KINDRED HEALTHCARE, INC - FORM 8-K - EX-99.1

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8-K - 8-K - KINDRED HEALTHCARE, INC	d389914d8k.htm

EXHIBIT 99.1

LOGO

Contact:

Richard A. Lechleiter

Executive Vice President and

Chief Financial Officer

(502) 596-7734

KINDRED HEALTHCARE REPORTS SECOND QUARTER RESULTS

Reported Results of $0.29 Per Diluted Share Include Charges

of $0.12 Per Share Primarily Related to Litigation and Divestitures

Company Continues to Exceed Quality and Clinical Outcome Goals and

Maintains Annual Earnings Guidance Range

LOUISVILLE, Ky. (August 2, 2012) – Kindred Healthcare, Inc. (the “Company”) (NYSE:KND) today announced its operating results for the second quarter ended June 30, 2012. The Company’s consolidated financial statements include the operating results of RehabCare Group, Inc. (“RehabCare”) since the closing of the acquisition on June 1, 2011.

Second Quarter Highlights:

•

Consolidated revenues rose 19% to $1.5 billion

— RehabCare acquisition added $359 million to current quarter revenues and $114 million to last year’s second quarter

•

RehabCare synergy plan reaches $70 million annual goal

•

Hospital results were bolstered by the RehabCare acquisition, volume growth and cost efficiencies

— Reported admissions grew 26% from last year; same-facility admissions grew 3%

— Excluding disclosed charges, operating income grew 37% to $149 million (compared to reported amount of $141 million)

•

Nursing and rehabilitation center division operating income improved to $71 million from $66 million in the first quarter of 2012

•

RehabCare contract therapy division operating income rose to $41 million from $30 million in the first quarter of 2012 as operating margins rebounded to 12.4%

•

PeopleFirst home health and hospice division reported significant revenue and operating income growth

•

Corporate overhead declined as a percent of revenues to 2.9% from 3.4% in last year’s second quarter

•

Operating cash flows improved from first quarter levels to $53 million despite $14 million in Medicaid payments deferred by states until July

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680 South Fourth Street Louisville, Kentucky 40202

502.596.7300 www.kindredhealthcare.com

Kindred Healthcare Reports Second Quarter Results

Page 2

August 2, 2012

Second Quarter Results

Continuing Operations

Consolidated revenues for the second quarter ended June 30, 2012 rose 19% to $1.5 billion compared to $1.3 billion in the second quarter last year. Income from continuing operations for the second quarter of 2012 totaled $15.5 million or $0.29 per diluted share compared to a loss of $6.1 million or $0.14 per diluted share in the second quarter last year.

Second quarter 2012 operating results included pretax charges of approximately $10 million related to (1) employment-related lawsuits, (2) the closing of two long-term acute care (“LTAC”) hospitals and the cancellation of a sub-acute unit project, (3) costs incurred in connection with the planned divestiture of 54 leased nursing and rehabilitation centers, and (4) transaction-related costs. These items reduced income from continuing operations by approximately $6.1 million or $0.12 per diluted share.

Second quarter 2011 operating results included certain charges that reduced income from continuing operations by $29.5 million or $0.68 per diluted share.

Discontinued Operations

During the past few 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.

Management Commentary

Paul J. Diaz, Chief Executive Officer of the Company, remarked, “Our second quarter reflects strong results in our hospital division, RehabCare contract therapy division and our PeopleFirst home health and hospice division as well as continued improvement in our nursing center division following the significant reimbursement and regulatory changes that became effective in the fourth quarter of 2011. In addition, we have now reached our $70 million annual synergy goal in connection with the RehabCare acquisition.”

Commenting on the Company’s ongoing efforts to improve the quality of its services, Mr. Diaz noted, “We recently announced that Barbara Baylis, Senior Vice President of Clinical and Residential Services for Kindred’s Nursing Center Division, was named the 2012 recipient of the prestigious Mary K. Ousley Champion of Quality Award by the American Health Care Association. Thanks to Barbara’s hard work and commitment to quality, our nursing and rehabilitation centers have shown improved patient outcomes, patient satisfaction, and have established a national reputation for quality care. Our nursing and rehabilitation centers continue to outperform national and peer benchmarks on key quality indicators, including performance on government quality inspections where Kindred ranks first on annual surveys compared with other large national providers.”

With respect to the Company’s ongoing development activities, Mr. Diaz noted, “During the first half of 2012, the Company opened a new 46-bed free-standing inpatient rehabilitation hospital in suburban Houston, relocated and expanded by 30 beds an existing free-standing inpatient rehabilitation hospital in Austin, Texas, and signed contracts to manage six additional acute rehabilitation units. We also acquired two previously leased hospitals for $68 million, further increasing the percentage of our owned facilities. In addition, projects to expand and upgrade LTAC hospitals in Dayton, Ohio and Charleston, South Carolina, including two co-located hospital based sub-acute units, are proceeding in line with our plans. Finally, we completed the acquisition of a home health company in Chicago earlier this week, expanding our home health operations in one of our key cluster markets.”

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Kindred Healthcare Reports Second Quarter Results

Page 3

August 2, 2012

Recent Medicare Rules

On August 1, 2012, the Centers for Medicare and Medicaid Services (“CMS”) issued final regulations (the “2012 CMS Rule”) regarding Medicare reimbursement for LTAC hospitals for the fiscal year beginning October 1, 2012.

Included in the 2012 CMS Rule is (1) a market basket increase to the standard federal payment rate of 2.6%; (2) offsets to the standard federal payment rate mandated by the Patient Protection and Affordable Care Act and the Healthcare Education and Reconciliation Act (collectively, the “ACA”) of: (a) 0.7% to account for the effect of a productivity adjustment, and (b) 0.1% as required by statute; (3) a wage level budget neutrality factor of 0.999265 applied to the adjusted standard federal payment rate; (4) adjustments to area wage indexes; and (5) a decrease in the high cost outlier threshold per discharge to $15,408. Effective December 29, 2012, the 2012 CMS Rule also would (1) begin a three-year phase-in of a 3.75% budget neutrality adjustment which would reduce LTAC hospital rates by 1.3% in 2013; and (2) restore a payment reduction that would limit payments for very short stay outliers that would reduce the Company’s LTAC hospital payments by approximately 0.5%. The 2012 CMS Rule also (1) provides for a one-year extension of the existing moratorium on the “25 Percent Rule” pending the results of an ongoing research initiative to re-define the role of LTAC hospitals in the Medicare program, and (2) allows for the expiration of the current moratorium on the development or expansion of LTAC hospitals on December 29, 2012.

In aggregate, based upon its review of the 2012 CMS Rule, the Company expects that LTAC Medicare payment rates will decline slightly in 2013 compared to current rates. The 2012 CMS Rule does not include the impact of a 2% sequestration payment reduction mandated by Congress that is expected to begin in February 2013.

Commenting on the 2012 CMS Rule, Mr. Diaz stated, “We appreciate CMS’s commitment to continuing to work with the American Hospital Association, the Federation of American Hospitals and the Acute Long Term Hospital Association on certification criteria and a permanent resolution of the 25 Percent Rule, but we are very disappointed that, in the face of compelling data to the contrary, the agency moved forward with the budget neutrality adjustment as proposed.”

On July 27, 2012, CMS issued final regulations updating Medicare payment rates for skilled nursing and rehabilitation centers effective October 1, 2012. These final regulations implement a net market basket increase of 1.8% consisting of (1) a 2.5% market basket inflation increase, less (2) a 0.7% adjustment to account for the effect of a productivity adjustment.

On July 25, 2012, CMS issued final regulations regarding Medicare reimbursement for inpatient rehabilitation facilities for the fiscal year beginning October 1, 2012. Included in these final regulations are (1) a market basket increase to the standard payment conversion factor of 2.7%; (2) offsets to the standard payment conversion factor mandated by the ACA of: (a) 0.7% to account for the effect of a productivity adjustment, and (b) 0.1% as required by statute; (3) adjustments to area wage indexes; and (4) a decrease in the high cost outlier threshold per discharge to $10,466. CMS has projected the impact of these changes will result in a 2.1% increase to average Medicare payments to inpatient rehabilitation facilities.

On July 24, 2012, CMS issued final regulations regarding Medicare payment rates for hospice providers effective October 1, 2012. These final regulations implement a net market basket increase of 1.6% consisting of: (1) a 2.6% market basket inflation increase, less (2) offsets to the standard payment conversion factor mandated by the ACA of: (a) a 0.7% adjustment to account for the effect of a productivity adjustment, and (b) 0.3% as required by statute. CMS has projected the impact of these changes will result in a 0.9% increase in payments to hospice providers.

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Kindred Healthcare Reports Second Quarter Results

Page 4

August 2, 2012

Earnings Guidance – Continuing Operations

The Company maintained its earnings guidance for 2012. The earnings guidance provided by the Company excludes the effect of (1) any costs associated with the closing of a regional office and three LTAC hospitals and the cancellation of a sub-acute unit project, (2) costs associated with employment-related lawsuits, (3) employee retention costs incurred in connection with the decision to allow leases to expire for 54 nursing and rehabilitation centers leased from Ventas, Inc. (“Ventas”) (NYSE:VTR), (4) any transaction-related charges, (5) any other reimbursement changes, (6) any acquisitions or divestitures, (7) any impairment charges, or (8) any repurchases of common stock.

The Company expects consolidated revenues for 2012 to approximate $6.2 billion. Operating income, or earnings before interest, income taxes, depreciation, amortization and rent, is expected to range from $868 million to $884 million. Rent expense is expected to approximate $432 million, while depreciation and amortization should approximate $201 million. Net interest expense is expected to approximate $107 million. The Company expects to report income from continuing operations for 2012 between $73 million and $83 million or $1.35 to $1.55 per diluted share (based upon diluted shares of 52 million).

The Company also indicated that it expects cash flows from operations in 2012 to range from $240 million to $260 million. Routine capital expenditures in 2012 are expected to range from $125 million to $135 million, including approximately $15 million of expenditures to complete the information systems integration of RehabCare. The Company’s expected routine capital expenditures also include approximately $11 million to upgrade the clinical information systems in its hospital, nursing center and home health businesses.

In addition to its routine capital expenditures, the Company expects that its previously announced development projects related to new and replacement hospitals and new transitional care centers will approximate $40 million to $45 million in 2012.

Operating cash flows in excess of the Company’s routine and development capital spending programs, which are expected to approximate $75 million to $80 million, will be available to repay debt or fund future acquisitions.

Webcast of Conference Call

As previously announced, investors and the general public can access a live webcast of the second quarter 2012 conference call through a link on the Company’s website at www.kindredhealthcare.com. The conference call will be held August 3, 2012 at 11:00 a.m. (Eastern Time).

A telephone replay of the conference call will be available at approximately 2:00 p.m. on August 3 by dialing (719) 457-0820, access code: 4223767. The replay will be available through August 12.

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Kindred Healthcare Reports Second Quarter Results

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August 2, 2012

Forward-Looking Statements

This press release includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements regarding the Company’s expected future financial position, results of operations, cash flows, financing plans, business strategy, budgets, capital expenditures, competitive positions, growth opportunities, plans and objectives of management and statements containing the words such as “anticipate,” “approximate,” “believe,” “plan,” “estimate,” “expect,” “project,” “could,” “should,” “will,” “intend,” “may” and other similar expressions, are forward-looking statements.

Such forward-looking statements are inherently uncertain, and stockholders and other potential investors must recognize that actual results may differ materially from the Company’s expectations as a result of a variety of factors, including, without limitation, those discussed below. 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 is unable to predict or control, that may cause the Company’s actual results or performance to differ materially from any future results or performance expressed or implied by such forward-looking statements. These statements involve risks, uncertainties and other factors discussed below and detailed from time to time in the Company’s filings with the Securities and Exchange Commission.

In addition to the factors set forth above, other factors that may affect the Company’s plans or results include, without limitation, (a) the impact of healthcare reform, which will initiate significant reforms to the United States healthcare system, including potential material changes to the delivery of healthcare services and the reimbursement paid for such services by the government or other third party payors, including reforms resulting from the ACA. Healthcare reform is affecting certain of the Company’s businesses and the Company expects that it will impact all of them in some manner. There is also the possibility that implementation of the provisions expanding health insurance coverage or the entire ACA will be delayed, revised or eliminated as a result of efforts to repeal or amend the law. The U.S. Supreme Court recently upheld the constitutionality of the ACA. Future court proceedings, the 2012 presidential election and pending efforts in the U.S. Congress to repeal, amend or retract funding for various aspects of the ACA create additional uncertainty about the ultimate impact of the ACA on the Company and the healthcare industry. Due to the substantial regulatory changes that will need to be implemented by CMS and others, and the numerous processes required to implement these reforms, the Company cannot predict which healthcare initiatives will be implemented at the federal or state level, the timing of any such reforms, or the effect such reforms or any other future legislation or regulation will have on the Company’s business, financial position, results of operations and liquidity, (b) the impact of the 2012 CMS Rule which, among other things, will reduce Medicare reimbursement to the Company’s LTAC hospitals in 2013 and beyond by imposing a budget neutrality adjustment and modifying the short-stay outlier rules, (c) the impact of final rules issued by CMS on July 29, 2011 which significantly reduced Medicare reimbursement to nursing centers and changed payments for the provision of group therapy services effective October 1, 2011, (d) the impact of the Budget Control Act of 2011 which will automatically reduce federal spending by approximately $1.2 trillion split evenly between domestic and defense spending. At this time, the Company believes this will result in an automatic 2% reduction on each claim submitted to Medicare beginning February 1, 2013, (e) changes in the reimbursement rates or the methods or timing of payment from third party payors, including commercial payors and the Medicare and Medicaid programs, changes arising from and related to the Medicare prospective payment system for LTAC hospitals, including potential changes in the Medicare payment rules, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, and changes in Medicare and Medicaid reimbursements for the Company’s LTAC hospitals, nursing and rehabilitation centers, inpatient rehabilitation hospitals and home health and hospice operations, and the expiration of the Medicare Part B therapy cap exception process, (f) the effects of additional legislative changes and government regulations, interpretation of regulations and changes in the nature and enforcement of regulations

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Kindred Healthcare Reports Second Quarter Results

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August 2, 2012

governing the healthcare industry, (g) the impact of the Medicare, Medicaid and SCHIP Extension Act of 2007, including the ability of the Company’s hospitals to adjust to potential LTAC certification, medical necessity reviews and the moratorium on future hospital development, (h) the impact of the Company’s significantly increased levels of indebtedness as a result of the RehabCare acquisition on the Company’s funding costs, operating flexibility and ability to fund ongoing operations, development capital expenditures or other strategic acquisitions with additional borrowings, (i) the Company’s ability to successfully pursue its development activities, including through acquisitions, and successfully integrate new operations, including the realization of anticipated revenues, economies of scale, cost savings and productivity gains associated with such operations, as and when planned, including the potential impact of unanticipated issues, expenses and liabilities associated with those activities, (j) the failure of the Company’s facilities to meet applicable licensure and certification requirements, (k) the further consolidation and cost containment efforts of managed care organizations and other third party payors, (l) the Company’s ability to meet its rental and debt service obligations, (m) the Company’s ability to operate pursuant to the terms of its debt obligations, and comply with its covenants thereunder, and its ability to operate pursuant to its master lease agreements with Ventas, (n) the condition of the financial markets, including volatility and weakness in the equity, capital and credit markets, which could limit the availability and terms of debt and equity financing sources to fund the requirements of the Company’s businesses, or which could negatively impact the Company’s investment portfolio, (o) national and regional economic, financial, business and political conditions, including their effect on the availability and cost of labor, credit, materials and other services, (p) the Company’s ability to control costs, particularly labor and employee benefit costs, (q) increased operating costs due to shortages in qualified nurses, therapists and other healthcare personnel, (r) the Company’s ability to attract and retain key executives and other healthcare personnel, (s) the increase in the costs of defending and insuring against alleged professional liability and other claims and the Company’s ability to predict the estimated costs related to such claims, including the impact of differences in actuarial assumptions and estimates compared to eventual outcomes, (t) the Company’s ability to successfully reduce (by divestiture of operations or otherwise) its exposure to professional liability and other claims, (u) the Company’s ability to successfully dispose of unprofitable facilities, (v) events or circumstances which could result in the impairment of an asset or other charges, such as the impact of the Medicare reimbursement regulations that resulted in the Company recording significant impairment charges in 2011, (w) changes in generally accepted accounting principles (“GAAP”) or practices, and changes in tax accounting or tax laws (or authoritative interpretations relating to any of these matters), and (x) the Company’s ability to maintain an effective system of internal control over financial reporting. Many of these factors are beyond the Company’s control. The Company cautions investors that any forward-looking statements made by the Company are not guarantees of future performance. 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.

As noted above, the Company’s earnings release includes a financial measure referred to as operating income, or earnings before interest, income taxes, depreciation, amortization and rent. The Company’s management uses operating income as a meaningful measure of operational performance in addition to other measures. The Company uses operating income to assess the relative performance of its operating divisions as well as the employees that operate these businesses. In addition, the Company believes this measurement is important because securities analysts and investors use this measurement to compare the Company’s performance to other companies in the healthcare industry. The Company believes that income from continuing operations is the most comparable GAAP measure. Readers of the Company’s financial information should consider income from continuing operations as an important

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Kindred Healthcare Reports Second Quarter Results

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August 2, 2012

measure of the Company’s financial performance because it provides the most complete measure of its performance. Operating income should be considered in addition to, not as a substitute for, or superior to, financial measures based upon GAAP as an indicator of operating performance. A reconciliation of operating income to income from continuing operations provided in the Condensed Business Segment Data is included in this press release.

About Kindred Healthcare

Kindred Healthcare, Inc., a top-125 private employer in the United States, is a FORTUNE 500 healthcare services company based in Louisville, Kentucky with annual revenues of $6 billion and approximately 76,000 employees in 46 states. At June 30, 2012, Kindred through its subsidiaries provided healthcare services in 2,154 locations, including 118 long-term acute care hospitals, six inpatient rehabilitation hospitals, 224 nursing and rehabilitation centers, 27 sub-acute units, 52 hospice and home care locations, 102 inpatient rehabilitation units (hospital-based) and a contract rehabilitation services business, RehabCare, which served 1,625 non-affiliated facilities. Ranked as one of Fortune magazine’s Most Admired Healthcare Companies for four years in a row, Kindred’s mission is to promote healing, provide hope, preserve dignity and produce value for each patient, resident, family member, customer, employee and shareholder we serve. For more information, go to www.kindredhealthcare.com.

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Kindred Healthcare Reports Second Quarter Results

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August 2, 2012

KINDRED HEALTHCARE, INC.

Financial Summary

(Unaudited)

(In thousands, except per share amounts)


	Three months ended						Six months ended
	June 30,						June 30,
	2012			2011			2012			2011
Revenues	$	1,535,828		$	1,292,592		$	3,115,798		$	2,485,013

Income (loss) from continuing operations	$	15,277		$	(6,540	)	$	33,809		$	15,736
Income (loss) from discontinued operations, net of income taxes		(14	)		587			96			408

Net income (loss)		15,263			(5,953	)		33,905			16,144
(Earnings) loss attributable to noncontrolling interests		239			421			(212	)		421

Income (loss) attributable to Kindred	$	15,502		$	(5,532	)	$	33,693		$	16,565

Amounts attributable to Kindred stockholders:
Income (loss) from continuing operations	$	15,516		$	(6,119	)	$	33,597		$	16,157
Income (loss) from discontinued operations		(14	)		587			96			408

Net income (loss)	$	15,502		$	(5,532	)	$	33,693		$	16,565

Earnings (loss) per common share:
Basic:
Income (loss) from continuing operations	$	0.29		$	(0.14	)	$	0.64		$	0.39
Income (loss) from discontinued operations		—			0.01			—			0.01

Net income (loss)	$	0.29		$	(0.13	)	$	0.64		$	0.40

Diluted:
Income (loss) from continuing operations	$	0.29		$	(0.14	)	$	0.64		$	0.38
Income (loss) from discontinued operations		—			0.01			—			0.01

Net income (loss)	$	0.29		$	(0.13	)	$	0.64		$	0.39

Shares used in computing earnings (loss) per common share:
Basic		51,664			43,231			51,633			41,145
Diluted		51,675			43,231			51,657			41,661

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Kindred Healthcare Reports Second Quarter Results

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August 2, 2012

KINDRED HEALTHCARE, INC.

Condensed Consolidated Statement of Operations

(Unaudited)

(In thousands, except per share amounts)


	Three months ended						Six months ended
	June 30,						June 30,
	2012			2011			2012			2011
Revenues	$	1,535,828		$	1,292,592		$	3,115,798		$	2,485,013

Salaries, wages and benefits		907,106			765,133			1,852,408			1,443,828
Supplies		108,238			96,718			219,533			186,740
Rent		107,541			95,677			215,509			187,130
Other operating expenses		312,995			287,132			623,959			546,501
Other income		(2,698	)		(2,880	)		(5,446	)		(5,665	)
Impairment charges		329			—			1,196			—
Depreciation and amortization		49,802			37,871			98,492			70,420
Interest expense		26,716			23,157			53,294			28,885
Investment income		(275	)		(257	)		(567	)		(752	)

		1,509,754			1,302,551			3,058,378			2,457,087

Income (loss) from continuing operations before income taxes		26,074			(9,959	)		57,420			27,926
Provision (benefit) for income taxes		10,797			(3,419	)		23,611			12,190

Income (loss) from continuing operations		15,277			(6,540	)		33,809			15,736
Income (loss) from discontinued operations, net of income taxes		(14	)		587			96			408

Net income (loss)		15,263			(5,953	)		33,905			16,144
(Earnings) loss attributable to noncontrolling interests		239			421			(212	)		421

Income (loss) attributable to Kindred	$	15,502		$	(5,532	)	$	33,693		$	16,565

Amounts attributable to Kindred stockholders:
Income (loss) from continuing operations	$	15,516		$	(6,119	)	$	33,597		$	16,157
Income (loss) from discontinued operations		(14	)		587			96			408

Net income (loss)	$	15,502		$	(5,532	)	$	33,693		$	16,565

Earnings (loss) per common share:
Basic:
Income (loss) from continuing operations	$	0.29		$	(0.14	)	$	0.64		$	0.39
Income (loss) from discontinued operations		—			0.01			—			0.01

Net income (loss)	$	0.29		$	(0.13	)	$	0.64		$	0.40

Diluted:
Income (loss) from continuing operations	$	0.29		$	(0.14	)	$	0.64		$	0.38
Income (loss) from discontinued operations		—			0.01			—			0.01

Net income (loss)	$	0.29		$	(0.13	)	$	0.64		$	0.39

Shares used in computing earnings (loss) per common share:
Basic		51,664			43,231			51,633			41,145
Diluted		51,675			43,231			51,657			41,661

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Kindred Healthcare Reports Second Quarter Results

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August 2, 2012

KINDRED HEALTHCARE, INC.

Condensed Consolidated Balance Sheet

(Unaudited)

(In thousands, except per share amounts)


	June 30,			December 31,
	2012			2011
ASSETS
Current assets:
Cash and cash equivalents	$	37,566		$	41,561
Cash - restricted		5,422			5,551
Insurance subsidiary investments		75,922			70,425
Accounts receivable less allowance for loss		1,060,462			994,700
Inventories		31,248			31,060
Deferred tax assets		24,101			17,785
Income taxes		6,361			39,513
Other		35,438			32,687

		1,276,520			1,233,282

Property and equipment		2,108,365			1,975,063
Accumulated depreciation		(998,198	)		(916,022	)

		1,110,167			1,059,041

Goodwill		1,088,379			1,084,655
Intangible assets less accumulated amortization		436,123			447,207
Assets held for sale		4,662			5,612
Insurance subsidiary investments		119,208			110,227
Other		207,471			198,469

Total assets	$	4,242,530		$	4,138,493

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	204,293		$	216,801
Salaries, wages and other compensation		382,150			407,493
Due to third party payors		26,367			37,306
Professional liability risks		46,458			46,010
Other accrued liabilities		134,037			130,693
Long-term debt due within one year		9,611			10,620

		802,916			848,923

Long-term debt		1,638,280			1,531,882
Professional liability risks		231,477			217,717
Deferred tax liabilities		7,557			17,955
Deferred credits and other liabilities		200,599			191,771

Noncontrolling interests-redeemable		9,373			9,704

Equity:
Stockholders’ equity:
Common stock, $0.25 par value; authorized 175,000 shares; issued 52,965 shares - June 30, 2012 and 52,116 shares - December 31, 2011		13,241			13,029
Capital in excess of par value		1,138,825			1,138,189
Accumulated other comprehensive loss		(1,445	)		(1,469	)
Retained earnings		172,865			139,172

		1,323,486			1,288,921
Noncontrolling interests-nonredeemable		28,842			31,620

Total equity		1,352,328			1,320,541

Total liabilities and equity	$	4,242,530		$	4,138,493

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Kindred Healthcare Reports Second Quarter Results

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August 2, 2012

KINDRED HEALTHCARE, INC.

Condensed Consolidated Statement of Cash Flows

(Unaudited)

(In thousands)


	Three months ended						Six months ended
	June 30,						June 30,
	2012			2011			2012			2011
Cash flows from operating activities:
Net income (loss)	$	15,263		$	(5,953	)	$	33,905		$	16,144
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		49,802			37,871			98,492			70,420
Amortization of stock-based compensation costs		3,077			3,462			4,879			6,106
Amortization of deferring financing costs		2,359			2,244			4,716			3,090
Payment of lender fees related to debt issuance		—			(46,232	)		—			(46,232	)
Provision for doubtful accounts		6,041			8,426			13,537			14,256
Deferred income taxes		(13,243	)		(1,959	)		(16,905	)		(2,689	)
Impairment charges		329			—			1,196			—
Other		1,919			(227	)		2,345			(703	)
Change in operating assets and liabilities:
Accounts receivable		(23,891	)		(43,935	)		(81,088	)		(80,575	)
Inventories and other assets		498			870			(15,407	)		(2,655	)
Accounts payable		(2,983	)		13,565			(12,533	)		1,217
Income taxes		229			(12,950	)		30,731			27,673
Due to third party payors		(1,963	)		6,577			(10,939	)		3,555
Other accrued liabilities		15,586			43,093			(3,331	)		41,681

Net cash provided by operating activities		53,023			4,852			49,598			51,288

Cash flows from investing activities:
Routine capital expenditures		(28,759	)		(33,950	)		(50,865	)		(58,668	)
Development capital expenditures		(12,376	)		(14,309	)		(22,998	)		(25,418	)
Acquisitions, net of cash acquired		(17,420	)		(651,952	)		(67,868	)		(659,979	)
Acquisition deposit		16,866			—			—			—
Sale of assets		—			—			1,110			1,714
Purchase of insurance subsidiary investments		(7,425	)		(9,220	)		(21,198	)		(17,037	)
Sale of insurance subsidiary investments		8,004			8,533			22,010			27,189
Net change in insurance subsidiary cash and cash equivalents		(1,363	)		(2,744	)		(14,486	)		(4,044	)
Change in other investments		182			—			451			1,000
Other		(255	)		(161	)		(1,004	)		(29	)

Net cash used in investing activities		(42,546	)		(703,803	)		(154,848	)		(735,272	)

Cash flows from financing activities:
Proceeds from borrowings under revolving credit		449,300			654,900			964,700			1,100,100
Repayment of borrowings under revolving credit		(457,500	)		(814,900	)		(854,500	)		(1,275,100	)
Proceeds from issuance of senior unsecured notes		—			550,000			—			550,000
Proceeds from issuance of term loan, net of discount		—			693,000			—			693,000
Repayment of other long-term debt		(2,645	)		(345,666	)		(5,311	)		(345,688	)
Payment of deferred financing costs		(270	)		(6,443	)		(313	)		(6,860	)
Contribution made by noncontrolling interest		200			—			200			—
Cash distributed to noncontrolling interests		(2,133	)		—			(3,521	)		—
Issuance of common stock		—			1,604			—			3,019
Other		—			355			—			744

Net cash provided by (used in) financing activities		(13,048	)		732,850			101,255			719,215

Change in cash and cash equivalents		(2,571	)		33,899			(3,995	)		35,231
Cash and cash equivalents at beginning of period		40,137			18,500			41,561			17,168

Cash and cash equivalents at end of period	$	37,566		$	52,399		$	37,566		$	52,399

- MORE -

Kindred Healthcare Reports Second Quarter Results

Page 12

August 2, 2012

KINDRED HEALTHCARE, INC.

Condensed Consolidated Statement of Operations

(Unaudited)

(In thousands, except per share amounts)


	2011 Quarters												2012 Quarters
	First			Second			Third			Fourth			First			Second
Revenues	$	1,192,421		$	1,292,592		$	1,514,062		$	1,522,688		$	1,579,970		$	1,535,828

Salaries, wages and benefits		678,695			765,133			900,570			911,417			945,302			907,106
Supplies		90,022			96,718			107,514			107,760			111,295			108,238
Rent		91,453			95,677			105,511			106,616			107,968			107,541
Other operating expenses		259,369			287,132			305,305			312,674			310,964			312,995
Other income		(2,785	)		(2,880	)		(2,815	)		(2,711	)		(2,748	)		(2,698	)
Impairment charges		—			—			26,712			102,569			867			329
Depreciation and amortization		32,549			37,871			46,947			48,227			48,690			49,802
Interest expense		5,728			23,157			25,790			26,244			26,578			26,716
Investment income		(495	)		(257	)		(37	)		(242	)		(292	)		(275	)

		1,154,536			1,302,551			1,515,497			1,612,554			1,548,624			1,509,754

Income (loss) from continuing operations before income taxes		37,885			(9,959	)		(1,435	)		(89,866	)		31,346			26,074
Provision (benefit) for income taxes		15,609			(3,419	)		(2,342	)		(16,952	)		12,814			10,797

Income (loss) from continuing operations		22,276			(6,540	)		907			(72,914	)		18,532			15,277
Income (loss) from discontinued operations, net of income taxes		(179	)		587			1,119			1,025			110			(14	)

Net income (loss)		22,097			(5,953	)		2,026			(71,889	)		18,642			15,263
(Earnings) loss attributable to noncontrolling interests		—			421			(241	)		58			(451	)		239

Income (loss) attributable to Kindred	$	22,097		$	(5,532	)	$	1,785		$	(71,831	)	$	18,191		$	15,502

Amounts attributable to Kindred stockholders:
Income (loss) from continuing operations	$	22,276		$	(6,119	)	$	666		$	(72,856	)	$	18,081		$	15,516
Income (loss) from discontinued operations		(179	)		587			1,119			1,025			110			(14	)

Net income (loss)	$	22,097		$	(5,532	)	$	1,785		$	(71,831	)	$	18,191		$	15,502

Earnings (loss) per common share:
Basic:
Income (loss) from continuing operations	$	0.56		$	(0.14	)	$	0.01		$	(1.42	)	$	0.35		$	0.29
Income (loss) from discontinued operations		—			0.01			0.02			0.02			—			—

Net income (loss)	$	0.56		$	(0.13	)	$	0.03		$	(1.40	)	$	0.35		$	0.29

Diluted:
Income (loss) from continuing operations	$	0.55		$	(0.14	)	$	0.01		$	(1.42	)	$	0.35		$	0.29
Income (loss) from discontinued operations		—			0.01			0.02			0.02			—			—

Net income (loss)	$	0.55		$	(0.13	)	$	0.03		$	(1.40	)	$	0.35		$	0.29

Shares used in computing earnings (loss) per common share:
Basic		39,035			43,231			51,329			51,335			51,603			51,664
Diluted		39,543			43,231			51,406			51,335			51,638			51,675

- MORE -

Kindred Healthcare Reports Second Quarter Results

Page 13

August 2, 2012

KINDRED HEALTHCARE, INC.

Condensed Business Segment Data

(Unaudited)

(In thousands)


	2011 Quarters												2012 Quarters
	First			Second			Third			Fourth			First			Second
Revenues:
Hospital division	$	558,974		$	593,425		$	684,781		$	712,812		$	765,823		$	729,419

Nursing center division		567,472			568,199			571,226			547,202			544,319			535,644

Rehabilitation division:
Skilled nursing rehabilitation services		114,618			161,246			252,574			246,720			255,451			255,187
Hospital rehabilitation services		22,490			38,291			69,811			70,232			74,369			73,379

		137,108			199,537			322,385			316,952			329,820			328,566

Home health and hospice division		8,038			10,828			15,419			26,451			28,432			28,872

		1,271,592			1,371,989			1,593,811			1,603,417			1,668,394			1,622,501

Eliminations:
Skilled nursing rehabilitation services		(57,081	)		(57,587	)		(57,922	)		(57,087	)		(58,433	)		(57,056	)
Hospital rehabilitation services		(21,225	)		(20,706	)		(20,528	)		(22,167	)		(28,317	)		(27,755	)
Nursing and rehabilitation centers		(865	)		(1,104	)		(1,299	)		(1,475	)		(1,674	)		(1,862	)

		(79,171	)		(79,397	)		(79,749	)		(80,729	)		(88,424	)		(86,673	)

	$	1,192,421		$	1,292,592		$	1,514,062		$	1,522,688		$	1,579,970		$	1,535,828

Income (loss) from continuing operations:
Operating income (loss):
Hospital division	$	108,385		$	108,465		$	125,701		$	144,891		$	160,669		$	141,511	(a)

Nursing center division		87,350			93,532			89,592			67,791			65,533			71,005	(b)

Rehabilitation division:
Skilled nursing rehabilitation services		9,159			15,978			27,575			13,204			14,193			22,942
Hospital rehabilitation services		5,332			8,033			15,606			14,760			16,116			17,860

		14,491			24,011			43,181			27,964			30,309			40,802

Home health and hospice division		(10	)		(447	)		1,107			2,453			2,341			2,789

Corporate:
Overhead		(38,315	)		(43,801	)		(48,806	)		(43,878	)		(42,728	)		(44,723	)
Insurance subsidiary		(602	)		(420	)		(750	)		(534	)		(482	)		(600	)

		(38,917	)		(44,221	)		(49,556	)		(44,412	)		(43,210	)		(45,323	)

Impairment charges		—			—			(26,712	)		(102,569	)		(867	)		(329	)
Transaction costs		(4,179	)		(34,851	)		(6,537	)		(5,139	)		(485	)		(597	)

Operating income		167,120			146,489			176,776			90,979			214,290			209,858
Rent		(91,453	)		(95,677	)		(105,511	)		(106,616	)		(107,968	)		(107,541	)(c)
Depreciation and amortization		(32,549	)		(37,871	)		(46,947	)		(48,227	)		(48,690	)		(49,802	)
Interest, net		(5,233	)		(22,900	)		(25,753	)		(26,002	)		(26,286	)		(26,441	)

Income (loss) from continuing operations before income taxes		37,885			(9,959	)		(1,435	)		(89,866	)		31,346			26,074
Provision (benefit) for income taxes		15,609			(3,419	)		(2,342	)		(16,952	)		12,814			10,797

	$	22,276		$	(6,540	)	$	907		$	(72,914	)	$	18,532		$	15,277

^(a)	Includes severance ($0.6 million) and other miscellaneous costs ($2.0 million) incurred in connection with the closing of two LTAC hospitals and the cancellation of a sub-acute unit project, and $5.0 million for employment-related lawsuits.

^(b)	Includes employee retention costs of $0.7 million incurred in connection with the decision to allow leases to expire for 54 nursing and rehabilitation centers leased from Ventas.

^(c)	Includes lease cancellation charges of $1.1 million incurred in connection with the closing of two LTAC hospitals.

- MORE -

Kindred Healthcare Reports Second Quarter Results

Page 14

August 2, 2012

KINDRED HEALTHCARE, INC.

Condensed Consolidating Statement of Operations

(Unaudited)

(In thousands)


	Second Quarter 2012
	Hospital division (a,c)			Nursing center division (b)			Rehabilitation division								Home health and hospice			Corporate			Transaction- related costs			Eliminations			Consolidated
							Skilled nursing			Hospital
							services			services		Total
Revenues	$	729,419		$	535,644		$	255,187		$	73,379	$	328,566		$	28,872		$	—		$	—		$	(86,673	)	$	1,535,828

Salaries, wages and benefits		321,088			258,633			224,472			50,949		275,421			21,206			30,796			—			(38	)		907,106
Supplies		79,431			26,616			729			40		769			1,236			186			—			—			108,238
Rent		54,719			50,229			1,359			39		1,398			609			586			—			—			107,541
Other operating expenses		187,389			179,390			7,044			4,530		11,574			3,641			17,039			597			(86,635	)		312,995
Other income		—			—			—			—		—			—			(2,698	)		—			—			(2,698	)
Impairment charges		47			282			—			—		—			—			—			—			—			329
Depreciation and amortization		22,866			13,229			2,724			2,323		5,047			925			7,735			—			—			49,802
Interest expense		273			20			—			—		—			—			26,423			—			—			26,716
Investment income		(35	)		(28	)		—			—		—			—			(212	)		—			—			(275	)

		665,778			528,371			236,328			57,881		294,209			27,617			79,855			597			(86,673	)		1,509,754

Income from continuing operations before income taxes	$	63,641		$	7,273		$	18,859		$	15,498	$	34,357		$	1,255		$	(79,855	)	$	(597	)	$	—			26,074

Provision for income taxes																												10,797

Income from continuing operations																											$	15,277

Capital expenditures, excluding acquisitions (including discontinued operations):
Routine	$	9,095		$	3,417		$	569		$	60	$	629		$	145		$	15,473		$	—		$	—		$	28,759
Development		11,289			1,087			—			—		—			—			—			—			—			12,376

	$	20,384		$	4,504		$	569		$	60	$	629		$	145		$	15,473		$	—		$	—		$	41,135


	Second Quarter 2011
	Hospital division			Nursing center division			Rehabilitation division								Home health and hospice			Corporate			Transaction- related costs			Eliminations			Consolidated
							Skilled nursing services			Hospital services		Total
							Skilled nursing services			Hospital services		Total
Revenues	$	593,425		$	568,199		$	161,246		$	38,291	$	199,537		$	10,828		$	—		$	—		$	(79,397	)	$	1,292,592

Salaries, wages and benefits		273,260			270,347			139,998			28,062		168,060			8,262			30,354			14,866			(16	)		765,133
Supplies		67,612			27,870			614			38		652			391			193			—			—			96,718
Rent		43,997			49,562			1,540			33		1,573			251			294			—			—			95,677
Other operating expenses		144,088			176,450			4,656			2,158		6,814			2,622			16,554			19,985			(79,381	)		287,132
Other income		—			—			—			—		—			—			(2,880	)		—			—			(2,880	)
Depreciation and amortization		16,572			13,038			1,221			819		2,040			118			6,103			—			—			37,871
Interest expense		66			22			—			—		—			—			11,266			11,803			—			23,157
Investment income		(2	)		(20	)		(1	)		—		(1	)		—			(234	)		—			—			(257	)

		545,593			537,269			148,028			31,110		179,138			11,644			61,650			46,654			(79,397	)		1,302,551

Income (loss) from continuing operations before income taxes	$	47,832		$	30,930		$	13,218		$	7,181	$	20,399		$	(816	)	$	(61,650	)	$	(46,654	)	$	—			(9,959	)

Income tax benefit																												(3,419	)

Loss from continuing operations																											$	(6,540	)

Capital expenditures, excluding acquisitions (including discontinued operations):
Routine	$	11,809		$	8,000		$	179		$	72	$	251		$	38		$	13,852		$	—		$	—		$	33,950
Development		6,423			7,705			—			—		—			181			—			—			—			14,309

	$	18,232		$	15,705		$	179		$	72	$	251		$	219		$	13,852		$	—		$	—		$	48,259

^(a)	Includes severance ($0.6 million) and other miscellaneous costs ($2.0 million) incurred in connection with the closing of two LTAC hospitals and the cancellation of a sub-acute unit project, and $5.0 million for employment-related lawsuits.

^(b)	Includes employee retention costs of $0.7 million incurred in connection with the decision to allow leases to expire for 54 nursing and rehabilitation centers leased from Ventas.

^(c)	Includes lease cancellation charges of $1.1 million incurred in connection with the closing of two LTAC hospitals.

- MORE -

Kindred Healthcare Reports Second Quarter Results

Page 15

August 2, 2012

KINDRED HEALTHCARE, INC.

Condensed Consolidating Statement of Operations (Continued)

(Unaudited)

(In thousands)


	Six months ended June 30, 2012
	Hospital division (a,c)			Nursing center division (b)			Rehabilitation division								Home health and hospice			Corporate			Transaction- related costs			Eliminations			Consolidated
							Skilled nursing services			Hospital services		Total
							Skilled nursing services			Hospital services		Total
Revenues	$	1,495,242		$	1,079,963		$	510,638		$	147,748	$	658,386		$	57,304		$	—		$	—		$	(175,097	)	$	3,115,798

Salaries, wages and benefits		660,244			527,671			456,610			104,680		561,290			42,497			60,775			—			(69	)		1,852,408
Supplies		161,907			53,340			1,528			94		1,622			2,269			395			—			—			219,533
Rent		110,086			100,167			2,751			117		2,868			1,224			1,164			—			—			215,509
Other operating expenses		370,911			362,414			15,365			8,998		24,363			7,408			32,809			1,082			(175,028	)		623,959
Other income		—			—			—			—		—			—			(5,446	)		—			—			(5,446	)
Impairment charges		351			845			—			—		—			—			—			—			—			1,196
Depreciation and amortization		45,469			25,970			5,352			4,647		9,999			1,823			15,231			—			—			98,492
Interest expense		579			48			—			—		—			—			52,667			—			—			53,294
Investment income		(43	)		(46	)		(1	)		—		(1	)		—			(477	)		—			—			(567	)

		1,349,504			1,070,409			481,605			118,536		600,141			55,221			157,118			1,082			(175,097	)		3,058,378

Income from continuing operations before income taxes	$	145,738		$	9,554		$	29,033		$	29,212	$	58,245		$	2,083		$	(157,118	)	$	(1,082	)	$	—			57,420

Provision for income taxes																												23,611

Income from continuing operations																											$	33,809

Capital expenditures, excluding acquisitions (including discontinued operations):
Routine	$	19,440		$	7,646		$	895		$	106	$	1,001		$	269		$	22,509		$	—		$	—		$	50,865
Development		21,238			1,760			—			—		—			—			—			—			—			22,998

	$	40,678		$	9,406		$	895		$	106	$	1,001		$	269		$	22,509		$	—		$	—		$	73,863


	Six months ended June 30, 2011
	Hospital division			Nursing center division			Rehabilitation division								Home health and hospice			Corporate			Transaction- related costs			Eliminations			Consolidated
							Skilled nursing services			Hospital services		Total
							Skilled nursing services			Hospital services		Total
Revenues	$	1,152,399		$	1,135,671		$	275,864		$	60,781	$	336,645		$	18,866		$	—		$	—		$	(158,568	)	$	2,485,013

Salaries, wages and benefits		526,322			543,517			241,884			44,699		286,583			14,570			58,020			14,866			(50	)		1,443,828
Supplies		129,459			54,995			1,125			64		1,189			761			336			—			—			186,740
Rent		84,296			98,946			3,049			61		3,110			440			338			—			—			187,130
Other operating expenses		279,768			356,277			7,718			2,653		10,371			3,992			30,447			24,164			(158,518	)		546,501
Other income		—			—			—			—		—			—			(5,665	)		—			—			(5,665	)
Depreciation and amortization		30,850			24,831			1,875			916		2,791			223			11,725			—			—			70,420
Interest expense		66			51			—			—		—			—			14,966			13,802			—			28,885
Investment income		(3	)		(40	)		(2	)		—		(2	)		—			(707	)		—			—			(752	)

		1,050,758			1,078,577			255,649			48,393		304,042			19,986			109,460			52,832			(158,568	)		2,457,087

Income (loss) from continuing operations before income taxes	$	101,641		$	57,094		$	20,215		$	12,388	$	32,603		$	(1,120	)	$	(109,460	)	$	(52,832	)	$	—			27,926

Provision for income taxes																												12,190

Income from continuing operations																											$	15,736

Capital expenditures, excluding acquisitions (including discontinued operations):
Routine	$	23,953		$	16,155		$	414		$	97	$	511		$	58		$	17,991		$	—		$	—		$	58,668
Development		14,200			11,027			—			—		—			191			—			—			—			25,418

	$	38,153		$	27,182		$	414		$	97	$	511		$	249		$	17,991		$	—		$	—		$	84,086

^(a)	Includes severance ($2.6 million) and other miscellaneous costs ($2.3 million) incurred in connection with the closing of a regional office and three LTAC hospitals and the cancellation of a sub-acute unit project, and $5.0 million for employment-related lawsuits.

^(b)	Includes employee retention costs of $0.7 million incurred in connection with the decision to allow leases to expire for 54 nursing and rehabilitation centers leased from Ventas.

^(c)	Includes lease cancellation charges of $2.9 million incurred in connection with the closing of three LTAC hospitals.

- MORE -

Kindred Healthcare Reports Second Quarter Results

Page 16

August 2, 2012

KINDRED HEALTHCARE, INC.

Condensed Business Segment Data

(Unaudited)


	2011 Quarters								2012 Quarters
	First		Second		Third		Fourth		First		Second
Hospital division data:
End of period data:
Number of hospitals:
Long-term acute care		89		120		120		121		120		118
Inpatient rehabilitation		—		5		5		5		6		6

		89		125		125		126		126		124

Number of licensed beds:
Long-term acute care		6,889		8,609		8,597		8,597		8,510		8,448
Inpatient rehabilitation		—		183		183		183		229		259

		6,889		8,792		8,780		8,780		8,739		8,707

Revenue mix %:
Medicare		60		60		60		62		62		61
Medicaid		8		8		8		7		6		6
Medicare Advantage		10		10		10		10		10		11
Commercial insurance and other		22		22		22		21		22		22

Admissions:
Medicare		8,504		8,913		11,002		11,682		12,400		11,544
Medicaid		1,085		1,163		1,236		1,163		1,025		1,038
Medicare Advantage		1,172		1,348		1,609		1,549		1,782		1,970
Commercial insurance and other		2,282		2,290		2,669		2,853		3,081		2,770

		13,043		13,714		16,516		17,247		18,288		17,322

Admissions mix %:
Medicare		65		65		67		68		68		67
Medicaid		8		8		7		7		5		6
Medicare Advantage		9		10		10		9		10		11
Commercial insurance and other		18		17		16		16		17		16

Patient days:
Medicare		219,213		237,257		275,561		285,358		304,795		290,273
Medicaid		45,650		45,746		48,911		48,648		45,058		43,174
Medicare Advantage		35,639		39,503		47,819		47,738		51,129		53,822
Commercial insurance and other		70,522		72,759		83,375		84,677		89,305		85,645

		371,024		395,265		455,666		466,421		490,287		472,914

Average length of stay:
Medicare		25.8		26.6		25.0		24.4		24.6		25.1
Medicaid		42.1		39.3		39.6		41.8		44.0		41.6
Medicare Advantage		30.4		29.3		29.7		30.8		28.7		27.3
Commercial insurance and other		30.9		31.8		31.2		29.7		29.0		30.9
Weighted average		28.4		28.8		27.6		27.0		26.8		27.3

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Kindred Healthcare Reports Second Quarter Results

Page 17

August 2, 2012

KINDRED HEALTHCARE, INC.

Condensed Business Segment Data (Continued)

(Unaudited)


	2011 Quarters								2012 Quarters
	First		Second		Third		Fourth		First		Second
Hospital division data (continued):
Revenues per admission:
Medicare	$	39,439	$	40,089	$	37,408	$	37,643	$	38,491	$	38,716
Medicaid		42,432		41,576		40,720		44,618		45,868		44,470
Medicare Advantage		46,217		42,708		43,616		46,154		42,632		39,541
Commercial insurance and other		54,065		56,850		57,216		52,465		53,733		57,194
Weighted average		42,856		43,271		41,462		41,330		41,876		42,109

Revenues per patient day:
Medicare	$	1,530	$	1,506	$	1,494	$	1,541	$	1,566	$	1,540
Medicaid		1,009		1,057		1,029		1,067		1,043		1,069
Medicare Advantage		1,520		1,457		1,468		1,498		1,486		1,447
Commercial insurance and other		1,749		1,789		1,832		1,768		1,854		1,850
Weighted average		1,507		1,501		1,503		1,528		1,562		1,542

Medicare case mix index (discharged patients only)		1.21		1.22		1.17		1.14		1.17		1.17

Average daily census		4,122		4,344		4,953		5,070		5,388		5,197
Occupancy %		68.7		65.5		62.6		63.5		67.4		64.8

Annualized employee turnover %		21.2		22.1		21.4		20.3		21.8		22.2

Nursing center division data:
End of period data:
Number of facilities:
Nursing and rehabilitation centers:
Owned or leased		220		220		220		220		220		220
Managed		4		4		4		4		4		4
Assisted living facilities		6		6		6		6		6		6

		230		230		230		230		230		230

Number of licensed beds:
Nursing and rehabilitation centers:
Owned or leased		26,767		26,687		26,687		26,663		26,663		26,711
Managed		485		485		485		485		485		485
Assisted living facilities		413		413		413		413		413		341

		27,665		27,585		27,585		27,561		27,561		27,537

Revenue mix %:
Medicare		38		37		36		33		34		33
Medicaid		37		38		38		40		39		41
Medicare Advantage		7		7		7		7		8		7
Private and other		18		18		19		20		19		19

Patient days (a):
Medicare		370,395		358,760		345,362		334,156		342,567		328,011
Medicaid		1,232,620		1,229,517		1,255,418		1,248,442		1,218,903		1,215,623
Medicare Advantage		97,460		94,483		95,751		95,730		101,312		97,583
Private and other		425,414		435,667		436,074		441,362		422,983		412,403

		2,125,889		2,118,427		2,132,605		2,119,690		2,085,765		2,053,620

(a)	Excludes managed facilities.

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Kindred Healthcare Reports Second Quarter Results

Page 18

August 2, 2012

KINDRED HEALTHCARE, INC.

Condensed Business Segment Data (Continued)

(Unaudited)


	2011 Quarters								2012 Quarters
	First		Second		Third		Fourth		First		Second
Nursing center division data (continued):
Patient day mix % (a):
Medicare		17		17		16		16		16		16
Medicaid		58		58		59		59		59		59
Medicare Advantage		5		4		5		4		5		5
Private and other		20		21		20		21		20		20

Revenues per patient day (a):
Medicare Part A	$	537	$	544	$	550	$	491	$	484	$	483
Total Medicare (including Part B)		579		589		599		544		536		538
Medicaid		172		173		174		176		176		178
Medicaid (net of provider taxes) (b)		155		156		155		156		156		158
Medicare Advantage		416		420		421		405		407		405
Private and other		235		240		243		241		248		250
Weighted average		267		268		268		258		261		261

Average daily census (a)		23,621		23,279		23,180		23,040		22,920		22,567
Admissions (a)		20,619		20,143		20,118		19,914		20,863		19,593
Occupancy % (a)		86.9		85.9		85.5		85.1		84.7		83.5
Medicare average length of stay (a)		32.9		33.4		33.0		32.1		31.8		32.2

Annualized employee turnover %		37.8		39.8		40.2		39.2		36.9		39.2

Rehabilitation division data:
Skilled nursing rehabilitation services:
Revenue mix %:
Company-operated		50		36		23		23		23		22
Non-affiliated		50		64		77		77		77		78

Sites of service (at end of period)		641		1,848		1,835		1,774		1,722		1,730
Revenue per site	$	178,812	$	137,316	$	137,643	$	139,077	$	148,346	$	147,507

Therapist productivity %		80.6		81.6		80.5		80.1		80.3		80.4
Hospital rehabilitation services:
Revenue mix %:
Company-operated		94		54		29		32		38		38
Non-affiliated		6		46		71		68		62		62

Sites of service (at end of period):
Inpatient rehabilitation units		1		104		102		102		100		102
LTAC hospitals		93		97		99		115		125		125
Sub-acute units		8		22		23		25		19		20
Outpatient units		12		119		114		115		111		115
Other		5		8		7		8		5		5

		119		350		345		365		360		367

Revenue per site	$	188,989	$	199,661	$	202,352	$	192,410	$	206,580	$	199,943

Annualized employee turnover %		14.5		17.1		16.5		16.5		19.6		16.9

(a)	Excludes managed facilities.

(b)	Provider taxes are recorded in other operating expenses for all periods presented.

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Kindred Healthcare Reports Second Quarter Results

Page 19

August 2, 2012

KINDRED HEALTHCARE, INC.

Earnings (Loss) Per Common Share Reconciliation (a)

(Unaudited)

(In thousands, except per share amounts)


	Three months ended June 30,												Six months ended June 30,
	2012						2011						2012						2011
	Basic			Diluted			Basic			Diluted			Basic			Diluted			Basic			Diluted
Earnings (loss):
Amounts attributable to Kindred stockholders:
Income (loss) from continuing operations:
As reported in Statement of Operations	$	15,516		$	15,516		$	(6,119	)	$	(6,119	)	$	33,597		$	33,597		$	16,157		$	16,157
Allocation to participating unvested restricted stockholders		(372	)		(371	)		—			—			(633	)		(633	)		(296	)		(292	)

Available to common stockholders	$	15,144		$	15,145		$	(6,119	)	$	(6,119	)	$	32,964		$	32,964		$	15,861		$	15,865

Income (loss) from discontinued operations
As reported in Statement of Operations	$	(14	)	$	(14	)	$	587		$	587		$	96		$	96		$	408		$	408
Allocation to participating unvested restricted stockholders		—			—			—			—			(2	)		(2	)		(7	)		(7	)

Available to common stockholders	$	(14	)	$	(14	)	$	587		$	587		$	94		$	94		$	401		$	401

Net income (loss):
As reported in Statement of Operations	$	15,502		$	15,502		$	(5,532	)	$	(5,532	)	$	33,693		$	33,693		$	16,565		$	16,565
Allocation to participating unvested restricted stockholders		(372	)		(371	)		—			—			(635	)		(635	)		(303	)		(299	)

Available to common stockholders	$	15,130		$	15,131		$	(5,532	)	$	(5,532	)	$	33,058		$	33,058		$	16,262		$	16,266

Shares used in the computation:
Weighted average shares outstanding - basic computation		51,664			51,664			43,231			43,231			51,633			51,633			41,145			41,145

Dilutive effect of employee stock options					11						—						24						516

Adjusted weighted average shares outstanding - diluted computation					51,675						43,231						51,657						41,661

Earnings (loss) per common share:
Income (loss) from continuing operations	$	0.29		$	0.29		$	(0.14	)	$	(0.14	)	$	0.64		$	0.64		$	0.39		$	0.38
Income (loss) from discontinued operations		—			—			0.01			0.01			—			—			0.01			0.01

Net income (loss)	$	0.29		$	0.29		$	(0.13	)	$	(0.13	)	$	0.64		$	0.64		$	0.40		$	0.39

(a)

Earnings (loss) per common share are based upon the weighted average number of common shares outstanding during the respective periods. The diluted calculation of earnings per common share includes the dilutive effect of stock options. The Company follows the provisions of the authoritative guidance for determining whether instruments granted in share-based payment transactions are participating securities, which requires that certain unvested restricted stock be included as a participating security in the basic and diluted earnings per common share calculation pursuant to the two-class method.

- MORE -

Kindred Healthcare Reports Second Quarter Results

Page 20

August 2, 2012

KINDRED HEALTHCARE, INC.

Reconciliation of Non-GAAP Measurements to GAAP Results

(Unaudited)

(In thousands, except per share amounts and statistics)

In addition to the results provided in accordance with GAAP, the Company has provided information in this release to compute certain non-GAAP measurements for the second quarter and six months ended June 30, 2012 and 2011 before certain charges or on a core basis. The charges that were excluded from core operating results for the second quarter ended June 30, 2012 relate to severance and employee retention costs, lease cancellation charges and other miscellaneous costs in connection with the closing of two LTAC hospitals, the cancellation of a sub-acute unit project, the decision to allow leases to expire for 54 nursing and rehabilitation centers leased from Ventas, employment-related lawsuits and transaction costs. The charges that were excluded from core operating results for the six months ended June 30, 2012 relate to severance and employee retention costs, lease cancellation charges and other miscellaneous costs in connection with the closing of a regional office and three LTAC hospitals, the cancellation of a sub-acute unit project, the decision to allow leases to expire for 54 nursing and rehabilitation centers leased from Ventas, employment-related lawsuits and transaction costs. The charges that were excluded from core operating results for the second quarter and six months ended June 30, 2011 relate to severance, transaction and financing costs.

The use of these non-GAAP measurements are not intended to replace the presentation of the Company’s financial results in accordance with GAAP. The Company believes that the presentation of core operating results provides additional information to investors to facilitate the comparison between periods by excluding certain charges for the second quarter and six months ended June 30, 2012 and 2011 that the Company believes are not representative of its ongoing operations due to the materiality and nature of the charges. The Company’s core operating results also represent a key performance measure for the purpose of evaluating performance internally.


	Three months ended						Six months ended
	June 30,						June 30,
	2012			2011			2012			2011
Detail of charges:
Severance, employee retention and other miscellaneous costs	($	3,263	)	($	14,866	)	($	5,607	)	($	14,866	)
Lease cancellation charges		(1,172	)		—			(2,922	)		—
Employment-related lawsuits		(5,000	)		—			(5,000	)		—
Transaction costs		(597	)		(19,985	)		(1,082	)		(24,164	)
Financing costs (in connection with RehabCare acquisition)		—			(11,803	)		—			(13,802	)

		(10,032	)		(46,654	)		(14,611	)		(52,832	)
Income tax benefit		3,888			17,114			5,662			19,337

Charges net of income taxes		(6,144	)		(29,540	)		(8,949	)		(33,495	)
Allocation to participating unvested restricted stockholders		147			—			169			606

Available to common stockholders	($	5,997	)	($	29,540	)	($	8,780	)	($	32,889	)

Weighted average diluted shares outstanding		51,675			43,231			51,657			41,661

Diluted loss per common share related to charges	($	0.12	)	($	0.68	)	($	0.17	)	($	0.79	)

Reconciliation of operating income before charges:
Operating income before charges	$	218,718		$	181,340		$	435,837		$	352,639
Detail of charges excluded from core operating results:
Severance, employee retention and other miscellaneous costs		(3,263	)		(14,866	)		(5,607	)		(14,866	)
Employment-related lawsuits		(5,000	)		—			(5,000	)		—
Transaction costs		(597	)		(19,985	)		(1,082	)		(24,164	)

		(8,860	)		(34,851	)		(11,689	)		(39,030	)

Reported operating income	$	209,858		$	146,489		$	424,148		$	313,609

Reconciliation of income from continuing operations before charges:
Amounts attributable to Kindred stockholders:
Income from continuing operations before charges	$	21,660		$	23,421		$	42,546		$	49,652
Charges net of income taxes		(6,144	)		(29,540	)		(8,949	)		(33,495	)

Reported income (loss) from continuing operations	$	15,516		($	6,119	)	$	33,597		$	16,157

Reconciliation of diluted income per common share from continuing operations before charges:
Diluted income per common share before charges (a)	$	0.41		$	0.53		$	0.81		$	1.17
Charges net of income taxes		(0.12	)		(0.68	)		(0.17	)		(0.79	)
Other		—			0.01			—			—

Reported diluted income (loss) per common share from continuing operations	$	0.29		($	0.14	)	$	0.64		$	0.38

Weighted average diluted shares used to compute diluted income per common share from continuing operations before charges		51,675			43,756			51,657			41,661
Weighted average diluted shares outstanding		51,675			43,231			51,657			41,661

Reconciliation of effective income tax rate before charges:
Effective income tax rate before charges		40.7	%		37.3	%		40.6	%		39.0	%
Impact of charges on effective income tax rate		0.7	%		(3.0	)%		0.5	%		4.6	%

Reported effective income tax rate		41.4	%		34.3	%		41.1	%		43.6	%

(a)

For purposes of computing diluted earnings per common share before charges, income from continuing operations before charges was reduced by $0.5 million and $0.4 million for the second quarters ended June 30, 2012 and 2011, respectively, and $0.8 million and $0.9 million for the six months ended June 30, 2012 and 2011, respectively, for the allocation of income to participating unvested restricted stockholders.

- MORE -

Kindred Healthcare Reports Second Quarter Results

Page 21

August 2, 2012

KINDRED HEALTHCARE, INC.

Reconciliation of Non-GAAP Measurements to GAAP Results (a) (Continued)

(Unaudited)

(In thousands)


	Second quarter 2012
				Charges
				Severance			Employment-			Other						Lease
	Before			and employee			related			miscellaneous			Transaction			cancellation						As
	charges			retention			lawsuits			costs			costs			charges			Total			reported
Income from continuing operations:
Operating income (loss):
Hospital division	$	149,132		$	(621	)	$	(5,000	)	$	(2,000	)	$	—		$	—		$	(7,621	)	$	141,511

Nursing center division		71,647			(642	)		—			—			—			—			(642	)		71,005

Rehabilitation division:
Skilled nursing rehabilitation services		22,942			—			—			—			—			—			—			22,942
Hospital rehabilitation services		17,860			—			—			—			—			—			—			17,860

		40,802			—			—			—			—			—			—			40,802

Home health and hospice division		2,789			—			—			—			—			—			—			2,789

Corporate:
Overhead		(44,723	)		—			—			—			—			—			—			(44,723	)
Insurance subsidiary		(600	)		—			—			—			—			—			—			(600	)

		(45,323	)		—			—			—			—			—			—			(45,323	)

Impairment charges		(329	)		—			—			—			—			—			—			(329	)
Transaction costs		—			—			—			—			(597	)		—			(597	)		(597	)

Operating income		218,718			(1,263	)		(5,000	)		(2,000	)		(597	)		—			(8,860	)		209,858
Rent		(106,369	)		—			—			—			—			(1,172	)		(1,172	)		(107,541	)
Depreciation and amortization		(49,802	)		—			—			—			—			—			—			(49,802	)
Interest, net		(26,441	)		—			—			—			—			—			—			(26,441	)

Income from continuing operations before income taxes		36,106			(1,263	)		(5,000	)		(2,000	)		(597	)		(1,172	)		(10,032	)		26,074
Provision for income taxes		14,685			(490	)		(1,938	)		(775	)		(231	)		(454	)		(3,888	)		10,797

	$	21,421		$	(773	)	$	(3,062	)	$	(1,225	)	$	(366	)	$	(718	)	$	(6,144	)	$	15,277


	Six months ended June 30, 2012
				Charges
				Severance			Employment-			Other						Lease
	Before			and employee			related			miscellaneous			Transaction			cancellation						As
	charges			retention			lawsuits			costs			costs			charges			Total			reported
Income from continuing operations:
Operating income (loss):
Hospital division	$	312,063		$	(2,629	)	$	(5,000	)	$	(2,254	)	$	—		$	—		$	(9,883	)	$	302,180

Nursing center division		137,180			(642	)		—			—			—			—			(642	)		136,538

Rehabilitation division:
Skilled nursing rehabilitation services		37,171			(36	)		—			—			—			—			(36	)		37,135
Hospital rehabilitation services		33,987			(11	)		—			—			—			—			(11	)		33,976

		71,158			(47	)		—			—			—			—			(47	)		71,111

Home health and hospice division		5,130			—			—			—			—			—			—			5,130

Corporate:
Overhead		(87,416	)		(35	)		—			—			—			—			(35	)		(87,451	)
Insurance subsidiary		(1,082	)		—			—			—			—			—			—			(1,082	)

		(88,498	)		(35	)		—			—			—			—			(35	)		(88,533	)

Impairment charges		(1,196	)		—			—			—			—			—			—			(1,196	)
Transaction costs		—			—			—			—			(1,082	)		—			(1,082	)		(1,082	)

Operating income		435,837			(3,353	)		(5,000	)		(2,254	)		(1,082	)		—			(11,689	)		424,148
Rent		(212,587	)		—			—			—			—			(2,922	)		(2,922	)		(215,509	)
Depreciation and amortization		(98,492	)		—			—			—			—			—			—			(98,492	)
Interest, net		(52,727	)		—			—			—			—			—			—			(52,727	)

Income from continuing operations before income taxes		72,031			(3,353	)		(5,000	)		(2,254	)		(1,082	)		(2,922	)		(14,611	)		57,420
Provision for income taxes		29,273			(1,299	)		(1,938	)		(874	)		(419	)		(1,132	)		(5,662	)		23,611

	$	42,758		$	(2,054	)	$	(3,062	)	$	(1,380	)	$	(663	)	$	(1,790	)	$	(8,949	)	$	33,809

(a)	No reconciliation is necessary for the second quarter of 2011 and the six months ended June 30, 2011 as no charges impacted the business segment results in these periods.

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Kindred Healthcare Reports Second Quarter Results

Page 22

August 2, 2012

KINDRED HEALTHCARE, INC.

Reconciliation of Earnings Guidance for 2012 - Continuing Operations (a)

(Unaudited)

(In millions, except per share amounts)


	As of August 2, 2012						As of May 1, 2012
	Low			High			Low			High
Operating income	$	868		$	884		$	868		$	884

Rent		432			432			432			432
Depreciation and amortization		201			201			199			199
Interest, net		107			107			107			107

Income from continuing operations before income taxes		128			144			130			146
Provision for income taxes		53			59			54			60

Income from continuing operations		75			85			76			86
Earnings attributable to noncontrolling interests		(2	)		(2	)		(3	)		(3	)

Income from continuing operations attributable to the Company		73			83			73			83
Allocation to participating unvested restricted stockholders		(2	)		(2	)		(2	)		(2	)

Available to common stockholders	$	71		$	81		$	71		$	81

Earnings per diluted share	$	1.35		$	1.55		$	1.35		$	1.55

Shares used in computing earnings per diluted share		52.0			52.0			52.5			52.5

(a)

The Company's earnings guidance excludes the effect of (1) any costs associated with the closing of a regional office and three LTAC hospitals and the cancellation of a sub-acute unit project, (2) costs associated with employment-related lawsuits, (3) employee retention costs incurred in connection with the decision to allow leases to expire for 54 nursing and rehabilitation centers leased from Ventas, (4) any transaction-related charges, (5) any other reimbursement changes, (6) any acquisitions or divestitures, (7) any impairment charges, or (8) any repurchases of common stock.

- END -

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KINDRED HEALTHCARE, INC Reports