KINDRED HEALTHCARE INC - 10-Q Quarterly Report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2004

¨ 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		(I.R.S. Employer
incorporation or organization)		Identification No.)

680 South Fourth Street
Louisville, KY		40202-2412
(Address of principal executive offices)		(Zip Code)

(502) 596-7300

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.) Yes x No ¨

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes x 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, 2004
Common stock, $0.25 par value		18,189,328 shares

1 of 39

KINDRED HEALTHCARE, INC.

FORM 10-Q

INDEX


		Page
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements:
	Condensed Consolidated Statement of Operations — for the three months ended March 31, 2004 and 2003	3

	Condensed Consolidated Balance Sheet — March 31, 2004 and December 31, 2003	4

	Condensed Consolidated Statement of Cash Flows — for the three months ended March 31, 2004 and 2003	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34

Item 4.	Controls and Procedures	34

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	36

Item 6.	Exhibits and Reports on Form 8-K	38

KINDRED HEALTHCARE, INC.

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)

(In thousands, except per share amounts)


	Three months ended March 31,
	2004			2003

Revenues	$	871,262		$	802,158

Salaries, wages and benefits		492,071			460,752
Supplies		116,733			104,182
Rent		64,459			63,078
Other operating expenses		145,406			146,839
Depreciation		22,046			19,195
Interest expense		3,656			2,888
Investment income		(1,218	)		(1,635	)

		843,153			795,299

Income from continuing operations before income taxes		28,109			6,859
Provision for income taxes		11,834			4,348

Income from continuing operations		16,275			2,511
Loss from discontinued operations, net of income taxes		(2,435	)		(15,635	)

Net income (loss)	$	13,840		$	(13,124	)

Earnings (loss) per common share:
Basic:
Income from continuing operations	$	0.46		$	0.07
Loss from discontinued operations		(0.07	)		(0.45	)

Net income (loss)	$	0.39		$	(0.38	)


Diluted:
Income from continuing operations	$	0.38		$	0.07
Loss from discontinued operations		(0.06	)		(0.45	)

Net income (loss)	$	0.32		$	(0.38	)


Shares used in computing earnings (loss) per common share:
Basic		35,414			34,755
Diluted		42,721			34,767

See accompanying notes.

KINDRED HEALTHCARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited)

(In thousands, except per share amounts)


	March 31, 2004			December 31, 2003
ASSETS
Current assets:
Cash and cash equivalents	$	17,827		$	66,524
Cash – restricted		7,864			7,339
Insurance subsidiary investments		175,710			146,325
Accounts receivable less allowance for loss of $94,160 – March 31 and $93,403 – December 31		475,238			429,304
Inventories		31,135			29,984
Deferred tax assets		89,836			89,836
Assets held for sale		27,360			27,400
Other		54,455			46,375

		879,425			843,087

Property and equipment		688,959			671,850
Accumulated depreciation		(212,963	)		(193,310	)

		475,996			478,540

Goodwill		31,417			31,417
Insurance subsidiary investments		66,157			74,618
Deferred tax assets		91,991			92,093
Other		63,066			65,659

	$	1,608,052		$	1,585,414

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	119,057		$	119,087
Salaries, wages and other compensation		207,004			214,113
Due to third party payors		27,669			31,406
Professional liability risks		71,140			83,725
Other accrued liabilities		83,938			88,333
Income taxes		46,356			36,684
Long-term debt due within one year		4,729			4,532

		559,893			577,880

Long-term debt		154,708			139,397
Professional liability risks		220,714			212,013
Deferred credits and other liabilities		58,974			58,559

Commitments and contingencies

Stockholders’ equity:
Common stock, $0.25 par value; authorized 175,000 shares; issued 36,369 shares – March 31 and 36,340 shares – December 31		9,092			9,085
Capital in excess of par value		585,853			585,394
Deferred compensation		(6,296	)		(8,040	)
Accumulated other comprehensive income		496			348
Retained earnings		24,618			10,778

		613,763			597,565

	$	1,608,052		$	1,585,414

See accompanying notes.

KINDRED HEALTHCARE, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

(In thousands)


	Three months ended March 31,
	2004			2003
Cash flows from operating activities:
Net income (loss)	$	13,840		$	(13,124	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation		22,046			20,083
Amortization of deferred compensation costs		1,743			1,253
Provision for doubtful accounts		8,116			6,288
Other		(102	)		506
Change in operating assets and liabilities:
Accounts receivable		(54,304	)		(53,316	)
Inventories and other assets		(9,468	)		(6,387	)
Accounts payable		(3,184	)		(2,998	)
Income taxes		9,912			(5,457	)
Due to third party payors		(3,737	)		3,551
Other accrued liabilities		(9,062	)		27,935

Net cash used in operating activities		(24,200	)		(21,666	)

Cash flows from investing activities:
Purchase of property and equipment		(17,881	)		(10,565	)
Purchase of insurance subsidiary investments		(9,776	)		(30,395	)
Sale of insurance subsidiary investments		5,672			2,333
Net change in insurance subsidiary cash and cash equivalents		(16,820	)		(71,911	)
Net change in other investments		1,777			(4,685	)
Other		508			(333	)

Net cash used in investing activities		(36,520	)		(115,556	)

Cash flows from financing activities:
Net change in revolving credit borrowings		16,900			–
Repayment of long-term debt		(1,032	)		(112	)
Payment of deferred financing costs		–			(1,596	)
Issuance of common stock		467			–
Other		(4,312	)		(4,967	)

Net cash provided by (used in) financing activities		12,023			(6,675	)

Change in cash and cash equivalents		(48,697	)		(143,897	)
Cash and cash equivalents at beginning of period		66,524			244,070

Cash and cash equivalents at end of period	$	17,827		$	100,173

Supplemental information:
Interest payments	$	3,272		$	2,835
Income tax payments		398			18

See accompanying notes.

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 – BASIS OF PRESENTATION

Business

Kindred Healthcare, Inc. (“Kindred” or the “Company”) is a healthcare services company that operates hospitals, nursing centers, institutional pharmacies and a contract rehabilitation services business. At March 31, 2004, the Company’s hospital division operated 68 hospitals in 23 states. The Company’s health services division operated 254 nursing centers in 30 states. The Company’s pharmacy division operated an institutional pharmacy business with 30 pharmacies in 19 states. The Company also operated a contract rehabilitation services business which began operating as a separate division on January 1, 2004.

During 2003, the Company effected certain strategic transactions to improve its future operating results. These transactions included the divestiture of all of its Florida and Texas nursing center operations, the acquisition for resale of eight additional nursing centers and two hospitals formerly leased from Ventas, Inc. (“Ventas”) and certain other dispositions and contract terminations. For accounting purposes, the operating results of these businesses and the losses associated with these transactions have been classified as discontinued operations in the accompanying unaudited condensed consolidated statement of operations for all periods presented. Assets not sold at March 31, 2004 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 2 for a summary of discontinued operations.

On April 20, 2001, the Company and its subsidiaries emerged from proceedings under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”) pursuant to the terms of the Company’s Fourth Amended Joint Plan of Reorganization (the “Plan of Reorganization”), as modified at the confirmation hearing by the United States Bankruptcy Court for the District of Delaware. In connection with its emergence, the Company changed its name to Kindred Healthcare, Inc.

Stock Split

On April 26, 2004, the Board of Directors declared a 2-for-1 stock split in the form of a 100% stock dividend. The new shares will be distributed on May 27, 2004 to stockholders of record at the close of business on May 10, 2004. Share and per share data for all periods presented in the accompanying unaudited condensed consolidated financial statements have been adjusted retroactively to reflect the stock split.

Impact of Recent Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board (the “FASB”) issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities – an interpretation of ARB No. 51.” The primary objectives of FIN 46 are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights (variable interest entities or “VIEs”) and how to determine when and which business enterprise should consolidate the VIE (the primary beneficiary). In December 2003, the FASB issued FIN 46-R (“FIN 46-R”), “Consolidation of Variable Interest Entities – an interpretation of ARB No. 51 (revised December 2003),” which replaces FIN 46. FIN 46-R incorporates certain modifications to FIN 46 adopted by the FASB subsequent to the issuance of FIN 46, including modifications to the scope of FIN 46. Additionally, FIN 46-R also incorporates much of the guidance previously issued in the form of FASB Staff Positions. The Company has adopted all of the provisions of FIN 46-R in the first quarter of 2004. The adoption of FIN 46-R did not have an impact on the presentation of the Company’s financial position, results of operations or liquidity.

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 1 – BASIS OF PRESENTATION (Continued)

Stock Option Accounting

The Company follows Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for its stock options because the alternative fair value accounting provided for under Statement of Financial Accounting Standards (“SFAS”) No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation,” requires the use of option valuation models that were not developed for use in valuing stock options.

Pro forma information regarding net income and earnings per share determined as if the Company had accounted for its stock options under the fair value method of SFAS 123 follows (in thousands, except per share amounts):


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