LOUISVILLE, Ky.– Kindred Healthcare Inc. (NYSE:KND) late Monday announced operating results for the second quarter ended June 30, 2013. During the second quarter of 2013, the company successfully completed the disposition of 54 nursing centers leased from Ventas Inc. (“Ventas”) (NYSE:VTR) and reflected the related operations as discontinued for all periods presented. .
Second Quarter Highlights:
• Consolidated revenues declined 1% to $1.41 billion
• Federal sequestration cuts of 2% (effective April 1) reduced consolidated revenues by over $13 million in the quarter
• Despite soft volumes, cost management drove solid core operating performance
• Core aggregate operating expenses declined 0.8% compared to last year’s second quarter
• Hospital division reported another successful quarter
• Sequestration diminished top line growth, but core operating income declined only 4% from last year
• RehabCare division reported 7% growth in operating income driven by better cost controls
• Home Health and Hospice revenues climbed 84% compared to last year
• Core operating income of $4.0 million improved 42% from a year ago
• Operating cash flows net of routine capital spending totaled $37 million in the quarter, up 49% from last year’s $24 million
Consolidated revenues for the second quarter ended June 30, 2013 declined 1% to $1.41 billion compared to $1.42 billion in the second quarter last year. Income from continuing operations for the second quarter of 2013 totaled $6.2 million or $0.12 per diluted share compared to $15.6 million or $0.29 per diluted share in the second quarter last year.
Second quarter 2013 operating results included pretax charges of approximately $18 million related to (1) a fixed asset impairment charge and certain other costs related to the planned sale of non-strategic facilities, (2) charges associated with the modification of certain of the Company’s senior debt, and (3) transaction related costs. These items reduced income from continuing operations by $10.9 million or $0.20 per diluted share.
Second quarter 2012 operating results included certain charges that reduced income from continuing operations by $5.4 million or $0.10 per diluted share.
Discontinued Operations
During the past several years, the Company has entered 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.
Other Information
As previously announced, Kindred successfully completed an amendment and restatement of its $785.5 million Term Loan Credit Agreement (the “Term Loan”) to effectively reduce its annual interest cost by 100 basis points beginning June 1, 2013. The applicable interest rate on the term loan, which matures on June 1, 2018, was reduced by 50 basis points to LIBOR + 325 basis points (previously LIBOR + 375 basis points). In addition, the LIBOR floor was reduced to 1.00% from 1.50%. Kindred expects that the amended and restated term loan will result in annualized interest savings of approximately $8 million.
Management Commentary
“Despite significant reimbursement pressures brought on by federal sequestration cuts of 2% beginning April 1, Kindred reported solid second quarter core results,” said Paul J. Diaz, Chief Executive Officer of the company. This accomplishment reflects the commitment of our caregivers, and a relentless focus on cost management across the enterprise, all while maintaining our culture of quality service and patient satisfaction. In addition, we are continuing to see the benefits of the Ventas nursing center transition to our continuing operations. The disposition of these 54 nursing centers lifted our earnings from continuing operations by $0.11 per diluted share in the first half of 2013.
“The second quarter also provided tangible evidence that our asset repositioning strategy and related capital redeployment activities are accelerating,” Diaz said. “In addition to the Ventas nursing center disposition, we recently completed the sale of seven nursing centers for $47 million, and we have announced another transaction to sell non-strategic facilities that should provide net sales proceeds of approximately $180 million before the end of the year. Finally, our ongoing review of the 2015 Ventas lease renewals will provide additional opportunities for repositioning Kindred as a stronger, more market-focused and profitable post-acute services provider.”
Commenting on the company’s financial strength, Diaz noted, “Our financial liquidity and available capital resources to invest further in our Integrated Care Markets and acquire additional home health and hospice businesses has never been stronger. Our free operating cash flows, after funding $13 million of planned cash dividends, are expected to remain at $90 million for 2013. These free cash flows, along with over $400 million of unused revolving credit capacity, and $227 million of expected net proceeds from the announced asset sales, provide us with significant financial resources to invest in our strategic growth plan.”
Regarding the company’s development and acquisition activities, Diaz noted, “We recently completed the acquisition of a 54-bed transitional care (“TC”) hospital in St. Louis, and we have plans to build new transitional care centers in Phoenix, Indianapolis, Las Vegas and Louisville as we continue to expand our continuum of services in these Integrated Care Markets. In addition, we also completed two home health acquisitions and one hospice acquisition that will further expand our service offerings in Houston and West Texas. These transactions are expected to be accretive to earnings beginning in 2014.”
Quarterly Cash Dividends
Kindred announced that its Board of Directors has approved the initiation of a quarterly cash dividend to its shareholders. An initial quarterly cash dividend of $0.12 per common share will be paid on September 9, 2013 to shareholders of record as of the close of business on August 19, 2013. Future declarations of quarterly dividends will be subject to the approval of Kindred’s Board of Directors.
“We are pleased to announce the first cash dividend paid to shareholders in the Company’s history,” Mr. Diaz noted. “This cash dividend reflects the strength of our operating cash flows, our confidence in our business outlook, and our commitment to growing shareholder value. The quality and strength of our balance sheet, along with a proven track record of generating strong operating cash flows, provides us with the financial flexibility to return capital to shareholders in the form of a dividend while also continuing our strategic development activities in our key Integrated Care Markets.”
Earnings Guidance – Continuing Operations
Kindred maintained its earnings guidance for 2013. The earnings guidance excludes the effect of (1) a one-time employee bonus distributed in the first quarter of 2013, (2) employee retention costs incurred in connection with the planned divestiture of non-strategic facilities, (3) any transaction-related charges, (4) charges associated with the modification of certain of the Company’s senior debt, (5) any other reimbursement changes, (6) any further acquisitions or divestitures (including the previously announced sales of non-strategic hospitals and nursing centers), (7) any impairment charges, and (8) any repurchases of common stock.
The company expects consolidated revenues for 2013 to approximate $5.8 billion. Operating income, or earnings before interest, income taxes, depreciation, amortization and rent, is expected to range from $797 million to $813 million. Rent expense is expected to approximate $392 million, while depreciation and amortization should approximate $192 million. Net interest expense is expected to approximate $109 million. The Company expects to report income from continuing operations for 2013 between $60 million to $70 million or $1.10 to $1.30 per diluted share (based upon diluted shares of 52.5 million).
Kindred raised its operating cash flow guidance for 2013 to a range between $235 million to $255 million (prior range was $230 million to $250 million) and lowered its estimated routine capital expenditures in 2013 to a range of $112 million to $122 million (prior range was $120 million to $130 million). In addition to its routine capital expenditures, the company re-affirmed that its development of new or replacement TC hospitals, transitional care centers, and inpatient rehabilitation hospitals (“IRFs”) will approximate $20 million to $30 million in 2013. The new planned cash dividend will require the use of approximately $13 million in fiscal 2013, and approximately $27 million on an annual basis. Operating cash flows in excess of the company’s routine and development capital spending programs and cash dividend payments, which are expected to approximate $90 million for 2013, will be available to repay debt and fund acquisitions.
The two previously announced transactions to sell 16 hospitals and eight nursing centers are not reflected in the company’s earnings guidance. As previously announced, these facilities generated combined revenues of approximately $352 million and earnings before interest, income taxes, depreciation and amortization of approximately $27 million (including the allocation of approximately $11 million of overhead cost) for the year ended December 31, 2012. Aggregate rents associated with these facilities approximated $16 million in 2012.
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