XNYS:KND Kindred Healthcare Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

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   þ     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   þ     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   þ   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   þ

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, 2012

Common stock, $0.25 par value   52,897,749 shares

 

 

 

 

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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,  2012 and 2011

     3   
  

Condensed Consolidated Statement of Comprehensive Income—for the three months ended March  31, 2012 and 2011

     4   
  

Condensed Consolidated Balance Sheet—March 31, 2012 and December 31, 2011

     5   
  

Condensed Consolidated Statement of Cash Flows—for the three months ended March 31,  2012 and 2011

     6   
  

Notes to Condensed Consolidated Financial Statements

     7   

Item 2.

  

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

     34   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     63   

Item 4.

  

Controls and Procedures

     64   

PART II.

  

OTHER INFORMATION

  

Item 1.

  

Legal Proceedings

     65   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     65   

Item 6.

  

Exhibits

     66   

 

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KINDRED HEALTHCARE, INC.

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)

(In thousands, except per share amounts)

 

     Three months ended
March 31,
 
     2012     2011  

Revenues

   $ 1,579,970      $ 1,192,421   
  

 

 

   

 

 

 

Salaries, wages and benefits

     945,302        678,695   

Supplies

     111,295        90,022   

Rent

     107,968        91,453   

Other operating expenses

     310,964        259,369   

Other income

     (2,748     (2,785

Impairment charges

     867        —     

Depreciation and amortization

     48,690        32,549   

Interest expense

     26,578        5,728   

Investment income

     (292     (495
  

 

 

   

 

 

 
     1,548,624        1,154,536   
  

 

 

   

 

 

 

Income from continuing operations before income taxes

     31,346        37,885   

Provision for income taxes

     12,814        15,609   
  

 

 

   

 

 

 

Income from continuing operations

     18,532        22,276   

Income (loss) from discontinued operations, net of income taxes

     110        (179
  

 

 

   

 

 

 

Net income

     18,642        22,097   

Earnings attributable to noncontrolling interests

     (451     —     
  

 

 

   

 

 

 

Income attributable to Kindred

   $ 18,191      $ 22,097   
  

 

 

   

 

 

 

Amounts attributable to Kindred stockholders:

    

Income from continuing operations

   $ 18,081      $ 22,276   

Income (loss) from discontinued operations

     110        (179
  

 

 

   

 

 

 

Net income

   $ 18,191      $ 22,097   
  

 

 

   

 

 

 

Earnings per common share:

    

Basic:

    

Income from continuing operations

   $ 0.35      $ 0.56   

Income (loss) from discontinued operations

     —          —     
  

 

 

   

 

 

 

Net income

   $ 0.35      $ 0.56   
  

 

 

   

 

 

 

Diluted:

    

Income from continuing operations

   $ 0.35      $ 0.55   

Income (loss) from discontinued operations

     —          —     
  

 

 

   

 

 

 

Net income

   $ 0.35      $ 0.55   
  

 

 

   

 

 

 

Shares used in computing earnings per common share:

    

Basic

     51,603        39,035   

Diluted

     51,638        39,543   

See accompanying notes.

 

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KINDRED HEALTHCARE, INC.

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

 

     Three months ended
March 31,
 
     2012     2011  

Net income

   $ 18,642      $ 22,097   

Other comprehensive income:

    

Available-for-sale securities:

    

Change in net unrealized investment gains

     1,202        554   

Reclassification of net gains included in net income

     (77     (158
  

 

 

   

 

 

 

Net change

     1,125        396   

Interest rate swaps:

    

Change in unrealized loss

     (131     —     

Reclassification of losses included in net income

     201        —     
  

 

 

   

 

 

 

Net change

     70        —     

Income tax expense related to items of other comprehensive income

     (420     (138
  

 

 

   

 

 

 

Other comprehensive income

     775        258   
  

 

 

   

 

 

 

Comprehensive income

     19,417        22,355   

Earnings attributable to noncontrolling interests

     (451     —     
  

 

 

   

 

 

 

Comprehensive income attributable to Kindred

   $ 18,966      $ 22,355   
  

 

 

   

 

 

 

See accompanying notes.

 

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KINDRED HEALTHCARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited)

(In thousands, except per share amounts)

 

     March 31,
2012
    December 31,
2011
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 40,137      $ 41,561   

Cash—restricted

     5,327        5,551   

Insurance subsidiary investments

     74,462        70,425   

Accounts receivable less allowance for loss of $32,864—March 31, 2012 and $29,746—December 31, 2011

     1,044,401        994,700   

Inventories

     31,155        31,060   

Deferred tax assets

     19,911        17,785   

Income taxes

     7,689        39,513   

Other

     40,186        32,687   
  

 

 

   

 

 

 
     1,263,268        1,233,282   

Property and equipment

     2,053,326        1,975,063   

Accumulated depreciation

     (956,871     (916,022
  

 

 

   

 

 

 
     1,096,455        1,059,041   

Goodwill

     1,084,716        1,084,655   

Intangible assets less accumulated amortization of $21,964—March 31, 2012 and $16,581—December 31, 2011

     441,824        447,207   

Assets held for sale

     4,671        5,612   

Insurance subsidiary investments

     120,184        110,227   

Other

     222,054        198,469   
  

 

 

   

 

 

 

Total assets

   $ 4,233,172      $ 4,138,493   
  

 

 

   

 

 

 
LIABILITIES AND EQUITY     

Current liabilities:

    

Accounts payable

   $ 205,835      $ 216,801   

Salaries, wages and other compensation

     380,981        407,493   

Due to third party payors

     28,330        37,306   

Professional liability risks

     45,257        46,010   

Other accrued liabilities

     131,339        130,693   

Long-term debt due within one year

     10,415        10,620   
  

 

 

   

 

 

 
     802,157        848,923   

Long-term debt

     1,648,071        1,531,882   

Professional liability risks

     223,344        217,717   

Deferred tax liabilities

     17,313        17,955   

Deferred credits and other liabilities

     196,089        191,771   

Noncontrolling interests-redeemable

     9,532        9,704   

Commitments and contingencies

    

Equity:

    

Stockholders’ equity:

    

Common stock, $0.25 par value; authorized 175,000 shares; issued 52,900 shares—March 31, 2012 and 52,116 shares—December 31, 2011

     13,225        13,029   

Capital in excess of par value

     1,135,917        1,138,189   

Accumulated other comprehensive loss

     (694     (1,469

Retained earnings

     157,363        139,172   
  

 

 

   

 

 

 
     1,305,811        1,288,921   

Noncontrolling interests-nonredeemable

     30,855        31,620   
  

 

 

   

 

 

 

Total equity

     1,336,666        1,320,541   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 4,233,172      $ 4,138,493   
  

 

 

   

 

 

 

See accompanying notes.

 

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KINDRED HEALTHCARE, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

(In thousands)

 

     Three months ended
March 31,
 
     2012     2011  

Cash flows from operating activities:

    

Net income

   $ 18,642      $ 22,097   

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

    

Depreciation and amortization

     48,690        32,549   

Amortization of stock-based compensation costs

     1,802        2,644   

Amortization of deferred financing costs

     2,357        846   

Provision for doubtful accounts

     7,496        5,830   

Deferred income taxes

     (3,662     (730

Impairment charges

     867        —     

Other

     426        (476

Change in operating assets and liabilities:

    

Accounts receivable

     (57,197     (36,640

Inventories and other assets

     (15,905     (3,525

Accounts payable

     (9,550     (12,348

Income taxes

     30,502        40,623   

Due to third party payors

     (8,976     (3,022

Other accrued liabilities

     (18,917     (1,412
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (3,425     46,436   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Routine capital expenditures

     (22,106     (24,718

Development capital expenditures

     (10,622     (11,109

Acquisitions

     (50,448     (8,027

Acquisition deposit

     (16,866     —     

Sale of assets

     1,110        1,714   

Purchase of insurance subsidiary investments

     (13,773     (7,817

Sale of insurance subsidiary investments

     14,006        18,656   

Net change in insurance subsidiary cash and cash equivalents

     (13,123     (1,300

Change in other investments

     269        1,000   

Other

     (749     132   
  

 

 

   

 

 

 

Net cash used in investing activities

     (112,302     (31,469
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from borrowings under revolving credit

     515,400        445,200   

Repayment of borrowings under revolving credit

     (397,000     (460,200

Repayment of other long-term debt

     (2,666     (22

Payment of deferred financing costs

     (43     (417

Cash distributed to noncontrolling interests

     (1,388     —     

Issuance of common stock

     —          1,415   

Other

     —          389   
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     114,303        (13,635
  

 

 

   

 

 

 

Change in cash and cash equivalents

     (1,424     1,332   

Cash and cash equivalents at beginning of period

     41,561        17,168   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 40,137      $ 18,500   
  

 

 

   

 

 

 

Supplemental information:

    

Interest payments

   $ 12,108      $ 2,888   

Income tax refunds

     13,956        24,786   

See accompanying notes.

 

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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 long-term acute care (“LTAC”) hospitals, inpatient rehabilitation hospitals (“IRFs”), nursing and rehabilitation 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 March 31, 2012, the Company’s hospital division operated 120 LTAC hospitals and six IRFs in 26 states. The Company’s nursing center division operated 224 nursing and rehabilitation centers and six assisted living facilities in 27 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 52 locations in eight states.

In recent years, the Company has completed several transactions related to the divestiture of unprofitable hospitals and nursing and rehabilitation centers to improve its future operating results. For accounting purposes, the operating results of these businesses have been classified as discontinued operations in the accompanying unaudited condensed consolidated statement of operations for all periods presented. Assets not sold at March 31, 2012 have been measured at the lower of carrying value or estimated fair value less costs of disposal and have been classified as held for sale in the accompanying unaudited condensed consolidated balance sheet. See Note 4 for a summary of discontinued operations.

Recently issued accounting requirements

In September 2011, the Financial Accounting Standards Board (the “FASB”) issued authoritative guidance related to testing goodwill for impairment. The main provisions of the guidance state that an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step goodwill impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform Step 1 of the goodwill impairment test. The guidance is effective for all interim and annual reporting periods beginning after December 15, 2011. 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 July 2011, the FASB issued authoritative guidance related to the presentation and disclosure of patient service revenue, provision for bad debts, and the allowance for doubtful accounts for certain healthcare entities. The provisions of the guidance require healthcare entities that recognize significant amounts of patient service revenue at the time services are rendered, even though they do not assess a patient’s ability to pay, to present the provision for bad debts related to those revenues as a deduction from patient service revenue (net of contractual allowances and discounts), as opposed to an operating expense. All other entities would continue to present the provision for bad debts as an operating expense. The guidance is effective for all interim and annual reporting periods beginning after December 15, 2011. The adoption of the guidance did not have an impact on the Company’s business, financial position, results of operations or liquidity.

In June 2011, the FASB issued authoritative guidance related to the presentation of other comprehensive income. The provisions of the guidance state that an entity has the option to present the total of comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The statement(s) should be presented with equal prominence to the other primary financial

 

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KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 1—BASIS OF PRESENTATION (Continued)

 

Recently issued accounting requirements (Continued)

 

statements. The guidance is effective for all interim and annual reporting periods beginning after December 15, 2011. The adoption of the guidance did not have a material impact on the Company’s business, financial position, results of operations or liquidity.

In December 2011, the FASB amended its authoritative guidance issued in June 2011 related to the presentation of other comprehensive income. The provisions indefinitely defer the requirement to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented, for both interim and annual financial statements. All other requirements of the June 2011 update were not impacted by the amendment which remains effective for all interim and annual reporting periods beginning after December 15, 2011. The adoption of the guidance did not have a material impact on the Company’s business, financial position, results of operations or liquidity.

In May 2011, the FASB issued authoritative guidance related to fair value measurements. The provisions of the guidance result in applying common fair value measurement and disclosure requirements in both United States generally accepted accounting principles and International Financial Reporting Standards. The amendments primarily change the wording used to describe many of the requirements in generally accepted accounting principles for measuring and disclosing information about fair value measurements. The guidance is effective for all interim and annual reporting periods beginning after December 15, 2011. The adoption of the guidance did not have a material impact on the Company’s business, financial position, results of operations or liquidity.

Equity

The following table sets forth a reconciliation of the carrying amount of equity attributable to redeemable noncontrolling interests, equity attributable to Kindred stockholders, equity attributable to nonredeemable noncontrolling interests and total equity (in thousands):

 

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

Balance at December 31, 2011

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

Comprehensive income:

            

Net income

     155            18,191        296        18,487   

Other comprehensive income

     —              775        —          775   
  

 

 

       

 

 

   

 

 

   

 

 

 
     155            18,966        296        19,262   

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

     —              (1,796     —          (1,796

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

     —              (2,082     —          (2,082

Stock-based compensation amortization

           1,802        —          1,802   

Distributions to noncontrolling interests

     (327         —          (1,061     (1,061
  

 

 

       

 

 

   

 

 

   

 

 

 

Balance at March 31, 2012

   $ 9,532          $ 1,305,811      $ 30,855      $ 1,336,666   
  

 

 

       

 

 

   

 

 

   

 

 

 

 

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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 $225.0 million of outstanding Term Loan Facility (as defined in Note 2 below) 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 $225.0 million. In exchange, the Company will receive interest on $225.0 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 were effective cash flow hedges at March 31, 2012. The fair value change of the interest rate swaps was $0.9 million and was recorded in other accrued liabilities at March 31, 2012.

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, 2011 filed with the Securities and Exchange Commission (the “SEC”) on Form 10-K. The accompanying condensed consolidated balance sheet at December 31, 2011 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 presentation 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—REHABCARE ACQUISITION

On June 1, 2011, the Company completed the acquisition of RehabCare Group, Inc. and its subsidiaries (“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 Kindred 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 $962.8 million and was comprised of $662.4 million in cash and $300.4 million of Kindred common stock at fair value. The Company also assumed $355.7 million of long-term debt in the RehabCare Merger, of which $345.4 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.

At the RehabCare Merger date, the Company acquired 32 LTAC hospitals, five IRFs, approximately 1,200 rehabilitation therapy sites of service and 102 hospital-based inpatient rehabilitation units.

 

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KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 2—REHABCARE ACQUISITION (Continued)

 

Operating results in the first quarter of 2012 included transaction costs totaling $0.2 million related to the RehabCare Merger. Operating results in the first quarter of 2011 included transaction costs totaling $3.9 million and financing costs totaling $2.0 million related to the RehabCare Merger. In the accompanying unaudited condensed consolidated statement of operations, transaction costs were included in other operating expenses and financing costs were included in interest expense.

In connection with the RehabCare Merger, the Company entered into a new $650 million senior secured asset-based revolving credit facility (the “ABL Facility”) and a new $700 million senior secured term loan facility (the “Term Loan Facility”) (collectively, the “New Credit Facilities”). The Company also successfully completed the private placement of $550 million of senior notes due 2019 (the “Notes”). The Company used proceeds from the New 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 $390.0 million and $345.4 million, respectively. The New Credit Facilities have incremental facility capacity in an aggregate amount between the two facilities of $200 million, subject to meeting certain conditions, including a specified senior secured leverage ratio. In connection with these new credit arrangements, the Company paid $46.2 million of lender fees related to debt issuance that were capitalized as deferred financing costs and paid $13.1 million of other financing costs that were charged to interest expense during the year of 2011.

Pro forma information

The unaudited pro forma net effect of the RehabCare Merger assuming the acquisition occurred as of January 1, 2010 is as follows (in thousands, except per share amounts):

 

     Three months
ended

March  31,
2011
 

Revenues

   $ 1,557,020   

Income from continuing operations attributable to Kindred

     36,526   

Income attributable to Kindred

     39,315   

Earnings per common share:

  

Basic:

  

Income from continuing operations

   $ 0.71   

Net income

   $ 0.76   

Diluted:

  

Income from continuing operations

   $ 0.70   

Net income

   $ 0.75   

The unaudited pro forma financial data has been derived by combining the historical financial results of the Company and the operations acquired in the RehabCare Merger for the period presented. The unaudited pro forma financial data includes transaction and financing costs totaling $10.7 million incurred by both the Company and RehabCare in connection with the RehabCare Merger. These costs have been eliminated from the results of operations for 2011 and have been reflected as expenses incurred as of January 1, 2010 for purposes of the pro forma financial presentation. Revenues and earnings before interest, income taxes and transaction-related costs associated with RehabCare aggregated $364.5 million and $31.6 million, respectively, for the three months ended March 31, 2012.

 

10


Table of Contents

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 3—OTHER ACQUISITIONS

The following is a summary of the Company’s other significant acquisition activities. The purchase price of the 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 facilities and real estate values. Each of these acquisitions were financed through operating cash flows or borrowings under the Company’s revolving credit facility.

In March 2012, the Company acquired the real estate of a previously leased hospital for $50.4 million. Annual rent associated with the hospital aggregated $4.1 million.

In March 2011, the Company acquired the real estate of a previously leased hospital for $8.0 million. Annual rent associated with the hospital aggregated $0.9 million.

The fair value of each of the assets acquired were measured using discounted cash flow methodologies which are considered Level 3 inputs (as described in Note 11).

NOTE 4—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 have been classified as discontinued operations, net of income taxes, in the accompanying unaudited condensed consolidated statement of operations. At March 31, 2012, the Company held for sale two hospitals reported as discontinued operations.

A summary of discontinued operations follows (in thousands):

 

     Three months ended
March 31,
 
     2012     2011  

Revenues

   $ 80      $ (31
  

 

 

   

 

 

 

Salaries, wages and benefits

     (98     (156

Supplies

     —          (2

Rent

     30        29   

Other operating expenses (income)

     (32     390   

Depreciation

     —          —     

Interest expense

     —          —     

Investment income

     —          —     
  

 

 

   

 

 

 
     (100     261   
  

 

 

   

 

 

 

Income (loss) from operations before income taxes

     180        (292

Provision (benefit) for income taxes

     70        (113
  

 

 

   

 

 

 

Income (loss) from operations

   $ 110      $ (179
  

 

 

   

 

 

 

 

11


Table of Contents

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 4—DISCONTINUED OPERATIONS (Continued)

 

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

 

     Three months ended
March 31,
 
     2012     2011  

Revenues:

    

Hospital division

   $ 18      $ (35

Nursing center division

     62        4   
  

 

 

   

 

 

 
   $ 80      $ (31
  

 

 

   

 

 

 

Operating income (loss):

    

Hospital division

   $ (303   $ (416

Nursing center division

     513        153   
  

 

 

   

 

 

 
   $ 210      $ (263
  

 

 

   

 

 

 

Rent:

    

Hospital division

   $ 29      $ 29   

Nursing center division

     1        —     
  

 

 

   

 

 

 
   $ 30      $ 29   
  

 

 

   

 

 

 

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

 

     March 31,
2012
     December 31,
2011
 

Long-term assets:

     

Property and equipment, net

   $ 4,659       $ 5,607   

Other

     12         5   
  

 

 

    

 

 

 
     4,671         5,612   

Current liabilities (included in other accrued liabilities)

     —           (118
  

 

 

    

 

 

 
   $ 4,671       $ 5,494   
  

 

 

    

 

 

 

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
March 31,
 
     2012     2011  

Medicare

   $ 678,924      $ 555,790   

Medicaid

     264,238        259,679   

Medicare Advantage

     118,413        95,381   

Other

     606,819        360,742   
  

 

 

   

 

 

 
     1,668,394        1,271,592   

Eliminations

     (88,424     (79,171
  

 

 

   

 

 

 
   $ 1,579,970      $ 1,192,421   
  

 

 

   

 

 

 

 

12


Table of Contents

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 6—EARNINGS PER SHARE

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

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

 

     Three months ended March 31,  
     2012     2011  
     Basic     Diluted     Basic     Diluted  

Earnings:

        

Income from continuing operations:

        

As reported in Statement of Operations

   $ 18,081      $ 18,081      $ 22,276      $ 22,276   

Allocation to participating unvested restricted stockholders

     (247     (247     (428     (423
  

 

 

   

 

 

   

 

 

   

 

 

 

Available to common stockholders

   $ 17,834      $ 17,834      $ 21,848      $ 21,853   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from discontinued operations, net of income taxes:

        

As reported in Statement of Operations

   $ 110      $ 110      $ (179   $ (179

Allocation to participating unvested restricted stockholders

     (1     (1     3        3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Available to common stockholders

   $ 109      $ 109      $ (176   $ (176
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income:

        

As reported in Statement of Operations

   $ 18,191      $ 18,191      $ 22,097      $ 22,097   

Allocation to participating unvested restricted stockholders

     (248     (248     (425     (420
  

 

 

   

 

 

   

 

 

   

 

 

 

Available to common stockholders

   $ 17,943      $ 17,943      $ 21,672      $ 21,677   
  

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in the computation:

        

Weighted average shares outstanding—basic computation

     51,603        51,603        39,035        39,035   
  

 

 

     

 

 

   

Dilutive effect of employee stock options

       35          508   
    

 

 

     

 

 

 

Adjusted weighted average shares outstanding—diluted computation

       51,638          39,543   
    

 

 

     

 

 

 

Earnings per common share:

        

Income from continuing operations

   $ 0.35      $ 0.35      $ 0.56      $ 0.55   

Income (loss) from discontinued operations

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 0.35      $ 0.35      $ 0.56      $ 0.55   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

       2,562          1,164   

 

13


Table of Contents

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 7—BUSINESS SEGMENT DATA

The Company is organized into four operating divisions: the hospital division, the nursing center division, the rehabilitation division and the home health and hospice division. The expansion of the Company’s home health and hospice operations and changes to the Company’s organizational structure have led the Company to segregate its home health and hospice business into a separate division. The Company’s home health and hospice division was previously included in the rehabilitation division. Based upon the authoritative guidance for business segments and after giving consideration to the Company’s business segments after the RehabCare Merger, the operating divisions represent five reportable operating segments, including (i) hospitals, (ii) skilled nursing and rehabilitation centers, (iii) skilled nursing-based rehabilitation contract therapy services, (iv) hospital-based rehabilitation contract therapy services and (v) home health and hospice services. These reportable operating segments are consistent with information used by the Company’s Chief Executive Officer 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 restated 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. Operating income reported for each of the Company’s operating segments excludes impairment charges, transaction costs and the allocation of corporate overhead.

Operating income for the hospital division for the three months ended March 31, 2012 included severance ($2.0 million) and other miscellaneous costs ($0.3 million) incurred in connection with the closing of a regional office and a LTAC hospital.

 

14


Table of Contents

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 7—BUSINESS SEGMENT DATA (Continued)

 

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

 

     Three months ended
March 31,
 
     2012     2011  

Revenues:

    

Hospital division

   $ 765,823      $ 558,974   

Nursing center division

     544,319        567,472   

Rehabilitation division:

    

Skilled nursing rehabilitation services

     255,451        114,618   

Hospital rehabilitation services

     74,369        22,490   
  

 

 

   

 

 

 
     329,820        137,108   

Home health and hospice division

     28,432        8,038   
  

 

 

   

 

 

 
     1,668,394        1,271,592   

Eliminations:

    

Skilled nursing rehabilitation services

     (58,433     (57,081

Hospital rehabilitation services

     (28,317     (21,225

Nursing and rehabilitation centers

     (1,674     (865
  

 

 

   

 

 

 
     (88,424     (79,171
  

 

 

   

 

 

 
   $ 1,579,970      $ 1,192,421   
  

 

 

   

 

 

 

Income from continuing operations:

    

Operating income (loss):

    

Hospital division

   $ 160,669      $ 108,385   

Nursing center division

     65,533        87,350   

Rehabilitation division:

    

Skilled nursing rehabilitation services

     14,193        9,159   

Hospital rehabilitation services

     16,116        5,332   
  

 

 

   

 

 

 
     30,309        14,491   

Home health and hospice division

     2,341        (10

Corporate:

    

Overhead

     (42,728     (38,315

Insurance subsidiary

     (482     (602
  

 

 

   

 

 

 
     (43,210     (38,917

Impairment charges

     (867     —     

Transaction costs

     (485     (4,179
  

 

 

   

 

 

 

Operating income

     214,290        167,120   

Rent

     (107,968     (91,453

Depreciation and amortization

     (48,690     (32,549

Interest, net

     (26,286     (5,233
  

 

 

   

 

 

 

Income from continuing operations before income taxes

     31,346        37,885   

Provision for income taxes

     12,814        15,609   
  

 

 

   

 

 

 
   $ 18,532      $ 22,276   
  

 

 

   

 

 

 

 

15


Table of Contents

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 7—BUSINESS SEGMENT DATA (Continued)

 

     Three months ended
March 31,
 
     2012      2011  

Rent:

     

Hospital division

   $ 55,367       $ 40,299   

Nursing center division

     49,938         49,384   

Rehabilitation division:

     

Skilled nursing rehabilitation services

     1,392         1,509   

Hospital rehabilitation services

     78         28   
  

 

 

    

 

 

 
     1,470         1,537   

Home health and hospice division

     615         189   

Corporate

     578         44   
  

 

 

    

 

 

 
   $ 107,968       $ 91,453   
  

 

 

    

 

 

 

Depreciation and amortization:

     

Hospital division

   $ 22,603       $ 14,278   

Nursing center division

     12,741         11,793   

Rehabilitation division:

     

Skilled nursing rehabilitation services

     2,628         654   

Hospital rehabilitation services

     2,324         97   
  

 

 

    

 

 

 
     4,952         751   

Home health and hospice division

     898         105   

Corporate

     7,496         5,622   
  

 

 

    

 

 

 
   $ 48,690       $ 32,549   
  

 

 

    

 

 

 

Capital expenditures, excluding acquisitions (including discontinued operations):

     

Hospital division:

     

Routine

   $ 10,345       $ 12,144   

Development

     9,949         7,777   
  

 

 

    

 

 

 
     20,294         19,921   

Nursing center division:

     

Routine

     4,229         8,155   

Development

     673         3,322   
  

 

 

    

 

 

 
     4,902         11,477   

Rehabilitation division:

     

Skilled nursing rehabilitation services:

     

Routine

     326         235   

Development

     —           —     
  

 

 

    

 

 

 
     326         235   

Hospital rehabilitation services:

     

Routine

     46         25   

Development

     —           —     
  

 

 

    

 

 

 
     46         25   

Home health and hospice division:

     

Routine

     751         20   

Development

     —           10   
  

 

 

    

 

 

 
     751         30   

Corporate:

     

Information systems

     6,237         3,932   

Other

     172         207   
  

 

 

    

 

 

 
   $ 32,728       $ 35,827   
  

 

 

    

 

 

 

 

16


Table of Contents

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 7—BUSINESS SEGMENT DATA (Continued)

 

     March 31,
2012
     December 31,
2011
 

Assets at end of period:

     

Hospital division

   $ 2,121,862       $ 2,056,103   

Nursing center division

     641,637         638,078   

Rehabilitation division:

     

Skilled nursing rehabilitation services

     441,294         425,499   

Hospital rehabilitation services

     342,795         347,491   
  

 

 

    

 

 

 
     784,089         772,990   

Home health and hospice division

     107,340         104,374   

Corporate

     578,244         566,948   
  

 

 

    

 

 

 
   $ 4,233,172       $ 4,138,493   
  

 

 

    

 

 

 

Goodwill:

     

Hospital division

   $ 745,450       $ 745,411   

Rehabilitation division:

     

Skilled nursing rehabilitation services

     107,036         107,026   

Hospital rehabilitation services

     167,765         167,753   
  

 

 

    

 

 

 
     274,801         274,779   

Home health and hospice division

     64,465         64,465   
  

 

 

    

 

 

 
   $ 1,084,716       $ 1,084,655   
  

 

 

    

 

 

 

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
March 31,
 
     2012     2011  

Professional liability:

    

Continuing operations

   $ 19,066      $ 17,760   

Discontinued operations

     (317     121   

Workers compensation:

    

Continuing operations

   $ 15,118      $ 13,068   

Discontinued operations

     (147     (301

 

17


Table of Contents

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 8—INSURANCE RISKS (Continued)

 

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

 

     March 31, 2012      December 31, 2011  
     Professional
liability
     Workers
compensation
     Total      Professional
liability
     Workers
compensation
     Total  

Assets:

                 

Current:

                 

Insurance subsidiary investments

   $ 44,096       $ 30,366       $ 74,462       $ 44,678       $ 25,747       $ 70,425   

Reinsurance recoverables

     60         —           60         323         —           323   

Other

     —           150         150         —           150         150   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     44,156         30,516         74,672         45,001         25,897         70,898   

Non-current:

                 

Insurance subsidiary investments

     55,853         64,331         120,184         39,048         71,179         110,227   

Reinsurance and other recoverables

     47,916         69,546         117,462         44,356         64,704         109,060   

Deposits

     3,977         1,574         5,551         3,643         1,623         5,266   

Other

     —           42         42         —           42         42   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     107,746         135,493         243,239         87,047         137,548         224,595   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 151,902       $ 166,009       $ 317,911       $ 132,048       $ 163,445       $ 295,493   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

                 

Allowance for insurance risks:

                 

Current

   $ 45,257       $ 35,043       $ 80,300       $ 46,010       $ 32,198       $ 78,208   

Non-current

     223,344         142,635         365,979         217,717         138,489         356,206   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 268,601       $ 177,678       $ 446,279       $ 263,727       $ 170,687       $ 434,414   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 2012 and 2011 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 $271.3 million at March 31, 2012 and $266.5 million at December 31, 2011.

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

NOTE 9—INSURANCE SUBSIDIARY INVESTMENTS

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

 

18


Table of Contents

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 9—INSURANCE SUBSIDIARY INVESTMENTS (Continued)

 

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

 

    March 31, 2012     December 31, 2011  
    Amortized
cost
    Unrealized
gains
    Unrealized
losses
    Fair
value
    Amortized
cost
    Unrealized
gains
    Unrealized
losses
    Fair
value
 

Cash and cash equivalents (a)

  $ 132,000      $ —        $ —        $ 132,000      $ 118,877      $ —        $ —        $ 118,877   

Debt securities:

               

Corporate bonds

    21,841        156        (19     21,978        23,134        163        (48     23,249   

Debt securities issued by U.S. government agencies

    19,021        119        (4     19,136        18,173        120        (5     18,288   

U.S. Treasury notes

    3,111        6        (1     3,116        3,867        10        —          3,877   

Debt securities issued by foreign governments

    625        6        —          631        625        8        —          633   

Commercial mortgage-backed securities

    134        5        —          139        137        6        —          143   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    44,732        292        (24     45,000        45,936        307        (53     46,190   

Equities by industry:

               

Healthcare

    1,474        83        (56     1,501        1,474        77        (72     1,479   

Financial services

    1,150        246        (45     1,351        1,150        89        (120     1,119   

Oil and gas

    921        202        (110     1,013        921        131        (117     935   

Other

    7,594        1,561        (232     8,923        7,594        1,006        (454     8,146   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    11,139        2,092        (443     12,788        11,139        1,303        (763     11,679   

Certificates of deposit

    4,855        3        —          4,858        3,905        3        (2     3,906   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 192,726      $ 2,387      $ (467   $ 194,646      $ 179,857      $ 1,613      $ (818   $ 180,652   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Includes $2.7 million and $2.2 million of money market funds at March 31, 2012 and December 31, 2011, 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 March 31, 2012 and 2011 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 2011, the Company made a capital contribution of $8.6 million during the first quarter of 2012 to its limited purpose insurance subsidiary. Conversely, as a result of improved professional liability underwriting results of the Company’s limited purpose insurance subsidiary in 2010, the Company received a distribution of $3.5 million during the first quarter of 2011 from its limited purpose insurance subsidiary. Both were completed in accordance with applicable regulations. The contribution and distribution had no impact on earnings.

 

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KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 10—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.

Litigation—The Company is a party to various legal actions (some of which are not insured), and regulatory and other governmental audits and investigations in the ordinary course of business. The Company cannot predict the ultimate outcome of pending litigation and regulatory and other governmental audits and investigations. These matters could potentially subject the Company to sanctions, damages, recoupments, fines and other penalties. The U.S. Department of Justice (the “DOJ”), the Centers for Medicare and Medicaid Services (“CMS”) or other federal and state enforcement and regulatory agencies may conduct additional investigations related to the Company’s businesses in the future which may, either individually or in the aggregate, have a material adverse effect on the Company’s business, financial position, results of operations and liquidity. See Note 13.

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.

 

20


Table of Contents

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 11—FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

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

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

 

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

 

21


Table of Contents

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 11—FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS (Continued)

 

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

 

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

March 31, 2012:

         

Recurring:

         

Assets:

         

Available-for-sale debt securities:

         

Corporate bonds

  $ —        $ 21,978      $ —        $ 21,978      $ —     

Debt securities issued by U.S. government agencies

    —          19,136        —          19,136        —     

U.S. Treasury notes

    3,116        —          —          3,116        —     

Debt securities issued by foreign governments

    —          631        —          631        —     

Commercial mortgage-backed securities

    —          139        —          139        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    3,116        41,884        —          45,000        —     

Available-for-sale equity securities

    12,788        —          —          12,788        —     

Money market funds

    6,529        —          —          6,529        —     

Certificates of deposit

    —          4,858        —          4,858        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale investments

    22,433        46,742        —          69,175        —     

Deposits held in money market funds

    351        3,977        —          4,328        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 22,784      $ 50,719      $ —        $ 73,503      $ —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

         

Interest rate swaps

  $ —        $ (945   $ —        $ (945   $ —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-recurring:

         

Assets:

         

Property and equipment

  $ —        $ —        $ 97      $ 97        (867
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

  $ —        $ —        $ —        $ —        $ —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2011:

         

Recurring:

         

Assets:

         

Available-for-sale debt securities:

         

Corporate bonds

  $ —        $ 23,249      $ —        $ 23,249      $ —     

Debt securities issued by U.S. government agencies

    —          18,288        —          18,288        —     

U.S. Treasury notes

    3,877        —          —          3,877        —     

Debt securities issued by foreign governments

    —          633        —          633        —     

Commercial mortgage-backed securities

    —          143        —          143        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    3,877        42,313        —          46,190        —     

Available-for-sale equity securities

    11,679        —          —          11,679        —     

Money market funds

    6,263        —          —          6,263        —     

Certificates of deposit

    —          3,906        —          3,906        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale investments

    21,819        46,219        —          68,038        —     

Deposits held in money market funds

    353        3,643        —          3,996        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 22,172      $ 49,862      $ —        $ 72,034      $ —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

         

Interest rate swaps

  $ —        $ (815   $ —        $ (815   $ —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-recurring:

         

Assets:

         

Hospital available for sale

  $ —        $ —        $ 1,200      $ 1,200      $ (1,490

Property and equipment

    —          —          6,604        6,604        (22,836

Goodwill—nursing and rehabilitation centers

    —          —          —          —          (6,080

Goodwill—skilled nursing rehabilitation services

    —          —          107,026        107,026        (45,999

Intangible assets—certificates of need

    —          —          1,000        1,000        (54,366
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ —        $ —        $ 115,830      $ 115,830      $ (130,771
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

  $ —        $ —        $ —        $ —        $ —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

22


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KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 11—FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS (Continued)

 

Recurring measurements

The Company’s available-for-sale investments are held by its limited purpose insurance subsidiary and 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 $129.3 million as of March 31, 2012 and $116.7 million as of December 31, 2011, 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 $3.8 million 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 months ended March 31, 2012 or March 31, 2011.

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

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

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

 

     March 31, 2012      December 31, 2011  

(In thousands)

   Carrying
value
     Fair
value
     Carrying
value
     Fair
value
 

Cash and cash equivalents

   $ 40,137       $ 40,137       $ 41,561       $ 41,561   

Cash–restricted

     5,327         5,327         5,551         5,551   

Insurance subsidiary investments

     194,646         194,646         180,652         180,652   

Tax refund escrow investments

     209         209         211         211   

Long-term debt, including amounts due within one year (excluding capital lease obligations totaling
$3.1 million and $3.9 million at March 31, 2012 and December 31, 2011, respectively)

     1,655,376         1,551,820         1,538,557         1,406,751   

Non-recurring measurements

On July 29, 2011, CMS issued final rules which, among other things, significantly reduced Medicare payments to nursing centers and changed the reimbursement for the provision of group rehabilitation therapy services to Medicare beneficiaries beginning October 1, 2011 (the “2011 CMS Rules”). In connection with the preparation of

 

23


Table of Contents

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 11—FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS (Continued)

 

Non-recurring measurements (Continued)

 

the Company’s operating results for the third quarter of 2011, 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 and rehabilitation 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 $0.9 million in the first quarter of 2012 for necessary property and equipment expenditures in impaired nursing and rehabilitation center asset groups. These charges reflected the amount by which the carrying value of certain assets exceeded their estimated fair value. The fair value of property and equipment was measured using Level 3 inputs such as replacement costs factoring in depreciation, economic obsolesce and inflation trends.

NOTE 12—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 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.

 

24


Table of Contents

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 12—CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

 

The following unaudited condensed consolidating financial data presents the financial position of the parent company/issuer, the guarantor subsidiaries and the non-guarantor subsidiaries as of March 31, 2012 and December 31, 2011, and the respective results of operations and cash flows for the three months ended March 31, 2012 and 2011.

Condensed Consolidating Statement of Operations and Comprehensive Income

 

    Three months ended March 31, 2012  

(In thousands)

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

Revenues

  $ —        $ 1,478,234      $ 126,848      $ (25,112   $ 1,579,970   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Salaries, wages and benefits

    69        901,413        43,820        —          945,302   

Supplies

    —          101,298        9,997        —          111,295   

Rent

    —          100,055        7,913        —          107,968   

Other operating expenses

    3        286,159        49,914        (25,112     310,964   

Other income

    —          (2,748     —          —          (2,748

Impairment charges

    —          867        —          —          867   

Depreciation and amortization

    —          45,309        3,381        —          48,690   

Management fees

    —          (3,348     3,348        —          —     

Intercompany interest (income) expense from affiliates

    (27,907     24,277        3,630        —          —     

Interest expense (income)

    26,293        (4,762     5,047        —          26,578   

Investment income

    —          (27     (265     —          (292

Equity in net income of consolidating affiliates

    (17,218     —          —          17,218        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    (18,760     1,448,493        126,785        (7,894     1,548,624   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

    18,760        29,741        63        (17,218     31,346   

Provision for income taxes

    569        12,138        107        —          12,814   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

    18,191        17,603        (44     (17,218     18,532   

Income from discontinued operations, net of income taxes

    —          110        —          —          110   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    18,191        17,713        (44     (17,218     18,642   

Earnings attributable to noncontrolling interests

    —          —          (451     —          (451
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) attributable to Kindred

  $ 18,191      $ 17,713      $ (495   $ (17,218   $ 18,191   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

  $ 18,966      $ 17,713      $ 688      $ (17,950   $ 19,417   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Kindred

  $ 18,966      $ 17,713      $ 237      $ (17,950   $ 18,966   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

25


Table of Contents

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 12—CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

 

Condensed Consolidating Statement of Operations and Comprehensive Income (Continued)

 

     Three months ended March 31, 2011  

(In thousands)

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

Revenues

   $ —        $ 1,192,066      $ 21,285      $ (20,930   $ 1,192,421   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Salaries, wages and benefits

     126        678,569        —          —          678,695   

Supplies

     —          90,022        —          —          90,022   

Rent

     3        91,450        —          —          91,453   

Other operating expenses

     31        258,735        21,533        (20,930     259,369   

Other income

     —          (2,785     —          —          (2,785

Depreciation and amortization

     —          32,549        —          —          32,549   

Intercompany interest (income) expense from affiliates

     (9,474     9,474        —          —          —     

Interest expense

     5,699        29        —          —          5,728   

Investment income

     —          (22     (473     —          (495

Equity in net income of consolidating affiliates

     (19,874     —          —          19,874        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     (23,489     1,158,021        21,060        (1,056     1,154,536   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     23,489        34,045        225        (19,874     37,885   

Provision for income taxes

     1,392        14,125        92        —          15,609   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     22,097        19,920        133        (19,874     22,276   

Loss from discontinued operations, net of income taxes

     —          (179     —          —          (179
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 22,097      $ 19,741      $ 133      $ (19,874   $ 22,097   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 22,355      $ 19,741      $ 391      $ (20,132   $ 22,355   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

26


Table of Contents

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 12—CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

 

Condensed Consolidating Balance Sheet

 

    As of March 31, 2012  

(In thousands)

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

Current assets:

         

Cash and cash equivalents

  $ —        $ 23,587      $ 16,550      $ —        $ 40,137   

Cash—restricted

    —          5,327        —          —          5,327   

Insurance subsidiary investments

    —          —          74,462        —          74,462   

Accounts receivable, net

    —          971,176        73,225        —          1,044,401   

Inventories

    —          28,269        2,886        —          31,155   

Deferred tax assets

    —          19,911        —          —          19,911   

Income taxes

    —          7,333        356        —          7,689   

Other

    —          37,700        2,486        —          40,186   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    —          1,093,303        169,965        —          1,263,268   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property and equipment, net

    —          1,045,897        50,558        —          1,096,455   

Goodwill

    —          815,816        268,900        —          1,084,716   

Intangible assets, net

    —          415,085        26,739        —          441,824   

Assets held for sale

    —          4,671        —          —          4,671   

Insurance subsidiary investments

    —          —          120,184        —          120,184   

Investment in subsidiaries

    282,730        —          —          (282,730     —     

Other

    50,314        114,320        57,420        —          222,054   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 333,044      $ 3,489,092      $ 693,766      $ (282,730   $ 4,233,172   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
LIABILITIES AND EQUITY          

Current liabilities:

         

Accounts payable

  $ 8      $ 187,586      $ 18,241      $ —        $ 205,835   

Salaries, wages and other compensation

    212        341,231        39,538        —          380,981   

Due to third party payors

    —          28,330        —          —          28,330   

Professional liability risks

    —          3,872        41,385        —          45,257   

Other accrued liabilities

    945        124,054        6,340        —          131,339   

Long-term debt due within one year

    7,000        98        3,317        —          10,415   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    8,165        685,171        108,821        —          802,157   

Long-term debt

    1,643,483        435        4,153        —          1,648,071   

Intercompany

    (2,624,049     2,292,070        331,979        —          —     

Professional liability risks

    —          107,385        115,959        —          223,344   

Deferred tax liabilities

    (366     29,672        (11,993     —          17,313   

Deferred credits and other liabilities

    —          136,641        59,448        —          196,089   

Noncontrolling interests-redeemable

    —          —          9,532        —          9,532   

Commitments and contingencies

         

Equity:

         

Stockholders’ equity

    1,305,811        237,718        45,012        (282,730     1,305,811   

Noncontrolling interests-nonredeemable

    —          —          30,855        —          30,855   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    1,305,811        237,718        75,867        (282,730     1,336,666   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 333,044      $ 3,489,092      $ 693,766      $ (282,730   $ 4,233,172   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

27


Table of Contents

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 12—CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

 

Condensed Consolidating Balance Sheet (Continued)

 

    As of December 31, 2011  

(In thousands)

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

Current assets:

         

Cash and cash equivalents

  $ —        $ 21,825      $ 19,736      $ —        $ 41,561   

Cash—restricted

    —          5,551        —          —          5,551   

Insurance subsidiary investments

    —          —          70,425        —          70,425   

Accounts receivable, net

    —          908,100        86,600        —          994,700   

Inventories

    —          28,220        2,840        —          31,060   

Deferred tax assets

    —          17,785        —          —          17,785   

Income taxes

    —          39,513        —          —          39,513   

Other

    —          30,489        2,198        —          32,687   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    —          1,051,483        181,799        —          1,233,282   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property and equipment, net

    —          1,007,187        51,854        —          1,059,041   

Goodwill

    —          815,787        268,868        —          1,084,655   

Intangible assets, net

    —          420,468        26,739        —          447,207   

Assets held for sale

    —          5,612        —          —          5,612   

Insurance subsidiary investments

    —          —          110,227        —          110,227   

Investment in subsidiaries

    266,817        —          —          (266,817     —     

Other

    52,623        92,231        53,615        —          198,469   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 319,440      $ 3,392,768      $ 693,102      $ (266,817   $ 4,138,493   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
LIABILITIES AND EQUITY          

Current liabilities:

         

Accounts payable

  $ 102      $ 196,326      $ 20,373      $ —        $ 216,801   

Salaries, wages and other compensation

    43        371,022        36,428        —          407,493   

Due to third party payors

    —          37,306        —          —          37,306   

Professional liability risks

    —          3,582        42,428        —          46,010   

Other accrued liabilities

    —          121,959        8,734        —          130,693   

Income taxes

    —          329        (329     —          —     

Long-term debt due within one year

    7,000        96        3,524        —          10,620   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    7,145        730,620        111,158        —          848,923   

Long-term debt

    1,526,583        460        4,839        —          1,531,882   

Intercompany

    (2,503,209     2,169,985        333,224        —          —     

Professional liability risks

    —          108,853        108,864        —          217,717   

Deferred tax liabilities

    —          30,342        (12,387     —          17,955   

Deferred credits and other liabilities

    —          130,466        61,305        —          191,771   

Noncontrolling interests-redeemable

    —          —          9,704        —          9,704   

Commitments and contingencies

         

Equity:

         

Stockholders’ equity

    1,288,921        222,042        44,775        (266,817     1,288,921   

Noncontrolling interests-nonredeemable

    —          —          31,620        —          31,620   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    1,288,921        222,042        76,395        (266,817     1,320,541   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 319,440      $ 3,392,768      $ 693,102      $ (266,817   $ 4,138,493   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

28


Table of Contents

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 12—CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

 

Condensed Consolidating Statement of Cash Flows

 

    Three months ended March 31, 2012  

(In thousands)

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

Net cash provided by (used in) operating activities

  $ 2,431      $ (12,603   $ 6,747      $ —        $ (3,425
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

         

Routine capital expenditures

    —          (20,940     (1,166     —          (22,106

Development capital expenditures

    —          (9,703     (919     —          (10,622

Acquisitions

    —          (50,448     —          —          (50,448

Acquisition deposit

    —          (16,866     —          —          (16,866

Sale of assets

    —          1,110        —          —          1,110   

Purchase of insurance subsidiary investments

    —          —          (13,773     —          (13,773

Sale of insurance subsidiary investments

    —          —          14,006        —          14,006   

Net change in insurance subsidiary cash and cash equivalents

    —          —          (13,123     —          (13,123

Change in other investments

    —          269        —          —          269   

Capital contribution to insurance subsidiary

    —          (8,600     —          8,600        —     

Other

    —          (749     —          —          (749
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

    —          (105,927     (14,975     8,600        (112,302
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

         

Proceeds from borrowings under revolving credit

    515,400        —          —          —          515,400   

Repayment of borrowings under revolving credit

    (397,000     —          —          —          (397,000

Repayment of other long-term debt

    (1,750     (23     (893     —          (2,666

Payment of deferred financing costs

    (43     —          —          —          (43

Cash distributed to noncontrolling interests

    —          —          (1,388     —          (1,388

Change in intercompany accounts

    (119,038     120,315        (1,277     —          —     

Capital contribution to insurance subsidiary

    —          —          8,600        (8,600     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

    (2,431     120,292        5,042        (8,600     114,303   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in cash and cash equivalents

    —          1,762        (3,186     —          (1,424

Cash and cash equivalents at beginning of period

    —          21,825        19,736        —          41,561   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

  $ —        $ 23,587      $ 16,550      $ —        $ 40,137   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

29


Table of Contents

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

NOTE 12—CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

 

Condensed Consolidating Statement of Cash Flows (Continued)

 

     Three months ended March 31, 2011  

(In thousands)

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

Net cash provided by operating activities

   $ 3,761      $ 44,544      $ 1,631      $ (3,500   $ 46,436   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

          

Routine capital expenditures

     —          (24,718     —          —          (24,718

Development capital expenditures

     —          (11,109     —          —          (11,109

Acquisitions

     —          (8,027     —          —          (8,027

Sale of assets

     —          1,714        —          —          1,714   

Purchase of insurance subsidiary investments

     —          —          (7,817     —          (7,817

Sale of insurance subsidiary investments

     —          —