KINDRED HEALTHCARE, INC - FORM 8-K - EX-99.1

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8-K - 8-K - KINDRED HEALTHCARE, INC	d772078d8k.htm

Exhibit 99.1

LOGO


Contact:		Stephen Farber
		Executive Vice President, Chief Financial Officer
		(502) 596-2525

KINDRED HEALTHCARE ANNOUNCES SECOND QUARTER 2014 RESULTS

Core Diluted EPS from Continuing Operations Increased 26% to $0.34⁽¹⁾

Strong Start to the Year Continues with 7% Growth in Both Consolidated Revenues and Core Operating Income

GAAP EPS Loss from Continuing Operations Totaled $0.48, Due to Pretax Charges of $0.83 per Diluted Share Related to Debt Refinancing, Restructuring, Litigation and Transaction Costs

Affirms 2014 Earnings Guidance and Adjusts Share Count to Reflect Recent Equity Offering

LOUISVILLE, Ky. (August 6, 2014) – Kindred Healthcare, Inc. (“Kindred” or the “Company”) (NYSE:KND) today announced its operating results for the second quarter ended June 30, 2014.

The Company has classified as discontinued for all periods presented the operations of three transitional care (“TC”) hospitals and two nursing centers that were either closed or divested in the second quarter. 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 and core operating income both increased 7% from the same period last year primarily resulting from improved hospital volumes, a strong rebound in the Company’s Care Management division operations, growth from acquisitions and solid cost controls throughout the Company

•

Strong hospital division results with 3.1% same-store admissions growth, 1.8% revenue growth per patient day and 1.3% growth in core operating costs per patient day

•

RehabCare division achieved sequential core operating income growth and margin improvement from 11.6% in the first quarter of 2014 to 12.3% in the second quarter of 2014

•

Nursing center division core operating income increased 11.3% primarily due to growth in revenues and operating margins were significantly improved due to ongoing repositioning and cost control initiatives

•

Care Management division delivered 66% revenue growth and core operating income that doubled compared to the same period last year

•

Recapitalization of the Company completed:

•

Divested 55 of 59 nursing centers leased from Ventas, Inc. (“Ventas”) (NYSE:VTR) as of August 1

•

$2.25 billion refinancing of the Company’s secured and unsecured debt on April 9 lowers borrowing costs, extends debt maturities and reduces interest rate risk

•

Recent common stock equity offering of 9.7 million shares generated $221 million in net proceeds used to repay the Company’s revolving credit facility

•

Board of Directors declared regular quarterly cash dividend of $0.12 per share payable on September 10, 2014

(1)	See reconciliation of core results to GAAP results on page 19.

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680 South Fourth Street Louisville, Kentucky 40202

502.596.7300 www.kindredhealthcare.com

Kindred Healthcare Announces Second Quarter 2014 Results

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August 6, 2014

Second Quarter Results

Continuing Operations

Consolidated revenues for the second quarter ended June 30, 2014 increased 7% to $1.3 billion compared to $1.2 billion in the same period of 2013, primarily due to improved hospital volumes, a strong rebound in the Care Management division’s operations and growth from acquisitions. Kindred reported a loss from continuing operations for the second quarter of 2014 of $25.9 million or $0.48 per diluted share compared to income from continuing operations of $13.6 million or $0.25 per diluted share in the second quarter of 2013. Second quarter 2014 operating results included pretax charges of $70.9 million ($44.6 million net of income taxes) or $0.83 per diluted share related to debt refinancing, restructuring, litigation and transaction costs. Without these items, diluted earnings per share from continuing operations increased 26% to $0.34. Operating results for the second quarter of 2013 included pretax charges of $1.5 million ($0.9 million net of income taxes) or $0.02 per diluted share related to debt refinancing and transaction costs.

Management Commentary

Paul J. Diaz, Chief Executive Officer of the Company, commented, “We are very pleased with our operating and financial results for the second quarter of 2014, which reflects our progress delivering on our promise to provide hope, healing and recovery to the patients we serve. More specifically, in the first half of this year, we saw continued improvement in employee engagement and reduced turnover, and improving quality measures, clinical outcomes and patient satisfaction in all of our business segments. We are also pleased to reaffirm our earnings guidance for the year, which reflects the change in share count from our recent equity offering, as we achieved revenue and core operating income growth of 7% year-over-year, respectively. We made progress on a number of internal and external growth initiatives during the quarter enhancing our Integrated Care Market capabilities, particularly in home health and hospice services. We continue to evaluate a robust pipeline of external opportunities to deploy our financial resources, industry leading infrastructure and management capabilities as we move forward with the growth phase of our strategic plan. Overall, we remain committed to further improving our patient’s experience and the long-term growth, profitability and financial position of the Company.”

Benjamin A. Breier, President and Chief Operating Officer of the Company, said, “Same-store hospital admissions increased 3.1% in the second quarter representing our first quarterly admissions increase since the third quarter of 2012 and our hospital core operating margin improved to 21.7% in the second quarter of 2014 from 21.3% in the same period a year ago. Our RehabCare division also continues to make great progress, as evidenced by our sequential operating income growth and margin improvement, despite Medicare reimbursement pricing pressures. In addition, we have added 57 net new skilled nursing rehabilitation sites of service during the year. Our efforts to reshape our nursing center division continue to pay off as we achieved a significant improvement in operating margins in the second quarter. We are developing three additional transitional care centers in Indianapolis, Phoenix and Las Vegas, which will add to the momentum in this division.”

Mr. Breier added, “Our Care Management division continues to make improvements in our home health and hospice operations, including enhancing our team, processes and technology, and we expect to apply these capabilities across a larger platform over time. In addition, our recently announced acquisition of the Silver State Accountable Care Organization (“ACO”) in Las Vegas is a very exciting transaction for Kindred, and the partnership marks our first ownership and direct management of an ACO anywhere in the country.”

Stephen D. Farber, Executive Vice President, Chief Financial Officer, commented, “We are pleased to have completed a major recapitalization of the Company with both a $2.25 billion debt refinancing in the second quarter and a 9.7 million share equity offering in the second and third quarters. The equity offering raised $221 million in proceeds that the Company has initially used to reduce its revolving credit facility, which helped to increase our available

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Kindred Healthcare Announces Second Quarter 2014 Results

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borrowing capacity under our revolver to approximately $652 million as of June 30, 2014. These transactions significantly improve our financial position, provide additional financial flexibility and reduce interest expense. Our current outstanding share count is 64.6 million shares and for generally accepted accounting principles (“GAAP”) purposes, on a weighted average basis, we expect our 2014 third and fourth quarters diluted shares used to compute earnings per share to approximate 63.0 million shares and on an annual basis for 2014, 58.3 million shares.”

Earnings Guidance – Continuing Operations

Kindred today affirmed its previous guidance for income from continuing operations for 2014 of between $58 million and $68 million. The Company noted that its earnings guidance for 2014 continues to be based on the same assumptions initially disclosed and there has been no change in its earnings guidance. The affirmed guidance for 2014 reflects an increased share count from the recent equity offering of 9.7 million shares of common stock. Under Kindred’s current diluted share count of 58.3 million outstanding shares following the recent equity offering, income from continuing operations for 2014 equates to $0.96 to $1.14 per diluted share. Under Kindred’s diluted share count of 53.2 million outstanding shares prior to the equity offering, the same assumptions for income from continuing operations for 2014 of $58 million to $68 million equated to $1.05 to $1.25 per diluted share.

The Company revised its operating cash flow guidance range of $245 million to $275 million to a revised range of $200 million to $230 million. This update reflects growth in accounts receivable, increased cash settlements of certain previously-accrued balance sheet liabilities, and other cash flow items.

The Company maintained its expectation of $100 million to $105 million for routine capital expenditures and for timing reasons reduced its anticipated 2014 cash outflows for development of new or replacement facilities by $5 million to approximately $15 million to $20 million. With these items, the Company expects its 2014 operating cash flows in excess of routine and development capital spending to approximate $85 million to $105 million, which will be available to fund acquisitions, repay debt and pay dividends. Estimated dividend payments for 2014 are expected to approximate $29 million, an increase of approximately $3 million from the previous guidance due to the issuance of 9.7 million additional common shares in the Company’s recently completed equity offering.

While Kindred does not typically provide quarterly guidance, given the many new shareholders of Kindred the Company notes that from a seasonal trending perspective, the third quarter is historically the slowest volumes and earnings quarter, and is typically followed by a stronger fourth quarter. For the third quarter of 2014, the Company expects diluted earnings per share from continuing operations to approximate $0.05 to $0.15. This compares to diluted earnings per share from continuing operations of $0.10 for the third quarter of 2013, excluding certain disclosed items and adjusted on a pro forma basis to include the incremental 9.7 million shares from the Company’s recently completed equity offering.

Please note the Company’s earnings and cash flow guidance for 2014 excludes the effect of reimbursement changes, debt refinancing costs, severance, retirement, retention and restructuring costs, litigation costs, transaction costs, any further acquisitions or divestitures, any impairment charges, and any repurchases of common stock.

Quarterly Cash Dividend

The Company also announced that its Board of Directors has approved the payment of the regular quarterly cash dividend to its shareholders of $0.12 per common share to be paid on September 10, 2014 to shareholders of record as of the close of business on August 20, 2014. Future declarations of quarterly dividends will be subject to the approval of Kindred’s Board of Directors.

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Kindred Healthcare Announces Second Quarter 2014 Results

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Conference Call

As previously announced, investors and the general public may access a live webcast of the second quarter 2014 conference call through a link on the Company’s website at http://investors.kindredhealthcare.com. The conference call will be held on August 7 at 10:00 a.m. (Eastern Time). The Conference call webcast will feature accompanying slides, which can be accessed through the Investor Relations section of the Company’s website.

A telephone replay of the conference call will become available at approximately 1:00 p.m. on August 7 by dialing (719) 457-0820, access code: 7592071. The replay will be available through August 17.

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 the potential acquisition of Gentiva Health Services, Inc. (“Gentiva”) (NASDAQ:GTIV) (including financing of the proposed transaction and the benefits, results, effects and timing of such transaction), and the Company’s expected future financial position, results of operations, cash flows, financing plans, business strategy, budgets, capital expenditures, competitive positions, growth opportunities, plans and objectives of management and statements containing the words such as “anticipate,” “approximate,” “believe,” “plan,” “estimate,” “expect,” “project,” “could,” “should,” “will,” “intend,” “may,” “potential” and other similar expressions, are forward-looking statements. Statements in this press release concerning the Company’s business outlook or future economic performance, anticipated profitability, revenues, expenses or other financial items, and product or services line growth, together with other statements that are not historical facts, are forward-looking statements that are estimates reflecting the best judgment of the Company based upon currently available information.

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, performance or plans to differ materially from any future results, performance or plans 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, results or stock price include, without limitation, (a) the impact of healthcare reform, which will initiate significant changes 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, including reforms resulting from the Patient Protection and Affordable Care Act and the Healthcare Education and Reconciliation Act (collectively, the “ACA”) or future deficit reduction measures adopted at the federal or state level. Healthcare reform is affecting each of the Company’s businesses in some manner. Potential future efforts in the U.S. Congress to repeal, amend, modify or retract funding for various aspects of the ACA create additional uncertainty about the ultimate impact of the ACA on the Company and the healthcare industry. Due to the substantial regulatory changes that will need to be implemented by the Centers for Medicare and Medicaid Services (“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) the Company’s ability to adjust to the new patient criteria for long-term acute care (“LTAC”) hospitals under the Pathway for SGR Reform Act of 2013, which will reduce the population of patients eligible for the Company’s hospital services and change the basis upon which the Company is paid, (c) the impact of the final rules issued by CMS on August 1, 2012 which, among other things, will reduce Medicare reimbursement to the Company’s TC hospitals in 2013 and beyond by imposing a budget neutrality adjustment and modifying the short-stay outlier rules, (d) the impact of the final rules issued by CMS on July 29, 2011 which significantly reduced Medicare reimbursement to the Company’s nursing centers and changed payments for the provision of group therapy services effective October 1, 2011, (e) the impact of the Budget Control Act of 2011 (as amended by the American Taxpayer Relief Act of 2012 (the “Taxpayer Relief Act”)) which instituted an automatic 2% reduction on each claim submitted to Medicare beginning April 1, 2013, (f) the costs of defending and insuring against alleged professional liability and other claims and investigations (including those related to pending

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investigations and whistleblower and wage and hour class action lawsuits against the Company) and the Company’s ability to predict the estimated costs and reserves related to such claims and investigations, including the impact of differences in actuarial assumptions and estimates compared to eventual outcomes, (g) the impact of the Taxpayer Relief Act which, among other things, reduces Medicare payments by an additional 25% for subsequent procedures when multiple therapy services are provided on the same day. At this time, the Company believes that the rules related to multiple therapy services will reduce its Medicare revenues by $25 million to $30 million on an annual basis, (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 reimbursement for the Company’s TC hospitals, nursing centers, inpatient rehabilitation hospitals and home health and hospice operations, 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) the ability of the Company’s hospitals and nursing centers to adjust to medical necessity reviews, (k) the impact of the Company’s significant level of indebtedness on its funding costs, operating flexibility and ability to fund ongoing operations, development capital expenditures or other strategic acquisitions with additional borrowings, (l) the Company’s ability to successfully redeploy its capital and proceeds of asset sales in pursuit of its business strategy and 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, as and when planned, including the potential impact of unanticipated issues, expenses and liabilities associated with those activities, (m) the Company’s ability to pay a dividend as, when and if declared by the Board of Directors, in compliance with applicable laws and the Company’s debt and other contractual arrangements, (n) the failure of the Company’s facilities to meet applicable licensure and certification requirements, (o) the further consolidation and cost containment efforts of managed care organizations and other third party payors, (p) the Company’s ability to meet its rental and debt service obligations, (q) the Company’s ability to operate pursuant to the terms of its debt obligations, and comply with its covenants thereunder, and the Company’s ability to operate pursuant to its master lease agreements with Ventas, (r) 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 the Company’s businesses, or which could negatively impact the Company’s investment portfolio, (s) the Company’s ability to control costs, particularly labor and employee benefit costs, (t) the Company’s ability to successfully reduce (by divestiture of operations or otherwise) its exposure to professional liability and other claims, (u) the Company’s obligations under various laws to self-report suspected violations of law by the Company to various government agencies, including any associated obligation to refund overpayments to government payors, fines and other sanctions, (v) national, regional and industry-specific economic, financial, business and political conditions, including their effect on the availability and cost of labor, credit, materials and other services, (w) increased operating costs due to shortages in qualified nurses, therapists and other healthcare personnel, (x) the Company’s ability to attract and retain key executives and other healthcare personnel, (y) the Company’s ability to successfully dispose of unprofitable facilities, (z) events or circumstances which could result in the impairment of an asset or other charges, such as the impact of the Medicare reimbursement regulations that resulted in the Company recording significant impairment charges in the last three fiscal years, (aa) changes in GAAP and changes in tax accounting or tax laws (or authoritative interpretations relating to any of these matters), (bb) the Company’s ability to maintain an effective system of internal control over financial reporting, (cc) the Company’s ability to realize the anticipated operating and financial synergies from the potential acquisition of Gentiva, (dd) the uncertainties as to whether Gentiva or any other companies that the Company may acquire will have the accretive effect on the Company’s earnings or cash flows that are expected, and (ee) the outcome of the potential acquisition of Gentiva, including the Company’s ability to realize the strategic rationale behind the Gentiva acquisition.

Many of these factors are beyond the Company’s control. The Company cautions investors that any forward-looking statements made by the Company are not guarantees of future performance. The Company disclaims any obligation to update any such factors or to announce publicly the results of any revisions to any of the forward-looking statements to reflect future events or developments.

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Kindred Healthcare Announces Second Quarter 2014 Results

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In addition to the results provided in accordance with GAAP, the Company has provided information in this release to compute certain non-GAAP measurements for the three months and six months ended June 30, 2014 and 2013 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.

Also in this release, the Company provides the financial measure of free cash flows excluding certain items. The Company recognizes that free cash flows excluding certain items is a non-GAAP measurement and is not intended to replace the presentation of the Company’s cash flows in accordance with GAAP. The Company believes that this non-GAAP measurement provides important information to investors related to the amount of discretionary cash flows that are available for other investing and financing activities. In addition, management uses free cash flows excluding certain items in making decisions related to acquisitions, development capital expenditures, dividends, long-term debt repayments and other uses. The Company believes net cash flows provided by (used in) operating activities is the most comparable GAAP measure. Readers of the Company’s financial information should consider net cash flows provided by (used in) operating activities as an important measure of the Company’s financial performance because it provides the most complete measure of its performance. Free cash flows excluding certain items 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 net cash flows provided by (used in) operating activities to free cash flows excluding certain items is included in this press release.

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 (loss) from continuing operations is the most comparable GAAP measure. Readers of the Company’s financial information should consider income (loss) 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 (loss) 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 FORTUNE 500 healthcare services company based in Louisville, Kentucky with annual revenues of $5 billion and approximately 63,000 employees in 47 states. At June 30, 2014, Kindred through its subsidiaries provided healthcare services in 2,353 locations, including 97 transitional care hospitals, five inpatient rehabilitation hospitals, 98 nursing centers, 21 sub-acute units, 153 Kindred at Home hospice, home health and non-medical home care locations, 104 inpatient rehabilitation units (hospital-based) and a contract rehabilitation services business, RehabCare, which served 1,875 non-affiliated facilities. Ranked as one of Fortune magazine’s Most Admired Healthcare Companies for six 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. You can also follow us on Twitter and Facebook.

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August 6, 2014

KINDRED HEALTHCARE, INC.

Financial Summary

(Unaudited)

(In thousands, except per share amounts)


	Three months ended						Six months ended
	June 30,						June 30,
	2014			2013			2014			2013
Revenues	$	1,275,964		$	1,191,030		$	2,562,706		$	2,450,464

Income (loss) from continuing operations	$	(21,065	)	$	13,729		$	921		$	24,603
Discontinued operations, net of income taxes:
Loss from operations		(8,153	)		(1,050	)		(14,654	)		(6,426	)
Loss on divestiture of operations		(2,018	)		(10,852	)		(5,024	)		(12,877	)

Loss from discontinued operations		(10,171	)		(11,902	)		(19,678	)		(19,303	)

Net income (loss)		(31,236	)		1,827			(18,757	)		5,300
(Earnings) loss attributable to noncontrolling interests:
Continuing operations		(4,828	)		(116	)		(9,357	)		(583	)
Discontinued operations		253			34			323			85

		(4,575	)		(82	)		(9,034	)		(498	)

Income (loss) attributable to Kindred	$	(35,811	)	$	1,745		$	(27,791	)	$	4,802

Amounts attributable to Kindred stockholders:
Income (loss) from continuing operations	$	(25,893	)	$	13,613		$	(8,436	)	$	24,020
Loss from discontinued operations		(9,918	)		(11,868	)		(19,355	)		(19,218	)

Net income (loss)	$	(35,811	)	$	1,745		$	(27,791	)	$	4,802

Earnings (loss) per common share:
Basic:
Income (loss) from continuing operations	$	(0.48	)	$	0.25		$	(0.16	)	$	0.45
Discontinued operations:
Loss from operations		(0.15	)		(0.02	)		(0.27	)		(0.12	)
Loss on divestiture of operations		(0.04	)		(0.20	)		(0.09	)		(0.24	)

Loss from discontinued operations		(0.19	)		(0.22	)		(0.36	)		(0.36	)

Net income (loss)	$	(0.67	)	$	0.03		$	(0.52	)	$	0.09

Diluted:
Income (loss) from continuing operations	$	(0.48	)	$	0.25		$	(0.16	)	$	0.45
Discontinued operations:
Loss from operations		(0.15	)		(0.02	)		(0.27	)		(0.12	)
Loss on divestiture of operations		(0.04	)		(0.20	)		(0.09	)		(0.24	)

Loss from discontinued operations		(0.19	)		(0.22	)		(0.36	)		(0.36	)

Net income (loss)	$	(0.67	)	$	0.03		$	(0.52	)	$	0.09

Shares used in computing earnings (loss) per common share:
Basic		53,714			52,265			53,180			52,164
Diluted		53,714			52,284			53,180			52,184
Cash dividends declared and paid per common share	$	0.12		$	—		$	0.24		$	—

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Kindred Healthcare Announces Second Quarter 2014 Results

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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,
	2014			2013			2014			2013
Revenues	$	1,275,964		$	1,191,030		$	2,562,706		$	2,450,464

Salaries, wages and benefits		770,321			715,619			1,544,133			1,497,484
Supplies		80,794			80,603			162,782			164,749
Rent		80,209			77,324			161,257			153,843
Other operating expenses		261,418			227,981			511,022			458,656
Other income		(154	)		(26	)		(388	)		(1,035	)
Impairment charges		—			438			—			625
Depreciation and amortization		39,442			38,554			78,779			80,152
Interest expense		80,530			29,074			106,329			57,233
Investment income		(2,449	)		(1,474	)		(2,632	)		(1,559	)

		1,310,111			1,168,093			2,561,282			2,410,148

Income (loss) from continuing operations before income taxes		(34,147	)		22,937			1,424			40,316
Provision (benefit) for income taxes		(13,082	)		9,208			503			15,713

Income (loss) from continuing operations		(21,065	)		13,729			921			24,603
Discontinued operations, net of income taxes:
Loss from operations		(8,153	)		(1,050	)		(14,654	)		(6,426	)
Loss on divestiture of operations		(2,018	)		(10,852	)		(5,024	)		(12,877	)

Loss from discontinued operations		(10,171	)		(11,902	)		(19,678	)		(19,303	)

Net income (loss)		(31,236	)		1,827			(18,757	)		5,300
(Earnings) loss attributable to noncontrolling interests:
Continuing operations		(4,828	)		(116	)		(9,357	)		(583	)
Discontinued operations		253			34			323			85

		(4,575	)		(82	)		(9,034	)		(498	)

Income (loss) attributable to Kindred	$	(35,811	)	$	1,745		$	(27,791	)	$	4,802

Amounts attributable to Kindred stockholders:
Income (loss) from continuing operations	$	(25,893	)	$	13,613		$	(8,436	)	$	24,020
Loss from discontinued operations		(9,918	)		(11,868	)		(19,355	)		(19,218	)

Net income (loss)	$	(35,811	)	$	1,745		$	(27,791	)	$	4,802

Earnings (loss) per common share:
Basic:
Income (loss) from continuing operations	$	(0.48	)	$	0.25		$	(0.16	)	$	0.45
Discontinued operations:
Loss from operations		(0.15	)		(0.02	)		(0.27	)		(0.12	)
Loss on divestiture of operations		(0.04	)		(0.20	)		(0.09	)		(0.24	)

Loss from discontinued operations		(0.19	)		(0.22	)		(0.36	)		(0.36	)

Net income (loss)	$	(0.67	)	$	0.03		$	(0.52	)	$	0.09

Diluted:
Income (loss) from continuing operations	$	(0.48	)	$	0.25		$	(0.16	)	$	0.45
Discontinued operations:
Loss from operations		(0.15	)		(0.02	)		(0.27	)		(0.12	)
Loss on divestiture of operations		(0.04	)		(0.20	)		(0.09	)		(0.24	)

Loss from discontinued operations		(0.19	)		(0.22	)		(0.36	)		(0.36	)

Net income (loss)	$	(0.67	)	$	0.03		$	(0.52	)	$	0.09

Shares used in computing earnings (loss) per common share:
Basic		53,714			52,265			53,180			52,164
Diluted		53,714			52,284			53,180			52,184
Cash dividends declared and paid per common share	$	0.12		$	—		$	0.24		$	—

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Kindred Healthcare Announces Second Quarter 2014 Results

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August 6, 2014

KINDRED HEALTHCARE, INC.

Condensed Consolidated Balance Sheet

(Unaudited)

(In thousands, except per share amounts)


	June 30,			December 31,
	2014			2013
ASSETS
Current assets:
Cash and cash equivalents	$	45,416		$	35,972
Cash—restricted		3,490			3,713
Insurance subsidiary investments		93,527			96,295
Accounts receivable less allowance for loss		1,006,963			916,529
Inventories		25,660			25,780
Deferred tax assets		39,658			37,920
Income taxes		50,812			36,846
Other		38,651			43,673

		1,304,177			1,196,728
Property and equipment		1,942,214			1,906,366
Accumulated depreciation		(1,024,411	)		(979,791	)

		917,803			926,575
Goodwill		994,854			992,102
Intangible assets less accumulated amortization		411,260			423,303
Assets held for sale		8,435			20,978
Insurance subsidiary investments		160,565			149,094
Deferred tax assets		—			17,043
Other		235,716			220,046

Total assets	$	4,032,810		$	3,945,869

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	162,040		$	181,772
Salaries, wages and other compensation		346,318			361,192
Due to third party payors		18,413			33,747
Professional liability risks		69,657			60,993
Other accrued liabilities		135,420			146,495
Long-term debt due within one year		10,233			8,222

		742,081			792,421
Long-term debt		1,530,340			1,579,391
Professional liability risks		243,536			246,230
Deferred tax liabilities		5,286			—
Deferred credits and other liabilities		215,855			206,611
Equity:
Stockholders’ equity:
Common stock, $0.25 par value; authorized 175,000 shares; issued 63,784 shares—June 30, 2014 and 54,165 shares—December 31, 2013		15,946			13,541
Capital in excess of par value		1,346,561			1,146,193
Accumulated other comprehensive loss		(2,299	)		(252	)
Accumulated deficit		(107,327	)		(76,825	)

		1,252,881			1,082,657
Noncontrolling interests		42,831			38,559

Total equity		1,295,712			1,121,216

Total liabilities and equity	$	4,032,810		$	3,945,869

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Kindred Healthcare Announces Second Quarter 2014 Results

Page 10

August 6, 2014

KINDRED HEALTHCARE, INC.

Condensed Consolidated Statement of Cash Flows

(Unaudited)

(In thousands)


	Three months ended						Six months ended
	June 30,						June 30,
	2014			2013			2014			2013
Cash flows from operating activities:
Net income (loss)	$	(31,236	)	$	1,827		$	(18,757	)	$	5,300
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		40,922			46,960			82,226			99,914
Amortization of stock-based compensation costs		6,378			3,840			8,963			6,088
Amortization of deferred financing costs		16,832			4,407			19,229			7,020
Payment of capitalized lender fees related to debt issuance		(19,125	)		(1,600	)		(19,125	)		(1,600	)
Provision for doubtful accounts		12,133			10,071			20,893			21,337
Deferred income taxes		17,528			(24,977	)		21,503			(25,321	)
Impairment charges		220			646			664			1,082
Loss on divestiture of discontinued operations		2,018			10,852			5,024			12,877
Other		70			(1,284	)		2,114			(864	)
Change in operating assets and liabilities:
Accounts receivable		(41,066	)		48,294			(112,895	)		(19,117	)
Inventories and other assets		(3,769	)		4,747			(9,987	)		(3,400	)
Accounts payable		(5,425	)		(3,288	)		(18,877	)		(19,078	)
Income taxes		(40,476	)		10,025			(11,063	)		22,700
Due to third party payors		(12,354	)		(8,187	)		(14,367	)		(9,215	)
Other accrued liabilities		7,387			(48,699	)		(21,262	)		(19,256	)

Net cash provided by (used in) operating activities		(49,963	)		53,634			(65,717	)		78,467

Cash flows from investing activities:
Routine capital expenditures		(24,485	)		(17,430	)		(46,162	)		(39,800	)
Development capital expenditures		(372	)		(5,086	)		(1,123	)		(7,474	)
Acquisitions, net of cash acquired		(1,383	)		(26,933	)		(24,098	)		(26,933	)
Sale of assets		8,927			7,243			13,961			12,303
Purchase of insurance subsidiary investments		(13,179	)		(11,759	)		(23,293	)		(22,595	)
Sale of insurance subsidiary investments		17,758			15,526			26,520			25,528
Net change in insurance subsidiary cash and cash equivalents		(4,957	)		(9,782	)		(11,556	)		(42,878	)
Change in other investments		70			39			710			358
Other		17			(77	)		(534	)		(221	)

Net cash used in investing activities		(17,604	)		(48,259	)		(65,575	)		(101,712	)

Cash flows from financing activities:
Proceeds from borrowings under revolving credit		648,315			377,900			1,157,015			861,400
Repayment of borrowings under revolving credit		(943,715	)		(385,200	)		(1,369,515	)		(844,400	)
Proceeds from issuance of senior unsecured notes		500,000			—			500,000			—
Proceeds from issuance of term loan, net of discount		997,500			—			997,500			—
Repayment of senior unsecured notes		(550,000	)		—			(550,000	)		—
Repayment of term loan		(781,594	)		(1,969	)		(783,563	)		(3,969	)
Repayment of other long-term debt		(67	)		(91	)		(157	)		(757	)
Payment of deferred financing costs		(2,378	)		(455	)		(2,648	)		(657	)
Equity offering, net of offering costs		203,977			—			203,977			—
Issuance of common stock in connection with employee benefit plans		883			203			4,687			207
Dividends paid		(6,572	)		—			(13,086	)		—
Distributions to noncontrolling interests		(2,662	)		(1,019	)		(5,595	)		(1,510	)
Other		248			19			2,121			351

Net cash provided by (used in) financing activities		63,935			(10,612	)		140,736			10,665

Change in cash and cash equivalents		(3,632	)		(5,237	)		9,444			(12,580	)
Cash and cash equivalents at beginning of period		49,048			42,664			35,972			50,007

Cash and cash equivalents at end of period	$	45,416		$	37,427		$	45,416		$	37,427

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Kindred Healthcare Announces Second Quarter 2014 Results

Page 11

August 6, 2014

KINDRED HEALTHCARE, INC.

Condensed Consolidated Statement of Operations

(Unaudited)

(In thousands, except per share amounts)


	2013 Quarters												2014 Quarters
	First			Second			Third			Fourth			First			Second
Revenues	$	1,259,434		$	1,191,030		$	1,175,445		$	1,209,676		$	1,286,742		$	1,275,964

Salaries, wages and benefits		781,865			715,619			718,227			738,952			773,812			770,321
Supplies		84,146			80,603			79,498			78,694			81,988			80,794
Rent		76,519			77,324			76,762			80,921			81,048			80,209
Other operating expenses		230,675			227,981			261,842			245,262			249,604			261,418
Other (income) expense		(1,009	)		(26	)		51			(458	)		(234	)		(154	)
Impairment charges		187			438			441			76,127			—			—
Depreciation and amortization		41,598			38,554			36,507			37,547			39,337			39,442
Interest expense		28,159			29,074			25,624			25,152			25,799			80,530
Investment income		(85	)		(1,474	)		(1,235	)		(1,252	)		(183	)		(2,449	)

		1,242,055			1,168,093			1,197,717			1,280,945			1,251,171			1,310,111

Income (loss) from continuing operations before income taxes		17,379			22,937			(22,272	)		(71,269	)		35,571			(34,147	)
Provision (benefit) for income taxes		6,505			9,208			(6,510	)		(20,522	)		13,585			(13,082	)

Income (loss) from continuing operations		10,874			13,729			(15,762	)		(50,747	)		21,986			(21,065	)
Discontinued operations, net of income taxes:
Loss from operations		(5,376	)		(1,050	)		(25,466	)		(7,150	)		(6,501	)		(8,153	)
Loss on divestiture of operations		(2,025	)		(10,852	)		(65,016	)		(5,994	)		(3,006	)		(2,018	)

Loss from discontinued operations		(7,401	)		(11,902	)		(90,482	)		(13,144	)		(9,507	)		(10,171	)

Net income (loss)		3,473			1,827			(106,244	)		(63,891	)		12,479			(31,236	)
(Earnings) loss attributable to noncontrolling interests:
Continuing operations		(467	)		(116	)		(841	)		(2,466	)		(4,529	)		(4,828	)
Discontinued operations		51			34			87			61			70			253

		(416	)		(82	)		(754	)		(2,405	)		(4,459	)		(4,575	)

Income (loss) attributable to Kindred	$	3,057		$	1,745		$	(106,998	)	$	(66,296	)	$	8,020		$	(35,811	)

Amounts attributable to Kindred stockholders:
Income (loss) from continuing operations	$	10,407		$	13,613		$	(16,603	)	$	(53,213	)	$	17,457		$	(25,893	)
Loss from discontinued operations		(7,350	)		(11,868	)		(90,395	)		(13,083	)		(9,437	)		(9,918	)

Net income (loss)	$	3,057		$	1,745		$	(106,998	)	$	(66,296	)	$	8,020		$	(35,811	)

Earnings (loss) per common share:
Basic:
Income (loss) from continuing operations	$	0.20		$	0.25		$	(0.31	)	$	(1.02	)	$	0.32		$	(0.48	)
Discontinued operations:
Loss from operations		(0.10	)		(0.02	)		(0.49	)		(0.14	)		(0.11	)		(0.15	)
Loss on divestiture of operations		(0.04	)		(0.20	)		(1.24	)		(0.11	)		(0.06	)		(0.04	)

Loss from discontinued operations		(0.14	)		(0.22	)		(1.73	)		(0.25	)		(0.17	)		(0.19	)

Net income (loss)	$	0.06		$	0.03		$	(2.04	)	$	(1.27	)	$	0.15		$	(0.67	)

Diluted:
Income (loss) from continuing operations	$	0.20		$	0.25		$	(0.31	)	$	(1.02	)	$	0.32		$	(0.48	)
Discontinued operations:
Loss from operations		(0.10	)		(0.02	)		(0.49	)		(0.14	)		(0.11	)		(0.15	)
Loss on divestiture of operations		(0.04	)		(0.20	)		(1.24	)		(0.11	)		(0.06	)		(0.04	)

Loss from discontinued operations		(0.14	)		(0.22	)		(1.73	)		(0.25	)		(0.17	)		(0.19	)

Net income (loss)	$	0.06		$	0.03		$	(2.04	)	$	(1.27	)	$	0.15		$	(0.67	)

Shares used in computing earnings (loss) per common share:
Basic		52,062			52,265			52,323			52,344			52,641			53,714
Diluted		52,083			52,284			52,323			52,344			52,711			53,714

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Kindred Healthcare Announces Second Quarter 2014 Results

Page 12

August 6, 2014

KINDRED HEALTHCARE, INC.

Condensed Business Segment Data

(Unaudited)

(In thousands)


	2013 Quarters												2014 Quarters
	First			Second			Third			Fourth			First			Second
Revenues:
Hospital division	$	657,814		$	606,604		$	594,154		$	606,988		$	646,458		$	632,156
Nursing center division		270,205			264,847			265,696			270,080			277,902			280,255
Rehabilitation division:
Skilled nursing rehabilitation services		258,750			249,647			245,330			243,280			254,255			253,989
Hospital rehabilitation services		74,523			69,777			68,296			74,017			73,964			75,324

		333,273			319,424			313,626			317,297			328,219			329,313

Care management division		51,621			53,039			53,801			66,466			87,704			87,986

		1,312,913			1,243,914			1,227,277			1,260,831			1,340,283			1,329,710
Eliminations:
Skilled nursing rehabilitation services		(28,657	)		(28,660	)		(28,151	)		(28,157	)		(29,646	)		(30,031	)
Hospital rehabilitation services		(23,609	)		(23,223	)		(22,520	)		(22,123	)		(23,233	)		(22,855	)
Nursing centers		(1,213	)		(1,001	)		(1,161	)		(875	)		(662	)		(860	)

		(53,479	)		(52,884	)		(51,832	)		(51,155	)		(53,541	)		(53,746	)

	$	1,259,434		$	1,191,030		$	1,175,445		$	1,209,676		$	1,286,742		$	1,275,964

Income (loss) from continuing operations:
Operating income (loss):
Hospital division	$	147,493		$	129,366		$	112,483		$	126,788		$	145,395		$	132,878	(a)
Nursing center division		29,145			36,018			31,505			35,585			38,471			36,880	(b)
Rehabilitation division:
Skilled nursing rehabilitation services		13,239			21,623			(7,209	)		14,260			18,328			19,982	(b)
Hospital rehabilitation services		18,132			19,573			18,215			18,005			19,820			20,084	(b)

		31,371			41,196			11,006			32,265			38,148			40,066

Care management division		2,786			3,961			1,085			2,131			4,697			7,065	(b)
Corporate:
Overhead		(45,585	)		(43,196	)		(39,157	)		(48,557	)		(44,050	)		(48,365	) (b)
Insurance subsidiary		(509	)		(384	)		(482	)		(539	)		(406	)		(443	)

		(46,094	)		(43,580	)		(39,639	)		(49,096	)		(44,456	)		(48,808	)
Impairment charges		(187	)		(438	)		(441	)		(76,127	)		—			—
Transaction costs		(944	)		(108	)		(613	)		(447	)		(683	)		(4,496	)

Operating income		163,570			166,415			115,386			71,099			181,572			163,585
Rent		(76,519	)		(77,324	)		(76,762	)		(80,921	)		(81,048	)		(80,209	) (c)
Depreciation and amortization		(41,598	)		(38,554	)		(36,507	)		(37,547	)		(39,337	)		(39,442	)
Interest, net		(28,074	)		(27,600	)		(24,389	)		(23,900	)		(25,616	)		(78,081	) (d)

Income (loss) from continuing operations before income taxes		17,379			22,937			(22,272	)		(71,269	)		35,571			(34,147	)
Provision (benefit) for income taxes		6,505			9,208			(6,510	)		(20,522	)		13,585			(13,082	)

	$	10,874		$	13,729		$	(15,762	)	$	(50,747	)	$	21,986		$	(21,065	)

(a)	Includes litigation costs of $4.6 million.

(b)

Includes severance and other costs related to restructuring activities of $4.9 million (nursing center division—$3.2 million, rehabilitation division—$0.3 million (skilled nursing rehabilitation services—$0.2 million and hospital rehabilitation services—$0.1 million), care management division—$0.8 million and corporate—$0.6 million).

(c)	Includes lease cancellation charges of $0.3 million incurred in connection with restructuring activities.

(d)	Includes $56.6 million of charges associated with debt refinancing.

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Kindred Healthcare Announces Second Quarter 2014 Results

Page 13

August 6, 2014

KINDRED HEALTHCARE, INC.

Condensed Consolidating Statement of Operations

(Unaudited)

(In thousands)


	Three months ended June 30, 2014
				Nursing			Rehabilitation division								Care
	Hospital			center			Skilled nursing			Hospital					management			Corporate			Transaction
	division (a)			division (b,c)			services (b)			services (b)		Total			division (b)			(b,d)			costs			Eliminations			Consolidated
Revenues	$	632,156		$	280,255		$	253,989		$	75,324	$	329,313		$	87,986		$	—		$	—		$	(53,746	)	$	1,275,964

Salaries, wages and benefits		271,092			128,641			223,907			50,303		274,210			66,804			29,813			—			(239	)		770,321
Supplies		66,509			10,559			680			32		712			2,833			181			—			—			80,794
Rent		52,526			23,856			1,067			22		1,089			2,177			561			—			—			80,209
Other operating expenses		161,722			104,317			9,406			4,899		14,305			11,281			18,804			4,496			(53,507	)		261,418
Other (income) expense		(45	)		(142	)		14			6		20			3			10			—			—			(154	)
Depreciation and amortization		17,008			7,686			2,885			2,488		5,373			2,139			7,236			—			—			39,442
Interest expense		187			7			51			—		51			12			80,273			—			—			80,530
Investment income		(16	)		(10	)		(225	)		—		(225	)		(1	)		(2,197	)		—			—			(2,449	)

		568,983			274,914			237,785			57,750		295,535			85,248			134,681			4,496			(53,746	)		1,310,111

Income (loss) from continuing operations before income taxes	$	63,173		$	5,341		$	16,204		$	17,574	$	33,778		$	2,738		$	(134,681	)	$	(4,496	)	$	—			(34,147	)

Income tax benefit																												(13,082	)

Loss from continuing operations																											$	(21,065	)

Capital expenditures, excluding acquisitions (including discontinued operations):
Routine	$	8,225		$	5,163		$	593		$	44	$	637		$	168		$	10,292		$	—		$	—		$	24,485
Development		51			321			—			—		—			—			—			—			—			372

	$	8,276		$	5,484		$	593		$	44	$	637		$	168		$	10,292		$	—		$	—		$	24,857


	Three months ended June 30, 2013
				Nursing			Rehabilitation division								Care
	Hospital			center			Skilled nursing			Hospital					management						Transaction
	division			division			services			services		Total			division			Corporate (e)			costs			Eliminations			Consolidated
Revenues	$	606,604		$	264,847		$	249,647		$	69,777	$	319,424		$	53,039		$	—		$	—		$	(52,884	)	$	1,191,030

Salaries, wages and benefits		261,362			123,242			219,874			46,236		266,110			39,730			25,242			—			(67	)		715,619
Supplies		64,737			12,568			785			30		815			2,325			158			—			—			80,603
Rent		50,221			24,104			1,197			19		1,216			1,155			628			—			—			77,324
Other operating expenses		150,959			93,274			7,326			3,930		11,256			7,023			18,178			108			(52,817	)		227,981
Other (income) expense		180			(255	)		39			8		47			—			2			—			—			(26	)
Impairment charges		408			30			—			—		—			—			—			—			—			438
Depreciation and amortization		17,525			6,814			2,878			2,319		5,197			1,615			7,403			—			—			38,554
Interest expense		179			1			73			—		73			—			28,821			—			—			29,074
Investment income		(2	)		(13	)		(74	)		—		(74	)		—			(1,385	)		—			—			(1,474	)

		545,569			259,765			232,098			52,542		284,640			51,848			79,047			108			(52,884	)		1,168,093

Income from continuing operations before income taxes	$	61,035		$	5,082		$	17,549		$	17,235	$	34,784		$	1,191		$	(79,047	)	$	(108	)	$	—			22,937

Provision for income taxes																												9,208

Income from continuing operations																											$	13,729

Capital expenditures, excluding acquisitions (including discontinued operations):
Routine	$	5,593		$	4,259		$	464		$	45	$	509		$	339		$	6,730		$	—		$	—		$	17,430
Development		5,079			7			—			—		—			—			—			—			—			5,086

	$	10,672		$	4,266		$	464		$	45	$	509		$	339		$	6,730		$	—		$	—		$	22,516

(a)	Includes litigation costs of $4.6 million.

(b)

Includes severance and other costs related to restructuring activities of $4.9 million (nursing center division—$3.2 million, rehabilitation division—$0.3 million (skilled nursing rehabilitation services - $0.2 million and hospital rehabilitation services—$0.1 million), care management division—$0.8 million and corporate—$0.6 million).

(c)	Includes lease cancellation charges of $0.3 million incurred in connection with restructuring activities.

(d)	Includes $56.6 million of charges associated with debt refinancing.

(e)	Includes $1.4 million of charges associated with debt refinancing.

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Kindred Healthcare Announces Second Quarter 2014 Results

Page 14

August 6, 2014

KINDRED HEALTHCARE, INC.

Condensed Consolidating Statement of Operations

(Unaudited)

(In thousands)


	Six months ended June 30, 2014
				Nursing			Rehabilitation division								Care
	Hospital			center			Skilled nursing			Hospital					management			Corporate			Transaction
	division (a)			division (b,c)			services (b)			services (b)		Total			division (b)			(b,d)			costs			Eliminations			Consolidated
Revenues	$	1,278,614		$	558,157		$	508,244		$	149,288	$	657,532		$	175,690		$	—		$	—		$	(107,287	)	$	2,562,706

Salaries, wages and benefits		545,928			256,395			448,514			100,302		548,816			135,493			57,651			339			(489	)		1,544,133
Supplies		133,677			21,328			1,416			67		1,483			5,932			362			—			—			162,782
Rent		105,661			47,808			2,156			73		2,229			4,433			1,126			—			—			161,257
Other operating expenses		320,814			205,426			19,995			9,004		28,999			22,500			35,241			4,840			(106,798	)		511,022
Other (income) expense		(78	)		(343	)		9			11		20			3			10			—			—			(388	)
Depreciation and amortization		33,993			15,228			5,580			5,052		10,632			4,264			14,662			—			—			78,779
Interest expense		372			12			109			—		109			22			105,814			—			—			106,329
Investment income		(18	)		(21	)		(284	)		—		(284	)		(1	)		(2,308	)		—			—			(2,632	)

		1,140,349			545,833			477,495			114,509		592,004			172,646			212,558			5,179			(107,287	)		2,561,282

Income from continuing operations before income taxes	$	138,265		$	12,324		$	30,749		$	34,779	$	65,528		$	3,044		$	(212,558	)	$	(5,179	)	$	—			1,424

Provision for income taxes																												503

Income from continuing operations																											$	921

Capital expenditures, excluding acquisitions (including discontinued operations):
Routine	$	16,627		$	10,218		$	1,442		$	100	$	1,542		$	476		$	17,299		$	—		$	—		$	46,162
Development		562			561			—			—		—			—			—			—			—			1,123

	$	17,189		$	10,779		$	1,442		$	100	$	1,542		$	476		$	17,299		$	—		$	—		$	47,285


	Six months ended June 30, 2013
				Nursing			Rehabilitation division								Care
	Hospital			center			Skilled nursing			Hospital					management			Corporate			Transaction
	division (e)			division (e)			services (e)			services (e)		Total			division (e)			(e,f)			costs			Eliminations			Consolidated
Revenues	$	1,264,418		$	535,052		$	508,397		$	144,300	$	652,697		$	104,660		$	—		$	—		$	(106,363	)	$	2,450,464

Salaries, wages and benefits		551,019			258,425			454,718			98,656		553,374			80,044			54,930			—			(308	)		1,497,484
Supplies		132,883			25,282			1,596			62		1,658			4,563			363			—			—			164,749
Rent		99,803			47,980			2,432			36		2,468			2,341			1,251			—			—			153,843
Other operating expenses		303,582			186,838			17,182			7,849		25,031			13,306			34,902			1,052			(106,055	)		458,656
Other (income) expense		75			(656	)		39			28		67			—			(521	)		—			—			(1,035	)
Impairment charges		584			41			—			—		—			—			—			—			—			625
Depreciation and amortization		37,247			14,155			5,990			4,650		10,640			3,141			14,969			—			—			80,152
Interest expense		361			6			169			—		169			—			56,697			—			—			57,233
Investment income		(6	)		(21	)		(102	)		—		(102	)		—			(1,430	)		—			—			(1,559	)

		1,125,548			532,050			482,024			111,281		593,305			103,395			161,161			1,052			(106,363	)		2,410,148

Income from continuing operations before income taxes	$	138,870		$	3,002		$	26,373		$	33,019	$	59,392		$	1,265		$	(161,161	)	$	(1,052	)	$	—			40,316

Provision for income taxes																												15,713

Income from continuing operations																											$	24,603

Capital expenditures, excluding acquisitions (including discontinued operations):
Routine	$	15,864		$	10,078		$	1,069		$	77	$	1,146		$	534		$	12,178		$	—		$	—		$	39,800
Development		7,467			7			—			—		—			—			—			—			—			7,474

	$	23,331		$	10,085		$	1,069		$	77	$	1,146		$	534		$	12,178		$	—		$	—		$	47,274

(a)	Includes litigation costs of $4.6 million.

(b)

Includes severance and other costs related to restructuring activities of $4.9 million (nursing center division - $3.2 million, rehabilitation division - $0.3 million (skilled nursing rehabilitation services - $0.2 million and hospital rehabilitation services - $0.1 million), care management division - $0.8 million and corporate - $0.6 million).

(c)	Includes lease cancellation charges of $0.3 million incurred in connection with restructuring activities.

(d)	Includes $56.6 million of charges associated with debt refinancing.

(e)

Includes one-time bonus costs of $19.8 million (hospital division - $7.8 million, nursing center division - $4.6 million, rehabilitation division - $6.3 million (skilled nursing rehabilitation services - $5.0 million and hospital rehabilitation services - $1.3 million), care management division - $0.8 million and corporate - $0.3 million).

(f)	Includes $1.4 million of charges associated with debt refinancing.

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Kindred Healthcare Announces Second Quarter 2014 Results

Page 15

August 6, 2014

KINDRED HEALTHCARE, INC.

Condensed Business Segment Data

(Unaudited)


	2013 Quarters								2014 Quarters
	First		Second		Third		Fourth		First		Second
Hospital division data:
End of period data:
Number of hospitals:
Transitional care		97		97		97		97		97		97
Inpatient rehabilitation		5		5		5		5		5		5

		102		102		102		102		102		102

Number of licensed beds:
Transitional care		7,059		7,059		7,073		7,105		7,145		7,145
Inpatient rehabilitation		215		215		215		215		215		215

		7,274		7,274		7,288		7,320		7,360		7,360

Revenue mix %:
Medicare		62.5		60.7		59.1		59.3		60.2		58.9
Medicaid		5.4		5.9		6.9		6.2		6.5		6.6
Medicare Advantage		10.2		11.1		11.1		11.7		11.2		11.0
Medicaid Managed		1.9		1.9		2.0		1.9		2.3		2.9
Commercial insurance and other		20.0		20.4		20.9		20.9		19.8		20.6
Admissions:
Medicare		10,274		9,432		9,010		9,255		9,858		9,410
Medicaid		685		744		788		712		835		914
Medicare Advantage		1,519		1,474		1,422		1,450		1,515		1,449
Medicaid Managed		209		208		225		252		317		381
Commercial insurance and other		1,951		1,869		1,874		1,818		2,107		2,055

		14,638		13,727		13,319		13,487		14,632		14,209

Admissions mix %:
Medicare		70.2		68.7		67.6		68.6		67.4		66.2
Medicaid		4.7		5.4		5.9		5.3		5.7		6.4
Medicare Advantage		10.4		10.8		10.7		10.7		10.3		10.2
Medicaid Managed		1.4		1.5		1.7		1.9		2.2		2.7
Commercial insurance and other		13.3		13.6		14.1		13.5		14.4		14.5
Patient days:
Medicare		252,195		234,490		223,639		226,662		239,759		230,122
Medicaid		28,765		30,425		31,569		29,799		32,909		32,821
Medicare Advantage		43,016		43,040		41,842		43,784		44,979		44,094
Medicaid Managed		8,808		8,342		8,264		8,238		10,733		13,247
Commercial insurance and other		63,227		57,091		59,575		57,334		62,858		61,892

		396,011		373,388		364,889		365,817		391,238		382,176

Average length of stay:
Medicare		24.5		24.9		24.8		24.5		24.3		24.5
Medicaid		42.0		40.9		40.1		41.9		39.4		35.9
Medicare Advantage		28.3		29.2		29.4		30.2		29.7		30.4
Medicaid Managed		42.1		40.1		36.7		32.7		33.9		34.8
Commercial insurance and other		32.4		30.5		31.8		31.5		29.8		30.1
Weighted average		27.1		27.2		27.4		27.1		26.7		26.9

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Kindred Healthcare Announces Second Quarter 2014 Results

Page 16

August 6, 2014

KINDRED HEALTHCARE, INC.

Condensed Business Segment Data (Continued)

(Unaudited)


	2013 Quarters								2014 Quarters
	First		Second		Third		Fourth		First		Second
Hospital division data (continued):
Revenues per admission:
Medicare	$	40,051	$	39,004	$	38,993	$	38,869	$	39,482	$	39,559
Medicaid		51,450		48,221		51,934		52,635		50,201		45,392
Medicare Advantage		44,326		45,709		46,429		49,051		47,739		48,067
Medicaid Managed		58,770		55,496		52,771		46,112		47,781		48,953
Commercial insurance and other		67,389		66,306		66,170		69,876		60,679		63,315
Weighted average		44,939		44,190		44,609		45,006		44,181		44,490
Revenues per patient day:
Medicare	$	1,632	$	1,569	$	1,571	$	1,587	$	1,623	$	1,618
Medicaid		1,225		1,179		1,296		1,258		1,274		1,264
Medicare Advantage		1,565		1,565		1,578		1,624		1,608		1,580
Medicaid Managed		1,395		1,384		1,437		1,411		1,411		1,408
Commercial insurance and other		2,079		2,171		2,081		2,216		2,034		2,102
Weighted average		1,661		1,625		1,628		1,659		1,652		1,654
Medicare case mix index (discharged patients only)		1.18		1.18		1.16		1.16		1.17		1.18
Average daily census		4,400		4,103		3,966		3,976		4,347		4,200
Occupancy %		68.3		63.5		61.1		61.4		67.4		64.9
Annualized employee turnover %		22.1		21.7		21.4		21.3		20.7		20.8
Nursing center division data:
End of period data:
Number of facilities:
Nursing centers:
Owned or leased		94		94		94		94		94		94
Managed		4		4		4		4		4		4
Assisted living facilities		6		6		6		6		6		6

		104		104		104		104		104		104

Number of licensed beds:
Nursing centers:
Owned or leased		11,921		11,921		11,921		11,921		11,921		11,909
Managed		485		485		485		485		485		485
Assisted living facilities		341		341		341		341		341		341

		12,747		12,747		12,747		12,747		12,747		12,735

Revenue mix %:
Medicare		35.0		34.0		33.1		32.1		32.0		31.8
Medicaid		35.7		36.4		38.8		39.8		40.4		39.7
Medicare Advantage		8.2		8.3		7.3		7.8		8.6		8.1
Medicaid Managed		3.4		3.5		3.5		3.5		3.2		3.6
Private and other		17.7		17.8		17.3		16.8		15.8		16.8

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Kindred Healthcare Announces Second Quarter 2014 Results

Page 17

August 6, 2014

KINDRED HEALTHCARE, INC.

Condensed Business Segment Data (Continued)

(Unaudited)


	2013 Quarters								2014 Quarters
	First		Second		Third		Fourth		First		Second
Nursing center division data (continued):
Patient days (a):
Medicare		167,391		158,780		154,562		148,179		148,957		149,385
Medicaid		505,962		506,025		515,789		522,071		516,487		506,917
Medicare Advantage		51,695		51,337		45,338		48,537		54,404		51,355
Medicaid Managed		52,500		52,532		53,740		53,100		49,857		55,997
Private and other		163,641		163,167		162,506		159,518		152,807		155,530

		941,189		931,841		931,935		931,405		922,512		919,184

Patient day mix % (a):
Medicare		17.8		17.0		16.6		15.9		16.1		16.3
Medicaid		53.7		54.3		55.3		56.1		56.0		55.1
Medicare Advantage		5.5		5.5		4.9		5.2		5.9		5.6
Medicaid Managed		5.6		5.7		5.8		5.7		5.4		6.1
Private and other		17.4		17.5		17.4		17.1		16.6		16.9
Revenues per patient day (a):
Medicare Part A	$	528	$	527	$	527	$	542	$	552	$	551
Total Medicare (including Part B)		565		567		569		586		597		597
Medicaid		191		190		200		206		217		220
Medicaid (net of provider taxes) (b)		168		168		178		184		195		197
Medicare Advantage		427		430		428		435		441		442
Medicaid Managed		177		177		175		177		178		180
Private and other		292		289		283		284		288		302
Weighted average		287		284		285		290		301		305
Average daily census (a)		10,458		10,240		10,130		10,124		10,250		10,101
Admissions (a)		10,806		10,066		9,824		9,842		10,252		10,170
Occupancy % (a)		83.3		81.5		80.5		80.2		81.2		80.2
Medicare average length of stay (a)		30.4		31.1		31.8		31.5		29.8		29.7
Annualized employee turnover %		41.3		44.0		44.3		42.8		39.4		40.7
Rehabilitation division data:
Skilled nursing rehabilitation services:
Revenue mix %:
Company-operated		11		11		11		12		12		12
Non-affiliated		89		89		89		88		88		88
Sites of service (at end of period)		1,729		1,713		1,768		1,806		1,851		1,863
Revenue per site	$	149,653	$	145,736	$	138,762	$	134,707	$	137,361	$	136,333
Therapist productivity %		81.1		80.4		79.8		79.5		80.0		79.8
Hospital rehabilitation services:
Revenue mix %:
Company-operated		32		33		33		30		31		30
Non-affiliated		68		67		67		70		69		70
Sites of service (at end of period):
Inpatient rehabilitation units		103		103		99		104		105		104
LTAC hospitals		123		123		122		121		121		118
Sub-acute units		8		8		7		10		10		9
Outpatient units		98		104		104		144		143		143

		332		338		332		379		379		374

Revenue per site	$	224,466	$	206,441	$	205,711	$	195,296	$	195,157	$	201,400
Annualized employee turnover %		10.4		13.2		14.0		13.7		12.5		14.7

(a)	Excludes managed facilities.

(b)	Provider taxes are recorded in other operating expenses for all periods presented.

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Kindred Healthcare Announces Second Quarter 2014 Results

Page 18

August 6, 2014

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,
	2014						2013						2014						2013
	Basic			Diluted			Basic			Diluted			Basic			Diluted			Basic			Diluted
Earnings (loss):
Amounts attributable to Kindred stockholders:
Income (loss) from continuing operations:
As reported in Statement of Operations	$	(25,893	)	$	(25,893	)	$	13,613		$	13,613		$	(8,436	)	$	(8,436	)	$	24,020		$	24,020
Allocation to participating unvested restricted stockholders		—			—			(449	)		(449	)		—			—			(736	)		(736	)

Available to common stockholders	$	(25,893	)	$	(25,893	)	$	13,164		$	13,164		$	(8,436	)	$	(8,436	)	$	23,284		$	23,284

Discontinued operations, net of income taxes:
Loss from operations:
As reported in Statement of Operations	$	(7,900	)	$	(7,900	)	$	(1,016	)	$	(1,016	)	$	(14,331	)	$	(14,331	)	$	(6,341	)	$	(6,341	)
Allocation to participating unvested restricted stockholders		—			—			34			34			—			—			194			194

Available to common stockholders	$	(7,900	)	$	(7,900	)	$	(982	)	$	(982	)	$	(14,331	)	$	(14,331	)	$	(6,147	)	$	(6,147	)

Loss on divestiture of operations:
As reported in Statement of Operations	$	(2,018	)	$	(2,018	)	$	(10,852	)	$	(10,852	)	$	(5,024	)	$	(5,024	)	$	(12,877	)	$	(12,877	)
Allocation to participating unvested restricted stockholders		—			—			358			358			—			—			395			395

Available to common stockholders	$	(2,018	)	$	(2,018	)	$	(10,494	)	$	(10,494	)	$	(5,024	)	$	(5,024	)	$	(12,482	)	$	(12,482	)

Loss from discontinued operations:
As reported in Statement of Operations	$	(9,918	)	$	(9,918	)	$	(11,868	)	$	(11,868	)	$	(19,355	)	$	(19,355	)	$	(19,218	)	$	(19,218	)
Allocation to participating unvested restricted stockholders		—			—			392			392			—			—			589			589

Available to common stockholders	$	(9,918	)	$	(9,918	)	$	(11,476	)	$	(11,476	)	$	(19,355	)	$	(19,355	)	$	(18,629	)	$	(18,629	)

Net income (loss):
As reported in Statement of Operations	$	(35,811	)	$	(35,811	)	$	1,745		$	1,745		$	(27,791	)	$	(27,791	)	$	4,802		$	4,802
Allocation to participating unvested restricted stockholders		—			—			(57	)		(57	)		—			—			(147	)		(147	)

Available to common stockholders	$	(35,811	)	$	(35,811	)	$	1,688		$	1,688		$	(27,791	)	$	(27,791	)	$	4,655		$	4,655

Shares used in the computation:
Weighted average shares outstanding - basic computation		53,714			53,714			52,265			52,265			53,180			53,180			52,164			52,164

Dilutive effect of employee stock options					—						19						—						20

Adjusted weighted average shares outstanding - diluted computation					53,714						52,284						53,180						52,184

Earnings (loss) per common share:
Income (loss) from continuing operations	$	(0.48	)	$	(0.48	)	$	0.25		$	0.25		$	(0.16	)	$	(0.16	)	$	0.45		$	0.45
Discontinued operations:
Loss from operations		(0.15	)		(0.15	)		(0.02	)		(0.02	)		(0.27	)		(0.27	)		(0.12	)		(0.12	)
Loss on divestiture of operations		(0.04	)		(0.04	)		(0.20	)		(0.20	)		(0.09	)		(0.09	)		(0.24	)		(0.24	)

Loss from discontinued operations		(0.19	)		(0.19	)		(0.22	)		(0.22	)		(0.36	)		(0.36	)		(0.36	)		(0.36	)

Net income (loss)	$	(0.67	)	$	(0.67	)	$	0.03		$	0.03		$	(0.52	)	$	(0.52	)	$	0.09		$	0.09

(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 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. However, because the Company reported a loss from continuing operations for the three months and six months ended June 30, 2014, there was no allocation to participating unvested restricted stockholders for these periods.

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Kindred Healthcare Announces Second Quarter 2014 Results

Page 19

August 6, 2014

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 information in this release to compute certain non-GAAP measurements for the three months and six months ended June 30, 2014 and 2013 before certain charges or on a core basis. The charges that were excluded from core operating results are denoted in the tables below.

The income tax benefit associated with the excluded charges was calculated using an effective income tax rate of 37.1% and 36.9% for the three months ended June 30, 2014 and 2013, respectively, and 37.1% and 40.3% for the six months ended June 30, 2014 and 2013, respectively.

The use of these non-GAAP measurements are 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 three months and six months ended June 30, 2014 and 2013 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 purpose of evaluating performance internally.


	Three months ended						Six months ended
	June 30,						June 30,
	2014			2013			2014			2013
Detail of charges:
One-time bonus costs	$	—		$	—		$	—			($19,842	)
Severance and other restructuring costs		(4,950	)		—			(4,950	)		—
Litigation costs		(4,600	)		—			(4,600	)		—
Transaction costs		(4,496	)		(108	)		(5,179	)		(1,052	)
Lease cancellation charges (rent expense)		(247	)		—			(247	)		—
Debt refinancing charges (interest expense)		(56,643	)		(1,365	)		(56,643	)		(1,365	)

		(70,936	)		(1,473	)		(71,619	)		(22,259	)
Income tax benefit		26,295			544			26,545			8,961

Charges net of income taxes		(44,641	)		(929	)		(45,074	)		(13,298	)
Allocation to participating unvested restricted stockholders		—			31			—			407

Available to common stockholders		($44,641	)		($898	)		($45,074	)		($12,891	)

Weighted average diluted shares outstanding		53,714			52,284			53,180			52,184

Diluted loss per common share related to charges		($0.83	)		($0.02	)		($0.85	)		($0.25	)

Reconciliation of operating income before charges:
Operating income before charges	$	177,631		$	166,523		$	359,886		$	350,879
Detail of charges excluded from core operating results:
One-time bonus costs		—			—			—			(19,842	)
Severance and other restructuring costs		(4,950	)		—			(4,950	)		—
Litigation costs		(4,600	)		—			(4,600	)		—
Transaction costs		(4,496	)		(108	)		(5,179	)		(1,052	)

		(14,046	)		(108	)		(14,729	)		(20,894	)

Reported operating income	$	163,585		$	166,415		$	345,157		$	329,985

Reconciliation of income from continuing operations before charges:
Amounts attributable to Kindred stockholders:
Income from continuing operations before charges	$	18,748		$	14,542		$	36,638		$	37,318
Charges net of income taxes		(44,641	)		(929	)		(45,074	)		(13,298	)

Reported income (loss) from continuing operations		($25,893	)		$13,613			($8,436	)		$24,020

Reconciliation of diluted income per common share from continuing operations before charges:
Diluted income per common share before charges (a)	$	0.34		$	0.27		$	0.67		$	0.70
Charges net of income taxes		(0.83	)		(0.02	)		(0.85	)		(0.25	)
Other		0.01			—			0.02			—

Reported diluted income (loss) per common share from continuing operations		($0.48	)		$0.25			($0.16	)		$0.45

Weighted average diluted shares used to compute income per common share from continuing operations before charges		53,792			52,284			53,255			52,184

Reconciliation of effective income tax rate before charges:
Effective income tax rate before charges		35.9	%		40.0	%		37.0	%		39.4	%
Impact of charges on effective income tax rate		2.4	%		0.1	%		-1.7	%		-0.4	%

Reported effective income tax rate		38.3	%		40.1	%		35.3	%		39.0	%

(a)

For purposes of computing diluted earnings per common share before charges, income from continuing operations before charges was reduced by $0.6 million and $0.5 million for the three months ended June 30, 2014 and 2013, respectively, and $1.1 million for both the six months ended June 30, 2014 and 2013, for the allocation of income to participating unvested restricted stockholders.

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Kindred Healthcare Announces Second Quarter 2014 Results

Page 20

August 6, 2014

KINDRED HEALTHCARE, INC.

Reconciliation of Non-GAAP Measurements to GAAP Results (Continued)

(Unaudited)

(In thousands)


	Three months ended June 30, 2014
				Charges
				Severance
	Before			and other						Debt			Transaction						As
	charges			restructuring			Litigation			refinancing			costs			Total			reported
Income (loss) from continuing operations:
Operating income (loss):
Hospital division	$	137,478		$	—		$	(4,600	)	$	—		$	—		$	(4,600	)	$	132,878
Nursing center division		40,085			(3,205	)		—			—			—			(3,205	)		36,880
Rehabilitation division:
Skilled nursing rehabilitation services		20,158			(176	)		—			—			—			(176	)		19,982
Hospital rehabilitation services		20,254			(170	)		—			—			—			(170	)		20,084

		40,412			(346	)		—			—			—			(346	)		40,066

Care management division		7,908			(843	)		—			—			—			(843	)		7,065
Corporate:
Overhead		(47,809	)		(556	)		—			—			—			(556	)		(48,365	)
Insurance subsidiary		(443	)		—			—			—			—			—			(443	)

		(48,252	)		(556	)		—			—			—			(556	)		(48,808	)
Transaction costs		—			—			—			—			(4,496	)		(4,496	)		(4,496	)

Operating income		177,631			(4,950	)		(4,600	)		—			(4,496	)		(14,046	)		163,585
Rent		(79,962	)		(247	)		—			—			—			(247	)		(80,209	)
Depreciation and amortization		(39,442	)		—			—			—			—			—			(39,442	)
Interest, net		(21,438	)		—			—			(56,643	)		—			(56,643	)		(78,081	)

Income (loss) from continuing operations before income taxes		36,789			(5,197	)		(4,600	)		(56,643	)		(4,496	)		(70,936	)		(34,147	)
Provision (benefit) for income taxes		13,213			(1,985	)		(1,757	)		(21,639	)		(914	)		(26,295	)		(13,082	)

	$	23,576		$	(3,212	)	$	(2,843	)	$	(35,004	)	$	(3,582	)	$	(44,641	)	$	(21,065	)


	Three months ended June 30, 2013
				Charges
	Before			Debt			Transaction						As
	charges			refinancing			costs			Total			reported
Income from continuing operations:
Operating income (loss):
Hospital division	$	129,366		$	—		$	—		$	—		$	129,366
Nursing center division		36,018			—			—			—			36,018
Rehabilitation division:
Skilled nursing rehabilitation services		21,623			—			—			—			21,623
Hospital rehabilitation services		19,573			—			—			—			19,573

		41,196			—			—			—			41,196

Care management division		3,961			—			—			—			3,961
Corporate:
Overhead		(43,196	)		—			—			—			(43,196	)
Insurance subsidiary		(384	)		—			—			—			(384	)

		(43,580	)		—			—			—			(43,580	)
Impairment charges		(438	)		—			—			—			(438	)
Transaction costs		—			—			(108	)		(108	)		(108	)

Operating income		166,523			—			(108	)		(108	)		166,415
Rent		(77,324	)		—			—			—			(77,324	)
Depreciation and amortization		(38,554	)		—			—			—			(38,554	)
Interest, net		(26,235	)		(1,365	)		—			(1,365	)		(27,600	)

Income from continuing operations before income taxes		24,410			(1,365	)		(108	)		(1,473	)		22,937
Provision for income taxes		9,752			(504	)		(40	)		(544	)		9,208

	$	14,658		$	(861	)	$	(68	)	$	(929	)	$	13,729

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Kindred Healthcare Announces Second Quarter 2014 Results

Page 21

August 6, 2014

KINDRED HEALTHCARE, INC.

Reconciliation of Non-GAAP Measurements to GAAP Results (Continued)

(Unaudited)

(In thousands)


	Six months ended June 30, 2014
				Charges
				Severance
	Before			and other						Debt			Transaction						As
	charges			restructuring			Litigation			refinancing			costs			Total			reported
Income from continuing operations:
Operating income (loss):
Hospital division	$	282,873		$	—		$	(4,600	)	$	—		$	—		$	(4,600	)	$	278,273
Nursing center division		78,556			(3,205	)		—			—			—			(3,205	)		75,351
Rehabilitation division:
Skilled nursing rehabilitation services		38,486			(176	)		—			—			—			(176	)		38,310
Hospital rehabilitation services		40,074			(170	)		—			—			—			(170	)		39,904

		78,560			(346	)		—			—			—			(346	)		78,214

Care management division		12,605			(843	)		—			—			—			(843	)		11,762
Corporate:
Overhead		(91,859	)		(556	)		—			—			—			(556	)		(92,415	)
Insurance subsidiary		(849	)		—			—			—			—			—			(849	)

		(92,708	)		(556	)		—			—			—			(556	)		(93,264	)
Transaction costs		—			—			—			—			(5,179	)		(5,179	)		(5,179	)

Operating income		359,886			(4,950	)		(4,600	)		—			(5,179	)		(14,729	)		345,157
Rent		(161,010	)		(247	)		—			—			—			(247	)		(161,257	)
Depreciation and amortization		(78,779	)		—			—			—			—			—			(78,779	)
Interest, net		(47,054	)		—			—			(56,643	)		—			(56,643	)		(103,697	)

Income from continuing operations before income taxes		73,043			(5,197	)		(4,600	)		(56,643	)		(5,179	)		(71,619	)		1,424
Provision for income taxes		27,048			(1,988	)		(1,760	)		(21,669	)		(1,128	)		(26,545	)		503

	$	45,995		$	(3,209	)	$	(2,840	)	$	(34,974	)	$	(4,051	)	$	(45,074	)	$	921


	Six months ended June 30, 2013
				Charges
	Before			One-time			Debt			Transaction						As
	charges			bonus			refinancing			costs			Total			reported
Income from continuing operations:
Operating income (loss):
Hospital division	$	284,622		$	(7,763	)	$	—		$	—		$	(7,763	)	$	276,859
Nursing center division		69,787			(4,624	)		—			—			(4,624	)		65,163
Rehabilitation division:
Skilled nursing rehabilitation services		39,914			(5,052	)		—			—			(5,052	)		34,862
Hospital rehabilitation services		38,960			(1,255	)		—			—			(1,255	)		37,705

		78,874			(6,307	)		—			—			(6,307	)		72,567

Care management division		7,580			(833	)		—			—			(833	)		6,747
Corporate:
Overhead		(88,466	)		(315	)		—			—			(315	)		(88,781	)
Insurance subsidiary		(893	)		—			—			—			—			(893	)

		(89,359	)		(315	)		—			—			(315	)		(89,674	)
Impairment charges		(625	)		—			—			—			—			(625	)
Transaction costs		—			—			—			(1,052	)		(1,052	)		(1,052	)

Operating income		350,879			(19,842	)		—			(1,052	)		(20,894	)		329,985
Rent		(153,843	)		—			—						—			(153,843	)
Depreciation and amortization		(80,152	)		—			—			—			—			(80,152	)
Interest, net		(54,309	)		—			(1,365	)		—			(1,365	)		(55,674	)

Income from continuing operations before income taxes		62,575			(19,842	)		(1,365	)		(1,052	)		(22,259	)		40,316
Provision for income taxes		24,674			(7,988	)		(550	)		(423	)		(8,961	)		15,713

	$	37,901		$	(11,854	)	$	(815	)	$	(629	)	$	(13,298	)	$	24,603

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Kindred Healthcare Announces Second Quarter 2014 Results

Page 22

August 6, 2014

KINDRED HEALTHCARE, INC.

Reconciliation of Non-GAAP Measurements to GAAP Results (Continued)

(Unaudited)

(In thousands)

The Company recognizes that free cash flows excluding certain items is a non-GAAP measurement and is not intended to replace the presentation of the Company’s cash flows in accordance with GAAP. The Company believes that this non-GAAP measurement provides important information to investors related to the amount of discretionary cash flows that are available for other investing and financing activities. In addition, management uses free cash flows excluding certain items in making decisions related to acquisitions, development capital expenditures, dividends, long-term debt repayments and other uses.

The income tax benefit associated with the excluded payments was calculated using an effective income tax rate of 26.9% and 27.6% for the three months ended June 30, 2014 and 2013, respectively, and 30.8% and 37.4% for the six months ended June 30, 2014 and 2013, respectively.


	Three months ended						Six months ended
	June 30,						June 30,
	2014			2013			2014			2013
Reconciliation of net cash flows provided by (used in) operating activities to free cash flows:
Net cash flows provided by (used in) operating activities		($49,963	)	$	53,634			($65,717	)	$	78,467
Less:
Routine capital expenditures		(24,485	)		(17,430	)		(46,162	)		(39,800	)
Development capital expenditures		(372	)		(5,086	)		(1,123	)		(7,474	)

		(24,857	)		(22,516	)		(47,285	)		(47,274	)

Free cash flows including certain items		(74,820	)		31,118			(113,002	)		31,193
Adjustments to remove certain payments (including payments made for discontinued operations) included in net cash flows provided by (used in) operating activities:
Litigation		700			—			25,850			—
One-time employee bonus		—			—			—			26,345
Capitalized lender fees related to debt refinancing		19,125			1,600			19,125			1,600
Other debt refinancing costs (expensed)		40,373			—			40,373			—
Severance, retirement and retention		2,929			2,545			5,378			3,608
Transaction costs		2,438			1,074			4,176			2,188

		65,565			5,219			94,902			33,741
Benefit of reduced income tax payments resulting from certain payments		(17,664	)		(1,441	)		(29,208	)		(12,636	)

		47,901			3,778			65,694			21,105

Free cash flows excluding certain items		($26,919	)	$	34,896			($47,308	)	$	52,298

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Kindred Healthcare Announces Second Quarter 2014 Results

Page 23

August 6, 2014

KINDRED HEALTHCARE, INC.

Reconciliation of Earnings Guidance for 2014—Continuing Operations (a)

(Unaudited)

(In millions, except per share amounts)


	As of August 6, 2014						As of June 16, 2014
	Low			High			Low			High
Operating income	$	707		$	724		$	715		$	732

Rent		330			330			335			335
Depreciation and amortization		161			161			163			163
Interest, net		98			98			98			98

Income from continuing operations before income taxes		118			135			119			136
Provision for income taxes		45			52			46			53

Income from continuing operations		73			83			73			83
Earnings attributable to noncontrolling interests		(15	)		(15	)		(15	)		(15	)

Income from continuing operations attributable to the Company		58			68			58			68
Allocation to participating unvested restricted stockholders		(2	)		(2	)		(2	)		(2	)

Available to common stockholders	$	56		$	66		$	56		$	66

Earnings per diluted share	$	0.96		$	1.14		$	1.05		$	1.25
Shares used in computing earnings per diluted share		58.3			58.3			53.2			53.2

(a)	The earnings guidance excludes the effect of reimbursement changes, debt refinancing costs, severance, retirement, retention and restructuring costs, litigation costs, transaction costs, any further acquisitions or divestitures, any impairment charges, and any repurchases of common stock.

- END -

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