KINDRED HEALTHCARE ANNOUNCES SECOND QUARTER RESULTS
Net Income from Continuing Operations - $24.6 Million or $0.57 per Diluted Share
Share Repurchase Programs Completed During the Quarter
$194 Million Expended to Repurchase 7.8 Million Shares
Outstanding Shares at Quarter End Approximated 40 million
Louisville, KY (July 31, 2006) – Kindred Healthcare, Inc. (the “Company”) (NYSE:KND) today announced its operating results for the second quarter ended June 30, 2006. 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, 2006 increased 6% to $1.1 billion from $1.0 billion for the same period in 2005. Net income from continuing operations for the second quarter of 2006 totaled $24.6 million or $0.57 per diluted share compared to $51.4 million or $1.11 per diluted share in the second quarter of 2005.
Operating results for the second quarter of 2006 included certain items that, in the aggregate, did not impact net income. These items included pretax income of $4.3 million related to the favorable settlement of prior year hospital Medicare cost reports, a $3.3 million pretax charge in connection with the settlement of a prior year tax dispute and a pretax charge of $1 million for investment banking services and costs related to the rent reset issue with Ventas, Inc. (“Ventas”) (NYSE:VTR).
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. In June 2005, the Company realized a pretax gain of $54.6 million related primarily to the settlement of a prior year hospital Medicare cost report issue. The Company also recorded pretax charges of $14.8 million related to a special recognition payment to non-executive caregivers and employees and $5.0 million related to a charitable donation. Second quarter 2005 operating results also included pretax income of $15.8 million related to retroactive nursing center Medicaid rate increases in the state of Indiana.
As previously disclosed, the Company began to recognize compensation expense prospectively in its consolidated financial statements for non-vested stock options on January 1, 2006. The expensing of stock options reduced net income in the second quarter of 2006 by approximately $1.7 million or $0.04 per diluted share.
For the six months ended June 30, 2006, consolidated revenues increased
9% to $2.1 billion from
$2.0 billion in the first half of 2005. Net income from continuing operations
totaled $45.0 million or $1.07 per diluted share for the first six months
of 2006 compared to $84.8 million or $1.87 per diluted share in the same
period a year ago.
Consolidated operating results for the first half of 2006 included certain items that, in the aggregate, reduced net income by approximately $0.5 million or $0.01 per diluted share. Operating results for the first half of 2005 included certain items that, in the aggregate, increased net income by approximately $32.4 million or $0.72 per diluted share.
The expensing of stock options reduced net income in the first half of 2006 by approximately $3 million or $0.07 per diluted share.
Management Commentary
Paul J. Diaz, President and Chief Executive Officer, remarked, “Kindred’s second quarter operating results reflect solid performance in each of our divisions. Excluding disclosed items, our diluted earnings per share for the quarter rose 30% to $0.57 from $0.44 in the second quarter a year ago. On an adjusted basis, each of our four operating divisions reported higher revenues and operating income compared to the second quarter last year.”
Commenting further on second quarter results, Mr. Diaz noted, “Our adjusted earnings growth was driven primarily by volume growth in each of our four operating divisions. Our hospital division again led the way during the second quarter, with revenues increasing 15%, resulting primarily from overall admissions growth of 9%. In addition, our non-government hospital admissions grew 28% in the second quarter of this year compared to the second quarter of 2005. We also reported solid growth in our nursing center business, with revenues increasing 14% resulting primarily from census growth from both Medicare and non-government sources. Overall occupancy in our nursing centers improved to 87.3% in the second quarter of this year from 85.3% in the second quarter of last year and 86.5% in the first quarter of 2006. KPS pharmacy results for the quarter reflected continued growth in our customer base and consistent execution in our transition to the Medicare Part D program. Second quarter KPS revenues rose 21% from the same period in 2005 as we added approximately 1,200 net new customer beds to our portfolio during the second quarter of this year. Peoplefirst Rehabilitation also reported a solid quarter as we continued to execute under the new Medicare RUGs system, expand our services and focus on our recruitment and retention programs.”
With respect to the recently completed Commonwealth acquisition, Mr. Diaz remarked, “We are focused on the operating results of the Commonwealth facilities that we acquired in the first quarter of this year. For the second quarter, these facilities added over $60 million in revenues and $6.6 million in operating income. Based upon the hard work of many of our people and the strength of our back-office capabilities, we completed the information systems conversions for all of the Commonwealth facilities in the second quarter. I am encouraged by the progress our people have already made in integrating these facilities into the Kindred network and look forward to continued execution success at the Commonwealth facilities over the balance of the year.”
Mr. Diaz also commented on the second half of 2006. “While the Company has performed well in the first half of the year, we face a more challenging Medicare reimbursement environment in our hospital business as a result of lower payments for shorter stay patients. These new payment rates apply to all hospital Medicare patients discharged after June 30. The adoption of these rates for our in-house patients at June 30, 2006 reduced our second quarter hospital operating income by approximately $4.7 million. Despite these challenges, we believe that our continued focus on our patients and employees will be the primary driver of future operational improvement.”
Common Share Repurchases
Warrant Expiration
As previously announced, the Company’s Series A warrants and Series B warrants expired on April 20, 2006. In connection with the exercise of these warrants, the Company issued approximately 10.1 million shares of common stock and received net proceeds of approximately $142.3 million. These proceeds were used to repurchase approximately 5.8 million shares of the Company’s common stock in the open market during the second quarter.
Completion of Board Authorized Repurchase Program
The Company also announced the repurchase of an additional two million
shares of the Company’s common stock in the open market during the
second quarter of 2006 at an aggregate cost of approximately
$52 million, thereby completing a $100 million share repurchase program
authorized by the Company’s Board of Directors in August 2005.
At June 30, 2006, the Company had approximately 40 million common shares outstanding.
Discontinued Operations
For the second quarter of 2006, the Company reported net income from discontinued operations totaling $5.4 million or $0.13 per diluted share compared to net income of $12.0 million or $0.26 per diluted share in the second quarter of 2005. 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 divested in prior years. These pretax adjustments aggregated $9.9 million ($6.1 million net of income taxes or $0.14 per diluted share) in the second quarter of 2006 and $23.0 million ($14.1 million net of income taxes or $0.31 per diluted share) in the second quarter of 2005.
For the first six months of 2006, the Company reported net income from discontinued operations totaling $8.8 million or $0.21 per diluted share compared to net income of $15.5 million or $0.34 per diluted share in the first half of 2005. Favorable pretax adjustments related to changes in estimates for professional liability reserves totaled $16.9 million ($10.4 million net of income taxes or $0.25 per diluted share) in the first six months of 2006 and $32.6 million ($20.0 million net of income taxes or $0.44 per diluted share) in the first half of 2005.
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 leases with Ventas; (b) the risks and uncertainties arising from and related to the rent reset process, including the appraisal process, pursuant to the master leases; (c) the risks and uncertainties associated with the court action presently pending between the Company and Ventas related to the production of the Company’s third party appraisals prepared for the rent reset process; (d) the Company’s ability to meet its rental and debt service obligations; (e) adverse developments with respect to the Company’s results of operations or liquidity; (f) the Company’s ability to attract and retain key executives and other healthcare personnel; (g) increased operating costs due to shortages in qualified nurses, therapists and other healthcare personnel; (h) the effects of healthcare reform and government regulations, interpretation of regulations and changes in the nature and enforcement of regulations governing the healthcare industry; (i) changes in the reimbursement rates or methods of payment from third party payors, including the Medicare and Medicaid programs, changes arising from and related to the Medicare prospective payment system for long-term acute care hospitals, including the final Medicare payment rules issued on May 2, 2006, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, and changes in Medicare and Medicaid reimbursements for the Company’s nursing centers; (j) national and regional economic conditions, particularly their effect on the availability and cost of labor, materials and other services; (k) the Company’s ability to control costs, including labor and employee benefit costs; (l) 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; (m) 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; (n) the Company’s ability to successfully reduce (by divestiture of operations or otherwise) its exposure to professional liability claims; (o) the Company’s ability to successfully dispose of unprofitable facilities; and (p) 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.
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CONTACT:
Richard A. Lechleiter
Executive Vice President and Chief Financial Officer
(502) 596-7734
