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| KND > SEC Filings for KND > Form 10-Q on 8-May-2008 | All Recent SEC Filings |
8-May-2008
Quarterly Report
Cautionary Statement
This Form 10-Q includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements
regarding the Company's expected future financial position, results of
operations, cash flows, financing plans, business strategy, budgets, capital
expenditures, competitive positions, growth opportunities, plans and objectives
of management and statements containing the words such as "anticipate,"
"approximate," "believe," "plan," "estimate," "expect," "project," "could,"
"should," "will," "intend," "may" and other similar expressions, are
forward-looking statements.
Such forward-looking statements are inherently uncertain, and stockholders and other potential investors must recognize that actual results may differ materially from the Company's expectations as a result of a variety of factors, including, without limitation, those discussed below. Such forward-looking statements are based upon management's current expectations and include known and unknown risks, uncertainties and other factors, many of which the Company is unable to predict or control, that may cause the Company's actual results or performance to differ materially from any future results or performance expressed or implied by such forward-looking statements. These statements involve risks, uncertainties and other factors discussed below and detailed from time to time in the Company's filings with the SEC. Factors that may affect the Company's plans or results include, without limitation:
• the Company's ability to operate pursuant to the terms of its debt obligations and its master lease agreements with Ventas, Inc.,
• the Company's ability to meet its rental and debt service obligations,
• adverse developments with respect to the Company's results of operations or liquidity,
• the Company's ability to attract and retain key executives and other healthcare personnel,
• increased operating costs due to shortages in qualified nurses, therapists and other healthcare personnel,
• the effects of healthcare reform and government regulations, interpretation of regulations and changes in the nature and enforcement of regulations governing the healthcare industry,
• changes in the reimbursement rates or the methods or timing of payment from third party payors, including the Medicare and Medicaid programs, changes arising from and related to the Medicare prospective payment system for LTAC hospitals ("LTAC PPS"), including potential changes in the Medicare payment rules, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, and changes in Medicare and Medicaid reimbursements for the Company's nursing centers,
• the impact of the Medicare, Medicaid and SCHIP Extension Act of 2007 (the "SCHIP Extension Act"), including the ability of the Company's hospitals to adjust to potential LTAC certification and the three-year moratorium on future hospital development,
• national and regional economic conditions, including their effect on the availability and cost of labor, materials and other services,
• the Company's ability to control costs, particularly labor and employee benefit costs,
• the Company's ability to successfully pursue its development activities and successfully integrate new operations, including the realization of anticipated revenues, economies of scale, cost savings and productivity gains associated with such operations,
• the increase in the costs of defending and insuring against alleged professional liability claims and the Company's ability to predict the estimated costs related to such claims,
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Cautionary Statement (Continued)
• the Company's ability to successfully reduce (by divestiture of operations or otherwise) its exposure to professional liability claims,
• the Company's ability to successfully dispose of unprofitable facilities, and
• the Company's ability to maintain an effective system of internal controls over financial reporting.
Many of these factors are beyond the Company's control. The Company cautions investors that any forward-looking statements made by the Company are not guarantees of future performance. The Company disclaims any obligation to update any such factors or to announce publicly the results of any revisions to any of the forward-looking statements to reflect future events or developments.
General
The business segment data in Note 6 of the accompanying Notes to Condensed Consolidated Financial Statements should be read in conjunction with the following discussion and analysis.
The Company is a healthcare services company that through its subsidiaries operates hospitals, nursing centers and a contract rehabilitation services business across the United States. At March 31, 2008, the Company's hospital division operated 84 LTAC hospitals (6,567 licensed beds) in 24 states. The Company's health services division operated 228 nursing centers (28,856 licensed beds) in 27 states. The Company operated a contract rehabilitation services business which provides rehabilitative services primarily in long-term care settings.
On July 31, 2007, the Company completed the Spin-off Transaction. See Note 2 of the accompanying Notes to Condensed Consolidated Financial Statements.
In recent years, the Company has completed several strategic divestitures to improve its future operating results. For accounting purposes, the operating results of these businesses and the losses or impairments 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, 2008 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 3 of the accompanying Notes to Condensed Consolidated Financial Statements.
Critical Accounting Policies
Management's discussion and analysis of financial condition and results of operations are based upon the Company's consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the use of estimates and judgments that affect the reported amounts and related disclosures of commitments and contingencies. The Company relies on historical experience and on various other assumptions that management believes to be reasonable under the circumstances to make judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates.
The Company believes the following critical accounting policies, among others, affect the more significant judgments and estimates used in the preparation of its consolidated financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Critical Accounting Policies (Continued)
Revenue recognition
The Company has agreements with third party payors that provide for payments to each of its operating divisions. These payment arrangements may be based upon prospective rates, reimbursable costs, established charges, discounted charges or per diem payments. Net patient service revenue is recorded at the estimated net realizable amounts from Medicare, Medicaid, other third party payors and individual patients for services rendered. Retroactive adjustments that are likely to result from future examinations by third party payors are accrued on an estimated basis in the period the related services are rendered and adjusted as necessary in future periods based upon new information or final settlements.
See Note 4 of the accompanying Notes to Condensed Consolidated Financial Statements for a summary of the Company's revenues.
Collectibility of accounts receivable
Accounts receivable consist primarily of amounts due from the Medicare and Medicaid programs, other government programs, managed care health plans, commercial insurance companies and individual patients and customers. Estimated provisions for doubtful accounts are recorded to the extent it is probable that a portion or all of a particular account will not be collected.
In evaluating the collectibility of accounts receivable, the Company considers a number of factors, including the age of the accounts, changes in collection patterns, the composition of patient accounts by payor type, the status of ongoing disputes with third party payors and general industry conditions. Actual collections of accounts receivable in subsequent periods may require changes in the estimated provision for loss. Changes in these estimates are charged or credited to the results of operations in the period of the change.
The provision for doubtful accounts totaled $7 million and $6 million for the first quarter of 2008 and 2007, respectively.
Allowances for insurance risks
The Company insures a substantial portion of its professional liability risks and workers compensation risks through a 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 subsequent expected ultimate claims costs vary from historical provisions for loss, future earnings will be charged or credited.
Provisions for loss for professional liability risks retained by the Company's limited purpose insurance subsidiary have been discounted based upon actuarial estimates of claim payment patterns using a discount rate of 5% in each period presented. Amounts equal to the discounted loss provision are funded annually. The Company does not fund the portion of professional liability risks related to estimated claims that have been incurred but not reported. Accordingly, these liabilities are not discounted. The allowance for professional liability risks aggregated $260 million at March 31, 2008 and $251 million at December 31, 2007. If the Company did not discount any of the allowances for professional liability risks, these balances would have approximated $273 million at March 31, 2008 and $264 million at December 31, 2007.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Critical Accounting Policies (Continued)
Allowances for insurance risks (Continued)
As a result of improved professional liability underwriting results of the Company's limited purpose insurance subsidiary, the Company received distributions of approximately $39 million and $37 million during the first quarter of 2008 and 2007, respectively, from its limited purpose insurance subsidiary. These proceeds were used to repay borrowings under the Company's revolving credit facility.
Changes in the number of professional liability claims and the cost to settle these claims significantly impact the allowance for professional liability risks. A relatively small variance between the Company's estimated and ultimate actual number of claims or average cost per claim could have a material impact, either favorable or unfavorable, on the adequacy of the allowance for professional liability risks. For example, a 1% variance in the allowance for professional liability risks at March 31, 2008 would impact the Company's operating income by approximately $3 million.
The provision for professional liability risks (continuing operations), including the cost of coverage maintained with unaffiliated commercial insurance carriers, aggregated $16 million and $18 million for the first quarter of 2008 and 2007, respectively.
Provisions for loss for workers compensation risks retained by the Company's limited purpose insurance subsidiary are not discounted and amounts equal to the loss provision are funded annually. The allowance for workers compensation risks aggregated $92 million at March 31, 2008 and $89 million at December 31, 2007. The provision for workers compensation risks (continuing operations), including the cost of coverage maintained with unaffiliated commercial insurance carriers, aggregated $11 million for the first quarter of both 2008 and 2007.
See Note 7 of the accompanying Notes to Condensed Consolidated Financial Statements for a summary of the Company's insurance activities.
Accounting for income taxes
The provision for income taxes is based upon the Company's estimate of annual taxable income or loss for each respective accounting period. The Company recognizes an asset or liability for the deferred tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. These temporary differences will result in taxable or deductible amounts in future years when the reported amounts of the assets are recovered or liabilities are settled. The Company also recognizes as deferred tax assets the future tax benefits from net operating and capital loss carryforwards. A valuation allowance is provided for these deferred tax assets if it is more likely than not that some portion or all of the net deferred tax assets will not be realized.
The Company's effective income tax rate was 41.6% and 42.5% in the first quarter of 2008 and 2007, respectively.
There are significant uncertainties with respect to capital loss and net operating loss carryforwards that could affect materially the realization of certain deferred tax assets. Accordingly, the Company has recognized deferred tax assets to the extent it is more likely than not they will be realized and a valuation allowance is provided for deferred tax assets to the extent that it is uncertain that the deferred tax asset will be realized. The Company recognized deferred tax assets totaling $180 million at March 31, 2008 and $174 million at December 31, 2007.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Critical Accounting Policies (Continued)
Accounting for income taxes (Continued)
The Company is subject to various federal and state income tax audits in the ordinary course of business. Such audits could result in increased tax payments, interest and penalties. While the Company believes its tax positions are appropriate, there can be no assurance that the various authorities engaged in the examination of its income tax returns will not challenge the Company's positions. See Note 8 of the accompanying Notes to Condensed Consolidated Financial Statements.
Valuation of long-lived assets and goodwill
The Company regularly reviews the carrying value of certain long-lived assets and identifiable intangible assets with respect to any events or circumstances that indicate an impairment or an adjustment to the amortization period is necessary. If circumstances suggest the recorded amounts cannot be recovered based upon estimated future cash flows, the carrying values of such assets are reduced to fair value.
In assessing the carrying values of long-lived assets, the Company estimates future cash flows at the lowest level for which there are independent, identifiable cash flows. For this purpose, these cash flows are aggregated based upon the contractual agreements underlying the operation of the facility or group of facilities. Generally, an individual facility is considered the lowest level for which there are independent, identifiable cash flows. However, to the extent that groups of facilities are leased under a master lease agreement in which the operations of a facility and compliance with the lease terms are interdependent upon other facilities in the agreement (including the Company's ability to renew the lease or divest a particular property), the Company defines the group of facilities under a master lease as the lowest level for which there are independent, identifiable cash flows. Accordingly, the estimated cash flows of all facilities within a master lease are aggregated for purposes of evaluating the carrying values of long-lived assets.
In accordance with SFAS No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," the Company is required to perform an impairment test for goodwill and indefinite lived intangible assets at least annually or more frequently if adverse events or changes in circumstances indicate that the asset may be impaired. The Company performs its annual impairment test at the end of each year. No impairment charge was recorded at December 31, 2007 in connection with the Company's annual impairment test.
The Company's other intangible assets with finite lives are amortized under SFAS 142 using the straight-line method over their estimated useful lives ranging from one to five years.
Recently Issued Accounting Pronouncements
In December 2007, the FASB issued SFAS 141R, which significantly changes the accounting for business combinations, including, among other changes, new accounting concepts in determining the fair value of assets and liabilities acquired, recording the fair value of contingent considerations and contingencies at acquisition date and expensing acquisition and restructuring costs. SFAS 141R will be applied prospectively and is effective for business combinations which occur during fiscal years beginning after December 15, 2008. At this time, the Company cannot determine the impact that SFAS 141R will have on its financial position, results of operations or liquidity.
In December 2007, the FASB issued SFAS 160, which will change the accounting and reporting for minority interests. SFAS 160 will recharacterize minority interests as noncontrolling interests and will be classified as a component of stockholders' equity. The new consolidation method will significantly change the accounting for transactions with minority-interest holders. SFAS 160 is effective for fiscal years beginning after December 15, 2008. The adoption of SFAS 160 is not expected to have a material impact on the Company's financial position, results of operations or liquidity.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Recently Issued Accounting Pronouncements (Continued)
In September 2006, the FASB issued SFAS 157, 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. SFAS 157 is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued SFAS 157-2, which deferred the effective date of SFAS 157 for one year for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. The provisions of SFAS 157 apply to assets and liabilities, including investments, loans and transfers (including sales and securitizations) of financial assets, derivatives, financial liabilities, and other various financial assets and liabilities. The adoption of SFAS 157 did not have a material impact on the Company's financial position, results of operations or liquidity. The adoption of SFAS 157-2 is not expected to have a material impact on the Company's financial position, results of operations or liquidity. See Note 1 of the accompanying Notes to Condensed Consolidated Financial Statements for a description of the impact of adopting SFAS 157.
Results of Operations - Continuing Operations
Hospital Division
Revenues increased 6% in the first quarter of 2008 to $488 million compared to $460 million in the first quarter of 2007, primarily as a result of increases in same-store volumes, expansion of services and ongoing development of new hospitals. On a same-store basis, aggregate admissions rose 5% in the first quarter of 2008 compared to the first quarter of 2007, while non-government same-store admissions increased 18% in the first quarter of 2008 compared to the first quarter of 2007.
Despite growth in volumes and revenues, hospital operating margins declined in the first quarter of 2008 primarily because the growth in wage and benefit costs exceeded overall revenue growth. Hospital wage and benefit costs increased 9% to $221 million in the first quarter of 2008 compared to $204 million in the first quarter of 2007. Average hourly wage rates grew 3% in the first quarter of 2008 compared to the first quarter of 2007, while employee benefit costs increased 8% in the first quarter of 2008 compared to the first quarter of 2007.
Professional liability costs were $6 million in the first quarter of both 2008 and 2007.
Health Services Division
Revenues increased 10% in the first quarter of 2008 to $535 million compared to $485 million in the first quarter of 2007. Revenue growth in the first quarter of 2008 was primarily attributable to reimbursement rate increases, growth in Medicare and managed care volumes, and acquisitions. On a same-store basis, aggregate patient days increased 1% in the first quarter of 2008 compared to the first quarter of 2007, while Medicare and non-government same-store patient days increased 2% and 10%, respectively, in the first quarter of 2008 compared to the first quarter of 2007.
Nursing center operating margins improved in the first quarter of 2008 primarily due to same-store growth in Medicare and managed care volumes, the favorable impact of acquired nursing centers and reductions in professional liability costs. Nursing center wage and benefit costs increased 8% to $275 million in the first quarter of 2008 compared to $256 million in the first quarter of 2007. Average hourly wage rates increased 4% in the first quarter of 2008 compared to the first quarter of 2007, while employee benefit costs increased 8% in the first quarter of 2008 compared to the first quarter of 2007.
Professional liability costs were $10 million in the first quarter of 2008 compared to $12 million in the first quarter of 2007.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Results of Operations - Continuing Operations (Continued)
Rehabilitation Division
Revenues increased 25% to $105 million in the first quarter of 2008 compared to $84 million in the first quarter of 2007. The increase in revenues in the first quarter of 2008 was primarily attributable to growth in both new contracts and the volume of services provided to existing customers. Revenues derived from unaffiliated customers aggregated $37 million in the first quarter of 2008 compared to $25 million in the first quarter of 2007.
Despite growth in volumes and revenues, operating margins in the first quarter of 2008 declined primarily due to wage rate pressures resulting from an increasingly competitive marketplace for therapists and start-up costs associated with external contract growth.
Pharmacy Division
The Spin-off Transaction was completed on July 31, 2007. As a result, the Company's consolidated operating results for the first quarter of 2008 did not include any results of the pharmacy division.
For accounting purposes, the pharmacy division was not treated as a discontinued operation in the Company's historical condensed consolidated financial statements. See Note 2 of the accompanying Notes to Condensed Consolidated Financial Statements.
Corporate Overhead
Operating income for the Company's operating divisions excludes allocations of corporate overhead. These costs aggregated $35 million in the first quarter of 2008 compared to $38 million in the first quarter of 2007. As a percentage of consolidated revenues, corporate overhead totaled 3.3% in the first quarter of 2008 compared to 3.4% in the first quarter of 2007.
The Company recorded approximately $5 million in other income in the first quarter of 2008 related to the information systems and transition services agreements in connection with the Spin-off Transaction.
Corporate expenses included the operating losses from the Company's limited purpose insurance subsidiary of $1 million in the first quarter of both 2008 and 2007.
Capital Costs
Rent expense increased 2% to $86 million in the first quarter of 2008 compared to $84 million in the first quarter of 2007. The increase resulted primarily from contractual inflation, contingent rent increases, growth in the number of leased facilities, and acquisition and development activities.
Depreciation and amortization expense increased to $31 million in the first quarter of 2008 compared to $28 million in the first quarter of 2007. The increase was primarily a result of the Company's ongoing capital expenditure program and its acquisition and development activities.
Interest expense aggregated $5 million in the first quarter of 2008 compared to $4 million in the first quarter of 2007. The increase in the first quarter of 2008 was primarily attributable to increased borrowings under the Company's revolving credit facility related to its acquisition and development activities.
Investment income related primarily to the Company's insurance subsidiary investments totaled $3 million in the first quarter of 2008 compared to $4 million in the first quarter of 2007.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Results of Operations - Continuing Operations (Continued)
Consolidated Results
Income from continuing operations before income taxes declined 10% to $26 million in the first quarter of 2008 compared to $29 million in the first quarter of 2007. Net income from continuing operations declined 9% to $15 million in the first quarter of 2008 compared to $17 million in the first quarter of 2007.
Results of Operations - Discontinued Operations
Net loss from discontinued operations aggregated $0.3 million in the first quarter of 2008 compared to $2 million in the first quarter of 2007.
The Company recorded a pretax loss on divestiture of operations related to the . . .
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