LOUISVILLE, Ky (Feb. 21, 2014) — Kindred Healthcare Inc. (NYSE:KND) announced operating results for the fourth quarter and year ended December 31, 2013. It cited declining utilization trends and Medicare sequestration cuts as headwinds for the period, but said Kindred had cut costs companywide and continued repositioning itself by shedding 139 of its facilities while acquiring hospice and home health operations.
The company forecasts a big jump in revenue for 2014 and stuck with guidance that it should finish the year $58 million to $68 million in the black.
“Our fourth quarter results were in line with our expectations and reflected a continuation of the difficult volume and utilization trends experienced by many healthcare providers in the second half of 2013,” CEO Paul J. Diaz said. “We also continued to advance our repositioning strategy with the closure or planned disposition of three additional non-strategic assets. We were successful in managing costs in response to volume weakness in our hospitals and nursing centers, and we are seeing some volume momentum in January and February that we expect will help us get the year off to a strong start.”
Diaz further noted, “For the full year, we are pleased to report that we exceeded our core earnings objectives that were announced in our third quarter earnings release as we continued to mitigate the negative impact of approximately $40 million of Medicare sequestration cuts across our enterprise. This accomplishment reflects the commitment of our caregivers, and a relentless focus on cost management across the enterprise, all while working to maintain a culture of quality service and patient satisfaction under very difficult circumstances. Despite volume challenges during the last half of the year, and Medicare sequestration cuts, our hospital division results were solid. Our RehabCare division made great progress in the midst of Medicare reimbursement reductions and continues to perform well. For our nursing center division, 2013 was a significant year of transition as we worked through several divestitures. We expect 2014 to reflect more stabilized nursing center operations with better financial performance. Our Care Management Division experienced significant growth in 2013 and now has annualized revenues of over $350 million. We expect operating improvements in our home health and hospice operations in 2014 as we assimilate numerous acquisitions and execute on a more standardized operating model.”
Regarding the company’s strategic initiatives, Diaz said, “In 2013, we continued advancing a strategy to reposition our business mix with the goal of improving our long-term growth, profitability and financial position and enhancing our Integrated Care Market capabilities, particularly in home health and hospice services. Specifically, we exited, sold or agreed to exit 139 facilities with annualized revenues of $1.3 billion, completed several home health and hospice acquisitions that added approximately $150 million of annualized revenues and we acquired the real estate of nine previously leased facilities for approximately $96 million that will benefit our balance sheet leverage over time. Having substantially completed the divestiture phase of our repositioning strategy, we are evaluating various opportunities to redeploy our management capabilities, industry leading infrastructure and financial resources as we move forward with the growth phase of our strategic plan.”
Additionally, Diaz said, “Our free cash flows, adjusted for certain items, were up 23 percent compared to last year before paying $13 million in quarterly dividends and absorbing significant reimbursement headwinds. Our significant free cash flows as well as our $396 million of available credit going into 2014, provide the financial strength to further reposition the company’s business mix and advance our Continue the Care strategy in our Integrated Care Markets.”
“The new long-term acute care (“LTAC”) patient criteria enacted in 2013 provides significant clarity to our business and affirms the role of LTAC hospitals in the healthcare continuum. The new criteria will not be fully phased in for most of our hospitals until the summer of 2018, which provides us with significant time to develop clinical programs and services that better align with the clinical needs of this patient population and this new payment system. We believe that the new criteria will afford us the opportunity to grow organically our patient volumes and leverage our existing capacity of TC hospitals.”
Kindred continues to benefit from its repositioning strategy through the planned exit from a nursing center and a transitional care (“TC”) hospital and the closure of another nursing center during the fourth quarter of 2013, according to its earnings news release. Kindred has reclassified operations of these three facilities as discontinued for all periods presented.
• Volume softness in the hospital and nursing center divisions drove a 1 percent decline in fourth quarter consolidated revenues, which were mitigated by cost controls throughout the company
• The closure or planned disposition of three additional non-strategic assets bolstered continuing operations diluted EPS by $0.05 in the quarter and $0.13 for the full year
• Free cash flows for the full year were strong
–Excluding certain items and dividend payments, fiscal 2013 free cash flows of $130 million were up 23 percent from last year
–GAAP operating cash flows totaled $199 million compared to $263 million a year ago
• Kindred continued to execute on its Integrated Care Market and redeployment strategy in the fourth quarter
–Senior Home Care purchase added $143 million of annualized home health revenues to Kindred at Home and the Care Management Division
–The real estate of seven previously leased nursing centers were acquired for $61 million reducing annual rents by approximately $7 million
• Kindred is well positioned operationally and financially to grow moving into 2014
–Available borrowing capacity under the company’s revolving credit facility approximated $396 million at year-end
• Board of Directors declared regular quarterly cash dividend of $0.12 per share payable on March 27, 2014
Fourth Quarter Results
Consolidated revenues for the fourth quarter declined 1 percent to $1.22 billion compared to $1.24 billion in the same period in 2012. The company reported a loss from continuing operations for the fourth quarter of 2013 of $54.1 million or $1.04 per share compared to a loss of $84 million or $1.62 per share in the fourth quarter of 2012. Fourth quarter 2013 operating results included pretax charges of $87.7 million related to (1) an asset impairment charge, (2) changes in estimates related to pending litigation, (3) severance and retirement costs, (4) costs associated with the closing of a TC hospital, (5) transaction-related costs and (6) an increase in the estimated tax benefit associated with pending litigation, which in aggregate reduced income from continuing operations by $62.4 million or $1.19 per share. Operating results for the fourth quarter of 2012 included an asset impairment charge and severance, restructuring, lease termination and transaction-related costs that reduced income from continuing operations by $104.8 million or $2.03 per share.
During the fourth quarter of 2013, the company recorded a $76 million goodwill impairment charge to reflect circumstances in which the carrying value of its home health reporting unit exceeded its fair value. The impairment charge resulted primarily from the expected decline in operating results in the Company’s home health business related to the Medicare reimbursement rate reductions for each of the next four years beginning January 1, 2014 announced by the Centers for Medicare and Medicaid Services (“CMS”) on November 22, 2013.
Fiscal Year Results
Consolidated revenues for the year 2013 declined 1 percent to $4.90 billion compared to $4.93 billion in 2012. Kindred reported a loss from continuing operations of $48.5 million or $0.93 per share in 2013 compared to a loss of $48.0 million or $0.93 per share in 2012.
In addition to the charges discussed in the fourth quarter results above, operating results in 2013 included (1) a one-time bonus to employees who do not participate in the Company’s incentive plans distributed in the first quarter of 2013, (2) changes in estimates related to pending litigation, (3) severance and retirement costs, (4) costs associated with the closure of a TC hospital and home health location and (5) charges associated with the modification of certain of the Company’s senior debt, which in aggregate reduced income from continuing operations by $99.1 million or $1.90 per share. Operating results in 2012 included certain items that reduced income from continuing operations by $112.8 million or $2.18 per share, most of which were related to asset impairment charges, litigation and severance and restructuring costs.
In connection with the Company’s long-range plans to reposition its businesses and enhance its Integrated Care Market strategy, the Company has completed various transactions and entered into certain agreements to significantly change its business mix, operating profile and future business prospects. During 2013, the Company exited, sold or agreed to exit, 139 facilities (15 TC hospitals, one inpatient rehabilitation hospital (“IRF”) and 123 nursing centers) with annualized revenues approximating $1.3 billion. These transactions generated approximately $250 million in cash proceeds from asset sales and will reduce annual rents by approximately $125 million. For accounting purposes, the historical operating results and losses on the disposal of these businesses have been classified as discontinued operations in the Company’s consolidated statement of operations for all historical periods.
Earnings Guidance – Continuing Operations
The company maintained its previous earnings guidance for 2014. Kindred expects consolidated revenues for 2014 to approximate $5.2 billion. Operating income, or earnings before interest, income taxes, depreciation, amortization and rent, is expected to range from $725 million to $742 million. Rent expense is expected to approximate $338 million, while depreciation and amortization should approximate $165 million. Net interest expense is expected to approximate $106 million. The Company expects to report income from continuing operations for 2014 between $58 million and $68 million or $1.05 to $1.25 per diluted share (based upon diluted shares of 53.2 million).
The Company’s 2014 earnings per share guidance includes $0.05 to $0.10 for the estimated impact of new acquisitions that the Company expects to complete in 2014.
The Company updated its operating cash flow guidance for 2014 at a range between $245 million and $275 million. Estimated routine capital expenditures for 2014 are expected to range from $100 million to $105 million and estimated costs to develop new or replacement TC hospitals, transitional care nursing centers, and IRFs will approximate $20 million to $25 million in 2014. Operating cash flows in excess of the Company’s routine and development capital spending programs are expected to approximate $125 million to $145 million for 2014 and will be available to pay dividends, repay debt and fund acquisitions. Estimated dividend payments for 2014 are expected to approximate $26 million.
Benjamin A. Breier, President and Chief Operating Officer of the Company, commented, “As we head into 2014, our confidence in our earnings guidance range has increased as we are beginning to see traction in our sales and marketing efforts to drive patient admissions as well as greater awareness among managed care payors of our value proposition, particularly for our TC hospitals. We also expect additional cost savings by continuing to push for ongoing performance improvement with our efficiency initiatives inside the Company.”
The Company’s earnings and cash flow guidance for 2014 excludes the effect of reimbursement changes, severance and retirement costs, litigation costs, transaction-related costs, any further acquisitions or divestitures (except as otherwise noted), any impairment charges, 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 to its shareholders of $0.12 per common share to be paid on March 27, 2014 to shareholders of record as of the close of business on March 6, 2014. Future declarations of quarterly dividends will be subject to the approval of Kindred’s Board of Directors.