knd-10q_20170331.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

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

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2017

OR

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

SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     .

Commission file number: 001-14057

 

KINDRED HEALTHCARE, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

61-1323993

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

680 South Fourth Street Louisville, KY

 

 

40202

(Address of principal executive offices)

 

(Zip Code)

(502) 596-7300

(Registrant’s telephone number, including area code)

 

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

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

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

Large accelerated filer

 

  

Accelerated filer

 

 

Emerging growth company

 

 

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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

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

 

Class of Common Stock

  

Outstanding at April 30, 2017

Common stock, $0.25 par value

  

     85,633,640 shares

 

 

 

1 of 71


 

KINDRED HEALTHCARE, INC.

FORM 10-Q

INDEX

 

 

 

Page

PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements (Unaudited):

 

 

Condensed Consolidated Statement of Operations – for the three months ended March 31, 2017 and 2016

3

 

Condensed Consolidated Statement of Comprehensive Income (Loss) – for the three months ended March 31, 2017 and 2016

4

 

Condensed Consolidated Balance Sheet – March 31, 2017 and December 31, 2016

5

 

Condensed Consolidated Statement of Cash Flows – for the three months ended March 31, 2017 and 2016

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

67

Item 4.

Controls and Procedures

68

 

PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

69

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

69

Item 6.

Exhibits

70

 

 

 

2


 

KINDRED HEALTHCARE, INC.

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)

(In thousands, except per share amounts)

 

 

Three months ended

 

 

March 31,

 

 

2017

 

 

2016

 

Revenues

$

1,768,396

 

 

$

1,837,971

 

Salaries, wages and benefits

 

931,880

 

 

 

926,214

 

Supplies

 

90,186

 

 

 

99,416

 

Rent

 

95,612

 

 

 

97,517

 

Other operating expenses

 

205,483

 

 

 

214,701

 

General and administrative expenses (exclusive of depreciation and

     amortization expense included below)

 

323,236

 

 

 

353,826

 

Other income

 

(228

)

 

 

(952

)

Litigation contingency expense

 

-

 

 

 

1,910

 

Impairment charges

 

1,157

 

 

 

7,788

 

Restructuring charges

 

16,172

 

 

 

1,952

 

Depreciation and amortization

 

34,960

 

 

 

40,681

 

Interest expense

 

59,334

 

 

 

57,499

 

Investment income

 

(527

)

 

 

(254

)

 

 

1,757,265

 

 

 

1,800,298

 

Income from continuing operations before income taxes

 

11,131

 

 

 

37,673

 

Provision for income taxes

 

2,302

 

 

 

11,836

 

Income from continuing operations

 

8,829

 

 

 

25,837

 

Discontinued operations, net of income taxes:

 

 

 

 

 

 

 

Income (loss) from operations

 

387

 

 

 

(582

)

Gain on divestiture of operations

 

-

 

 

 

262

 

Income (loss) from discontinued operations

 

387

 

 

 

(320

)

Net income

 

9,216

 

 

 

25,517

 

(Earnings) loss attributable to noncontrolling interests:

 

 

 

 

 

 

 

Continuing operations

 

(14,965

)

 

 

(12,514

)

Discontinued operations

 

1

 

 

 

(2

)

 

 

(14,964

)

 

 

(12,516

)

Income (loss) attributable to Kindred

$

(5,748

)

 

$

13,001

 

Amounts attributable to Kindred stockholders:

 

 

 

 

 

 

 

Income (loss) from continuing operations

$

(6,136

)

 

$

13,323

 

Income (loss) from discontinued operations

 

388

 

 

 

(322

)

Net income (loss)

$

(5,748

)

 

$

13,001

 

Earnings (loss) per common share:

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

Income (loss) from continuing operations

$

(0.07

)

 

$

0.15

 

Discontinued operations:

 

 

 

 

 

 

 

Income (loss) from operations

 

-

 

 

 

-

 

Gain on divestiture of operations

 

-

 

 

 

-

 

Income (loss) from discontinued operations

 

-

 

 

 

-

 

Net income (loss)

$

(0.07

)

 

$

0.15

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

Income (loss) from continuing operations

$

(0.07

)

 

$

0.15

 

Discontinued operations:

 

 

 

 

 

 

 

Income (loss) from operations

 

-

 

 

 

-

 

Gain on divestiture of operations

 

-

 

 

 

-

 

Income (loss) from discontinued operations

 

-

 

 

 

-

 

Net income (loss)

$

(0.07

)

 

$

0.15

 

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

 

 

 

 

 

 

 

Basic

 

87,085

 

 

 

86,590

 

Diluted

 

87,085

 

 

 

87,249

 

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

 

 

March 31,

 

 

2017

 

 

2016

 

Net income

$

9,216

 

 

$

25,517

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

Available-for-sale securities (Note 10):

 

 

 

 

 

 

 

Change in unrealized investment gains

 

949

 

 

 

610

 

Reclassification of (gains) losses realized in net income

 

(1

)

 

 

135

 

Net change

 

948

 

 

 

745

 

Interest rate swaps (Note 1):

 

 

 

 

 

 

 

Change in unrealized gains (losses)

 

1,026

 

 

 

(6,096

)

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

   payments

 

(103

)

 

 

391

 

Net change

 

923

 

 

 

(5,705

)

Income tax benefit related to items of other

    comprehensive income (loss)

 

-

 

 

 

2,138

 

Other comprehensive income (loss)

 

1,871

 

 

 

(2,822

)

Comprehensive income

 

11,087

 

 

 

22,695

 

Earnings attributable to noncontrolling interests

 

(14,964

)

 

 

(12,516

)

Comprehensive income (loss) attributable to Kindred

$

(3,877

)

 

$

10,179

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

4


 

KINDRED HEALTHCARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited)

(In thousands, except per share amounts)

 

 

March 31,

 

 

December 31,

 

 

2017

 

 

2016

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

116,913

 

 

$

137,061

 

Insurance subsidiary investments

 

110,872

 

 

 

108,966

 

Accounts receivable less allowance for loss of $74,240 ─ March 31, 2017 and $71,070 ─ December 31, 2016

 

1,246,855

 

 

 

1,172,078

 

Inventories

 

24,701

 

 

 

24,673

 

Income taxes

 

7,776

 

 

 

10,067

 

Other

 

66,899

 

 

 

63,693

 

 

 

1,574,016

 

 

 

1,516,538

 

 

 

 

 

 

 

 

 

Property and equipment

 

2,014,453

 

 

 

2,026,430

 

Accumulated depreciation

 

(1,158,911

)

 

 

(1,147,844

)

 

 

855,542

 

 

 

878,586

 

 

 

 

 

 

 

 

 

Goodwill

 

2,427,074

 

 

 

2,427,074

 

Intangible assets less accumulated amortization of $105,999 ─  March 31, 2017 and $102,580 ─ December 31, 2016

 

783,020

 

 

 

790,235

 

Insurance subsidiary investments

 

201,115

 

 

 

204,929

 

Other

 

303,842

 

 

 

295,362

 

Total assets (a)

$

6,144,609

 

 

$

6,112,724

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

179,151

 

 

$

203,925

 

Salaries, wages and other compensation

 

378,805

 

 

 

397,486

 

Due to third party payors

 

34,481

 

 

 

41,320

 

Professional liability risks

 

66,073

 

 

 

65,284

 

Other accrued liabilities

 

241,387

 

 

 

269,736

 

Long-term debt due within one year

 

24,828

 

 

 

27,977

 

 

 

924,725

 

 

 

1,005,728

 

 

 

 

 

 

 

 

 

Long-term debt

 

3,344,511

 

 

 

3,215,062

 

Professional liability risks

 

300,773

 

 

 

295,311

 

Deferred tax liabilities

 

202,867

 

 

 

201,808

 

Deferred credits and other liabilities

 

354,277

 

 

 

353,294

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

Stockholder's equity:

 

 

 

 

 

 

 

Common stock, $0.25 par value; authorized 175,000 shares; issued 85,691 shares ─ March 31, 2017 and

   85,166 shares December 31, 2016

 

21,423

 

 

 

21,291

 

Capital in excess of par value

 

1,700,748

 

 

 

1,710,231

 

Accumulated other comprehensive income

 

3,444

 

 

 

1,573

 

Accumulated deficit

 

(926,292

)

 

 

(920,544

)

 

 

799,323

 

 

 

812,551

 

Noncontrolling interests

 

218,133

 

 

 

228,970

 

Total equity

 

1,017,456

 

 

 

1,041,521

 

Total liabilities (a) and equity

$

6,144,609

 

 

$

6,112,724

 

 

 

(a)

The Company’s consolidated assets as of March 31, 2017 and December 31, 2016 include total assets of variable interest entities of $395.7 million and $394.1 million, respectively, which can only be used to settle the obligations of the variable interest entities. The Company’s consolidated liabilities as of March 31, 2017 and December 31, 2016 include total liabilities of variable interest entities of $37.5 million and $38.9 million, respectively. See note 1 of the notes to unaudited condensed consolidated financial statements.

 

 

See accompanying notes.

5


 

KINDRED HEALTHCARE, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

Three months ended

 

 

March 31,

 

 

2017

 

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

$

9,216

 

 

$

25,517

 

Adjustments to reconcile net income to net cash used in operating activities:

 

 

 

 

 

 

 

Depreciation expense

 

30,300

 

 

 

33,957

 

Amortization of intangible assets

 

4,660

 

 

 

6,826

 

Amortization of stock-based compensation costs

 

3,132

 

 

 

4,404

 

Amortization of deferred financing costs

 

4,132

 

 

 

3,567

 

Payment of capitalized lender fees related to debt amendment

 

(5,403

)

 

 

-

 

Provision for doubtful accounts

 

11,218

 

 

 

11,725

 

Deferred income taxes

 

1,227

 

 

 

11,496

 

Impairment charges

 

1,157

 

 

 

7,788

 

Gain on divestiture of discontinued operations

 

-

 

 

 

(262

)

Other

 

6,050

 

 

 

303

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

(85,833

)

 

 

(87,892

)

Inventories and other assets

 

(4,457

)

 

 

(5,232

)

Accounts payable

 

(24,497

)

 

 

(10,621

)

Income taxes

 

2,291

 

 

 

146

 

Due to third party payors

 

(6,839

)

 

 

(4,843

)

Other accrued liabilities

 

(38,992

)

 

 

(127,219

)

Net cash used in operating activities

 

(92,638

)

 

 

(130,340

)

Cash flows from investing activities:

 

 

 

 

 

 

 

Routine capital expenditures

 

(11,941

)

 

 

(18,106

)

Development capital expenditures

 

(5,439

)

 

 

(10,019

)

Acquisitions, net of cash acquired

 

(3,150

)

 

 

(26,339

)

Acquisition deposits

 

-

 

 

 

18,489

 

Sale of assets

 

-

 

 

 

1,081

 

Purchase of insurance subsidiary investments

 

(22,308

)

 

 

(32,841

)

Sale of insurance subsidiary investments

 

18,699

 

 

 

30,890

 

Net change in insurance subsidiary cash and cash equivalents

 

6,412

 

 

 

9,958

 

Net change in other investments

 

29

 

 

 

(33,981

)

Other

 

154

 

 

 

(1,919

)

Net cash used in investing activities

 

(17,544

)

 

 

(62,787

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from borrowings under revolving credit

 

478,600

 

 

 

533,700

 

Repayment of borrowings under revolving credit

 

(343,400

)

 

 

(303,100

)

Proceeds from other long-term debt

 

-

 

 

 

750

 

Repayment of term loan

 

(3,509

)

 

 

(3,003

)

Repayment of other long-term debt

 

(284

)

 

 

(280

)

Payment of deferred financing costs

 

(79

)

 

 

(151

)

Payment of dividend for mandatory redeemable preferred stock

 

(3,010

)

 

 

(2,801

)

Dividends paid

 

(10,228

)

 

 

(10,068

)

Payroll tax payments for equity awards issuance

 

(2,255

)

 

 

(2,649

)

Contributions made by noncontrolling interests

 

-

 

 

 

4,368

 

Distributions to noncontrolling interests

 

(25,801

)

 

 

(16,315

)

Purchase of noncontrolling interests

 

-

 

 

 

(1,000

)

Net cash provided by financing activities

 

90,034

 

 

 

199,451

 

Change in cash and cash equivalents

 

(20,148

)

 

 

6,324

 

Cash and cash equivalents at beginning of period

 

137,061

 

 

 

98,758

 

Cash and cash equivalents at end of period

$

116,913

 

 

$

105,082

 

Supplemental information:

 

 

 

 

 

 

 

Interest payments

$

74,839

 

 

$

73,676

 

Income tax refunds

 

1,240

 

 

 

188

 

Non-cash contribution made by noncontrolling interest

 

-

 

 

 

2,800

 

 

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 a home health, hospice and community care business, transitional care (“TC”) hospitals, inpatient rehabilitation hospitals (“IRFs”), a contract rehabilitation services business, nursing centers, and assisted living facilities across the United States (collectively, the “Company” or “Kindred”). At March 31, 2017, the Company’s Kindred at Home division primarily provided home health, hospice, and community care services from 619 sites of service in 40 states. The Company’s hospital division operated 82 TC hospitals (certified as long-term acute care (“LTAC”) hospitals under the Medicare program) in 18 states. The Company’s Kindred Rehabilitation Services division operated 19 IRFs and 101 hospital-based acute rehabilitation units (“ARUs”) (certified as IRFs), and provided rehabilitation services primarily in hospitals and long-term care settings in 46 states. The Company’s nursing center division operated 91 nursing centers and seven assisted living facilities in 19 states.

Discontinued operations

The Company has completed several transactions related to the divestiture of unprofitable hospitals and nursing centers to improve its future operating results. For accounting purposes, the operating results of these businesses and the gains associated with these transactions were classified as discontinued operations in the accompanying unaudited condensed consolidated statement of operations for all periods presented in accordance with the authoritative guidance in effect through December 31, 2014. Effective January 1, 2015, the authoritative guidance modified the requirements for reporting discontinued operations. A disposal is now required to be reported in discontinued operations only if the disposal represents a strategic shift that has (or will have) a major effect on the Company’s operations and financial results.

Recently issued accounting requirements

In January 2017, the Financial Accounting Standards Board (the “FASB”) issued authoritative guidance that simplifies the measurement of goodwill impairment to a single-step test. The guidance removes step two of the goodwill impairment test, which required a hypothetical purchase price allocation. The measurement of goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Under the revised guidance, failing step one will always result in goodwill impairment. The new guidance is effective for annual and interim periods beginning after December 15, 2019 and early adoption is permitted. The Company adopted the new guidance on January 1, 2017 on a prospective basis. If the Company fails step one of the goodwill impairment test under the new guidance, the results could materially impact the Company’s financial position and results of operations but not its business or liquidity.

In January 2017, the FASB issued authoritative guidance that revises the definition of a business, which affects accounting for acquisitions, disposals, goodwill impairment, and consolidation. The guidance is intended to help entities evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The revision provides a more robust framework to use in determining when a set of assets and activities is a business. The new guidance is effective for annual and interim periods beginning after December 15, 2017 and early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s business, financial position, results of operations or liquidity.

In November 2016, the FASB issued authoritative guidance that simplifies the disclosure of restricted cash within the statement of cash flows. The guidance is intended to reduce diversity when reporting restricted cash and requires entities to explain changes in the combined total of restricted and unrestricted balances in the statement of cash flows. The new guidance is effective for annual and interim periods beginning after December 15, 2017 and early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated statement of cash flows.

In August 2016, the FASB issued authoritative guidance to eliminate diversity in practice related to the cash flow statement classification of eight specific cash flow issues, which include debt prepayment or extinguishment costs, maturity of a zero coupon bond, settlement of contingent consideration liabilities after a business combination, proceeds from insurance settlements and distribution from certain equity method investees. The new guidance is effective for annual and interim periods beginning after December 15, 2017 and early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated statement of cash flows.

7


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 1 – BASIS OF PRESENTATION (Continued)

Recently issued accounting requirements (Continued)

In June 2016, the FASB issued authoritative guidance for accounting for credit losses on financial instruments. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments and modifies the impairment model for available-for-sale debt securities. The new guidance is effective for annual periods beginning after December 15, 2019 and early adoption is permitted beginning after December 15, 2018. The adoption of this standard is not expected to have a material impact on the Company’s business, financial position, results of operations, and liquidity.

In February 2016, the FASB issued amended authoritative guidance on accounting for leases. The new provisions require that a lessee of operating leases recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The lease liability will be equal to the present value of lease payments, with the right-of-use asset based upon the lease liability. The classification criteria for distinguishing between finance (or capital) leases and operating leases are substantially similar to the previous lease guidance, but with no explicit bright lines. As such, operating leases will result in straight-line rent expense similar to current practice. For short-term leases (term of 12 months or less), a lessee is permitted to make an accounting election not to recognize lease assets and lease liabilities, which would generally result in lease expense being recognized on a straight-line basis over the lease term. The guidance is effective for annual and interim periods beginning after December 15, 2018, and will require application of the new guidance at the beginning of the earliest comparable period presented. The Company will not elect early adoption and will apply the modified retrospective approach as required. The adoption of this standard is expected to have a material impact on the Company’s financial position. The Company is still evaluating the impact on its results of operations and there is no impact on liquidity.

In January 2016, the FASB issued amended authoritative guidance which makes targeted improvements for financial instruments. The new provisions impact certain aspects of recognition, measurement, presentation and disclosure requirements of financial instruments. Specifically, the guidance will (1) require equity investments to be measured at fair value with changes in fair value recognized in net income, (2) simplify the impairment assessment of equity investments without readily determinable fair values, (3) eliminate the requirement to disclose the method and assumptions used to estimate fair value for financial instruments measured at amortized cost, and (4) require separate presentation of financial assets and financial liabilities by measurement category. The guidance is effective for annual and interim periods beginning after December 15, 2017, and early adoption is not permitted. The adoption of this standard is not expected to have a material impact on the Company’s business, financial position, results of operations, or liquidity.

In May 2014, the FASB issued authoritative guidance which changes the requirements for recognizing revenue when entities enter into contracts with customers. Under the new provisions, an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. It also requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

 

In July 2015, the FASB finalized a one year deferral of the new revenue standard with an updated effective date for interim and annual periods beginning on or after December 15, 2017. Entities are not permitted to adopt the standard earlier than the original effective date, which was on or after December 15, 2016.

 

In March 2016, the FASB finalized its amendments to the guidance in the new revenue standard on assessing whether an entity is a principal or an agent in a revenue transaction. Under the new amendments, the FASB confirmed that a principal in an arrangement controls a good or service before it is transferred to a customer but revised the structure of indicators when an entity is the principal. The amendments have the same effective date and transition requirements as the new revenue standard.

 

In May 2016, the FASB finalized its amendments to the guidance in the new revenue standard on contracts with customers and specifically, collectability, non-cash consideration, presentation of sales taxes, and completed contracts. The amendments are intended to reduce the risk of diversity in practice and the cost and complexity of applying certain aspects of the revenue standard. The amendments have the same effective date and transition requirements as the new revenue standard, which is effective for interim and annual periods beginning on or after December 15, 2017, with early adoption permitted on or after December 15, 2016.

The Company will not elect early adoption but will apply the modified retrospective approach upon the required effective date. The Company is still evaluating the impact of the adoption of the new revenue standard on its business, financial position, results of operations, and liquidity.

8


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 1 – BASIS OF PRESENTATION (Continued)

Equity

The following table sets forth the changes in equity attributable to noncontrolling interests and equity attributable to Kindred stockholders for the three months ended March 31, 2017 and 2016 (in thousands):

 

For the three months ended March 31, 2017

Amounts attributable to Kindred stockholders

 

 

Noncontrolling interests

 

 

Total equity

 

Balance at December 31, 2016

$

812,551

 

 

$

228,970

 

 

$

1,041,521

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

(5,748

)

 

 

14,964

 

 

 

9,216

 

Other comprehensive income

 

1,871

 

 

 

-

 

 

 

1,871

 

 

 

(3,877

)

 

 

14,964

 

 

 

11,087

 

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

 

(2,255

)

 

 

-

 

 

 

(2,255

)

Stock-based compensation amortization

 

3,132

 

 

 

-

 

 

 

3,132

 

Dividends paid

 

(10,228

)

 

 

-

 

 

 

(10,228

)

Distributions to noncontrolling interests

 

-

 

 

 

(25,801

)

 

 

(25,801

)

Balance at March 31, 2017

$

799,323

 

 

$

218,133

 

 

$

1,017,456

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2015

$

1,499,854

 

 

$

206,193

 

 

$

1,706,047

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Net income

 

13,001

 

 

 

12,516

 

 

 

25,517

 

Other comprehensive loss

 

(2,822

)

 

 

-

 

 

 

(2,822

)

 

 

10,179

 

 

 

12,516

 

 

 

22,695

 

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

 

(2,649

)

 

 

-

 

 

 

(2,649

)

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

   benefit plans

 

(142

)

 

 

-

 

 

 

(142

)

Stock-based compensation amortization

 

4,404

 

 

 

-

 

 

 

4,404

 

Dividends paid

 

(10,068

)

 

 

-

 

 

 

(10,068

)

Contributions made by noncontrolling interests

 

-

 

 

 

7,168

 

 

 

7,168

 

Distributions to noncontrolling interests

 

-

 

 

 

(16,315

)

 

 

(16,315

)

Purchase of noncontrolling interests

 

(234

)

 

 

(2,158

)

 

 

(2,392

)

Balance at March 31, 2016

$

1,501,344

 

 

$

207,404

 

 

$

1,708,748

 

 

9


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 1 – BASIS OF PRESENTATION (Continued)

Derivative financial instruments

In January 2016, the Company entered into three interest rate swap agreements to hedge its floating interest rate on an aggregate of $325 million of debt outstanding under its Term Loan Facility (as defined in Note 11). The interest rate swaps have an effective date of January 11, 2016, and expire on January 9, 2021. The Company is required to make payments based upon a fixed interest rate of 1.862% and 1.855% calculated on the notional amount of $175 million and $150 million, respectively. In exchange, the Company will receive interest on $325 million at a variable interest rate that is based upon the three-month London Interbank Offered Rate (“LIBOR”), subject to a minimum rate of 1.0%.

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

The interest rate swaps were assessed for hedge effectiveness for accounting purposes and the Company determined the interest rate swaps qualify for cash flow hedge accounting at March 31, 2017. The Company records the effective portion of the gain or loss on these derivative financial instruments in accumulated other comprehensive income (loss) as a component of stockholders’ equity and records the ineffective portion of the gain or loss on these derivative financial instruments as interest expense. For the three months ended March 31, 2017 and 2016, there was no ineffectiveness related to the interest rate swaps.

The aggregate fair value of the interest rate swaps recorded in other accrued liabilities was $1.7 million and $2.7 million at March 31, 2017 and December 31, 2016, respectively.

Variable interest entities

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

Of the Company’s 19 operating IRFs, 17 are partnerships subject to an operating and management services agreement. Under United States generally accepted accounting principles (“GAAP”), the Company determined that 14 of these 17 partnerships qualify as VIEs and concluded that the Company is the primary beneficiary in all but one partnership. The Company holds an ownership interest and acts as manager in each of the partnerships. Through the management services agreement, the Company is delegated necessary responsibilities to provide management services, administrative services and direction of the day-to-day operations. Based upon the Company’s assessment of the most significant activities of the IRFs, the manager has the ability to direct the majority of those activities in 13 of the partnerships.

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

 

 

 


10


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 1 – BASIS OF PRESENTATION (Continued)

Variable interest entities (Continued)

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

 

 

March 31,

 

 

December 31,

 

 

2017

 

 

2016

 

Assets:

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

42,648

 

 

$

41,681

 

Accounts receivable, net

 

35,992

 

 

 

33,996

 

Inventories

 

1,641

 

 

 

1,641

 

Other

 

2,323

 

 

 

2,824

 

 

 

82,604

 

 

 

80,142

 

Property and equipment, net

 

16,090

 

 

 

16,736

 

Goodwill

 

275,375

 

 

 

275,375

 

Intangible assets, net

 

21,630

 

 

 

21,839

 

Other

 

15

 

 

 

15

 

Total assets

$

395,714

 

 

$

394,107

 

Liabilities:

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

22,501

 

 

$

23,345

 

Salaries, wages and other compensation

 

2,162

 

 

 

3,160

 

Other accrued liabilities

 

3,245

 

 

 

3,046

 

Long-term debt due within one year

 

1,433

 

 

 

1,571

 

 

 

29,341

 

 

 

31,122

 

Long-term debt

 

309

 

 

 

455

 

Deferred credits and other liabilities

 

7,870

 

 

 

7,357

 

Total liabilities

$

37,520

 

 

$

38,934

 

Other information

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions for quarterly reports on Form 10-Q of Regulation S-X and do not include all of the disclosures normally required by GAAP or those normally required in annual reports on Form 10-K. Accordingly, these financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended December 31, 2016 filed with the Securities and Exchange Commission (the “SEC”) on Form 10-K. The accompanying condensed consolidated balance sheet at December 31, 2016 was derived from audited consolidated financial statements, but does not include all disclosures required by GAAP.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the Company’s customary accounting practices. Management believes that financial information included herein reflects all adjustments necessary for a fair statement of interim results and, except as otherwise disclosed, all such adjustments are of a normal and recurring nature.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP and include amounts based upon the estimates and judgments of management. Actual amounts may differ from those estimates.

Reclassifications

Certain prior period amounts have been reclassified to conform with the current period presentation.


11


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 2 – 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 resulted from negotiations with each of the sellers that were based upon both the historical and expected future cash flows of the respective businesses. Each of these acquisitions was financed through operating cash flows and borrowings under the Company’s ABL Facility (as defined in Note 11). Unaudited pro forma financial data related to the acquired businesses have not been presented because the acquisitions are not material individually to the Company’s consolidated financial statements.

During the first quarter of 2017, the Company acquired two home health businesses for $3.2 million in cash.

During the first quarter of 2016, the Company acquired four home health and hospice businesses for $26.3 million in cash. The Company also acquired a hospice business in exchange for $9.0 million of outstanding accounts receivable owed to the Company.

 

NOTE 3 – DISCONTINUED OPERATIONS

In accordance with the authoritative guidance for the impairment or disposal of long-lived assets, the divestitures of unprofitable businesses discussed in Note 1 have been accounted for as discontinued operations. Accordingly, the results of operations of these businesses for all periods presented and the gains or losses associated with these transactions have been classified as discontinued operations, net of income taxes, in the accompanying unaudited condensed consolidated statement of operations based upon the authoritative guidance which was in effect through December 31, 2014. Effective January 1, 2015, the authoritative guidance modified the requirements for reporting discontinued operations. A disposal is now required to be reported in discontinued operations only if the disposal represents a strategic shift that has (or will have) a major effect on the Company’s operations and financial results.

A summary of discontinued operations follows (in thousands):

 

 

Three months ended

 

 

March 31,

 

 

2017

 

 

2016

 

Revenues

$

508

 

 

$

3,514

 

Salaries, wages and benefits

 

2

 

 

 

1,722

 

Supplies

 

-

 

 

 

134

 

Rent

 

466

 

 

 

766

 

Other operating expenses

 

13

 

 

 

529

 

General and administrative expenses (income)

 

(360

)

 

 

1,222

 

Depreciation

 

-

 

 

 

102

 

Investment income

 

-

 

 

 

(1

)

 

 

121

 

 

 

4,474

 

Income (loss) from operations before income taxes

 

387

 

 

 

(960

)

Income tax benefit

 

-

 

 

 

(378

)

Income (loss) from operations

 

387

 

 

 

(582

)

Gain on divestiture of operations

 

-

 

 

 

262

 

Income (loss) from discontinued operations

 

387

 

 

 

(320

)

(Earnings) loss attributable to noncontrolling interests

 

1

 

 

 

(2

)

Income (loss) attributable to Kindred

$

388

 

 

$

(322

)


12


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 3 – DISCONTINUED OPERATIONS (Continued)

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

 

 

Three months ended

 

 

March 31,

 

 

2017

 

 

2016

 

Revenues:

 

 

 

 

 

 

 

Hospital division

$

502

 

 

$

460

 

Nursing center division

 

6

 

 

 

3,054

 

 

$

508

 

 

$

3,514

 

Segment EBITDAR:

 

 

 

 

 

 

 

Hospital division

$

967

 

 

$

497

 

Nursing center division

 

(114

)

 

 

(590

)

 

$

853

 

 

$

(93

)

Rent:

 

 

 

 

 

 

 

Hospital division

$

466

 

 

$

462

 

Nursing center division

 

-

 

 

 

304

 

 

$

466

 

 

$

766

 

Depreciation:

 

 

 

 

 

 

 

Hospital division

$

-

 

 

$

-

 

Nursing center division

 

-

 

 

 

102

 

 

$

-

 

 

$

102

 

 

 

NOTE 4 – RESTRUCTURING CHARGES

The Company has initiated various restructuring activities whereby it has incurred costs associated with reorganizing its operations, including the divestiture, swap, closure and consolidation of facilities and branches, reduced headcount and realigned operations in order to improve cost efficiencies in response to changes in the healthcare industry and to partially mitigate reductions in reimbursement rates from third party payors. The costs associated with these activities are reported as restructuring charges in the statement of operations and would have been recorded as general and administrative expense or rent expense if not classified as restructuring charges.

 

The following table sets forth the restructuring charges incurred by business segment (in thousands):

 

 

Three months ended

 

 

March 31,

 

 

2017

 

 

2016

 

Kindred at Home:

 

 

 

 

 

 

 

Home health

$

5,932

 

 

$

175

 

Hospice

 

2,386

 

 

 

417

 

 

 

8,318

 

 

 

592

 

Hospital division

 

972

 

 

 

924

 

Kindred Rehabilitation Services:

 

 

 

 

 

 

 

Kindred Hospital Rehabilitation Services

 

-

 

 

 

-

 

RehabCare

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Nursing center division

 

6,166

 

 

 

-

 

Support center

 

716

 

 

 

436

 

 

$

16,172

 

 

$

1,952

 


13


KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 4 RESTRUCTURING CHARGES (Continued)

Restructuring Activities:

Skilled Nursing Facility Business Exit

During the fourth quarter of 2016, the Company approved the strategic plan to exit the skilled nursing facility business as an owner and operator. As a result, the Company plans to optimize its overhead structure by eliminating divisional and corporate overhead above the facility level. The activities related to the skilled nursing facility business exit plan include retention, lease terminations costs, facility closure costs, and professional and other costs, which are expected to be substantially complete in 2018.

The composition of the restructuring charges that the Company has incurred for these activities is as follows (in thousands):

 

 

Three months ended

 

 

March 31,

 

 

2017

 

 

2016

 

Retention

$

5,807

 

 

$

-

 

Professional and other costs

 

359

 

 

 

-

 

 

$

6,166

 

 

$

-

 

 

The following table summarizes the Company’s skilled nursing facility business exit plan restructuring liability activity (included in current liabilities) during the three months ended March 31, 2017 (in thousands):

 

 

Retention

 

 

Professional and other costs

 

 

Total

 

Liability balance at December 31, 2016

$

3,920

 

 

$

420

 

 

$

4,340

 

Expense

 

5,807

 

 

 

359

 

 

 

6,166

 

Payments

 

(30

)

 

 

(470

)

 

 

(500

)

Liability balance at March 31, 2017

$

9,697