Kindred Healthcare Reports Fourth Quarter 2016 Results

Kindred Healthcare, Inc. (“Kindred” or the “Company”) (NYSE:KND) today announced its operating results for the fourth quarter ended December 31, 2016.

Benjamin A. Breier, President and Chief Executive Officer of the Company, commented, “We are pleased to report fourth quarter and full year 2016 operating results in line with our expectations. We made significant progress growing our home health, hospice and inpatient rehabilitation businesses, and stabilized our nursing center and RehabCare volumes. We are further encouraged by the performance of our Hospital Division in its first full quarter under long-term acute care (“LTAC”) patient criteria. Our solid volume and cash flow performance, coupled with enterprise-wide cost realignment initiatives, position us to continue building on our success as the post-acute provider of choice among patients, families, healthcare systems and payors.”

Mr. Breier continued, “We continue to advance our strategic initiative to divest our skilled nursing center business, and are pleased with the level of interest in the portfolio. We hope to complete this accretive transaction by year end, and use the anticipated net cash proceeds of $100 million to $300 million to repay debt. Similar to our strategic move into the home health, hospice and community care space, our exit from the nursing center business will contribute to the ongoing transformation of Kindred’s growth, cash flow and earnings profile.”

Mr. Breier added, “We were especially pleased with the volume growth and stable revenue in our Hospital Division in its first full quarter under LTAC patient criteria, both of which were better than we expected. Despite the roughly $30 million revenue impact in the quarter from LTAC patient criteria, we maintained revenues essentially flat year-over-year and grew volumes 2.5% on a same-hospital basis. This solid performance on the topline did not translate directly into EBITDAR growth due in part to increases in labor costs. Nevertheless, our early performance gives us confidence in our multi-pronged LTAC criteria mitigation strategy, and our ability to mitigate at least half of the run-rate impact of criteria by the end of 2017.”

Mr. Breier continued, “Since September 1, 2016, all of the Company’s ongoing LTAC hospitals are under the new patient criteria model. With one full quarter under this new model now completed, we remain confident that we are successfully managing this transition. For the fourth quarter of 2016, approximately 89% of Kindred’s ongoing Hospital Division revenues came from compliant patients, which includes all patients except Medicare site-neutral patients, up from approximately 87% in the month of September. The remaining approximately 11% of revenues were from Medicare site-neutral patients.”

Mr. Breier said, “We are proud of our success to-date in implementing our strategic vision to create innovative post-acute solutions and deliver effective care coordination across the entire patient episode within a value-based healthcare system. Our strategy to pursue innovative solutions was recently confirmed when Kindred was named to Fortune magazine’s list of the World’s Most Admired Companies for the eighth time. Kindred ranked third among Health Care: Medical Facilities companies for innovation, recognizing Kindred’s network management and post-acute benefits management capabilities.”

Mr. Breier concluded, “We believe that a full complement of interrelated solutions is the best way to deliver a positive patient experience. In response to the evolving environment, one of Kindred’s solutions includes building strong relationships with other healthcare partners and providers to align patient care across care settings. For example, Kindred recently announced a clinical collaboration with Genesis HealthCare (NYSE:GEN) to complement our existing platform of post-acute services with unaffiliated nursing centers. We are setting the foundation for a stronger Kindred as we drive effective patient-centered solutions and proactively adapt to the changing healthcare marketplace.”

All financial and statistical information included in this earnings release reflects the continuing operations of the Company’s businesses for all periods presented unless otherwise indicated.

Fourth Quarter and Year Consolidated Results(1):

Fourth Quarter

• Consolidated revenues were $1.75 billion, a 2.0% year-over-year decrease, while the GAAP loss from continuing operations was $6.4 million compared to income of $56.0 million in the same period in 2015. The decrease in consolidated revenues was primarily attributable to both the impact of the first full quarter of LTAC patient criteria and the sale or closure of 15 LTAC hospitals on or before October 1, 2016. The decrease in GAAP income from continuing operations was due to an increase in income taxes attributable to a non-cash deferred tax valuation allowance of $22 million in the fourth quarter of 2016 and a reduction in income tax benefits of $47 million associated with the settlement of a significant litigation contingency in the fourth quarter of 2015, LTAC patient criteria, skilled nursing Medicare census declines and an increase in labor costs. Core EBITDAR declined 13.1% to $215.3 million compared to $247.8 million in the same period in 2015, primarily due to LTAC patient criteria, skilled nursing Medicare census declines and an increase in labor costs.
• GAAP operating cash flows were $146.9 million compared to $70.2 million for the same period a year ago. Core operating cash flows were $142.4 million compared to $53.9 million for the same period a year ago. Core free cash flows were $104.4 million compared to $2.0 million in the same period a year ago. The increase in GAAP operating cash flows, core operating cash flows and core free cash flows in the fourth quarter of 2016 was primarily attributable to reductions in net working capital and, for core free cash flows, lower routine capital expenditures.
• GAAP diluted loss per share from continuing operations was $0.23 as compared to GAAP diluted earnings per share (“EPS”) from continuing operations of $0.50 a year ago. The decrease in GAAP diluted EPS from continuing operations was primarily attributable to an increase in certain charges in the fourth quarter of 2016, including a non-cash deferred tax valuation allowance, a reduction in income tax benefits associated with the settlement of a significant litigation contingency in the fourth quarter of 2015, LTAC patient criteria and an increase in labor costs. Core diluted EPS from continuing operations was $0.08 as compared to $0.33 a year ago. The decline in core diluted EPS was primarily attributable to LTAC patient criteria, declines in skilled nursing Medicare census and an increase in labor costs.

Year

• Consolidated revenues were $7.22 billion, a 2.3% year-over-year increase, while the GAAP loss from continuing operations was $617.5 million compared to a loss of $51.9 million in the same period in 2015. The increase in consolidated revenues was primarily attributable to the acquisition of Gentiva Health Services, Inc. (“Gentiva”) on February 2, 2015 and an increase in same-store volumes in both the Kindred at Home and Kindred Hospital Rehabilitation Services business segments. The increase in GAAP loss from continuing operations was primarily attributable to certain charges, net of income taxes, of $740.7 million related to impairments, deferred tax valuation allowance, restructuring, litigation, transaction, debt amendment, business interruption settlements, and research and development costs. GAAP loss from continuing operations for 2015 included certain charges, net of income taxes, of $206.4 million related to impairments, restructuring, litigation, transaction and severance costs. Core EBITDAR declined 3.1% to $950.1 million compared to $980.3 million in the same period in 2015, primarily due to LTAC patient criteria, a decline in skilled nursing Medicare census and an increase in labor costs.
• GAAP operating cash flows were $185.0 million for 2016 compared to $163.3 million for the same period a year ago. The increase in GAAP operating cash flows was attributable to a decline in certain transaction and refinancing payments in 2016. Core operating cash flows were $298.8 million for 2016 compared to $318.1 million for the same period a year ago. Core free cash flows for 2016 were $156.8 million compared to $153.7 million in the same period a year ago. The decrease in core operating cash flows in 2016 was primarily attributable to an increase in net working capital and lower earnings. The increase in core free cash flows for 2016 was attributable to lower routine capital expenditures.
• GAAP diluted loss per share from continuing operations was $7.73 for 2016 as compared to $1.12 a year ago. The increase in GAAP diluted loss per share was primarily attributable to an increase in certain charges in 2016, as noted above. Core diluted EPS from continuing operations was $0.76 as compared to $1.28 a year ago. The decline in core diluted EPS was primarily attributable to LTAC patient criteria, declines in skilled nursing Medicare census, increase in labor costs and a 4.4% increase in aggregate rent, depreciation, amortization, and net interest expense.

Fourth Quarter Segment Results(1)(2):

Our Kindred at Home Division, which comprises the Company’s home health, hospice, community care and home-based primary care businesses, recorded fourth quarter revenues that increased 4.3% over the prior year period to $630.2 million with home health episodes growing 2.6% and hospice average daily census growing 5.1% compared to the same period last year. Segment EBITDAR decreased 8.8% to $90.3 million as compared to $99.0 million and core EBITDAR decreased 10.3% to $88.9 million compared to $99.0 million, compared to the prior year period, both primarily due to an increase in labor costs and lower revenue rates. On a same-store basis, home health episodes grew 3.9% and hospice admissions grew 4.4% over the prior year period.

Kindred’s Hospital Division fourth quarter revenues declined to $530.7 million from the prior year period due to its full entrance into LTAC patient criteria and the impact of the sale or closure of 15 LTAC hospitals since the comparable period. These declines were offset partially by a 2.5% increase in same-hospital admissions and a 4.3% increase in same-hospital commercial revenue rates. Segment EBITDAR in the Hospital Division for the fourth quarter declined to $91.9 million from $116.5 million a year ago, and core EBITDAR for the fourth quarter declined to $91.3 million from $117.7 million a year ago, both due primarily to LTAC patient criteria, divestitures and an increase in labor costs. For the fourth quarter 2016, segment EBITDAR and core EBITDAR also reflect an unbudgeted EBITDAR decline compared to expectations of $2.9 million related to the operations of the LTAC hospitals acquired in a facility swap transaction in the second quarter of 2016. For the year, segment EBITDAR and core EBITDAR reflect unbudgeted declines of $5.9 million related to the LTAC hospitals acquired in the facility swap transaction and $3.9 million related to costs associated with the three closed LTAC hospitals in the third quarter of 2016.

Kindred Rehabilitation Services (“KRS”) Division, which comprises the Company’s hospital-based rehabilitation segment, recorded fourth quarter revenues that declined 0.2% from the prior year period to $361.5 million. Segment EBITDAR for KRS increased 25.4% to $54.9 million as compared to $43.8 million in the prior year period and core EBITDAR decreased 3.6% to $54.9 million compared to $57.0 million a year ago. Segment EBITDAR in the prior period was negatively impacted by $12.9 million of customer contract litigation in the fourth quarter of 2015. Strong performance in the fourth quarter from Kindred Hospital Rehabilitation Services (“KHRS”) inpatient rehabilitation facilities (“IRFs”) was offset by the continuing impact of customer census declines and fewer sites of service operated in RehabCare. The KHRS segment achieved strong revenue growth of 9.3% to $170.0 million, and segment EBITDAR and core EBITDAR grew to $49.3 million each, an increase of 9.9% and 9.3%, respectively, compared to the same period a year ago, as a result of the development of new IRFs and a 4.6% increase in same-IRF discharges. For the year, segment EBITDAR and core EBITDAR results for KHRS included start-up losses of $2.8 million related to the development of new IRFs. RehabCare revenues declined 7.3% to $191.5 million compared to the fourth quarter last year. RehabCare fourth quarter segment EBITDAR increased to $5.6 million as compared to a loss of $1.1 million in the prior year period due to the previously mentioned customer contract litigation in the fourth quarter of 2015 and core EBITDAR decreased to $5.6 million compared to $11.9 million, in the prior year period primarily as a result of year-end training and implementation costs related to RehabCare’s corporate integrity agreement and customer census declines.

Kindred’s Nursing Center Division fourth quarter revenues declined 0.1% to $273.1 million compared to the same period last year. Segment EBITDAR and core EBITDAR in the fourth quarter each declined 8.0% to $33.7 million from $36.6 million a year ago, as a result of declining Medicare census, patient mix deterioration and higher labor costs.

2017 Outlook(3)

All forward-looking non-GAAP financial measures used to provide “2017 Outlook” and “2018 Outlook” (collectively “Outlook”) are provided only on a non-GAAP basis. This is due to the inherent difficulty of forecasting the timing or amount of items that would be included in the most directly comparable forward-looking GAAP financial measures. As a result, reconciliation of the forward-looking non-GAAP financial measures to GAAP financial measures is not available without unreasonable effort and the Company is unable to assess the probable significance of the unavailable information.

The Company’s Outlook excludes costs related to significant transactions, material litigation, the effect of any reimbursement changes, debt refinancing or amendment costs, restructuring costs, any further acquisitions or divestitures, any impairment charges, deferred tax asset valuation allowances, and any further issuances or repurchases of common stock.

For the 2017 Outlook, Kindred expects:

• Annual revenues of $7.2 billion, with a range of $7.1 billion to $7.3 billion.
• Core EBITDAR of $930 million, with a range of $910 million to $950 million.
• Core diluted EPS from continuing operations of $0.55, with a range of $0.40 to $0.70 per share(4).

As previously discussed, the Company is in the process of divesting its skilled nursing facility business. For purposes of consistency with our year-end reporting, the 2017 Outlook assumes the Company’s skilled nursing facility business is operated for the entire year. For accounting purposes, this business may qualify as a discontinued operation prior to the completion of the divestiture. At the time the skilled nursing facility business qualifies as a discontinued operation, the Company will be required to recast its historical operating results from continuing operations to exclude the business for all periods presented. We also will update our 2017 Outlook in our quarterly reporting during the quarter in which the recasting occurs.

The Company is not providing a quarterly outlook for 2017 due to uncertainty related to the timing of both the divestiture of its skilled nursing facility business and when this business may qualify as a discontinued operation. However, the Company does expect the first quarter of 2017 to generate substantially similar results as the fourth quarter of 2016, with improving results as the range of initiatives discussed above gain traction over the course of the year.

2018 Outlook(1)

Kindred’s planned divestiture of its skilled nursing facilities will significantly impact the Company’s reported results, reducing revenues and expenses, and is expected to increase profitability. To assist investors, Kindred is providing the following outlook for 2018:

• Annual revenues of approximately $6.3 billion.
• Core EBITDAR of approximately $840 million.
• Core diluted EPS from continuing operations of approximately $0.80(2).

Please note that all of these items represent midpoint estimates that the Company expects to update over time, and these estimates assume that Kindred completes its skilled nursing facilities exit prior to the start of 2018.

Fourth Quarter Dividend and Change in Dividend Policy

The Kindred Board of Directors declared a cash dividend of $0.12 per share on the Company’s common stock payable on March 31, 2017 to shareholders of record as of the close of business on March 13, 2017. The Kindred Board of Directors has determined that trading levels of the Company’s common stock do not sufficiently reflect the value of the Company’s quarterly cash dividend. Following the payment of the quarterly cash dividend mentioned above, the Kindred Board of Directors has determined to discontinue the Company’s quarterly cash dividend on its common stock and redirect the funds to repay debt and invest in growth.

Cash Flow

Stephen D. Farber, Executive Vice President and Chief Financial Officer of Kindred, noted, “We remain focused on cash flows and were very pleased with our strong cash flow in 2016, and liquidity position at end of year, with only $62.5 million drawn on the Company’s $900 million revolving line of credit. Our fourth quarter GAAP operating cash flows, core operating cash flows and core free cash flows were each up considerably over the third quarter and over the same quarter last year. We were pleased that many of the transient working capital items identified in the third quarter were remedied this quarter, contributing to the fourth quarter’s strong cash flow results. For 2017, we expect modestly muted cash flow performance compared to 2016, based on our 2017 Outlook and adjusted for costs related to our skilled nursing facilities exit and our cost realignment initiatives. For the 2018 Outlook, we expect Kindred’s cash flow results to return to historical levels of roughly $300 million per year in core operating cash flows and approximately half of that amount in core free cash flows with potential upside from this expectation, as capital expenditures and NCI will be reduced meaningfully following our exit from our skilled nursing facility business.”

Mr. Farber continued, “In addition to our operating and free cash flows, we expect additional cash flow for the next several years from harvesting the Company’s net operating loss carryforwards (“NOLs”) to offset federal tax liability, and expect our cash taxes to be less than 10% of our federal book taxes. We ended 2016 with $464 million of federal NOLs, and expect additional NOLs to be generated by our skilled nursing facilities exit. In addition, please note that 2017 is the last year of dividend payments of $12 million per year on the mandatory redeemable preferred stock the Company issued in 2014 as part of the acquisition of Gentiva.”

Mr. Farber concluded, “We expect the combination of significant operational and free cash flows, nominal cash taxes, $100 million to $300 million of expected net cash proceeds from the skilled nursing facility exit, approximately $90 million of associated reduction of annual rent expense, $30 million of associated reduction of annual capital expenditures, $18 million of associated reduction of cash noncontrolling interest disbursements, and the elimination of $54 million of annual common stock and mandatory redeemable preferred stock dividends to drive significant deleveraging and growth for Kindred.”

Conference Call

As previously announced, investors and the general public may access a live webcast of the fourth quarter 2016 conference call through a link on the Company’s website at http://investors.kindredhealthcare.com. The conference call will be held on February 28 at 9:00 a.m. (Eastern Time).

A telephone replay of the conference call will become available at approximately 12:00 p.m. on February 28 by dialing (719) 457-0820, access code: 9155505. The replay will be available through March 10.

Forward-Looking Statements and Non-GAAP Reconciliations

See page 15 for important disclosures regarding the Company’s forward-looking statements and the non-GAAP financial reconciliations that follow.

About Kindred Healthcare

Kindred Healthcare, Inc., a top-90 private employer in the United States, is a FORTUNE 500 healthcare services company based in Louisville, Kentucky with annual revenues of approximately $7.2 billion. At December 31, 2016, Kindred through its subsidiaries had approximately 100,100 employees providing healthcare services in 2,654 locations in 46 states, including 82 LTAC hospitals, 19 inpatient rehabilitation hospitals, 91 nursing centers, 17 sub-acute units, 635 Kindred at Home home health, hospice and non-medical home care sites of service, 102 inpatient rehabilitation units (hospital-based) and contract rehabilitation service businesses which served 1,708 non-affiliated sites of service. Ranked as one of Fortune magazine’s Most Admired Healthcare Companies for eight years, 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.