Kindred Healthcare Reports First Quarter 2017 Results

Kindred Healthcare, Inc. (“Kindred” or the “Company”) (NYSE:KND) today announced its operating results for the first quarter ended March 31, 2017.

Benjamin A. Breier, President and Chief Executive Officer of the Company, commented, “We are pleased to report progress in the first quarter of 2017, as evidenced by strong growth in our home health, hospice and inpatient rehabilitation businesses and continued advancement by our Hospital Division in its second full quarter under long-term acute care (“LTAC”) patient criteria. Furthermore, we are reaffirming our expectations for 2017 and 2018.”

Mr. Breier continued, “In the first quarter, we delivered very encouraging sequential and year-over-year improvement in our Kindred at Home Division, with strong same-store volume growth in both our home health and hospice businesses. Combined with a sequential reduction of labor costs in the first quarter, we returned to historic growth levels and delivered results in line with our 2017 expectations.”

“Our Hospital Division continued to advance our multi-pronged LTAC patient criteria mitigation strategy in the first quarter. Our successful execution is reflected in the exceptional growth of the Hospital Division’s same-hospital non-government admissions, a key element of our LTAC mitigation strategy that helped offset light Medicare volumes. We also continue to make progress in reducing patients’ length of stay through our efforts to eliminate avoidable clinical delays. We remain confident that our mitigation strategies will offset at least half of the expected run-rate impact of LTAC patient criteria by year-end,” remarked Mr. Breier.

Mr. Breier added, “Since announcing our transformative initiative to divest our skilled nursing center business, our Nursing Center Division has maintained high standards of care while delivering stable operating results. We continue to make progress on our nursing center divestiture and remain focused on completing an accretive, value-enhancing transaction by year end.”

Mr. Breier concluded, “On behalf of Kindred’s entire leadership team, I am proud to share that our recently completed 2017 Quality, Innovation and Social Responsibility Report demonstrates another year of outperforming quality benchmarks and success in sending more patients home with better outcomes. We continue to deliver innovative post-acute solutions while building and deepening our relationships with key partners. Our clinical excellence, national reach, and innovative use of technology and data enable the development of new products that create value for all of our stakeholders, including our shareholders, payors and partners.”

All financial and statistical information included in this earnings release reflects the continuing operations of the Company’s businesses for all periods presented unless otherwise indicated.

First Quarter Consolidated Results(1):

• Consolidated revenues were $1.77 billion, a 3.8% year-over-year decrease, primarily attributable to the impact of the transition to LTAC patient criteria and the sale or closure of 15 LTAC hospitals in the second half of 2016. GAAP income from continuing operations was $8.8 million compared to $25.8 million in the same period a year ago, primarily due to the impact of LTAC patient criteria and an increase in restructuring costs. Core EBITDAR declined to $217.8 million compared to $245.2 million in the same period of 2016, primarily due to LTAC patient criteria and the sale or closure of 15 LTAC hospitals noted above.
• GAAP operating cash flows were a deficit of $92.6 million compared to a deficit of $130.4 million for the same period a year ago. Core operating cash flows were a deficit of $71.7 million compared to $1.0 million for the same period a year ago. Core free cash flows were a deficit of $109.4 million compared to a deficit of $33.4 million in the same period a year ago. GAAP operating cash flows improved in the first quarter of 2017 primarily due to a reduction in litigation settlements, including a $126 million litigation payment made in the first quarter of 2016. The decrease in core operating and core free cash flows was primarily attributable to an additional payroll of approximately $40 million, LTAC patient criteria and an increase in net working capital in the first quarter of 2017 compared to the prior year period.
• GAAP diluted loss per share from continuing operations was $0.07 as compared to GAAP diluted earnings per share (“EPS”) from continuing operations of $0.15 a year ago. This decrease was primarily attributable to LTAC patient criteria and an increase in restructuring charges in the first quarter of 2017. Core diluted EPS from continuing operations was $0.04 as compared to $0.24 a year ago. The decline in core diluted EPS was primarily attributable to LTAC patient criteria and a $2.3 million, or $0.03 per diluted share, increase in the provision for income taxes due to an accounting rule change effective January 1, 2017 that requires book to tax differences associated with stock-based compensation to be recorded to the provision for income taxes in the statement of operations rather than the statement of stockholders’ equity.

First Quarter Segment Results(1)(2):

Our Kindred at Home Division, which comprises the Company’s home health, hospice, community care and home-based primary care businesses, recorded first quarter revenues that increased 3.9% over the prior year period to $630.2 million. On a same-store basis, home health episodic admissions grew 4.3% (5.4% increase excluding the impact of the extra leap year day in the first quarter of 2016 (“leap year adjusted”)) and hospice admissions grew 3.9% (5.1% increase leap year adjusted) over the prior year period. Both Segment EBITDAR and Core EBITDAR were relatively flat in the first quarter of 2017 compared to the prior year period. On a sequential basis for both Segment EBITDAR and Core EBITDAR, home health direct labor costs per visit declined 3.7% and hospice direct labor costs per patient day were relatively flat in the first quarter of 2017 compared to the fourth quarter of 2016.

Kindred’s Hospital Division first quarter revenues declined to $540.3 million from $643.3 million in the prior year period primarily due to the impact of LTAC patient criteria, a 1.8% decline in same-hospital admissions (0.7% decline leap year adjusted) compared to last year and the sale or closure of 15 LTAC hospitals in the second half of 2016, which contributed approximately $63 million of revenue in the first quarter of 2016. Same-hospital non-government admissions increased 9.1% (10.3% increase leap year adjusted) in the first quarter of 2017 compared to the prior year period. Sequentially, same-hospital admissions increased 4.6%, non-government admissions increased 8.7% and same-hospital census improved 5.0% as compared to the fourth quarter of 2016. For the first quarter of 2017, approximately 86% (90% excluding Texas LTAC hospitals) of same-hospital revenue came from compliant patients, which include all patients except Medicare site neutral patients, down from approximately 89% (92% excluding Texas LTAC hospitals) in the fourth quarter of 2016. Importantly, same-hospital compliant admissions grew 3.9% to 8,401 in the first quarter of 2017 from 8,087 compliant admissions in the fourth quarter of 2016. Segment EBITDAR and Core EBITDAR in the Hospital Division for the first quarter both declined to $91.2 million from $135.5 million a year ago, primarily due to the impact of LTAC patient criteria, increases in labor and other costs, and the sale or closure of 15 LTAC hospitals noted above, which contributed approximately $8 million of EBITDAR in the first quarter of 2016.

First Quarter Segment Results(1)(2)(Continued):

Kindred Rehabilitation Services (“KRS”) Division, which comprises the Company’s hospital-based rehabilitation segment, increased first quarter revenues by 1.8% to $376.8 million as compared to $370.0 million in the prior year period. Segment EBITDAR and Core EBITDAR for KRS both increased 3.6% to $62.0 million as compared to $59.9 million in the prior year period. The Kindred Hospital Rehabilitation Services segment achieved strong revenue growth of 6.7% to $176.8 million, and Segment EBITDAR and Core EBITDAR both grew to $51.4 million, an increase of 7.4% compared to the same period a year ago, as a result of the development of new inpatient rehabilitation facilities (“IRFs”) and a 2.3% increase (3.4% increase leap year adjusted) in same-IRF discharges. RehabCare revenues declined 2.1% to $200.0 million for the first quarter, while first quarter Segment EBITDAR and Core EBITDAR both decreased to $10.6 million as compared to $12.0 million, all relative to the prior year period, primarily due to the reduction in sites of service, declines in customer census and average wage rate pressure. Sequentially, RehabCare Segment EBITDAR and Core EBITDAR grew from $5.6 million in the fourth quarter of 2016 to $10.6 million in the first quarter of 2017.

Kindred’s Nursing Center Division first quarter revenues were up slightly to $272.8 million, due to a 2.2% increase in revenue per patient day partially offset by an overall average daily census decline of 0.9% and Medicare length of stay contraction of 5.3%, both as compared to the prior year period. Segment EBITDAR and Core EBITDAR in the first quarter both increased 5.4% to $31.7 million from $30.1 million a year ago, as a result of an increase in revenue per patient day and improved cost efficiencies.

2017 Outlook(3)

All forward-looking non-GAAP financial measures used to provide “2017 Outlook” and “2018 Outlook” (collectively “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 assess the probable significance of the unavailable information.

The Company’s Outlook does not take into account the effect of any reimbursement changes, any further acquisitions or divestitures, and any further issuances or repurchases of common stock.

For the 2017 Outlook, Kindred reaffirms:

• Annual revenues of $7.2 billion, with a range of $7.1 billion to $7.3 billion.
• Core EBITDAR of $930 million, with a range of $910 million to $950 million.
• Core diluted EPS from continuing operations of $0.55, with a range of $0.40 to $0.70 per share(4).

For the second quarter of 2017, Kindred expects Core EBITDAR of approximately $225 million to $240 million, and Core diluted EPS from continuing operations of approximately $0.10 to $0.20.

The 2017 Outlook assumes the Company’s skilled nursing facility business is operated for the entire year. For accounting purposes, this business may qualify as a discontinued operation prior to the completion of the divestiture. At the time the skilled nursing facility business qualifies as a discontinued operation, the Company will be required to recast its historical operating results from continuing operations to exclude the business for all periods presented. Kindred will also update its 2017 Outlook during the quarter in which the recasting occurs.

2018 Outlook(1)

Kindred’s planned divestiture of its skilled nursing facilities will significantly impact the Company’s reported results, reducing revenues and expenses, and is expected to increase profitability.

For the 2018 Outlook, Kindred reaffirms:

• Annual revenues of approximately $6.3 billion.
• Core EBITDAR of approximately $840 million.
• Core diluted EPS from continuing operations of approximately $0.80(2).

Please note that all of these items represent midpoint estimates that the Company expects to update over time, and these estimates assume that Kindred completes its skilled nursing facilities exit prior to the start of 2018.

Cash Flow

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 in other quarters of the year, were in line with our expectations, and, as noted above, included the impact of an extra payroll of approximately $40 million compared to the prior year quarter, LTAC patient criteria and typical fluctuations in working capital. As previously discussed, once we complete the sale of our skilled nursing facility business and with our continued progress in 2017 mitigating LTAC patient criteria, we expect Kindred’s cash flow in 2018 to return to historical levels of roughly $300 million per year in core operating cash flows. Core free cash flows, which have been approximately half of core operating cash flows, will benefit from reductions in capital expenditures and noncontrolling interests that will result from our exit from the skilled nursing facility business.”

Conference Call

As previously announced, investors and the general public may access a live webcast of the first quarter 2017 conference call through a link on the Company’s website at http://investors.kindredhealthcare.com. The conference call will be held on May 4 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 4 by dialing (719) 457-0820, access code: 8925579. The replay will be available through May 14.

Forward-Looking Statements and Non-GAAP Reconciliations

See page 13 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(3). At March 31, 2017, Kindred through its subsidiaries had approximately 100,100 employees providing healthcare services in 2,624 locations in 46 states, including 82 LTAC hospitals, 19 inpatient rehabilitation hospitals, 91 nursing centers, 19 sub-acute units, 619 Kindred at Home home health, hospice and non-medical home care sites of service, 101 inpatient rehabilitation units (hospital-based) and contract rehabilitation service businesses which served 1,693 non-affiliated sites of service. Ranked as one of Fortune magazine’s Most Admired Healthcare Companies for eight 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.