KINDRED HEALTHCARE ANNOUNCES FIRST QUARTER RESULTS
Net Income from Continuing Operations - $20.4 million or $0.50 per Diluted Share
Louisville, KY (April 27, 2006) – Kindred Healthcare, Inc. (the “Company”) (NYSE:KND) today announced its operating results for the first quarter ended March 31, 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.
First Quarter Results
Continuing Operations
Revenues for the first quarter of 2006 rose 13% to $1.0 billion compared to $930 million in the year-earlier period. Net income from continuing operations totaled $20.4 million or $0.50 per diluted share compared to $33.4 million or $0.75 per diluted share in the first quarter last year.
Operating results for the first quarter of 2006 included certain items that, in the aggregate, decreased net income by approximately $0.5 million or $0.01 per diluted share. These items included pretax income of $1.9 million related to the favorable settlement of prior year hospital Medicare cost reports, a $1.3 million pretax gain from an institutional pharmacy joint venture transaction, a pretax charge of $2.7 million related primarily to revisions to prior estimates for accrued contract labor costs in the Company’s rehabilitation division, and a pretax charge of $1.3 million for investment banking services and costs related to the rent reset issue with Ventas, Inc. (“Ventas”) (NYSE:VTR), the Company’s primary landlord.
As previously disclosed, the Company began to recognize compensation expense prospectively in its consolidated financial statements for non-vested stock options on January 1, 2006. The expensing of stock options reduced net income in the first quarter of 2006 by approximately $1.3 million or $0.03 per diluted share.
Operating results for the first quarter of 2005 included certain items that, in the aggregate, increased net income by approximately $2.6 million or $0.06 per diluted share. These items included favorable pretax adjustments of $2.9 million related to the settlement of prior year hospital Medicare cost reports and $1.4 million of accrued reorganization costs.
Discontinued Operations
In the first quarter of 2006, the Company reported net income from discontinued operations totaling $3.4 million or $0.08 per diluted share compared to net income of $3.5 million or $0.08 per diluted share in the first 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 $7.0 million ($4.3 million net of income taxes or $0.11 per diluted share) in the first quarter of 2006 and $9.6 million ($5.9 million net of income taxes or $0.13 per diluted share) in the first quarter of 2005.
Other Quarterly Information
Over the last few years, the Company’s limited purpose insurance subsidiary has achieved improved professional liability underwriting results. As a result, the Company received a return of capital of approximately $25 million from its limited purpose insurance subsidiary during the first quarter of 2006. These proceeds were used primarily to repay borrowings under the Company’s revolving credit facility.
Management Commentary
“In the first quarter, we continued to execute our operating strategy as we faced a number of regulatory changes in our operating divisions,” remarked Paul J. Diaz, President and Chief Executive Officer of the Company. “Our hospital division continued to produce solid results, with overall admissions increasing 10% and non-government admissions increasing 23% in the first quarter compared to a year ago. On a same-store basis, overall hospital admissions increased 6% compared to the first quarter of 2005. Our nursing center revenues increased over 8% from last year’s first quarter while volume grew over 2%. Our nursing center operators also addressed the many challenges associated with the new RUGs refinement system that became effective on January 1. KPS turned in another strong quarter, particularly in light of the many significant issues related to the Medicare Part D transition. KPS revenues increased over 45% in the first quarter of this year compared to the same period in 2005, with customer beds at March 31 up 24% from a year ago. In Peoplefirst, we successfully managed through the new therapy cap rules and we are starting to see growth in our external customer base that should continue over the balance of the year.”
Commenting on the Company’s recent development activities, Mr. Diaz noted, “We completed the Commonwealth acquisition at the end of February, a relatively large transaction in which we acquired six hospitals, eleven nursing centers and four assisted living facilities. Additionally, these new facilities will be serviced by our KPS pharmacy business and our Peoplefirst rehabilitation business. While we have operated these facilities for only a short period, our transition of these operations is proceeding as planned.”
Warrant Expiration
As previously announced and in accordance with their terms, the Company’s Series A warrants and Series B warrants expired on April 20, 2006. In connection with the exercise of these warrants, the Company issued approximately 10.1 million shares of common stock and received net proceeds of approximately $142.3 million. The Company intends to repurchase shares of its common stock in the open market with the cash proceeds from the exercise of the warrants over time and subject to market conditions. The Company’s diluted earnings per share is derived by use of the treasury method of accounting, which assumes that warrants are converted and shares of common stock are repurchased simultaneously. Since the Company’s repurchase of its common stock in the open market is subject to certain daily trading volume limitations, the actual dilution resulting from the exercise of the warrants in 2006 may be higher than the levels reported in its historical financial statements. At April 26, 2006, the Company’s outstanding common stock aggregated approximately 47.2 million shares.
Proposed Regulatory Changes
As previously disclosed, the Centers for Medicare and Medicaid Services (“CMS”) issued proposed regulatory changes regarding Medicare reimbursement to long-term acute care hospitals (the “Proposed Hospital Rule”) on January 19, 2006. Based upon the Company’s historical Medicare patient volumes, the Company expects that the Proposed Hospital Rule would reduce Medicare revenues to the Company’s hospitals associated with short stay outliers and high cost outliers between $115 million and $120 million on an annual basis. This estimate does not include the negative impact resulting from the elimination of the annual market basket adjustment to the Medicare payment rates that also is contained in the Proposed Hospital Rule. The annual market basket adjustment has typically ranged between 3% and 4%, or approximately $25 million to $30 million in annual revenues. The Proposed Hospital Rule would be effective for discharges occurring on or after July 1, 2006. The Proposed Hospital Rule is expected to be issued in its final form on or about May 1, 2006, and as such, is subject to change.
Mr. Diaz commented, “We have worked extensively over the past few months to demonstrate the significant negative impact that the Proposed Hospital Rule would have on our shared goal with CMS of ensuring that Medicare beneficiaries who need long-term acute care hospital services receive high quality care in the most appropriate setting. We believe this goal is best achieved by developing certification criteria to ensure that the most medically complex patients are treated in long-term acute care hospitals and that these facilities have the resources and capabilities to treat those patients.”
No Earnings Guidance for 2006
Primarily as a result of uncertainties related to the Proposed Hospital Rule, the Company is not providing 2006 earnings guidance at this time. There is also uncertainty with respect to the previously disclosed rent reset option available to Ventas.
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 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, and changes arising from and related to the Medicare prospective payment system for long-term acute care hospitals, including the Proposed Hospital Rule, and the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, and changes in Medicare and Medicaid reimbursements for the Company’s nursing centers; (h) national and regional economic conditions, particularly 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 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; (k) 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; (l) the Company’s ability to successfully reduce (by divestiture of operations or otherwise) its exposure to professional liability claims; (m) the Company’s ability to successfully dispose of unprofitable facilities; and (n) 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.
Kindred Healthcare, Inc. through its subsidiaries operates hospitals,
nursing centers, institutional pharmacies and a contract rehabilitation
services business across the United States.
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to view the 1st Quarter Results.
CONTACT:
Richard A. Lechleiter
Executive Vice President and Chief Financial Officer
(502) 596-7734
