KINDRED HEALTHCARE ANNOUNCES THIRD QUARTER RESULTS
Company Maintains Fiscal 2006 Earnings Guidance
Louisville, KY (November 1, 2006) – Kindred Healthcare, Inc. (the “Company”) (NYSE:KND) today announced its operating results for the third quarter ended September 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 third quarter ended September 30, 2006 increased 11% to $1.1 billion from $951 million for the same period in 2005. Net income from continuing operations for the third quarter of 2006 totaled $3.6 million or $0.09 per diluted share compared to $20.4 million or $0.45 per diluted share in the third quarter of 2005.
Operating results for the third quarter of 2006 included certain items that, in the aggregate, reduced net income by approximately $1.9 million or $0.05 per diluted share. These items included pretax income of $1.3 million ($0.8 million net of income taxes or $0.02 per diluted share) related to an insurance recovery and a favorable adjustment of a prior year tax dispute, and $3.5 million ($2.1 million net of income taxes or $0.05 per diluted share) of pretax costs incurred in connection with the planned spin-off of the Company’s institutional pharmacy business and the rent reset issue with Ventas, Inc. (“Ventas”) (NYSE:VTR). Third quarter 2006 results also included a charge of $0.02 per diluted share related to a change in estimate of the Company’s annual effective income tax rate.
Operating results for the third quarter of 2005 included certain items that, in the aggregate, increased net income by approximately $3.2 million or $0.07 per diluted share.
As previously disclosed, in connection with the recent resolution of the Ventas rent reset issue, annual aggregate rents to Ventas increased by approximately $33 million effective July 19, 2006. The impact of the increased rents reduced third quarter 2006 net income by approximately $3.6 million or $0.09 per diluted share.
On January 1, 2006, the Company began to recognize compensation expense prospectively in its consolidated financial statements for non-vested stock options. The expensing of stock options reduced net income in the third quarter of 2006 by approximately $1.6 million or $0.04 per diluted share.
For the nine months ended September 30, 2006, consolidated revenues increased 10% to $3.2 billion from $2.9 billion in the first nine months of 2005. Net income from continuing operations totaled $49.7 million or $1.20 per diluted share for the first nine months of 2006 compared to $105.9 million or $2.32 per diluted share in the same period a year ago.
Operating results for the first nine months of 2006 included certain items that, in the aggregate, reduced net income by approximately $1.8 million or $0.05 per diluted share. Operating results for the first nine months of 2005 included certain items that, in the aggregate, increased net income by approximately $35.5 million or $0.78 per diluted share.
The expensing of stock options reduced net income in the first nine months of 2006 by approximately $4.6 million or $0.11 per diluted share.
No Change in 2006 Earnings Guidance
The Company maintained its previous fiscal 2006 earnings guidance for its continuing operations. Revenues for 2006 are expected to approximate $4.3 billion. Operating income, or earnings before interest, income taxes, depreciation, amortization and rents, is expected to range between $541 million to $556 million. Depreciation, amortization and net interest costs are expected to approximate $123 million. Net income from continuing operations is expected to be between $60 million and $69 million, or $1.47 to $1.69 per diluted share (based upon diluted shares of 40.9 million).
The Company indicated that the earnings guidance does not include any significant changes in third party reimbursements (other than those previously disclosed by the Company) or the effect of the proposed spin-off of the Company’s institutional pharmacy business.
Management Commentary
Paul J. Diaz, President and Chief Executive Officer of the Company, remarked, “As we had already indicated to investors, the third quarter was a difficult operating period for Kindred, primarily in our hospital business. The combined effect of seasonally weak census and the full impact of the Medicare rate cuts had a significant negative impact on our hospital operating income. However, our other three divisions, particularly our nursing centers, performed quite well in the quarter.”
Mr. Diaz continued, “Our ongoing quality and program development efforts contributed to higher nursing center occupancy levels and gains in Medicare and managed care census. As a result, our nursing center revenues were 13% higher than the third quarter last year, while our third quarter nursing center operating income rose 27% compared to the same period in 2005. Our KPS institutional pharmacy business reported a strong third quarter, with revenues growing 26% and operating income, excluding the costs associated with the planned spin-off of this business, growing 19% compared to the third quarter a year ago. Peoplefirst rehabilitation services revenues increased 16% from last year’s third quarter, while its operating income grew 12% compared to the third quarter last year as we continued to recruit additional therapists and expand our external contract business. Furthermore, our quality and risk management initiatives continue to positively impact our professional liability and workers compensation costs across all of our divisions.”
With respect to the recently completed Commonwealth acquisition, Mr. Diaz remarked, “We are continuing to work through the transition of these facilities into the Kindred network. For the third quarter, these facilities added $59 million of revenues and $4 million of operating income. While the back office and systems transitions of these facilities have gone quite well, admissions in the Commonwealth hospitals were soft compared to our plan. However, we believe there are significant opportunities to increase admissions and improve the profitability of these facilities over the next several quarters.”
With respect to the Company’s earnings guidance, Mr. Diaz noted, “We are confident that our fourth quarter results will rebound as admissions increase and our mitigation plans for the hospital Medicare rate cuts begin to take hold.”
Commenting on the Company’s ongoing development activities, Mr. Diaz noted, “During the third quarter, we announced four additional hospital projects, including a new 50-bed facility in Springfield, Illinois, the repositioning of our Seattle hospital, the replacement of our Indianapolis hospital and the expansion of our Flamingo hospital in Las Vegas. In KPS, we acquired two pharmacies in Iowa and one in Kentucky during the third quarter. In addition, we opened three new pharmacies in the third quarter and expect to open two more locations in the fourth quarter as we continue to expand our customer base and leverage our infrastructure.”
Mr. Diaz concluded, “We are quite pleased to have recently announced a definitive agreement with AmerisourceBergen Corporation (NYSE:ABC) to create the second largest institutional pharmacy provider by combining the operations of our KPS institutional pharmacy business with PharMerica. We believe this transaction can provide substantial benefits to our shareholders and will create a strong quality and service-oriented national institutional pharmacy provider with greater growth opportunities.”
Discontinued Operations
As previously disclosed, during the third quarter of 2006, the Company entered into agreements with Health Care Property Investors, Inc. (“HCP”) (NYSE:HCP) pursuant to which the Company will acquire eleven unprofitable leased nursing centers for resale in exchange for three hospitals currently owned by the Company. As part of the transaction, the Company will continue to operate the hospitals under a long-term lease arrangement with HCP. The transaction with HCP is expected to be completed in the fourth quarter of 2006. For accounting purposes, the operating results of the eleven nursing centers have been classified as discontinued operations in the consolidated statement of operations for all historical periods.
For the third quarter of 2006, the Company reported a net loss from discontinued operations totaling $0.8 million or $0.02 per diluted share compared to a net loss of $0.9 million or $0.02 per diluted share in the third 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 $0.4 million ($0.2 million net of income taxes or $0.01 per diluted share) in the third quarter of 2006 and $4.1 million ($2.6 million net of income taxes or $0.06 per diluted share) in the third quarter of 2005.
For the first nine months of 2006, the Company reported net income from discontinued operations totaling $6.9 million or $0.17 per diluted share compared to net income of $13.9 million or $0.30 per diluted share in the first nine months of 2005. Favorable pretax adjustments related to changes in estimates for professional liability reserves totaled $17.3 million ($10.6 million net of income taxes or $0.26 per diluted share) in the first nine months of 2006 and $36.7 million ($22.6 million net of income taxes or $0.49 per diluted share) in the first nine months 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 Company’s ability to meet its rental and debt service obligations; (c) the Company’s and AmerisourceBergen’s ability to complete the proposed merger of their respective institutional pharmacy operations, including the receipt of all required regulatory approvals and the satisfaction of other closing conditions to the proposed transaction; (d) adverse developments with respect to the Company’s results of operations or liquidity; (e) the Company’s ability to attract and retain key executives and other healthcare personnel; (f) increased operating costs due to shortages in qualified nurses, therapists and other healthcare personnel; (g) the effects of healthcare reform and government regulations, interpretation of regulations and changes in the nature and enforcement of regulations governing the healthcare industry; (h) 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 in May 2006, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, and changes in Medicare and Medicaid reimbursements for the Company’s nursing centers; (i) national and regional economic conditions, including their effect on the availability and cost of labor, materials and other services; (j) the Company’s ability to control costs, including labor and employee benefit costs; (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 its 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 its performance. Operating income
should be considered in addition to, not as a substitute for, or superior
to, financial measures based upon 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.
About Kindred Healthcare
Kindred Healthcare, Inc. (NYSE:KND) is a Fortune 500 healthcare services
company, based in Louisville, Kentucky, with annualized revenues of $4.3
billion that provides services in over 500 locations in 39 states. Kindred
through its subsidiaries operates long-term acute care hospitals, skilled
nursing centers, institutional pharmacies and a contract rehabilitation
services business, Peoplefirst Rehabilitation Services, across
the United States. Kindred’s 55,000 employees are committed to providing
high quality patient care and outstanding customer service to become the
most trusted and respected provider of healthcare services in every community
we serve. For more information, go to www.kindredhealthcare.com.
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to view the 3rd Quarter Results.
CONTACT:
Richard A. Lechleiter
Executive Vice President and Chief Financial Officer
(502) 596-7734
