Kindred Healthcare Announces Third Quarter 2014 Results

Kindred Healthcare, Inc. (“Kindred” or the “Company”) (NYSE:KND) today announced its operating results for the third quarter ended September 30, 2014.

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.

Third Quarter Highlights:

• Consolidated revenues increased 6% and core operating income increased 7% from the same period last year primarily resulting from improved hospital volumes, strong performance in the Care Management division’s Kindred at Home operations, growth from acquisitions and solid cost controls throughout the Company

• Hospital division reported strong results with 3% same-facility admissions growth and less than 1% growth in core operating costs per patient day
• RehabCare division continues to deliver strong results including core operating income growth of 9% and margin improvement to 11.7% from 11.0% compared to the same period a year ago
• Care Management division, including Kindred at Home, delivered 60% revenue growth and core operating income tripled compared to the same period last year
• Nursing Center division core operating income increased 16.1% primarily due to growth in revenues and its operating margins were significantly improved due to ongoing repositioning and cost control initiatives
• Strong sequential cash flows with core operating cash flows of $95 million and core free cash flows of $72 million
• Board of Directors declared regular quarterly cash dividend of $0.12 per share payable on December 9, 2014

(1) See reconciliation of core results to GAAP results on page 20.

Third Quarter Results

Continuing Operations

Consolidated revenues for the third quarter ended September 30, 2014 increased 6% to $1.24 billion compared to $1.18 billion during the same period of 2013, primarily due to improved hospital volumes, strong performance in the Care Management division’s operations, growth from acquisitions and solid cost controls throughout the Company. Kindred reported income from continuing operations for the third quarter of 2014 of $1.7 million or $0.03 per diluted share compared to a loss from continuing operations of $16.6 million or $0.31 per diluted share in the third quarter of 2013. Third quarter 2014 operating results included pretax charges of $7.7 million ($5.3 million net of income taxes) or $0.08 per diluted share related to transaction, customer bankruptcy, severance and restructuring costs. Operating results for the third quarter of 2013 included pretax charges of $32.9 million ($23.2 million net of income taxes) or $0.44 per diluted share related to litigation costs, costs associated with the closure of a hospital and a home health location, costs associated with certain severance and retirement benefits, charges associated with the modification of certain of the Company’s senior debt, and transaction costs.

Management Commentary

Paul J. Diaz, Chief Executive Officer of the Company, commented, “We are very pleased with our operating and financial results for the third quarter of 2014, which were in line with our expectations and reflect further progress in delivering on our promise to provide hope, healing and recovery to the patients we serve. We continued to see improvement in employee engagement and reduced turnover, while improving quality measures, clinical outcomes and patient satisfaction in all of our business segments. We are also pleased to reaffirm and narrow our earnings guidance and reaffirm our free cash flows guidance for the year, which reflects the change in share count in our earnings guidance from our mid-year equity offering, as we achieved revenue and core operating income growth of 6% and 7% year-over-year, respectively.”

Mr. Diaz continued, “We also made progress on a number of internal and external growth initiatives during the quarter that will enhance our Integrated Care Market capabilities, particularly in home health and hospice services. In addition, we continue to evaluate a robust pipeline of external opportunities to deploy our financial resources, industry leading infrastructure and management capabilities. Overall, we remain committed to further improving our patients’ experiences and to the long-term growth, profitability and strengthened financial position of the Company.”

Benjamin A. Breier, President and Chief Operating Officer of the Company, said, “Our hospital division had another strong quarter. Same-facility hospital admissions increased 3% in the third quarter compared to the same period last year. RehabCare continues to make great progress, as evidenced by our 9% increase in operating income and margin improvement to 11.7% from 11.0% compared to the same period a year ago. In addition, we have added 90 net new skilled nursing rehabilitation contracts during 2014. Our efforts to reshape our nursing center division continue to pay off as we achieved a significant improvement in our core operating margins in the third quarter to 13.1% from 11.9%.”

Mr. Breier added, “Lastly, the positive results in our home health and hospice operations reflect continued execution improvement by our Care Management division, including Kindred at Home, which has been enabled through better processes, technology and team. We believe that the merger with Gentiva Health Services, Inc. (“Gentiva”) (NASDAQ:GTIV) will further accelerate these capabilities and our Continue the Care strategy, creating significant value for patients, employees and shareholders.”

Stephen D. Farber, Executive Vice President, Chief Financial Officer, commented, “Our balance sheet at September 30, 2014 is in great shape with no outstanding borrowings under our revolving credit facility, a cash balance of $82 million and borrowing capacity under our revolving credit facility of approximately $650 million. Our core operating cash flows for the third quarter were $95 million and core free cash flows were $72 million, a significant improvement over the first half of 2014. We expect that cash flow improvements will continue over the next several quarters through performance enhancements in our hospital division central business offices. Our core diluted earnings per share from continuing operations of $0.11 per share for the third quarter of 2014 compares to core diluted earnings per share from continuing operations of $0.12 per share for the third quarter of 2013 (or $0.10 per share on a pro forma basis assuming the incremental 9.7 million shares issued in the Company’s equity offering completed in June 2014).”

Acquisition of Gentiva

Kindred announced on October 9, 2014 that a definitive agreement was signed to acquire Gentiva:

• Transaction value is approximately $1.8 billion

• Combined company is expected to have pro forma annual revenues of approximately $7.1 billion and operating income or earnings before interest, income taxes, depreciation, amortization and rent (“EBITDAR”) of approximately $1.0 billion
• Transaction expected to be significantly accretive to Company earnings and cash flows, exclusive of transaction costs, with more than $70 million of expected synergies within two years of closing

Mr. Diaz commented, “The merger with Gentiva will create one of the nation’s premier healthcare service providers with diverse business and revenue mix. We are encouraged by Gentiva’s strong results in the third quarter, which were consistent with our expectations and underscore our confidence in the merits of the combination. We are impressed with the talented team at Gentiva and look forward to working closely together to complete our combination, which will advance our strategy, mission and shared values.”

“We are pleased by the news that after the close of the transaction with Gentiva, David Causby will join our team as President of the combined Kindred at Home business,” stated Mr. Breier. “David is a strong leader with a deep understanding of Gentiva’s operations, people and systems, which will be invaluable to ensuring a smooth transition. David’s appointment will allow for continued focus on our patients and operations, and ensure a successful integration and a higher level of certainty on achieving our cost and revenue synergy goals.”

Earnings Guidance – Continuing Operations

The Company today reaffirmed and narrowed its guidance for income from continuing operations for 2014 of between $59 million and $65 million. Using Kindred’s annual diluted share count of 58.3 million outstanding shares following the mid-year equity offering, income from continuing operations for 2014 equates to $0.98 to $1.08 per diluted share (previously $0.96 to $1.14 per diluted share). As denoted on page 24, based upon the completion of three quarters in 2014, the Company has conformed various line items underlying its earnings guidance, which in aggregate are fully offsetting and had no net impact on its expectations for income from continuing operations attributable to the Company.

The Company also reaffirmed its operating cash flows in excess of routine and development capital spending programs and before dividends (“free cash flows”) guidance range of $85 million to $105 million. Estimated dividend payments for 2014 are expected to approximate $29 million.

Please note the Company’s earnings and free cash flows guidance for 2014 excludes the effect of reimbursement changes, debt refinancing costs, severance, retirement, retention and restructuring costs, customer bankruptcy costs, litigation costs, transaction costs, any further acquisitions or divestitures, any impairment charges, any further issuances of common stock, debt or mandatory convertible equity securities in conjunction with the Gentiva transaction and any repurchases of common stock.

Quarterly Cash Dividend

The Company also announced that its Board of Directors has approved the payment of the regular quarterly cash dividend of $0.12 per common share to be paid on December 9, 2014 to shareholders of record as of the close of business on November 18, 2014. Future declarations of quarterly dividends will be subject to the approval of Kindred’s Board of Directors.

Conference Call

As previously announced, investors and the general public may access a live webcast of the third quarter 2014 conference call through a link on the Company’s website at http://investors.kindredhealthcare.com. The conference call will be held on November 6 at 10:00 a.m. (Eastern Time). The conference call webcast will feature accompanying slides, which will be posted prior to the conference call, and will be accessible through the Investor Relations section of the Company’s website.

A telephone replay of the conference call will become available at approximately 5:30 p.m. on November 6 by dialing (719) 457-0820, access code: 2187635. The replay will be available through November 16.

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. These forward-looking statements include, but are not limited to, statements regarding the Company’s proposed business combination transaction with Gentiva (including financing of the proposed transaction and the benefits, results, effects and timing of a transaction), all statements regarding the Company’s (and the Company’s and Gentiva’s combined) expected future financial position, results of operations, cash flows, dividends, 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,” “would,” “should,” “will,” “intend,” “may,” “potential,” “upside,” and other similar expressions. Statements in this press release concerning the business outlook or future economic performance, anticipated profitability, revenues, expenses, dividends or other financial items, and product or services line growth of the Company (and the combined businesses of the Company and Gentiva), together with other statements that are not historical facts, are forward-looking statements that are estimates reflecting the best judgment of the Company based upon currently available information.

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, performance or plans with respect to Gentiva to differ materially from any future results, performance or plans 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 (the “SEC”).

Risks and uncertainties related to the proposed merger include, but are not limited to, the risk that Gentiva’s stockholders do not approve the merger, potential adverse reactions or changes to business relationships resulting from the announcement or completion of the merger, uncertainties as to the timing of the merger, adverse effects on the Company’s stock price resulting from the announcement or completion of the merger, competitive responses to the announcement or completion of the merger, the risk that healthcare regulatory, licensure or other approvals and financing required for the consummation of the merger are not obtained or are obtained subject to terms and conditions that are not anticipated, costs and difficulties related to the integration of Gentiva’s businesses and operations with the Company’s businesses and operations, the inability to obtain, or delays in obtaining, cost savings and synergies from the merger, uncertainties as to whether the completion of the merger or any transaction will have the accretive effect on the Company’s earnings or cash flows that it expects, unexpected costs, liabilities, charges or expenses resulting from the merger, litigation relating to the merger, the inability to retain key personnel, and any changes in general economic and/or industry-specific conditions.

In addition to the factors set forth above, other factors that may affect the Company’s plans, results or stock price include, without limitation, (a) the impact of healthcare reform, which will initiate significant changes 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”) or future deficit reduction measures adopted at the federal or state level. Healthcare reform is affecting each of the Company’s businesses in some manner. Potential future efforts in the U.S. Congress to repeal, amend, modify 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 Company’s ability to adjust to the new patient criteria for long-term acute care (“LTAC”) hospitals under the Pathway for SGR Reform Act of 2013, which will reduce the population of patients eligible for the Company’s hospital services and change the basis upon which the Company is paid, (c) the impact of the final rules issued by CMS on August 1, 2012 which, among other things, reduced Medicare reimbursement to the Company’s transitional care (“TC”) hospitals in 2013 and beyond by imposing a budget neutrality adjustment and modifying the short-stay outlier rules, (d) the impact of the final rules issued by CMS on July 29, 2011 which significantly reduced Medicare reimbursement to the Company’s nursing centers and changed payments for the provision of group therapy services effective October 1, 2011, (e) the impact of the Budget Control Act of 2011 (as amended by the American Taxpayer Relief Act of 2012 (the “Taxpayer Relief Act”)) which instituted an automatic 2% reduction on each claim submitted to Medicare beginning April 1, 2013, (f) the costs of defending and insuring against alleged professional liability and other claims and investigations (including those related to pending investigations and whistleblower and wage and hour class action lawsuits against the Company) and the Company’s ability to predict the estimated costs and reserves related to such claims and investigations, including the impact of differences in actuarial assumptions and estimates compared to eventual outcomes, (g) the impact of the Taxpayer Relief Act which, among other things, reduces Medicare payments by an additional 25% for subsequent procedures when multiple therapy services are provided on the same day. At this time, the Company believes that the rules related to multiple therapy services will reduce its Medicare revenues by $25 million to $30 million on an annual basis, (h) 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 reimbursement for the Company’s TC hospitals, nursing centers, inpatient rehabilitation hospitals and home health and hospice operations, and the expiration of the Medicare Part B therapy cap exception process, (i) 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, (j) the ability of the Company’s hospitals and nursing centers to adjust to medical necessity reviews, (k) the impact of the Company’s significant level of indebtedness on its funding costs, operating flexibility and ability to fund ongoing operations, development capital expenditures or other strategic acquisitions with additional borrowings, (l) the Company’s ability to successfully redeploy its capital and proceeds of asset sales in pursuit of its business strategy and 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, (m) the Company’s ability to pay a dividend as, when and if declared by the Board of Directors, in compliance with applicable laws and the Company’s debt and other contractual arrangements, (n) the failure of the Company’s facilities to meet applicable licensure and certification requirements, (o) the further consolidation and cost containment efforts of managed care organizations and other third party payors, (p) the Company’s ability to meet its rental and debt service obligations, (q) the Company’s ability to operate pursuant to the terms of its debt obligations, and comply with its covenants thereunder, and the Company’s ability to operate pursuant to its master lease agreements with Ventas, Inc. (NYSE:VTR), (r) 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, (s) the Company’s ability to control costs, particularly labor and employee benefit costs, (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 obligations under various laws to self-report suspected violations of law by the Company to various government agencies, including any associated obligation to refund overpayments to government payors, fines and other sanctions, (v) national, regional and industry-specific economic, financial, business and political conditions, including their effect on the availability and cost of labor, credit, materials and other services, (w) increased operating costs due to shortages in qualified nurses, therapists and other healthcare personnel, (x) the Company’s ability to attract and retain key executives and other healthcare personnel, (y) the Company’s ability to successfully dispose of unprofitable facilities, (z) 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 the last three fiscal years, (aa) 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 (bb) the Company’s ability to maintain an effective system of internal control over financial reporting.

In addition to the factors set forth above, other factors that may affect the Company’s plans, results or stock price are set forth in the Company’s Annual Report on Form 10-K and in its reports on Forms 10-Q and 8-K.

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 press release to compute certain non-GAAP measurements for the three months and nine months ended September 30, 2014 and 2013 before certain charges or on a core basis and on a pro forma basis. A reconciliation of the non-GAAP measurements to the GAAP measurements is included in this press release.

Also in this release, the Company provides the financial measure of free cash flows excluding certain items. The Company recognizes that free cash flows excluding certain items is a non-GAAP measurement and is not intended to replace the presentation of the Company’s cash flows in accordance with GAAP. The Company believes that this non-GAAP measurement provides important information to investors related to the amount of discretionary cash flows that are available for other investing and financing activities. In addition, management uses free cash flows excluding certain items in making decisions related to acquisitions, development capital expenditures, dividends, long-term debt repayments and other uses. The Company believes net cash flows provided by operating activities is the most comparable GAAP measure. Readers of the Company’s financial information should consider net cash flows provided by operating activities as an important measure of the Company’s financial performance because it provides the most complete measure of its performance. Free cash flows excluding certain items 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 net cash flows provided by operating activities to free cash flows excluding certain items is included in this press release.

The Company’s earnings release also includes financial measures referred to as operating income, or EBITDAR, and earnings before interest, income taxes, depreciation and amortization (“EBITDA”). The Company’s management uses EBITDAR or EBITDA as meaningful measures of operational performance in addition to other measures. The Company uses EBITDAR or EBITDA to assess the relative performance of its operating divisions as well as the employees that operate these businesses. In addition, the Company believes these measurements are important because securities analysts and investors use these measurements to compare the Company’s performance to other companies in the healthcare industry. The Company believes that income (loss) from continuing operations is the most comparable GAAP measure. Readers of the Company’s financial information should consider income (loss) from continuing operations as an important measure of the Company’s financial performance because it provides the most complete measure of its performance. EBITDAR or EBITDA 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 EBITDAR or EBITDA to income (loss) from continuing operations provided in the Condensed Business Segment Data is included in this press release. The pro forma EBITDAR total of $1.0 billion included in this press release was computed by combining the mid-point of the Company’s 2014 earnings guidance and 2014 EBITDAR estimate of $232 million for Gentiva, which is based upon Gentiva’s 2014 current average analyst consensus estimates. In addition, pro forma EBITDAR includes full run rate expected cost synergies of $70 million from the transaction.

Additional Information

This press release does not constitute an offer to sell or the solicitation of an offer to buy any securities or a solicitation of any vote or approval. This communication may be deemed to be solicitation material in respect of the proposed merger between the Company and Gentiva. In connection with the proposed merger, Gentiva and the Company intend to file a registration statement on Form S-4, containing a proxy statement/prospectus, with the SEC. SHAREHOLDERS OF GENTIVA ARE URGED TO READ ALL RELEVANT DOCUMENTS FILED WITH THE SEC, INCLUDING THE PROXY STATEMENT/PROSPECTUS, BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT THE PROPOSED MERGER. Investors and security holders will be able to obtain copies of the proxy statement/prospectus as well as other filings containing information about the Company and Gentiva, without charge, at the SEC’s website, www.sec.gov. Those documents, when filed, as well as the Company’s other public filings with the SEC, may be obtained without charge at the Company’s website at www.kindredhealthcare.com.

Participants in Solicitation

The Company and its directors and executive officers, and Gentiva and its directors and executive officers, may be deemed to be participants in the solicitation of proxies from the holders of Gentiva common stock in respect of the proposed merger. Information about the directors and executive officers of the Company is set forth in the proxy statement for the Company’s 2014 Annual Meeting of Shareholders, which was filed with the SEC on April 3, 2014. Information about the directors and executive officers of Gentiva is set forth in the proxy statement for Gentiva’s 2014 Annual Meeting of Shareholders, which was filed with the SEC on March 25, 2014. Investors may obtain additional information regarding the interest of such participants by reading the proxy statement/prospectus regarding the proposed merger when it becomes available.

About Kindred Healthcare

Kindred Healthcare, Inc., a top-150 private employer in the United States, is a FORTUNE 500 healthcare services company based in Louisville, Kentucky with annual revenues of $5 billion and approximately 62,600 employees in 47 states. At September 30, 2014, Kindred through its subsidiaries provided healthcare services in 2,376 locations, including 97 transitional care hospitals, five inpatient rehabilitation hospitals, 99 nursing centers, 22 sub-acute units, 152 Kindred at Home hospice, home health and non-medical home care locations, 102 inpatient rehabilitation units (hospital-based) and a contract rehabilitation services business, RehabCare, which served 1,899 non-affiliated facilities. Ranked as one of Fortune magazine’s Most Admired Healthcare Companies for six 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. You can also follow us on Twitter and Facebook.