LOUISVILLE, Ky.–(Nov. 6, 2013) (BUSINESS WIRE)–Kindred Healthcare Inc. (NYSE:KND) today announced its operating results for the third quarter ended September 30, 2013. In connection with its previously announced repositioning plan, during the third quarter of 2013, the Company sold 15 hospitals and eight skilled nursing facilities for $227 million in cash and executed an agreement with Ventas, Inc. (“Ventas”) (NYSE:VTR) to exit 59 skilled nursing facilities and close another facility. In addition, during the first half of 2013, the Company successfully exited 54 skilled nursing facilities previously leased from Ventas. Except for the facility to be closed, the Company has reclassified the operations of these facilities (136 in number and approximately $1.3 billion in annualized revenues) as discontinued for all periods presented. 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.
“Having successfully executed a favorable agreement with Ventas at the end of the third quarter, we have now established a level of certainty within the Ventas relationship that we have never before attained and we are pleased to be moving forward at an accelerated pace with our previously announced repositioning plan,”said CEO Paul J. Diaz. “Since the beginning of the year, we have essentially disposed of 136 non-strategic and, in many cases, unprofitable facilities and we are confident that our strategic disposition work will be completed in advance of our previous timeline. More importantly, as we look to the future, our divestiture activities will eliminate substantial rent obligations and provide a significant amount of capital which we intend to redeploy in home health and other strategic acquisitions in our Integrated Care Markets that will create a more valuable enterprise for our patients, employees and shareholders in 2014 and beyond.”
As previously announced, an agreement with Ventas on September 30, 2013, renewed certain existing leases covering 22 transitional care (“TC”) hospitals and 26 skilled nursing facilities and pay additional annual rents aggregating $15 million beginning October 1, 2014. For accounting purposes, Kindred is required to record the additional rents over the new lease term on a straight-line basis beginning on October 1, 2013, the effective date of the agreement. As a result, the company will record incremental rent expense of $5 million ($0.05 per diluted share) in the fourth quarter of 2013 and $13 million ($0.15 per diluted share) in the first nine months of fiscal 2014. Cash payments for the additional annual rent will not begin until October 1, 2014.
The agreement with Ventas provides for an exit from 59 skilled nursing facilities and the closure of another. The lease term for these facilities will expire on September 30, 2014. For accounting purposes, Kindred classified the 59 skilled nursing facilities as assets held for sale and reflected the related operating results as discontinued operations in the accompanying condensed consolidated statement of operations for all historical periods. The facility scheduled for closure will be reflected as a discontinued operation upon completion of the closure process.
Kindred paid $20 million ($12 million net of income taxes) to Ventas on October 1, 2013, in exchange for the early termination of certain leases. In addition,it recorded an asset impairment charge of $8 million ($5 million net of income taxes) related to leasehold improvements in the early terminated leases. These charges were recorded in discontinued operations in the third quarter of 2013 in the accompanying condensed consolidated statement of operations.
Recent Acquisition Announcements
Earlier this week, Kindred Healthcare announced an agreement to acquire Senior Home Care Inc., one of the largest home health providers in Florida and Louisiana with annualized revenues of approximately $143 million. Kindred expects the Senior Home Care acquisition will increase 2014 earnings by $0.07 to $0.09 per diluted share.
“This transaction is another important example of how we are redeploying assets from our divestiture process and repositioning Kindred with a focus on our Integrated Care Markets and our Care Management Division, including Kindred at Home,” Diaz said.
In addition to the Senior Home Care acquisition, the company also announced this week that it intends to acquire nine skilled nursing facilities that it currently leases from HCP Inc. and its affiliates for approximately $83 million. The annual lease payments for these facilities approximate $9 million. Kindred anticipates that the transaction with HCP will increase 2014 earnings by approximately $0.04 per diluted share.
Mr. Diaz noted, “Purchasing the real estate of these skilled nursing facilities is an important step as we continue to reduce our lease obligations, our most expensive debt, and improve the Company’s capital structure and earnings going forward.”
Third Quarter Results
Consolidated revenues for the third quarter ended September 30, 2013 declined 2% to $1.2 billion compared to $1.23 billion in the third quarter last year. The Company reported a loss from continuing operations for the third quarter of 2013 of $20.4 million or $0.39 per diluted share compared to income of $6.8 million or $0.13 per diluted share in the third quarter last year.
Third quarter 2013 operating results included pretax charges of approximately $33 million related to (1) changes in estimates related to pending litigation, (2) costs associated with the closure of a hospital and a home health location, (3) costs associated with certain severance and retirement benefits, (4) charges associated with the modification of certain of the Company’s senior debt, and (5) transaction-related costs. These items reduced income from continuing operations by $23.2 million or $0.44 per diluted share.
Third quarter 2012 operating results included certain charges that reduced income from continuing operations by $1.0 million or $0.02 per diluted share.
Diaz noted, “Our adjusted third quarter results, while soft, should be viewed in the context of the seasonal volume weakness and this extraordinarily busy period of repositioning activities related to the disposition of non-strategic assets that we have previously discussed with investors. Importantly, we also believe that investors should note the very strong free cash flows being generated by the Company that will enable us to continue to invest in future growth and support our recurring cash dividend to shareholders.”
Diaz continued, “I have great confidence in our repositioning plan and our “Continue the Care” strategy and we are well on our way in the creation of a company focused on our Integrated Care Markets, our new Care Management Division and Kindred at Home and the many benefits associated with the new business profile of Kindred. In particular, we are moving toward a path to profitability in a smaller, higher acuity, and more market-focused skilled nursing facility business. Additionally, we will improve our home health and hospice operations by investing significant resources to bring together numerous acquisitions and execute on a more standardized operating model. And finally, our hospital and RehabCare divisions continue to perform in line with our expectations so far this year despite significant regulatory headwinds in each of these businesses.”
As previously discussed, in connection with the Company’s long-range plans to reposition its businesses and enhance its Integrated Care Market strategy, the Company has effected various transactions and entered into certain agreements to significantly change its business mix, operating profile and future business prospects during fiscal 2013. During the first nine months of 2013, the Company has exited, sold or agreed to exit 136 facilities (14 TC hospitals, one inpatient rehabilitation hospital (“IRF”) and 121 skilled nursing facilities with annualized revenues approximating $1.3 billion). For accounting purposes, the historical operating results of these businesses have been classified as discontinued operations in the Company’s accompanying condensed consolidated statement of operations for all historical periods.
During the first half of 2013, in connection with a previously executed agreement, the Company exited 54 skilled nursing facilities previously leased from Ventas. No cash consideration was paid by the Company in connection with this divestiture.
In addition to the previously discussed September agreement with Ventas, the Company sold 15 hospitals and eight skilled nursing facilities for $227 million in cash in the third quarter of 2013. Proceeds from these transactions were used to reduce the Company’s borrowings under its revolving credit facility. As previously announced, the Company recorded a significant loss from these sales primarily due to the write-off of a portion of the goodwill and intangible assets recorded in its hospital division. As a result, the loss on divestiture of discontinued operations included in the accompanying condensed consolidated statement of operations reflects a pretax loss of approximately $78 million ($64 million net of income taxes) in the third quarter of 2013 and $96 million ($75 million net of income taxes) for the nine months ended September 30, 2013 associated with these divestitures.
Earnings Guidance – Continuing Operations
The Company’s previously issued earnings guidance for continuing operations reflected the exit from 54 skilled nursing facilities previously leased from Ventas completed in the first half of 2013. However, the earnings guidance did not reflect the impact of (1) the sale of 15 hospitals and eight skilled nursing facilities or (2) the recent agreement with Ventas to exit 59 skilled nursing facilities and close another facility, both of which were completed in the third quarter of 2013.
As a result, the Company has revised its earnings guidance for 2013 to reflect the discontinued operations reclassifications recorded during the third quarter of 2013.
The guidance for earnings and cash flows excludes the effect of (1) a one-time employee bonus distributed in the first quarter of 2013, (2) changes in estimates related to pending litigation, (3) the early lease termination payment to Ventas, (4) costs associated with the closure of a hospital and a home health location, (5) costs associated with certain severance and retirement benefits, (6) any transaction-related costs, (7) charges associated with the modification of certain of the Company’s senior debt, (8) any other reimbursement changes, (9) any further acquisitions or divestitures (unless otherwise noted), (10) any impairment charges, and (11) any repurchases of common stock. A schedule detailing the financial impact of certain of these items is included elsewhere in this press release.
Revised 2013 Continuing Operations Earnings Guidance
The Company expects consolidated revenues for 2013 to approximate $4.9 billion. Operating income, or earnings before interest, income taxes, depreciation, amortization and rent, is expected to range from $657 million to $665 million. Rent expense is expected to approximate $323 million, while depreciation and amortization should approximate $159 million. Net interest expense is expected to approximate $103 million. The Company expects to report income from continuing operations for 2013 between $42 million to $47 million or $0.78 to $0.88 per diluted share (based upon diluted shares of 52.3 million). The Company’s previously issued 2013 guidance for diluted earnings per share ranged from $1.10 to $1.30.