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Kindred Healthcare Second Quarter Results Exceed Company's Guidance

August 4, 2010

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Company Reports $0.41 per Diluted Share from Continuing Operations Compared to Earnings Guidance Range of $0.30 to $0.40

Company Maintains 2010 EPS Range of $1.20 to $1.35

LOUISVILLE, Ky., Aug 04, 2010 (BUSINESS WIRE) --

Kindred Healthcare, Inc. (the "Company") (NYSE:KND) today announced its operating results for the second quarter ended June 30, 2010. All financial and statistical information included in this press release reflects the continuing operations of the Company's businesses for all periods presented unless otherwise indicated.

Second Quarter Highlights:

  • Consolidated revenues rose 1% to $1.1 billion

--Each operating division reported revenue growth compared to last year

  • Reported diluted earnings per share totaled $0.41, including $0.01 of charges for transaction costs

-- Second quarter earnings exceeded the high end of the Company's earnings guidance range

  • Hospital volumes continued to improve

-- Reported admissions grew 1% from last year

-- Same-facility aggregate admissions grew 1%; same-facility commercial admissions grew 6%

-- Volume growth in the quarter was partially offset by softer commercial pricing

  • Nursing and rehabilitation center admissions grew 3% in the second quarter compared to last year

-- Reimbursement rates were generally in line with expectations

  • Peoplefirst Rehabilitation continued to report solid growth

--Second quarter revenues grew 1% while operating income rose 4% compared to last year

-- Revenues per site of service grew nearly 6% from last year's second quarter

  • Operating cash flows of $97 million were 17% higher than the same period last year

Second Quarter Results

Continuing Operations

Consolidated revenues for the second quarter ended June 30, 2010 rose 1% to $1.1 billion. Income from continuing operations for the second quarter of 2010 totaled $16.1 million or $0.41 per diluted share compared to $17.5 million or $0.45 per diluted share in the second quarter last year.

Second quarter 2010 operating results included pretax charges related to transaction costs of $0.9 million ($0.5 million net of income taxes or $0.01 per diluted share).

Discontinued Operations

During the past few years, the Company has entered into transactions related to the divestiture of unprofitable businesses. For accounting purposes, the historical operating results of these businesses 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.

In the second quarter of 2009, the Company recorded a loss of $24.0 million or $0.62 per diluted share related to the divestiture of six unprofitable nursing centers.

Management Commentary

Paul J. Diaz, President and Chief Executive Officer of the Company, remarked, "We are pleased to report good second quarter results. Our hospital and nursing center admissions growth was solid and we generally did a good job of controlling our costs. However, the softness in reimbursement rates in both of these businesses presents ongoing operational challenges."

Commenting on the Company's financial position, Mr. Diaz noted, "Our second quarter 2010 operating cash flows were 17% ahead of last year as we continued to focus on our accounts receivable collections. As a result, our accounts receivable balance at June 30, 2010 declined approximately $32 million from a year ago while our revenues continued to grow. As we have previously indicated to investors, we believe that our operating cash flows in 2010 will fund a significant portion of our routine and development capital spending."

With respect to the Company's ongoing development activities in the second half of 2010, Mr. Diaz remarked, "We are continuing to construct three additional hospitals that will open over the next 18 months, and we acquired a combined 241-bed skilled nursing/assisted living facility to further expand our presence in the Cleveland market. In other cluster markets, we recently opened a new 74-bed replacement hospital in Houston and began construction of a new 120-bed transitional care center in Indianapolis. We also acquired two hospitals and two nursing centers that were previously leased and opened a new replacement hospital in Sacramento, California. Finally, the ongoing development of our five hospital-based subacute units, 32 transitional care centers and 102 transitional care units is on track."

2010 Earnings Guidance - Continuing Operations

The Company maintained its 2010 earnings guidance for continuing operations. The Company expects consolidated revenues for 2010 to approximate $4.4 billion. Operating income, or earnings before interest, income taxes, depreciation, amortization and rent, is expected to range from $567 million to $575 million. Rent expense is expected to approximate $359 million, while depreciation, amortization and net interest expense are expected to approximate $128 million. The Company expects to report income from continuing operations for 2010 between $48 million to $54 million or $1.20 to $1.35 per diluted share (based upon diluted shares of 39 million).

The Company also provided its earnings outlook for the third quarter of 2010, estimating diluted earnings per share between break-even and $0.10 per diluted share (based upon diluted shares of 39 million). Management's estimated third quarter earnings range includes the expected impact of a $3 million favorable income tax adjustment.

The Company indicated that the earnings guidance for continuing operations reflects the anticipated impact of the notice issued by the Centers for Medicare and Medicaid Services ("CMS") on July 16, 2010 related to payment rates for nursing centers and the final rules issued on July 30, 2010 related to payment rates for long-term acute care ("LTAC") hospitals, both of which will be effective on October 1, 2010. The Company also indicated that the earnings guidance does not reflect any other reimbursement changes, any material acquisitions or divestitures, or any repurchases of common stock.

Mr. Diaz noted, "We look forward to continued progress in each of our operating divisions as we focus on the execution of our strategic operating plan. The second half of 2010 will present a number of operational challenges, including significant Medicare reimbursement changes in our nursing centers and Peoplefirst rehabilitation businesses. As in the past, high satisfaction levels from our patients, residents, customers, employees and physicians will continue to drive our operating results and business success."

Webcast of Conference Call

As previously announced, investors and the general public can access a live webcast of the second quarter 2010 conference call through a link on the Company's website at www.kindredhealthcare.com. The conference call will be held August 5, 2010 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: 8219402. The replay will be available through August 13.

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, development opportunities, plans and objectives of management and statements containing the words such as "anticipate," "approximate," "believe," "plan," "estimate," "expect," "project," "could," "should," "will," "intend," "may" and other similar expressions, are forward-looking statements.

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

In addition to the factors set forth above, other factors that may affect the Company's plans or results include, without limitation, (a) the impact of healthcare reform, which will initiate significant reforms to the United States healthcare system, including potential material changes to the delivery of healthcare services and the reimbursement paid for such services by the government or other third party payors. Healthcare reform will impact each of the Company'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, the Company cannot predict which healthcare initiatives will be implemented at the federal or state level, the timing of any such reforms, or the effect such reforms or any other future legislation or regulation will have on the Company's business, financial position, results of operations and liquidity, (b) 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, and the expiration of the Medicare Part B therapy cap exception process, (c) 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, (d) the impact of the Medicare, Medicaid and SCHIP Extension Act of 2007 (the "SCHIP Extension Act"), including the ability of the Company's hospitals to adjust to potential LTAC certification, medical necessity reviews and the moratorium on future hospital development, (e) 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, (f) failure of the Company's facilities to meet applicable licensure and certification requirements, (g) the further consolidation and cost containment efforts of managed care organizations and other third party payors, (h) the Company's ability to meet its rental and debt service obligations, (i) the Company's ability to operate pursuant to the terms of its debt obligations and its master lease agreements with Ventas, Inc. (NYSE:VTR), (j) 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, (k) national and regional economic, financial, business and political conditions, including their effect on the availability and cost of labor, credit, materials and other services, (l) the Company's ability to control costs, particularly labor and employee benefit costs, (m) increased operating costs due to shortages in qualified nurses, therapists and other healthcare personnel, (n) the Company's ability to attract and retain key executives and other healthcare personnel, (o) 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, (p) the Company's ability to successfully reduce (by divestiture of operations or otherwise) its exposure to professional liability claims, (q) the Company's ability to successfully pursue its development activities, including through acquisitions, and successfully integrate new operations, including the realization of anticipated revenues, economies of scale, cost savings and productivity gains associated with such operations, (r) the Company's ability to successfully dispose of unprofitable facilities, (s) events or circumstances which could result in impairment of an asset or other charges, (t) changes in generally accepted accounting principles ("GAAP") or practices, and (u) 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 Kindred Healthcare Second Quarter Results Exceed Company's Guidance 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 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 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., a top-200 private employer in the United States, is a FORTUNE 500 healthcare services company based in Louisville, Kentucky with annual revenues of over $4.2 billion and approximately 53,500 employees in 40 states. At June 30, 2010, Kindred through its subsidiaries provided healthcare services in 633 locations, including 83 long-term acute care hospitals, 223 nursing and rehabilitation centers and a contract rehabilitation services business, Peoplefirst rehabilitation services, which served 327 non-affiliated facilities. Ranked as one of Fortune magazine's Most Admired Healthcare Companies in 2009 and 2010, 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,
2010 2009 2010 2009
Revenues $ 1,081,364 $ 1,073,054 $ 2,171,201 $ 2,142,528
Income from continuing operations $ 16,136 $ 17,538 $ 31,291 $ 40,879
Discontinued operations, net of income taxes:
Income (loss) from operations 87 (897 ) (67 ) (1,478 )
Gain (loss) on divestiture of operations 54 (24,051 ) (83 ) (24,051 )
Net income (loss) $ 16,277 $ (7,410 ) $ 31,141 $ 15,350
Earnings (loss) per common share:
Basic:
Income from continuing operations $ 0.41 $ 0.45 $ 0.79 $ 1.05
Discontinued operations:
Income (loss) from operations - (0.02 ) - (0.04 )
Gain (loss) on divestiture of operations - (0.62 ) - (0.62 )
Net income (loss) $ 0.41 $ (0.19 ) $ 0.79 $ 0.39
Diluted:
Income from continuing operations $ 0.41 $ 0.45 $ 0.79 $ 1.05
Discontinued operations:
Income (loss) from operations - (0.02 ) - (0.04 )
Gain (loss) on divestiture of operations - (0.62 ) - (0.62 )
Net income (loss) $ 0.41 $ (0.19 ) $ 0.79 $ 0.39
Shares used in computing earnings (loss) per
common share:
Basic 38,756 38,307 38,691 38,246
Diluted 38,914 38,415 38,881 38,366
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,
2010 2009 2010 2009
Revenues $ 1,081,364 $ 1,073,054 $ 2,171,201 $ 2,142,528
Salaries, wages and benefits 612,205 620,830 1,239,380 1,236,048
Supplies 85,455 83,912 171,341 164,248
Rent 88,981 86,882 177,300 172,083
Other operating expenses 238,687 221,755 472,891 442,160
Other income (2,857 ) (2,823 ) (5,941 ) (5,695 )
Depreciation and amortization 29,852 31,355 60,973 61,845
Interest expense 1,298 2,229 2,605 4,707
Investment (income) loss 377 (1,033 ) (500 ) (2,508 )
1,053,998 1,043,107 2,118,049 2,072,888
Income from continuing operations before income taxes 27,366 29,947 53,152 69,640
Provision for income taxes 11,230 12,409 21,861 28,761
Income from continuing operations 16,136 17,538 31,291 40,879
Discontinued operations, net of income taxes:
Income (loss) from operations 87 (897 ) (67 ) (1,478 )
Gain (loss) on divestiture of operations 54 (24,051 ) (83 ) (24,051 )
Net income (loss) $ 16,277 $ (7,410 ) $ 31,141 $ 15,350
Earnings (loss) per common share:
Basic:
Income from continuing operations $ 0.41 $ 0.45 $ 0.79 $ 1.05
Discontinued operations:
Income (loss) from operations - (0.02 ) - (0.04 )
Gain (loss) on divestiture of operations - (0.62 ) - (0.62 )
Net income (loss) $ 0.41 $ (0.19 ) $ 0.79 $ 0.39
Diluted:
Income from continuing operations $ 0.41 $ 0.45 $ 0.79 $ 1.05
Discontinued operations:
Income (loss) from operations - (0.02 ) - (0.04 )
Gain (loss) on divestiture of operations - (0.62 ) - (0.62 )
Net income (loss) $ 0.41 $ (0.19 ) $ 0.79 $ 0.39
Shares used in computing earnings (loss) per
common share:
Basic 38,756 38,307 38,691 38,246
Diluted 38,914 38,415 38,881 38,366
KINDRED HEALTHCARE, INC.
Condensed Consolidated Balance Sheet
(Unaudited)
(In thousands, except per share amounts)
June 30, December 31,
2010 2009
ASSETS
Current assets:
Cash and cash equivalents $ 12,902 $ 16,303
Cash - restricted 5,508 5,820
Insurance subsidiary investments 63,010 106,834
Accounts receivable less allowance for loss 628,207 610,959
Inventories 22,295 22,303
Deferred tax assets 20,236 42,791
Income taxes 22,235 17,447
Other 23,165 21,194
797,558 843,651
Property and equipment 1,603,474 1,515,700
Accumulated depreciation (805,596 ) (765,602 )
797,878 750,098
Goodwill 81,680 81,223
Intangible assets less accumulated amortization 68,039 64,491
Assets held for sale 11,221 8,806
Insurance subsidiary investments 112,963 100,223
Deferred tax assets 117,353 110,930
Other 64,938 62,802
$ 2,051,630 $ 2,022,224
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 156,213 $ 161,066
Salaries, wages and other compensation 275,927 287,772
Due to third party payors 26,591 28,261
Professional liability risks 42,919 47,076
Other accrued liabilities 79,069 78,358
Long-term debt due within one year 88 86
580,807 602,619
Long-term debt 140,003 147,647
Professional liability risks 213,629 195,126
Deferred credits and other liabilities 116,535 110,238
Stockholders' equity:

Common stock, $0.25 par value; authorized 175,000 shares; issued 39,483 shares - June 30, 2010 and 39,104 shares - December 31, 2009

9,871

9,776

Capital in excess of par value 823,594 820,407
Accumulated other comprehensive loss (624 ) (423 )
Retained earnings 167,815 136,834
1,000,656 966,594
$ 2,051,630 $ 2,022,224
KINDRED HEALTHCARE, INC.
Condensed Consolidated Statement of Cash Flows
(Unaudited)
(In thousands)
Three months ended Six months ended
June 30, June 30,
2010 2009 2010 2009
Cash flows from operating activities:
Net income (loss) $ 16,277 $ (7,410 ) $ 31,141 $ 15,350
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 29,852 31,714 60,973 62,519
Amortization of stock-based compensation costs 2,746 2,660 5,521 5,099
Provision for doubtful accounts 5,846 7,631 12,277 14,647
Deferred income taxes (3,264 ) (7,328 ) (10,727 ) (9,507 )
(Gain) loss on divestiture of discontinued operations (54 ) 24,051 83 24,051
Other 1,089 32 926 236
Change in operating assets and liabilities:
Accounts receivable 29,601 22,274 (29,525 ) (64,141 )
Inventories and other assets 4,759 (2,026 ) (6,486 ) (9,561 )
Accounts payable (596 ) 170 (8,178 ) (12,094 )
Income taxes (7,533 ) 2,878 21,753 46,101
Due to third party payors (130 ) (19,154 ) (2,024 ) (9,753 )
Other accrued liabilities 18,349 27,405 7,212 21,870
Net cash provided by operating activities 96,942 82,897 82,946 84,817
Cash flows from investing activities:
Routine capital expenditures (25,670 ) (25,050 ) (40,485 ) (51,974 )
Development capital expenditures (12,288 ) (13,846 ) (19,855 ) (26,908 )
Acquisitions (1,794 ) (59,793 ) (49,490 ) (75,397 )
Purchase of insurance subsidiary investments (9,840 ) (22,415 ) (24,118 ) (58,672 )
Sale of insurance subsidiary investments 8,622 25,927 61,833 80,019
Net change in insurance subsidiary cash
and cash equivalents (1,926 ) (4,783 ) (7,501 ) 15,675
Change in other investments 2 2,000 2 2,000
Other 609 5,347 581 4,394
Net cash used in investing activities (42,285 ) (92,613 ) (79,033 ) (110,863 )
Cash flows from financing activities:
Proceeds from borrowings under revolving credit 262,400 266,100 652,000 656,900
Repayment of borrowings under revolving credit (319,000 ) (359,900 ) (659,600 ) (731,500 )
Payment of deferred financing costs (31 ) (118 ) (53 ) (427 )
Issuance of common stock - - 35 -
Other 201 (89 ) 304 5
Net cash used in financing activities (56,430 ) (94,007 ) (7,314 ) (75,022 )
Change in cash and cash equivalents (1,773 ) (103,723 ) (3,401 ) (101,068 )
Cash and cash equivalents at beginning of period 14,675 143,450 16,303 140,795
Cash and cash equivalents at end of period $ 12,902 $ 39,727 $ 12,902 $ 39,727
KINDRED HEALTHCARE, INC.
Condensed Consolidated Statement of Operations
(Unaudited)
(In thousands, except per share amounts)
2009 Quarters 2010 Quarters
First Second Third Fourth First Second
Revenues $ 1,069,474 $ 1,073,054 $ 1,057,488 $ 1,069,991 $ 1,089,837 $ 1,081,364
Salaries, wages and benefits 615,218 620,830 629,077 617,961 627,175 612,205
Supplies 80,336 83,912 82,400 86,408 85,886 85,455
Rent 85,201 86,882 88,081 88,084 88,319 88,981
Other operating expenses 220,405 221,755 221,524 222,521 234,204 238,687
Other income (2,872 ) (2,823 ) (2,870 ) (2,947 ) (3,084 ) (2,857 )
Depreciation and amortization 30,490 31,355 31,992 31,893 31,121 29,852
Interest expense 2,478 2,229 1,741 1,432 1,307 1,298
Investment (income) loss (1,475 ) (1,033 ) (746 ) (1,159 ) (877 ) 377
1,029,781 1,043,107 1,051,199 1,044,193 1,064,051 1,053,998
Income from continuing operations
before income taxes 39,693 29,947 6,289 25,798 25,786 27,366
Provision for income taxes 16,352 12,409 901 9,453 10,631 11,230
Income from continuing operations 23,341 17,538 5,388 16,345 15,155 16,136
Discontinued operations, net of income taxes:
Income (loss) from operations (581 ) (897 ) 13 2,396 (154 ) 87
Gain (loss) on divestiture of operations - (24,051 ) 52 567 (137 ) 54
Net income (loss) $ 22,760 $ (7,410 ) $ 5,453 $ 19,308 $ 14,864 $ 16,277
Earnings (loss) per common share:
Basic:
Income from continuing operations $ 0.60 $ 0.45 $ 0.14 $ 0.42 $ 0.38 $ 0.41
Discontinued operations:
Income (loss) from operations (0.02 ) (0.02 ) - 0.06 - -
Gain (loss) on divestiture of operations - (0.62 ) - 0.01 - -
Net income (loss) $ 0.58 $ (0.19 ) $ 0.14 $ 0.49 $ 0.38 $ 0.41
Diluted:
Income from continuing operations $ 0.60 $ 0.45 $ 0.14 $ 0.42 $ 0.38 $ 0.41
Discontinued operations:
Income (loss) from operations (0.02 ) (0.02 ) - 0.06 - -
Gain (loss) on divestiture of operations - (0.62 ) - 0.01 - -
Net income (loss) $ 0.58 $ (0.19 ) $ 0.14 $ 0.49 $ 0.38 $ 0.41
Shares used in computing earnings (loss)
per common share:
Basic 38,184 38,307 38,398 38,465 38,626 38,756
Diluted 38,315 38,415 38,524 38,693 38,859 38,914
KINDRED HEALTHCARE, INC.
Condensed Business Segment Data
(Unaudited)
(In thousands)
2009 Quarters 2010 Quarters
First Second Third Fourth First Second
Revenues:
Hospital division $ 492,509 $ 487,145 $ 468,069 $ 485,169 $ 507,062 $ 493,401
Nursing center division 529,942 537,545 539,217 543,638 539,321 542,215
Rehabilitation division 117,647 120,450 122,625 114,316 120,144 122,061
1,140,098 1,145,140 1,129,911 1,143,123 1,166,527 1,157,677
Eliminations (70,624 ) (72,086 ) (72,423 ) (73,132 ) (76,690 ) (76,313 )
$ 1,069,474 $ 1,073,054 $ 1,057,488 $ 1,069,991 $ 1,089,837 $ 1,081,364
Income from continuing operations:
Operating income (loss):
Hospital division $ 100,899 $ 91,027 $ 78,674 $ 93,211 $ 95,033 $ 90,893 (a)
Nursing center division 75,574 79,522 73,383 77,111 70,249 76,493
Rehabilitation division 15,453 13,599 10,912 10,628 14,635 14,078
Corporate:
Overhead (34,087 ) (33,586 ) (33,843 ) (33,120 ) (33,781 ) (32,799 )
Insurance subsidiary (1,452 ) (1,182 ) (1,769 ) (1,782 ) (480 ) (791 )
(35,539 ) (34,768 ) (35,612 ) (34,902 ) (34,261 ) (33,590 )
Operating income 156,387 149,380 127,357 146,048 145,656 147,874
Rent (85,201 ) (86,882 ) (88,081 ) (88,084 ) (88,319 ) (88,981 )
Depreciation and amortization (30,490 ) (31,355 ) (31,992 ) (31,893 ) (31,121 ) (29,852 )
Interest, net (1,003 ) (1,196 ) (995 ) (273 ) (430 ) (1,675 )
Income from continuing operations
before income taxes 39,693 29,947 6,289 25,798 25,786 27,366
Provision for income taxes 16,352 12,409 901 9,453 10,631 11,230
$ 23,341 $ 17,538 $ 5,388 $ 16,345 $ 15,155 $ 16,136
(a) Includes transaction costs approximating $0.9 million.
KINDRED HEALTHCARE, INC.
Condensed Consolidating Statement of Operations
(Unaudited)
(In thousands)
Second Quarter 2009 Second Quarter 2010
Nursing Nursing
Hospital center Rehabilitation Hospital center Rehabilitation
division division division Corporate Eliminations Consolidated division division division Corporate Eliminations Consolidated
Revenues $ 487,145 $ 537,545 $ 120,450 $ - $ (72,086 ) $ 1,073,054 $ 493,401 $ 542,215 $ 122,061 $ - $ (76,313 ) $ 1,081,364
Salaries, wages and benefits 220,628 272,801 101,824 25,577 - 620,830 221,086 264,653 101,982 24,484 - 612,205
Supplies 56,430 26,795 553 134 - 83,912 57,150 27,448 726 131 - 85,455
Rent 36,834 48,565 1,459 24 - 86,882 38,043 49,439 1,470 29 - 88,981
Other operating expenses 119,060 158,427 4,474 11,880 (72,086 ) 221,755 124,272 173,621 5,275 11,832 (76,313 ) 238,687
Other income - - - (2,823 ) - (2,823 ) - - - (2,857 ) - (2,857 )
Depreciation and amortization 13,018 12,038 549 5,750 - 31,355 12,549 11,185 626 5,492 - 29,852
Interest expense 1 28 - 2,200 - 2,229 1 29 - 1,268 - 1,298
Investment (income) loss 3 (17 ) (2 ) (1,017 ) - (1,033 ) - (17 ) (3 ) 397 - 377
445,974 518,637 108,857 41,725 (72,086 ) 1,043,107 453,101 526,358 110,076 40,776 (76,313 ) 1,053,998

Income from continuing operations before income taxes

$ 41,171 $ 18,908 $ 11,593 $ (41,725 ) $ - 29,947 $ 40,300 $ 15,857 $ 11,985 $ (40,776 ) $ - 27,366
Provision for income taxes 12,409 11,230

Income from continuing operations

$ 17,538 $ 16,136

Capital expenditures, excluding acquisitions (including discontinued operations):

Routine

$ 5,335 $ 10,495 $ 172 $ 9,048 $ - $ 25,050 $ 7,954 $ 9,135 $ 281 $ 8,300 $ - $ 25,670

Development

12,395 1,451 - - - 13,846 10,209 2,079 - - - 12,288
$ 17,730 $ 11,946 $ 172 $ 9,048 $ - $ 38,896 $ 18,163 $ 11,214 $ 281 $ 8,300 $ - $ 37,958
KINDRED HEALTHCARE, INC.
Condensed Consolidating Statement of Operations (Continued)
(Unaudited)
(In thousands)
Six months ended June 30, 2009 Six months ended June 30, 2010
Nursing Nursing
Hospital center Rehabilitation Hospital center Rehabilitation
division division division Corporate Eliminations Consolidated division division division Corporate Eliminations Consolidated
Revenues $ 979,654 $ 1,067,487 $ 238,097 $ - $ (142,710 ) $ 2,142,528 $ 1,000,463 $ 1,081,536 $ 242,205 $ - $ (153,003 ) $ 2,171,201
Salaries, wages and benefits 438,873 545,283 200,020 51,872 - 1,236,048 448,727 537,895 202,494 50,264 - 1,239,380
Supplies 110,575 52,347 1,040 286 - 164,248 115,084 54,576 1,413 268 - 171,341
Rent 73,279 95,839 2,910 55 - 172,083 75,458 98,831 2,945 66 - 177,300
Other operating expenses 238,280 314,761 7,985 23,844 (142,710 ) 442,160 250,726 342,323 9,585 23,260 (153,003 ) 472,891
Other income - - - (5,695 ) - (5,695 ) - - - (5,941 ) - (5,941 )
Depreciation and amortization 25,530 23,723 1,096 11,496 - 61,845 25,563 23,298 1,211 10,901 - 60,973
Interest expense 1 68 - 4,638 - 4,707 3 60 - 2,542 - 2,605
Investment income (4 ) (75 ) (4 ) (2,425 ) - (2,508 ) (1 ) (35 ) (4 ) (460 ) - (500 )
886,534 1,031,946 213,047 84,071 (142,710 ) 2,072,888 915,560 1,056,948 217,644 80,900 (153,003 ) 2,118,049

Income from continuing operations before income taxes

$ 93,120 $ 35,541 $ 25,050 $ (84,071 ) $ - 69,640 $ 84,903 $ 24,588 $ 24,561 $ (80,900 ) $ - 53,152
Provision for income taxes 28,761 21,861

Income from continuing operations

$ 40,879 $ 31,291

Capital expenditures, excluding acquisitions (including discontinued operations):

Routine

$ 10,179 $ 28,759 $ 362 $ 12,674 $ - $ 51,974 $ 14,019 $ 13,184 $ 548 $ 12,734 $ - $ 40,485

Development

21,881 5,027 - - - 26,908 15,983 3,872 - - - 19,855
$ 32,060 $ 33,786 $ 362 $ 12,674 $ - $ 78,882 $ 30,002 $ 17,056 $ 548 $ 12,734 $ - $ 60,340
KINDRED HEALTHCARE, INC.
Condensed Business Segment Data (Continued)
(Unaudited)
2009 Quarters 2010 Quarters
First Second Third Fourth First Second
Hospital data:
End of period data:
Number of hospitals 82 82 82 83 83 83
Number of licensed beds 6,520 6,520 6,520 6,580 6,580 6,576
Revenue mix %:
Medicare 56 55 55 56 56 56
Medicaid 10 10 11 9 9 9
Medicare Advantage 10 11 9 9 10 10
Commercial insurance and other 24 24 25 26 25 25
Admissions:
Medicare 7,421 7,117 6,875 7,283 7,432 7,125
Medicaid 1,052 1,053 1,165 984 997 990
Medicare Advantage 1,094 1,091 926 919 1,129 1,106
Commercial insurance and other 1,921 1,869 1,969 2,280 2,262 2,048
11,488 11,130 10,935 11,466 11,820 11,269
Admissions mix %:
Medicare 65 64 63 63 63 63
Medicaid 9 9 11 9 8 9
Medicare Advantage 9 10 8 8 10 10
Commercial insurance and other 17 17 18 20 19 18
Patient days:
Medicare 197,377 197,203 188,712 196,067 202,882 195,964
Medicaid 50,868 50,485 53,585 47,352 47,813 45,952
Medicare Advantage 35,229 36,806 29,912 30,315 34,524 36,000
Commercial insurance and other 65,509 61,960 65,717 74,253 75,483 70,651
348,983 346,454 337,926 347,987 360,702 348,567
Average length of stay:
Medicare 26.6 27.7 27.4 26.9 27.3 27.5
Medicaid 48.4 47.9 46.0 48.1 48.0 46.4
Medicare Advantage 32.2 33.7 32.3 33.0 30.6 32.5
Commercial insurance and other 34.1 33.2 33.4 32.6 33.4 34.5
Weighted average 30.4 31.1 30.9 30.3 30.5 30.9
KINDRED HEALTHCARE, INC.
Condensed Business Segment Data (Continued)
(Unaudited)
2009 Quarters 2010 Quarters
First Second Third Fourth First Second
Hospital data (continued):
Revenues per admission:
Medicare $ 37,262 $ 37,748 $ 37,105 $ 37,620 $ 38,078 $ 38,938
Medicaid 45,160 45,759 43,640 43,314 45,738 42,774
Medicare Advantage 46,387 46,950 47,597 47,807 45,187 46,169
Commercial insurance and other 61,286 63,716 59,957 54,662 56,344 59,842
Weighted average 42,872 43,769 42,805 42,314 42,899 43,784
Revenues per patient day:
Medicare $ 1,401 $ 1,362 $ 1,352 $ 1,397 $ 1,395 $ 1,416
Medicaid 934 954 949 900 954 922
Medicare Advantage 1,440 1,392 1,473 1,449 1,478 1,418
Commercial insurance and other 1,797 1,922 1,796 1,678 1,688 1,735
Weighted average 1,411 1,406 1,385 1,394 1,406 1,416
Medicare case mix index (discharged patients only) 1.22 1.23 1.19 1.18 1.21 1.21
Average daily census 3,878 3,807 3,673 3,782 4,008 3,830
Occupancy % 66.0 64.7 63.6 64.3 68.2 66.1
Annualized employee turnover % 21.3 22.1 22.8 22.1 21.8 22.6
Nursing center data:
End of period data:
Number of nursing centers:
Owned or leased 218 218 218 218 218 219
Managed 4 4 4 4 4 4
222 222 222 222 222 223
Number of licensed beds:
Owned or leased 27,138 27,138 27,086 27,038 27,038 27,223
Managed 485 485 485 485 485 485
27,623 27,623 27,571 27,523 27,523 27,708
Revenue mix %:
Medicare 35 35 34 33 35 34
Medicaid 41 41 42 43 41 41
Medicare Advantage 6 6 6 6 6 7
Private and other 18 18 18 18 18 18
KINDRED HEALTHCARE, INC.
Condensed Business Segment Data (Continued)
(Unaudited)
2009 Quarters 2010 Quarters
First Second Third Fourth First Second
Nursing center data (continued):
Patient days (excludes managed facilities):
Medicare 374,853 375,140 360,009 353,443 369,102 363,149
Medicaid 1,326,654 1,323,157 1,357,596 1,368,198 1,312,517 1,292,246
Medicare Advantage 80,352 82,652 84,322 86,449 87,692 92,051
Private and other 403,320 415,510 415,467 403,166 397,550 415,921
2,185,179 2,196,459 2,217,394 2,211,256 2,166,861 2,163,367
Patient day mix %:
Medicare 17 17 16 16 17 17
Medicaid 61 60 61 62 61 60
Medicare Advantage 4 4 4 4 4 4
Private and other 18 19 19 18 18 19
Revenues per patient day:
Medicare Part A $ 457 $ 459 $ 464 $ 466 $ 470 $ 469
Total Medicare (including Part B) 497 500 508 510 513 515
Medicaid 165 167 166 170 168 171
Medicare Advantage 380 392 398 405 398 400
Private and other 235 232 234 239 238 234
Weighted average 243 245 243 246 249 250
Average daily census 24,280 24,137 24,102 24,035 24,076 23,773
Admissions (excludes managed facilities) 18,166 18,456 17,803 18,376 19,026 18,924
Occupancy % 89.3 88.9 88.9 88.9 89.0 87.3
Medicare average length of stay 34.8 35.5 36.3 35.1 33.7 35.2
Annualized employee turnover % 37.9 39.9 40.2 38.9 36.7 38.8
Rehabilitation data:
Revenue mix %:
Company-operated 61 60 59 64 64 63
Non-affiliated 39 40 41 36 36 37
Sites of service (at end of period) 661 659 660 622 619 633
Revenue per site $ 177,984 $ 182,775 $ 185,797 $ 183,789 $ 194,094 $ 192,829
Therapist productivity % 84.8 84.8 83.5 83.8 83.8 84.2
Annualized employee turnover % 10.9 11.6 13.1 12.8 12.6 14.2
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,
2010 2009 2010 2009
Basic Diluted Basic Diluted Basic Diluted Basic Diluted
Earnings (loss):

Income from continuing operations:

As reported in Statement of Operations

$ 16,136 $ 16,136 $ 17,538 $ 17,538 $ 31,291 $ 31,291 $ 40,879 $ 40,879

Allocation to participating unvested restricted stockholders

(300 ) (299 ) (323 ) (322 ) (578 ) (575 ) (762 ) (759 )

Available to common stockholders

$ 15,836 $ 15,837 $ 17,215 $ 17,216 $ 30,713 $ 30,716 $ 40,117 $ 40,120

Discontinued operations, net of income taxes:

Income (loss) from operations:

As reported in Statement of Operations

$ 87 $ 87 $ (897 ) $ (897 ) $ (67 ) $ (67 ) $ (1,478 ) $ (1,478 )

Allocation to participating unvested restricted stockholders

(2 ) (2 ) 17 17 1 1 28 27

Available to common stockholders

$ 85 $ 85 $ (880 ) $ (880 ) $ (66 ) $ (66 ) $ (1,450 ) $ (1,451 )

Gain (loss) on divestiture of operations:

As reported in Statement of Operations

$ 54 $ 54 $ (24,051 ) $ (24,051 ) $ (83 ) $ (83 ) $ (24,051 ) $ (24,051 )

Allocation to participating unvested restricted stockholders

(1 ) (1 ) 442 441 2 2 448 447

Available to common stockholders

$ 53 $ 53 $ (23,609 ) $ (23,610 ) $ (81 ) $ (81 ) $ (23,603 ) $ (23,604 )

Net income (loss):

As reported in Statement of Operations

$ 16,277 $ 16,277 $ (7,410 ) $ (7,410 ) $ 31,141 $ 31,141 $ 15,350 $ 15,350

Allocation to participating unvested restricted stockholders

(303 ) (302 ) 136 136 (575 ) (572 ) (286 ) (285 )

Available to common stockholders

$ 15,974 $ 15,975 $ (7,274 ) $ (7,274 ) $ 30,566 $ 30,569 $ 15,064 $ 15,065
Shares used in the computation:

Weighted average shares outstanding - basic computation

38,756 38,756 38,307 38,307 38,691 38,691 38,246 38,246

Dilutive effect of employee stock options

158 108 190 120

Adjusted weighted average shares outstanding - diluted computation

38,914 38,415 38,881 38,366
Earnings (loss) per common share:

Income from continuing operations

$ 0.41 $ 0.41 $ 0.45 $ 0.45 $ 0.79 $ 0.79 $ 1.05 $ 1.05

Discontinued operations:

Income (loss) from operations

- - (0.02 ) (0.02 ) - - (0.04 ) (0.04 )

Gain (loss) on divestiture of operations

- - (0.62 ) (0.62 ) - - (0.62 ) (0.62 )

Net income (loss)

$ 0.41 $ 0.41 $ (0.19 ) $ (0.19 ) $ 0.79 $ 0.79 $ 0.39 $ 0.39

(a) Earnings (loss) per common share are based upon the weighted average number of common shares outstanding during the respective periods. The diluted calculation of earnings (loss) per common share includes the dilutive effect of stock options. On January 1, 2009, the Company adopted 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 Earnings Guidance for 2010 - Continuing Operations
(Unaudited)
(In millions, except per share amounts)
Earnings Guidance Ranges (a)

As of August 4, 2010

As of May 4, 2010
Low High Low High
Operating income $

567

$

575

$ 571 $ 579
Rent

359

359

360 360
Depreciation and amortization 123 123 123 123
Interest, net 5 5 5 5
Income from continuing operations before income taxes 80 88 83 91
Provision for income taxes 32 34 35 37
Income from continuing operations 48 54 48 54
Allocation to participating unvested restricted stockholders 1 1 1 1
Available to common stockholders $ 47 $ 53 $ 47 $ 53
Earnings per diluted share $ 1.20 $ 1.35 $ 1.20 $ 1.35
Shares used in computing earnings per diluted share 39.0 39.0 39.0 39.0

(a) The Company indicated that the earnings guidance reflects the anticipated impact of the notice issued by CMS on July 16, 2010 related to payment rates for nursing centers and the final rules issued on July 30, 2010 related to payment rates for LTAC hospitals, both of which will be effective on October 1, 2010. The Company also indicated that the earnings guidance does not reflect any other reimbursement changes, any material acquisitions or divestitures, or any repurchases of common stock.

SOURCE: Kindred Healthcare, Inc.

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