KINDRED HEALTHCARE ANNOUNCES SECOND QUARTER RESULTS
Fiscal 2005 Earnings Guidance Revised
Board of Directors Authorizes up to $100 Million in Common Stock and Warrant
Repurchases
Company Completes Credit Facility Amendments:
Acquisition Capabilities Increased by $250 Million
Common Stock and Warrant Repurchase Authorizations Increased by $150 Million
Louisville, KY (August 2, 2005) – Kindred Healthcare, Inc. (the “Company”) (NYSE:KND) today announced its operating results for the second quarter ended June 30, 2005. 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.
Continuing Operations
Consolidated revenues for the second quarter ended June 30, 2005 increased 18% to $1.0 billion from $886 million for the same period in 2004. Net income from continuing operations for the second quarter of 2005 totaled $50.0 million or $1.08 per diluted share compared to $25.1 million or $0.60 per diluted share in the second quarter of 2004.
Operating results for the second quarter of 2005 included certain items that, in the aggregate, increased net income by approximately $31.1 million or $0.67 per diluted share. As previously announced, the Company recorded pretax income of approximately $54.6 million ($33.6 million net of income taxes) related primarily to the settlement of a prior year hospital Medicare cost report issue which was under appeal. The Company also recorded previously announced pretax charges of $15.0 million ($9.2 million net of income taxes) related to a special recognition payment to non-executive caregivers and employees and $5.0 million ($3.1 million net of income taxes) related to a charitable donation. Second quarter 2005 operating results also included pretax income of $15.9 million ($9.8 million net of income taxes) related to recently approved retroactive nursing center Medicaid rate increases in the state of Indiana, of which approximately $2.1 million related to the first quarter of 2005 and approximately $13.8 million related to prior years.
Operating results in the second quarter of 2004 included certain items that, in the aggregate, increased net income by approximately $5.8 million or $0.14 per diluted share.
For the six months ended June 30, 2005, consolidated revenues increased
14% to $2.0 billion from
$1.7 billion in the first half of 2004. Net income from continuing operations
totaled $82.3 million or $1.81 per diluted share for the first six months
of 2005 compared to $41.6 million or $0.98 per diluted share in the same
period a year ago.
Consolidated operating results for the first half of 2005 also included favorable pretax adjustments of $2.9 million related to prior year hospital Medicare cost report settlements and $1.4 million of accrued reorganization items in connection with the completion of legal proceedings related to the Company’s reorganization, both of which were recorded in the first quarter. The aggregate effect of these items increased net income from continuing operations in the first half of 2005 by $2.6 million or $0.06 per diluted share. Operating results for the first half of 2004 included a favorable pretax adjustment of $2.2 million ($1.3 million net of income taxes or $0.03 per diluted share) related to the settlement of prior year hospital Medicare cost reports recorded in the first quarter.
Discontinued Operations
For the second quarter of 2005, the Company reported net income from discontinued operations totaling $13.4 million or $0.29 per diluted share, compared to a net loss of $2.2 million or $0.05 per diluted share in the second quarter of 2004. Operating results for discontinued operations in the second quarter of 2005 included a favorable pretax adjustment of $23.0 million ($14.1 million net of income taxes or $0.31 per diluted share) resulting from a change in estimate for professional liability reserves related primarily to the Company’s Florida and Texas nursing centers that were substantially divested in 2003.
The Company also reported a net gain of $2.7 million or $0.06 per diluted share related to the divestiture of discontinued operations in the second quarter of 2005 compared to a net loss of $1.1 million or $0.03 per diluted share in the second quarter of 2004.
For the first six months of 2005, the Company reported net income from discontinued operations totaling $18.0 million or $0.40 per diluted share compared to a net loss of $4.9 million or $0.11 per diluted share in the first half of 2004. Favorable pretax adjustments related to changes in estimates for professional liability reserves totaled $32.6 million ($20.0 million net of income taxes or $0.44 per diluted share) in the first six months of 2005.
Gains and losses related to the divestiture of discontinued operations for the first six months of 2005 and 2004 were the same as those reported for the respective second quarter periods.
Management Commentary
Paul J. Diaz, President and Chief Executive Officer, remarked, “Our reported earnings for the second quarter were strong. However, excluding the separately disclosed items, we are disappointed with our results on an adjusted basis compared to our expectations. Substantially all of the shortfall in the second quarter resulted in our hospital division where various operating challenges at five facilities primarily relating to admissions and non-government revenues negatively impacted overall divisional results compared to our plan.”
Commenting further on second quarter hospital results, Mr. Diaz noted, “While not meeting expectations, the overall hospital portfolio continued to produce strong growth in admissions and revenues and, on an adjusted basis, growth in operating income in the second quarter compared to a year ago. We believe that the operating issues we saw in the second quarter can be addressed over the balance of the year to produce better overall hospital division performance. The remainder of our hospital portfolio and our other three operating divisions generally performed in line with our expectations in the second quarter.”
Mr. Diaz also commented on the Company’s operating performance in the first half of 2005, “Excluding the separately disclosed items, our consolidated results for the first half of 2005 are well ahead of last year. Adjusted hospital results reflect 12% revenue growth and 14% growth in operating income while same-store admissions grew 4% compared to the first six months of last year. Our KPS pharmacy results have been solid this year, with our same-store pharmacies reporting net customer growth while the operating performance of our two newly acquired pharmacies was in line with our plan. Our nursing centers continue to face challenges in gaining census in the face of declines in length of stay, but our focus on improving clinical outcomes and customer service continued to result in stable professional liability costs and quality mix. In Peoplefirst Rehabilitation, we continued to make personnel and infrastructure investments to support future growth while facing a challenging labor market for therapists.”
Commenting on the Company’s growth plans, Mr. Diaz stated, “As we look ahead, our continued focus on human resources, new sales and marketing initiatives, and the expansion of our customer service and clinical programs will continue to drive our future success. We are also continuing to successfully execute our strategic development plans, having recently announced agreements to add a 50-bed hospital in the Phoenix market and a 57-bed hospital in Philadelphia, both of which are scheduled to open in the first half of 2006. We are excited about the other development opportunities in our hospital business that could result in the announcement of three to four additional facilities over the balance of 2005. Our KPS pharmacy division accelerated its development activities in the second quarter through the acquisition of a 7,300-bed institutional pharmacy in southern California on April 1. In addition, we plan to open two to three institutional pharmacies in new markets during the remainder of the year.”
Recent Developments
As previously disclosed, the Centers for Medicare and Medicaid Services (“CMS”) issued proposed rules in April 2005 that could result in a material reduction in Medicare payments to the Company’s hospitals. Following a public comment period, CMS issued these rules in their final form on August 1, 2005. The final rules provide updates to the weights for diagnosis related groups and the geometric length-of-stay thresholds that will take effect for hospital Medicare discharges occurring on or after October 1, 2005. CMS has estimated that these changes could result in an aggregate reduction in payments to long-term acute care hospitals of approximately 4.2%. The Company expects these changes to reduce Medicare revenues to its hospitals between $35 million to $40 million on an annual basis based upon historical Medicare patient volumes.
On July 28, 2005, CMS published the final rules related to revised payment rates to nursing centers. Among other things, the final rules provide for a 3.1% inflation update to all resource utilization groupings (“RUGs”) categories effective October 1, 2005. Based upon current Part A Medicare payment rates, the Company expects that these rates will increase from approximately $348 per patient day to approximately $358 per patient day on October 1, 2005.
In addition, the final rules increase the indexing of RUGs categories, expand the total RUGs categories from 44 to 53 and eliminate the 20% payment add-on for the care of higher acuity patients that had been in effect since 2000 under the Balanced Budget Refinement Act. These changes are expected to reduce Medicare Part A per diem rates to the Company’s nursing centers from $358 per patient day to approximately $343 per patient day beginning on January 1, 2006.
Revised Earnings Guidance for 2005 – Continuing Operations
The Company is increasing its fiscal 2005 earnings guidance for its continuing operations primarily due to the special items reported in the second quarter while also taking into account the recently issued Medicare reimbursement rules. Revenues for 2005 are expected to approximate $3.9 billion. Operating income, or earnings before interest, income taxes, depreciation, amortization and rents, is expected to range from $584 million to $594 million. Professional liability costs for 2005 are expected to range from $80 million to $90 million, while depreciation, amortization and net interest costs are expected to approximate $100 million. Net income from continuing operations is expected between $123 million and $129 million, or $2.71 to $2.84 per diluted share (based upon diluted shares of 45.5 million). The Company indicated that the guidance includes the effect of favorable hospital Medicare cost report settlements, the special recognition payments to non-executive caregivers and employees, a charitable donation, accrued reorganization items and the portion of the recently approved retroactive Indiana nursing center Medicaid rate increases related to prior years, the aggregate effect of which increased net income from continuing operations in the first half of 2005 by approximately $32.4 million or $0.71 per diluted share. The Company indicated that the guidance also includes the estimated impact of the previously discussed final hospital reimbursement rules issued by CMS on August 1, 2005 that are expected to reduce Medicare payments to the Company’s hospitals by approximately $14 million ($8.6 million net of income taxes or $0.19 per diluted share) in the second half of 2005. The guidance does not include any other significant changes in third party reimbursements, the potential impact of the repurchase of any of the Company’s common stock and warrants under the equity repurchase authorization disclosed in this earnings release, or the effect of any potential acquisitions or divestitures.
The Company’s previous 2005 earnings guidance for continuing operations indicated revenues approximating $3.9 billion, operating income between $560 million and $570 million and net income ranging from $109 million to $115 million or $2.37 to $2.50 per diluted share (based upon diluted shares of 46 million). Professional liability costs were expected to range from $85 million to $95 million, while depreciation, amortization and net interest costs were expected to approximate $100 million. The previous 2005 earnings guidance also included favorable hospital Medicare cost report settlements and accrued reorganization items that increased first quarter 2005 net income from continuing operations by $2.6 million or $0.06 per diluted share. In addition, the previous 2005 earnings guidance did not include the estimated impact of the hospital reimbursement rules issued on August 1, 2005.
Mr. Diaz commented, “Our revised guidance reflects the special items recorded in the first half of the year and our adjusted operating results for the second quarter which were below our expectations. The guidance also reflects the recent changes in hospital Medicare reimbursement which should have the effect of reducing hospital revenues by approximately $14 million in the second half of the year. These regulatory developments do, however, provide the Company with additional reimbursement visibility going forward. While we will continue to face operating challenges in each of our divisions, we are confident that our consolidated results in the second half of 2005 will reflect solid growth in our operations.”
Financial Position and Cash Flows
At June 30, 2005, the Company’s cash and cash equivalents aggregated $33 million and there were no outstanding borrowings under the Company’s $300 million revolving credit facility (the “Credit Facility”).
Consolidated accounts receivable at June 30, 2005 included the impact of the favorable $55 million hospital Medicare settlement recorded in the second quarter. The Company expects to collect these amounts on or before April 30, 2006. In addition, accounts receivable at June 30, 2005 also included approximately $37 million of accrued revenues related to recently approved nursing center Medicaid rate increases in the state of Indiana recorded in the second quarter. The Company expects to collect these amounts, and pay the related $19 million of provider taxes, by the end of 2005.
Over the last two years, the Company’s limited purpose insurance subsidiary has achieved improved professional liability underwriting results. As a result, the Company received a return of capital of approximately $30 million from its limited purpose insurance subsidiary during the second quarter of 2005 to be used for general corporate purposes. These proceeds were used primarily to repay borrowings under the Credit Facility.
At June 30, 2005, the Company held for sale two hospitals and one nursing center. Assets not sold at June 30, 2005 have been measured at the lower of carrying value or estimated fair value less cost of disposal and have been classified as held for sale in the Company’s unaudited condensed consolidated balance sheet. The Company expects sales proceeds from these divestitures to approximate $10 million in 2005.
Mr. Diaz remarked, “Our balance sheet remains solid and we expect our operating cash flows to be strong over the second half of 2005 as we work to improve our accounts receivable collections.”
Board Authorization for $100 Million Common Stock and Warrant Repurchases
The Company also announced that its Board of Directors has authorized up to $100 million in common stock and warrant repurchases. The Company intends to finance any repurchases from operating cash flows or borrowings under the Credit Facility. The authorization includes both open market purchases as well as private transactions.
Credit Facility Amendments
The Company also announced the successful completion of certain amendments to its Credit Facility. The amendments (1) increase the amount permitted for acquisitions and certain investments by the Company from $150 million to $400 million, (2) provide the Company with the additional flexibility to repurchase up to $150 million of its common stock and warrants, and (3) increase the Company’s permitted capital expenditures in each fiscal year. The amendments also expand the borrowing base of the Credit Facility to include certain additional real estate holdings. In addition, the amendments clarify certain regulatory issues and expand certain representations and covenants of the Company, none of which are expected to impact the Company’s financial flexibility.
Mr. Diaz noted, “The authorization to repurchase our common stock and warrants, coupled with the Credit Facility amendments, provide Kindred with significant additional financial flexibility going forward as we continue to look at ways to grow the Company and increase shareholder value. These steps are a clear reflection of our confidence in our business plan and prospects.”
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 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 on 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 Securities and Exchange Commission.
In addition to the factors set forth above, other factors that may affect the Company’s plans or results include, without limitation, (a) the Company’s ability to operate pursuant to the terms of its debt obligations and its master lease agreements with Ventas, Inc. (NYSE:VTR); (b) the Company’s ability to meet its rental and debt service obligations; (c) adverse developments with respect to the Company’s results of operations or liquidity; (d) the Company’s ability to attract and retain key executives and other healthcare personnel; (e) increased operating costs due to shortages in qualified nurses, therapists and other healthcare personnel; (f) the effects of healthcare reform and government regulations, interpretation of regulations and changes in the nature and enforcement of regulations governing the healthcare industry; (g) changes in the reimbursement rates or methods of payment from third party payors, including the Medicare and Medicaid programs, and changes arising from and related to the Medicare prospective payment system for long-term acute care hospitals and the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, and changes in nursing center Medicare reimbursement resulting from revised RUGs payments; (h) national and regional economic conditions, including their effect on the availability and cost of labor, materials and other services; (i) the Company’s ability to control costs, including labor and employee benefit costs; (j) the Company’s ability to comply with the terms of its Corporate Integrity Agreement; (k) 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; (l) 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; (m) the Company’s ability to successfully reduce (by divestiture of operations or otherwise) its exposure to professional liability claims; (n) the Company’s ability to successfully dispose of unprofitable facilities; and (o) the Company’s ability to ensure and 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.
As noted above, the Company’s earnings guidance includes the financial measure referred to as operating income. 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 the Company’s 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 net income from continuing operations is the most comparable measure, in relation to generally accepted accounting principles, to operating income. Readers of the Company’s financial information should consider net income from continuing operations as an important measure of the Company’s financial performance because it provides the most complete measure of the Company’s performance. Operating income should be considered in addition to, not as a substitute for, or superior to, financial measures based on generally accepted accounting principles as an indicator of operating performance. A reconciliation of the estimated operating income to net income from continuing operations provided in the Company’s earnings guidance is included in this press release.
Kindred Healthcare, Inc. through it subsidiaries operates hospitals,
nursing centers, institutional pharmacies and a contract rehabilitation
services business across the United States.
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to view the 2nd Quarter Results.
CONTACT:
Richard A. Lechleiter
Executive Vice President and Chief Financial Officer
(502) 596-7734
