Kindred Healthcare, Inc. (KND)

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Kindred Healthcare (KND)

Q4 2012 Earnings Call

February 26, 2013 9:00 am ET

Executives

Charles Edward Jones - Chairman and Principal

Paul J. Diaz - Chief Executive Officer, Director and Chairman of Strategic Development Committee

Richard A. Lechleiter - Chief Financial Officer and Executive Vice President

Benjamin A. Breier - President and Chief Operating Officer

Analysts

Albert J. Rice - UBS Investment Bank, Research Division

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Clara Houin - Avondale Partners, LLC, Research Division

Henry Reukauf - Deutsche Bank AG, Research Division

Ryan K. Halsted - Wells Fargo Securities, LLC, Research Division

Presentation

Operator

Good day, everyone, and welcome to this Kindred Healthcare 4Q '12 Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Eddie Jones with Corporate Communications. Please go ahead.

Charles Edward Jones

Good morning. Welcome to the Kindred Healthcare Fourth Quarter Conference Call. This is Eddie Jones from Corporate Communications. Before the company's presentation, I would like to read a cautionary statement.

This conference call includes forward-looking statements as defined in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which involves a number of risks and uncertainties. Such forward-looking statements are based upon management's current expectations and include known and unknown risks, uncertainties and other factors, many of which the company and its management are unable to predict or control, that may cause the company's actual results or performance to differ materially from any future results performance expressed or implied by such forward-looking statements. The company cautions participants that any forward-looking information is not a guarantee of future performance and that actual results could differ materially from those contained in the forward-looking information. The company refers you to its reports filed with the Securities and Exchange Commission, including the company's annual report on Form 10-K, the company's other reports filed periodically with the SEC and its press release regarding the fourth quarter operating results for a discussion of these forward-looking statements and other factors that could affect these forward-looking statements.

Many of these factors are beyond the control of the company and its management. The company cautions investors that any forward-looking statements made by the company are not guarantees of future performance. The information being provided today is as of this date only, and the company disclaims any obligation to update any such factors or to announce publicly the results of any revisions to any of the forward-looking statements to reflect future events or developments.

Certain references to operating income, or EBITDAR, as well as other non-GAAP disclosures, have been reconciled to the company's consolidated operating results and are available on the company's website, www.kindredhealthcare.com.

It is now my pleasure to introduce the participants in today's call: Paul Diaz, Chief Executive Officer; Rich Lechleiter, Executive Vice President and Chief Financial Officer; and Ben Breier, President and Chief Operating Officer. Mr. Diaz will begin the call.

Paul J. Diaz

Thank you, Eddie, and good morning, everyone. Last night, we announced our operating results for the fourth quarter and full fiscal year. I am pleased to report that we finished the year on a strong note and that our core operating performance for 2012 was at the high end of the guidance we issued to investors at the beginning of the year.

2012, Kindred continued to make progress in improving quality and patient satisfaction and delivering better clinical outcomes for patients in settings across the post-acute continuum. We want to thank our caregivers and colleagues throughout our organization, who delivered on Kindred's promise of hope, healing and recovery, as they work to advance our mission in spite of a very challenging operating environment.

From an operational and financial standpoint, we finished the year with a solid quarter. Excluding certain items, our continuing operations, earnings per diluted share of $0.46 in the fourth quarter was a significant improvement from the comparable $0.28 per share reported last year, following major Medicare cuts in both our Nursing Center and rehabilitation therapy divisions. And we are very encouraged by the strong volume trend so far this year and our strong operating cash flows.

Before commenting further on our results and our opportunities going forward, I'd like Rich to recap our results, and then we'll provide some operational color as well. Rich?

Richard A. Lechleiter

Thanks, Paul. Good morning, everybody. As Paul said, Q4 finished the year quite nicely at $0.46, actually a bit better than we expected. The full year core EPS of $1.52 actually came in at the high end of our guidance range we put out in the first quarter last year and reflects the full realization of the RehabCare synergies and other cost reductions put in place earlier in the year.

A couple of items to note. Our Hospital division turned in a nice quarter with EBITDAR growing 8%, even though volumes were a bit soft at the beginning of the quarter, but rates were better overall. RehabCare operating margins were over 13%, including strong growth in our hospital rehab therapy business.

Two other items are also included in the quarter. $8 million of favorable bad debt pickup based on very strong cash collections and a $6 million hit from the rehab therapy Medicare caps that were put into place on October 1, a bit worse than we thought.

On the Home Health side, revenues and EBITDAR both doubled from last year. Operating margins improved to 10%. And we reached a threshold $200 million in annualized revenues. Cost controls across the enterprise continue to be very effective. For example, in the Hospital division, our cost per patient day grew only 1.2% in the quarter, while in the nursing homes, cost grew only 9/10 of 1% compared to the fourth quarter last year. Corporate overhead was up only 1.8% from last year and stood at 2.9% of consolidated revenues at the end of the year, a very good showing.

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