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Kindred Healthcare Second Quarter Results Exceed Company's Guidance

August 4, 2009

Company Reports $0.45 per Diluted Share from Continuing Operations Compared to Earnings Guidance Range of $0.28 to $0.38

Out-performance Driven Primarily by Growth in Hospital Commercial Business, Productivity Gains in Peoplefirst Rehabilitation and Improved Cost Controls Across the Organization

Company Maintains 2009 EPS Range of $1.35 to $1.45

Company Provides Third Quarter 2009 EPS Guidance Range of Breakeven to $0.05


Louisville, KY (August 4, 2009) – Kindred Healthcare, Inc. (the “Company”) (NYSE:KND) today announced its operating results for the second quarter ended June 30, 2009.

Second Quarter Highlights:

  • Consolidated revenues rose 5% to $1.1 billion
    - Each operating division reported revenue growth compared to last year
  • Diluted earnings per share reported at $0.45 compared to last year’s $0.49

  • -Last year’s second quarter results included income of $0.10 per share related to certain items
  • Hospital operating income grew 6% in the second quarter
    - Both reported and same-store admissions grew 2% compared to last year’s second quarter
    - Operating results included approximately $4 million of Medicare reimbursement cuts that became effective on June 3, 2009
  • Nursing center results in line with expectations
    - Revenue quality mix improved to 58.9% from 57.4% in the second quarter of 2008
  • Peoplefirst rehabilitation services reported continued revenue growth and productivity gains
    - Quarterly revenues were up 13% from last year’s second quarter; operating income grew 34%
  • Financial liquidity strengthened during the quarter

  • - Operating cash flows nearly doubled to $83 million from last year's second quarter
    - Accounts receivable days outstanding declined to 55.0 from 57.3 at June 30, 2008
    - $58 million purchase of six unprofitable nursing centers financed primarily through operating cash flows
    - Long-term debt, net of excess cash, declined to $253 million at June 30, 2009 compared to $266 million at June 30, 2008

Continuing Operations

Consolidated revenues for the second quarter ended June 30, 2009 totaled $1.1 billion, an increase of 5% from last year’s second quarter. Income from continuing operations for the second quarter of 2009 totaled $17.5 million or $0.45 per diluted share compared to $19.5 million or $0.49 per diluted share in the second quarter last year.

Operating results for the second quarter of 2008 included certain items that, in the aggregate, increased net income by $4.0 million or $0.10 per diluted share. These items included pretax income of $8.3 million related to the favorable settlement of a prior year nursing center Medicaid cost report dispute and a pretax charge of $1.9 million related to a prior period rent escalator adjustment for ten leased facilities.

For the six months ended June 30, 2009, consolidated revenues increased 4% to $2.1 billion compared to the first half of 2008. Income from continuing operations totaled $40.9 million or $1.05 per diluted share for the first six months of 2009 compared to $36.7 million or $0.94 per diluted share in the same period a year ago.

Consolidated operating results for the first half of 2008 included the items discussed above that increased net income by approximately $4.0 million or $0.10 per diluted share.

Discontinued Operations

During the past several years, the Company has entered into transactions to divest unprofitable businesses. For accounting purposes, the historical operating results of these businesses and gains or losses associated with these operations have been classified as discontinued operations in the Company’s consolidated statement of operations for all historical periods. As previously announced, the Company completed a transaction with Ventas, Inc. (“Ventas”) (NYSE:VTR) on June 30, 2009 in which the Company purchased for resale six unprofitable nursing centers.

In the second quarter of 2009, the Company reported a loss from discontinued operations totaling $0.9 million or $0.02 per diluted share compared to a loss of $0.5 million or $0.01 per diluted share in the second quarter of 2008.

For the first six months of 2009, the Company reported a loss from discontinued operations of $1.5 million or $0.04 per diluted share compared to a loss of $3.0 million or $0.08 per diluted share in the first half of 2008.

In the second quarter of 2009, the Company recorded a net loss of $24.0 million or $0.62 per diluted share related to the divestiture transaction with Ventas. The Company expects to sell the six nursing centers acquired from Ventas and the related operations as soon as practicable and generate approximately $25 million in cash proceeds. In the second quarter of 2008, the Company recorded a net gain of $2.7 million or $0.07 per diluted share related to the divestiture of discontinued operations.

Management Commentary

Paul J. Diaz, President and Chief Executive Officer of the Company, remarked, “We are pleased to report solid second quarter performance in each of our three operating divisions. Our efforts to improve the quality of our services and retain and develop our team have enabled us to continue to grow revenues and manage costs in an otherwise difficult operating and reimbursement environment.”

Commenting on the Company’s second quarter operations, Mr. Diaz noted, “Growth in hospital operating income was driven primarily by 12% growth in non-government admissions and favorable commercial pricing as we continued to demonstrate the value of our hospital services to commercial payors. Excluding the favorable prior year Medicaid cost report settlement, our nursing center revenues grew 4% and operating income was in line with our expectations for the quarter. Peoplefirst rehabilitation services continued to achieve solid revenue growth and strong productivity gains that drove operating income growth of 34% compared to the second quarter last year. Furthermore, our focus on cost management across the organization was a major factor in our second quarter success.”

Mr. Diaz further noted, “The significant growth in operating cash flows in the first half of this year has further improved our financial liquidity. Looking forward, we will continue to focus on maximizing cash flows to fund our growth initiatives and reduce our leverage.”

2009 Earnings Guidance – Continuing Operations

The Company maintained its 2009 earnings guidance for continuing operations. The Company expects consolidated revenues for 2009 to approximate $4.3 billion. Operating income, or earnings before interest, income taxes, depreciation, amortization and rent, is expected to range from $578 million to $584 million. Rent expense is expected to approximate $353 million, while depreciation, amortization and net interest expense are expected to approximate $134 million. Income from continuing operations for 2009 is expected to approximate $54 million to $57 million or $1.35 to $1.45 per diluted share (based upon diluted shares of 39 million).

The Company also provided its earnings outlook for the third quarter of 2009, estimating diluted earnings per share between breakeven to $0.05 per diluted share (based upon diluted shares of 39 million). Management’s estimated third quarter earnings range includes the expected impact of a $2 million favorable income tax adjustment.

The Company indicated that the earnings guidance reflects the estimated impact of the final rules issued by the Centers for Medicare and Medicaid Services (“CMS”) on July 31, 2009 related to payment rates for long-term acute care (“LTAC”) hospitals and nursing centers. The Company also indicated that the earnings guidance does not reflect any material acquisitions or divestitures and does not take into account any repurchases of common stock.

Mr. Diaz noted, “We remain focused on our strategic operating plan and improving our core operations. As in the past, we expect some seasonal weakness in the third quarter, particularly in our hospital business, followed by stronger fourth quarter performance.”

Webcast of Conference Call

As previously announced, investors and the general public can access a live webcast of the second quarter 2009 conference call through a link on Kindred’s website at www.kindredhealthcare.com. The conference call will be held August 5, 2009 at 10:00 a.m. Eastern Time.

A telephone replay of the conference call will be available at approximately 1:00 p.m. on August 5 by dialing (719) 457-0820, access code: 2430834. The replay will be available through August 14.

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 effects of healthcare reform, legislative changes and government regulations, interpretation of regulations and changes in the nature and enforcement of regulations governing the healthcare industry; (c) 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 three-year moratorium on future hospital development; (d) failure of the Company’s facilities to meet applicable licensure and certification requirements; (e) the further consolidation of managed care organizations and other third party payors; (f) the Company’s ability to meet its rental and debt service obligations; (g) the Company’s ability to operate pursuant to the terms of its debt obligations and its master lease agreements with Ventas; (h) the condition of the financial markets, including volatility and deterioration 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; (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) increased operating costs due to shortages in qualified nurses, therapists and other healthcare personnel; (l) the Company’s ability to attract and retain key executives and other healthcare personnel; (m) 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; (n) the Company’s ability to successfully reduce (by divestiture of operations or otherwise) its exposure to professional liability claims; (o) 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; (p) the Company’s ability to successfully dispose of unprofitable facilities; (q) events or circumstances which could result in impairment of an asset or other charges; (r) changes in generally accepted accounting principles or practices; and (s) 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 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 54,500 employees in 41 states. At June 30, 2009, Kindred through its subsidiaries provided healthcare services in 653 locations, including 82 long-term acute care hospitals, 222 skilled nursing centers and a contract rehabilitation services business, Peoplefirst rehabilitation services, which served 349 non-affiliated facilities. Ranked first in Fortune magazine’s Most Admired Companies “Health Care: Medical Facilities” category, 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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CONTACT:
Richard A. Lechleiter
Executive Vice President and Chief Financial Officer
(502) 596-7734