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, 2005
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission file number: 001-14057
KINDRED HEALTHCARE, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 61-1323993 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
| 680 South Fourth Street Louisville, KY |
40202-2412 | |
| (Address of principal executive offices) | (Zip Code) | |
(502) 596-7300
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant 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, 2005 | |
| Common stock, $0.25 par value |
38,426,884 shares |
1 of 40
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, 2005 and 2004 |
3 | |||
| Condensed Consolidated Balance Sheet — March 31, 2005 and December 31, 2004 | 4 | |||
| Condensed Consolidated Statement of Cash Flows — for the three months ended March 31, 2005 and 2004 |
5 | |||
| Notes to Condensed Consolidated Financial Statements | 6 | |||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 20 | ||
| Item 3. |
Quantitative and Qualitative Disclosures About Market Risk | 36 | ||
| Item 4. |
Controls and Procedures | 37 | ||
| PART II. |
OTHER INFORMATION | |||
| Item 1. |
Legal Proceedings | 38 | ||
| Item 6. |
Exhibits | 39 | ||
2
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
| Three months ended March 31, |
||||||||
| 2005 |
2004 |
|||||||
| Revenues |
$ | 939,989 | $ | 858,015 | ||||
| Salaries, wages and benefits |
515,020 | 484,049 | ||||||
| Supplies |
128,283 | 115,496 | ||||||
| Rent |
67,996 | 63,619 | ||||||
| Other operating expenses |
152,167 | 142,321 | ||||||
| Depreciation and amortization |
24,114 | 21,561 | ||||||
| Interest expense |
2,000 | 3,654 | ||||||
| Investment income |
(2,348 | ) | (1,214 | ) | ||||
| 887,232 | 829,486 | |||||||
| Income from continuing operations before reorganization items and income taxes |
52,757 | 28,529 | ||||||
| Reorganization items |
(1,371 | ) | – | |||||
| Income from continuing operations before income taxes |
54,128 | 28,529 | ||||||
| Provision for income taxes |
21,868 | 11,996 | ||||||
| Income from continuing operations |
32,260 | 16,533 | ||||||
| Income (loss) from discontinued operations, net of income taxes |
4,630 | (2,693 | ) | |||||
| Net income |
$ | 36,890 | $ | 13,840 | ||||
| Earnings per common share: |
||||||||
| Basic: |
||||||||
| Income from continuing operations |
$ | 0.89 | $ | 0.47 | ||||
| Income (loss) from discontinued operations |
0.13 | (0.08 | ) | |||||
| Net income |
$ | 1.02 | $ | 0.39 | ||||
| Diluted: |
||||||||
| Income from continuing operations |
$ | 0.73 | $ | 0.38 | ||||
| Income (loss) from discontinued operations |
0.10 | (0.06 | ) | |||||
| Net income |
$ | 0.83 | $ | 0.32 | ||||
| Shares used in computing earnings per common share: |
||||||||
| Basic |
36,312 | 35,414 | ||||||
| Diluted |
44,410 | 42,721 | ||||||
See accompanying notes.
3
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
(In thousands, except per share amounts)
| March 31, 2005 |
December 31, 2004 |
|||||||
| ASSETS | ||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 15,571 | $ | 69,128 | ||||
| Cash – restricted |
5,874 | 6,054 | ||||||
| Insurance subsidiary investments |
251,850 | 238,856 | ||||||
| Accounts receivable less allowance for loss of $65,237 – March 31, 2005 and $60,320 – December 31, 2004 |
463,278 | 400,517 | ||||||
| Inventories |
36,497 | 35,025 | ||||||
| Deferred tax assets |
70,137 | 70,137 | ||||||
| Assets held for sale |
16,343 | 22,672 | ||||||
| Other |
44,286 | 31,954 | ||||||
| 903,836 | 874,343 | |||||||
| Property and equipment |
786,340 | 765,586 | ||||||
| Accumulated depreciation |
(297,629 | ) | (273,880 | ) | ||||
| 488,711 | 491,706 | |||||||
| Goodwill |
41,960 | 31,582 | ||||||
| Insurance subsidiary investments |
44,442 | 41,651 | ||||||
| Deferred tax assets |
91,437 | 91,180 | ||||||
| Other |
105,884 | 62,831 | ||||||
| $ | 1,676,270 | $ | 1,593,293 | |||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: |
||||||||
| Accounts payable |
$ | 111,876 | $ | 122,176 | ||||
| Salaries, wages and other compensation |
233,999 | 230,056 | ||||||
| Due to third party payors |
23,331 | 33,910 | ||||||
| Professional liability risks |
79,115 | 82,609 | ||||||
| Other accrued liabilities |
75,340 | 76,985 | ||||||
| Income taxes |
52,068 | 26,748 | ||||||
| Long-term debt due within one year |
5,506 | 5,282 | ||||||
| 581,235 | 577,766 | |||||||
| Long-term debt |
56,304 | 32,544 | ||||||
| Professional liability risks |
203,006 | 204,713 | ||||||
| Deferred credits and other liabilities |
60,901 | 58,485 | ||||||
| Commitments and contingencies |
||||||||
| Stockholders’ equity: |
||||||||
| Common stock, $0.25 par value; authorized 175,000 shares; issued 38,273 shares – March 31, 2005 and 37,189 shares – December 31, 2004 |
9,568 | 9,297 | ||||||
| Capital in excess of par value |
654,120 | 636,015 | ||||||
| Deferred compensation |
(7,118 | ) | (7,353 | ) | ||||
| Accumulated other comprehensive income |
6 | 468 | ||||||
| Retained earnings |
118,248 | 81,358 | ||||||
| 774,824 | 719,785 | |||||||
| $ | 1,676,270 | $ | 1,593,293 | |||||
See accompanying notes.
4
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In thousands)
| Three months ended March 31, |
||||||||
| 2005 |
2004 |
|||||||
| Cash flows from operating activities: |
||||||||
| Net income |
$ | 36,890 | $ | 13,840 | ||||
| Adjustments to reconcile net income to net cash provided by (used in) |
||||||||
| Depreciation and amortization |
24,114 | 22,046 | ||||||
| Amortization of deferred compensation costs |
1,912 | 1,743 | ||||||
| Provision for doubtful accounts |
4,987 | 8,116 | ||||||
| Reorganization items |
(1,371 | ) | – | |||||
| Other |
(186 | ) | (102 | ) | ||||
| Change in operating assets and liabilities: |
||||||||
| Accounts receivable |
(59,132 | ) | (54,304 | ) | ||||
| Inventories and other assets |
(10,359 | ) | (9,468 | ) | ||||
| Accounts payable |
(2,445 | ) | (3,184 | ) | ||||
| Income taxes |
25,332 | 9,912 | ||||||
| Due to third party payors |
(10,579 | ) | (3,737 | ) | ||||
| Other accrued liabilities |
8,791 | (9,062 | ) | |||||
| Net cash provided by (used in) operating activities |
17,954 | (24,200 | ) | |||||
| Cash flows from investing activities: |
||||||||
| Purchase of property and equipment |
(17,963 | ) | (17,881 | ) | ||||
| Acquisition of institutional pharmacy |
(27,600 | ) | – | |||||
| Acquisition deposit |
(31,500 | ) | – | |||||
| Sale of assets |
1,055 | 370 | ||||||
| Purchase of insurance subsidiary investments |
(113,884 | ) | (9,776 | ) | ||||
| Sale of insurance subsidiary investments |
84,591 | 5,672 | ||||||
| Net change in insurance subsidiary cash and cash equivalents |
13,111 | (16,820 | ) | |||||
| Net change in other investments |
– | 1,777 | ||||||
| Other |
(99 | ) | 138 | |||||
| Net cash used in investing activities |
(92,289 | ) | (36,520 | ) | ||||
| Cash flows from financing activities: |
||||||||
| Net change in revolving credit borrowings |
25,200 | 16,900 | ||||||
| Repayment of long-term debt |
(1,216 | ) | (1,032 | ) | ||||
| Issuance of common stock |
16,699 | 467 | ||||||
| Other |
(19,905 | ) | (4,312 | ) | ||||
| Net cash provided by financing activities |
20,778 | 12,023 | ||||||
| Change in cash and cash equivalents |
(53,557 | ) | (48,697 | ) | ||||
| Cash and cash equivalents at beginning of period |
69,128 | 66,524 | ||||||
| Cash and cash equivalents at end of period |
$ | 15,571 | $ | 17,827 | ||||
| Supplemental information: |
||||||||
| Interest payments |
$ | 1,034 | $ | 3,272 | ||||
| Income tax payments (refunds) |
(566 | ) | 398 | |||||
See accompanying notes.
5
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 through its subsidiaries operates hospitals, nursing centers, institutional pharmacies and a contract rehabilitation services business across the United States. At March 31, 2005, the Company’s hospital division operated 73 hospitals in 24 states. The Company’s health services division operated 249 nursing centers in 29 states. The Company’s pharmacy division operated an institutional pharmacy business with 36 pharmacies in 23 states and a pharmacy management business servicing substantially all of the Company’s hospitals. The Company also operated a contract rehabilitation services business which began operating as a separate division on January 1, 2004.
During 2004 and 2003, the Company completed several transactions related to the divestiture of unprofitable hospitals, nursing centers and other healthcare businesses. 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, 2005 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.
In April 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.
Impact of Recent Accounting Pronouncement
In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004) (“SFAS 123R”), “Share-Based Payment,” which requires companies to expense the fair value of employee stock options and other forms of stock-based compensation for interim periods that begin after June 15, 2005. This requirement represents a significant change because stock option awards have not been recognized as compensation expense in the Company’s historical consolidated financial statements under Accounting Principles Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees.” SFAS 123R requires the cost of an award, based upon fair value on the date of grant, to be recognized over the period during which an employee is required to provide service in exchange for the award (usually the vesting period). The fair value of the award on the date of grant will be estimated using option pricing models. In April 2005, the Securities and Exchange Commiss