KINDRED HEALTHCARE ANNOUNCES SECOND QUARTER RESULTS
Company Re-establishes 2007 Earnings Guidance Following Pharmacy
Spin-Off Transaction
and Introduces Preliminary 2008 Earnings Guidance
Board of Directors Authorizes up to $100 Million in Common Stock Repurchases
Louisville, KY (August 7, 2007) – Kindred Healthcare,
Inc. (the “Company” or “Kindred”) (NYSE:KND) today
announced its operating results for the second quarter ended June 30,
2007. During the second quarter of 2007, the Company completed certain
transactions related to the disposition of 22 nursing centers and one
hospital. Accordingly, the Company’s historical consolidated results
of operations and related statistics have been restated to reflect these
facilities as discontinued operations for all periods presented.
Continuing Operations
Consolidated revenues for the second quarter ended June 30, 2007 increased 5% to $1.1 billion from $1.0 billion for the same period in 2006. Net income from continuing operations for the second quarter of 2007 totaled $9.7 million or $0.24 per diluted share compared to $26.5 million or $0.62 per diluted share in the second quarter of 2006.
Operating results for the second quarter of 2007 included certain items that, in the aggregate, reduced net income by $3.3 million or $0.08 per diluted share. These items included a pretax charge of $2.8 million for professional fees and other costs incurred in connection with the recently completed spin-off of Kindred’s institutional pharmacy business, and a pretax charge of $3.4 million for employee severance costs. The Company also recorded a pretax charge of $4.6 million related to an unfavorable judgment rendered in connection with a civil dispute with a hospital vendor. In addition, operating results for the second quarter of 2007 included pretax income of $5.5 million related to a favorable settlement of a rehabilitation therapy contract dispute from prior years.
For the six months ended June 30, 2007, consolidated revenues increased 8% to $2.2 billion from $2.0 billion in the first half of 2006. Net income from continuing operations totaled $26.2 million or $0.65 per diluted share for the first six months of 2007 compared to $50.7 million or $1.21 per diluted share in the same period a year ago.
Consolidated operating results for the first half of 2007 included certain
items that, in the aggregate, reduced net income by approximately $5.8
million or $0.14 per diluted share. Operating results for the first half
of 2006 included certain items that, in the aggregate, reduced net income
by approximately $0.6 million or $0.01 per diluted share.
Discontinued Operations
As previously announced, the Company completed a transaction with Ventas, Inc. (“Ventas”) (NYSE:VTR) on June 29, 2007 in which the Company purchased for resale 21 nursing centers and one hospital. In addition, the Company terminated a nursing center lease with another landlord in the second quarter of 2007. For accounting purposes, the historical operating results of these facilities and related losses associated with their disposition have been classified as discontinued operations in the Company’s consolidated statement of operations for all periods presented.
In the second quarter of 2007, the Company reported a net loss from discontinued operations totaling $1.9 million or $0.05 per diluted share compared to net income of $3.5 million or $0.08 per diluted share in the second quarter of 2006. Operating results for the second quarter of 2006 included favorable pretax adjustments totaling $9.9 million ($6.1 million net of income taxes or $0.14 per diluted share) resulting from a change in estimate for professional liability reserves related to prior years.
For the first six months of 2007, the Company reported a net loss from discontinued operations of $3.3 million or $0.08 per diluted share compared to net income of $3.1 million or $0.07 per diluted share in the first half of 2006. Operating results for the first half of 2006 included favorable pretax adjustments totaling $16.9 million ($10.4 million net of income taxes or $0.25 per diluted share) resulting from a change in estimate for professional liability reserves related to prior years.
In the second quarter of 2007, the Company recorded a net loss of $69.7 million or $1.71 per diluted share related primarily to the divestiture transaction with Ventas. The Company expects to sell the 22 facilities acquired from Ventas and the related operations for $80 million to $90 million by the end of 2007.
Recent Developments
Board Authorization for up to $100 Million in Common Stock Repurchases
The Company also announced that its Board of Directors has authorized
up to $100 million in common stock repurchases. The authorization allows
for repurchases of up to $50 million of common stock during 2007 and the
remainder during 2008. The Company intends to finance any repurchases
from operating cash flows or from borrowings under its revolving credit
facility. The authorization includes both open market purchases as well
as private transactions.
Spin-off of Institutional Pharmacy Business
As previously announced, the Company completed the spin-off of its institutional pharmacy business on July 31, 2007 (the “Spin-off”). Following the Spin-off, the Company’s institutional pharmacy subsidiary was merged with the institutional pharmacy operations of AmerisourceBergen Corporation (NYSE:ABC) to form a new publicly traded company, PharMerica Corporation (“PharMerica”) (NYSE:PMC). In connection with these transactions, Kindred shareholders received approximately 50% of the common stock of PharMerica on a tax-free basis and the Company received a tax-free cash distribution of $125 million. These proceeds were used to repay borrowings under the Company’s revolving credit facility.
For accounting purposes, the Company’s institutional pharmacy business
will not be accounted for as a discontinued operation. Accordingly, the
Company’s historical consolidated results of operations will not
be retroactively restated as a result of the Spin-off.
Management Commentary
Paul J. Diaz, President and Chief Executive Officer of the Company, remarked,
“Despite continued improvements in our nursing center business and
solid performance from Peoplefirst rehabilitation services, our
second quarter results were below our expectations due to softness in
our hospital Medicare volumes and non-government rates. Excluding the
Spin-off transaction costs, our KPS pharmacy business was negatively impacted
by $1.3 million of additional bad debt costs and $0.5 million of additional
reserves for Medicare Part D co-payment issues.”
Mr. Diaz further noted, “During the first half of 2007, we made
progress on a number of fronts. Our overall operating results for the
first half of 2007 were good and we completed several initiatives to better
position the Company for future growth. The previously announced transaction
to dispose of 11 under-performing nursing centers in the first quarter
and the second quarter transaction with Ventas to eliminate another 22
under-performing facilities will enhance our future operations and allow
management to focus on more profitable operations. In addition, the changes
made to the Ventas master leases related to insurance requirements and
bed management opportunities should provide additional future growth in
our existing facilities. With respect to our ongoing development activities,
we recently opened two new hospitals in Pittsburgh and Cleveland and we
expect to add eight new hospitals to our portfolio over the next two years.
In addition, we are reviewing other opportunities to acquire nursing centers
that will complement our strategic plan similar to the Ocadian and Commonwealth
nursing center acquisitions that are performing well compared to plan.
We also recently announced the acquisition of a nursing center/assisted
living facility in Cleveland that fits into our cluster market strategy.
Finally, we are excited about the recently completed spin-off of our KPS
pharmacy business and the long-term growth prospects for our shareholders
resulting from their equity interest in the new PharMerica.”
Mr. Diaz continued, “We believe that the underlying operating
fundamentals of our hospital, nursing center and rehabilitation therapy
businesses are solid and that our efforts related to quality, customer
service and employee retention will continue to build value for all of
our constituents. In addition, the recently announced enhancements to
our credit facility will provide significant financial flexibility as
we continue to pursue our strategic growth plan and seek ways to create
additional value for shareholders.”
Earnings Guidance
Following the Spin-off, the Company re-established 2007 earnings guidance for its continuing operations and introduced preliminary continuing operations earnings guidance for 2008. The Company’s prior earnings guidance for 2007 continuing operations did not include the impact of the Spin-off.
For 2007, the Company expects consolidated revenues to approximate $4.2 billion. Operating income, or earnings before interest, income taxes, depreciation, amortization and rents, is expected to range from $556 million to $563 million. Unallocated corporate overhead (included in operating income) is expected to approximate between $150 million to $152 million. Rent expense is expected to approximate $349 million, while depreciation, amortization and net interest expense is expected to approximate $118 million. Net income from continuing operations for 2007 is expected to approximate $51 million to $55 million or $1.25 to $1.35 per diluted share (based upon diluted shares of 40.7 million).
The Company indicated that the 2007 earnings guidance includes the operations of KPS through July 31, 2007 but does not include any costs resulting from the Spin-off. The earnings guidance also excludes the employee severance costs and disclosed litigation items recorded in the second quarter of 2007. In addition, the Company’s 2007 earnings guidance also includes the estimated impact of the recent hospital Medicare reimbursement rule that is expected to reduce hospital revenues by approximately $22 million in the second half of 2007 (including the impact of a lower than expected market basket increase). The guidance does not include any other significant changes in reimbursements, the effects of any other material acquisitions or divestitures or the impact of the recently approved $100 million stock repurchase program.
Mr. Diaz remarked, “In the first half of 2007, we reported diluted earnings per share of $0.65, including the impact of disclosed items that reduced diluted earnings per share by $0.14. Over the balance of this year, we expect to report diluted earnings per share of $0.46 to $0.56 excluding one-time items. Further, as we previously indicated to investors and consistent with prior years, we expect that third quarter results will be seasonally weak followed by a strong rebound in the fourth quarter. In particular, we expect that diluted earnings per share in the third quarter of 2007 will approximate $0.05 to $0.10 per share and that diluted earnings per share in the fourth quarter of 2007 will approximate $0.41 to $0.46 per share. While it is our normal policy to provide annual earnings guidance, we are providing this information for the next two quarters in light of the complexities associated with the Spin-off.”
With respect to the Company’s re-established earnings guidance for 2007, Mr. Diaz continued, “Despite our earnings shortfall in the second quarter, our new annual 2007 earnings guidance that reflects the Spin-off is substantially equivalent to our prior guidance of $1.50 to $1.60 per diluted share that assumed a full year of KPS operations. The loss of KPS operations for the last five months of 2007 reduced prior earnings guidance by approximately $0.30 per diluted share. However, the interest savings from the $125 million tax-free distribution, expected overhead reductions and the favorable impact of the information services agreement with PharMerica should add $0.10 to $0.15 per diluted share to our earnings in the second half of 2007.”
For 2008, the Company expects consolidated revenues to approximate $4.1 billion. Operating income is expected to range from $556 million to $563 million. Unallocated corporate overhead (included in operating income) is expected to approximate between $150 million to $152 million. Rent expense is expected to approximate $356 million, while depreciation, amortization and net interest expense is expected to approximate $116 million. Net income from continuing operations for 2008 is expected to approximate $48 million to $52 million or $1.15 to $1.25 per diluted share (based upon diluted shares of 41.7 million).
The Company indicated that the 2008 earnings guidance excludes the operations of the KPS institutional pharmacy business and does not include any unusual items. In addition, the guidance does not include any other significant changes in reimbursement, the effects of any material acquisitions or divestitures or the impact of the recently approved $100 million stock repurchase program.
Mr. Diaz commented, “We are providing our preliminary view of 2008 so that investors can better understand a full year of Kindred operations without the institutional pharmacy business. Looking forward, we are encouraged by the progress we’ve made in our three remaining business segments and the opportunities we have to further enhance shareholder value.”
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 ability to complete the resale of facilities recently acquired from Ventas; (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, 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, particularly 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 annual revenues of over $4
billion that provides services in approximately 560 locations in 39 states.
Kindred through its subsidiaries operates long-term acute care hospitals,
skilled nursing centers and a contract rehabilitation services business,
Peoplefirst Rehabilitation Services, across the United States.
Kindred’s 51,000 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
About Kindred Healthcare
Click here to view the 2nd Quarter Results.
CONTACT:
Richard A. Lechleiter
Executive Vice President and Chief Financial Officer
(502) 596-7734
