Fierce Healthcare reported Kindred’s Third Quarter Profits. Kindred Healthcare, Inc. (the "Company") announced its operating results for the third quarter ended September 30, 2010.
Consolidated revenues for the quarter totaled $1.0 billion, approximately the same as a year ago. Diluted earnings per share were $0.13 compared to last year’s $0.14. Hospital operating income was in line with expectations despite soft volumes. Nursing and rehabilitation center admissions grew 9% in the third quarter compared to last year. Peoplefirst Rehabilitation operating income rose 30% from the third quarter last year.
Overall results for the quarter benefited from effective cost controls across the organization. Current quarter includes previously announced tax benefit of $0.07 per diluted share. Transaction costs in the current quarter reduced earnings per diluted share by $0.01. Operating cash flows grew 18% to $68 million in the third quarter compared to last year. Company announces cluster market acquisitions in each of its three operating divisions. Company completed the acquisition of five long-term acute care ("LTAC") hospitals for $178 million in cash in its southern California cluster market.
Company acquired three owned nursing and rehabilitation centers for $38 million in cash in its Dallas-Fort Worth cluster market Company announced a definitive agreement to acquire a home health company in its Ohio cluster market
Consolidated revenues for the third quarter ended September 30, 2010 totaled $1.0 billion, approximately the same as last year’s third quarter. Income from continuing operations for the third quarter of 2010 totaled $5.1 million or $0.13 per diluted share compared to $5.4 million or $0.14 per diluted share in the third quarter last year.
Third quarter 2010 operating results included pretax charges related to transaction costs of $0.8 million ($0.5 million net of income taxes or $0.01 per diluted share).
As expected, the Company recorded a $2.9 million or $0.07 per diluted share favorable income tax adjustment in the third quarter of 2010. This adjustment was included in the Company’s previously issued third quarter earnings guidance.
Operating results for the third quarter of 2009 included a favorable income tax adjustment that increased net income by $1.7 million or $0.04 per diluted share.
For the nine months ended September 30, 2010, consolidated revenues increased 1% to $3.2 billion compared to the first nine months of 2009. Income from continuing operations totaled $36.4 million or $0.92 per diluted share for the first nine months of 2010 compared to $46.3 million or $1.18 per diluted share in the same period a year ago.
Consolidated operating results for the first nine months of 2010 included certain items that, in the aggregate, reduced net income by approximately $0.4 million or $0.01 per diluted share.
Paul J. Diaz, President and Chief Executive Officer of the Company, remarked, "We are pleased to report good third quarter results. Our nursing and rehabilitation center admissions growth was solid and we generally did a good job of controlling our costs in each of our divisions. Peoplefirst Rehabilitation reported 30% growth in operating income and signed 54 net additional unaffiliated contracts during the quarter. However, the softness in hospital admissions, as well as reimbursement pressures in both our hospitals and nursing centers, negatively impacted otherwise strong operating results."
Commenting on the Company’s cash flows, Mr. Diaz noted, "We continue to generate strong operating cash flows for investment and other capital uses to create value for our shareholders. Operating cash flows grew 18% to $68 million in the third quarter and 6% to $151 million for the first nine months of 2010 compared to last year. Likewise, free cash flows, defined as operating cash flows less routine capital spending, grew 13% to $39 million in the third quarter and 21% to $82 million for the first nine months of this year compared to a year ago. We believe that our operating cash flows will fund substantially all of our routine and development capital spending in 2010."
Mr. Diaz further commented, "Our development and acquisition efforts over the past several years have added a substantial number of successful new sites of service in our cluster markets, many of which have included owned real estate. While a number of our development projects have not yet reached stabilization, we now operate 40 owned facilities that have provided, after the allocation of corporate overhead, approximately $62 million or 30% of our consolidated income before interest, income taxes, depreciation and amortization (‘EBITDA’) over the past twelve months. Prudent investment of our free cash flows and unused borrowing capacity in owned real estate is one of several growth strategies that should further position us to enhance shareholder value in the future."
Earnings Guidance — Continuing Operations
The Company raised its 2010 earnings guidance for continuing operations. The Company expects consolidated revenues for 2010 to approximate $4.3 billion. Operating income, or earnings before interest, income taxes, depreciation, amortization and rent, is expected to range from $569 million to $574 million. Rent expense is expected to approximate $358 million, while depreciation, amortization and net interest expense are expected to approximate $129 million. Income from continuing operations for 2010 is expected to approximate $51 million to $54 million or $1.30 to $1.35 per diluted share (based upon diluted shares of 38.9 million).
The Company also provided its earnings outlook for the fourth quarter of 2010, estimating diluted earnings per share between $0.38 to $0.43 (based upon diluted shares of 38.9 million).
With respect to the Company’s liquidity, management noted that operating cash flows for fiscal 2010 should range between $190 million to $210 million.
The Company anticipates that routine capital spending (expenditures necessary to maintain existing facilities that generally do not increase capacity or add services) for 2010 will approximate $105 million to $110 million, hospital development capital spending (primarily new facility construction) should approximate $40 million to $45 million and nursing and rehabilitation center development capital spending (primarily the addition of transitional care services for higher acuity patients and new facility construction) should approximate $20 million to $25 million. Management expects that substantially all of these expenditures will be financed through internal sources.
The Company’s earnings guidance for continuing operations reflects the anticipated impact of reimbursement changes related to the revised Medicare patient classification categories under the resource utilization grouping system ("RUGs IV") and related policies for nursing centers and rehabilitation therapy services that became effective on October 1, 2010. While not material to the fourth quarter, the five LTAC hospitals and three nursing and rehabilitation centers recently acquired by the Company are included in the Company’s earnings guidance. The earnings guidance does not reflect any other reimbursement changes or acquisitions, nor does it include any divestitures or repurchases of common stock.
Mr. Diaz noted, "We look forward to continued progress in each of our operating divisions as we focus on the execution of our strategic operating plan. The fourth quarter of 2010 will present a number of operational challenges, including significant Medicare reimbursement changes in our nursing center and Peoplefirst rehabilitation businesses. Notwithstanding the reimbursement changes in our businesses, our continued focus on the quality of our services, our clinical outcomes and our value proposition as a low cost provider will continue to drive our operating results and business success."
Cluster Market Development Update
Completion of Vista Healthcare Acquisition
The Company also announced that its subsidiaries have completed the previously announced acquisition of five LTAC hospitals from Vista Healthcare, LLC ("Vista") for a purchase price of $178 million in cash (the "Vista Acquisition"). The Company financed the Vista Acquisition with proceeds from its revolving credit facility.
The Vista Acquisition includes four freestanding hospitals and one hospital-in-hospital with a total of 250 beds all located in southern California. The acquired assets currently generate annualized revenues of approximately $150 million and earnings before interest, income taxes, depreciation and amortization of approximately $27 million. The Company did not acquire the working capital of Vista or assume any of its liabilities. All of the Vista hospitals are leased.
Mr. Diaz commented, "The Vista Acquisition is a great opportunity for us to take advantage of the growing demand for our services in southern California. The Vista hospitals provide high quality services and care for patients with high acuity levels. We also believe that the clinical service offerings provided by Vista will allow us to attract more commercial and managed care business."
Mr. Diaz continued, "We are excited to have Vista’s employees join our organization and believe they bring resources and expertise that will complement our existing operations and local teams. We look forward to integrating our operations with Vista as soon as possible and to the continued growth of our Hospital Division."
Acquisition of Three Dallas Nursing and Rehabilitation Centers
In September, the Company announced that its subsidiaries had completed the acquisition of three nursing and rehabilitation centers in the Dallas-Fort Worth market for a purchase price of $38 million in cash. The Company financed this transaction with proceeds from its revolving credit facility.
These three owned nursing and rehabilitation centers have a total of 405 beds and currently generate annualized revenues of approximately $24 million and earnings before interest, income taxes, depreciation and amortization of approximately $3 million. The Company acquired the real estate associated with these recently constructed nursing and rehabilitation centers but did not acquire the working capital or assume any of the liabilities associated with these nursing and rehabilitation centers.
Definitive Agreement to Acquire Home Health Company in Ohio
The Company also recently announced that its subsidiaries have signed a definitive agreement to acquire a home health company in Ohio. The financial terms of the transaction were not disclosed. The Company expects to finance the transaction with proceeds from its revolving credit facility.
The home health company operates ten locations primarily in the central and northeastern regions of Ohio. The Company currently operates two LTAC hospitals and nine nursing and rehabilitation centers within the service areas of these home health operations. In addition, the Company’s Peoplefirst home care and hospice business currently provides hospice services in Columbus and Dayton, Ohio.
The assets being acquired currently generate annualized revenues of approximately $13 million and earnings before interest, income taxes, depreciation and amortization of approximately $2 million.
Within the first year following the closing of the Vista Acquisition, the Dallas nursing and rehabilitation center transaction and the Ohio home health transaction, the Company expects to incur certain transition costs that are expected to range from $4 million to $6 million. Excluding these costs, the Company expects that these transactions will be slightly accretive to earnings in 2010 and $0.18 to $0.23 per diluted share accretive to earnings upon completion of the integration process. The Company’s estimate of earnings accretion includes the expected negative impact of refinancing its current $500 million revolving credit facility, including both its existing indebtedness and the amounts used to finance these transactions.