KINDRED HEALTHCARE THIRD QUARTER RESULTS EXCEED COMPANY’S GUIDANCE
Continuing Operations Loss of $0.23 per Share Includes $0.40 of Disclosed Net Charges
Company Increases Earnings Guidance for the Fourth Quarter of 2007 and Fiscal 2008
Company Repurchases $50 Million of its Common Stock in the Third Quarter
Louisville, KY (November 5, 2007) – Kindred Healthcare, Inc. (the “Company” or “Kindred”) (NYSE:KND) today announced its operating results for the third quarter ended September 30, 2007. As previously announced, the Company completed the spin-off of its institutional pharmacy business on July 31, 2007 (the “Spin-off”) as part of a transaction to form a new publicly traded company, PharMerica Corporation (NYSE:PMC). For accounting purposes, the Company’s institutional pharmacy business was not treated as a discontinued operation. Accordingly, the Company’s historical consolidated results of operations have not been retroactively restated as a result of the Spin-off.
Continuing Operations
Consolidated revenues for the third quarter declined 1% to $1.0 billion primarily as a result of the Spin-off. Excluding the institutional pharmacy business in both periods, revenues rose approximately 8% in the third quarter ended September 30, 2007 compared to the same period in 2006. The Company reported a net loss from continuing operations for the third quarter of 2007 totaling $9.1 million or $0.23 per diluted share compared to net income of $4.6 million or $0.11 per diluted share for the third quarter of 2006.
Operating results for the third quarter of 2007 included certain items that, in the aggregate, reduced net income by approximately $16.0 million or $0.40 per diluted share. These items included a non-cash pretax charge of $17.7 million for compensation costs resulting from the Spin-off (primarily related to the revaluation of stock options adjusted in the Spin-off and the vesting of certain stock-based and other compensation), a pretax charge of $3.9 million for professional fees and other costs incurred in connection with the Spin-off and a pretax charge of $0.9 million for employee severance costs. In addition, the provision for income taxes included a net charge of $2.2 million related to income tax items associated with the Spin-off and the favorable resolution of certain income tax contingencies for prior years.
The Company’s third quarter 2007 earnings guidance of $0.05 to $0.10 per diluted share from continuing operations excluded the impact of the previously discussed items related to the Spin-off, employee severance costs and income tax adjustments.
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.
For the first nine months of 2007, consolidated revenues increased 5% to $3.2 billion from $3.1 billion in the same period last year. Excluding the institutional pharmacy business in both periods, revenues rose 8% for the first nine months of 2007 compared to the same period in 2006. Net income from continuing operations totaled $17.1 million or $0.42 per diluted share for the first nine months of 2007 compared to $55.3 million or $1.34 per diluted share for the same period a year ago.
Operating results for the first nine months of 2007 included certain items that, in the aggregate, reduced net income by approximately $21.8 million or $0.54 per diluted share. Operating results for the first nine months of 2006 included certain items that, in the aggregate, reduced net income by approximately $1.9 million or $0.05 per diluted share.
Repurchases of Common Stock
As previously announced, the Company’s Board of Directors 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. During the third quarter of 2007, the Company expended $50 million to purchase approximately 2.6 million shares of its common stock. The Company intends to finance any additional 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.
Management Commentary
Paul J. Diaz, President and Chief Executive Officer of the Company, commented, “We are pleased with our overall operating results in light of the seasonal weakness that we typically experience in the third quarter. Each of our three operating divisions, hospitals, nursing centers and Peoplefirst rehabilitation, reported increases in revenues compared to the third quarter last year. Excluding disclosed items, we achieved solid growth in net income from continuing operations and diluted earnings per share in the third quarter of this year compared to the same period a year ago as we continued to see the benefits of volume growth, better quality mix, improved cost management and more favorable professional liability and workers’ compensation cost trends across all of our operating divisions.”
With respect to Kindred’s operations, Mr. Diaz further commented, “Our hospital revenue growth of 6% was driven by a 5% increase in admissions. While Medicare admissions were relatively flat with last year, we reported 24% growth in non-government admissions as we continued to pursue our sales and marketing strategy focused on managed care and commercial insurance payors. Hospital operating income rose 12% in the quarter compared to the third quarter of last year primarily as a result of operating efficiencies associated with volume growth. Our nursing center results for the third quarter were solid, with revenue growth of 10% and operating income growth of 26% compared to the same quarter in 2006. Aggregate patient days rose 3% and our quality mix revenues from private pay, Medicare and managed care residents improved to 56% in the third quarter of this year compared to 53% for the third quarter of last year. Peoplefirst rehabilitation services revenues grew 16% from last year’s third quarter as we continued to expand our services and add new external customer contracts. We also made progress in the quarter to reduce our overhead costs following the Spin-off.”
Commenting on the Company’s ongoing development activities, Mr. Diaz noted, “During the third quarter, we opened new hospitals in Havertown, Pennsylvania and Richmond, Virginia. In addition, we acquired a nursing center/assisted living facility in Cleveland as we continued to implement our cluster market strategy. We also are pleased with the operational progress we are making in the transition of eight northern California nursing centers that we added earlier in the year. We are continuing to review other opportunities to add facilities to our portfolio that will complement our strategic growth plan.”
With respect to the Company’s efforts to divest unprofitable facilities, Mr. Diaz remarked, “We are proceeding with our plan to dispose of the facilities that we acquired from Ventas in the second quarter of this year. We are maintaining our estimated sales proceeds range of $80 million to $90 million and plan to divest most of these facilities by the end of the year.”
Earnings Guidance
In connection with the third quarter earnings announcement, the Company
increased its earnings guidance for 2007 and 2008.
For fiscal 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 $568 million
to $571 million. Rent expense is expected to approximate $347 million,
while depreciation, amortization and net interest expense is expected
to approximate $123 million. Net income from continuing operations for
2007 is expected to approximate $57 million to $59 million or $1.42 to
$1.47 per diluted share (based upon diluted shares of 39.8 million). The
Company’s prior earnings guidance for fiscal 2007 indicated net
income from continuing operations ranging from $51 million to $55 million
or $1.25 to $1.35 per diluted share (based upon diluted shares of 40.7
million).
For the fourth quarter of 2007, the Company expects net income from continuing operations to range from $18 million to $20 million or $0.46 to $0.51 per diluted share (based upon diluted shares of 38.5 million). The Company’s prior earnings guidance for the fourth quarter of 2007 indicated diluted earnings per share from continuing operations ranging from $0.41 to $0.46.
The Company indicated that the 2007 earnings guidance includes the operations of the institutional pharmacy business through July 31, 2007 but does not include any items resulting from the Spin-off. The earnings guidance also excludes the employee severance costs and other disclosed items recorded in the first nine months of 2007. In addition, the Company’s 2007 earnings guidance 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 any additional stock repurchases.
For 2008, the Company expects consolidated revenues to approximate $4.2 billion. Operating income is expected to range from $568 million to $574 million. Rent expense is expected to approximate $347 million, while depreciation, amortization and net interest expense is expected to approximate $135 million. Net income from continuing operations for 2008 is expected to approximate $49 million to $53 million or $1.25 to $1.35 per diluted share (based upon diluted shares of 39.0 million). The Company’s prior earnings guidance for fiscal 2008 indicated net income from continuing operations ranging from $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 does not include any unusual items. In addition, the 2008 guidance does not include any other significant changes in reimbursement, the effects of any material acquisitions or divestitures or the impact of any additional share repurchases.
Mr. Diaz commented, “Our increased fourth quarter earnings guidance reflects greater seasonal demand for our services and our confidence that we will realize additional professional liability cost reductions as a result of our ongoing quality improvement and risk management programs.” Mr. Diaz further noted, “Our increased earnings guidance for 2008 was driven primarily by our expectation of continued improvements in professional liability cost trends and the benefit of our third quarter stock repurchase program.”
Mr. Diaz concluded, “Having completed the Spin-off in the third quarter, we are very focused on growing our three operating divisions to enhance shareholder value. While there continues to be regulatory uncertainty in each of our three operating divisions, we are excited about the opportunities we have to further improve patient care and operating results in each of our businesses.”
Discontinued Operations
For the third quarter of 2007, the Company reported break-even results from discontinued operations compared to a net loss of $1.8 million or $0.04 per diluted share for the third quarter of 2006. Favorable pretax adjustments related to changes in estimates for professional liability reserves totaled $0.4 million ($0.2 million net of income taxes or $0.01 per diluted share) in the third quarter of 2006.
For the first nine months of 2007, the Company reported a net loss from discontinued operations totaling $3.3 million or $0.08 per diluted share compared to net income of $1.3 million or $0.03 per diluted share for the first nine months of 2006. 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) for the first nine months of 2006.
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, Inc. (“Ventas”) (NYSE:VTR); (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. Kindred through its subsidiaries operates long-term acute care hospitals, skilled nursing centers and a contract rehabilitation services business, Peoplefirst Rehabilitation Services, in approximately 600 locations in 39 states across the United States. Kindred’s 52,500 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.
Click here to view the 3rd Quarter Results.
CONTACT:
Richard A. Lechleiter
Executive Vice President and Chief Financial Officer
(502) 596-7734
