Kindred Healthcare Reports Third Quarter Results

Kindred Healthcare Reports Third Quarter Results

Reported Results of $0.15 Per Diluted Share Include Charges of $0.06 Per Share Related Primarily to Dispositions

Third Quarter Operating Cash Flows Surged to Near-Record $141 Million from $67 Million Last Year

Company Tightens 2012 Annual EPS Guidance Range to $1.40 to $1.50 from $1.35 to $1.55, Maintaining Annual Mid-Point at $1.45 and Fourth Quarter Mid-Point at $0.43

2013 Annual EPS Guidance Range of $1.20 to $1.40 Reaffirmed

LOUISVILLE, Ky.--(BUSINESS WIRE)-- Kindred Healthcare, Inc. (the "Company") (NYS: KND) today announced its operating results for the third quarter ended September 30, 2012. The Company's consolidated financial statements include the operating results of RehabCare Group, Inc. ("RehabCare") since the closing of the acquisition on June 1, 2011.

Third Quarter Highlights:

• Despite a seasonally weak period, consolidated revenues rose 1% to $1.5 billion and operating income was nearly $200 million

  • While hospital revenues grew 4%, adverse Medicare reimbursement changes hampered revenues in the nursing center and RehabCare contract therapy divisions

• Operating cash flows surged to near-record $141 million in the quarter compared to $67 million last year

  • Results are on track to meet annual 2012 guidance range of $260 million to $280 million

• Hospital division revenues rose 4% while operating income grew 10%

  • Same-store admissions rose 2% compared to last year

  • Cost per patient day rose only 1% from a year ago

• Nursing center division reported stable operating income of $71 million in difficult reimbursement environment

• RehabCare contract therapy division reported solid operating income of $37 million

  • Division reported brisk new contract sales in the first nine months this year

  • Recent Medicare rule changes adversely impacted results late in this year's third quarter

• PeopleFirst home health and hospice division reported significant revenue and operating income growth

  • Recent IntegraCare acquisition added approximately $71 million in annualized revenues

• Corporate overhead declined as a percent of revenues to 3.0% from 3.2% in last year's third quarter

  • RehabCare synergies and other cost reductions drove third quarter overhead lower by 6% compared to last year

Third Quarter Results

Continuing Operations

Consolidated revenues for the third quarter ended September 30, 2012 rose 1% to $1.5 billion compared to the third quarter last year. Income from continuing operations for the third quarter of 2012 totaled $7.9 million or $0.15 per diluted share compared to $0.6 million or $0.01 per diluted share in the third quarter last year.

Third quarter 2012 operating results included pretax charges of $4.9 million related to (1) an impairment charge in connection with the planned divestiture of a long-term acute care ("LTAC") hospital, (2) employee retention costs incurred in connection with the decision to allow the leases to expire for 54 nursing and rehabilitation centers (the "54 Nursing Centers") currently leased from Ventas, Inc. ("Ventas") (NYS: VTR) , (3) a lease cancellation charge in connection with the closing of a LTAC hospital, and (4) transaction-related costs. These items reduced income from continuing operations in the third quarter by $3.3 million or $0.06 per diluted share.

Third quarter 2011 operating results included certain charges, most of which related to impairment charges and costs associated with the RehabCare acquisition, that reduced income from continuing operations by $20.9 million or $0.40 per diluted share.

Discontinued Operations

The Company periodically enters into transactions related to the divestiture of unprofitable businesses. For accounting purposes, the historical operating results of these businesses have been classified as discontinued operations in the Company's condensed consolidated statement of operations for all historical periods.

Management Commentary

Paul J. Diaz, Chief Executive Officer of the Company, remarked, "Our third quarter operating results were in line with our expectations and position us to achieve our full-year earnings guidance. While the third quarter is typically a seasonally weak period, our results reflected the same solid cost management and commitment to quality that we have reported all year."

Mr. Diaz continued, "Our third quarter operating cash flows of $141 million were near-record levels. In addition, our demonstrated ability to generate significant cash flows in excess of our routine capital spending and required repayments of debt provides the financial flexibility to continue to invest in our Cluster Market Strategy and strategic acquisitions."

With respect to the Company's $200 million credit expansion completed in early October, Mr. Diaz noted, "Our financial strength and significant liquidity have enabled us to expand our credit capacity to finance future growth. Following the closing of the transaction, our unused credit capacity totaled approximately $450 million compared to $237 million at June 30, 2012."

Mr. Diaz also discussed the significant reimbursement pressure in the long-term healthcare industry, "Over the past year, both Kindred and our industry peers have struggled in an environment of severe Medicare and Medicaid payment pressures as well as significant survey and enforcement activity. Most recently, we have been challenged by new Medicare Part B regulations regarding rehabilitation therapy which have created inefficiencies in our operations (as much as $1 million per month), and more importantly, potentially restrict access to therapy services that benefit our most frail residents. As we have in the past, we will continue our dialogue with policymakers to improve the current system to make it more patient-centered, predictable and efficient."

Earnings Guidance - Continuing Operations

The Company tightened its earnings guidance range for 2012. The Company expects consolidated revenues for 2012 to approximate $6.2 billion. Operating income, or earnings before interest, income taxes, depreciation, amortization and rent, is expected to range from $867 million to $875 million. Rent expense is expected to approximate $430 million, while depreciation and amortization should approximate $201 million. Net interest expense is expected to approximate $107 million. The Company expects to report income from continuing operations for 2012 between $75 million and $80 million or $1.40 to $1.50 per diluted share (based upon diluted shares of 52 million).

The Company also maintained its operating cash flow guidance range for 2012 at $260 million to $280 million. Estimated routine capital expenditures for 2012 are expected to range from $135 million to $145 million, including approximately $17 million of expenditures to complete the information systems integration of RehabCare. The Company's expected routine capital expenditures also include approximately $13 million to upgrade the clinical information systems in its hospital, nursing center and home health businesses.

In addition to its routine capital expenditures, the Company expects that its previously announced development projects related to new and replacement hospitals and new transitional care centers will approximate $40 million to $45 million in 2012.

Operating cash flows in excess of the Company's routine and development capital spending programs, which are expected to approximate $85 million to $90 million for 2012, will be available to repay debt and fund acquisitions.

The earnings guidance provided by the Company for 2012 excludes the effect of (1) any costs associated with the closing of a regional office, the planned divestiture or closing of five LTAC hospitals and the cancellation of a sub-acute unit project, (2) costs associated with employment-related lawsuits, (3) employee retention costs incurred in connection with the decision to allow the leases to expire for 54 Nursing Centers, (4) any transaction-related charges, (5) any other reimbursement changes, (6) any future acquisitions or divestitures, (7) any impairment charges, and (8) any repurchases of common stock.

In addition, the Company reaffirmed its preliminary earnings guidance for fiscal 2013. The Company expects consolidated revenues for 2013 to approximate $5.9 billion. Operating income is expected to range from $806 million to $825 million. Rent expense is expected to approximate $387 million, while depreciation and amortization should approximate $189 million. Net interest expense is expected to approximate $113 million. The Company expects to report income from continuing operations for 2013 between $65 million to $76 million or $1.20 to $1.40 per diluted share (based upon diluted shares of 52.7 million).

The Company estimated its operating cash flows for 2013 to range between $230 million to $250 million. Estimated routine capital expenditures for 2013 are expected to range from $120 million to $130 million.

In addition to its routine capital expenditures, the Company expects that its development projects related to new and replacement LTAC hospitals, transitional care centers, and inpatient rehabilitation hospitals will approximate $20 million to $30 million in 2013.

Operating cash flows in excess of the Company's routine and development capital spending programs, which are expected to approximate $90 million for 2013, will be available to repay debt and fund acquisitions.

In addition, the earnings guidance for 2013 (1) assumes the impact of Medicare reimbursement reductions that are expected to reduce the Company's consolidated revenues between $90 million to $100 million, and further assumes that the operating results of the 54 Nursing Centers are classified as discontinued operations effective January 1, 2013, and (2) excludes the effect of any other reimbursement changes, any future acquisitions or other divestitures, any impairment charges, and any repurchases of common stock.

Mr. Diaz commented, "Our 2013 guidance reflects our best efforts to respond to a continued difficult reimbursement environment, including the anticipated Medicare reductions from sequestration and recently promulgated Medicare payment regulations negatively impacting our LTAC hospitals. Despite this environment, we remain committed to making the necessary investments to improve quality and clinical outcomes and demonstrate our value proposition to patients, families and payors. Moreover, we must support our dedicated caregivers by providing appropriate merit increases and affordable benefits. In this regard, we have continued our efforts to explore other cost saving initiatives and our 2013 guidance reflects our commitment to reduce enterprise costs an additional $20 million to $25 million in 2013 by expanding our shared services model across the Company and focusing on additional non-patient care expenses. Our confidence level in achieving these savings is high since we are following the same path we pursued in attaining the approximately $125 million of RehabCare synergies and other cost reductions in fiscal 2012."

Finally, Mr. Diaz noted, "We also continue to look for ways to rationalize our portfolio, in addition to the expiration of the Ventas leases, to advance our cluster market strategy and improve our business and payor mix over time. The continued growth in our home health and hospice operations is another key to our integrated care model and our "Continue the Care" strategy. We believe that these actions in conjunction with our cost savings measures, position us well as healthcare reform accelerates over the next several years."

Webcast of Conference Call

As previously announced, investors and the general public can access a live webcast of the third quarter 2012 conference call through a link on the Company's website at www.kindredhealthcare.com. The conference call will be held October 30, 2012 at 10:00 a.m. (Eastern Time).

A telephone replay of the conference call will be available at approximately 1:00 p.m. on October 30 by dialing (719) 457-0820, access code: 9543758. The replay will be available through November 8.

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 impact of healthcare reform, which will initiate significant reforms to the United States healthcare system, including potential material changes to the delivery of healthcare services and the reimbursement paid for such services by the government or other third party payors, including reforms resulting from the Patient Protection and Affordable Care Act and the Healthcare Education and Reconciliation Act (collectively, the "ACA"). Healthcare reform is affecting certain of the Company's businesses and the Company expects that it will impact all of them in some manner. There is also the possibility that implementation of the provisions expanding health insurance coverage or the entire ACA will be delayed, revised or eliminated as a result of efforts to repeal or amend the law. Although the U.S. Supreme Court has upheld the constitutionality of the ACA, the potential for future court proceedings, the outcome of the 2012 presidential election and potential efforts in the U.S. Congress to repeal, amend or retract funding for various aspects of the ACA create additional uncertainty about the ultimate impact of the ACA on the Company and the healthcare industry. Due to the substantial regulatory changes that will need to be implemented by the Centers for Medicare and Medicaid Services ("CMS") and others, and the numerous processes required to implement these reforms, the Company cannot predict which healthcare initiatives will be implemented at the federal or state level, the timing of any such reforms, or the effect such reforms or any other future legislation or regulation will have on the Company's business, financial position, results of operations and liquidity, (b) the impact of the rules issued by CMS on August 1, 2012 which, among other things, will reduce Medicare reimbursement to the Company's LTAC hospitals in 2013 and beyond by imposing a budget neutrality adjustment and modifying the short-stay outlier rules, (c) the impact of final rules issued by CMS on July 29, 2011 which significantly reduced Medicare reimbursement to nursing centers and changed payments for the provision of group therapy services effective October 1, 2011, (d) the impact of the Budget Control Act of 2011 which will automatically reduce federal spending by approximately $1.2 trillion split evenly between domestic and defense spending. At this time, the Company believes this will result in an automatic 2% reduction on each claim submitted to Medicare beginning February 1, 2013, (e) changes in the reimbursement rates or the methods or timing of payment from third party payors, including commercial payors and the Medicare and Medicaid programs, changes arising from and related to the Medicare prospective payment system for LTAC hospitals, including potential changes in the Medicare payment rules, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, and changes in Medicare and Medicaid reimbursements for the Company's LTAC hospitals, nursing and rehabilitation centers, inpatient rehabilitation hospitals and home health and hospice operations, and the expiration of the Medicare Part B therapy cap exception process, (f) the effects of additional legislative changes and government regulations, interpretation of regulations and changes in the nature and enforcement of regulations governing the healthcare industry, (g) the impact of the Medicare, Medicaid and SCHIP Extension Act of 2007, including the ability of the Company's hospitals to adjust to potential LTAC certification, medical necessity reviews and the moratorium on future hospital development, (h) the impact of the Company's significantly increased levels of indebtedness as a result of the RehabCare acquisition on the Company's funding costs, operating flexibility and ability to fund ongoing operations, development capital expenditures or other strategic acquisitions with additional borrowings, (i) the Company's ability to successfully pursue its development activities, including through acquisitions, and successfully integrate new operations, including the realization of anticipated revenues, economies of scale, cost savings and productivity gains associated with such operations, as and when planned, including the potential impact of unanticipated issues, expenses and liabilities associated with those activities, (j) the failure of the Company's facilities to meet applicable licensure and certification requirements, (k) the further consolidation and cost containment efforts of managed care organizations and other third party payors, (l) the Company's ability to meet its rental and debt service obligations, (m) the Company's ability to operate pursuant to the terms of its debt obligations, and comply with its covenants thereunder, and its ability to operate pursuant to its master lease agreements with Ventas, (n) the condition of the financial markets, including volatility and weakness in the equity, capital and credit markets, which could limit the availability and terms of debt and equity financing sources to fund the requirements of the Company's businesses, or which could negatively impact the Company's investment portfolio, (o) national and regional economic, financial, business and political conditions, including their effect on the availability and cost of labor, credit, materials and other services, (p) the Company's ability to control costs, particularly labor and employee benefit costs, (q) increased operating costs due to shortages in qualified nurses, therapists and other healthcare personnel, (r) the Company's ability to attract and retain key executives and other healthcare personnel, (s) the increase in the costs of defending and insuring against alleged professional liability and other claims and the Company's ability to predict the estimated costs related to such claims, including the impact of differences in actuarial assumptions and estimates compared to eventual outcomes, (t) the Company's ability to successfully reduce (by divestiture of operations or otherwise) its exposure to professional liability and other claims, (u) the Company's ability to successfully dispose of unprofitable facilities, (v) events or circumstances which could result in the impairment of an asset or other charges, such as the impact of the Medicare reimbursement regulations that resulted in the Company recording significant impairment charges in 2011, (w) changes in generally accepted accounting principles ("GAAP") or practices, and changes in tax accounting or tax laws (or authoritative interpretations relating to any of these matters), and (x) the Company's ability to maintain an effective system of internal control 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.

In addition to the results provided in accordance with GAAP, the Company has provided information in this release to compute certain non-GAAP measurements for the third quarter and nine months ended September 30, 2012 and 2011 before certain charges or on a core basis. A reconciliation of the non-GAAP measurements to the GAAP measurements is included in this press release.

As noted above, the Company's earnings release includes a financial measure referred to as operating income, or earnings before interest, income taxes, depreciation, amortization and rent. 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 income from continuing operations is the most comparable GAAP measure. Readers of the Company's financial information should consider 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 GAAP as an indicator of operating performance. A reconciliation of operating income to income from continuing operations provided in the Condensed Business Segment Data is included in this press release.

About Kindred Healthcare

Kindred Healthcare, Inc., a top-125 private employer in the United States, is a FORTUNE 500 healthcare services company based in Louisville, Kentucky with annual revenues of $6 billion and approximately 78,000 employees in 46 states. At September 30, 2012, Kindred through its subsidiaries provided healthcare services in 2,212 locations, including 117 long-term acute care hospitals, six inpatient rehabilitation hospitals, 224 nursing and rehabilitation centers, 27 sub-acute units, 102 hospice, home care and private duty locations, 104 inpatient rehabilitation units (hospital-based) and a contract rehabilitation services business, RehabCare, which served 1,632 non-affiliated facilities. Ranked as one of Fortune magazine's Most Admired Healthcare Companies for four years in a row, Kindred's mission is to promote healing, provide hope, preserve dignity and produce value for each patient, resident, family member, customer, employee and shareholder we serve. For more information, go to www.kindredhealthcare.com.