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Kindred Healthcare Reports Strong Second Quarter Results Following RehabCare Acquisition

August 8, 2011

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Excluding Transaction-Related Charges, Company Reports Continuing Operations Diluted EPS of $0.53, Up 26% from Last Year's Adjusted EPS of $0.42
Company Reports GAAP Continuing Operations Loss of $0.14 per Diluted Share
RehabCare Integration Ahead of Expectations
Company Continues to Execute on Cluster Market Development Strategy
Company Resumes Earnings Guidance Following RehabCare Acquisition
(Continuing operations diluted EPS, excluding transaction-related charges)
Third quarter 2011 - $0.25 to $0.30
Fiscal 2011 - $1.80 to $1.90
Fiscal 2012 - $1.65 to $1.85

LOUISVILLE, Ky., Aug 08, 2011 (BUSINESS WIRE) --

Kindred Healthcare, Inc. ("Kindred" or "the Company") (NYSE:KND) today announced its operating results for the second quarter ended June 30, 2011. As previously announced, the Company completed the acquisition of RehabCare Group, Inc. ("RehabCare") (formerly NYSE:RHB) on June 1, 2011. The Company's consolidated financial statements include the operating results of RehabCare since the closing of the transaction.

Second Quarter Highlights:

  • Consolidated revenues rose 20% to $1.3 billion
    • RehabCare added $114 million in second quarter revenues
    • Same-store revenues grew in each operating division
  • Excluding transaction-related charges, the Company reported improved operating margins
    • Adjusted operating income rose 22% to $181 million (14.0% of revenues) compared to $149 million (13.8% of revenues) in the second quarter last year
    • Adjusted income from continuing operations grew 40% to $23.4 million (1.8% of revenues) from $16.7 million (1.5% of revenues) in the second quarter last year
    • RehabCare acquisition was slightly accretive to second quarter earnings
  • Company reported solid operational growth in the second quarter compared to last year
    • Hospital admissions rose 22% in the quarter; same-store admissions were relatively unchanged
    • Nursing center admissions increased 6% compared to the second quarter last year
    • Expanding rehabilitation therapy business now reaches 2,200 sites
  • The Company continues to generate significant operating cash flows
    • Excluding transaction-related payments, year to date operating cash flows were up 42% from last year's first half

Second Quarter Results

Continuing Operations

Consolidated revenues for the second quarter ended June 30, 2011 rose 20% to $1.3 billion. The Company reported a loss from continuing operations for the second quarter of 2011 totaling $6.1 million or $0.14 per diluted share compared to income of $16.1 million or $0.41 per diluted share in the second quarter last year.

Excluding transaction-related charges, the Company's income from continuing operations grew 40% to $23.4 million or $0.53 per diluted share from $16.7 million or $0.42 per diluted share in the second quarter of 2010.

Management Commentary

Paul J. Diaz, President and Chief Executive Officer of the Company, remarked, "Our second quarter core operating results were outstanding, with our continued focus on quality, customer service and operating efficiencies leading the way to volume and earnings growth across the Company. We are pleased to report significant core earnings growth in the quarter while also completing the RehabCare acquisition and focusing on its transition."

Commenting on the RehabCare acquisition, Mr. Diaz further noted, "Having closed the acquisition one month in advance of our expectations, our support center and operating teams successfully completed all of the initial integration activities with minimal disruption to the business units. We have now completed the financial information systems conversions and will begin the roll-out of our hospital clinical information systems in the former RehabCare hospitals. These critical infrastructure investments are the foundation for our operating synergies and the ongoing benefits of our expanded size and scale. Based upon our initial success in this area, we now believe that we will realize approximately $55 million of cost synergies in 2012 and $65 million in cost synergies in 2013, significantly ahead of our previous estimates."

Mr. Diaz commented on the Company's ongoing development activities, "As we recently announced, we continue to advance our cluster market strategy through the selective development of our different businesses to meet the needs of our patients, physicians, managed care plans and other healthcare partners in our key markets. The new projects in Charleston, Dayton, Indianapolis, Seattle and Dallas will provide ongoing growth in our long-term acute care hospital, sub-acute and skilled nursing and rehabilitation businesses. In addition, our two new inpatient rehabilitation hospital projects in Austin and Houston will complement our existing operations in both of these markets. These exciting new projects are expected to be accretive to earnings beginning in 2013."

Finally, Mr. Diaz discussed the Company's improved liquidity, "Our operating cash flows continue to be a source of financial strength for Kindred as we continue to pursue our cluster market development strategy and reduce our leverage. Excluding transaction-related payments, our operating cash flows in the first half of 2011 increased 42% to $120 million from last year's adjusted $85 million."

Recent Regulatory Changes

The Centers for Medicare and Medicaid Services ("CMS") recently issued final rules that will impact the Company's businesses effective October 1, 2011.

On July 29, 2011, CMS issued final rules which, among other things, will reduce Medicare payments to nursing centers by 11.1% and change the reimbursement for the provision of group rehabilitation therapy services to Medicare beneficiaries. While the Company had anticipated a negative annual impact of approximately $30 million to $40 million for the budget neutrality adjustments, management now estimates that these rules could reduce the Company's annual revenues by approximately $85 million to $95 million in its nursing center business and approximately $10 million to $15 million in its rehabilitation therapy business. In addition, the Company believes that other technical changes required under the final rules may increase rehabilitation therapy costs by approximately $10 million to $15 million on an annual basis.

In addition, CMS also issued final rules that provided payment increases to inpatient rehabilitation facilities ("IRFs") and long-term acute care ("LTAC") hospitals. Among other things, CMS indicated that Medicare payment rates for IRFs are expected to increase at an annual rate of 2.2% and LTAC hospital payment rates are expected to rise 2.5%. Based upon its review of the final rules, management believes that the Medicare rate increase for the Company's LTAC hospitals will likely approximate 0.7% in 2012.

Mr. Diaz commented, "We recognize that CMS has a responsibility to achieve budget neutrality under the new RUGs IV reimbursement system. But the same rush to implementation that led to the current overpayments will now likely lead to an overcorrection that will negatively impact the interests of patients, residents, staff and job creation. We will continue to work with policymakers to re-consider a phase-in of the parity adjustment and the impact of the rehabilitation therapy and assessment process changes to maintain the stability of skilled nursing providers, the quality of their services and the accurate achievement of budget neutrality."

Earnings Guidance - Continuing Operations

Following the completion of the RehabCare acquisition, the Company resumed its prior practice of providing earnings guidance. The Company indicated that the earnings guidance for continuing operations reflects the anticipated impact of the previously discussed final rules recently issued by CMS related to payment rates for nursing centers, LTAC hospitals, IRFs and the Company's rehabilitation therapy business, all of which will be effective on October 1, 2011. The earnings guidance provided by the Company excludes the effect of (i) any transaction-related charges that have been recorded in prior periods or that may be incurred in the future, (ii) any other reimbursement changes, (iii) any material acquisitions or divestitures, or (iv) any repurchases of common stock.

The Company expects consolidated revenues for 2011 to approximate $5.6 billion. Operating income, or earnings before interest, income taxes, depreciation, amortization and rent, is expected to range from $775 million to $780 million. Rent expense is expected to approximate $400 million, while depreciation and amortization should approximate $164 million. Net interest expense is expected to approximate $69 million. The Company expects to report income from continuing operations for 2011 between $89 million to $93 million or $1.80 to $1.90 per diluted share (based upon diluted shares of 47 million).

Excluding transaction-related charges, the Company has reported diluted earnings per common share of $1.17 in the first half of 2011.

The Company also provided its earnings outlook for the third quarter of 2011, estimating diluted earnings per share between $0.25 and $0.30 (based upon diluted shares of 52 million). Management's estimated third quarter earnings range includes the expected impact of a $3 million favorable income tax adjustment ($0.05 per diluted share).

In addition, the Company provided its initial preliminary earnings guidance for fiscal 2012. The Company expects consolidated revenues for 2012 to approximate $6.4 billion. Operating income is expected to range from $911 million to $928 million. Rent expense is expected to approximate $445 million, while depreciation and amortization should approximate $200 million. Net interest expense is expected to approximate $110 million. The Company expects to report income from continuing operations for 2012 between $93 million to $104 million or $1.65 to $1.85 per diluted share (based upon diluted shares of 53 million).

Mr. Diaz noted, "When we announced the RehabCare acquisition in February, we provided to investors a pro forma 2011 earnings per diluted share range of $1.95 to $2.15 assuming that the acquisition had occurred on January 1, 2011 and we realized $25 million in pretax operating synergies. While we will operate the combined company for only seven months this year, we are pleased to provide core 2011 earnings guidance at a level that is close to our assumed full-year pro forma estimate."

Mr. Diaz continued, "Our 2012 preliminary earnings guidance reflects our significant outperformance in the first half of this year, our continuing efforts to grow the Company organically as well as our enhanced view of the operating synergies and lower than expected financing costs associated with the RehabCare acquisition. Despite the significant negative impact of the recently issued CMS rules for nursing centers and rehabilitation therapy, we will continue to find new growth opportunities that are available to us as a result of our diverse lines of business and larger size and scale as we look forward to 2012 and beyond."

Webcast of Conference Call

As previously announced, investors and the general public can access a live webcast of the second quarter 2011 conference call through a link on the Company's website at http://investors.kindredhealthcare.com or at www.earnings.com. The conference call will be held August 9, 2011 at 10:00 a.m. (Eastern Time).

A telephone replay of the conference call will be available at approximately 11:30 a.m. on August 9 by dialing (719) 457-0820, access code: 4145869. The replay will be available through August 18.

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 Kindred'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 Kindred'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 Kindred is unable to predict or control, that may cause Kindred'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 Kindred's filings with the Securities and Exchange Commission.

In addition to the factors set forth above, other factors that may affect Kindred's plans or results include, without limitation, (a) the impact of a final rule issued by CMS on July 29, 2011 providing for a 11.1% reduction in Medicare reimbursement to nursing centers as well as changes in payments for the provision of group rehabilitation therapy services, (b) other potential reimbursement changes resulting from the Budget Control Act of 2011, (c) Kindred's ability to integrate the operations of the acquired hospitals and rehabilitation services operations and realize the anticipated revenues, economies of scale, cost synergies and productivity gains in connection with the RehabCare acquisition and any other acquisitions that may be undertaken during 2011, as and when planned, including the potential for unanticipated issues, expenses and liabilities associated with those acquisitions, (d) the potential for diversion of management time and resources in seeking to integrate RehabCare's operations, (e) the potential failure to retain key employees of RehabCare, (f) the impact of Kindred's significantly increased levels of indebtedness as a result of the RehabCare acquisition on Kindred's funding costs, operating flexibility and ability to fund ongoing operations, development capital expenditures or other strategic acquisitions with additional borrowings, particularly in light of ongoing volatility in the credit and capital markets, (g) 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. Healthcare reform will impact each of Kindred's businesses in some manner. 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, Kindred 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 Kindred's business, financial position, results of operations and liquidity, (h) 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 nursing centers, and the expiration of the Medicare Part B therapy cap exception process, (i) the effects of additional legislative changes and government regulations, interpretation of regulations and changes in the nature and enforcement of regulations governing the healthcare industry, (j) Kindred'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, (k) the impact of the Medicare, Medicaid and SCHIP Extension Act of 2007 (the "SCHIP Extension Act"), including the ability of Kindred's hospitals to adjust to potential LTAC certification, medical necessity reviews and the moratorium on future hospital development, (l) the impact of the expiration of several moratoriums under the SCHIP Extension Act which could impact the short stay rules, the budget neutrality adjustment as well as implement the policy known as the "25 Percent Rule," which would limit certain patient admissions, (m) failure of Kindred's facilities to meet applicable licensure and certification requirements, (n) the further consolidation and cost containment efforts of managed care organizations and other third party payors, (o) Kindred's ability to meet its rental and debt service obligations, (p) Kindred's ability to operate pursuant to the terms of its debt obligations and its master lease agreements with Ventas, Inc. (NYSE:VTR), (q) 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 Kindred's businesses, or which could negatively impact Kindred's investment portfolio, (r) national and regional economic, financial, business and political conditions, including their effect on the availability and cost of labor, credit, materials and other services, (s) Kindred's ability to control costs, particularly labor and employee benefit costs, (t) increased operating costs due to shortages in qualified nurses, therapists and other healthcare personnel, (u) Kindred's ability to attract and retain key executives and other healthcare personnel, (v) the increase in the costs of defending and insuring against alleged professional liability and other claims and the ability to predict the estimated costs related to such claims, including the impact of differences in actuarial assumptions and estimates compared to eventual outcomes, (w) Kindred's ability to successfully reduce (by divestiture of operations or otherwise) its exposure to professional liability and other claims, (x) Kindred's ability to successfully dispose of unprofitable facilities, (y) events or circumstances which could result in the impairment of an asset or other charges, (z) 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 (aa) Kindred's ability to maintain an effective system of internal control over financial reporting. Many of these factors are beyond Kindred's control. Kindred cautions investors that any forward-looking statements made by Kindred are not guarantees of future performance. Kindred 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.

In addition to the results provided in accordance with GAAP, the Company has provided non-GAAP measurements which present operating results and cash flows from operations for the second quarter and six months ended June 30, 2011 and 2010 before certain charges or on a core basis. A reconciliation of the non-GAAP measurements to the GAAP measurements is included in this press release.

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 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-150 private employer in the United States, is a healthcare services company based in Louisville, Kentucky with annual revenues of $6 billion and approximately 76,300 employees in 46 states. At June 30, 2011, Kindred through its subsidiaries provided healthcare services in over 2,200 locations, including 120 long-term acute care hospitals, five inpatient rehabilitation hospitals, 224 nursing and rehabilitation centers, 22 sub-acute units, 20 hospice and home care locations, 104 inpatient rehabilitation units (hospital-based) and a contract rehabilitation services business, RehabCare, which served approximately 1,760 non-affiliated facilities. Ranked as one of Fortune magazine's Most Admired Healthcare Companies for three 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.

KINDRED HEALTHCARE, INC.
Financial Summary
(Unaudited)
(In thousands, except per share amounts)
Three months ended Six months ended
June 30, June 30,
2011 2010 2011 2010
Revenues $ 1,292,592 $ 1,081,364 $ 2,485,013 $ 2,171,201
Income (loss) from continuing operations $ (6,540 ) $ 16,136 $ 15,736 $ 31,291
Discontinued operations, net of income taxes:
Income (loss) from operations 587 87 408 (67 )
Gain (loss) on divestiture of operations - 54 - (83 )
Income (loss) from discontinued operations 587 141 408 (150 )
Net income (loss) (5,953 ) 16,277 16,144 31,141
Loss attributable to noncontrolling interests 421 - 421 -
Income (loss) attributable to Kindred $ (5,532 ) $ 16,277 $ 16,565 $ 31,141
Amounts attributable to Kindred stockholders:
Income (loss) from continuing operations $ (6,119 ) $ 16,136 $ 16,157 $ 31,291
Income (loss) from discontinued operations 587 141 408 (150 )
Net income (loss) $ (5,532 ) $ 16,277 $ 16,565 $ 31,141
Earnings (loss) per common share:
Basic:
Income (loss) from continuing operations $ (0.14 ) $ 0.41 $ 0.39 $ 0.79
Discontinued operations:
Income (loss) from operations 0.01 - 0.01 -
Gain (loss) on divestiture of operations - - - -
Net income (loss) $ (0.13 ) $ 0.41 $ 0.40 $ 0.79
Diluted:
Income (loss) from continuing operations $ (0.14 ) $ 0.41 $ 0.38 $ 0.79
Discontinued operations:
Income (loss) from operations 0.01 - 0.01 -
Gain (loss) on divestiture of operations - - - -
Net income (loss) $ (0.13 ) $ 0.41 $ 0.39 $ 0.79

Shares used in computing earnings (loss) per common share:

Basic 43,231 38,756 41,145 38,691
Diluted 43,231 38,914 41,661 38,881
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,
2011 2010 2011 2010
Revenues $ 1,292,592 $ 1,081,364 $ 2,485,013 $ 2,171,201
Salaries, wages and benefits 765,133 612,205 1,443,828 1,239,380
Supplies 96,718 85,455 186,740 171,341
Rent 95,677 88,981 187,130 177,300
Other operating expenses 287,132 238,687 546,501 472,891
Other income (2,880 ) (2,857 ) (5,665 ) (5,941 )
Depreciation and amortization 37,871 29,852 70,420 60,973
Interest expense 23,157 1,298 28,885 2,605
Investment (income) loss (257 ) 377 (752 ) (500 )
1,302,551 1,053,998 2,457,087 2,118,049
Income (loss) from continuing operations before income taxes (9,959 ) 27,366 27,926 53,152
Provision (benefit) for income taxes (3,419 ) 11,230 12,190 21,861
Income (loss) from continuing operations (6,540 ) 16,136 15,736 31,291
Discontinued operations, net of income taxes:
Income (loss) from operations 587 87 408 (67 )
Gain (loss) on divestiture of operations - 54 - (83 )
Income (loss) from discontinued operations 587 141 408 (150 )
Net income (loss) (5,953 ) 16,277 16,144 31,141
Loss attributable to noncontrolling interests 421 - 421 -
Income (loss) attributable to Kindred $ (5,532 ) $ 16,277 $ 16,565 $ 31,141
Amounts attributable to Kindred stockholders:
Income (loss) from continuing operations $ (6,119 ) $ 16,136 $ 16,157 $ 31,291
Income (loss) from discontinued operations 587 141 408 (150 )
Net income (loss) $ (5,532 ) $ 16,277 $ 16,565 $ 31,141
Earnings (loss) per common share:
Basic:
Income (loss) from continuing operations $ (0.14 ) $ 0.41 $ 0.39 $ 0.79
Discontinued operations:
Income (loss) from operations 0.01 - 0.01 -
Gain (loss) on divestiture of operations - - - -
Net income (loss) $ (0.13 ) $ 0.41 $ 0.40 $ 0.79
Diluted:
Income (loss) from continuing operations $ (0.14 ) $ 0.41 $ 0.38 $ 0.79
Discontinued operations:
Income (loss) from operations 0.01 - 0.01 -
Gain (loss) on divestiture of operations - - - -
Net income (loss) $ (0.13 ) $ 0.41 $ 0.39 $ 0.79

Shares used in computing earnings (loss) per common share:

Basic 43,231 38,756 41,145 38,691
Diluted 43,231 38,914 41,661 38,881
KINDRED HEALTHCARE, INC.
Condensed Consolidated Balance Sheet
(Unaudited)
(In thousands, except per share amounts)
June 30, December 31,
2011 2010
ASSETS
Current assets:
Cash and cash equivalents $ 52,399 $ 17,168
Cash - restricted 5,457 5,494
Insurance subsidiary investments 61,519 76,753
Accounts receivable less allowance for loss 944,742 631,877
Inventories 30,762 24,327
Deferred tax assets 29,705 13,439
Income taxes 15,770 42,118
Other 35,266 24,862
1,175,620 836,038
Property and equipment 1,939,698 1,754,170
Accumulated depreciation (907,710 ) (857,623 )
1,031,988 896,547
Goodwill 1,097,997 242,420
Intangible assets less accumulated amortization 499,920 92,883
Assets held for sale 7,073 7,167
Insurance subsidiary investments 110,633 101,210
Deferred tax assets - 88,816
Other 133,365 72,334
Total assets $ 4,056,596 $ 2,337,415
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable $ 217,034 $ 174,495
Salaries, wages and other compensation 401,014 291,116
Due to third party payors 40,293 27,115
Professional liability risks 40,583 41,555
Other accrued liabilities 119,270 87,012
Long-term debt due within one year 10,435 91
828,629 621,384
Long-term debt 1,433,257 365,556
Professional liability risks 227,986 207,669
Deferred tax liabilities 36,670 -
Deferred credits and other liabilities 127,304 111,047
Noncontrolling interests-redeemable 23,841 -
Equity:
Stockholders' equity:

Common stock, $0.25 par value; authorized 175,000 shares; issued 52,116 shares - June 30, 2011 and 39,495 shares - December 31, 2010

13,029 9,874
Capital in excess of par value 1,132,748 828,593
Accumulated other comprehensive income 317 135
Retained earnings 209,218 193,157
1,355,312 1,031,759
Noncontrolling interests-nonredeemable 23,597 -
Total equity 1,378,909 1,031,759
Total liabilities and equity $ 4,056,596 $ 2,337,415
KINDRED HEALTHCARE, INC.
Condensed Consolidated Statement of Cash Flows
(Unaudited)
(In thousands)
Three months ended Six months ended
June 30, June 30,
2011 2010 2011 2010
Cash flows from operating activities:
Net income (loss) $ (5,953 ) $ 16,277 $ 16,144 $ 31,141

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Depreciation and amortization 37,871 29,852 70,420 60,973
Amortization of stock-based compensation costs 3,462 2,746 6,106 5,521
Payment of lender fees related to debt issuance (46,232 ) - (46,232 ) -
Provision for doubtful accounts 8,426 5,846 14,256 12,277
Deferred income taxes (1,959 ) (3,264 ) (2,689 ) (10,727 )
(Gain) loss on divestiture of discontinued operations - (54 ) - 83
Other 2,017 1,089 2,387 926
Change in operating assets and liabilities:
Accounts receivable (43,935 ) 29,601 (80,575 ) (29,525 )
Inventories and other assets 870 4,759 (2,655 ) (6,486 )
Accounts payable 13,565 (596 ) 1,217 (8,178 )
Income taxes (12,950 ) (7,533 ) 27,673 21,753
Due to third party payors 6,577 (130 ) 3,555 (2,024 )
Other accrued liabilities 43,093 18,349 41,681 7,212
Net cash provided by operating activities 4,852 96,942 51,288 82,946
Cash flows from investing activities:
Routine capital expenditures (33,950 ) (25,670 ) (58,668 ) (40,485 )
Development capital expenditures (14,309 ) (12,288 ) (25,418 ) (19,855 )
Acquisitions, net of cash acquired (651,952 ) (1,794 ) (659,979 ) (49,490 )
Sale of assets - - 1,714 -
Purchase of insurance subsidiary investments (9,220 ) (9,840 ) (17,037 ) (24,118 )
Sale of insurance subsidiary investments 8,533 8,622 27,189 61,833

Net change in insurance subsidiary cash and cash equivalents

(2,744 ) (1,926 ) (4,044 ) (7,501 )
Change in other investments - 2 1,000 2
Other (161 ) 609 (29 ) 581
Net cash used in investing activities (703,803 ) (42,285 ) (735,272 ) (79,033 )
Cash flows from financing activities:
Proceeds from borrowings under revolving credit 654,900 262,400 1,100,100 652,000
Repayment of borrowings under revolving credit (814,900 ) (319,000 ) (1,275,100 ) (659,600 )
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 (345,666 ) (21 ) (345,688 ) (42 )
Payment of deferred financing costs (6,443 ) (31 ) (6,860 ) (53 )
Issuance of common stock 1,604 - 3,019 35
Other 355 222 744 346
Net cash provided by (used in) financing activities 732,850 (56,430 ) 719,215 (7,314 )
Change in cash and cash equivalents 33,899 (1,773 ) 35,231 (3,401 )
Cash and cash equivalents at beginning of period 18,500 14,675 17,168 16,303
Cash and cash equivalents at end of period $ 52,399 $ 12,902 $ 52,399 $ 12,902
KINDRED HEALTHCARE, INC.
Condensed Consolidated Statement of Operations
(Unaudited)
(In thousands, except per share amounts)
2010 Quarters 2011 Quarters
First Second Third Fourth First Second
Revenues $ 1,089,837 $ 1,081,364 $ 1,053,012 $ 1,135,484 $ 1,192,421 $ 1,292,592
Salaries, wages and benefits 627,175 612,205 613,607 652,703 678,695 765,133
Supplies 85,886 85,455 83,753 87,103 90,022 96,718
Rent 88,319 88,981 89,295 90,777 91,453 95,677
Other operating expenses 234,204 238,687 234,968 240,750 259,369 287,132
Other income (3,084 ) (2,857 ) (2,794 ) (2,687 ) (2,785 ) (2,880 )
Depreciation and amortization 31,121 29,852 29,167 31,412 32,549 37,871
Interest expense 1,307 1,298 1,642 2,843 5,728 23,157
Investment (income) loss (877 ) 377 (403 ) (342 ) (495 ) (257 )
1,064,051 1,053,998 1,049,235 1,102,559 1,154,536 1,302,551

Income (loss) from continuing operations before income taxes

25,786 27,366 3,777 32,925 37,885 (9,959 )
Provision (benefit) for income taxes 10,631 11,230 (1,323 ) 13,170 15,609 (3,419 )
Income (loss) from continuing operations 15,155 16,136 5,100 19,755 22,276 (6,540 )
Discontinued operations, net of income taxes:
Income (loss) from operations (154 ) 87 (260 ) 1,125 (179 ) 587
Gain (loss) on divestiture of operations (137 ) 54 86 (456 ) - -
Income (loss) from discontinued operations (291 ) 141 (174 ) 669 (179 ) 587
Net income (loss) 14,864 16,277 4,926 20,424 22,097 (5,953 )
Loss attributable to noncontrolling interests - - - - - 421
Income (loss) attributable to Kindred $ 14,864 $ 16,277 $ 4,926 $ 20,424 $ 22,097 $ (5,532 )
Amounts attributable to Kindred stockholders:
Income (loss) from continuing operations $ 15,155 $ 16,136 $ 5,100 $ 19,755 $ 22,276 $ (6,119 )
Income (loss) from discontinued operations (291 ) 141 (174 ) 669 (179 ) 587
Net income (loss) $ 14,864 $ 16,277 $ 4,926 $ 20,424 $ 22,097 $ (5,532 )
Earnings (loss) per common share:
Basic:
Income (loss) from continuing operations $ 0.38 $ 0.41 $ 0.13 $ 0.50 $ 0.56 $ (0.14 )
Discontinued operations:
Income (loss) from operations - - (0.01 ) 0.03 - 0.01
Gain (loss) on divestiture of operations - - - (0.01 ) - -
Net income (loss) $ 0.38 $ 0.41 $ 0.12 $ 0.52 $ 0.56 $ (0.13 )
Diluted:
Income (loss) from continuing operations $ 0.38 $ 0.41 $ 0.13 $ 0.50 $ 0.55 $ (0.14 )
Discontinued operations:
Income (loss) from operations - - (0.01 ) 0.03 - 0.01
Gain (loss) on divestiture of operations - - - (0.01 ) - -
Net income (loss) $ 0.38 $ 0.41 $ 0.12 $ 0.52 $ 0.55 $ (0.13 )

Shares used in computing earnings (loss) per common share:

Basic 38,626 38,756 38,778 38,790 39,035 43,231
Diluted 38,859 38,914 38,838 39,089 39,543 43,231
KINDRED HEALTHCARE, INC.
Condensed Business Segment Data
(Unaudited)
(In thousands)
2010 Quarters 2011 Quarters
First Second Third Fourth First Second
Revenues:
Hospital division $ 507,062 $ 493,401 $ 465,198 $ 507,660 $ 558,974 $ 593,425
Nursing center division 539,321 542,215 539,914 566,435 567,472 568,199
Rehabilitation division:
Skilled nursing rehabilitation services 98,997 101,148 103,807 117,325 122,656 172,074
Hospital rehabilitation services 21,147 20,913 20,436 21,182 22,490 38,291
120,144 122,061 124,243 138,507 145,146 210,365
1,166,527 1,157,677 1,129,355 1,212,602 1,271,592 1,371,989
Eliminations (76,690 ) (76,313 ) (76,343 ) (77,118 ) (79,171 ) (79,397 )
$ 1,089,837 $ 1,081,364 $ 1,053,012 $ 1,135,484 $ 1,192,421 $ 1,292,592
Income (loss) from continuing operations:
Operating income (loss):
Hospital division $ 95,440 $ 91,790 $ 75,784 $ 97,343 $ 108,385 $ 108,465
Nursing center division 70,614 76,529 69,363 86,912 87,350 93,532
Rehabilitation division:
Skilled nursing rehabilitation services 9,537 9,307 9,486 5,307 9,149 15,531
Hospital rehabilitation services 5,146 4,793 4,728 4,302 5,332 8,033
14,683 14,100 14,214 9,609 14,481 23,564
Corporate:
Overhead (33,831 ) (32,799 ) (34,329 ) (33,002 ) (38,315 ) (43,801 )
Insurance subsidiary (480 ) (791 ) (783 ) (1,099 ) (602 ) (420 )
(34,311 ) (33,590 ) (35,112 ) (34,101 ) (38,917 ) (44,221 )
Transaction costs (a) (770 ) (955 ) (771 ) (2,148 ) (4,179 ) (34,851 )
Operating income 145,656 147,874 123,478 157,615 167,120 146,489
Rent (88,319 ) (88,981 ) (89,295 ) (90,777 ) (91,453 ) (95,677 )
Depreciation and amortization (31,121 ) (29,852 ) (29,167 ) (31,412 ) (32,549 ) (37,871 )
Interest, net (430 ) (1,675 ) (1,239 ) (2,501 ) (5,233 ) (22,900 ) (b)

Income (loss) from continuing operations before income taxes

25,786 27,366 3,777 32,925 37,885 (9,959 )
Provision (benefit) for income taxes 10,631 11,230 (1,323 ) 13,170 15,609 (3,419 )
$ 15,155 $ 16,136 $ 5,100 $ 19,755 $ 22,276 $ (6,540 )
(a) Transaction-related charges for the 2010 periods have been reclassified to conform with the current period presentation.
(b) Includes $11.8 million of financing costs associated with the acquisition of RehabCare.
KINDRED HEALTHCARE, INC.
Condensed Consolidating Statement of Operations
(Unaudited)
(In thousands)
Second Quarter 2011
Nursing Rehabilitation division
Hospital center Skilled nursing Hospital Transaction
division division services services Total Corporate costs Eliminations Consolidated
Revenues $ 593,425 $ 568,199 $ 172,074 $ 38,291 $ 210,365 $ - $ - $ (79,397 ) $ 1,292,592
Salaries, wages and benefits 273,260 270,347 148,236 28,086 176,322 30,354 14,866 (16 ) 765,133
Supplies 67,612 27,870 1,006 37 1,043 193 - - 96,718
Rent 43,997 49,562 1,791 33 1,824 294 - - 95,677
Other operating expenses 144,088 176,450 7,301 2,135 9,436 16,554 19,985 (79,381 ) 287,132
Other income - - - - - (2,880 ) - - (2,880 )
Depreciation and amortization 16,572 13,038 1,339 819 2,158 6,103 - - 37,871
Interest expense 66 22 - - - 11,266 11,803 - 23,157
Investment income (2 ) (20 ) (1 ) - (1 ) (234 ) - - (257 )
545,593 537,269 159,672 31,110 190,782 61,650 46,654 (79,397 ) 1,302,551

Income (loss) from continuing operations before income taxes

$ 47,832 $ 30,930 $ 12,402 $ 7,181 $ 19,583 $ (61,650 ) $ (46,654 ) $ - (9,959 )
Provision (benefit) for income taxes (3,419 )
Income (loss) from continuing operations $ (6,540 )

Capital expenditures, excluding acquisitions (including discontinued operations):

Routine $ 11,809 $ 8,000 $ 217 $ 72 $ 289 $ 13,852 $ - $ - $ 33,950
Development 6,423 7,705 181 - 181 - - - 14,309
$ 18,232 $ 15,705 $ 398 $ 72 $ 470 $ 13,852 $ - $ - $ 48,259
Second Quarter 2010
Nursing Rehabilitation division
Hospital center Skilled nursing Hospital Transaction
division division services services Total Corporate costs Eliminations Consolidated
Revenues $ 493,401 $ 542,215 $ 101,148 $ 20,913 $ 122,061 $ - $ - $ (76,313 ) $ 1,081,364
Salaries, wages and benefits 221,086 264,653 86,551 15,431 101,982 24,484 - - 612,205
Supplies 57,150 27,448 704 22 726 131 - - 85,455
Rent 38,043 49,439 1,445 25 1,470 29 - - 88,981
Other operating expenses 123,375 173,585 4,586 667 5,253 11,832 955 (76,313 ) 238,687
Other income - - - - - (2,857 ) - - (2,857 )
Depreciation and amortization 12,549 11,185 558 68 626 5,492 - - 29,852
Interest expense 1 29 - - - 1,268 - - 1,298
Investment (income) loss - (17 ) (2 ) (1 ) (3 ) 397 - - 377
452,204 526,322 93,842 16,212 110,054 40,776 955 (76,313 ) 1,053,998

Income (loss) from continuing operations before income taxes

$ 41,197 $ 15,893 $ 7,306 $ 4,701 $ 12,007 $ (40,776 ) $ (955 ) $ - 27,366
Provision (benefit) for income taxes 11,230
Income (loss) from continuing operations $ 16,136

Capital expenditures, excluding acquisitions (including discontinued operations):

Routine $ 7,954 $ 9,135 $ 258 $ 23 $ 281 $ 8,300 $ - $ - $ 25,670
Development 10,209 2,079 - - - - - - 12,288
$ 18,163 $ 11,214 $ 258 $ 23 $ 281 $ 8,300 $ - $ - $ 37,958
KINDRED HEALTHCARE, INC.
Condensed Consolidating Statement of Operations (Continued)
(Unaudited)
(In thousands)
Six months ended June 30, 2011
Nursing Rehabilitation division
Hospital center Skilled nursing Hospital Transaction
division division services services Total Corporate costs Eliminations Consolidated
Revenues $ 1,152,399 $ 1,135,671 $ 294,730 $ 60,781 $ 355,511 $ - $ - $ (158,568 ) $ 2,485,013
Salaries, wages and benefits 526,322 543,517 256,419 44,734 301,153 58,020 14,866 (50 ) 1,443,828
Supplies 129,459 54,995 1,890 60 1,950 336 - - 186,740
Rent 84,296 98,946 3,489 61 3,550 338 - - 187,130
Other operating expenses 279,768 356,277 11,741 2,622 14,363 30,447 24,164 (158,518 ) 546,501
Other income - - - - - (5,665 ) - - (5,665 )
Depreciation and amortization 30,850 24,831 2,098 916 3,014 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 1,078,577 275,635 48,393 324,028 109,460 52,832 (158,568 ) 2,457,087

Income from continuing operations before income taxes

$ 101,641 $ 57,094 $ 19,095 $ 12,388 $ 31,483 $ (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 $ 472 $ 97 $ 569 $ 17,991 $ - $ - $ 58,668
Development 14,200 11,027 191 - 191 - - - 25,418
$ 38,153 $ 27,182 $ 663 $ 97 $ 760 $ 17,991 $ - $ - $ 84,086
Six months ended June 30, 2010
Nursing Rehabilitation division
Hospital center Skilled nursing Hospital Transaction
division (a) division (a) services services Total Corporate (a) costs Eliminations Consolidated
Revenues

$

1,000,463

$ 1,081,536 $ 200,145 $ 42,060 $ 242,205 $ - $ - $ (153,003 ) $ 2,171,201
Salaries, wages and benefits 448,727 537,895 171,574 30,920 202,494 50,264 - - 1,239,380
Supplies 115,084 54,576 1,370 43 1,413 268 - - 171,341
Rent 75,458 98,831 2,894 51 2,945 66 - - 177,300
Other operating expenses 249,422 341,922 8,357 1,158 9,515 23,310 1,725 (153,003 ) 472,891
Other income - - - - - (5,941 ) - - (5,941 )
Depreciation and amortization 25,563 23,298 1,081 130 1,211 10,901 - - 60,973
Interest expense 3 60 - - - 2,542 - - 2,605
Investment income (1 ) (35 ) (3 ) (1 ) (4 ) (460 ) - - (500 )
914,256 1,056,547 185,273 32,301 217,574 80,950 1,725 (153,003 ) 2,118,049

Income from continuing operations before income taxes

$ 86,207 $ 24,989 $ 14,872 $ 9,759 $ 24,631 $ (80,950 ) $ (1,725 ) $ - 53,152
Provision for income taxes 21,861
Income from continuing operations $ 31,291

Capital expenditures, excluding acquisitions (including discontinued operations):

Routine $ 14,019 $ 13,184 $ 486 $ 62 $ 548 $ 12,734 $ - $ - $ 40,485
Development 15,983 3,872 - - - - - - 19,855
$ 30,002 $ 17,056 $ 486 $ 62 $ 548 $ 12,734 $ - $ - $ 60,340
(a) Includes $2.9 million in aggregate of severance and retirement costs in salaries, wages and benefits (Hospital division - $ 1.1 million, Nursing center division - $0.5 million and Corporate - $1.3 million).
KINDRED HEALTHCARE, INC.
Condensed Business Segment Data
(Unaudited)
2010 Quarters 2011 Quarters
First Second Third Fourth First Second
Hospital data:
End of period data:
Number of hospitals:
Long-term acute care 83 83 83 89 89 120
Inpatient rehabilitation - - - - - 5
83 83 83 89 89 125
Number of licensed beds:
Long-term acute care 6,580 6,576 6,563 6,887 6,889 8,609
Inpatient rehabilitation - - - - - 183
6,580 6,576 6,563 6,887 6,889 8,792
Revenue mix %:
Medicare 56 56 55 58 60 60
Medicaid 9 9 9 9 8 8
Medicare Advantage 10 10 10 9 10 10
Commercial insurance and other 25 25 26 24 22 22
Admissions:
Medicare 7,432 7,125 6,769 7,640 8,504 8,913
Medicaid 997 990 1,022 1,034 1,085 1,163
Medicare Advantage 1,129 1,106 936 1,071 1,172 1,348
Commercial insurance and other 2,262 2,048 1,978 2,020 2,282 2,290
11,820 11,269 10,705 11,765 13,043 13,714
Admissions mix %:
Medicare 63 63 63 65 65 65
Medicaid 8 9 10 9 8 8
Medicare Advantage 10 10 9 9 9 10
Commercial insurance and other 19 18 18 17 18 17
Patient days:
Medicare 202,882 195,964 179,324 198,129 219,213 237,257
Medicaid 47,813 45,952 48,514 46,596 45,650 45,746
Medicare Advantage 34,524 36,000 31,186 32,868 35,639 39,503
Commercial insurance and other 75,483 70,651 70,198 69,585 70,522 72,759
360,702 348,567 329,222 347,178 371,024 395,265
Average length of stay:
Medicare 27.3 27.5 26.5 25.9 25.8 26.6
Medicaid 48.0 46.4 47.5 45.1 42.1 39.3
Medicare Advantage 30.6 32.5 33.3 30.7 30.4 29.3
Commercial insurance and other 33.4 34.5 35.5 34.4 30.9 31.8
Weighted average 30.5 30.9 30.8 29.5 28.4 28.8
KINDRED HEALTHCARE, INC.
Condensed Business Segment Data (Continued)
(Unaudited)
2010 Quarters 2011 Quarters
First Second Third Fourth First Second
Hospital data (continued):
Revenues per admission:
Medicare $ 38,078 $ 38,938 $ 37,675 $ 38,368 $ 39,439 $ 40,089
Medicaid 45,738 42,774 42,910 41,704 42,432 41,576
Medicare Advantage 45,187 46,169 48,122 44,744 46,217 42,708
Commercial insurance and other 56,344 59,842 61,314 61,131 54,065 56,850
Weighted average 42,899 43,784 43,456 43,150 42,856 43,271
Revenues per patient day:
Medicare $ 1,395 $ 1,416 $ 1,422 $ 1,479 $ 1,530 $ 1,506
Medicaid 954 922 904 925 1,009 1,057
Medicare Advantage 1,478 1,418 1,444 1,458 1,520 1,457
Commercial insurance and other 1,688 1,735 1,728 1,775 1,749 1,789
Weighted average 1,406 1,416 1,413 1,462 1,507 1,501
Medicare case mix index (discharged patients only) 1.21 1.21 1.19 1.17 1.21 1.22
Average daily census 4,008 3,830 3,579 3,774 4,122 4,344
Occupancy % 68.2 66.1 62.0 64.0 68.7 65.5
Annualized employee turnover % 21.8 22.6 22.3 22.0 21.2 22.1
Nursing and rehabilitation center data:
End of period data:
Number of facilities:
Nursing and rehabilitation centers:
Owned or leased 218 219 222 222 220 220
Managed 4 4 4 4 4 4
Assisted living facilities 6 7 7 7 6 6
228 230 233 233 230 230
Number of licensed beds:
Nursing and rehabilitation centers:
Owned or leased 26,711 26,760 27,030 26,957 26,767 26,687
Managed 485 485 485 485 485 485
Assisted living facilities 327 463 463 463 413 413
27,523 27,708 27,978 27,905 27,665 27,585
Revenue mix %:
Medicare 35 34 33 36 38 37
Medicaid 41 41 41 39 37 38
Medicare Advantage 6 7 7 7 7 7
Private and other 18 18 19 18 18 18
KINDRED HEALTHCARE, INC.
Condensed Business Segment Data (Continued)
(Unaudited)
2010 Quarters 2011 Quarters
First Second Third Fourth First Second
Nursing and rehabilitation center data (continued):
Patient days (excludes managed facilities):
Medicare 369,102 363,149 346,837 344,018 370,395 358,760
Medicaid 1,312,517 1,292,246 1,289,643 1,287,739 1,232,620 1,229,517
Medicare Advantage 87,692 92,051 91,643 94,336 97,460 94,483
Private and other 397,550 415,921 437,413 453,357 425,414 435,667
2,166,861 2,163,367 2,165,536 2,179,450 2,125,889 2,118,427
Patient day mix %:
Medicare 17 17 16 16 17 17
Medicaid 61 60 60 59 58 58
Medicare Advantage 4 4 4 4 5 4
Private and other 18 19 20 21 20 21
Revenues per patient day:
Medicare Part A $ 470 $ 469 $ 468 $ 534 $ 537 $ 544
Total Medicare (including Part B) 513 515 519 587 579 589
Medicaid 168 171 171 171 172 173
Medicare Advantage 398 400 405 432 416 420
Private and other 238 234 232 228 235 240
Weighted average 249 250 249 260 267 268
Average daily census 24,076 23,773 23,538 23,690 23,621 23,279
Admissions (excludes managed facilities) 19,026 18,924 19,383 19,118 20,619 20,143
Occupancy % 89.0 87.3 86.8 86.4 86.9 85.9
Medicare average length of stay 33.7 35.2 34.3 33.0 32.9 33.4
Annualized employee turnover % 36.7 38.8 39.8 39.6 37.8 39.8
Rehabilitation data:
Skilled nursing rehabilitation services:
Revenue mix %:
Company-operated 57 56 55 49 47 34
Non-affiliated 43 44 45 51 53 66
Sites of service (at end of period) 554 568 595 635 641 1,848
Revenue per site $ 172,498 $ 171,254 $ 167,832 $ 174,896 $ 178,812 $ 137,316
Therapist productivity % 83.8 84.2 82.1 78.6 80.6 81.6
Hospice and home care revenues $ 3,434 $ 3,875 $ 3,947 $ 6,266 $ 8,038 $ 10,828
Hospital rehabilitation services:
Revenue mix %:
Company-operated 96 96 95 95 94 54
Non-affiliated 4 4 5 5 6 46
Sites of service (at end of period):
Inpatient rehabilitation units - - - 1 1 104
LTAC hospitals 85 85 85 91 93 97
Sub-acute units 7 7 7 7 8 22
Outpatient units 10 11 11 12 12 119
Other 2 2 4 4 5 8
104 105 107 115 119 350
Revenue per site $ 203,337 $ 199,174 $ 190,986 $ 184,193 $ 188,989 $ 199,661
Annualized employee turnover % 12.6 14.2 15.4 14.4 14.5 17.1
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,
2011 2010 2011 2010
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 $ (6,119 ) $ (6,119 ) $ 16,136 $ 16,136 $ 16,157 $ 16,157 $ 31,291 $ 31,291

Allocation to participating unvested restricted stockholders

- - (300 ) (299 ) (296 ) (292 ) (578 ) (575 )
Available to common stockholders $ (6,119 ) $ (6,119 ) $ 15,836 $ 15,837 $ 15,861 $ 15,865 $ 30,713 $ 30,716
Discontinued operations, net of income taxes:
Income (loss) from operations:
As reported in Statement of Operations $ 587 $ 587 $ 87 $ 87 $ 408 $ 408 $ (67 ) $ (67 )

Allocation to participating unvested restricted stockholders

- - (2 ) (2 ) (7 ) (7 ) 1 1
Available to common stockholders $ 587 $ 587 $ 85 $ 85 $ 401 $ 401 $ (66 ) $ (66 )
Gain (loss) on divestiture of operations:
As reported in Statement of Operations $ - $ - $ 54 $ 54 $ - $ - $ (83 ) $ (83 )

Allocation to participating unvested restricted stockholders

- - (1 ) (1 ) - - 2 2
Available to common stockholders $ - $ - $ 53 $ 53 $ - $ - $ (81 ) $ (81 )
Net income (loss):
As reported in Statement of Operations $ (5,532 ) $ (5,532 ) $ 16,277 $ 16,277 $ 16,565 $ 16,565 $ 31,141 $ 31,141

Allocation to participating unvested restricted stockholders

- - (303 ) (302 ) (303 ) (299 ) (575 ) (572 )
Available to common stockholders $ (5,532 ) $ (5,532 ) $ 15,974 $ 15,975 $ 16,262 $ 16,266 $ 30,566 $ 30,569
Shares used in the computation:

Weighted average shares outstanding - basic computation

43,231 43,231 38,756 38,756 41,145 41,145 38,691 38,691
Dilutive effect of employee stock options - 158 516 190

Adjusted weighted average shares outstanding - diluted computation

43,231 38,914 41,661 38,881
Earnings (loss) per common share:
Income (loss) from continuing operations $ (0.14 ) $ (0.14 ) $ 0.41 $ 0.41 $ 0.39 $ 0.38 $ 0.79 $ 0.79
Discontinued operations:
Income (loss) from operations 0.01 0.01 - - 0.01 0.01 - -
Gain (loss) on divestiture of operations - - - - - - - -
Net income (loss) $ (0.13 ) $ (0.13 ) $ 0.41 $ 0.41 $ 0.40 $ 0.39 $ 0.79 $ 0.79
(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 (loss) 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 (loss) per common share calculation pursuant to the two-class method.
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 a non-GAAP measurement which presents operating results for the second quarter and six months ended June 30, 2011 and 2010 before certain transaction-related charges or on a core basis. The charges that were excluded from core operating results for the second quarter and six months ended June 30, 2011 relate to transaction, financing and severance costs. The charges that were excluded from core operating results for the second quarter ended June 30, 2010 relate to transaction costs. The charges that are excluded from core operating results for the six months ended June 30, 2010 relate to transaction, severance and retirement costs.

The income tax benefit associated with the excluded charges was calculated using an effective income tax rate of 36.7% for the second quarter and six months ended June 30, 2011 and an effective income tax rate of 38.5% for the second quarter and six months ended June 30, 2010. Certain of the excluded charges for the second quarter and six months ended June 30, 2011 are not deductible for income tax purposes thus resulting in a lower effective income tax rate than the comparable prior year periods.

This non-GAAP measurement is 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, 2011 and 2010 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 purposes of evaluating performance internally.

Three months ended Six months ended
June 30, June 30,
2011 2010 2011 2010
Detail of transaction-related charges excluded from core operating results:
Transaction costs ($19,985 ) ($955 ) ($24,164 ) ($1,725 )
Financing costs (in connection with the RehabCare acquisition) (11,803 ) - (13,802 ) -
Severance and retirement costs (14,866 ) - (14,866 ) (2,906 )
(46,654 ) (955 ) (52,832 ) (4,631 )
Income tax benefit 17,114 368 19,337 1,783
Charges net of income taxes (29,540 ) (587 ) (33,495 ) (2,848 )
Allocation to participating unvested restricted stockholders - 11 606 52
Available to common stockholders ($29,540 ) ($576 ) ($32,889 ) ($2,796 )
Weighted average diluted shares outstanding 43,231 38,914 41,661 38,881
Diluted loss per common share related to charges ($0.68 ) ($0.01 ) ($0.79 ) ($0.07 )
Reconciliation of adjusted operating income before transaction-related charges:
Operating income before transaction-related charges $ 181,340 $ 148,829 $ 352,639 $ 298,161
Detail of transaction-related charges excluded from core operating results:
Transaction costs (19,985 ) (955 ) (24,164 ) (1,725 )
Severance and retirement costs (14,866 ) - (14,866 ) (2,906 )
(34,851 ) (955 ) (39,030 ) (4,631 )
Reported operating income $ 146,489 $ 147,874 $ 313,609 $ 293,530

Reconciliation of adjusted income (loss) from continuing operations before transaction-related charges:

Amounts attributable to Kindred stockholders:
Income from continuing operations before transaction-related charges $ 23,421 $ 16,723 $ 49,652 $ 34,139
Charges net of income taxes (29,540 ) (587 ) (33,495 ) (2,848 )
Reported income (loss) from continuing operations ($6,119 ) $ 16,136 $ 16,157 $ 31,291

Reconciliation of diluted income (loss) per common share from continuing operations before transaction-related charges:

Diluted income per common share before transaction-related charges $ 0.53 $ 0.42 $ 1.17 $ 0.86
Charges net of income taxes (0.68 ) (0.01 ) (0.79 ) (0.07 )
Other 0.01 - - -
Reported diluted income (loss) per common share from continuing operations ($0.14 ) $ 0.41 $ 0.38 $ 0.79

Weighted average diluted shares used to compute diluted income (loss) per common share from continuing operations before transaction-related charges

43,756 38,914 41,661 38,881
Weighted average diluted shares outstanding 43,231 38,914 41,661 38,881
Reconciliation of effective income tax rate before transaction-related charges:
Effective income tax rate before transaction-related charges 37.3 % 40.9 % 39.0 % 40.9 %
Impact of transaction-related charges on effective income tax rate (3.0 )% 0.1 % 4.6 % 0.2 %
Reported effective income tax rate 34.3 % 41.0 % 43.6 % 41.1 %
KINDRED HEALTHCARE, INC.
Reconciliation of Non-GAAP Measurements to GAAP Results (Continued)
(Unaudited)
(In thousands)

In addition to the results provided in accordance with GAAP, the Company has provided a non-GAAP measurement which presents operating cash flows for the second quarter and six months ended June 30, 2011 and 2010 excluding certain payments, net of income tax benefit, or on an adjusted basis. The payments that were excluded from adjusted operating cash flows for the second quarter and six months ended June 30, 2011 relate to financing, transaction and severance costs, net of income tax benefit. The payments that were excluded from adjusted operating cash flows for the second quarter ended June 30, 2010 relate to transaction costs, net of income tax benefit. The payments that are excluded from adjusted operating cash flows for the six months ended June 30, 2010 relate to transaction, severance and retirement costs, net of income tax benefit.

The income tax benefit associated with the excluded payments was calculated using an effective income tax rate of 36.7% for the second quarter and six months ended June 30, 2011 and an effective income tax rate of 38.5% for the second quarter and six months ended June 30, 2010. Certain of the excluded payments for the second quarter and six months ended June 30, 2011 are not deductible for income tax purposes thus resulting in a lower effective income tax rate than the comparable prior year periods.

This non-GAAP measurement is not intended to replace the presentation of the Company's operating cash flows in accordance with GAAP. The Company believes that the presentation of adjusted operating cash flows provides additional information to investors to facilitate the comparison between periods by excluding certain payments for the second quarter and six months ended June 30, 2011 and 2010 that the Company believes are not representative of its ongoing operations due to the materiality and nature of the payments. The Company's adjusted operating cash flows also represent a key cash flow measure for the purposes of evaluating cash flows internally.

Three months ended Six months ended
June 30, June 30,
2011 2010 2011 2010

Reconciliation of net cash flows provided by operating activities to adjusted cash flows:

Net cash provided by operating activities $ 4,852 $ 96,942 $ 51,288 $ 82,946
Adjustments to remove certain payments:
Financing costs:
Capitalized as deferred financing costs 46,232 - 46,232 -
Charged to interest expense 13,074 - 13,074 -
Transaction costs 19,601 616 22,063 755
Severance and retirement costs 6,970 - 6,970 2,689

Benefit of reduced income tax payments resulting from financing, transaction and severance costs

(17,114 ) (368 ) (19,337 ) (1,783 )
68,763 248 69,002 1,661
Adjusted operating cash flows $ 73,615 $ 97,190 $ 120,290 $ 84,607
KINDRED HEALTHCARE, INC.
Reconciliation of Earnings Guidance for 2011 and 2012 - Continuing Operations
(Unaudited)
(In millions, except per share amounts)
Earnings Guidance Ranges as of August 8, 2011 (a)
2011 2012
Low High Low High
Operating income $ 775 $ 780 $ 911 $ 928
Rent 400 400 445 445
Depreciation and amortization 164 164 200 200
Interest, net 69 69 110 110
Income from continuing operations before income taxes 142 147 156 173
Provision for income taxes 53 54 63 69
Income from continuing operations 89 93 93 104
Earnings attributable to noncontrolling interests 2 2 4 4
Income attributable to the Company 87 91 89 100
Allocation to participating unvested restricted stockholders 2 2 2 2
Available to common stockholders $ 85 $ 89 $ 87 $ 98
Earnings per diluted share $ 1.80 $ 1.90 $ 1.65 $ 1.85
Shares used in computing earnings per diluted share 47.0 47.0 53.0 53.0
(a)

The Company's earnings guidance reflects the anticipated impact of the final rules recently issued by CMS related to payment rates for nursing centers, LTAC hospitals, IRFs and the Company's rehabilitation therapy business, all of which will be effective on October 1, 2011. The Company's earnings guidance excludes the effect of (i) any transaction-related charges that have been recorded in prior periods or that may be incurred in the future, (ii) any other reimbursement changes, (iii) any material acquisitions or divestitures, or (iv) any repurchases of common stock.

SOURCE: Kindred Healthcare, Inc.

Kindred Healthcare, Inc.
Richard A. Lechleiter
Executive Vice President and Chief Financial Officer
502-596-7734