Kindred Healthcare Announces Second Quarter 2014 Results

Kindred Healthcare, Inc. (“Kindred” or the “Company”) (NYSE:KND) today announced its operating results for the second quarter ended June 30, 2014.

The Company has classified as discontinued for all periods presented the operations of three transitional care (“TC”) hospitals and two nursing centers that were either closed or divested in the second quarter. All financial and statistical information included in this press release reflects the continuing operations of the Company’s businesses for all periods presented unless otherwise indicated.

Second Quarter Highlights:

• Consolidated revenues and core operating income both increased 7% from the same period last year primarily resulting from improved hospital volumes, a strong rebound in the Company’s Care Management division operations, growth from acquisitions and solid cost controls throughout the Company

• Strong hospital division results with 3.1% same-store admissions growth, 1.8% revenue growth per patient day and 1.3% growth in core operating costs per patient day
• RehabCare division achieved sequential core operating income growth and margin improvement from 11.6% in the first quarter of 2014 to 12.3% in the second quarter of 2014
• Nursing center division core operating income increased 11.3% primarily due to growth in revenues and operating margins were significantly improved due to ongoing repositioning and cost control initiatives
• Care Management division delivered 66% revenue growth and core operating income that doubled compared to the same period last year
• Recapitalization of the Company completed:
  • Divested 55 of 59 nursing centers leased from Ventas, Inc. (“Ventas”) (NYSE:VTR) as of August 1
  • $2.25 billion refinancing of the Company’s secured and unsecured debt on April 9 lowers borrowing costs, extends debt maturities and reduces interest rate risk
  • Recent common stock equity offering of 9.7 million shares generated $221 million in net proceeds used to repay the Company’s revolving credit facility
• Board of Directors declared regular quarterly cash dividend of $0.12 per share payable on September 10, 2014

(1) See reconciliation of core results to GAAP results on page 19.

Second Quarter Results

Continuing Operations

Consolidated revenues for the second quarter ended June 30, 2014 increased 7% to $1.3 billion compared to $1.2 billion in the same period of 2013, primarily due to improved hospital volumes, a strong rebound in the Care Management division’s operations and growth from acquisitions. Kindred reported a loss from continuing operations for the second quarter of 2014 of $25.9 million or $0.48 per diluted share compared to income from continuing operations of $13.6 million or $0.25 per diluted share in the second quarter of 2013. Second quarter 2014 operating results included pretax charges of $70.9 million ($44.6 million net of income taxes) or $0.83 per diluted share related to debt refinancing, restructuring, litigation and transaction costs. Without these items, diluted earnings per share from continuing operations increased 26% to $0.34. Operating results for the second quarter of 2013 included pretax charges of $1.5 million ($0.9 million net of income taxes) or $0.02 per diluted share related to debt refinancing and transaction costs.

Management Commentary

Paul J. Diaz, Chief Executive Officer of the Company, commented, “We are very pleased with our operating and financial results for the second quarter of 2014, which reflects our progress delivering on our promise to provide hope, healing and recovery to the patients we serve. More specifically, in the first half of this year, we saw continued improvement in employee engagement and reduced turnover, and improving quality measures, clinical outcomes and patient satisfaction in all of our business segments. We are also pleased to reaffirm our earnings guidance for the year, which reflects the change in share count from our recent equity offering, as we achieved revenue and core operating income growth of 7% year-over-year, respectively. We made progress on a number of internal and external growth initiatives during the quarter enhancing our Integrated Care Market capabilities, particularly in home health and hospice services. We continue to evaluate a robust pipeline of external opportunities to deploy our financial resources, industry leading infrastructure and management capabilities as we move forward with the growth phase of our strategic plan. Overall, we remain committed to further improving our patient’s experience and the long-term growth, profitability and financial position of the Company.”

Benjamin A. Breier, President and Chief Operating Officer of the Company, said, “Same-store hospital admissions increased 3.1% in the second quarter representing our first quarterly admissions increase since the third quarter of 2012 and our hospital core operating margin improved to 21.7% in the second quarter of 2014 from 21.3% in the same period a year ago. Our RehabCare division also continues to make great progress, as evidenced by our sequential operating income growth and margin improvement, despite Medicare reimbursement pricing pressures. In addition, we have added 57 net new skilled nursing rehabilitation sites of service during the year. Our efforts to reshape our nursing center division continue to pay off as we achieved a significant improvement in operating margins in the second quarter. We are developing three additional transitional care centers in Indianapolis, Phoenix and Las Vegas, which will add to the momentum in this division.”

Mr. Breier added, “Our Care Management division continues to make improvements in our home health and hospice operations, including enhancing our team, processes and technology, and we expect to apply these capabilities across a larger platform over time. In addition, our recently announced acquisition of the Silver State Accountable Care Organization (“ACO”) in Las Vegas is a very exciting transaction for Kindred, and the partnership marks our first ownership and direct management of an ACO anywhere in the country.”

Stephen D. Farber, Executive Vice President, Chief Financial Officer, commented, “We are pleased to have completed a major recapitalization of the Company with both a $2.25 billion debt refinancing in the second quarter and a 9.7 million share equity offering in the second and third quarters. The equity offering raised $221 million in proceeds that the Company has initially used to reduce its revolving credit facility, which helped to increase our available borrowing capacity under our revolver to approximately $652 million as of June 30, 2014. These transactions significantly improve our financial position, provide additional financial flexibility and reduce interest expense.

Our current outstanding share count is 64.6 million shares and for generally accepted accounting principles (“GAAP”) purposes, on a weighted average basis, we expect our 2014 third and fourth quarters diluted shares used to compute earnings per share to approximate 63.0 million shares and on an annual basis for 2014, 58.3 million shares.”

Earnings Guidance – Continuing Operations

Kindred today affirmed its previous guidance for income from continuing operations for 2014 of between $58 million and $68 million. The Company noted that its earnings guidance for 2014 continues to be based on the same assumptions initially disclosed and there has been no change in its earnings guidance. The affirmed guidance for 2014 reflects an increased share count from the recent equity offering of 9.7 million shares of common stock. Under Kindred’s current diluted share count of 58.3 million outstanding shares following the recent equity offering, income from continuing operations for 2014 equates to $0.96 to $1.14 per diluted share. Under Kindred’s diluted share count of 53.2 million outstanding shares prior to the equity offering, the same assumptions for income from continuing operations for 2014 of $58 million to $68 million equated to $1.05 to $1.25 per diluted share.

The Company revised its operating cash flow guidance range of $245 million to $275 million to a revised range of $200 million to $230 million. This update reflects growth in accounts receivable, increased cash settlements of certain previously-accrued balance sheet liabilities, and other cash flow items.

The Company maintained its expectation of $100 million to $105 million for routine capital expenditures and for timing reasons reduced its anticipated 2014 cash outflows for development of new or replacement facilities by $5 million to approximately $15 million to $20 million. With these items, the Company expects its 2014 operating cash flows in excess of routine and development capital spending to approximate $85 million to $105 million, which will be available to fund acquisitions, repay debt and pay dividends. Estimated dividend payments for 2014 are expected to approximate $29 million, an increase of approximately $3 million from the previous guidance due to the issuance of 9.7 million additional common shares in the Company’s recently completed equity offering.

While Kindred does not typically provide quarterly guidance, given the many new shareholders of Kindred the Company notes that from a seasonal trending perspective, the third quarter is historically the slowest volumes and earnings quarter, and is typically followed by a stronger fourth quarter. For the third quarter of 2014, the Company expects diluted earnings per share from continuing operations to approximate $0.05 to $0.15. This compares to diluted earnings per share from continuing operations of $0.10 for the third quarter of 2013, excluding certain disclosed items and adjusted on a pro forma basis to include the incremental 9.7 million shares from the Company’s recently completed equity offering.

Please note the Company’s earnings and cash flow guidance for 2014 excludes the effect of reimbursement changes, debt refinancing costs, severance, retirement, retention and restructuring costs, litigation costs, transaction costs, any further acquisitions or divestitures, any impairment charges, and any repurchases of common stock.

Quarterly Cash Dividend

The Company also announced that its Board of Directors has approved the payment of the regular quarterly cash dividend to its shareholders of $0.12 per common share to be paid on September 10, 2014 to shareholders of record as of the close of business on August 20, 2014. Future declarations of quarterly dividends will be subject to the approval of Kindred’s Board of Directors.

Conference Call

As previously announced, investors and the general public may access a live webcast of the second quarter 2014 conference call through a link on the Company’s website at http://investors.kindredhealthcare.com. The conference call will be held on August 7 at 10:00 a.m. (Eastern Time). The Conference call webcast will feature accompanying slides, which can be accessed through the Investor Relations section of the Company’s website.

A telephone replay of the conference call will become available at approximately 1:00 p.m. on August 7 by dialing (719) 457-0820, access code: 7592071. The replay will be available through August 17.

Forward-Looking Statements

This press release 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. All statements regarding the potential acquisition of Gentiva Health Services, Inc. (“Gentiva”) (NASDAQ:GTIV) (including financing of the proposed transaction and the benefits, results, effects and timing of such transaction), and 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,” “potential” and other similar expressions, are forward-looking statements. Statements in this press release concerning the Company’s business outlook or future economic performance, anticipated profitability, revenues, expenses or other financial items, and product or services line growth, together with other statements that are not historical facts, are forward-looking statements that are estimates reflecting the best judgment of the Company based upon currently available information.

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, performance or plans to differ materially from any future results, performance or plans 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 Securities and Exchange Commission.

In addition to the factors set forth above, other factors that may affect the Company’s plans, results or stock price include, without limitation, (a) the impact of healthcare reform, which will initiate significant changes to the United States healthcare system, including potential material changes to the delivery of healthcare services and the reimbursement paid for such services by the government or other third party payors, including reforms resulting from the Patient Protection and Affordable Care Act and the Healthcare Education and Reconciliation Act (collectively, the “ACA”) or future deficit reduction measures adopted at the federal or state level. Healthcare reform is affecting each of the Company’s businesses in some manner. Potential future efforts in the U.S. Congress to repeal, amend, modify or retract funding for various aspects of the ACA create additional uncertainty about the ultimate impact of the ACA on the Company and the healthcare industry. Due to the substantial regulatory changes that will need to be implemented by the Centers for Medicare and Medicaid Services (“CMS”) and others, and the numerous processes required to implement these reforms, the Company cannot predict which healthcare initiatives will be implemented at the federal or state level, the timing of any such reforms, or the effect such reforms or any other future legislation or regulation will have on the Company’s business, financial position, results of operations and liquidity, (b) the Company’s ability to adjust to the new patient criteria for long-term acute care (“LTAC”) hospitals under the Pathway for SGR Reform Act of 2013, which will reduce the population of patients eligible for the Company’s hospital services and change the basis upon which the Company is paid, (c) the impact of the final rules issued by CMS on August 1, 2012 which, among other things, will reduce Medicare reimbursement to the Company’s TC hospitals in 2013 and beyond by imposing a budget neutrality adjustment and modifying the short-stay outlier rules, (d) the impact of the final rules issued by CMS on July 29, 2011 which significantly reduced Medicare reimbursement to the Company’s nursing centers and changed payments for the provision of group therapy services effective October 1, 2011, (e) the impact of the Budget Control Act of 2011 (as amended by the American Taxpayer Relief Act of 2012 (the “Taxpayer Relief Act”)) which instituted an automatic 2% reduction on each claim submitted to Medicare beginning April 1, 2013, (f) the costs of defending and insuring against alleged professional liability and other claims and investigations (including those related to pending investigations and whistleblower and wage and hour class action lawsuits against the Company) and the Company’s ability to predict the estimated costs and reserves related to such claims and investigations, including the impact of differences in actuarial assumptions and estimates compared to eventual outcomes, (g) the impact of the Taxpayer Relief Act which, among other things, reduces Medicare payments by an additional 25% for subsequent procedures when multiple therapy services are provided on the same day. At this time, the Company believes that the rules related to multiple therapy services will reduce its Medicare revenues by $25 million to $30 million on an annual basis, (h) changes in the reimbursement rates or the methods or timing of payment from third party payors, including commercial payors and the Medicare and Medicaid programs, changes arising from and related to the Medicare prospective payment system for LTAC hospitals, including potential changes in the Medicare payment rules, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, and changes in Medicare and Medicaid reimbursement for the Company’s TC hospitals, nursing centers, inpatient rehabilitation hospitals and home health and hospice operations, and the expiration of the Medicare Part B therapy cap exception process, (i) the effects of additional legislative changes and government regulations, interpretation of regulations and changes in the nature and enforcement of regulations governing the healthcare industry, (j) the ability of the Company’s hospitals and nursing centers to adjust to medical necessity reviews, (k) the impact of the Company’s significant level of indebtedness on its funding costs, operating flexibility and ability to fund ongoing operations, development capital expenditures or other strategic acquisitions with additional borrowings, (l) the Company’s ability to successfully redeploy its capital and proceeds of asset sales in pursuit of its business strategy and pursue its development activities, including through acquisitions, and successfully integrate new operations, including the realization of anticipated revenues, economies of scale, cost savings and productivity gains associated with such operations, as and when planned, including the potential impact of unanticipated issues, expenses and liabilities associated with those activities, (m) the Company’s ability to pay a dividend as, when and if declared by the Board of Directors, in compliance with applicable laws and the Company’s debt and other contractual arrangements, (n) the failure of the Company’s facilities to meet applicable licensure and certification requirements, (o) the further consolidation and cost containment efforts of managed care organizations and other third party payors, (p) the Company’s ability to meet its rental and debt service obligations, (q) the Company’s ability to operate pursuant to the terms of its debt obligations, and comply with its covenants thereunder, and the Company’s ability to operate pursuant to its master lease agreements with Ventas, (r) the condition of the financial markets, including volatility and weakness in the equity, capital and credit markets, which could limit the availability and terms of debt and equity financing sources to fund the requirements of the Company’s businesses, or which could negatively impact the Company’s investment portfolio, (s) the Company’s ability to control costs, particularly labor and employee benefit costs, (t) the Company’s ability to successfully reduce (by divestiture of operations or otherwise) its exposure to professional liability and other claims, (u) the Company’s obligations under various laws to self-report suspected violations of law by the Company to various government agencies, including any associated obligation to refund overpayments to government payors, fines and other sanctions, (v) national, regional and industry-specific economic, financial, business and political conditions, including their effect on the availability and cost of labor, credit, materials and other services, (w) increased operating costs due to shortages in qualified nurses, therapists and other healthcare personnel, (x) the Company’s ability to attract and retain key executives and other healthcare personnel, (y) the Company’s ability to successfully dispose of unprofitable facilities, (z) events or circumstances which could result in the impairment of an asset or other charges, such as the impact of the Medicare reimbursement regulations that resulted in the Company recording significant impairment charges in the last three fiscal years, (aa) changes in GAAP and changes in tax accounting or tax laws (or authoritative interpretations relating to any of these matters), (bb) the Company’s ability to maintain an effective system of internal control over financial reporting, (cc) the Company’s ability to realize the anticipated operating and financial synergies from the potential acquisition of Gentiva, (dd) the uncertainties as to whether Gentiva or any other companies that the Company may acquire will have the accretive effect on the Company’s earnings or cash flows that are expected, and (ee) the outcome of the potential acquisition of Gentiva, including the Company’s ability to realize the strategic rationale behind the Gentiva acquisition.

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.

In addition to the results provided in accordance with GAAP, the Company has provided information in this release to compute certain non-GAAP measurements for the three months and six months ended June 30, 2014 and 2013 before certain charges or on a core basis. A reconciliation of the non-GAAP measurements to the GAAP measurements is included in this press release.

Also in this release, the Company provides the financial measure of free cash flows excluding certain items. The Company recognizes that free cash flows excluding certain items is a non-GAAP measurement and is not intended to replace the presentation of the Company’s cash flows in accordance with GAAP. The Company believes that this non-GAAP measurement provides important information to investors related to the amount of discretionary cash flows that are available for other investing and financing activities. In addition, management uses free cash flows excluding certain items in making decisions related to acquisitions, development capital expenditures, dividends, long-term debt repayments and other uses. The Company believes net cash flows provided by (used in) operating activities is the most comparable GAAP measure. Readers of the Company’s financial information should consider net cash flows provided by (used in) operating activities as an important measure of the Company’s financial performance because it provides the most complete measure of its performance. Free cash flows excluding certain items should be considered in addition to, not as a substitute for, or superior to, financial measures based upon GAAP as an indicator of operating performance. A reconciliation of net cash flows provided by (used in) operating activities to free cash flows excluding certain items is included in this press release.

The Company’s earnings release includes a financial measure referred to as operating income, or earnings before interest, income taxes, depreciation, amortization and rent. The Company’s management uses operating income as a meaningful measure of operational performance in addition to other measures. The Company uses operating income to assess the relative performance of its operating divisions as well as the employees that operate these businesses. In addition, the Company believes this measurement is important because securities analysts and investors use this measurement to compare the Company’s performance to other companies in the healthcare industry. The Company believes that income (loss) from continuing operations is the most comparable GAAP measure. Readers of the Company’s financial information should consider income (loss) from continuing operations as an important measure of the Company’s financial performance because it provides the most complete measure of its performance. Operating income should be considered in addition to, not as a substitute for, or superior to, financial measures based upon GAAP as an indicator of operating performance. A reconciliation of operating income to income (loss) from continuing operations provided in the Condensed Business Segment Data is included in this press release.

About Kindred Healthcare

Kindred Healthcare, Inc., a top-150 private employer in the United States, is a FORTUNE 500 healthcare services company based in Louisville, Kentucky with annual revenues of $5 billion and approximately 63,000 employees in 47 states. At June 30, 2014, Kindred through its subsidiaries provided healthcare services in 2,353 locations, including 97 transitional care hospitals, five inpatient rehabilitation hospitals, 98 nursing centers, 21 sub-acute units, 153 Kindred at Home hospice, home health and non-medical home care locations, 104 inpatient rehabilitation units (hospital-based) and a contract rehabilitation services business, RehabCare, which served 1,875 non-affiliated facilities. Ranked as one of Fortune magazine’s Most Admired Healthcare Companies for six years in a row, Kindred’s mission is to promote healing, provide hope, preserve dignity and produce value for each patient, resident, family member, customer, employee and shareholder we serve. For more information, go to www.kindredhealthcare.com. You can also follow us on Twitter and Facebook.