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Kindred Healthcare Reports Third Quarter Results

October 30, 2008
Company Reports Income of $0.02 per Diluted Share from Continuing Operations

Operating Results in Line with October 21 Announcement

Fourth Quarter 2008 EPS Range of $0.35 to $0.45 Maintained

Company Provides Initial 2009 EPS Guidance Range of $1.30 to $1.45

Louisville, KY (October 30, 2008) – Kindred Healthcare, Inc. (the “Company” or “Kindred”) (NYSE:KND) today announced its operating results for the third quarter ended September 30, 2008.

Third Quarter Summary:

  • Consolidated revenues exceeded $1 billion
    - Excluding the institutional pharmacy business that was spun off in July 2007, revenues grew
    6% compared to the third quarter of 2007

  • Diluted earnings per share from continuing operations reported at $0.02
    - Results included a negative impact of $0.06 per diluted share from certain items
    - The results are consistent with the range provided by the Company on October 21, 2008

  • Despite higher admissions, hospital results were hampered by declines in length of stay, higher
    costs and the Gulf hurricanes
    - Reported hospital admissions grew 6% compared to last year’s third quarter
    - Same-store aggregate admissions grew 4%; non-government admissions grew 12%
    - Operating margins were pressured by a 4% decline in commercial insurance length of stay
    and related higher costs per patient day
    - Hurricanes reduced hospital operating income by approximately $6 million in the quarter

  • Continued improvement in nursing center results
    - Third quarter revenues and operating income were each up 5% over last year’s same period
    - Revenue quality mix improved to 56.4% from 55.8% in the third quarter of 2007

  • Continued revenue and contract growth in Peoplefirst rehabilitation services
    - Quarterly revenues were up 21% from last year’s third quarter
    - 49 new external contracts added in the first nine months of 2008

Continuing Operations

Consolidated revenues for the third quarter of 2008 rose 1% from last year’s third quarter to $1.0 billion. Excluding the institutional pharmacy business that was spun off in the third quarter of 2007 (the “Spin-off”), revenues increased by approximately 6% in the third quarter compared to the same period in 2007. Income from continuing operations for the third quarter of 2008 totaled $0.8 million or $0.02 per diluted share compared to a loss of $7.8 million or $0.20 per diluted share in the third quarter of last year. For accounting purposes, the Spin-off was not treated as a discontinued operation. Accordingly, the Company’s historical consolidated results of operations have not been retroactively restated to reflect the Spin-off.

Operating results for the third quarter of 2008 included certain items that, in the aggregate, reduced net income by $2.3 million or $0.06 per diluted share. These items included approximately $5.7 million of pretax direct costs and operating declines compared to last year in the Company’s Louisiana and southern Texas hospital operations resulting from the Gulf hurricanes, a $0.9 million pretax write-down in the Company’s investment portfolio related to a failed financial institution and a favorable income tax adjustment of approximately $1.8 million.

Operating results for the third quarter of 2007 included certain items that, in the aggregate, reduced net income by approximately $16.0 million or $0.40 per diluted share.

For the nine months ended September 30, 2008, consolidated revenues totaled $3.1 billion compared to $3.2 billion for the same period in 2007. Income from continuing operations totaled $37.1 million or $0.95 per diluted share for the first nine months of 2008 compared to $20.0 million or $0.49 per diluted share in the same period in 2007.

Consolidated operating results for the first nine months of 2008 included certain items that, in the aggregate, increased net income by approximately $2.8 million or $0.07 per diluted share. Operating results for the first nine months of 2007 included certain items that, in the aggregate, reduced net income by approximately $21.8 million or $0.54 per diluted share.

Discontinued Operations

During the third quarter of 2008, the Company discontinued the operations of three unprofitable hospitals. For accounting purposes, the historical operating results of these businesses and losses associated with these operations have been classified as discontinued operations in the Company’s consolidated statement of operations for all historical periods.

In the third quarter of 2008, the Company reported break-even results from discontinued operations compared to a loss of $1.3 million or $0.03 per diluted share in the third quarter of 2007.

For the first nine months of 2008, the Company reported a loss from discontinued operations of $2.7 million or $0.07 per diluted share compared to a loss of $6.2 million or $0.15 per diluted share in the first nine months of 2007.

In the third quarter of 2008, the Company recorded a loss of $22.1 million or $0.56 per diluted share related to the previously announced closure of a hospital. Losses on the divestiture of discontinued operations totaled $19.3 million or $0.49 per diluted share for the nine months ended September 30, 2008 compared to $77.0 million or $1.90 per diluted share for the same period in 2007.

Management Commentary

“Our consolidated third quarter results were negatively impacted by weaker than expected hospital operations,” commented Paul J. Diaz, President and Chief Executive Officer of Kindred. “While we expected seasonally lower volumes in the third quarter, the decline in length of stay, particularly for commercial insurance patients, resulted in further revenue and margin pressure. At the same time, we did not effectively manage our costs based on our volume of patient days in the quarter. In addition, the operational disruptions caused by this year’s Gulf hurricanes further reduced our hospital operating results. As a result of these issues, our third quarter hospital operating income declined to $65 million compared to $83 million in the third quarter last year.”

Mr. Diaz continued, “Our skilled nursing centers continued to perform well in the third quarter as we benefited from higher overall occupancy levels, improved employee retention rates, and lower professional liability and workers compensation costs. We also are continuing to grow our rehabilitation therapy business, adding 49 new external contracts so far this year. In the third quarter, Peoplefirst rehabilitation services reported strong revenue growth and improved therapist retention rates compared to the same period last year.”

Commenting on the Company’s ongoing development activities, Mr. Diaz noted, “During the third quarter, we opened a new 70-bed hospital in West Palm Beach, Florida. Looking forward, we are excited about the continued development of five hospital projects that should be completed over the next two years.”

Earnings Guidance – Continuing Operations

The Company maintained its 2008 earnings guidance for continuing operations. The Company expects consolidated revenues for 2008 to approximate $4.2 billion. Operating income, or earnings before interest, income taxes, depreciation, amortization and rent, is expected to range from $560 million to $567 million. Rent expense is expected to approximate $346 million, while depreciation, amortization and net interest expense are expected to approximate $128 million. Income from continuing operations for 2008 is expected to approximate $51 million to $55 million or $1.30 to $1.40 per diluted share (based upon diluted shares of 39 million).

The Company also maintained its earnings outlook for the fourth quarter of 2008, estimating earnings per common share from continuing operations between $0.35 to $0.45.

The Company anticipates that routine capital spending in 2008 will approximate $120 million to $125 million and hospital development capital spending should approximate $50 million to $55 million. Management expects that most of these expenditures will be financed through internal resources.

The Company also provided its initial earnings guidance for 2009. Consolidated revenues are expected to approximate $4.4 billion. Operating income is expected to range from $583 million to $593 million. Rent expense is expected to approximate $361 million, while depreciation, amortization and net interest expense are expected to approximate $133 million. Income from continuing operations for 2009 is expected to approximate $52 million to $57 million or $1.30 to $1.45 per diluted share (based upon diluted shares of 39.5 million).

The Company anticipates that routine capital spending in 2009 will approximate $100 million to $110 million and hospital development capital spending should approximate $50 million to $60 million. Management expects that most of these expenditures will be financed through internal sources.

The earnings guidance reflects the estimated impact of a final rule issued by the Centers for Medicare and Medicaid Services on July 31, 2008 related to the re-weighting of payments under the prospective payment system for long-term acute care (“LTAC”) hospitals. The Company also indicated that the earnings guidance does not reflect any other changes in government reimbursement, any material acquisitions or divestitures or any repurchases of common stock.

Mr. Diaz noted, “As we approach the end of 2008, we believe that there are additional opportunities to improve the operations in each of our operating divisions. While challenges remain, our continued focus on our employees, patients, residents and customers will drive our business results. In addition, we expect to generate significant operating cash flows in the fourth quarter of 2008 through improved accounts receivable collections. While continuing to fund our routine capital spending needs and our ongoing hospital development program, we expect that the Company will be financially well positioned going into 2009.”

Webcast of Conference Call

As previously announced, investors and the general public can access a live webcast of the third quarter 2008 conference call through a link on Kindred’s website at www.kindredhealthcare.com. The conference call will be held October 31, 2008 at 10:00 a.m. Eastern Time.

A telephone replay of the conference call will be available at approximately 1:00 p.m. on October 31 by dialing (719) 457-0820, access code: 4490589. The replay will be available through November 7.

Forward-Looking Statements

This press release includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. 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) changes in the reimbursement rates or the methods or timing of payment from third party payors, including 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 nursing centers; (b) 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 and the three-year moratorium on future hospital development; (c) the Company’s ability to operate pursuant to the terms of its debt obligations and its master leases with Ventas, Inc. (NYSE:VTR); (d) the Company’s ability to meet its rental and debt service obligations; (e) the Company’s ability to attract and retain key executives and other healthcare personnel; (f) increased operating costs due to shortages in qualified nurses, therapists and other healthcare personnel; (g) the effects of healthcare reform and government regulations, interpretation of regulations and changes in the nature and enforcement of regulations governing the healthcare industry; (h) failure of the Company’s facilities to meet applicable licensure and certification requirements; (i) national and regional economic, financial, business and political conditions, including their effect on the availability and cost of labor, credit, materials and other services; (j) the Company’s ability to control costs, particularly labor and employee benefit costs; (k) the Company’s ability to successfully pursue its development activities and successfully integrate new operations, including the realization of anticipated revenues, economies of scale, cost savings and productivity gains associated with such operations; (l) the increase in the costs of defending and insuring against alleged professional liability 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; (m) the Company’s ability to successfully reduce (by divestiture of operations or otherwise) its exposure to professional liability claims; (n) the further consolidation of managed care organizations and other third party payors; (o) the Company’s ability to successfully dispose of unprofitable facilities; (p) events or circumstances which could result in impairment of an asset or other charges; (q) changes in generally accepted accounting principles or practices; (r) the condition of the financial markets, including volatility and deterioration in the capital and credit markets, which would limit the availability and terms of debt and equity financing sources to fund the requirements of the Company’s businesses; and (s) the Company’s ability to maintain an effective system of internal controls 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 guidance includes the financial measure referred to as operating income. 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 measure, in relation to generally accepted accounting principles, to operating income. 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 generally accepted accounting principles as an indicator of operating performance. A reconciliation of the estimated operating income to income from continuing operations provided in the Company’s earnings guidance is included in this press release.

About Kindred Healthcare

Kindred Healthcare, Inc. is a healthcare services company, based in Louisville, Kentucky, with annual revenues of over $4 billion and approximately 54,300 employees in 40 states. At September 30, 2008, Kindred through its subsidiaries provided healthcare services in 658 locations, including 82 long-term acute care hospitals, 228 skilled nursing centers and a contract rehabilitation services business, Peoplefirst rehabilitation services, which served 348 non-affiliated facilities. 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.

Click here to view the 3rd Quarter Results.

CONTACT:
Richard A. Lechleiter
Executive Vice President and Chief Financial Officer
(502) 596-7734