Effective December 29, 2012, the 2012 CMS Rules (1) began a three-year phase-in of a 3.75% budget neutrality adjustment which will reduce LTAC hospital rates by 1.3% in 2013; and (2) restored a payment reduction that will limit payments for very short-stay outliers that will reduce the Company’s TC hospital payments by approximately 0.5%. The 2012 CMS Rules also (1) provide for a one-year extension of the existing moratorium on the “25 Percent Rule,” and (2) allow for the expiration of the moratorium on the development or expansion of LTAC hospitals on December 29, 2012.

In aggregate, based upon its review of the 2012 CMS Rules, the Company expects that LTAC Medicare payment rates will decline slightly in 2013. The 2012 CMS Rules do not include the impact of a 2% sequestration payment reduction mandated by Congress that applies to each claim submitted to Medicare that began on April 1, 2013.

 

 55 


ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

   

Other Information (Continued)

Effects of inflation and changing prices (Continued)

Hospital division (Continued)

On August 1, 2011, CMS issued final regulations regarding Medicare reimbursement for LTAC hospitals for the fiscal year beginning October 1, 2011. Included in the final regulations is: (1) a market basket increase to the standard federal payment rate of 2.9%; (2) offsets to the standard federal payment rate mandated by the ACA of: (a) 1.0% to account for the effect of a productivity adjustment, and (b) 0.1% as required by statute; (3) a wage level budget neutrality factor of 0.99775 applied to the adjusted standard federal payment rate; (4) adjustments to area wage indexes; and (5) a decrease in the high cost outlier threshold per discharge to $17,931. CMS has projected the impact of these changes will result in a 2.5% increase to average Medicare payments to LTAC hospitals. Management believes that the impact of these changes to LTAC PPS resulted in an approximate 0.7% increase in payments to the Company’s TC hospitals.

On December 29, 2007, the SCHIP Extension Act of 2007 (the “SCHIP Extension Act”) became law. This legislation provided for, among other things: (1) a mandated study by the Secretary of Health and Human Services on the establishment of LTAC hospital certification criteria; (2) enhanced medical necessity review of LTAC hospital cases; (3) a three-year moratorium on the establishment of new LTAC hospital or satellite facilities and increases in the number of licensed beds at a LTAC hospital or satellite facility; (4) a three-year moratorium on the application of a one-time budget neutrality adjustment to payment rates to LTAC hospitals under LTAC PPS; (5) a three-year moratorium on very short-stay outlier payment reductions to LTAC hospitals initially implemented on May 1, 2007; and (6) a three-year moratorium on the application of the “25 Percent Rule” to freestanding LTAC hospitals.

The ACA extended the moratoriums on the establishment of new LTAC hospitals or satellites and bed increases at LTAC hospitals or satellites, the application of a one-time budget neutrality adjustment to rates, and the payment reductions due to the very short-stay outlier provisions from three years to five years. These moratoriums expired on December 29, 2012. As discussed above, the 2012 CMS Rules began a three-year phase-in of a 3.75% budget neutrality adjustment which will reduce LTAC hospital rates by 1.3% in 2013.

The ACA also extended the moratorium on the expansion of the “25 Percent Rule” to freestanding LTAC hospitals from three years to five years. Following the ACA, the moratorium on the expansion of the “25 Percent Rule” to freestanding LTAC hospitals was set to expire for cost reporting periods beginning on or after July 1, 2012. However, the 2012 CMS Rules further extended the moratorium to all freestanding LTAC hospitals with cost reporting periods beginning on or after October 1, 2012 and before October 1, 2013.

CMS has regulations governing payments to LTAC hospitals that are co-located with another hospital (a “HIH”). The rules generally limit Medicare payments to the HIH if the Medicare admissions to the HIH from its co-located hospital exceed 25% of the total Medicare discharges for the HIH’s cost reporting period, the “25 Percent Rule.” There are limited exceptions for admissions from rural, urban single or a hospital that generates more than 25% of the Medicare discharges in a metropolitan statistical area (“MSA Dominant hospital”). Admissions that exceed this “25 Percent Rule” are paid a lower amount under IPPS. Patients transferred after they have reached the short-term acute care outlier payment status are not counted toward the admission threshold. Patients admitted prior to meeting the admission threshold, as well as Medicare patients admitted from a non co-located hospital, are eligible for the full payment under LTAC PPS. If the HIH’s admissions from the co-located hospital exceed the limit in a cost reporting period, Medicare will pay the lesser of: (1) the amount payable under LTAC PPS; or (2) the amount payable under IPPS. At September 30, 2013, the Company operated 22 HIHs with 835 licensed beds.

On May 1, 2007, CMS issued regulatory changes regarding Medicare reimbursement for LTAC hospitals (the “2007 Final Rule”). In the 2007 Final Rule, the “25 Percent Rule” was expanded to all LTAC hospitals, regardless of whether they are co-located with another hospital. Under the 2007 Final Rule, all LTAC hospitals were to be paid LTAC PPS rates for admissions from a single referral source up to 25% of aggregate Medicare admissions. Patients reaching high cost outlier status in the short-term hospital were not to be counted when computing the 25% limit. Admissions beyond the 25% threshold were to be paid at a lower amount based upon IPPS rates. However, as set forth above, the SCHIP Extension Act initially placed a three-year moratorium on the expansion of the “25 Percent Rule” to freestanding hospitals. That moratorium was extended to five years by the ACA. This moratorium was further extended for one additional year under the 2012 CMS Rules. In addition, the SCHIP Extension Act initially provided for a three-year period during which: (1) LTAC hospitals may admit up to 50% of their patients from their co-located hospitals and still be paid according to LTAC PPS; and (2) LTAC hospitals that are co-located with an urban single hospital or a MSA Dominant hospital may admit up to 75% of their patients from such urban single hospital or MSA Dominant hospital and still be paid according to LTAC PPS. Those periods also were extended to five years under the ACA and for one additional year under the 2012 CMS Rules. The final LTAC hospital rule issued on August 2, 2013 will allow the moratorium to expire for providers with cost reporting periods beginning on or after October 1, 2013.

 

 56 


ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

   

Other Information (Continued)

Effects of inflation and changing prices (Continued)

Hospital division (Continued)

The ACA requires a quality reporting system for LTAC hospitals beginning in federal fiscal year 2014 under which any market basket update would be reduced by 2% for any LTAC hospital that does not meet the quality reporting standards. CMS has issued final regulations that require LTACs to report quality measures related to, among other items, catheter-associated urinary tract infections, central line associated blood stream infections, new or worsening pressure ulcers, unplanned readmissions and falls with major injury.

The Job Creation Act of 2012 (the “Job Creation Act”) provides for reductions in reimbursement of Medicare bad debts at the Company’s hospitals and nursing centers. For the hospitals, the current bad debt reimbursement rate of 70% for all bad debts will be lowered to 65% effective for cost reporting periods beginning on or after October 1, 2012.

The Company cannot predict the ultimate long-term impact of LTAC PPS. This payment system is subject to significant change. Slight variations in patient acuity or length of stay could significantly change Medicare revenues generated under LTAC PPS. In addition, the Company’s TC hospitals may not be able to appropriately adjust their operating costs to changes in patient acuity and length of stay or to changes in reimbursement rates. In addition, there can be no assurance that LTAC PPS will not have a material adverse effect on revenues from commercial third party payors. Various factors, including a reduction in average length of stay, have negatively impacted revenues from commercial third party payors in recent years.

On July 31, 2013, CMS issued final regulations regarding Medicare reimbursement for IRFs for the fiscal year beginning October 1, 2013. Included in these final regulations are: (1) a market basket increase to the standard payment conversion factor of 2.6%; (2) offsets to the standard payment conversion factor mandated by the ACA of: (a) 0.5% to account for the effect of a productivity adjustment, and (b) 0.3% as required by statute; (3) adjustments to area wage indexes; and (4) a decrease in the high cost outlier threshold per discharge to $9,272. CMS has projected the impact of these changes will result in a 2.3% increase to average Medicare payments to IRFs.

On July 25, 2012, CMS issued final regulations regarding Medicare reimbursement for IRFs for the fiscal year beginning October 1, 2012. Included in these final regulations are: (1) a market basket increase to the standard payment conversion factor of 2.7%; (2) offsets to the standard payment conversion factor mandated by the ACA of: (a) 0.7% to account for the effect of a productivity adjustment, and (b) 0.1% as required by statute; (3) adjustments to area wage indexes; and (4) a decrease in the high cost outlier threshold per discharge to $10,466. CMS has projected the impact of these changes will result in a 2.1% increase to average Medicare payments to IRFs.

On July 29, 2011, CMS issued final regulations regarding Medicare reimbursement for IRFs for the fiscal year beginning October 1, 2011. Included in these final regulations are: (1) a market basket increase to the standard payment conversion factor of 2.9%; (2) offsets to the standard payment conversion factor mandated by the ACA of: (a) 1.0% to account for the effect of a productivity adjustment, and (b) 0.1% as required by statute; (3) a wage level budget neutrality factor of 0.9988 applied to the standard payment conversion factor; (4) a case mix group budget neutrality factor of 0.9988 applied to the standard payment conversion factor; (5) adjustments to area wage indexes; and (6) a decrease in the high cost outlier threshold per discharge to $10,660.

Similar to LTAC hospitals, the ACA requires a quality reporting system for IRFs beginning in fiscal year 2014 in which any market basket update would be reduced by 2% for any IRF that does not meet quality reporting standards. CMS has finalized regulations that require IRFs to report quality measures related to, among other items, catheter-associated urinary tract infections, pressure ulcers and unplanned readmissions.

 

 57 


ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

   

Other Information (Continued)

Effects of inflation and changing prices (Continued)

Nursing center division

On July 16, 2010, CMS issued a notice that updated the payment rates for nursing centers for the fiscal year beginning October 1, 2010. Under this rule, for the fiscal year beginning October 1, 2010, CMS increased the number of resource utilization group (“RUG”) categories for nursing centers from 53 to 66 (i.e., RUGs IV) and amended the criteria, including the provision of therapy services, used to classify patients into these categories. CMS began paying claims using the RUGs IV system effective October 1, 2010. Under RUGs IV, among other requirements, providers must allocate therapy minutes among the patients being served during concurrent therapy sessions, and a therapist/assistant may treat concurrently only two patients. These changes have required the Company to employ more therapists to provide additional individual therapy minutes.

The therapy time requirements to qualify for rehabilitation RUG categories are unchanged under RUGs IV, however the regulatory changes altered how minutes were allocated to calculate the RUGs scores using the most recent clinical assessment tool of the minimum data set, MDS 3.0. Rather than count all therapy time that a nursing center patient receives, rehabilitation providers must instead allocate therapy minutes between the patients being served during concurrent therapy sessions. In addition, the number of patients that a therapist/assistant may treat concurrently is limited to two patients. Under final rules issued by CMS in 2011, group therapy is defined as therapy sessions with four patients who are performing similar therapy activities. Irrespective of the number of patients ultimately treated in a group therapy session, rehabilitation providers must allocate therapy minutes during such sessions as if four patients are being served. The Company’s rehabilitation division hired additional therapists to facilitate the provision of additional individual minutes to address patient needs.

On July 31, 2013, CMS issued final regulations updating Medicare payment rates for skilled nursing centers effective October 1, 2013. These final regulations implement a net market basket increase of 1.3% consisting of: (1) a 2.3% market basket inflation increase, less (2) a 0.5% adjustment to account for the effect of a productivity adjustment, and less (3) a 0.5% market basket forecast error adjustment.

On July 27, 2012, CMS issued final regulations updating Medicare payment rates for skilled nursing centers effective October 1, 2012. These final regulations implement a net market basket increase of 1.8% consisting of: (1) a 2.5% market basket inflation increase, less (2) a 0.7% adjustment to account for the effect of a productivity adjustment.

On July 29, 2011, CMS issued the 2011 CMS Rules which, among other things, impose: (1) a negative adjustment to RUGs IV therapy rates, and (2) a net market basket increase of 1.7% consisting of (a) a 2.7% market basket inflation increase, less (b) a 1.0% adjustment to account for the effect of a productivity adjustment, beginning on October 1, 2011. CMS projected the impact of these changes will result in an 11.1% decrease in payments to skilled nursing centers. In addition to these rate changes, the 2011 CMS Rules introduced additional changes to RUG calculations along with adding additional patient assessments. Under the 2011 CMS Rules, group therapy is defined as therapy sessions with four patients who are performing similar therapy activities. In addition, for purposes of assigning patients to RUGs IV payment categories, the minutes of group therapy are divided by four with 25% of the minutes being allocated to each patient. The 2011 CMS Rules also clarify the circumstances for reporting breaks in care of three or more days of therapy and also implement a new change of therapy assessment that is designed to allocate the patient to the RUG level that represents the treatment provided in the last seven days. Both changes are likely to produce alterations in the RUG scores billed for the patient along with generating additional patient assessments. The Company believes that the 2011 CMS Rules on an annual basis have reduced its revenues by approximately $100 million to $110 million in the Company’s nursing center business and have negatively impacted the Company’s rehabilitation therapy business by approximately $40 million to $50 million.

In February 2012, Congress passed the Job Creation Act which provides for reductions in reimbursement of Medicare bad debts at the Company’s nursing centers. The Job Creation Act provides for a phase-in of the reduction in the rate of reimbursement for bad debts of patients that are dually eligible for Medicare and Medicaid. The rate of reimbursement for bad debts for these dually eligible patients will be reduced from 100% to 88%, then 76% and then 65% for cost reporting periods beginning on or after October 1, 2012, October 1, 2013, and October 1, 2014, respectively. The rate of reimbursement for bad debts for patients not dually eligible for both Medicare and Medicaid was reduced from 70% to 65%, for cost reporting periods beginning on or after October 1, 2012. Approximately 90% of the Company’s Medicare bad debt reimbursements are associated with patients that are dually eligible.

 

 58 


ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

   

Other Information (Continued)

Effects of inflation and changing prices (Continued)

Rehabilitation division

Medicare Part B provides reimbursement for certain physician services, limited drug coverage and other outpatient services, such as therapy and other services, outside of a Medicare Part A covered patient stay. Payment for these services is determined according to the MPFS. Annually since 1997, the MPFS has been subject to the SGR, which is intended to keep spending growth in line with allowable spending. Each year since the SGR was enacted, this adjustment produced a scheduled negative update to payment for physicians, therapists and other healthcare providers paid under the MPFS. Annually, since 2002, Congress has stepped in with so-called “doc fix” legislation to suspend payment cuts to physicians. Various legislation has annually suspended the payment cut. The Taxpayer Relief Act further suspended the payment cut until December 31, 2013.

Effective January 1, 2011, reimbursement rates for Medicare Part B therapy services included in the MPFS were reduced by 25% for subsequent procedures when multiple therapy services are provided on the same day. The Taxpayer Relief Act will further reduce Medicare payments for subsequent procedures when multiple therapy services are provided on the same day. The Company believes that the rules related to multiple therapy services will reduce its revenues by $25 million to $30 million on an annual basis.

Since 2006, federal legislation has provided for an annual Medicare Part B outpatient therapy cap. In succeeding years, CMS increased the amount of the therapy cap. Legislation also was passed that required CMS to implement a broad process for reviewing medically necessary therapy claims, creating an exception to the cap. Legislation has annually extended the Medicare Part B outpatient therapy cap exception process. The Job Creation Act extended the therapy cap exception process through December 31, 2012. The Taxpayer Relief Act further extended the therapy cap exception process through December 31, 2013. Patients in the Company’s facilities whose stay is not reimbursed by Medicare Part A must seek reimbursement for their therapy under Medicare Part B and are subject to the therapy cap.

In February 2012, the Middle Class Tax Relief Act of 2012 was enacted, which provides that certain Medicare Part B therapy services exceeding a threshold of $3,700 would be subject to a pre-payment manual medical review process effective October 1, 2012. The review process for these services was scheduled to expire on December 31, 2012 but was extended through December 31, 2013 under the Taxpayer Relief Act. This review process has had an adverse effect on the provision and billing of services for patients and could negatively impact therapist efficiencies.

 

 59 


ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

   

Other Information (Continued)

Effects of inflation and changing prices (Continued)

Home health and hospice division

On July 3, 2013, CMS issued proposed regulations regarding Medicare payment rates for home health agencies effective January 1, 2014. These proposed regulations implement a market basket increase of 2.4%. As mandated by the ACA, CMS proposed to rebase home health payment rates by reducing the national standardized 60 day episode payment rate by 3.5% in each of the next four years beginning January 1, 2014. Rebasing adjustments also included increases in the national per visit payment rates for low utilization episodes and a decrease in the non-routine medical supply conversion factor. In addition, CMS proposed the removal of two categories of diagnostic codes from the Home Health Prospective Payment System Grouper. CMS has projected the impact of these changes will result in a 1.5% decrease in payments to home health agencies in calendar year 2014.

On August 2, 2013, CMS issued final regulations regarding Medicare payment rates for hospice providers effective October 1, 2013. These final regulations implement a net market basket increase of 1.7% consisting of: (1) a 2.5% market basket inflation increase, less (2) offsets to the standard payment conversion factor mandated by the ACA of: (a) a 0.5% adjustment to account for the effect of a productivity adjustment, and (b) 0.3% as required by statute. In addition, CMS continued the phase-out of the wage index budget neutrality adjustment. CMS has projected the impact of these changes will result in a 1.0% increase in payments to hospice providers.

On November 2, 2012, CMS issued final regulations regarding Medicare payment rates for home health agencies effective January 1, 2013. These final regulations implement a net market basket increase of 1.3% consisting of: (1) a 2.3% market basket inflation increase, less (2) a 1.0% adjustment mandated by the ACA. In addition, CMS implemented a 1.32% reduction in case mix. CMS has projected the impact of these changes will result in a 0.01% decrease in payments to home health agencies.

On July 24, 2012, CMS issued final regulations regarding Medicare payment rates for hospice providers effective October 1, 2012. These final regulations implement a net market basket increase of 1.6% consisting of: (1) a 2.6% market basket inflation increase, less (2) offsets to the standard payment conversion factor mandated by the ACA of: (a) a 0.7% adjustment to account for the effect of a productivity adjustment, and (b) 0.3% as required by statute. In addition, CMS continued the phase-out of the wage index budget neutrality adjustment. CMS has projected the impact of these changes will result in a 0.9% increase in payments to hospice providers.

 

 60 


ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

   

Condensed Consolidated Statement of Operations

(Unaudited)

(In thousands, except per share amounts)

   

 

   

2012 Quarters

   

   

2013 Quarters

   

   

First

   

   

Second

   

   

Third

   

   

Fourth

   

   

First

   

   

Second

   

   

Third

   

Revenues

$

1,269,884

   

   

$

1,229,108

   

   

$

1,226,159

   

   

$

1,247,549

   

   

$

1,288,867

   

   

$

1,218,116

   

   

$

1,198,473

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Salaries, wages and benefits

   

780,050

   

   

   

747,992

   

   

   

754,761

   

   

   

761,494

   

   

   

799,519

   

   

   

731,401

   

   

   

733,605

   

Supplies

   

89,805

   

   

   

86,652

   

   

   

85,129

   

   

   

85,535

   

   

   

86,835

   

   

   

83,025

   

   

   

81,812

   

Rent

   

76,947

   

   

   

78,186

   

   

   

79,312

   

   

   

79,047

   

   

   

78,982

   

   

   

79,864

   

   

   

79,269

   

Other operating expenses

   

233,198

   

   

   

236,418

   

   

   

230,076

   

   

   

227,873

   

   

   

239,402

   

   

   

236,227

   

   

   

269,927

   

Other (income) expense

   

(3,136

)

   

   

(3,165

)

   

   

(3,178

)

   

   

(3,181

)

   

   

(1,009

)

   

   

(26

)

   

   

52

   

Impairment charges

   

498

   

   

   

111

   

   

   

406

   

   

   

108,127

   

   

   

187

   

   

   

457

   

   

   

441

   

Depreciation and amortization

   

39,470

   

   

   

40,655

   

   

   

41,304

   

   

   

42,623

   

   

   

42,650

   

   

   

39,631

   

   

   

37,591

   

Interest expense

   

26,570

   

   

   

26,713

   

   

   

26,663

   

   

   

27,929

   

   

   

28,171

   

   

   

29,084

   

   

   

25,633

   

Investment income

   

(283

)

   

   

(258

)

   

   

(212

)

   

   

(246

)

   

   

(88

)

   

   

(1,475

)

   

   

(1,235

)

   

   

1,243,119

   

   

   

1,213,304

   

   

   

1,214,261

   

   

   

1,329,201

   

   

   

1,274,649

   

   

   

1,198,188

   

   

   

1,227,095

   

Income (loss) from continuing operations before income taxes

   

26,765

   

   

   

15,804

   

   

   

11,898

   

   

   

(81,652

)

   

   

14,218

   

   

   

19,928

   

   

   

(28,622

)

Provision (benefit) for income taxes

   

11,039

   

   

   

6,817

   

   

   

5,070

   

   

   

2,870

   

   

   

5,264

   

   

   

8,027

   

   

   

(9,003

)

Income (loss) from continuing operations

   

15,726

   

   

   

8,987

   

   

   

6,828

   

   

   

(84,522

)

   

   

8,954

   

   

   

11,901

   

   

   

(19,619

)

Discontinued operations, net of income taxes:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Income (loss) from operations

   

4,086

   

   

   

6,632

   

   

   

3,059

   

   

   

4,625

   

   

   

(3,456

)

   

   

778

   

   

   

(21,609

)

Loss on divestiture of operations

   

(1,170

)

   

   

(356

)

   

   

(2,280

)

   

   

(939

)

   

   

(2,025

)

   

   

(10,852

)

   

   

(65,016

)

Income (loss) from discontinued operations

   

2,916

   

   

   

6,276

   

   

   

779

   

   

   

3,686

   

   

   

(5,481

)

   

   

(10,074

)

   

   

(86,625

)

Net income (loss)

   

18,642

   

   

   

15,263

   

   

   

7,607

   

   

   

(80,836

)

   

   

3,473

   

   

   

1,827

   

   

   

(106,244

)

(Earnings) loss attributable to noncontrolling interests

   

(451

)

   

   

239

   

   

   

(41

)

   

   

(790

)

   

   

(416

)

   

   

(82

)

   

   

(754

)

Income (loss) attributable to Kindred

$

18,191

   

   

$

15,502

   

   

$

7,566

   

   

$

(81,626

)

   

$

3,057

   

   

$

1,745

   

   

$

(106,998

)

Amounts attributable to Kindred stockholders:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Income (loss) from continuing operations

$

15,275

   

   

$

9,226

   

   

$

6,787

   

   

$

(85,312

)

   

$

8,538

   

   

$

11,819

   

   

$

(20,373

)

Income (loss) from discontinued operations

   

2,916

   

   

   

6,276

   

   

   

779

   

   

   

3,686

   

   

   

(5,481

)

   

   

(10,074

)

   

   

(86,625

)

Net income (loss)

$

18,191

   

   

$

15,502

   

   

$

7,566

   

   

$

(81,626

)

   

$

3,057

   

   

$

1,745

   

   

$

(106,998

)

Earnings (loss) per common share:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Basic:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Income (loss) from continuing operations

$

0.29

   

   

$

0.17

   

   

$

0.13

   

   

$

(1.65

)

   

$

0.16

   

   

$

0.22

   

   

$

(0.39

)

Discontinued operations:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Income (loss) from operations

   

0.08

   

   

   

0.13

   

   

   

0.05

   

   

   

0.09

   

   

   

(0.06

)

   

   

0.01

   

   

   

(0.41

)

Loss on divestiture of operations

   

(0.02

)

   

   

(0.01

)

   

   

(0.04

)

   

   

(0.02

)

   

   

(0.04

)

   

   

(0.20

)

   

   

(1.24

)

Income (loss) from discontinued operations

   

0.06

   

   

   

0.12

   

   

   

0.01

   

   

   

0.07

   

   

   

(0.10

)

   

   

(0.19

)

   

   

(1.65

)

Net income (loss)

$

0.35

   

   

$

0.29

   

   

$

0.14

   

   

$

(1.58

)

   

$

0.06

   

   

$

0.03

   

   

$

(2.04

)

Diluted:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Income (loss) from continuing operations

$

0.29

   

   

$

0.17

   

   

$

0.13

   

   

$

(1.65

)

   

$

0.16

   

   

$

0.22

   

   

$

(0.39

)

Discontinued operations:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Income (loss) from operations

   

0.08

   

   

   

0.13

   

   

   

0.05

   

   

   

0.09

   

   

   

(0.06

)

   

   

0.01

   

   

   

(0.41

)

Loss on divestiture of operations

   

(0.02

)

   

   

(0.01

)

   

   

(0.04

)

   

   

(0.02

)

   

   

(0.04

)

   

   

(0.20

)

   

   

(1.24

)

Income (loss) from discontinued operations

   

0.06

   

   

   

0.12

   

   

   

0.01

   

   

   

0.07

   

   

   

(0.10

)

   

   

(0.19

)

   

   

(1.65

)

Net income (loss)

$

0.35

   

   

$

0.29

   

   

$

0.14

   

   

$

(1.58

)

   

$

0.06

   

   

$

0.03

   

   

$

(2.04

)

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

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Basic

   

51,603

   

   

   

51,664

   

   

   

51,676

   

   

   

51,692

   

   

   

52,062

   

   

   

52,265

   

   

   

52,323

   

Diluted

   

51,638

   

   

   

51,675

   

   

   

51,709

   

   

   

51,692

   

   

   

52,083

   

   

   

52,284

   

   

   

52,323

   

 

 61 


ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

   

Operating Data

(Unaudited)

(In thousands)

   

 

   

2012 Quarters

   

   

2013 Quarters

   

   

First

   

   

Second

   

   

Third

   

   

Fourth

   

   

First

   

   

Second

   

   

Third

   

Revenues:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Hospital division

$

683,068

   

   

$

648,152

   

   

$

636,463

   

   

$

647,794

   

   

$

677,246

   

   

$

623,877

   

   

$

608,506

   

Nursing center division

   

285,032

   

   

   

279,353

   

   

   

282,223

   

   

   

283,451

   

   

   

283,771

   

   

   

278,191

   

   

   

277,668

   

Rehabilitation division:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Skilled nursing rehabilitation services

   

253,595

   

   

   

253,181

   

   

   

252,201

   

   

   

244,558

   

   

   

257,585

   

   

   

248,331

   

   

   

243,968

   

Hospital rehabilitation services

   

74,369

   

   

   

73,402

   

   

   

71,899

   

   

   

73,910

   

   

   

74,523

   

   

   

69,777

   

   

   

68,296

   

   

   

327,964

   

   

   

326,583

   

   

   

324,100

   

   

   

318,468

   

   

   

332,108

   

   

   

318,108

   

   

   

312,264

   

Home health and hospice division

   

28,432

   

   

   

28,872

   

   

   

35,943

   

   

   

50,093

   

   

   

51,621

   

   

   

53,039

   

   

   

53,801

   

   

   

1,324,496

   

   

   

1,282,960

   

   

   

1,278,729

   

   

   

1,299,806

   

   

   

1,344,746

   

   

   

1,273,215

   

   

   

1,252,239

   

Eliminations:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Skilled nursing rehabilitation services

   

(28,953

)

   

   

(28,481

)

   

   

(27,805

)

   

   

(26,788

)

   

   

(30,161

)

   

   

(30,122

)

   

   

(29,414

)

Hospital rehabilitation services

   

(25,023

)

   

   

(24,496

)

   

   

(23,904

)

   

   

(24,463

)

   

   

(24,505

)

   

   

(23,976

)

   

   

(23,191

)

Nursing centers

   

(636

)

   

   

(875

)

   

   

(861

)

   

   

(1,006

)

   

   

(1,213

)

   

   

(1,001

)

   

   

(1,161

)

   

   

(54,612

)

   

   

(53,852

)

   

   

(52,570

)

   

   

(52,257

)

   

   

(55,879

)

   

   

(55,099

)

   

   

(53,766

)

   

$

1,269,884

   

   

$

1,229,108

   

   

$

1,226,159

   

   

$

1,247,549

   

   

$

1,288,867

   

   

$

1,218,116

   

   

$

1,198,473

   

Income (loss) from continuing operations:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Operating income (loss):

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Hospital division

$

151,491

   

   

$

131,933

   

   

$

130,798

   

   

$

146,649

   

   

$

149,644

   

   

$

131,958

   

   

$

112,290

  (a)

Nursing center division

   

32,810

   

   

   

35,030

   

   

   

37,865

   

   

   

31,276

   

   

   

28,519

   

   

   

35,381

   

   

   

30,304

   

Rehabilitation division:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Skilled nursing rehabilitation services

   

10,904

   

   

   

19,519

   

   

   

16,996

   

   

   

21,074

   

   

   

12,074

   

   

   

20,307

   

   

   

(8,571

) (b)

Hospital rehabilitation services

   

16,116

   

   

   

17,860

   

   

   

16,977

   

   

   

18,792

   

   

   

18,132

   

   

   

19,573

   

   

   

18,215

  (c)

   

   

27,020

   

   

   

37,379

   

   

   

33,973

   

   

   

39,866

   

   

   

30,206

   

   

   

39,880

   

   

   

9,644

   

Home health and hospice division

   

2,341

   

   

   

2,789

   

   

   

3,645

   

   

   

4,933

   

   

   

2,786

   

   

   

3,961

   

   

   

1,085

  (d)

Corporate:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Overhead

   

(42,728

)

   

   

(44,723

)

   

   

(45,883

)

   

   

(45,729

)

   

   

(45,582

)

   

   

(43,199

)

   

   

(39,151

) (e)

Insurance subsidiary

   

(482

)

   

   

(600

)

   

   

(545

)

   

   

(500

)

   

   

(509

)

   

   

(384

)

   

   

(482

)

   

   

(43,210

)

   

   

(45,323

)

   

   

(46,428

)

   

   

(46,229

)

   

   

(46,091

)

   

   

(43,583

)

   

   

(39,633

)

Impairment charges

   

(498

)

   

   

(111

)

   

   

(406

)

   

   

(108,127

)

   

   

(187

)

   

   

(457

)

   

   

(441

)

Transaction costs

   

(485

)

   

   

(597

)

   

   

(482

)

   

   

(667

)

   

   

(944

)

   

   

(108

)

   

   

(613

)

Operating income

   

169,469

   

   

   

161,100

   

   

   

158,965

   

   

   

67,701

   

   

   

163,933

   

   

   

167,032

   

   

   

112,636

   

Rent

   

(76,947

)

   

   

(78,186

)

   

   

(79,312

)

   

   

(79,047

)

   

   

(78,982

)

   

   

(79,864

)

   

   

(79,269

)

Depreciation and amortization

   

(39,470

)

   

   

(40,655

)

   

   

(41,304

)

   

   

(42,623

)

   

   

(42,650

)

   

   

(39,631

)

   

   

(37,591

)

Interest, net

   

(26,287

)

   

   

(26,455

)

   

   

(26,451

)

   

   

(27,683

)

   

   

(28,083

)

   

   

(27,609

)

   

   

(24,398

) (f)

Income (loss) from continuing operations before income taxes

   

26,765

   

   

   

15,804

   

   

   

11,898

   

   

   

(81,652

)

   

   

14,218

   

   

   

19,928

   

   

   

(28,622

)

Provision for income taxes

   

11,039

   

   

   

6,817

   

   

   

5,070

   

   

   

2,870

   

   

   

5,264

   

   

   

8,027

   

   

   

(9,003

)

   

$

15,726

   

   

$

8,987

   

   

$

6,828

   

   

$

(84,522

)

   

$

8,954

   

   

$

11,901

   

   

$

(19,619

)

   

 

   

 

(a)

Includes costs of $5.5 million in connection with the closing of a TC hospital and a litigation charge of $0.7 million.

 

(b)

Includes $23.1 million of litigation charges.

 

(c)

Includes $0.3 million of severance and retirement costs.

 

(d)

Includes $0.6 million of severance and retirement costs and $0.5 million of costs associated with closing a home health location.

 

(e)

Includes $1.0 million of severance and retirement costs and $0.5 million of fees associated with the modification of certain of the Company’s senior debt.

 

(f)

Includes $0.1 million of charges associated with the modification of certain of the Company’s senior debt.

   

   

 

 62 


ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

   

Operating Data (Continued)

(Unaudited)

(In thousands)

   

 

   

2012 Quarters

   

   

2013 Quarters

   

   

First

   

   

Second

   

   

Third

   

   

Fourth

   

   

First

   

   

Second

   

   

Third

   

Rent:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Hospital division

$

50,375

   

   

$

51,218

   

   

$

52,197

   

   

$

51,632

   

   

$

50,711

   

   

$

51,381

   

   

$

50,929

   

Nursing center division

   

23,861

   

   

   

24,326

   

   

   

24,300

   

   

   

24,432

   

   

   

25,207

   

   

   

25,487

   

   

   

25,450

   

Rehabilitation division:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Skilled nursing rehabilitation services

   

1,440

   

   

   

1,408

   

   

   

1,356

   

   

   

1,238

   

   

   

1,235

   

   

   

1,197

   

   

   

1,123

   

Hospital rehabilitation services

   

78

   

   

   

39

   

   

   

2

   

   

   

21

   

   

   

17

   

   

   

19

   

   

   

19

   

   

   

1,518

   

   

   

1,447

   

   

   

1,358

   

   

   

1,259

   

   

   

1,252

   

   

   

1,216

   

   

   

1,142

   

Home health and hospice division

   

615

   

   

   

609

   

   

   

805

   

   

   

1,111

   

   

   

1,186

   

   

   

1,155

   

   

   

1,193

   

Corporate

   

578

   

   

   

586

   

   

   

652

   

   

   

613

   

   

   

626

   

   

   

625

   

   

   

555

   

   

$

76,947

   

   

$

78,186

   

   

$

79,312

   

   

$

79,047

   

   

$

78,982

   

   

$

79,864

   

   

$

79,269

   

Depreciation and amortization:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Hospital division

$

19,343

   

   

$

19,844

   

   

$

20,060

   

   

$

20,373

   

   

$

20,453

   

   

$

18,266

   

   

$

17,483

   

Nursing center division

   

6,749

   

   

   

7,076

   

   

   

7,298

   

   

   

7,458

   

   

   

7,662

   

   

   

7,150

   

   

   

6,830

   

Rehabilitation division:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Skilled nursing rehabilitation services

   

2,660

   

   

   

2,752

   

   

   

2,811

   

   

   

2,945

   

   

   

3,112

   

   

   

2,878

   

   

   

2,461

   

Hospital rehabilitation services

   

2,324

   

   

   

2,323

   

   

   

2,328

   

   

   

2,334

   

   

   

2,331

   

   

   

2,319

   

   

   

2,281

   

   

   

4,984

   

   

   

5,075

   

   

   

5,139

   

   

   

5,279

   

   

   

5,443

   

   

   

5,197

   

   

   

4,742

   

Home health and hospice division

   

898

   

   

   

925

   

   

   

1,137

   

   

   

1,482

   

   

   

1,526

   

   

   

1,615

   

   

   

1,638

   

Corporate

   

7,496

   

   

   

7,735

   

   

   

7,670

   

   

   

8,031

   

   

   

7,566

   

   

   

7,403

   

   

   

6,898

   

   

$

39,470

   

   

$

40,655

   

   

$

41,304

   

   

$

42,623

   

   

$

42,650

   

   

$

39,631

   

   

$

37,591

   

Capital expenditures, excluding acquisitions (including discontinued operations):

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Hospital division:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Routine

$

10,345

   

   

$

9,095

   

   

$

9,015

   

   

$

9,817

   

   

$

10,271

   

   

$

5,593

   

   

$

6,421

   

Development

   

9,949

   

   

   

11,289

   

   

   

14,334

   

   

   

6,693

   

   

   

2,388

   

   

   

5,079

   

   

   

3,235

   

   

   

20,294

   

   

   

20,384

   

   

   

23,349

   

   

   

16,510

   

   

   

12,659

   

   

   

10,672

   

   

   

9,656

   

Nursing center division:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Routine

   

4,229

   

   

   

3,417

   

   

   

4,965

   

   

   

8,153

   

   

   

5,819

   

   

   

4,259

   

   

   

5,584

   

Development

   

673

   

   

   

1,087

   

   

   

843

   

   

   

5,454

   

   

   

   

   

   

7

   

   

   

   

   

   

4,902

   

   

   

4,504

   

   

   

5,808

   

   

   

13,607

   

   

   

5,819

   

   

   

4,266

   

   

   

5,584

   

Rehabilitation division:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Skilled nursing rehabilitation services:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Routine

   

326

   

   

   

569

   

   

   

707

   

   

   

672

   

   

   

605

   

   

   

464

   

   

   

860

   

Development

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

326

   

   

   

569

   

   

   

707

   

   

   

672

   

   

   

605

   

   

   

464

   

   

   

860

   

Hospital rehabilitation services:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Routine

   

46

   

   

   

60

   

   

   

125

   

   

   

117

   

   

   

32

   

   

   

45

   

   

   

31

   

Development

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

46

   

   

   

60

   

   

   

125

   

   

   

117

   

   

   

32

   

   

   

45

   

   

   

31

   

Home health and hospice division:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Routine

   

124

   

   

   

145

   

   

   

160

   

   

   

1,187

   

   

   

195

   

   

   

339

   

   

   

522

   

Development

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

124

   

   

   

145

   

   

   

160

   

   

   

1,187

   

   

   

195

   

   

   

339

   

   

   

522

   

Corporate:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Routine:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Information systems

   

6,864

   

   

   

15,195

   

   

   

10,842

   

   

   

17,440

   

   

   

5,289

   

   

   

6,436

   

   

   

7,298

   

Other

   

172

   

   

   

278

   

   

   

125

   

   

   

985

   

   

   

159

   

   

   

294

   

   

   

2,436

   

   

$

32,728

   

   

$

41,135

   

   

$

41,116

   

   

$

50,518

   

   

$

24,758

   

   

$

22,516

   

   

$

26,387

   

   

 

 63 


ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

   

Condensed Consolidating Statement of Operations

(Unaudited)

(In thousands)

   

 

   

Three months ended September 30, 2013

   

   

   

   

   

   

   

   

Rehabilitation division

   

   

   

   

      

   

   

   

   

   

   

   

   

   

   

   

   

Hospital
division (a)

   

   

Nursing
center
division

   

   

Skilled
nursing
services (b)

   

   

Hospital
services (c)

   

   

Total

   

   

Home health
and hospice
division (d)

   

      

Corporate (e)

   

   

Transaction-
related
costs

   

   

Eliminations

   

   

Consolidated

   

Revenues

$

608,506

   

   

$

277,668

   

   

$

243,968

   

   

$

68,296

   

   

$

312,264

   

   

$

53,801

   

   

$

   

   

$

   

   

$

(53,766

)

   

$

1,198,473

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Salaries, wages and benefits

   

269,295

   

   

   

134,068

   

   

   

220,267

   

   

   

45,872

   

   

   

266,139

   

   

   

43,184

   

   

   

21,022

   

   

   

   

   

   

(103

)

   

   

733,605

   

Supplies

   

65,351

   

   

   

13,155

   

   

   

750

   

   

   

28

   

   

   

778

   

   

   

2,277

   

   

   

251

   

   

   

   

   

   

   

   

   

81,812

   

Rent

   

50,929

   

   

   

25,450

   

   

   

1,123

   

   

   

19

   

   

   

1,142

   

   

   

1,193

   

   

   

555

   

   

   

   

   

   

   

   

   

79,269

   

Other operating expenses

   

161,568

   

   

   

100,321

   

   

   

31,342

   

   

   

4,150

   

   

   

35,492

   

   

   

7,237

   

   

   

18,359

   

   

   

613

   

   

   

(53,663

)

   

   

269,927

   

Other (income) expense

   

2

   

   

   

(180

)

   

   

180

   

   

   

31

   

   

   

211

   

   

   

18

   

   

   

1

   

   

   

   

   

   

   

   

   

52

   

Impairment charges

   

418

   

   

   

23

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

441

   

Depreciation and amortization

   

17,483

   

   

   

6,830

   

   

   

2,461

   

   

   

2,281

   

   

   

4,742

   

   

   

1,638

   

   

   

6,898

   

   

   

   

   

   

   

   

   

37,591

   

Interest expense

   

203

   

   

   

13

   

   

   

63

   

   

   

   

   

   

63

   

   

   

6

   

   

   

25,348

   

   

   

   

   

   

   

   

   

25,633

   

Investment income

   

(8

)

   

   

(19

)

   

   

(50

)

   

   

   

   

   

(50

)

   

   

   

   

   

(1,158

)

   

   

   

   

   

   

   

   

(1,235

)

   

   

565,241

   

   

   

279,661

   

   

   

256,136

   

   

   

52,381

   

   

   

308,517

   

   

   

55,553

   

   

   

71,276

   

   

   

613

   

   

   

(53,766

)

   

   

1,227,095

   

Income (loss) from continuing operations before income taxes

$

43,265

   

   

$

(1,993

)

   

$

(12,168

)

   

$

15,915

   

   

$

3,747

   

   

$

(1,752

)

   

$

(71,276

)

   

$

(613

)

   

$

   

   

   

(28,622

)

Income tax benefit

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

(9,003

)

Loss from continuing operations

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

$

(19,619

)

   

   

   

   

Three months ended September 30, 2012

   

   

   

   

   

   

   

   

Rehabilitation division

   

      

   

   

      

   

   

   

   

   

   

   

   

   

   

   

   

Hospital
division (f)

   

   

Nursing
center
division

   

   

Skilled
nursing
services

   

      

Hospital
services

   

      

Total

   

      

Home health
and hospice
division

   

      

Corporate

   

   

Transaction-
related
costs

   

   

Eliminations

   

   

Consolidated

   

Revenues

$

636,463

   

   

$

282,223

   

   

$

252,201

   

   

$

71,899

   

   

$

324,100

   

   

$

35,943

   

   

$

   

   

$

   

   

$

(52,570

)

   

$

1,226,159

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Salaries, wages and benefits

   

283,611

   

   

   

138,153

   

   

   

224,283

   

   

   

50,724

   

   

   

275,007

   

   

   

26,332

   

   

   

32,008

   

   

   

(350

)

   

   

   

   

   

754,761

   

Supplies

   

67,820

   

   

   

14,831

   

   

   

704

   

   

   

33

   

   

   

737

   

   

   

1,557

   

   

   

184

   

   

   

   

   

   

   

   

   

85,129

   

Rent

   

52,197

   

   

   

24,300

   

   

   

1,356

   

   

   

2

   

   

   

1,358

   

   

   

805

   

   

   

652

   

   

   

   

   

   

   

   

   

79,312

   

Other operating expenses

   

154,286

   

   

   

91,769

   

   

   

10,216

   

   

   

4,165

   

   

   

14,381

   

   

   

4,409

   

   

   

16,969

   

   

   

832

   

   

   

(52,570

)

   

   

230,076

   

Other (income) expense

   

(52

)

   

   

(395

)

   

   

2

   

   

   

   

   

   

2

   

   

   

   

   

   

(2,733

)

   

   

   

   

   

   

   

   

(3,178

)

Impairment charges

   

284

   

   

   

122

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

406

   

Depreciation and amortization

   

20,060

   

   

   

7,298

   

   

   

2,811

   

   

   

2,328

   

   

   

5,139

   

   

   

1,137

   

   

   

7,670

   

   

   

   

   

   

   

   

   

41,304

   

Interest expense

   

231

   

   

   

15

   

   

   

36

   

   

   

   

   

   

36

   

   

   

4

   

   

   

26,377

   

   

   

   

   

   

   

   

   

26,663

   

Investment income

   

(5

)

   

   

(17

)

   

   

   

   

   

   

   

   

   

   

   

   

   

   

(190

)

   

   

   

   

   

   

   

   

(212

)

   

   

578,432

   

   

   

276,076

   

   

   

239,408

   

   

   

57,252

   

   

   

296,660

   

   

   

34,244

   

   

   

80,937

   

   

   

482

   

   

   

(52,570

)

   

   

1,214,261

   

Income from continuing operations before      income taxes

$

58,031

   

   

$

6,147

   

   

$

12,793

   

   

$

14,647

   

   

$

27,440

   

   

$

1,699

   

   

$

(80,937

)

   

$

(482

)

   

$

   

   

   

11,898

   

Provision for income taxes

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

5,070

   

Income from continuing operations

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

$

6,828

   

   

 

   

(a)

Includes costs of $5.5 million in connection with the closing of a TC hospital and a litigation charge of $0.7 million.

(b)

Includes $23.1 million of litigation charges.

(c)

Includes $0.3 million of severance and retirement costs.

(d)

Includes $0.6 million of severance and retirement costs and $0.5 million of costs associated with closing a home health location.

(e)

Includes $1.0 million of severance and retirement costs and $0.6 million of fees and charges associated with the modification of certain of the Company’s senior debt.

(f)

Includes a lease cancellation charge of $0.6 million incurred in connection with the closing of a TC hospital.

   

   

   

 

 64 


ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

   

Condensed Consolidating Statement of Operations (Continued)

(Unaudited)

(In thousands)

   

 

   

Nine months ended September 30, 2013

   

   

   

   

   

   

   

   

Rehabilitation division

   

   

   

   

      

   

   

   

   

   

   

   

   

   

   

   

   

Hospital
division (a,b)

   

   

Nursing
center
division (a)

   

   

Skilled
nursing
services (a,c)

   

   

Hospital
services
(a,d)

   

      

Total

   

   

Home health
and hospice
division (a,e)

   

      

Corporate
(a,f)

   

   

Transaction-
related
costs

   

   

Eliminations

   

   

Consolidated

   

Revenues

$

1,909,629

   

   

$

839,630

   

   

$

749,884

   

   

$

212,596

   

   

$

962,480

   

   

$

158,461

   

   

$

   

   

$

   

   

$

(164,744

)

   

$

3,705,456

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Salaries, wages and benefits

   

837,573

   

   

   

408,679

   

   

   

674,985

   

   

   

144,528

   

   

   

819,513

   

   

   

123,228

   

   

   

75,943

   

   

   

   

   

   

(411

)

   

   

2,264,525

   

Supplies

   

201,579

   

   

   

40,178

   

   

   

2,346

   

   

   

90

   

   

   

2,436

   

   

   

6,840

   

   

   

639

   

   

   

   

   

   

   

   

   

251,672

   

Rent

   

153,021

   

   

   

76,144

   

   

   

3,555

   

   

   

55

   

   

   

3,610

   

   

   

3,534

   

   

   

1,806

   

   

   

   

   

   

   

   

   

238,115

   

Other operating expenses

   

476,508

   

   

   

297,405

   

   

   

48,524

   

   

   

11,999

   

   

   

60,523

   

   

   

20,543

   

   

   

53,245

   

   

   

1,665

   

   

   

(164,333

)

   

   

745,556

   

Other (income) expense

   

77

   

   

   

(836

)

   

   

219

   

   

   

59

   

   

   

278

   

   

   

18

   

   

   

(520

)

   

   

   

   

   

   

   

   

(983

)

Impairment charges

   

1,002

   

   

   

83

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

1,085

   

Depreciation and amortization

   

56,202

   

   

   

21,642

   

   

   

8,451

   

   

   

6,931

   

   

   

15,382

   

   

   

4,779

   

   

   

21,867

   

   

   

   

   

   

   

   

   

119,872

   

Interest expense

   

564

   

   

   

41

   

   

   

232

   

   

   

   

   

   

232

   

   

   

6

   

   

   

82,045

   

   

   

   

   

   

   

   

   

82,888

   

Investment income

   

(16

)

   

   

(42

)

   

   

(152

)

   

   

   

   

   

(152

)

   

   

   

   

   

(2,588

)

   

   

   

   

   

   

   

   

(2,798

)

   

   

1,726,510

   

   

   

843,294

   

   

   

738,160

   

   

   

163,662

   

   

   

901,822

   

   

   

158,948

   

   

   

232,437

   

   

   

1,665

   

   

   

(164,744

)

   

   

3,699,932

   

Income (loss) from continuing operations before   income taxes

$

183,119

   

   

$

(3,664

)

   

$

11,724

   

   

$

48,934

   

   

$

60,658

   

   

$

(487

)

   

$

(232,437

)

   

$

(1,665

)

   

$

   

   

   

5,524

   

Provision for income taxes

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

4,288

   

Income from continuing operations

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

$

1,236

   

   

   

   

   

Nine months ended September 30, 2012

   

   

   

   

   

   

   

   

Rehabilitation division

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Hospital
division (g)

   

   

Nursing
center
division (h)

   

   

Skilled
nursing
services

   

   

Hospital
services

   

      

Total

   

   

Home health
and hospice
division

   

      

Corporate

   

   

Transaction-
related
costs

   

   

Eliminations

   

   

Consolidated

   

Revenues

$

1,967,683

   

   

$

846,608

   

   

$

758,977

   

   

$

219,670

   

   

$

978,647

   

   

$

93,247

   

   

$

   

   

$

   

   

$

(161,034

)

   

$

3,725,151

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Salaries, wages and benefits

   

864,779

   

   

   

418,487

   

   

   

682,940

   

   

   

155,404

   

   

   

838,344

   

   

   

68,829

   

   

   

92,783

   

   

   

(350

)

   

   

(69

)

   

   

2,282,803

   

Supplies

   

210,106

   

   

   

44,697

   

   

   

2,251

   

   

   

127

   

   

   

2,378

   

   

   

3,826

   

   

   

579

   

   

   

   

   

   

   

   

   

261,586

   

Rent

   

153,790

   

   

   

72,487

   

   

   

4,204

   

   

   

119

   

   

   

4,323

   

   

   

2,029

   

   

   

1,816

   

   

   

   

   

   

   

   

   

234,445

   

Other operating expenses

   

478,923

   

   

   

278,697

   

   

   

26,365

   

   

   

13,163

   

   

   

39,528

   

   

   

11,817

   

   

   

49,778

   

   

   

1,914

   

   

   

(160,965

)

   

   

699,692

   

Other (income) expense

   

(347

)

   

   

(978

)

   

   

2

   

   

   

23

   

   

   

25

   

   

   

   

   

   

(8,179

)

   

   

   

   

   

   

   

   

(9,479

)

Impairment charges

   

636

   

   

   

379

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

1,015

   

Depreciation and amortization

   

59,247

   

   

   

21,123

   

   

   

8,223

   

   

   

6,975

   

   

   

15,198

   

   

   

2,960

   

   

   

22,901

   

   

   

   

   

   

   

   

   

121,429

   

Interest expense

   

810

   

   

   

52

   

   

   

36

   

   

   

   

   

   

36

   

   

   

4

   

   

   

79,044

   

   

   

   

   

   

   

   

   

79,946

   

Investment income

   

(46

)

   

   

(39

)

   

   

(1

)

   

   

   

   

   

(1

)

   

   

   

   

   

(667

)

   

   

   

   

   

   

   

   

(753

)

   

   

1,767,898

   

   

   

834,905

   

   

   

724,020

   

   

   

175,811

   

   

   

899,831

   

   

   

89,465

   

   

   

238,055

   

   

   

1,564

   

   

   

(161,034

)

   

   

3,670,684

   

Income from continuing operations before              income taxes

$

199,785

   

   

$

11,703

   

   

$

34,957

   

   

$

43,859

   

   

$

78,816

   

   

$

3,782

   

   

$

(238,055

)

   

$

(1,564

)

   

$

   

   

   

54,467

   

Provision for income taxes

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

22,926

   

Income from continuing operations

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

$

31,541

   

   

 

   

(a)

Includes one-time bonus costs of $20.4 million (hospital division – $8.0 million, nursing center division – $5.0 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).

(b)

Includes costs of $5.5 million in connection with the closing of a TC hospital and a litigation charge of $0.7 million.

(c)

Includes $23.1 million of litigation charges.

(d)

Includes $0.3 million of severance and retirement costs.

(e)

Includes $0.6 million of severance and retirement costs and $0.5 million of costs associated with closing a home health location.

(f)

Includes $1.0 million of severance and retirement costs and $2.0 million of fees and charges associated with the modification of certain of the Company’s senior debt.

(g)

Includes severance ($2.5 million), other miscellaneous costs ($1.1 million) and lease cancellation charges ($1.5 million) incurred in connection with the closing of a regional office and two TC hospitals, and $5.0 million for employment related lawsuits.

(h)

Includes $0.9 million incurred in connection with the cancellation of a sub-acute unit project.

   

   

   

 

 65 


ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

   

Operating Data

(Unaudited)

   

 

   

2012 Quarters

   

      

2013 Quarters

   

   

First

   

      

Second

   

      

Third

   

      

Fourth

   

      

First

   

      

Second

   

      

Third

   

Hospital division data:

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

End of period data:

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

Number of hospitals:

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

Transitional care

   

104

      

      

   

103

      

      

   

102

      

      

   

102

      

      

   

102

      

      

   

102

      

      

   

102

      

Inpatient rehabilitation

   

5

      

      

   

5

      

      

   

5

      

      

   

5

      

      

   

5

      

      

   

5

      

      

   

5

      

   

   

109

      

      

   

108

      

      

   

107

      

      

   

107

      

      

   

107

      

      

   

107

      

      

   

107

      

Number of licensed beds:

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

Transitional care

   

7,469

      

      

   

7,419

      

      

   

7,380

      

      

   

7,380

      

      

   

7,380

      

      

   

7,380

      

      

   

7,394

      

Inpatient rehabilitation

   

185

      

      

   

215

      

      

   

215

      

      

   

215

      

      

   

215

      

      

   

215

      

      

   

215

      

   

   

7,654

      

      

   

7,634

      

      

   

7,595

      

      

   

7,595

      

      

   

7,595

      

      

   

7,595

      

      

   

7,609

      

Revenue mix %:

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

Medicare

   

63

      

      

   

62

      

      

   

61

      

      

   

63

      

      

   

63

      

      

   

61

      

      

   

59

      

Medicaid

   

6

      

      

   

6

      

      

   

6

      

      

   

6

      

      

   

5

      

      

   

6

      

      

   

7

      

Medicare Advantage

   

10

      

      

   

11

      

      

   

11

      

      

   

10

      

      

   

10

      

      

   

11

      

      

   

11

      

Commercial insurance and other

   

21

      

      

   

21

      

      

   

22

      

      

   

21

      

      

   

22

      

      

   

22

      

      

   

23

      

Admissions:

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

Medicare

   

10,767

      

      

   

9,989

      

      

   

9,831

      

      

   

9,936

      

      

   

10,649

      

      

   

9,756

      

      

   

9,266

      

Medicaid

   

925

      

      

   

919

      

      

   

915

      

      

   

839

      

      

   

685

      

      

   

744

      

      

   

789

      

Medicare Advantage

   

1,532

      

      

   

1,649

      

      

   

1,494

      

      

   

1,453

      

      

   

1,583

      

      

   

1,537

      

      

   

1,461

      

Commercial insurance and other

   

2,546

      

      

   

2,342

      

      

   

2,357

      

      

   

2,247

      

      

   

2,226

      

      

   

2,121

      

      

   

2,144

      

   

   

15,770

      

      

   

14,899

      

      

   

14,597

      

      

   

14,475

      

      

   

15,143

      

      

   

14,158

      

      

   

13,660

      

Admissions mix %:

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

Medicare

   

68

      

      

   

67

      

      

   

68

      

      

   

69

      

      

   

70

      

      

   

69

      

      

   

68

      

Medicaid

   

6

      

      

   

6

      

      

   

6

      

      

   

6

      

      

   

5

      

      

   

5

      

      

   

6

      

Medicare Advantage

   

10

      

      

   

11

      

      

   

10

      

      

   

10

      

      

   

10

      

      

   

11

      

      

   

11

      

Commercial insurance and other

   

16

      

      

   

16

      

      

   

16

      

      

   

15

      

      

   

15

      

      

   

15

      

      

   

15

      

Patient days:

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

Medicare

   

264,930

      

      

   

250,081

      

      

   

244,189

      

      

   

248,315

      

      

   

261,311

      

      

   

241,790

      

      

   

230,780

      

Medicaid

   

32,848

      

      

   

30,568

      

      

   

33,671

      

      

   

31,697

      

      

   

28,776

      

      

   

30,447

      

      

   

31,608

      

Medicare Advantage

   

43,392

      

      

   

46,071

      

      

   

44,138

      

      

   

42,458

      

      

   

44,639

      

      

   

44,695

      

      

   

43,391

      

Commercial insurance and other

   

75,351

      

      

   

73,331

      

      

   

72,394

      

      

   

69,552

      

      

   

73,512

      

      

   

66,706

      

      

   

68,583

      

   

   

416,521

      

      

   

400,051

      

      

   

394,392

      

      

   

392,022

      

      

   

408,238

      

      

   

383,638

      

      

   

374,362

      

Average length of stay:

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

Medicare

   

24.6

      

      

   

25.0

      

      

   

24.8

      

      

   

25.0

      

      

   

24.5

      

      

   

24.8

      

      

   

24.9

      

Medicaid

   

35.5

      

      

   

33.3

      

      

   

36.8

      

      

   

37.8

      

      

   

42.0

      

      

   

40.9

      

      

   

40.1

      

Medicare Advantage

   

28.3

      

      

   

27.9

      

      

   

29.5

      

      

   

29.2

      

      

   

28.2

      

      

   

29.1

      

      

   

29.7

      

Commercial insurance and other

   

29.6

      

      

   

31.3

      

      

   

30.7

      

      

   

31.0

      

      

   

33.0

      

      

   

31.5

      

      

   

32.0

      

Weighted average

   

26.4

      

      

   

26.9

      

      

   

27.0

      

      

   

27.1

      

      

   

27.0

      

      

   

27.1

      

      

   

27.4

      

Revenues per admission:

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

Medicare

$

39,802

      

      

$

40,043

      

      

$

39,423

      

      

$

40,963

      

      

$

39,956

      

      

$

38,884

      

      

$

39,078

      

Medicaid

   

42,937

      

      

   

42,150

      

      

   

41,591

      

      

   

43,487

      

      

   

51,441

      

      

   

48,141

      

      

   

51,891

      

Medicare Advantage

   

44,297

      

      

   

42,661

      

      

   

46,465

      

      

   

45,790

      

      

   

44,397

      

      

   

45,348

      

      

   

46,793

      

Commercial insurance and other

   

57,715

      

      

   

59,384

      

      

   

60,002

      

      

   

61,313

      

      

   

65,694

      

      

   

65,537

      

      

   

63,947

      

Weighted average

   

43,314

      

      

   

43,503

      

      

   

43,602

      

      

   

44,752

      

      

   

44,723

      

      

   

44,065

      

      

   

44,546

      

Revenues per patient day:

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

Medicare

$

1,618

      

      

$

1,599

      

      

$

1,587

      

      

$

1,639

      

      

$

1,628

      

      

$

1,569

      

      

$

1,569

      

Medicaid

   

1,209

      

      

   

1,267

      

      

   

1,130

      

      

   

1,151

      

      

   

1,225

      

      

   

1,176

      

      

   

1,295

      

Medicare Advantage

   

1,564

      

      

   

1,527

      

      

   

1,573

      

      

   

1,567

      

      

   

1,574

      

      

   

1,559

      

      

   

1,576

      

Commercial insurance and other

   

1,950

      

      

   

1,897

      

      

   

1,954

      

      

   

1,981

      

      

   

1,989

      

      

   

2,084

      

      

   

1,999

      

Weighted average

   

1,640

      

      

   

1,620

      

      

   

1,614

      

      

   

1,652

      

      

   

1,659

      

      

   

1,626

      

      

   

1,625

      

Medicare case mix index (discharged   patients only)

   

1.18

      

      

   

1.18

      

      

   

1.16

      

      

   

1.15

      

      

   

1.18

      

      

   

1.18

      

      

   

1.16

      

Average daily census

   

4,577

      

      

   

4,396

      

      

   

4,287

      

      

   

4,261

      

      

   

4,536

      

      

   

4,216

      

      

   

4,069

      

Occupancy %

   

68.3

      

      

   

64.9

      

      

   

63.9

      

      

   

63.6

      

      

   

67.5

      

      

   

62.5

      

      

   

60.0

      

Annualized employee turnover %

   

22.0

      

      

   

21.5

      

      

   

20.2

      

      

   

19.8

      

      

   

22.2

      

      

   

21.6

      

      

   

21.1

      

   

   

 

 66 


ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

   

Operating Data (Continued)

(Unaudited)

   

 

   

2012 Quarters

   

      

2013 Quarters

   

   

First

   

      

Second

   

      

Third

   

      

Fourth

   

      

First

   

      

Second

   

      

Third

   

Nursing center division data:

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

End of period data:

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

Number of facilities:

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

Nursing centers:

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

Owned or leased

   

99

      

      

   

99

      

      

   

99

      

      

   

98

      

      

   

98

      

      

   

98

      

      

   

98

      

Managed

   

4

      

      

   

4

      

      

   

4

      

      

   

4

      

      

   

4

      

      

   

4

      

      

   

4

      

Assisted living facilities

   

6

      

      

   

6

      

      

   

6

      

      

   

6

      

      

   

6

      

      

   

6

      

      

   

6

      

   

   

109

      

      

   

109

      

      

   

109

      

      

   

108

      

      

   

108

      

      

   

108

      

      

   

108

      

Number of licensed beds:

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

Nursing centers:

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

Owned or leased

   

12,747

      

      

   

12,795

      

      

   

12,795

      

      

   

12,741

      

      

   

12,741

      

      

   

12,741

      

      

   

12,741

      

Managed

   

485

      

      

   

485

      

      

   

485

      

      

   

485

      

      

   

485

      

      

   

485

      

      

   

485

      

Assisted living facilities

   

413

      

      

   

341

      

      

   

341

      

      

   

341

      

      

   

341

      

      

   

341

      

      

   

341

      

   

   

13,645

      

      

   

13,621

      

      

   

13,621

      

      

   

13,567

      

      

   

13,567

      

      

   

13,567

      

      

   

13,567

      

Revenue mix %:

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

Medicare

   

35

      

      

   

35

      

      

   

34

      

      

   

35

      

      

   

35

      

      

   

34

      

      

   

33

      

Medicaid

   

36

      

      

   

37

      

      

   

37

      

      

   

37

      

      

   

36

      

      

   

36

      

      

   

39

      

Medicare Advantage

   

8

      

      

   

8

      

      

   

8

      

      

   

7

      

      

   

8

      

      

   

8

      

      

   

7

      

Private and other

   

21

      

      

   

20

      

      

   

21

      

      

   

21

      

      

   

21

      

      

   

22

      

      

   

21

      

Patient days (a):

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

Medicare

   

184,273

      

      

   

178,799

      

      

   

173,627

      

      

   

170,509

      

      

   

175,642

      

      

   

166,291

      

      

   

161,181

      

Medicaid

   

548,718

      

      

   

549,131

      

      

   

554,260

      

      

   

549,053

      

      

   

533,317

      

      

   

533,032

      

      

   

542,265

      

Medicare Advantage

   

55,238

      

      

   

50,688

      

      

   

50,355

      

      

   

48,687

      

      

   

55,478

      

      

   

54,593

      

      

   

47,565

      

Private and other

   

238,158

      

      

   

232,488

      

      

   

238,386

      

      

   

239,446

      

      

   

228,210

      

      

   

228,875

      

      

   

228,698

      

   

   

1,026,387

      

      

   

1,011,106

      

      

   

1,016,628

      

      

   

1,007,695

      

      

   

992,647

      

      

   

982,791

      

      

   

979,709

      

Patient day mix % (a):

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

Medicare

   

18

      

      

   

18

      

      

   

17

      

      

   

17

      

      

   

18

      

      

   

17

      

      

   

17

      

Medicaid

   

54

      

      

   

54

      

      

   

55

      

      

   

54

      

      

   

54

      

      

   

54

      

      

   

55

      

Medicare Advantage

   

5

      

      

   

5

      

      

   

5

      

      

   

5

      

      

   

5

      

      

   

6

      

      

   

5

      

Private and other

   

23

      

      

   

23

      

      

   

23

      

      

   

24

      

      

   

23

      

      

   

23

      

      

   

23

      

Revenues per patient day (a):

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

Medicare Part A

$

504

      

      

$

505

      

      

$

515

      

      

$

536

      

      

$

525

      

      

$

525

      

      

$

524

      

Total Medicare (including Part B)

   

546

      

      

   

550

      

      

   

560

      

      

   

574

      

      

   

562

      

      

   

564

      

      

   

566

      

Medicaid

   

185

      

      

   

187

      

      

   

188

      

      

   

190

      

      

   

190

      

      

   

190

      

      

   

199

      

Medicaid (net of provider taxes) (b)

   

163

      

      

   

165

      

      

   

166

      

      

   

167

      

      

   

168

      

      

   

167

      

      

   

177

      

Medicare Advantage

   

427

      

      

   

421

      

      

   

422

      

      

   

429

      

      

   

427

      

      

   

431

      

      

   

427

      

Private and other

   

248

      

      

   

244

      

      

   

249

      

      

   

253

      

      

   

262

      

      

   

261

      

      

   

255

      

Weighted average

   

278

      

      

   

276

      

      

   

277

      

      

   

281

      

      

   

286

      

      

   

283

      

      

   

283

      

Average daily census (a)

   

11,279

      

      

   

11,111

      

      

   

11,050

      

      

   

10,953

      

      

   

11,029

      

      

   

10,800

      

      

   

10,649

      

Admissions (a)

   

11,538

      

      

   

10,646

      

      

   

10,482

      

      

   

10,814

      

      

   

11,475

      

      

   

10,708

      

      

   

10,387

      

Occupancy % (a)

   

83.7

      

      

   

82.6

      

      

   

82.0

      

      

   

81.5

      

      

   

82.2

      

      

   

80.5

      

      

   

79.4

      

Medicare average length of stay (a)

   

30.4

      

      

   

31.3

      

      

   

31.9

      

      

   

30.7

      

      

   

30.2

      

      

   

31.0

      

      

   

31.6

      

Annualized employee turnover %

   

38.4

      

      

   

40.4

      

      

   

39.8

      

      

   

39.6

      

      

   

41.0

      

      

   

43.8

      

      

   

43.5

      

   

 

   

 

(a)

Excludes managed facilities.

 

(b)

Provider taxes are recorded in other operating expenses for all periods presented.

   

   

 

 67 


ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

   

Operating Data (Continued)

(Unaudited)

   

 

   

2012 Quarters

   

      

2013 Quarters

   

   

First

   

      

Second

   

      

Third

   

      

Fourth

   

      

First

   

      

Second

   

      

Third

   

Rehabilitation division data:

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

Skilled nursing rehabilitation services:

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

Revenue mix %:

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

Company-operated

   

11

      

      

   

11

      

      

   

11

      

      

   

11

      

      

   

12

      

      

   

12

      

      

   

12

      

Non-affiliated

   

89

      

      

   

89

      

      

   

89

      

      

   

89

      

      

   

88

      

      

   

88

      

      

   

88

      

Sites of service (at end of period)

   

1,722

      

      

   

1,730

      

      

   

1,735

      

      

   

1,726

      

      

   

1,729

      

      

   

1,713

      

      

   

1,768

      

Revenue per site

$

147,268

      

      

$

146,347

      

      

$

145,361

      

      

$

141,690

      

      

$

148,979

      

      

$

144,968

      

      

$

137,991

      

Therapist productivity %

   

80.3

      

      

   

80.4

      

      

   

80.5

      

      

   

80.5

      

      

   

81.1

      

      

   

80.4

      

      

   

80.4

      

Hospital rehabilitation services:

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

Revenue mix %:

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

Company-operated

   

34

      

      

   

33

      

      

   

33

      

      

   

33

      

      

   

33

      

      

   

34

      

      

   

34

      

Non-affiliated

   

66

      

      

   

67

      

      

   

67

      

      

   

67

      

      

   

67

      

      

   

66

      

      

   

66

      

Sites of services (at end of period):

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

Inpatient rehabilitation units

   

100

      

      

   

102

      

      

   

104

      

      

   

105

      

      

   

103

      

      

   

103

      

      

   

99

      

LTAC hospitals

   

125

      

      

   

125

      

      

   

123

      

      

   

123

      

      

   

123

      

      

   

123

      

      

   

122

      

Sub-acute units

   

19

      

      

   

20

      

      

   

20

      

      

   

21

      

      

   

8

      

      

   

8

      

      

   

7

      

Outpatient units

   

111

      

      

   

115

      

      

   

117

      

      

   

119

      

      

   

98

      

      

   

104

      

      

   

104

      

Other

   

5

      

      

   

5

      

      

   

5

      

      

   

5

      

      

   

      

      

   

      

      

   

      

   

   

360

      

      

   

367

      

      

   

369

      

      

   

373

      

      

   

332

      

      

   

338

      

      

   

332

      

Revenue per site

$

206,580

      

      

$

200,006

      

      

$

194,849

      

      

$

198,150

      

      

$

224,466

      

      

$

206,441

      

      

$

205,711

      

Annualized employee turnover %

   

19.6

      

      

   

16.9

      

      

   

17.3

      

      

   

16.9

      

      

   

10.4

      

      

   

13.2

      

      

   

14.0

      

   

   

   

 

 68 


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   

The following discussion of the Company’s exposure to market risk contains “forward-looking statements” that involve risks and uncertainties. Given the unpredictability of interest rates as well as other factors, actual results could differ materially from those projected in such forward-looking information.

The Company’s exposure to market risk relates to changes in the prime rate, federal funds rate and LIBOR which affect the interest paid on certain borrowings.

The following table provides information about the Company’s financial instruments that are sensitive to changes in interest rates. The table presents principal cash flows and related weighted average interest rates by expected maturity date.

Interest Rate Sensitivity

Principal (Notional) Amount by Expected Maturity

Average Interest Rate

(Dollars in thousands)

   

 

   

Expected maturities

   

      

Fair
value
9/30/13

   

   

2013

   

   

2014

   

   

2015

   

   

2016

   

   

2017

   

   

Thereafter

   

   

Total

   

      

Liabilities:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

      

   

   

   

Long-term debt, including amounts due within one year:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

      

   

   

   

Fixed rate:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

      

   

   

   

Notes

$

   

   

$

   

   

$

   

   

$

   

   

$

   

   

$

550,000

      

   

$

550,000

   

      

$

587,125

      

Other

   

26

      

   

   

109

      

   

   

116

      

   

   

123

      

   

   

10

      

   

   

—  

      

   

   

384

   

      

   

367

(a)

   

$

26

      

   

$

109

      

   

$

116

      

   

$

123

      

   

$

10

      

   

$

550,000

      

   

$

550,384

   

      

$

587,492

      

Average interest rate

   

6.0

%

   

   

6.0

%

   

   

6.0

%

   

   

6.0

%

   

   

6.0

%

   

   

8.3

%

   

   

   

   

      

   

   

   

Variable rate:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

      

   

   

   

ABL Facility (b)

$

   

   

$

   

   

$

   

   

$

   

   

$

      

   

$

57,400

   

   

$

57,400

   

      

$

57,400

      

Term Loan Facility (c,d)

   

3,937

      

   

   

7,875

      

   

   

7,875

      

   

   

7,875

      

   

   

7,875

      

   

   

750,094

      

   

   

785,531

   

      

   

783,567

      

Other (e)

   

59

      

   

   

232

      

   

   

3,720

      

   

   

      

   

   

   

   

   

   

   

   

4,011

   

      

   

4,011

      

   

$

3,996

      

   

$

8,107

      

   

$

11,595

      

   

$

7,875

      

   

$

7,875

      

   

$

807,494

      

   

$

846,942

   

      

$

844,978

      

   

 

   

(a)

Calculated based upon the net present value of future principal and interest payments using a discount rate of 6%.

(b)

Interest on borrowings under the Company’s ABL Facility is payable at a rate per annum equal to the applicable margin plus, at the Company’s option, either: (1) LIBOR determined by reference to the costs of funds for Eurodollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs, or (2) a base rate determined by reference to the highest of: (a) the prime rate of JPMorgan Chase Bank, N.A., (b) the federal funds effective rate plus one-half of 1.00% and (c) LIBOR as described in subclause (1) plus 1.00%. At September 30, 2013, the applicable margin for borrowings under the ABL Facility was 2.75% with respect to LIBOR borrowings and 1.75% with respect to base rate borrowings. The applicable margin is subject to adjustment each fiscal quarter, based upon average historical excess availability during the preceding quarter.

(c)

Interest on borrowings under the Term Loan Facility is payable at a rate per annum equal to an applicable margin plus, at the Company’s option, either: (1) LIBOR determined by reference to the costs of funds for Eurodollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs, or (2) a base rate determined by reference to the highest of: (a) the prime rate of JPMorgan Chase Bank, N.A., (b) the federal funds effective rate plus one-half of 1.00% and (c) LIBOR described in subclause (1) plus 1.00%. LIBOR is subject to an interest rate floor of 1.00%. The applicable margin for borrowings under the Term Loan Facility is 3.25% with respect to LIBOR borrowings and 2.25% with respect to base rate borrowings. The expected maturities for the Term Loan Facility exclude the original issue discount of approximately $7 million.

(d)

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 Term Loan Facility debt. 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 LIBOR, subject to a minimum rate of 1.5%.

(e)

Interest based upon LIBOR plus 4%.

   

   

       

 

 69 


ITEM 4.  CONTROLS AND PROCEDURES

   

Evaluation of Disclosure Controls and Procedures and Changes in Internal Control Over Financial Reporting

The Company has carried out an evaluation under the supervision and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2013, the Company’s disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in the reports that the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required.

There has been no change in the Company’s internal control over financial reporting during the Company’s quarter ended September 30, 2013, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

   

   

   

 

 70 


PART II.  OTHER INFORMATION

   

Item 1. Legal 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 and internal audits and investigations. These matters could potentially subject the Company to sanctions, damages, recoupments, fines and other penalties. The DOJ, CMS or other federal and state enforcement and regulatory agencies may conduct additional investigations related to the Company’s businesses in the future which may, either individually or in the aggregate, have a material adverse effect on the Company’s business, financial position, results of operations and liquidity. See Note 15 of the notes to condensed consolidated financial statements for a description of the Company’s other pending legal proceedings.

The Company’s subsidiary, RehabCare, and two other unrelated therapy services providers, are defendants in a whistleblower lawsuit styled United States ex rel. Health Dimensions Rehabilitation, Inc. v. RehabCare Group, Inc., et al. currently pending in federal district court for the Eastern District of Missouri. This action was filed under seal in federal district court for the District of Minnesota on July 11, 2007. The U.S. Attorney’s Office in Minnesota intervened in the lawsuit on December 5, 2011 by filing a new complaint and demand for jury trial in federal district court for the District of Minnesota. The lawsuit was transferred to federal district court for the Eastern District of Missouri in May 2012.  

The lawsuit arises from a subcontractor arrangement between RehabCare and one of the unrelated therapy service providers and fees paid under and in connection with the transaction. The parties entered into the transaction in 2006. The new complaint alleges violations of the federal civil False Claims Act based upon an underlying claim that the transaction violated the federal Anti-Kickback Statute, 42 U.S.C. §1320a-7(b). In July 2013, all parties filed motions for summary judgment, which were denied on August 30, 2013. The trial on the matter began on September 23, 2013, but has been recessed until February 3, 2014 while the parties continue settlement discussions. Any potential settlement of this lawsuit would be subject to, among other items, the negotiation and execution of a definitive settlement agreement, any necessary approvals by the parties, approval of the OIG (which may include other remedial actions), and final court approval of the related settlement agreement. The Company disputes the allegations in the complaint and continues to defend this lawsuit vigorously.

The United States is seeking single damages in the amount of approximately $226 million, treble damages, per claim penalties of $5,500 to $11,000 for each claim submitted, other unspecified damages, attorneys’ fees and costs. Based upon the results of certain pre-trial motions, new facts associated with the case and settlement discussions occurring in September 2013, the Company recorded an additional $23 million loss provision in the third quarter of 2013 (for a total loss reserve of $25 million) related to this matter. The Company continues to evaluate the loss provision in light of potentially relevant factual and legal developments, including information learned through rulings on dispositive motions, settlement discussions and other rulings. The expected loss reserve is based upon currently available information and is subject to significant judgment and a variety of assumptions, and known and unknown uncertainties. Given the uncertainty of litigation, the actual loss may vary significantly from the current reserve, which does not represent the Company’s maximum loss exposure. At this time, no estimate of the possible loss or range of loss, in excess of the amount accrued, can be made regarding this lawsuit.

 

 71 


PART II.  OTHER INFORMATION

   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

ISSUER PURCHASES OF EQUITY SECURITIES

   

 

Period

Total number of
shares (or units)
purchased (a)

   

      

Average price
paid per share
(or unit) (b)

   

      

Total number of
shares (or units)
purchased as part of
publicly announced
plans or programs

   

      

Maximum number (or
approximate dollar value)
of shares (or units) that may yet
be purchased under the
plans or programs

   

Month #1 (July 1 – July 31)

   

306

   

   

$

15.36

   

   

   

   

   

$

   

Month #2 (August 1 – August 31)

   

1,063

   

   

   

15.02

   

   

   

   

   

   

   

Month #3 (September 1 – September 30)

   

   

   

   

   

   

   

   

   

   

   

Total

   

1,369

   

   

$

15.10

   

   

   

   

   

$

   

   

 

   

(a)

These amounts represent shares of the Company’s common stock, par value $0.25 per share, withheld to offset tax withholding obligations that occurred upon the vesting and release of service-based restricted share awards previously granted under the Company’s stock-based compensation plans for its employees (the “Withheld Shares”).  The total tax withholding obligation is calculated by dividing the closing price of the Company’s common stock on the New York Stock Exchange on the applicable vesting date to determine the total number of Withheld Shares required to satisfy such withholding obligation.

(b)

The average price per share for each period was calculated by dividing the sum of the aggregate value of the Withheld Shares by the total number of Withheld Shares.

   

   

 

 72 


PART II.  OTHER INFORMATION (Continued)

   

Item 6. Exhibits

   

 

2.1*

      

Amendment No. 2 to Asset Purchase Agreement dated as of April 24, 2013 (as amended by Amendment No. 1 dated     June 14, 2013), dated as of August 29, 2013 by and between Kindred Healthcare Operating, Inc., Vibra Healthcare II, LLC, Kindred Healthcare, Inc. and Vibra Healthcare, LLC.

   

   

10.1

      

Employment Agreement dated as of July 10, 2013 by and between Kindred Healthcare Operating, Inc. and Richard A. Lechleiter. Exhibit 10.1 to the Company’s Current Report on Form 8-K dated July 10, 2013 (Comm. File No. 001-14057) is hereby incorporated by reference.

   

   

10.2

      

Employment Agreement dated as of July 15, 2013 by and between Kindred Healthcare Operating, Inc. and Jon B. Rousseau.

   

   

10.3

      

Change-in-Control Severance Agreement dated as of July 15, 2013 by and between Kindred Healthcare Operating, Inc. and Jon B. Rousseau.

   

   

10.4

      

Amendment and Restatement Agreement dated as of August 21, 2013 to the ABL Credit Agreement and the Security Agreement, by and among the Company, the other Credit Parties party thereto, the Consenting Lenders and JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent. Exhibit 10.1 to the Company’s Current Report on     Form 8-K dated August 21, 2013 (Comm. File No. 001-14057) is hereby incorporated by reference.

   

   

10.5

      

Second Amendment and Restatement Agreement dated as of August 21, 2013 to the Amended and Restated Term Loan Credit Agreement and the Security Agreement, by and among the Company, the other Credit Parties party thereto, the Consenting Lenders and JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent. Exhibit 10.2 to the Company’s Current Report on Form 8-K dated August 21, 2013 (Comm. File No. 001-14057) is hereby incorporated by reference.

   

   

10.6

      

Employment Agreement dated as of September 30, 2013 by and between Kindred Healthcare Operating, Inc. and

Steven L. Monaghan.

   

   

10.7

      

Change-in-Control Severance Agreement dated as of September 30, 2013 by and between Kindred Healthcare Operating, Inc. and Steven L. Monaghan.

   

   

10.8

   

Agreement Regarding Master Leases, dated as of September 30, 2013 between Ventas Realty, Limited Partnership, as Lessor and Kindred Healthcare, Inc. and Kindred Healthcare Operating, Inc., as Tenant. Exhibit 10.1 to the Company’s Current Report on Form 8-K dated September 30, 2013 (Comm. File No. 001-14057) is hereby incorporated by reference.

   

   

10.9

   

Amended and Restated Master Lease Agreement No. 5, dated as of September 30, 2013 between Ventas Realty, Limited Partnership, as Lessor and Kindred Healthcare, Inc. and Kindred Healthcare Operating, Inc., as Tenant. Exhibit 10.2 to the Company’s Current Report on Form 8-K dated September 30, 2013 (Comm. File No. 001-14057) is hereby incorporated by reference.

   

   

31

      

Rule 13a-14(a)/15d-14(a) Certifications.

   

   

32

      

Section 1350 Certifications.

   

   

101.INS

      

XBRL Instance Document.

   

   

101.SCH

      

XBRL Taxonomy Extension Schema Document.

   

   

101.CAL

      

XBRL Taxonomy Extension Calculation Linkbase Document.

   

   

101.DEF

      

XBRL Taxonomy Extension Definition Linkbase Document.

   

   

101.LAB

      

XBRL Taxonomy Extension Label Linkbase Document.

   

   

101.PRE

      

XBRL Taxonomy Extension Presentation Linkbase Document.

   

   

   

*The Company will furnish supplementally to the SEC upon request a copy of any omitted exhibit or schedule.

 

 73 


SIGNATURES

   

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

   

 

   

   

KINDRED HEALTHCARE, INC.

Date: November 12, 2013

/s/    PAUL J. DIAZ

   

   

Paul J. Diaz

   

   

Chief Executive Officer

   

   

   

Date: November 12, 2013

/s/    RICHARD A. LECHLEITER

   

   

Richard A. Lechleiter

   

   

Executive Vice President and

Chief Financial Officer

   

   

   

 

 74