KINDRED HEALTHCARE ANNOUNCES FOURTH QUARTER RESULTS

Fourth Quarter Net Income from Continuing Operations - $24.3 million or $0.56 per Diluted Share

Fiscal Year Net Income from Continuing Operations - $128.6 million or $2.84 per Diluted Share

Fourth Quarter Results

Continuing Operations

Consolidated revenues for the fourth quarter ended December 31, 2005 increased 11% to $989 million from $893 million in the same period last year. Net income from continuing operations for the fourth quarter of 2005 totaled $24.3 million or $0.56 per diluted share compared to $26.6 million or $0.63 per diluted share in the fourth quarter last year.

Operating results for the fourth quarter of 2005 included certain items that, in the aggregate, increased net income by approximately $2.2 million or $0.05 per diluted share. These items included pretax income of $2.8 million related to a favorable bad debt adjustment in the Company’s pharmacy business, pretax income of $1.7 million related to favorable settlements of prior year hospital Medicare cost reports, pretax income of $0.5 million from the dissolution of a pharmacy partnership interest, pretax income of $0.5 million from insurance recoveries related to hurricane losses, a pretax charge of $2.6 million for investment banking services and consulting fees, and a $0.2 million favorable pretax adjustment related to accrued reorganization costs.

Operating results for the fourth quarter of 2004 included certain items that, in the aggregate, increased net income by approximately $1.5 million or $0.04 per diluted share. These items included pretax income of $5.7 million for professional liability costs and a pretax charge of $3.3 million related to the write-off of a clinical information systems project.

Discontinued Operations

During 2004 and 2005, the Company completed several transactions related to the divestiture of unprofitable businesses, including the divestiture of three nursing centers in the fourth quarter of 2005. For accounting purposes, the historical operating results of these businesses and losses associated with these operations have been classified as discontinued operations in the Company’s condensed consolidated statement of operations for all historical periods.

For the fourth quarter of 2005, the Company reported net income from discontinued operations totaling $2.2 million or $0.05 per diluted share compared to breakeven results in the fourth quarter of 2004. Operating results for discontinued operations in both periods included favorable pretax adjustments 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. These pretax adjustments aggregated $5.6 million ($3.4 million net of income taxes or $0.08 per diluted share) in the fourth quarter of 2005 and $7.0 million ($4.3 million net of income taxes or $0.10 per diluted share) in the fourth quarter of 2004.

The Company reported a net loss of $0.9 million or $0.02 per diluted share related to the divestiture of discontinued operations in the fourth quarter of 2005 compared to a net loss of $7.2 million or $0.17 per diluted share in the fourth quarter of 2004.

At December 31, 2005, the Company held for sale two hospitals and one nursing center. Assets not sold at December 31, 2005 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 Company’s condensed consolidated balance sheet. The Company expects sales proceeds from these divestitures to approximate $12 million in 2006.

Other Fourth Quarter Information

The Company announced in December 2005 that it had obtained lender approval to increase the amount of available credit under its revolving credit agreement from $300 million to $400 million and to increase the amount of permitted acquisitions from $400 million to $500 million, among other things. The Company obtained lender commitments for the increased credit capacity and closed the transaction in February 2006. At December 31, 2005, the remaining permitted acquisition amount aggregated $352 million.

During the fourth quarter of 2005, the Company repurchased approximately 1,753,000 shares of its common stock at an aggregate cost of approximately $48 million.

Fiscal Year Results

Continuing Operations

Consolidated revenues for the year ended December 31, 2005 increased 12% to $3.9 billion from $3.5 billion in 2004. Net income from continuing operations totaled $128.6 million or $2.84 per diluted share in 2005 compared to $87.3 million or $2.06 per diluted share in 2004.

Operating results for 2005 included certain items that, in the aggregate, increased net income by approximately $37.8 million or $0.83 per diluted share. In addition to the items reported in the fourth quarter, these items related primarily to favorable settlements of prior year hospital Medicare cost reports, a special employee recognition payment to non-executive caregivers and employees, a charitable donation, a retroactive nursing center Medicaid rate increase related to a prior year, hurricane related costs and a favorable adjustment related to accrued reorganization costs.

Operating results for 2004 included certain items that, in the aggregate, increased net income by approximately $2.3 million or $0.06 per diluted share.

Discontinued Operations

In 2005, the Company reported net income from discontinued operations totaling $17.7 million or $0.39 per diluted share compared to a net loss of $0.9 million or $0.02 per diluted share in 2004. Favorable pretax adjustments related to changes in estimates for professional liability reserves totaled $42.3 million ($26.0 million net of income taxes or $0.58 per diluted share) for the year ended December 31, 2005 and $18.0 million ($11.1 million net of income taxes or $0.26 per diluted share) for the same period of 2004.

Net losses related to the divestiture of discontinued operations for the year ended December 31, 2005 aggregated $1.4 million or $0.03 per diluted share compared to $15.8 million or $0.37 per diluted share for the same period of 2004.

Management Commentary

“We are pleased with our fourth quarter results, with each of our operating divisions contributing to our success,” remarked Paul J. Diaz, President and Chief Executive Officer of the Company. “Our hospitals reported 7% same-store admissions growth compared to last year, while continued growth in commercial and managed care revenues and improved operating efficiencies contributed to a solid quarter for this division. Our nursing centers rebounded well in the quarter, with stronger Medicare volumes and reduced contract labor costs from third quarter levels. Our KPS pharmacy business completed its third acquisition of 2005 during the fourth quarter while also reporting organic customer growth in its same-store operations. We also gained momentum in Peoplefirst rehabilitation through enhanced recruiting and reduced contract labor from the third quarter.”

Commenting on the Company’s full-year results, Mr. Diaz remarked, “Our results for fiscal 2005 reflect solid performance on a number of fronts. Our overall revenue growth of 12% reflected continued growth in each of our four divisions. In our hospital division, 5% growth in same-store admissions, along with improvements in our clinical, customer service and quality measures, led the way to another successful year. Fiscal 2005 also marked an exciting year of growth and expansion in our KPS pharmacy business. The successful integration of three acquisitions, organic customer growth at our existing pharmacies and significant investments in preparation for the new Medicare prescription drug benefit in 2006 all made for a highly productive year for our KPS team. While our nursing center financial results were somewhat disappointing in 2005, we significantly improved the quality of care delivered to our residents as we continue to reposition this business to care for more Medicare and managed care patients in the future. Our Peoplefirst rehabilitation business also made progress in building its recruiting capabilities, filling open positions, reducing contract labor and positioning itself for anticipated future external customer growth.”

Mr. Diaz commented on the Company’s acquisition and development activities, noting, “In addition to our pharmacy acquisitions, we opened two pharmacies and added two hospitals to our portfolio in 2005. We are continuing to make progress toward the completion of the Commonwealth acquisition, a transaction that will provide growth opportunities in each of our four business lines. In addition, we recently expanded both our revolving credit capacity and acquisition capabilities by $100 million. As in the past, we will continue to seek acquisition and strategic opportunities to enhance shareholder value.”

Mr. Diaz also commented on the Company’s overall financial position and cash flows, noting, “As a result of a strong fourth quarter, we reported cash flows from operations totaling $263 million for all of 2005. Our cash balances at the end of the year increased to $83 million and there were no outstanding borrowings under our revolving credit facility at the end of the year. Our operating cash flows during 2005 were primarily used to finance $126 million in capital expenditures to maintain and improve our existing facilities, $115 million in acquisitions and $48 million toward the fourth quarter repurchase of our common stock.”

Mr. Diaz further commented, “Fiscal 2005 also was a year highlighted by the remarkable commitment of our employees to our patients and their families. Among the many accomplishments across the Company, the examples of selfless acts of heroism by our people during the Hurricane Katrina and Hurricane Rita disasters made us all feel proud to be part of Kindred.”

Proposed Regulatory Changes

On January 19, 2006, the Centers for Medicare and Medicaid Services (“CMS”) issued proposed regulatory changes regarding Medicare reimbursement to long-term acute care hospitals (the “Proposed Hospital Rule”). As previously disclosed, based upon the Company’s historical Medicare patient volumes, the Company expects that the Proposed Hospital Rule would reduce Medicare revenues to the Company’s hospitals associated with short stay outliers and high cost outliers between $115 million and $120 million on an annual basis. This estimate does not include the negative impact resulting from the elimination of the annual market basket adjustment to the Medicare payment rates that also is contained in the Proposed Hospital Rule. The annual market basket adjustment has typically ranged between 3% and 4%, or approximately $25 million to $30 million in annual revenues. The Proposed Hospital Rule would be effective for discharges occurring on or after July 1, 2006 through June 30, 2007. The Proposed Hospital Rule is subject to a 60-day public comment period, and as such, is subject to change.

Mr. Diaz commented, “We are working in consultation with our trade associations and other advocacy groups during the 60-day public comment period to demonstrate the significant negative impact that the Proposed Hospital Rule would have on our shared goal with CMS of ensuring that Medicare beneficiaries who need long-term acute care hospital services receive high quality care in the most appropriate setting. We believe this goal is best achieved by developing certification criteria to ensure that the most medically complex patients are treated in long-term acute care hospitals and that these facilities have the resources and capabilities to treat those patients.”

Nursing Center Divestitures

In December 2005, the Company announced an agreement to acquire ten unprofitable leased nursing centers for resale in exchange for two owned hospitals. The agreement provided for the Company to lease the two hospitals for approximately the same annual rents that are currently paid for the ten nursing centers.

As a result of the Proposed Hospital Rule, the parties have agreed to postpone the proposed transaction pending the final outcome of the Proposed Hospital Rule. This transaction is subject to certain approvals and other conditions to closing. There can be no assurance that the transaction will close or will not be modified based upon the final outcome of the Proposed Hospital Rule.

No Earnings Guidance for 2006

As a result of uncertainties related to a number of regulatory changes that will impact each of its four operating divisions in 2006, the Company is not providing 2006 earnings guidance at this time. In addition to the Proposed Hospital Rule, a revised Medicare patient classification system for nursing centers known as “RUGs refinement” will impact the operating results for both the Company’s nursing centers and Peoplefirst rehabilitation businesses in 2006. The implementation of Medicare Part B therapy caps in 2006 also is expected to affect the operating results of the Company’s nursing center and Peoplefirst rehabilitation services divisions. In addition, the implementation of the Medicare Part D drug benefit that became effective January 1, 2006 will impact a significant portion of the Company’s KPS pharmacy business. There is also uncertainty with respect to the previously disclosed rent reset option available to the Company’s primary landlord, Ventas, Inc. (“Ventas”) (NYSE:VTR).

Issues Associated with Outstanding Warrants

The Company’s Series A warrants (NASDAQ:KINDW) and Series B warrants (NASDAQ:KINDZ) will expire on April 20, 2006. Each Series A warrant allows the holder to purchase two shares of the Company’s common stock at an aggregate price of $30.00, while each Series B warrant allows the holder to purchase two shares of common stock at an aggregate price of $33.33. At December 31, 2005, there were outstanding 1,859,534 Series A warrants and 4,630,343 Series B warrants.

Effective February 27, 2006, the Company successfully amended the warrant agreement governing its Series A warrants and its Series B warrants. The amendment implements a cashless exercise procedure offering warrant holders the option to pay the exercise price for the warrants in the form of shares of the Company’s common stock acquired upon the exercise of such warrants. The cashless exercise procedure will be available to current and subsequent warrant holders beginning February 27, 2006. The warrant agreement did not previously provide for a cashless exercise procedure.

To the extent warrant holders do not avail themselves of the cashless exercise procedure, the Company intends to repurchase shares of its common stock in the open market with the cash proceeds from the exercise of the warrants over time and subject to market conditions. The Company’s diluted earnings per share is derived by use of the treasury stock method of accounting, which assumes that warrants are converted and shares of common stock are repurchased simultaneously. Since the Company’s repurchase of its common stock in the open market is subject to certain daily trading volume limitations, the actual dilution resulting from the exercise of the warrants in 2006 may be higher than the levels reported in its historical financial statements.

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 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 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; (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 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 the Medicare prospective payment system for long-term acute care hospitals, including the Proposed Hospital Rule, and the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, and changes in Medicare and Medicaid reimbursements for the Company’s nursing centers; (h) national and regional economic conditions, particularly their effect on the availability and cost of labor, materials and other services; (i) the Company’s ability to control costs, particularly 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.

Kindred Healthcare, Inc. through its subsidiaries operates hospitals, nursing centers, institutional pharmacies and a contract rehabilitation services business across the United States.

Click here to view the 4th Quarter Results.

CONTACT:
Richard A. Lechleiter
Executive Vice President and Chief Financial Officer
(502) 596-7734

Return to Press Releases