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Kindred Healthcare Reports Strong Results in First Full Quarter Following RehabCare Acquisition

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Excluding Certain Items, Company Reports Continuing Operations Diluted EPS of $0.41,
Exceeding the Company's Guidance Range of $0.25 to $0.30
Company Reports GAAP Continuing Operations Income of $0.01 per Diluted Share
RehabCare Integration and Cost Synergies Ahead of Plan
Company Raises Fiscal 2011 Earnings Guidance to $1.87 to $1.92 from $1.80 to $1.90
(Continuing operations diluted EPS, excluding certain items)
Fourth Quarter EPS Expected at $0.35 to $0.40
Fiscal 2012 Earnings Guidance Reaffirmed at $1.65 to $1.85

LOUISVILLE, Ky., Nov 02, 2011 (BUSINESS WIRE) -- Kindred Healthcare, Inc. ("Kindred" or the "Company") (NYSE:KND) today announced its operating results for the third quarter ended September 30, 2011. Third quarter results reflect the first full interim period of combined operations since the Company completed the acquisition of RehabCare Group, Inc. ("RehabCare") on June 1, 2011. The Company's consolidated financial statements include the operating results of RehabCare since the closing of the transaction.

Third Quarter Highlights:

  • Consolidated revenues rose 44% to $1.5 billion
    • RehabCare added $343 million in third quarter revenues
    • Hospital admissions rose 54% in the quarter; same-store admissions rose 4%
    • Nursing and rehabilitation center admissions increased 4%
    • Expanding rehabilitation therapy business reported revenue growth of 172%
  • Excluding certain items, the Company reported improved margins in each operating division
    • Adjusted operating income rose 69% to $210 million (13.9% of revenues) compared to $124 million (11.8% of revenues) in the third quarter last year
    • Adjusted income from continuing operations nearly quadrupled to $21.5 million (1.4% of revenues) from $5.6 million (0.5% of revenues) in the third quarter last year
  • Company continues to generate significant operating cash flows
    • Excluding transaction-related payments, year to date operating cash flows were up 27% to $195 million from $153 million in the same period last year
  • Company's cost synergy forecast shows continued improvement
    • Synergies from RehabCare acquisition to reach $55 million annual rate by year end 2011 and $62 million annual rate by the end of first quarter 2012
    • Additional $14 million of annualized overhead reductions in the Company's nursing center division will be achieved by year end 2011

Third Quarter Results (Continuing Operations)

Consolidated revenues for the third quarter ended September 30, 2011 rose 44% to $1.5 billion. The Company reported income from continuing operations for the third quarter of 2011 totaling $0.6 million or $0.01 per diluted share compared to income of $5.1 million or $0.13 per diluted share in the third quarter last year. As previously announced, third quarter 2011 results included a favorable income tax adjustment of $3.3 million or $0.06 per diluted share. Third quarter 2010 operating results included a $2.9 million or $0.07 per diluted share favorable income tax adjustment.

Excluding certain items discussed below, the Company's income from continuing operations grew 287% to $21.5 million or $0.41 per diluted share from $5.6 million or $0.14 per diluted share in the third quarter last year.

During the third quarter of 2011, the Company incurred certain costs related to acquisitions that reduced pretax income by $6.5 million ($4.5 million net of income taxes or $0.09 per diluted share).

On July 29, 2011, the Centers for Medicare and Medicaid Services ("CMS") issued final rules that, among other things, significantly reduced Medicare payments to nursing centers beginning October 1, 2011. As a result of these rules, the Company tested the recoverability of its assets and recorded a pretax asset impairment charge aggregating $26.7 million ($16.4 million net of income taxes or $0.31 per diluted share). This charge reflected the amount by which the carrying value of certain assets exceeded their estimated fair value.

Management Commentary

Paul J. Diaz, President and Chief Executive Officer of the Company, remarked, "We are very pleased to report an outstanding first full quarter of operations following the RehabCare acquisition. Our continued focus on the quality of our services and clinical outcomes drove solid volume growth and operating efficiencies that resulted in improved margins in each of our businesses and significant growth in our core earnings."

"In light of continued reimbursement pressures, we are focused on the realization of cost synergies across the organization. The investments we have made in people and infrastructure in connection with the RehabCare acquisition are the foundation for achieving greater operating synergies and securing the benefits from our expanded size and scale. We are confident that we will reach annualized cost savings of $55 million by year end 2011 and $62 million by the end of the first quarter 2012 related to the RehabCare acquisition. In addition to the RehabCare synergies, we recently reorganized our nursing center division that will result in annualized cost savings of approximately $14 million by year end 2011."

Mr. Diaz commented on the Company's ongoing development activities, "We continue to advance our cluster market strategy through the selective development of our different businesses to meet the needs of patients, physicians, managed care plans and other healthcare partners in our key markets. Our recent acquisitions of home health operations in California, Arizona, Nevada, Utah and Massachusetts will further complement our existing operations and provide for future growth in these markets."

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 nine months of 2011 increased 27% to $195 million from last year's adjusted $153 million."

Recent Regulatory Changes

As previously discussed, CMS recently issued final rules that became effective on 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. Based upon its review of the final rules, the Company believes that its nursing center Medicare rates could decline by as much as 15% in 2012. The Company believes that these rules could reduce the Company's annual revenues by approximately $95 million to $105 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 $20 million to $25 million on an annual basis.

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, the Company believes that the Medicare rate increase for the Company's LTAC hospitals will likely approximate 0.7% in 2012.

Earnings Guidance - Continuing Operations

The Company also updated its earnings guidance for fiscal 2011 and 2012. 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 became 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, (iv) any impairment charges that have been recorded in prior periods or that may be incurred in the future, or (v) 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 $777 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 $67 million. The Company expects to report income from continuing operations for 2011 between $91 million to $93 million or $1.87 to $1.92 per diluted share (based upon diluted shares of 47 million), an increase from its prior guidance of $1.80 to $1.90 per diluted share.

Excluding transaction-related charges and impairment charges, the Company has reported diluted earnings per common share of $1.56 in the first nine months of 2011.

The Company also provided its earnings outlook for the fourth quarter of 2011, estimating diluted earnings per share between $0.35 and $0.40 (based upon diluted shares of 52 million).

In addition, the Company reaffirmed its 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).

The Company also indicated that it expects cash flows from operations in 2012 to range from $270 million to $290 million.

Routine capital expenditures in 2012 are expected to range from $135 million to $145 million, including approximately $16 million of expenditures to complete the information systems integration of RehabCare. The Company's expected routine capital expenditures also include approximately $11 million to upgrade the clinical information systems in its hospital, nursing center and home health businesses.

In addition, the Company continues its ongoing development of its previously announced projects. At September 30, 2011, projects related to the replacement, expansion and upgrade of its LTAC hospitals in Dayton, Ohio and Charleston, South Carolina, as well as the development of two new IRFs in Texas and a new LTAC hospital in Seattle, will be completed at an aggregate additional cost of approximately $32 million through 2013 (these expenditures are not included in the routine capital spending estimates discussed above).

Mr. Diaz continued, "Our 2012 earnings guidance reflects our significant outperformance in the first nine months of this year, our continuing efforts to grow the Company organically as well as our enhanced view of the cost synergies and lower than expected financing costs associated with the RehabCare acquisition. Despite the worse than expected negative impact of the recently issued CMS rules for nursing centers and rehabilitation therapy, we will continue to seek 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 third 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 November 3, 2011 at 10:00 a.m. (Eastern Time).

A telephone replay of the conference call will be available at approximately 1:00 p.m. on November 3 by dialing (719) 457-0820, access code: 2597040. The replay will be available through November 12.

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 third quarter and nine months ended September 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 76,900 employees in 46 states. At September 30, 2011, Kindred through its subsidiaries provided healthcare services in over 2,250 locations, including 120 long-term acute care hospitals, five inpatient rehabilitation hospitals, 224 nursing and rehabilitation centers, 23 sub-acute units, 47 hospice and home care locations, 102 inpatient rehabilitation units (hospital-based) and a contract rehabilitation services business, RehabCare, which served approximately 1,740 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 Nine months ended
September 30, September 30,
2011 2010 2011 2010
Revenues $ 1,514,062 $ 1,053,012 $ 3,999,075 $ 3,224,213
Income from continuing operations $ 907 $ 5,100 $ 16,643 $ 36,391
Discontinued operations, net of income taxes:
Income (loss) from operations 1,119 (260 ) 1,527 (327 )
Gain on divestiture of operations - 86 - 3
Income (loss) from discontinued operations 1,119 (174 ) 1,527 (324 )
Net income 2,026 4,926 18,170 36,067
(Earnings) loss attributable to noncontrolling interests (241 ) - 180 -
Income attributable to Kindred $ 1,785 $ 4,926 $ 18,350 $ 36,067
Amounts attributable to Kindred stockholders:
Income from continuing operations $ 666 $ 5,100 $ 16,823 $ 36,391
Income (loss) from discontinued operations 1,119 (174 ) 1,527 (324 )
Net income $ 1,785 $ 4,926 $ 18,350 $ 36,067
Earnings per common share:
Basic:
Income from continuing operations $ 0.01 $ 0.13 $ 0.37 $ 0.92
Discontinued operations:
Income (loss) from operations 0.02 (0.01 ) 0.03 (0.01 )
Gain on divestiture of operations - - - -
Net income $ 0.03 $ 0.12 $ 0.40 $ 0.91
Diluted:
Income from continuing operations $ 0.01 $ 0.13 $ 0.37 $ 0.92
Discontinued operations:
Income (loss) from operations 0.02 (0.01 ) 0.03 (0.01 )
Gain on divestiture of operations - - - -
Net income $ 0.03 $ 0.12 $ 0.40 $ 0.91

Shares used in computing earnings per common share:

Basic 51,329 38,778 44,577 38,720
Diluted 51,406 38,838 44,934 38,855
KINDRED HEALTHCARE, INC.
Condensed Consolidated Statement of Operations
(Unaudited)
(In thousands, except per share amounts)
Three months ended Nine months ended
September 30, September 30,
2011 2010 2011 2010
Revenues $ 1,514,062 $ 1,053,012 $ 3,999,075 $ 3,224,213
Salaries, wages and benefits 900,570 613,607 2,344,398 1,852,987
Supplies 107,514 83,753 294,254 255,094
Rent 105,511 89,295 292,641 266,595
Other operating expenses 332,017 234,968 878,518 707,859
Other income (2,815 ) (2,794 ) (8,480 ) (8,735 )
Depreciation and amortization 46,947 29,167 117,367 90,140
Interest expense 25,790 1,642 54,675 4,247
Investment income (37 ) (403 ) (789 ) (903 )
1,515,497 1,049,235 3,972,584 3,167,284
Income (loss) from continuing operations before income taxes (1,435 ) 3,777 26,491 56,929
Provision (benefit) for income taxes (2,342 ) (1,323 ) 9,848 20,538
Income from continuing operations 907 5,100 16,643 36,391
Discontinued operations, net of income taxes:
Income (loss) from operations 1,119 (260 ) 1,527 (327 )
Gain on divestiture of operations - 86 - 3
Income (loss) from discontinued operations 1,119 (174 ) 1,527 (324 )
Net income 2,026 4,926 18,170 36,067
(Earnings) loss attributable to noncontrolling interests (241 ) - 180 -
Income attributable to Kindred $ 1,785 $ 4,926 $ 18,350 $ 36,067
Amounts attributable to Kindred stockholders:
Income from continuing operations $ 666 $ 5,100 $ 16,823 $ 36,391
Income (loss) from discontinued operations 1,119 (174 ) 1,527 (324 )
Net income $ 1,785 $ 4,926 $ 18,350 $ 36,067
Earnings per common share:
Basic:
Income from continuing operations $ 0.01 $ 0.13 $ 0.37 $ 0.92
Discontinued operations:
Income (loss) from operations 0.02 (0.01 ) 0.03 (0.01 )
Gain on divestiture of operations - - - -
Net income $ 0.03 $ 0.12 $ 0.40 $ 0.91
Diluted:
Income from continuing operations $ 0.01 $ 0.13 $ 0.37 $ 0.92
Discontinued operations:
Income (loss) from operations 0.02 (0.01 ) 0.03 (0.01 )
Gain on divestiture of operations - - - -
Net income $ 0.03 $ 0.12 $ 0.40 $ 0.91

Shares used in computing earnings per common share:

Basic 51,329 38,778 44,577 38,720
Diluted 51,406 38,838 44,934 38,855
KINDRED HEALTHCARE, INC.
Condensed Consolidated Balance Sheet
(Unaudited)
(In thousands, except per share amounts)
September 30, December 31,
2011 2010
ASSETS
Current assets:
Cash and cash equivalents $ 34,095 $ 17,168
Cash - restricted 5,402 5,494
Insurance subsidiary investments 64,846 76,753
Accounts receivable less allowance for loss 972,340 631,877
Inventories 30,821 24,327
Deferred tax assets 28,799 13,439
Income taxes 18,039 42,118
Other 30,796 24,862
1,185,138 836,038
Property and equipment 1,926,726 1,754,170
Accumulated depreciation (875,885 ) (857,623 )
1,050,841 896,547
Goodwill 1,123,699 242,420
Intangible assets less accumulated amortization 506,066 92,883
Assets held for sale 7,094 7,167
Insurance subsidiary investments 104,298 101,210
Deferred tax assets - 88,816
Other 198,441 72,334
Total assets $ 4,175,577 $ 2,337,415
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable $ 218,523 $ 174,495
Salaries, wages and other compensation 392,297 291,116
Due to third party payors 41,436 27,115
Professional liability risks 41,728 41,555
Other accrued liabilities 140,840 87,012
Long-term debt due within one year 10,539 91
845,363 621,384
Long-term debt 1,489,359 365,556
Professional liability risks 224,903 207,669
Deferred tax liabilities 26,678 -
Deferred credits and other liabilities 189,814 111,047
Noncontrolling interests-redeemable 9,626 -
Equity:
Stockholders' equity:

Common stock, $0.25 par value; authorized 175,000 shares; issued 52,112 shares - September 30, 2011 and 39,495 shares - December 31, 2010

13,028 9,874
Capital in excess of par value 1,135,032 828,593
Accumulated other comprehensive income (loss) (1,000 ) 135
Retained earnings 211,003 193,157
1,358,063 1,031,759
Noncontrolling interests-nonredeemable 31,771 -
Total equity 1,389,834 1,031,759
Total liabilities and equity $ 4,175,577 $ 2,337,415
KINDRED HEALTHCARE, INC.
Condensed Consolidated Statement of Cash Flows
(Unaudited)
(In thousands)
Three months ended Nine months ended
September 30, September 30,
2011 2010 2011 2010
Cash flows from operating activities:
Net income $ 2,026 $ 4,926 $ 18,170 $ 36,067

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization 46,947 29,167 117,367 90,140
Amortization of stock-based compensation costs 3,505 2,593 9,611 8,114
Payment of lender fees related to debt issuance - - (46,232 ) -
Provision for doubtful accounts 7,793 6,110 22,049 18,387
Deferred income taxes (2,286 ) (3,017 ) (4,975 ) (13,744 )
Impairment charges 26,712 - 26,712 -
Gain on divestiture of discontinued operations - (86 ) - (3 )
Other (922 ) (2,792 ) 1,465 (1,866 )
Change in operating assets and liabilities:
Accounts receivable (27,497 ) 8,146 (108,072 ) (21,379 )
Inventories and other assets 6,304 (1,088 ) 3,649 (7,574 )
Accounts payable (831 ) (7,515 ) 386 (15,693 )
Income taxes (6,881 ) 3,981 20,792 25,734
Due to third party payors 1,143 12,123 4,698 10,099
Other accrued liabilities 10,505 15,361 52,186 22,573
Net cash provided by operating activities 66,518 67,909 117,806 150,855
Cash flows from investing activities:
Routine capital expenditures (36,595 ) (28,623 ) (95,263 ) (69,108 )
Development capital expenditures (44,152 ) (20,364 ) (69,570 ) (40,219 )
Acquisitions, net of cash acquired (50,928 ) (38,379 ) (710,907 ) (87,869 )
Sale of assets - - 1,714 -
Purchase of insurance subsidiary investments (8,867 ) (10,566 ) (25,904 ) (34,684 )
Sale of insurance subsidiary investments 10,398 11,138 37,587 72,971

Net change in insurance subsidiary cash and cash equivalents

(826 ) (3,111 ) (4,870 ) (10,612 )
Change in other investments - - 1,000 2
Other (663 ) 698 (692 ) 1,279
Net cash used in investing activities (131,633 ) (89,207 ) (866,905 ) (168,240 )
Cash flows from financing activities:
Proceeds from borrowings under revolving credit 533,200 457,900 1,633,300 1,109,900
Repayment of borrowings under revolving credit (474,700 ) (432,800 ) (1,749,800 ) (1,092,400 )
Proceeds from issuance of senior unsecured notes - - 550,000 -
Proceeds from issuance of term loan, net of discount - - 693,000 -
Repayment of other long-term debt (2,545 ) (22 ) (348,233 ) (64 )
Payment of deferred financing costs (1,855 ) (1,361 ) (8,715 ) (1,414 )
Issuance of common stock - - 3,019 35
Purchase of noncontrolling interests in subsidiaries (7,292 ) - (7,292 ) -
Other 3 - 747 346
Net cash provided by financing activities 46,811 23,717 766,026 16,403
Change in cash and cash equivalents (18,304 ) 2,419 16,927 (982 )
Cash and cash equivalents at beginning of period 52,399 12,902 17,168 16,303
Cash and cash equivalents at end of period $ 34,095 $ 15,321 $ 34,095 $ 15,321
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 Third
Revenues $ 1,089,837 $ 1,081,364 $ 1,053,012 $ 1,135,484 $ 1,192,421 $ 1,292,592 $ 1,514,062
Salaries, wages and benefits 627,175 612,205 613,607 652,703 678,695 765,133 900,570
Supplies 85,886 85,455 83,753 87,103 90,022 96,718 107,514
Rent 88,319 88,981 89,295 90,777 91,453 95,677 105,511
Other operating expenses 234,204 238,687 234,968 240,750 259,369 287,132 332,017
Other income (3,084 ) (2,857 ) (2,794 ) (2,687 ) (2,785 ) (2,880 ) (2,815 )
Depreciation and amortization 31,121 29,852 29,167 31,412 32,549 37,871 46,947
Interest expense 1,307 1,298 1,642 2,843 5,728 23,157 25,790
Investment (income) loss (877 ) 377 (403 ) (342 ) (495 ) (257 ) (37 )
1,064,051 1,053,998 1,049,235 1,102,559 1,154,536 1,302,551 1,515,497
Income (loss) from continuing operations
before income taxes 25,786 27,366 3,777 32,925 37,885 (9,959 ) (1,435 )
Provision (benefit) for income taxes 10,631 11,230 (1,323 ) 13,170 15,609 (3,419 ) (2,342 )
Income (loss) from continuing operations 15,155 16,136 5,100 19,755 22,276 (6,540 ) 907
Discontinued operations, net of income taxes:
Income (loss) from operations (154 ) 87 (260 ) 1,125 (179 ) 587 1,119
Gain (loss) on divestiture of operations (137 ) 54 86 (456 ) - - -
Income (loss) from discontinued operations (291 ) 141 (174 ) 669 (179 ) 587 1,119
Net income (loss) 14,864 16,277 4,926 20,424 22,097 (5,953 ) 2,026
(Earnings ) loss attributable to noncontrolling interests - - - - - 421 (241 )
Income (loss) attributable to Kindred $ 14,864 $ 16,277 $ 4,926 $ 20,424 $ 22,097 $ (5,532 ) $ 1,785
Amounts attributable to Kindred stockholders:
Income (loss) from continuing operations $ 15,155 $ 16,136 $ 5,100 $ 19,755 $ 22,276 $ (6,119 ) $ 666
Income (loss) from discontinued operations (291 ) 141 (174 ) 669 (179 ) 587 1,119
Net income (loss) $ 14,864 $ 16,277 $ 4,926 $ 20,424 $ 22,097 $ (5,532 ) $ 1,785
Earnings (loss) per common share:
Basic:
Income (loss) from continuing operations $ 0.38 $ 0.41 $ 0.13 $ 0.50 $ 0.56 $ (0.14 ) $ 0.01
Discontinued operations:
Income (loss) from operations - - (0.01 ) 0.03 - 0.01 0.02
Gain (loss) on divestiture of operations - - - (0.01 ) - - -
Net income (loss) $ 0.38 $ 0.41 $ 0.12 $ 0.52 $ 0.56 $ (0.13 ) $ 0.03
Diluted:
Income (loss) from continuing operations $ 0.38 $ 0.41 $ 0.13 $ 0.50 $ 0.55 $ (0.14 ) $ 0.01
Discontinued operations:
Income (loss) from operations - - (0.01 ) 0.03 - 0.01 0.02
Gain (loss) on divestiture of operations - - - (0.01 ) - - -
Net income (loss) $ 0.38 $ 0.41 $ 0.12 $ 0.52 $ 0.55 $ (0.13 ) $ 0.03

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

Basic 38,626 38,756 38,778 38,790 39,035 43,231 51,329
Diluted 38,859 38,914 38,838 39,089 39,543 43,231 51,406
KINDRED HEALTHCARE, INC.
Condensed Business Segment Data
(Unaudited)
(In thousands)
2010 Quarters 2011 Quarters
First Second Third Fourth First Second Third
Revenues:
Hospital division $ 507,062 $ 493,401 $ 465,198 $ 507,660 $ 558,974 $ 593,425 $ 684,781
Nursing center division 539,321 542,215 539,914 566,435 567,472 568,199 571,226
Rehabilitation division:
Skilled nursing rehabilitation services 98,997 101,148 103,807 117,325 122,656 172,074 267,993
Hospital rehabilitation services 21,147 20,913 20,436 21,182 22,490 38,291 69,811
120,144 122,061 124,243 138,507 145,146 210,365 337,804
1,166,527 1,157,677 1,129,355 1,212,602 1,271,592 1,371,989 1,593,811
Eliminations:
Skilled nursing rehabilitation services (56,464 ) (56,279 ) (56,841 ) (57,084 ) (57,946 ) (58,691 ) (59,221 )
Hospital rehabilitation services (20,226 ) (20,034 ) (19,502 ) (20,034 ) (21,225 ) (20,706 ) (20,528 )
(76,690 ) (76,313 ) (76,343 ) (77,118 ) (79,171 ) (79,397 ) (79,749 )
$ 1,089,837 $ 1,081,364 $ 1,053,012 $ 1,135,484 $ 1,192,421 $ 1,292,592 $ 1,514,062
Income (loss) from continuing operations:
Operating income (loss):
Hospital division $ 95,440 $ 91,790 $ 75,784 $ 97,343 $ 108,385 $ 108,465 $ 122,599 (a)
Nursing center division 70,614 76,529 69,363 86,912 87,350 93,532 65,982 (a)
Rehabilitation division:
Skilled nursing rehabilitation services 9,537 9,307 9,486 5,307 9,149 15,531 28,682
Hospital rehabilitation services 5,146 4,793 4,728 4,302 5,332 8,033 15,606
14,683 14,100 14,214 9,609 14,481 23,564 44,288
Corporate:
Overhead (33,831 ) (32,799 ) (34,329 ) (33,002 ) (38,315 ) (43,801 ) (48,806 )
Insurance subsidiary (480 ) (791 ) (783 ) (1,099 ) (602 ) (420 ) (750 )
(34,311 ) (33,590 ) (35,112 ) (34,101 ) (38,917 ) (44,221 ) (49,556 )
Transaction costs (b) (770 ) (955 ) (771 ) (2,148 ) (4,179 ) (34,851 ) (6,537 )
Operating income 145,656 147,874 123,478 157,615 167,120 146,489 176,776
Rent (88,319 ) (88,981 ) (89,295 ) (90,777 ) (91,453 ) (95,677 ) (105,511 )
Depreciation and amortization (31,121 ) (29,852 ) (29,167 ) (31,412 ) (32,549 ) (37,871 ) (46,947 )
Interest, net (430 ) (1,675 ) (1,239 ) (2,501 ) (5,233 ) (22,900 ) (25,753 )

Income (loss) from continuing operations before income taxes

25,786 27,366 3,777 32,925 37,885 (9,959 ) (1,435 )
Provision (benefit) for income taxes 10,631 11,230 (1,323 ) 13,170 15,609 (3,419 ) (2,342 )
$ 15,155 $ 16,136 $ 5,100 $ 19,755 $ 22,276 $ (6,540 ) $ 907

(a)

Includes impairment charges of $3.1 million for the hospital division and $23.6 million for the nursing center division.

(b)

Transaction-related charges for the 2010 periods have been reclassified to conform with the current period presentation.

KINDRED HEALTHCARE, INC.
Condensed Consolidating Statement of Operations
(Unaudited)
(In thousands)
Three months ended September 30, 2011
Nursing Rehabilitation division
Hospital center Skilled nursing Hospital Transaction
division (a) division (a) services services Total Corporate costs Eliminations Consolidated
Revenues $ 684,781 $ 571,226 $ 267,993 $ 69,811 $ 337,804 $ - $ - $ (79,749 ) $ 1,514,062
Salaries, wages and benefits 316,507 272,505 227,577 49,262 276,839 33,482 1,256 (19 ) 900,570
Supplies 77,045 28,650 1,506 62 1,568 251 - - 107,514
Rent 52,737 49,862 2,169 95 2,264 648 - - 105,511
Other operating expenses 168,630 204,089 10,228 4,881 15,109 18,638 5,281 (79,730 ) 332,017
Other income - - - - - (2,815 ) - - (2,815 )
Depreciation and amortization 21,612 12,655 3,023 2,372 5,395 7,285 - - 46,947
Interest expense 206 25 - - - 25,559 - - 25,790
Investment income (1 ) (18 ) (1 ) (1 ) (2 ) (16 ) - - (37 )
636,736 567,768 244,502 56,671 301,173 83,032 6,537 (79,749 ) 1,515,497

Income (loss) from continuing operations before income taxes

$ 48,045 $ 3,458 $ 23,491 $ 13,140 $ 36,631 $ (83,032 ) $ (6,537 ) $ - (1,435 )
Income tax benefit (2,342 )
Income from continuing operations $ 907

Capital expenditures, excluding acquisitions (including discontinued operations):

Routine $ 12,919 $ 10,572 $ 296 $ 81 $ 377 $ 12,727 $ - $ - $ 36,595
Development 39,964 4,113 75 - 75 - - - 44,152
$ 52,883 $ 14,685 $ 371 $ 81 $ 452 $ 12,727 $ - $ - $ 80,747
Three months ended September 30, 2010
Nursing Rehabilitation division
Hospital center Skilled nursing Hospital Transaction
division division services services Total Corporate costs Eliminations Consolidated
Revenues $ 465,198 $ 539,914 $ 103,807 $ 20,436 $ 124,243 $ - $ - $ (76,343 ) $ 1,053,012
Salaries, wages and benefits 215,590 267,665 89,923 15,040 104,963 25,403 - (14 ) 613,607
Supplies 55,189 27,559 836 24 860 145 - - 83,753
Rent 38,122 49,627 1,474 28 1,502 44 - - 89,295
Other operating expenses 118,635 175,327 3,562 644 4,206 12,358 771 (76,329 ) 234,968
Other income - - - - - (2,794 ) - - (2,794 )
Depreciation and amortization 12,655 10,527 591 77 668 5,317 - - 29,167
Interest expense - 36 - - - 1,606 - - 1,642
Investment income - (21 ) - - - (382 ) - - (403 )
440,191 530,720 96,386 15,813 112,199 41,697 771 (76,343 ) 1,049,235

Income from continuing operations before income taxes

$ 25,007 $ 9,194 $ 7,421 $ 4,623 $ 12,044 $ (41,697 ) $ (771 ) $ - 3,777
Income tax benefit (1,323 )
Income from continuing operations $ 5,100

Capital expenditures, excluding acquisitions (including discontinued operations):

Routine $ 9,113 $ 11,548 $ 328 $ 23 $ 351 $ 7,611 $ - $ - $ 28,623
Development 12,900 7,464 - - - - - - 20,364
$ 22,013 $ 19,012 $ 328 $ 23 $ 351 $ 7,611 $ - $ - $ 48,987

(a)

Includes $26.7 million in aggregate of impairment charges in other operating expenses (hospital division - $ 3.1 million and nursing center division - $23.6 million).

KINDRED HEALTHCARE, INC.
Condensed Consolidating Statement of Operations (Continued)
(Unaudited)
(In thousands)
Nine months ended September 30, 2011
Nursing Rehabilitation division
Hospital center Skilled nursing Hospital Transaction
division division services services Total Corporate costs Eliminations Consolidated
Revenues $ 1,837,180 $ 1,706,897 $ 562,723 $ 130,592 $ 693,315 $ - $ - $ (238,317 ) $ 3,999,075
Salaries, wages and benefits 842,829 816,022 483,996 93,996 577,992 91,502 16,122 (69 ) 2,344,398
Supplies 206,504 83,645 3,396 122 3,518 587 - - 294,254
Rent 137,033 148,808 5,658 156 5,814 986 - - 292,641
Other operating expenses 448,398 560,366 21,969 7,503 29,472 49,085 29,445 (238,248 ) 878,518
Other income - - - - - (8,480 ) - - (8,480 )
Depreciation and amortization 52,462 37,486 5,121 3,288 8,409 19,010 - - 117,367
Interest expense 272 76 - - - 40,525 13,802 - 54,675
Investment income (4 ) (58 ) (3 ) (1 ) (4 ) (723 ) - - (789 )
1,687,494 1,646,345 520,137 105,064 625,201 192,492 59,369 (238,317 ) 3,972,584

Income from continuing operations before income taxes

$ 149,686 $ 60,552 $ 42,586 $ 25,528 $ 68,114

$

(192,492

)

$ (59,369 ) $ - 26,491
Provision for income taxes 9,848
Income from continuing operations $ 16,643

Capital expenditures, excluding acquisitions (including discontinued operations):

Routine $ 36,872 $ 26,727 $ 768 $ 178 $ 946 $ 30,718 $ - $ - $ 95,263
Development 54,164 15,140 266 - 266 - - - 69,570
$ 91,036 $ 41,867 $ 1,034 $ 178 $ 1,212 $ 30,718 $ - $ - $ 164,833
Nine months ended September 30, 2010
Nursing Rehabilitation division
Hospital center Skilled nursing Hospital Transaction
division (a) division (a) services services Total Corporate (a) costs Eliminations Consolidated
Revenues $ 1,465,661 $ 1,621,450 $ 303,952 $ 62,496 $ 366,448 $ - $ - $ (229,346 ) $ 3,224,213
Salaries, wages and benefits 664,317 805,560 261,497 45,960 307,457 75,667 - (14 ) 1,852,987
Supplies 170,273 82,135 2,206 67 2,273 413 - - 255,094
Rent 113,580 148,458 4,368 79 4,447 110 - - 266,595
Other operating expenses 368,057 517,249 11,919 1,802 13,721 35,668 2,496 (229,332 ) 707,859
Other income - - - - - (8,735 ) - - (8,735 )
Depreciation and amortization 38,218 33,825 1,672 207 1,879 16,218 - - 90,140
Interest expense 3 96 - - - 4,148 - - 4,247
Investment income (1 ) (56 ) (3 ) (1 ) (4 ) (842 ) - - (903 )
1,354,447 1,587,267 281,659 48,114 329,773

122,647

2,496 (229,346 ) 3,167,284

Income from continuing operations before income taxes

$ 111,214 $ 34,183 $ 22,293 $ 14,382 $ 36,675

$

(122,647

)

$ (2,496 ) $ - 56,929
Provision for income taxes 20,538
Income from continuing operations $ 36,391

Capital expenditures, excluding acquisitions (including discontinued operations):

Routine $ 23,132 $ 24,732 $ 814 $ 85 $ 899 $ 20,345 $ - $ - $ 69,108
Development 28,883 11,336 - - - - - - 40,219
$ 52,015 $ 36,068 $ 814 $ 85 $ 899 $ 20,345 $ - $ - $ 109,327

(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 Third
Hospital data:
End of period data:
Number of hospitals:
Long-term acute care 83 83 83 89 89 120 120
Inpatient rehabilitation - - - - - 5 5
83 83 83 89 89 125 125
Number of licensed beds:
Long-term acute care 6,580 6,576 6,563 6,887 6,889 8,609 8,597
Inpatient rehabilitation - - - - - 183 183
6,580 6,576 6,563 6,887 6,889 8,792 8,780
Revenue mix %:
Medicare 56 56 55 58 60 60 60
Medicaid 9 9 9 9 8 8 8
Medicare Advantage 10 10 10 9 10 10 10
Commercial insurance and other 25 25 26 24 22 22 22
Admissions:
Medicare 7,432 7,125 6,769 7,640 8,504 8,913 11,002
Medicaid 997 990 1,022 1,034 1,085 1,163 1,236
Medicare Advantage 1,129 1,106 936 1,071 1,172 1,348 1,609
Commercial insurance and other 2,262 2,048 1,978 2,020 2,282 2,290 2,669
11,820 11,269 10,705 11,765 13,043 13,714 16,516
Admissions mix %:
Medicare 63 63 63 65 65 65 67
Medicaid 8 9 10 9 8 8 7
Medicare Advantage 10 10 9 9 9 10 10
Commercial insurance and other 19 18 18 17 18 17 16
Patient days:
Medicare 202,882 195,964 179,324 198,129 219,213 237,257 275,561
Medicaid 47,813 45,952 48,514 46,596 45,650 45,746 48,911
Medicare Advantage 34,524 36,000 31,186 32,868 35,639 39,503 47,819
Commercial insurance and other 75,483 70,651 70,198 69,585 70,522 72,759 83,375
360,702 348,567 329,222 347,178 371,024 395,265 455,666
Average length of stay:
Medicare 27.3 27.5 26.5 25.9 25.8 26.6 25.0
Medicaid 48.0 46.4 47.5 45.1 42.1 39.3 39.6
Medicare Advantage 30.6 32.5 33.3 30.7 30.4 29.3 29.7
Commercial insurance and other 33.4 34.5 35.5 34.4 30.9 31.8 31.2
Weighted average 30.5 30.9 30.8 29.5 28.4 28.8 27.6
KINDRED HEALTHCARE, INC.
Condensed Business Segment Data (Continued)
(Unaudited)
2010 Quarters 2011 Quarters
First Second Third Fourth First Second Third
Hospital data (continued):
Revenues per admission:
Medicare $ 38,078 $ 38,938 $ 37,675 $ 38,368 $ 39,439 $ 40,089 $ 37,408
Medicaid 45,738 42,774 42,910 41,704 42,432 41,576 40,720
Medicare Advantage 45,187 46,169 48,122 44,744 46,217 42,708 43,616
Commercial insurance and other 56,344 59,842 61,314 61,131 54,065 56,850 57,216
Weighted average 42,899 43,784 43,456 43,150 42,856 43,271 41,462
Revenues per patient day:
Medicare $ 1,395 $ 1,416 $ 1,422 $ 1,479 $ 1,530 $ 1,506 $ 1,494
Medicaid 954 922 904 925 1,009 1,057 1,029
Medicare Advantage 1,478 1,418 1,444 1,458 1,520 1,457 1,468
Commercial insurance and other 1,688 1,735 1,728 1,775 1,749 1,789 1,832
Weighted average 1,406 1,416 1,413 1,462 1,507 1,501 1,503
Medicare case mix index (discharged patients only) 1.21 1.21 1.19 1.17 1.21 1.22 1.17
Average daily census 4,008 3,830 3,579 3,774 4,122 4,344 4,953
Occupancy % 68.2 66.1 62.0 64.0 68.7 65.5 62.6
Annualized employee turnover % 21.8 22.6 22.3 22.0 21.2 22.1 21.4
Nursing and rehabilitation center data:
End of period data:
Number of facilities:
Nursing and rehabilitation centers:
Owned or leased 218 219 222 222 220 220 220
Managed 4 4 4 4 4 4 4
Assisted living facilities 6 7 7 7 6 6 6
228 230 233 233 230 230 230
Number of licensed beds:
Nursing and rehabilitation centers:
Owned or leased 26,711 26,760 27,030 26,957 26,767 26,687 26,687
Managed 485 485 485 485 485 485 485
Assisted living facilities 327 463 463 463 413 413 413
27,523 27,708 27,978 27,905 27,665 27,585 27,585
Revenue mix %:
Medicare 35 34 33 36 38 37 36
Medicaid 41 41 41 39 37 38 38
Medicare Advantage 6 7 7 7 7 7 7
Private and other 18 18 19 18 18 18 19
KINDRED HEALTHCARE, INC.
Condensed Business Segment Data (Continued)
(Unaudited)
2010 Quarters 2011 Quarters
First Second Third Fourth First Second Third
Nursing and rehabilitation center data (continued):
Patient days (excludes managed facilities):
Medicare 369,102 363,149 346,837 344,018 370,395 358,760 345,362
Medicaid 1,312,517 1,292,246 1,289,643 1,287,739 1,232,620 1,229,517 1,255,418
Medicare Advantage 87,692 92,051 91,643 94,336 97,460 94,483 95,751
Private and other 397,550 415,921 437,413 453,357 425,414 435,667 436,074
2,166,861 2,163,367 2,165,536 2,179,450 2,125,889 2,118,427 2,132,605
Patient day mix %:
Medicare 17 17 16 16 17 17 16
Medicaid 61 60 60 59 58 58 59
Medicare Advantage 4 4 4 4 5 4 5
Private and other 18 19 20 21 20 21 20
Revenues per patient day:
Medicare Part A $ 470 $ 469 $ 468 $ 534 $ 537 $ 544 $ 550
Total Medicare (including Part B) 513 515 519 587 579 589 599
Medicaid 168 171 171 171 172 173 174
Medicare Advantage 398 400 405 432 416 420 421
Private and other 238 234 232 228 235 240 243
Weighted average 249 250 249 260 267 268 268
Average daily census 24,076 23,773 23,538 23,690 23,621 23,279 23,180
Admissions (excludes managed facilities) 19,026 18,924 19,383 19,118 20,619 20,143 20,118
Occupancy % 89.0 87.3 86.8 86.4 86.9 85.9 85.5
Medicare average length of stay 33.7 35.2 34.3 33.0 32.9 33.4 33.0
Annualized employee turnover % 36.7 38.8 39.8 39.6 37.8 39.8 40.2
Rehabilitation data:
Skilled nursing rehabilitation services:
Revenue mix %:
Company-operated 57 56 55 49 47 34 22
Non-affiliated 43 44 45 51 53 66 78
Sites of service (at end of period) 554 568 595 635 641 1,848 1,835
Revenue per site $ 172,498 $ 171,254 $ 167,832 $ 174,896 $ 178,812 $ 137,316 $ 137,643
Therapist productivity % 83.8 84.2 82.1 78.6 80.6 81.6 80.5
Home health and hospice revenues $ 3,434 $ 3,875 $ 3,947 $ 6,266 $ 8,038 $ 10,828 $ 15,419
Hospital rehabilitation services:
Revenue mix %:
Company-operated 96 96 95 95 94 54 29
Non-affiliated 4 4 5 5 6 46 71
Sites of service (at end of period):
Inpatient rehabilitation units - - - 1 1 104 102
LTAC hospitals 85 85 85 91 93 97 99
Sub-acute units 7 7 7 7 8 22 23
Outpatient units 10 11 11 12 12 119 114
Other 2 2 4 4 5 8 7
104 105 107 115 119 350 345
Revenue per site $ 203,337 $ 199,174 $ 190,986 $ 184,193 $ 188,989 $ 199,661 $ 202,352
Annualized employee turnover % 12.6 14.2 15.4 14.4 14.5 17.1 16.5
KINDRED HEALTHCARE, INC.
Earnings Per Common Share Reconciliation (a)
(Unaudited)
(In thousands, except per share amounts)
Three months ended September 30, Nine months ended September 30,
2011 2010 2011 2010
Basic Diluted Basic Diluted Basic Diluted Basic Diluted
Earnings:
Amounts attributable to Kindred stockholders:
Income from continuing operations:
As reported in Statement of Operations $ 666 $ 666 $ 5,100 $ 5,100 $ 16,823 $ 16,823 $ 36,391 $ 36,391

Allocation to participating unvested restricted stockholders

(10 ) (10 ) (91 ) (91 ) (287 ) (284 ) (664 ) (662 )
Available to common stockholders $ 656 $ 656 $ 5,009 $ 5,009 $ 16,536 $ 16,539 $ 35,727 $ 35,729
Discontinued operations, net of income taxes:
Income (loss) from operations:
As reported in Statement of Operations $ 1,119 $ 1,119 $ (260 ) $ (260 ) $ 1,527 $ 1,527 $ (327 ) $ (327 )

Allocation to participating unvested restricted stockholders

(17 ) (17 ) 5 5 (26 ) (26 ) 6 6
Available to common stockholders $ 1,102 $ 1,102 $ (255 ) $ (255 ) $ 1,501 $ 1,501 $ (321 ) $ (321 )
Gain on divestiture of operations:
As reported in Statement of Operations $ - $ - $ 86 $ 86 $ - $ - $ 3 $ 3

Allocation to participating unvested restricted stockholders

- - (2 ) (2 ) - - - -
Available to common stockholders $ - $ - $ 84 $ 84 $ - $ - $ 3 $ 3
Net income:
As reported in Statement of Operations $ 1,785 $ 1,785 $ 4,926 $ 4,926 $ 18,350 $ 18,350 $ 36,067 $ 36,067

Allocation to participating unvested restricted stockholders

(27 ) (27 ) (88 ) (88 ) (313 ) (310 ) (658 ) (656 )
Available to common stockholders $ 1,758 $ 1,758 $ 4,838 $ 4,838 $ 18,037 $ 18,040 $ 35,409 $ 35,411
Shares used in the computation:

Weighted average shares outstanding - basic computation

51,329 51,329 38,778 38,778 44,577 44,577 38,720 38,720
Dilutive effect of employee stock options 77 60 357 135

Adjusted weighted average shares outstanding - diluted computation

51,406 38,838 44,934 38,855
Earnings per common share:
Income from continuing operations $ 0.01 $ 0.01 $ 0.13 $ 0.13 $ 0.37 $ 0.37 $ 0.92 $ 0.92
Discontinued operations:
Income (loss) from operations 0.02 0.02 (0.01 ) (0.01 ) 0.03 0.03 (0.01 ) (0.01 )
Gain on divestiture of operations - - - - - - - -
Net income $ 0.03 $ 0.03 $ 0.12 $ 0.12 $ 0.40 $ 0.40 $ 0.91 $ 0.91

(a)

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

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 third quarter and nine months ended September 30, 2011 and 2010 before certain charges or on a core basis. The charges that were excluded from core operating results for the third quarter and nine months ended September 30, 2011 relate to transaction, financing, severance and impairment charges. The charges that were excluded from core operating results for the third quarter ended September 30, 2010 relate to transaction costs. The charges that are excluded from core operating results for the nine months ended September 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 37.2% and 36.8% for the third quarter and nine months ended September 30, 2011, respectively, and an effective income tax rate of 38.5% for the third quarter and nine months ended September 30, 2010. Certain of the excluded charges for the third quarter and nine months ended September 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 third quarter and nine months ended September 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 Nine months ended
September 30, September 30,
2011 2010 2011 2010
Detail of charges excluded from core operating results:
Transaction costs ($5,281 ) ($771 ) ($29,445 ) ($2,496 )
Financing costs (in connection with the RehabCare acquisition) - - (13,802 ) -
Severance and retirement costs (1,256 ) - (16,122 ) (2,906 )
Impairment charges (26,712 ) - (26,712 ) -
(33,249 ) (771 ) (86,081 ) (5,402 )
Income tax benefit 12,371 297 31,708 2,080
Charges net of income taxes (20,878 ) (474 ) (54,373 ) (3,322 )
Allocation to participating unvested restricted stockholders 314 8 920 60
Available to common stockholders ($20,564 ) ($466 ) ($53,453 ) ($3,262 )
Weighted average diluted shares outstanding 51,406 38,838 44,934 38,855
Diluted loss per common share related to charges ($0.40 ) ($0.01 ) ($1.19 ) ($0.08 )
Reconciliation of adjusted operating income before charges:
Operating income before charges $ 210,025 $ 124,249 $ 562,664 $ 422,410
Detail of charges excluded from core operating results:
Transaction costs (5,281 ) (771 ) (29,445 ) (2,496 )
Severance and retirement costs (1,256 ) - (16,122 ) (2,906 )
Impairment charges (26,712 ) - (26,712 ) -
(33,249 ) (771 ) (72,279 ) (5,402 )
Reported operating income $ 176,776 $ 123,478 $ 490,385 $ 417,008
Reconciliation of adjusted income from continuing operations before charges:
Amounts attributable to Kindred stockholders:
Income from continuing operations before charges $ 21,544 $ 5,574 $ 71,196 $ 39,713
Charges net of income taxes (20,878 ) (474 ) (54,373 ) (3,322 )
Reported income from continuing operations $ 666 $ 5,100 $ 16,823 $ 36,391

Reconciliation of diluted income per common share from continuing operations before charges:

Diluted income per common share before charges (a) $ 0.41 $ 0.14 $ 1.56 $ 1.00
Charges net of income taxes as computed above (0.40 ) (0.01 ) (1.19 ) (0.08 )
Reported diluted income per common share from continuing operations $ 0.01 $ 0.13 $ 0.37 $ 0.92
Weighted average diluted shares outstanding 51,406 38,838 44,934 38,855
Reconciliation of effective income tax rate before charges:
Effective income tax rate before charges 31.5 % 22.6 % 36.9 % 36.3 %
Impact of charges on effective income tax rate 131.7 % 12.4 % 0.3 % (0.2 )%
Reported effective income tax rate 163.2 % 35.0 % 37.2 % 36.1 %

(a)

For purposes of computing diluted earnings per common share, income from continuing operations before charges was reduced by $0.3 million and $0.1 million for the three months ended September 30, 2011 and 2010, respectively, and $1.2 million and $0.7 million for the nine months ended September 30, 2011 and 2010, respectively, for the allocation of income to participating unvested restricted stockholders.

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 third quarter and nine months ended September 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 third quarter and nine months ended September 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 third quarter ended September 30, 2010 relate to transaction costs, net of income tax benefit. The payments that are excluded from adjusted operating cash flows for the nine months ended September 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 33.3% and 36.2% for the third quarter and nine months ended September 30, 2011, respectively, and an effective income tax rate of 38.5% for the third quarter and nine months ended September 30, 2010. Certain of the excluded payments for the third quarter and nine months ended September 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 third quarter and nine months ended September 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 Nine months ended
September 30, September 30,
2011 2010 2011 2010

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

Net cash provided by operating activities $ 66,518 $ 67,909 $ 117,806 $ 150,855
Adjustments to remove certain payments:
Financing costs:
Capitalized as deferred financing costs - - 46,232 -
Charged to interest expense - - 13,074 -
Transaction costs 7,395 955 29,458 1,710
Severance and retirement costs 3,295 - 10,265 2,689

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

(2,781 ) (297 ) (22,118 ) (2,080 )
7,909 658 76,911 2,319
Adjusted operating cash flows $ 74,427 $ 68,567 $ 194,717 $ 153,174
KINDRED HEALTHCARE, INC.
Reconciliation of Earnings Guidance for 2011 and 2012 - Continuing Operations
(Unaudited)
(In millions, except per share amounts)
Earnings Guidance Ranges (a)
As of November 2, 2011 As of August 8, 2011
2011 2012 2011 2012
Low High Low High Low High Low High
Operating income $

777

$

780

$ 911 $ 928 $ 775 $ 780 $ 911 $ 928
Rent 400 400 445 445 400 400 445 445
Depreciation and amortization 164 164 200 200 164 164 200 200
Interest, net 67 67 110 110 69 69 110 110

Income from continuing operations before income taxes

146

149

156 173 142 147 156 173
Provision for income taxes 55

56

63 69 53 54 63 69
Income from continuing operations

91

93

93 104 89 93 93 104

Earnings attributable to noncontrolling interests

(1 ) (1 ) (4 ) (4 ) (2 ) (2 ) (4 ) (4 )
Income attributable to the Company

90

92

89 100 87 91 89 100

Allocation to participating unvested restricted stockholders

(2 ) (2 ) (2 ) (2 ) (2 ) (2 ) (2 ) (2 )
Available to common stockholders $

88

$

90

$ 87 $ 98 $ 85 $ 89 $ 87 $ 98
Earnings per diluted share $

1.87

$

1.92

$ 1.65 $ 1.85 $ 1.80 $ 1.90 $ 1.65 $ 1.85

Shares used in computing earnings per diluted share

47.0 47.0 53.0 53.0 47.0 47.0 53.0 53.0

(a)

The Company's earnings guidance for continuing operations 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 became 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, (iv) any impairment charges that have been recorded in prior periods or that may be incurred in the future, or (v) 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