Kindred Healthcare Reports First Quarter 2016 Results

Kindred Healthcare, Inc. (“Kindred” or the “Company”) (NYSE:KND) today announced its operating results for the first quarter ended March 31, 2016.

Benjamin A. Breier, President and Chief Executive Officer of the Company, commented, “We are off to a strong start in 2016 with first quarter results at the high end of our expectations. Our performance underscores the value of our diversified portfolio as well as our focus on driving quality outcomes in all of our businesses, particularly as we prepare our Hospital Division to transition to reimbursement under long-term acute care (“LTAC”) patient criteria later this year. The Hospital Division delivered a solid quarter with seasonal volume increases, stable operating results compared to the prior year and significant improvement from the operating trends experienced in the second half of 2015. In addition, we continued to drive growth and momentum in Kindred at Home (“KAH”) and Kindred Hospital Rehabilitation Services (“KHRS”), with strong sequential and year-over-year volume growth and operating performance in these businesses. Solid execution remains our top priority across the Company as we drive effective patient-centered care solutions and adapt to change.”

Mr. Breier continued, “Kindred is the nation’s largest provider of integrated care for people with post-acute and chronic care needs. More important than our size and clinical expertise, we are working to seamlessly connect our service lines to coordinate care and break down traditional silos of care, in advance of the growing demand for value-based care and payment. We are putting the key resources in place to ensure patients receive the right care for the right duration with targeted clinical interventions to support shorter lengths of stay and ongoing wellness. We recently issued our 2015 Quality, Innovation and Social Responsibility Report that highlights our clinical expertise, capabilities across the continuum of post-acute services and care innovations. These strengths support smooth transitions between care settings, produce positive clinical outcomes, and improve the patient experience. As always, I thank Kindred’s 102,000 teammates for the exceptional care and hope that they provide to more than one million patients each year.”

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.

First Quarter Consolidated Highlights(1):

• Consolidated revenues were $1.84 billion, a 9.7% year-over-year increase, and core earnings before interest, income taxes, depreciation, amortization, rent and certain charges (“core EBITDAR”) increased 5.4% to $247 million compared to the same period in 2015. A significant driver of the growth was the acquisition of Gentiva Health Services, Inc. (“Gentiva”) on February 2, 2015.
• Core diluted earnings per share (“EPS”) from continuing operations was $0.25 and adjusted core diluted EPS from continuing operations was $0.35 based upon 87.2 million weighted average diluted shares. In the same period a year ago, core diluted EPS was $0.34 and adjusted core diluted EPS was $0.43 based upon 82.4 million weighted average diluted shares.

First Quarter Consolidated Highlights(1):(Continued)

• Core operating cash flow was approximately breakeven(2) compared to core operating cash flows of $38 million(2) for the same period a year ago. Core free cash flow was a deficit of $35 million(3) compared to core free cash flows of $6 million(3) in the same period a year ago. These quarterly cash flow comparisons were negatively impacted by approximately $93 million of cash flow timing differences related to the Company’s acquisition of Gentiva in February 2015.
• GAAP consolidated operating results:

• The Kindred Board of Directors declared a cash dividend of $0.12 per share on the Company’s common stock payable on June 10, 2016 to shareholders of record as of the close of business on May 18, 2016.

Stephen D. Farber, Executive Vice President and Chief Financial Officer of Kindred, noted, “Operating cash flows for the first quarter, which are typically lower than the other quarters of the year, were in line with our expectations and are on track for the year. We continue to expect to generate roughly $300 million per year in core operating cash flows(2) and approximately half of that amount in core free cash flows(3).”

First Quarter Segment Highlights(1)(4):

Kindred’s Hospital Division first quarter revenues increased 0.4% over the prior year period to $643 million, with an increase in same-hospital admissions of 1.2% and an increase in same-hospital revenues per patient day of 2.0% compared to the same period last year. As compared to the fourth quarter of 2015, same-hospital admissions increased 9.2%. Core EBITDAR for the first quarter increased 0.5% to $135.5 million from $134.8 million a year ago, and increased 15.1% from $117.7 million in the fourth quarter of 2015.

KAH first quarter revenues and core EBITDAR increased to $606 million and $91 million, respectively, as compared to the prior year period. The home health business achieved strong growth in the first quarter with episodic admissions increasing 2.1% and revenues increasing 6.2% to $364 million, both over the prior year period on a combined basis. These results were achieved despite a 10% net reduction in home health branches since the beginning of 2015, primarily from branch consolidations. Average home health revenue per branch grew 14.8% during the last twelve months compared to a year ago. The hospice business generated $176 million of revenues in the first quarter with average daily census growth of 1.7% compared to the same period a year ago and average daily census growth of 1.0% from the fourth quarter of 2015, notwithstanding an 8.3% net reduction in hospice branches since the beginning of 2015, primarily from branch consolidations. Average hospice revenue per branch grew 8.2% during the last twelve months compared to a year ago.

Kindred Rehabilitation Services Division revenues declined 8.4% to $370 million and core EBITDAR declined 2.0% to $59.9 million compared to the first quarter last year. Strong performance in the first quarter from KHRS freestanding inpatient rehabilitation hospitals (“IRFs”) was offset by the impact of previously reported contract losses in RehabCare that occurred primarily in the first half of 2015. The KHRS segment achieved strong revenue growth of 9.4% and core EBITDAR growth of 7.4% compared to the same period a year ago, with IRF same-hospital discharges growing 5.5% during the quarter. RehabCare revenues declined 19% to $204 million from a year ago. Core EBITDAR and operating margins stabilized in the first quarter with results that improved slightly from the fourth quarter of 2015 despite the late fourth quarter cancellation of a customer contract with 24 sites of service in connection with litigation to collect past due amounts.

First Quarter Segment Highlights(1): (Continued)

Kindred’s Nursing Center Division revenues declined 0.8% to $272 million compared to the first quarter last year. Core EBITDAR was $30 million, down from $37 million a year ago, primarily due to a 2.8% decline in average daily census, start-up losses of $1.5 million at two newly opened transitional care centers and higher contract labor costs.

2016 Outlook

Kindred today reaffirmed its outlook for 2016. Kindred expects:

• Annual revenues of approximately $7.250 billion, with a range of $7.2 billion to $7.3 billion
• Core EBITDAR of approximately $990 million, with a range of $970 million to $1.010 billion
• Core diluted EPS from continuing operations of approximately $0.90, with a range of $0.80 to $1.00(2)
• Adjusted core diluted EPS from continuing operations of approximately $1.25, with a range of $1.15 to $1.35(2)(3)

For the second quarter of 2016, the Company expects core EBITDAR to approximate $260 million to $275 million, core diluted EPS from continuing operations to approximate $0.30 to $0.40 and adjusted core diluted EPS from continuing operations to approximate $0.40 to $0.50.

Additionally, Kindred reaffirmed its preliminary outlook for 2017 core EBITDAR of at least $1 billion.

Mr. Breier commented, “Our focus for 2016 continues to be on readiness for LTAC patient criteria and on driving growth and development across our faster growing home health, hospice, and inpatient rehabilitation businesses. We are also focused on optimizing our LTAC hospital portfolio as a key element of our LTAC mitigation strategy and our previously announced transactions with Curahealth, LLC (“Curahealth”) and Select Medical Holdings Corporation are important steps to advance these efforts.”

The Company’s outlook does not reflect the potential impact of the previously announced definitive agreement to sell 12 LTAC hospitals to Curahealth. The Company will make the appropriate adjustments to its outlook once there is more clarity around the timing of the transaction closing.

The Company’s outlook also excludes transaction costs, the effect of any reimbursement changes, debt refinancing costs, severance, retirement, retention, consulting and restructuring costs, litigation and related contingency expense, integration costs, business interruption settlements, research and development, any further acquisitions or divestitures, any impairment charges, any further issuances of common stock or any repurchases of common stock.

All forward-looking non-GAAP financial measures contained in this section “2016 Outlook” are provided only on a non-GAAP basis. This is due to the inherent difficulty of forecasting the timing or amount of items that would be included in the most directly comparable forward-looking GAAP financial measures. As a result, reconciliation of the forward-looking non-GAAP financial measures to GAAP financial measures is not available without unreasonable effort and the Company is unable to address the probable significance of the unavailable information.

Cash Dividend

The Company announced that its Board of Directors has approved the payment of a cash dividend of $0.12 per share of common stock to be paid on June 10, 2016 to shareholders of record as of the close of business on May 18, 2016.

Conference Call

As previously announced, investors and the general public may access a live webcast of the first quarter 2016 conference call through a link on the Company’s website at http://investors.kindredhealthcare.com. The conference call will be held on May 5 at 9:00 a.m. (Eastern Time).

A telephone replay of the conference call will become available at approximately 12:00 p.m. on May 5 by dialing (719) 457-0820, access code: 2174744. The replay will be available through May 14.

Forward-Looking Statements and Non-GAAP Reconciliations

See page 11 for important disclosures regarding the Company’s forward-looking statements and the non-GAAP financial reconciliations that follow.

About Kindred Healthcare

Kindred Healthcare, Inc., a top-90 private employer in the United States, is a FORTUNE 500 healthcare services company based in Louisville, Kentucky with annual revenues of approximately $7.2 billion(1). At March 31, 2016, Kindred through its subsidiaries had approximately 102,000 employees providing healthcare services in 2,700 locations in 46 states, including 95 transitional care hospitals, 19 inpatient rehabilitation hospitals, 92 nursing centers, 20 sub-acute units, 618 Kindred at Home home health, hospice and non-medical home care sites of service, 104 inpatient rehabilitation units (hospital-based) and a contract rehabilitation services business, RehabCare, which served 1,752 non-affiliated sites of service. Ranked as one of Fortune magazine’s Most Admired Healthcare Companies for seven years, 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.

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. These forward-looking statements include, but are not limited to, all statements regarding the Company’s expected future financial position, results of operations, cash flows, dividends, financing plans, business strategy, budgets, capital expenditures, competitive positions, growth opportunities, plans and objectives of management, government investigations, regulatory matters, and statements containing the words such as “anticipate,” “approximate,” “believe,” “plan,” “estimate,” “expect,” “project,” “could,” “would,” “should,” “will,” “intend,” “may,” “potential,” “upside,” and other similar expressions. Statements in this press release concerning the Company’s business outlook or future economic performance, anticipated profitability, revenues, expenses, dividends or other financial items, product or services line growth, and expected outcome of government investigations and other regulatory matters, 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. 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 detailed from time to time in the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K with the Securities and Exchange Commission.

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.

Non-GAAP Measurements

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 ended March 31, 2016 and 2015 before certain charges or on a core and adjusted core basis, and on a same-hospital basis. The use of these non-GAAP measures are not intended to replace the presentation of the Company’s financial results in accordance with GAAP. The Company believes that the presentation of core operating results provides additional information to investors to facilitate the comparison between periods by excluding certain charges that are not representative of its ongoing operations due to the materiality and nature of the charges. The Company believes the presentation of adjusted core operating results, which excludes non-cash expenses related to amortization of intangible assets, stock-based compensation and deferred financing costs from core operating results, is a useful performance measure used by some investors, equity analysts and others to make informed investment decisions and for comparability to other companies that use similar measures. The Company believes the presentation of same-hospital revenues, which excludes the results from two hospitals that closed during 2015, provides investors, equity analysts and others with useful information regarding the performance of the Company's hospital operations that are comparable for the periods presented. The Company believes that reported hospital segment revenues is the most comparable GAAP measure. Readers of the Company’s financial information should consider reported hospital segment revenues as an important measure of the Company’s Hospital Division financial performance because it provides the most complete measure of its revenues. The Company’s earnings release also includes financial measures referred to as operating income, or EBITDAR or core EBITDAR, and core earnings before interest, income taxes, depreciation and amortization (“core EBITDA”). The Company’s management uses core EBITDAR or core EBITDA as meaningful measures of operational performance in addition to other measures. The Company uses core EBITDAR or core EBITDA to assess the relative performance of its operating divisions as well as the employees that operate these businesses. In addition, the Company believes these measurements are important because securities analysts and investors use these measurements 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 results presented on a core and adjusted core basis and core EBITDAR or core EBITDA, as well as a same-hospital basis, 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. Reconciliations of the non-GAAP measurements to the GAAP measurements are included in the following pages of this press release.

Also in this press release, the Company provides the financial measures of operating cash flows and free cash flows excluding certain items, which the Company refers to as core operating cash flows and core free cash flows. The Company recognizes that core operating cash flows and core free cash flows are non-GAAP measurements and are not intended to replace the presentation of the Company’s cash flows in accordance with GAAP. The Company believes that these non-GAAP measurements provide important information to investors for comparability to other companies that use similar measures. In addition, management uses core operating cash flows and core free cash flows 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 operating activities is the most comparable GAAP measure. Readers of the Company’s financial information should consider net cash flows provided by operating activities as an important measure of the Company’s financial performance because it provides the most complete measure of its performance. Core operating cash flows and core free cash flows 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. Reconciliations of net cash flows provided by operating activities to core operating cash flows and core free cash flows are included in this press release.