KINDRED HEALTHCARE ANNOUNCES THIRD QUARTER RESULTS
Fiscal 2005 Earnings Guidance Revised
Company Discontinues Three Unprofitable Nursing Centers During the Quarter
Louisville, KY (November 1, 2005) – Kindred Healthcare, Inc. (the “Company”) (NYSE:KND) today announced its operating results for the third quarter ended September 30, 2005. 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 of 2005 rose 11% to $973 million compared to $879 million in the same period of 2004. Net income from continuing operations for the third quarter of 2005 totaled $19.2 million or $0.42 per diluted share compared to $18.7 million or $0.44 per diluted share in the third quarter of 2004.
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. Hospital operating results included pretax income of $5.9 million ($3.6 million net of income taxes) related to favorable settlements of prior year Medicare cost reports. The Company also adjusted the special employee recognition payment and the retroactive Medicaid rate increases in the state of Indiana that were accrued in the second quarter of 2005, the net effect of which increased pretax income by $1.4 million ($0.9 million net of income taxes) in the third quarter of 2005. In addition, the Company indicated that the effects of Hurricane Katrina and Hurricane Rita reduced its hospital pretax income by approximately $2.1 million ($1.3 million net of income taxes) during the third quarter.
Operating results for the third quarter of 2004 included certain items that, in the aggregate, reduced net income by approximately $1.1 million or $0.03 per diluted share.
For the nine months ended September 30, 2005, revenues increased 13% to $2.9 billion compared to $2.6 billion in the same period last year. Net income from continuing operations totaled $103.3 million or $2.26 per diluted share for the nine months ended September 30, 2005 compared to $60.6 million or $1.43 per diluted share in the first nine months of 2004.
Operating results for the first nine months of 2005 included certain items that, in the aggregate, increased net income by approximately $35.6 million or $0.78 per diluted share. In addition to the items reported in the third quarter, these items related primarily to favorable settlements of prior year hospital Medicare cost reports, a special employee recognition payment to non-executive caregivers and employees, a charitable donation, a retroactive nursing center Medicaid rate increase related to a prior year, and a favorable adjustment related to accrued reorganization costs.
Operating results for the first nine months of 2004 included certain items that, in the aggregate, increased net income by approximately $4.4 million or $0.10 per diluted share.
Discontinued Operations
During the third quarter of 2005, the Company disposed of an unprofitable leased nursing center and designated two owned nursing centers as held for sale. For accounting purposes, the historical operating results of these facilities and related loss on disposal have been classified as discontinued operations for all periods presented.
For the third quarter of 2005, the Company reported net income from discontinued operations totaling $0.3 million or $0.01 per diluted share compared to net income of $4.4 million or $0.11 per diluted share in the third quarter of 2004. 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 substantially divested in 2003. These pretax adjustments aggregated $4.1 million ($2.6 million net of income taxes or $0.06 per diluted share) in the third quarter of 2005 and $11.0 million ($6.8 million net of income taxes or $0.16 per diluted share) in the third quarter of 2004.
The Company reported a net loss of $3.2 million or $0.07 per diluted share related to the divestiture of discontinued operations in the third quarter of 2005 compared to a net loss of $7.5 million or $0.18 per diluted share in the third quarter of 2004.
For the first nine months of 2005, the Company reported net income from discontinued operations totaling $16.5 million or $0.36 per diluted share compared to a net loss of $0.8 million or $0.02 per diluted share for the same period in 2004. Favorable pretax adjustments related to changes in estimates for professional liability reserves totaled $36.7 million ($22.6 million net of income taxes or $0.49 per diluted share) in the first nine months of 2005 and $11.0 million ($6.8 million net of income taxes or $0.16 per diluted share) in the first nine months of 2004.
Losses related to the divestiture of discontinued operations in the first nine months of 2005 aggregated $0.5 million or $0.01 per diluted share compared to $8.6 million or $0.20 per diluted share in the same period of 2004.
Common Stock and Warrant Repurchase
On August 2, 2005, the Company announced that its Board of Directors
had authorized up to $100 million in common stock and warrant repurchases.
Since that time, the Company has not repurchased any of these securities
because of a self-imposed trading blackout related to the negotiation
of the definitive agreement to acquire the assets of Commonwealth Communities
Holdings LLC, an operator of long-term acute care hospitals, nursing centers
and assisted living facilities (“Commonwealth”). On October
24, 2005, the Company announced the execution of a definitive agreement
to acquire the assets of Commonwealth. The Company expects to commence
its equity repurchase program in the fourth quarter of 2005.
Company Revises 2005 Earnings Guidance
The Company revised its previous fiscal 2005 earnings guidance for its continuing operations. Revenues for 2005 are expected to approximate $3.9 billion. Operating income, or earnings before interest, income taxes, depreciation, amortization and rents, is expected to range from $581 million to $586 million. Professional liability costs for 2005 are expected to range from $75 million to $80 million, while depreciation, amortization and net interest costs are expected to approximate $102 million. Net income from continuing operations is expected between $122 million and $125 million, or $2.68 to $2.75 per diluted share (based upon diluted shares of 45.5 million).
The Company indicated that the earnings guidance includes the effect of favorable hospital Medicare cost report settlements, the special recognition payments to non-executive caregivers and employees, a charitable donation, accrued reorganization items, the portion of the Indiana nursing center Medicaid rate increases related to prior years and the effects of Hurricane Katrina and Hurricane Rita, the aggregate effect of which increased net income from continuing operations by approximately $35.6 million or $0.78 per diluted share during the first nine months of 2005. The guidance does not include any significant changes in third party reimbursements (other than those previously disclosed by the Company), the potential impact of the repurchase of any of the Company’s common stock and warrants under the current $100 million equity repurchase authorization, or the effect of any potential or pending acquisitions or divestitures.
The Company’s previous 2005 earnings guidance for continuing operations indicated revenues approximating $3.9 billion, operating income between $584 million and $594 million and net income ranging from $123 million to $129 million or $2.71 to $2.84 per diluted share (based upon diluted shares of 45.5 million). Professional liability costs were expected to range from $80 million to $90 million, while depreciation, amortization and net interest costs were expected to approximate $100 million. The previous 2005 earnings guidance also included the effect of certain disclosed items that increased net income from continuing operations by approximately $32.4 million or $0.71 per diluted share.
For the fourth quarter of 2005, revenues are expected to range from $975 million to $1 billion while operating income is expected to range from $129 million to $134 million. Net income from continuing operations is expected to range from $19 million to $22 million, or $0.42 to $0.49 per diluted share (based upon diluted shares of 45 million).
Management Commentary
Paul J. Diaz, President and Chief Executive Officer of the Company,
remarked, “We again reported revenue growth in each of our four
divisions during the third quarter of 2005 compared to the same period
last year. Excluding certain disclosed items, our third quarter hospital
operating income was better than we reported in the second quarter of
2005 and 12% ahead of comparable results for the third quarter last year.
Our hospitals reported another quarter of strong admissions growth as
we made progress in addressing the operating issues identified in five
underperforming hospitals during the second quarter of this year. Our
KPS pharmacy division continues to report strong growth in revenues and
operating income and should benefit from our recently completed Chicago
acquisition. While overall pharmacy results showed significant growth
from last year, our same-store results were short of plan, reflecting
slower new customer sales due to uncertainty surrounding the new Medicare
Part D program that will take effect on January 1, 2006. Peoplefirst
Rehabilitation reported another solid quarter as we continue to gain momentum
on our recruiting efforts. Our nursing center census during the quarter
was soft, but we continued to make strategic quality investments in this
business, with the goal of increasing Medicare, managed care and overall
census. As we implemented these strategic quality investments, we incurred
unanticipated premium pay and contract labor costs, which we expect will
moderate in the fourth quarter.”
With respect to the Company’s development plans, Mr. Diaz commented,
“Our recent announcement of the Commonwealth acquisition significantly
accelerates our acquisition and development activities and provides new
business opportunities for each of our four operating divisions. This
transaction will add six hospitals, nine nursing centers and four assisted
living facilities to our portfolio. These operations currently generate
approximately $225 million in annualized revenues. While there are several
conditions to closing, we believe that this transaction will be completed
in the first quarter of 2006.”
Commenting further on the Company’s development plans, Mr. Diaz noted, “We recently announced plans to develop a new 60-bed freestanding hospital in Richmond, Virginia and a new 60-bed freestanding hospital with a co-located 40-bed subacute unit in Indianapolis that will replace our existing leased 46-bed hospital facility. These projects, together with our previously announced hospital projects in New Jersey, Arizona and Pennsylvania, put us well on our way to achieving our goal of developing five to seven new hospitals each year. In our KPS Pharmacy business, we announced this week the acquisition of an institutional pharmacy in Chicago serving approximately 8,600 customer beds. We have now completed three institutional pharmacy acquisitions this year which will add approximately $135 million of annualized revenues to our KPS Pharmacy business. We also recently opened a new institutional pharmacy in Nashville, our fourth site in Tennessee and our second new opening in 2005.”
Rent Reset Issue with Ventas, Inc.
The Company also provided guidance on its current estimate of the potential rent reset under its master lease agreements (the “Master Lease Agreements”) with Ventas, Inc. (NYSE:VTR) (“Ventas”). The Company leases 39 of its 73 hospitals and 186 of its 245 nursing centers from Ventas. The current aggregate annual rent under the Master Lease Agreements approximates $190 million and the annual rent escalator, subject to certain parameters, is 3½%.
As previously disclosed in the Company’s filings with the Securities and Exchange Commission (the “SEC”), Ventas has a one-time option to reset the rent and the related rent escalators under each of the original Master Lease Agreements to the “Fair Market Rental” of the leased properties. Fair Market Rental is determined through an appraisal procedure set forth in the Master Lease Agreements. A summary of the appraisal procedure is set forth below.
Ventas has indicated that based upon currently available information, reports of experts and current conditions, if Ventas were currently entitled to, and did, exercise the rent reset option, the base rent under the Master Lease Agreements would increase by at least $35 million per year.
The Company has performed substantial analysis of the potential rent reset, including internal analysis and the engagement of several independent appraisal firms to estimate the rent reset on many of the leased properties. At this time, the Company has a significant disagreement with Ventas on the potential value of the rent reset option, both with respect to the annual base rent and the level of the annual rent escalator. As a general matter, the Company believes that the aggregate rent on its hospitals may increase while the aggregate rent on its nursing centers would decline. The Company’s analysis is based upon a number of factors, some of which are subject to change, including, without limitation, reimbursement rates and regulatory changes affecting the leased properties, the historical and projected financial results of the individual leased properties, the condition, age and capital requirements of the leased properties, the method of calculating market rents, current market rents and industry market rents for long-term acute care hospitals and nursing centers, the terms of the Master Lease Agreements that limit operational flexibility, the aggregate rental value of the portfolio of skilled nursing facilities and long-term acute care hospitals contained within each Master Lease Agreement, and the inherent risks involved in any third party appraisal process.
Mr. Diaz commented, “While we continue to enhance and expand our analysis of the potential rent reset, we have performed substantial work to support our estimate, including third party appraisals on each of our hospitals and approximately one-fourth of our nursing centers leased from Ventas. We have reviewed our analysis with additional unaffiliated third parties who have supported our conclusions.”
Commenting on the issues associated with the potential rent reset, Mr. Diaz noted, “While our analysis has indicated a significant difference of opinion with Ventas regarding the value of the rent reset, we also understand that the determination of fair market rents requires certain levels of subjectivity and judgment related to the many variables that may be considered under the circumstances. As a result, we believe it is important for investors to consider the possibility of a wide range of outcomes with respect to the rent reset issue.”
“We clearly have a significant difference of opinion with Ventas regarding the value of the potential rent reset,” Mr. Diaz further commented. “We have developed a good working relationship with Ventas over the last few years and we will continue to engage in a constructive dialogue with Ventas on this issue as well as other issues that may benefit both companies in the future. Nevertheless, if we are unable to resolve our differences, we are comfortable with the appraisal procedure set forth in the Master Lease Agreements and believe we have a compelling case in support of our conclusions.”
Generally, the Master Lease Agreements provide that Ventas can initiate
the rent reset procedure under each Master Lease Agreement at any time
between January 20, 2006 and July 19, 2007 by delivering a notice to the
Company proposing the Fair Market Rental (as described below) for the
balance of the lease term (the “Reset Proposal Notice”). If
the Company and Ventas are unable to reach an agreement on the Fair Market
Rental within 30 days following delivery of the Reset Proposal Notice,
the Company and Ventas each must select an independent appraiser. These
two appraisers then will have ten days to select a third independent appraiser
(the “Independent Appraiser”). The Independent Appraiser will
have 60 days to complete its determination of Fair Market Rental and the
annual rent escalator, which determination will be final and binding on
the parties. Within 30 days following the Independent Appraiser’s
determination, Ventas may elect to exercise its right to reset Fair Market
Rental by sending the Company a final exercise notice (the “Final
Exercise Notice”).
Alternatively, Ventas may decide not to exercise its rent reset option,
in which event the rent and existing 3½% contingent annual escalator
would remain at their then current levels under the Master Lease Agreements.
Provided that Ventas exercises its rent reset right in accordance with
the Master Lease Agreements, the rent reset will become effective on the
later of July 19, 2006 or the date of delivery of the Reset Proposal Notice,
which can be no later than July 19, 2007.
As a condition to exercising its rent reset right, upon delivery of the Final Exercise Notice, Ventas is required to pay the Company a reset fee equal to a prorated portion of $5 million based upon the proportion of base rent payable under the Master Lease Agreement(s) with respect to which rent is reset to the total base rent payable under all of the Master Lease Agreements.
“Fair Market Rental” is generally defined under the Master Lease Agreements as the amount (including escalations) that a willing tenant would pay, and a willing landlord would accept, for leasing the leased properties for the term (including renewal terms). Fair Market Rental is to be determined on the basis of certain assumptions, including (1) all leased properties are in good condition and repair (given their respective ages and prevailing healthcare industry standards with respect to what is considered good condition and repair), without any deferred maintenance (but allowing for ordinary wear and tear), (2) all leased properties are in material compliance with applicable laws and have all authorizations necessary for use as a nursing center or hospital, as applicable, and (3) the replacement cost of the leased properties are not determinative of Fair Market Rental. In addition, Fair Market Rental shall take into account market conditions, market levels of earnings before interest, income taxes, depreciation, amortization, rent and management fees (“EBITDARM”), the ratio of market levels of EBITDARM to market levels of rent and the actual levels of EBITDARM at the applicable leased properties, as well as historical levels of EBITDARM at the applicable leased properties (including the EBITDARM of the leased properties measured as of April 20, 2001).
Under the Master Lease Agreements, Ventas has a right to sever properties from the existing leases in order to create additional leases, a device adopted to facilitate its financing flexibility. However, for purposes of the rent reset right, the additional leases are disregarded and the Fair Market Rental is determined for each of the four original Master Lease Agreements.
Additional information regarding the Master Lease Agreements is contained in the Company’s Form 10-K for the year ended December 31, 2004 and copies of the Master Lease Agreements filed with the SEC.
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 SEC.
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 Lease Agreements with Ventas; (b) the Company’s ability to meet its rental and debt service obligations; (c) adverse developments with respect to the Company’s results of operations or liquidity; (d) the Company’s ability to attract and retain key executives and other healthcare personnel; (e) increased operating costs due to shortages in qualified nurses, therapists and other healthcare personnel; (f) the effects of healthcare reform and government regulations, interpretation of regulations and changes in the nature and enforcement of regulations governing the healthcare industry; (g) 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 nursing center Medicare reimbursement resulting from revised resource utilization groupings payments; (h) national and regional economic conditions, including their effect on the availability and cost of labor, materials and other services; (i) the Company’s ability to control costs, including labor and employee benefit costs; (j) the Company’s ability to comply with the terms of its Corporate Integrity Agreement; (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 the Company’s 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 the Company’s 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.
Kindred Healthcare, Inc. through its subsidiaries operates hospitals,
nursing centers, institutional pharmacies and a contract rehabilitation
services business across the United States.
Click here
to view the 3rd Quarter Results.
CONTACT:
Richard A. Lechleiter
Executive Vice President and Chief Financial Officer
(502) 596-7734
