Kindred Healthcare Reports Strong First Quarter Core Results

  Kindred Healthcare Reports Strong First Quarter Core Results

 Excluding Certain Items, First Quarter Continued Operations Diluted EPS Rose
                    14% to $0.49 Compared to $0.43 in 2012

First Quarter GAAP Continuing Operations Diluted EPS Totaled $0.17 Compared to
                              Last Year’s $0.40

   Company Advances Repositioning Strategy as Reclassification of 19 Ventas
Nursing Centers Exited in the Quarter Lifted Continuing Operations Diluted EPS
                                   by $0.05

   Additional Integrated Care Market Development Plans and Home Health and
                       Hospice Acquisitions Highlighted

    Company Maintains Fiscal 2013 Core Earnings Guidance of $1.10 to $1.30

Business Wire

LOUISVILLE, Ky. -- May 01, 2013

Kindred Healthcare, Inc. (“Kindred” or the “Company”) (NYSE:KND) today
announced its operating results for the first quarter ended March 31, 2013.
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.

Continuing Operations Highlights (excluding certain items unless otherwise
indicated):

  *Consolidated revenues rose 1% to $1.55 billion
  *Solid cost management drove core operating income growth of 6% and EPS
    growth of 14%

       *Core aggregate operating expenses increased only 0.3% compared to
         last year’s first quarter

  *Hospital division reported another successful quarter

       *Stable occupancy combined with improved cost management drove 4%
         growth in operating income

  *RehabCare revenue growth and higher therapist productivity drove 30%
    growth in operating income
  *Home health and hospice division reports continued growth

       *Revenues climbed 82% while operating income rose 55%

  *Nursing center division continued to work through challenging
    reimbursement and regulatory changes while transitioning the operations of
    54 nursing centers leased from Ventas

       *19 nursing centers transitioned in the quarter, with another 23
         transitioned on April 30, 2013

  *GAAP operating cash flows grew to $25 million compared to last year’s
    deficit of $3 million

       *Operating cash flows this year were reduced by $17 million (net of
         income taxes) for certain items in the quarter

First Quarter Results

Continuing Operations

Consolidated revenues for the first quarter ended March 31, 2013 rose 1% to
$1.55 billion compared to $1.54 billion in the first quarter last year. Income
from continuing operations for the first quarter of 2013 totaled $9.1 million
or $0.17 per diluted share compared to $21.2 million or $0.40 per diluted
share in the first quarter last year.

First quarter 2013 operating results included certain pretax charges
aggregating $28.9 million related to (1) a one-time bonus paid to
approximately 50,000 employees who do not participate in the Company’s
incentive compensation program, (2) employee retention costs incurred in
connection with the planned divestiture of 17 non-strategic facilities and the
nonrenewal of 54 nursing centers leased from Ventas, Inc. (“Ventas”)
(NYSE:VTR), and (3) transaction-related costs, the combined effect of which
reduced income from continuing operations by $17.2 million or $0.32 per
diluted share.

First quarter 2012 operating results included certain charges that reduced
income from continuing operations by $1.6 million or $0.03 per diluted share.

Discontinued Operations

During the past few years, the Company has entered into transactions related
to the divestiture of unprofitable businesses. For accounting purposes, the
historical operating results of these businesses and losses associated with
these operations have been classified as discontinued operations in the
Company’s consolidated statement of operations for all historical periods.

In connection with the nonrenewal of 54 nursing centers leased from Ventas,
the Company exited 19 of these facilities in the first quarter of 2013 and
reflected the related operations as discontinued. The Company expects that the
remaining facilities will be classified as discontinued upon the completion of
the transaction process in 2013. At April 30, 2013, the Company had exited 42
of the 54 Ventas facilities.

For the first quarter of 2013, the Company reported a loss from discontinued
operations totaling $4.8 million or $0.09 per diluted share compared to $1.8
million or $0.03 per diluted share in the first quarter last year.

In the first quarter of both 2013 and 2012, the Company reported a loss of
$1.2 million or $0.02 per diluted share related to the divestiture of
discontinued operations.

Management Commentary

Paul J. Diaz, Chief Executive Officer of the Company, remarked, “We are
pleased to report a very strong start to our fiscal 2013. While we continue to
work through significant reimbursement and regulatory pressures in each of our
businesses, our team generated 6% growth in consolidated operating income and
14% growth in our continuing operations diluted EPS on a core basis. This
accomplishment reflects the commitment of our caregivers, and a relentless
focus on cost management across the enterprise, while maintaining our culture
of quality service and patient satisfaction. In addition, we are now beginning
to see the benefits of the Ventas lease transition to our continuing
operations, with the exit from 19 of these facilities adding $0.05 of EPS in
the quarter. Another 23 Ventas facilities were transferred on April 30.”

Mr. Diaz continued, “The first quarter also provided tangible evidence that
our strategic growth plan, asset repositioning, and related capital
redeployment activities are accelerating. With our exit from 54 Ventas nursing
centers currently underway, last week’s announcement to dispose of 17
non-strategic facilities outside of our Integrated Care Markets and our
ongoing review of the 2015 Ventas lease renewals and other properties, our
path to reposition Kindred as a stronger, more market-focused and profitable
post-acute services provider is taking shape. At the same time, our financial
liquidity and available capital resources to invest further in our Integrated
Care Markets and acquire additional home health and hospice businesses has
never been stronger. Our free operating cash flows, along with nearly $400
million of unused revolving credit capacity and $180 million of expected net
proceeds from the announced asset sales, provide us with significant financial
resources to invest in our strategic growth plan.”

Commenting on the Company’s development and acquisition activities, Mr. Diaz
noted, “We recently announced the acquisition of a 54-bed transitional care
hospital in St. Louis, as well as plans to build three new transitional care
centers in Phoenix, Indianapolis and Las Vegas, as we continue to expand the
continuum of our services in these Integrated Care Markets. In addition, we
also announced two home health acquisitions and one hospice acquisition that
will further expand our service offerings in Houston and West Texas. These
transactions demonstrate the strength of our development and capital
redeployment strategy and are expected to be accretive to earnings beginning
in 2014.”

Mr. Diaz concluded, “As we look out over the balance of the year, there are
additional reimbursement challenges related primarily to the implementation of
Medicare sequestration cuts. However, we are confident that the structural
cost reductions we have put in place, along with our ability to increase
volumes and grow our rehabilitation and home health and hospice businesses,
will enable us to meet our earnings guidance expectations for the full fiscal
year. In addition, we believe that the Company will generate significant
levels of free cash flows in 2013 to further reduce our adjusted leverage and
fund our strategic growth plans.”

Earnings Guidance – Continuing Operations

The Company maintained its earnings guidance for 2013. The earnings guidance
provided by the Company reflects the disposition of the 54 nursing centers
leased from Ventas. The earnings guidance also excludes the effect of (1) a
one-time employee bonus, (2) employee retention costs incurred in connection
with the planned divestiture of 17 non-strategic facilities and the nonrenewal
of 54 nursing centers leased from Ventas, (3) any transaction-related charges,
(4) any other reimbursement changes, (5) any further acquisitions or
divestitures, (6) any impairment charges, and (7) any repurchases of common
stock. The recently announced transaction to sell 17 non-strategic facilities
is not reflected in the Company’s earnings guidance. The Company had
previously announced that this transaction, which is subject to certain
conditions, is not expected to change its 2013 annual earnings guidance.

The Company expects consolidated revenues for 2013 to approximate $5.9
billion. Operating income, or earnings before interest, income taxes,
depreciation, amortization and rent, is expected to range from $806million to
$822 million. Rent expense is expected to approximate $399 million, while
depreciation and amortization should approximate $189 million. Net interest
expense is expected to approximate $113 million. The Company expects to report
income from continuing operations for 2013 between $60 million to $70 million
or $1.10 to $1.30 per diluted share (based upon diluted shares of 52.7
million).

The Company re-affirmed its operating cash flow guidance for 2013 at a range
between $230 million to $250 million. Estimated routine capital expenditures
in 2013 are expected to range from $120 million to $130 million. In addition
to its routine capital expenditures, the Company re-affirmed that its
development of new or replacement transitional care (“TC”) hospitals,
transitional care centers, and inpatient rehabilitation hospitals (“IRFs”)
will approximate $20 million to $30 million in 2013. Operating cash flows in
excess of the Company’s routine and development capital spending programs,
which are expected to approximate $90 million for 2013, will be available to
repay debt and fund acquisitions.

Webcast of Conference Call

As previously announced, investors and the general public can access a live
webcast of the first quarter 2013 conference call through a link on the
Company’s website at www.kindredhealthcare.com. The conference call will be
held May 2, 2013 at 10:00 a.m. (Eastern Time).

A telephone replay of the conference call will be available at approximately
1:00 p.m. on May 2 by dialing (719) 457-0820, access code: 5104129. The replay
will be available through May 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 Section21E of the
Securities Exchange Act of 1934, as amended. All statements regarding the
Company’s expected future financial position, results of operations, cash
flows, financing plans, business strategy, budgets, capital expenditures,
competitive positions, growth opportunities, plans and objectives of
management and statements containing the words such as “anticipate,”
“approximate,” “believe,” “plan,” “estimate,” “expect,” “project,” “could,”
“should,” “will,” “intend,” “may” and other similar expressions, are
forward-looking statements. 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 or performance to differ materially from any future
results or performance expressed or implied by such forward-looking
statements. These statements involve risks, uncertainties and other factors
discussed below and detailed from time to time in the Company’s filings with
the Securities and Exchange Commission.

In addition to the factors set forth above, other factors that may affect the
Company’s plans, 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 impact of
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, (c) the impact of final rules issued by CMS on July 29, 2011
which significantly reduced Medicare reimbursement to the Company’s nursing
and rehabilitation centers and changed payments for the provision of group
therapy services effective October 1, 2011, (d) the impact of the Budget
Control Act of 2011 (as amended by the American Taxpayer Relief Act of 2012
(the “Taxpayer Relief Act”)) which will automatically reduce federal spending
by approximately $1.2 trillion split evenly between domestic and defense
spending. The automatic 2% reduction on each claim submitted to Medicare began
on April 1, 2013, (e) the impact of the Taxpayer Relief Act which, among other
things, reduces Medicare payments by 50% for subsequent procedures when
multiple therapy services are provided on the same day. At this time, the
Company believes that the new rules related to multiple therapy services will
reduce the Company’s Medicare revenues by $25 million to $30 million on an
annual basis, (f) 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 long-term acute care (“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 and rehabilitation centers, IRFs and home health and hospice
operations, and the expiration of the Medicare Part B therapy cap exception
process, (g) 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, (h) the ability
of the Company’s hospitals to adjust to potential LTAC certification and
medical necessity reviews, (i) the impact of the Company’s significantly
increased levels of indebtedness as a result of the RehabCare Group, Inc.
acquisition on the Company’s funding costs, operating flexibility and ability
to fund ongoing operations, development capital expenditures or other
strategic acquisitions with additional borrowings, (j) the Company’s ability
to successfully pursue its development activities, including through
acquisitions, and successfully integrate new operations, including the
realization of anticipated revenues, economies of scale, cost savings and
productivity gains associated with such operations, as and when planned,
including the potential impact of unanticipated issues, expenses and
liabilities associated with those activities, (k) the failure of the Company’s
facilities to meet applicable licensure and certification requirements, (l)
the further consolidation and cost containment efforts of managed care
organizations and other third party payors, (m) the Company’s ability to meet
its rental and debt service obligations, (n) the Company’s ability to operate
pursuant to the terms of its debt obligations, and comply with its covenants
thereunder, and its ability to operate pursuant to its master lease agreements
with Ventas, (o) 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, (p) national and regional economic, financial,
business and political conditions, including their effect on the availability
and cost of labor, credit, materials and other services, (q) the Company’s
ability to control costs, particularly labor and employee benefit costs, (r)
increased operating costs due to shortages in qualified nurses, therapists and
other healthcare personnel, (s) the Company’s ability to attract and retain
key executives and other healthcare personnel, (t) the increase in the costs
of defending and insuring against alleged professional liability and other
claims and the Company’s ability to predict the estimated costs related to
such claims, including the impact of differences in actuarial assumptions and
estimates compared to eventual outcomes, (u) the Company’s ability to
successfully reduce (by divestiture of operations or otherwise) its exposure
to professional liability and other claims, (v) the Company’s ability to
successfully dispose of unprofitable facilities, (w) events or circumstances
which could result in the impairment of an asset or other charges, such as the
impact of Medicare reimbursement regulations that resulted in the Company
recording significant impairment charges in 2012 and 2011, (x) 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 (y) the Company’s ability to maintain an effective
system of internal control over financial reporting. Many of these factors are
beyond the Company’s control. The Company cautions investors that any
forward-looking statements made by the Company are not guarantees of future
performance. The Company disclaims any obligation to update any such factors
or to announce publicly the results of any revisions to any of the
forward-looking statements to reflect future events or developments.

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 ended March 31, 2013 and 2012 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 (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-125 private employer in the United States, is
a FORTUNE 500 healthcare services company based in Louisville, Kentucky with
annual revenues of $6 billion and approximately 76,000 employees in 46 states.
At March 31, 2013, Kindred through its subsidiaries provided healthcare
services in 2,169 locations, including 116 transitional care hospitals, six
inpatient rehabilitation hospitals, 204 nursing centers, 24 sub-acute units,
101 Kindred at Home hospice, home health and non-medical home care locations,
103 inpatient rehabilitation units (hospital-based) and a contract
rehabilitation services business, RehabCare, which served 1,615 non-affiliated
facilities. Ranked as one of Fortune magazine’s Most Admired Healthcare
Companies for five 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
                                               March 31,
                                               2013            2012
                                                                 
Revenues                                       $ 1,554,908      $ 1,537,931 
                                                                 
Income from continuing operations              $ 9,504           $ 21,615
Discontinued operations, net of income
taxes:
Loss from operations                             (4,787    )       (1,803    )
Loss on divestiture of operations               (1,244    )      (1,170    )
Loss from discontinued operations               (6,031    )      (2,973    )
Net income                                       3,473             18,642
Earnings attributable to noncontrolling         (416      )      (451      )
interests
Income attributable to Kindred                 $ 3,057          $ 18,191    
                                                                 
Amounts attributable to Kindred
stockholders:
Income from continuing operations              $ 9,088           $ 21,164
Loss from discontinued operations               (6,031    )      (2,973    )
Net income                                     $ 3,057          $ 18,191    
                                                                 
Earnings per common share:
Basic:
Income from continuing operations              $ 0.17            $ 0.40
Discontinued operations:
Loss from operations                             (0.09     )       (0.03     )
Loss on divestiture of operations               (0.02     )      (0.02     )
Net income                                     $ 0.06           $ 0.35      
                                                                 
Diluted:
Income from continuing operations              $ 0.17            $ 0.40
Discontinued operations:
Loss from operations                             (0.09     )       (0.03     )
Loss on divestiture of operations               (0.02     )      (0.02     )
Net income                                     $ 0.06           $ 0.35      
                                                                 
Shares used in computing earnings per
common share:
Basic                                            52,062            51,603
Diluted                                          52,083            51,638
                                                                             

                                                            
KINDRED HEALTHCARE, INC.
Condensed Consolidated Statement of Operations
(Unaudited)
(In thousands, except per share amounts)
                                                                 
                                               Three months ended
                                               March 31,
                                               2013              2012
                                                                 
Revenues                                       $ 1,554,908      $ 1,537,931 
                                                                 
Salaries, wages and benefits                     943,773           921,359
Supplies                                         105,808           108,533
Rent                                             105,978           104,313
Other operating expenses                         305,503           296,365
Other income                                     (993      )       (3,143    )
Impairment charges                               436               848
Depreciation and amortization                    51,196            46,986
Interest expense                                 28,174            26,578
Investment income                               (91       )      (288      )
                                                1,539,784       1,501,551 
Income from continuing operations before         15,124            36,380
income taxes
Provision for income taxes                      5,620           14,765    
Income from continuing operations                9,504             21,615
Discontinued operations, net of income
taxes:
Loss from operations                             (4,787    )       (1,803    )
Loss on divestiture of operations               (1,244    )      (1,170    )
Loss from discontinued operations               (6,031    )      (2,973    )
Net income                                       3,473             18,642
Earnings attributable to noncontrolling         (416      )      (451      )
interests
Income attributable to Kindred                 $ 3,057          $ 18,191    
                                                                 
Amounts attributable to Kindred
stockholders:
Income from continuing operations              $ 9,088           $ 21,164
Loss from discontinued operations               (6,031    )      (2,973    )
Net income                                     $ 3,057          $ 18,191    
                                                                 
Earnings per common share:
Basic:
Income from continuing operations              $ 0.17            $ 0.40
Discontinued operations:
Loss from operations                             (0.09     )       (0.03     )
Loss on divestiture of operations               (0.02     )      (0.02     )
Net income                                     $ 0.06           $ 0.35      
                                                                 
Diluted:
Income from continuing operations              $ 0.17            $ 0.40
Discontinued operations:
Loss from operations                             (0.09     )       (0.03     )
Loss on divestiture of operations               (0.02     )      (0.02     )
Net income                                     $ 0.06           $ 0.35      
                                                                 
Shares used in computing earnings per
common share:
Basic                                            52,062            51,603
Diluted                                          52,083            51,638
                                                                             

                                                           
KINDRED HEALTHCARE, INC.
Condensed Consolidated Balance Sheet
(Unaudited)
(In thousands, except per share amounts)
                                                                
                                             March 31,          December 31,
                                             2013               2012
ASSETS
Current assets:
Cash and cash equivalents                    $ 42,664           $ 50,007
Cash - restricted                              5,263              5,197
Insurance subsidiary investments               91,057             86,168
Accounts receivable less allowance for         1,094,750          1,038,605
loss
Inventories                                    32,057             32,021
Deferred tax assets                            11,366             12,663
Income taxes                                   1,835              13,573
Other                                         39,781           35,532     
                                               1,318,773          1,273,766
                                                                
Property and equipment                         2,202,083          2,226,903
Accumulated depreciation                      (1,088,591 )      (1,083,777 )
                                               1,113,492          1,143,126
                                                                
Goodwill                                       1,041,266          1,041,266
Intangible assets less accumulated             434,020            439,767
amortization
Assets held for sale                           2,793              4,131
Insurance subsidiary investments               146,985            116,424
Other                                         220,330          219,466    
Total assets                                 $ 4,277,659       $ 4,237,946  
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable                             $ 193,263          $ 210,668
Salaries, wages and other compensation         390,701            389,009
Due to third party payors                      34,392             35,420
Professional liability risks                   67,859             54,088
Other accrued liabilities                      152,241            137,204
Long-term debt due within one year            8,363            8,942      
                                               846,819            835,331
                                                                
Long-term debt                                 1,671,279          1,648,706
Professional liability risks                   240,070            236,630
Deferred tax liabilities                       10,588             9,764
Deferred credits and other liabilities         213,570            214,671
                                                                
Equity:
Stockholders’ equity:
Common stock, $0.25 par value;
authorized 175,000 shares; issued 54,047       13,512             13,320
shares - March 31, 2013 and 53,280
shares - December 31, 2012
Capital in excess of par value                 1,143,950          1,145,922
Accumulated other comprehensive loss           (248       )       (1,882     )
Retained earnings                             101,509          98,799     
                                               1,258,723          1,256,159
Noncontrolling interests                      36,610           36,685     
Total equity                                  1,295,333        1,292,844  
Total liabilities and equity                 $ 4,277,659       $ 4,237,946  
                                                                             

                                                             
KINDRED HEALTHCARE, INC.
Condensed Consolidated Statement of Cash Flows
(Unaudited)
(In thousands)
                                                                  
                                                 Three months ended
                                                 March 31,
                                                 2013             2012
Cash flows from operating activities:
Net income                                       $ 3,473          $ 18,642
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization                      52,954           48,690
Amortization of stock-based compensation           2,248            1,802
costs
Amortization of deferred financing costs           2,613            2,357
Provision for doubtful accounts                    11,266           7,496
Deferred income taxes                              (344     )       (3,662   )
Impairment charges                                 436              867
Loss on divestiture of discontinued                1,244            1,170
operations
Other                                              420              277
Change in operating assets and liabilities:
Accounts receivable                                (67,411  )       (57,197  )
Inventories and other assets                       (8,147   )       (15,905  )
Accounts payable                                   (15,790  )       (9,550   )
Income taxes                                       12,170           31,242
Due to third party payors                          (1,028   )       (8,976   )
Other accrued liabilities                         30,729         (20,678  )
Net cash provided by (used in) operating          24,833         (3,425   )
activities
                                                                  
Cash flows from investing activities:
Routine capital expenditures                       (22,370  )       (22,106  )
Development capital expenditures                   (2,388   )       (10,622  )
Acquisitions, net of cash acquired                 -                (50,448  )
Acquisition deposit                                -                (16,866  )
Sale of assets                                     5,060            1,110
Purchase of insurance subsidiary investments       (10,836  )       (13,773  )
Sale of insurance subsidiary investments           10,002           14,006
Net change in insurance subsidiary cash and        (33,096  )       (13,123  )
cash equivalents
Change in other investments                        319              269
Other                                             (144     )      (749     )
Net cash used in investing activities             (53,453  )      (112,302 )
                                                                  
Cash flows from financing activities:
Proceeds from borrowings under revolving           483,500          515,400
credit
Repayment of borrowings under revolving            (459,200 )       (397,000 )
credit
Repayment of other long-term debt                  (2,666   )       (2,666   )
Payment of deferred financing costs                (202     )       (43      )
Distribution made to noncontrolling                (491     )       (1,388   )
interests
Issuance of common stock                           4                -
Other                                             332            -        
Net cash provided by financing activities         21,277         114,303  
Change in cash and cash equivalents                (7,343   )       (1,424   )
Cash and cash equivalents at beginning of         50,007         41,561   
period
Cash and cash equivalents at end of period       $ 42,664        $ 40,137   
                                                                             

                                                                                                
KINDRED HEALTHCARE, INC.
Condensed Consolidated Statement of Operations
(Unaudited)
(In thousands, except per share amounts)
                                                                                                             
                                                                                                             First
                   2012 Quarters                                                                             Quarter
                   First             Second            Third             Fourth            Year              2013
                                                                                                             
Revenues           $ 1,537,931      $ 1,495,146      $ 1,487,458      $ 1,512,115      $ 6,032,650      $ 1,554,908 
                                                                                                             
Salaries,
wages and            921,359           884,990           891,813           894,945           3,593,107         943,773
benefits
Supplies             108,533           105,646           104,237           104,946           423,362           105,808
Rent                 104,313           105,629           106,796           106,492           423,230           105,978
Other
operating            296,365           298,971           292,682           292,325           1,180,343         305,503
expenses
Other income         (3,143    )       (3,149    )       (3,154    )       (3,027    )       (12,473   )       (993      )
Impairment           848               317               693               108,909           110,767           436
charges
Depreciation
and                  46,986            48,279            49,059            50,885            195,209           51,196
amortization
Interest             26,578            26,715            26,667            27,933            107,893           28,174
expense
Investment          (288      )      (267      )      (231      )      (253      )      (1,039    )      (91       )
income
                    1,501,551       1,467,131       1,468,562       1,583,155       6,020,399       1,539,784 
Income (loss)
from
continuing           36,380            28,015            18,896            (71,040   )       12,251            15,124
operations
before income
taxes
Provision for       14,765          11,549          7,781           7,180           41,275          5,620     
income taxes
Income (loss)
from                 21,615            16,466            11,115            (78,220   )       (29,024   )       9,504
continuing
operations
Discontinued
operations,
net of income
taxes:
Loss from            (1,803    )       (847      )       (1,228    )       (1,677    )       (5,555    )       (4,787    )
operations
Loss on
divestiture of      (1,170    )      (356      )      (2,280    )      (939      )      (4,745    )      (1,244    )
operations
Loss from
discontinued        (2,973    )      (1,203    )      (3,508    )      (2,616    )      (10,300   )      (6,031    )
operations
Net income           18,642            15,263            7,607             (80,836   )       (39,324   )       3,473
(loss)
(Earnings)
loss
attributable        (451      )      239             (41       )      (790      )      (1,043    )      (416      )
to
noncontrolling
interests
Income (loss)
attributable       $ 18,191         $ 15,502         $ 7,566          $ (81,626   )     $ (40,367   )     $ 3,057     
to Kindred
                                                                                                             
Amounts
attributable
to Kindred
stockholders:
Income (loss)
from               $ 21,164          $ 16,705          $ 11,074          $ (79,010   )     $ (30,067   )     $ 9,088
continuing
operations
Loss from
discontinued        (2,973    )      (1,203    )      (3,508    )      (2,616    )      (10,300   )      (6,031    )
operations
Net income         $ 18,191         $ 15,502         $ 7,566          $ (81,626   )     $ (40,367   )     $ 3,057     
(loss)
                                                                                                             
Earnings
(loss) per
common share:
Basic:
Income (loss)
from               $ 0.40            $ 0.32            $ 0.21            $ (1.53     )     $ (0.58     )     $ 0.17
continuing
operations
Discontinued
operations:
Loss from            (0.03     )       (0.02     )       (0.03     )       (0.03     )       (0.11     )       (0.09     )
operations
Loss on
divestiture of      (0.02     )      (0.01     )      (0.04     )      (0.02     )      (0.09     )      (0.02     )
operations
Net income         $ 0.35           $ 0.29           $ 0.14           $ (1.58     )     $ (0.78     )     $ 0.06      
(loss)
                                                                                                             
Diluted:
Income (loss)
from               $ 0.40            $ 0.32            $ 0.21            $ (1.53     )     $ (0.58     )     $ 0.17
continuing
operations
Discontinued
operations:
Loss from            (0.03     )       (0.02     )       (0.03     )       (0.03     )       (0.11     )       (0.09     )
operations
Loss on
divestiture of      (0.02     )      (0.01     )      (0.04     )      (0.02     )      (0.09     )      (0.02     )
operations
Net income         $ 0.35           $ 0.29           $ 0.14           $ (1.58     )     $ (0.78     )     $ 0.06      
(loss)
                                                                                                             
Shares used in
computing
earnings
(loss) per
common share:
Basic                51,603            51,664            51,676            51,692            51,659            52,062
Diluted              51,638            51,675            51,709            51,692            51,659            52,083
                                                                                                                         

                                                                                                
KINDRED HEALTHCARE, INC.
Condensed Business Segment Data
(Unaudited)
(In thousands)
                                                                                                                           
                                                                                                             First
                   2012 Quarters                                                                             Quarter
                   First             Second            Third             Fourth            Year              2013
Revenues:
Hospital           $ 749,383         $ 714,517         $ 699,175         $ 712,005         $ 2,875,080       $ 748,214
division
                                                                                                                           
Nursing center       512,148           503,325           505,192           506,891           2,027,556         502,703
division
                                                                                                                           
Rehabilitation
division:
Skilled
nursing              257,014           256,941           255,217           247,572           1,016,744         260,789
rehabilitation
services
Hospital
rehabilitation      74,369          73,402          71,899          73,910          293,580         74,523    
services
                    331,383         330,343         327,116         321,482         1,310,324       335,312   
                                                                                                                           
Home health
and hospice         28,432          28,872          35,943          50,093          143,340         51,621    
division
                     1,621,346         1,577,057         1,567,426         1,590,471         6,356,300         1,637,850
                                                                                                                           
Eliminations:
Skilled
nursing              (53,612   )       (52,440   )       (51,154   )       (48,714   )       (205,920  )       (52,889   )
rehabilitation
services
Hospital
rehabilitation       (28,161   )       (27,646   )       (26,909   )       (27,620   )       (110,336  )       (27,994   )
services
Nursing and
rehabilitation      (1,642    )      (1,825    )      (1,905    )      (2,022    )      (7,394    )      (2,059    )
centers
                    (83,415   )      (81,911   )      (79,968   )      (78,356   )      (323,650  )      (82,942   )
                   $ 1,537,931      $ 1,495,146      $ 1,487,458      $ 1,512,115      $ 6,032,650      $ 1,554,908 
                                                                                                                           
Income (loss)
from
continuing
operations:
Operating
income (loss):
Hospital           $ 161,826         $ 142,668         $ 138,250         $ 156,924         $ 599,668         $ 161,819     (a,b)
division
                                                                                                                           
Nursing center       63,906            68,012            69,906            65,085            266,909           51,178      (a,c)
division
                                                                                                                           
Rehabilitation
division:
Skilled
nursing              14,323            23,279            20,012            24,088            81,702            15,278      (a)
rehabilitation
services
Hospital
rehabilitation      16,116          17,860          16,977          18,792          69,745          18,132     (a)
services
                    30,439          41,139          36,989          42,880          151,447         33,410    
                                                                                                                           
Home health
and hospice          2,341             2,789             3,645             4,933             13,708            2,786       (a)
division
                                                                                                                           
Corporate:
Overhead             (42,728   )       (44,723   )       (45,883   )       (45,729   )       (179,063  )       (45,582   ) (a)
Insurance           (482      )      (600      )      (545      )      (500      )      (2,127    )      (509      )
subsidiary
                     (43,210   )       (45,323   )       (46,428   )       (46,229   )       (181,190  )       (46,091   )
                                                                                                                           
Impairment           (848      )       (317      )       (693      )       (108,909  )       (110,767  )       (436      )
charges
Transaction         (485      )      (597      )      (482      )      (667      )      (2,231    )      (2,285    )
costs
Operating            213,969           208,371           201,187           114,017           737,544           200,381
income
Rent                 (104,313  )       (105,629  )       (106,796  )       (106,492  )       (423,230  )       (105,978  )
Depreciation
and                  (46,986   )       (48,279   )       (49,059   )       (50,885   )       (195,209  )       (51,196   )
amortization
Interest, net       (26,290   )      (26,448   )      (26,436   )      (27,680   )      (106,854  )      (28,083   )
Income (loss)
from
continuing           36,380            28,015            18,896            (71,040   )       12,251            15,124
operations
before income
taxes
Provision for       14,765          11,549          7,781           7,180           41,275          5,620     
income taxes
                   $ 21,615         $ 16,466         $ 11,115         $ (78,220   )     $ (29,024   )     $ 9,504     

____________
      Includes one-time bonus costs of $25.9 million (hospital division - $8.8
      million, nursing center division - $9.7 million, rehabilitation division
(a)  - $6.3 million (skilled nursing rehabilitation services - $5.0 million
      and hospital rehabilitation services - $1.3 million), home health and
      hospice division - $0.8 million and corporate - $0.3 million).
      
(b)   Includes employee retention costs of $0.3 million incurred in connection
      with the planned divestiture of 17 non-strategic facilities.
      
(c)   Includes employee retention costs of $0.4 million incurred in connection
      with the nonrenewal of 54 nursing centers leased from Ventas.
      


KINDRED HEALTHCARE, INC.
Condensed Consolidating Statement of Operations
(Unaudited)
(In thousands)

                First Quarter 2013
                                Nursing       Rehabilitation division                    Home                     Transaction-                 
                  Hospital        center          Skilled       Hospital                   health                       related
                                                  nursing                                      and
                  division        division        services        services     Total           hospice      Corporate       costs            Eliminations     Consolidated
                  (a,b)           (a,c)           (a)             (a)                          (a)          (a)
                                                                                                                                                              
Revenues          $ 748,214      $ 502,703      $ 260,789      $ 74,523     $ 335,312      $ 51,621     $ -            $  -            $  (82,942 )     $ 1,554,908 
                                                                                                                                                              
Salaries,
wages and           332,256         254,450         234,844         52,420       287,264         40,314       29,730           -                (241    )       943,773
benefits
Supplies            77,637          24,874          811             32           843             2,238        216              -                -               105,808
Rent                53,148          49,766          1,235           17           1,252           1,186        626              -                -               105,978
Other
operating           176,603         172,590         9,856           3,919        13,775          6,283        16,668           2,285            (82,701 )       305,503
expenses
Other
(income)            (101    )       (389    )       -               20           20              -            (523    )        -                -               (993      )
expense
Impairment          176             260             -               -            -               -            -                -                -               436
charges
Depreciation
and                 23,941          12,720          3,112           2,331        5,443           1,526        7,566            -                -               51,196
amortization
Interest            182             20              96              -            96              -            27,876           -                -               28,174
expense
Investment         (5      )      (13     )      (28     )      -           (28     )      -           (45     )       -              -             (91       )
income
                   663,837       514,278       249,926       58,739      308,665       51,547      82,114         2,285          (82,942 )      1,539,784 
Income (loss)
from
continuing        $ 84,377       $ (11,575 )     $ 10,863       $ 15,784     $ 26,647       $ 74         $ (82,114 )     $  (2,285  )     $  -              15,124
operations
before income
taxes
Provision for                                                                                                                                                  5,620     
income taxes
Income from
continuing                                                                                                                                                    $ 9,504     
operations
                                                                                                                                                              
Capital
expenditures,
excluding
acquisitions
(including
discontinued
operations):
Routine           $ 10,271        $ 5,819         $ 605           $ 32         $ 637           $ 195        $ 5,448         $  -             $  -             $ 22,370
Development        2,388         -             -             -           -             -           -              -              -             2,388     
                  $ 12,659       $ 5,819        $ 605          $ 32         $ 637          $ 195        $ 5,448        $  -            $  -            $ 24,758    
                                                                                                                                                              
                                                                                                                                                              
                  First Quarter 2012
                                  Nursing         Rehabilitation division                      Home                         Transaction-
                  Hospital        center          Skilled         Hospital                     health                       related
                                                  nursing                                      and
                  division        division        services        services     Total           hospice      Corporate       costs            Eliminations     Consolidated
                  (d)
                                                                                                                                                              
Revenues          $ 749,383      $ 512,148      $ 257,014      $ 74,369     $ 331,383      $ 28,432     $ -            $  -            $  (83,415 )     $ 1,537,931 
                                                                                                                                                              
Salaries,
wages and           330,309         252,877         233,204         53,731       286,935         21,291       29,979           -                (32     )       921,359
benefits
Supplies            80,047          26,382          808             54           862             1,033        209              -                -               108,533
Rent                53,151          48,451          1,440           78           1,518           615          578              -                -               104,313
Other
operating           177,292         169,287         8,679           4,468        13,147          3,767        15,770           485              (83,383 )       296,365
expenses
Other income        (91     )       (304    )       -               -            -               -            (2,748  )        -                -               (3,143    )
Impairment          304             544             -               -            -               -            -                -                -               848
charges
Depreciation
and                 22,346          11,262          2,660           2,324        4,984           898          7,496            -                -               46,986
amortization
Interest            306             28              -               -            -               -            26,244           -                -               26,578
expense
Investment         (8      )      (14     )      (1      )      -           (1      )      -           (265    )       -              -             (288      )
income
                   663,656       508,513       246,790       60,655      307,445       27,604      77,263         485            (83,415 )      1,501,551 
Income from
continuing
operations        $ 85,727       $ 3,635        $ 10,224       $ 13,714     $ 23,938       $ 828        $ (77,263 )     $  (485    )     $  -              36,380
before income
taxes
Provision for                                                                                                                                                  14,765    
income taxes
Income from
continuing                                                                                                                                                    $ 21,615    
operations
                                                                                                                                                              
Capital
expenditures,
excluding
acquisitions
(including
discontinued
operations):
Routine           $ 10,345        $ 4,229         $ 326           $ 46         $ 372           $ 124        $ 7,036         $  -             $  -             $ 22,106
Development        9,949         673           -             -           -             -           -              -              -             10,622    
                  $ 20,294       $ 4,902        $ 326          $ 46         $ 372          $ 124        $ 7,036        $  -            $  -            $ 32,728    

____________
      Includes one-time bonus costs of $25.9 million (hospital division - $8.8
      million, nursing center division - $9.7 million, rehabilitation division
(a)  - $6.3 million (skilled nursing rehabilitation services - $5.0 million
      and hospital rehabilitation services - $1.3 million), home health and
      hospice division - $0.8 million and corporate - $0.3 million).
      
(b)   Includes employee retention costs of $0.3 million incurred in connection
      with the planned divestiture of 17 non-strategic facilities.
      
(c)   Includes employee retention costs of $0.4 million incurred in connection
      with the nonrenewal of 54 nursing centers leased from Ventas.
      
(d)   Includes severance costs of $2.0 million and other costs of $0.1 million
      incurred in connection with the closing of a regional office.
      


KINDRED HEALTHCARE, INC.
Condensed Business Segment Data
(Unaudited)
                                                                    
                                                                                 First
                   2012 Quarters                                                 Quarter
                   First       Second      Third       Fourth      Year          2013
Hospital
division data:
End of period
data:
Number of
hospitals:
Transitional       118         117         116         116                       116
care
Inpatient          6           6           6           6                         6
rehabilitation
                   124         123         122         122                       122
                                                                                 
Number of
licensed beds:
Transitional       8,454       8,404       8,347       8,382                     8,382
care
Inpatient          229         259         259         259                       259
rehabilitation
                   8,683       8,663       8,606       8,641                     8,641
                                                                                 
Revenue mix %:
Medicare           63          62          61          63          62            63
Medicaid           6           6           6           6           6             5
Medicare           10          10          11          10          10            10
Advantage
Commercial
insurance and      21          22          22          21          22            22
other
                                                                                 
Admissions:
Medicare           11,989      11,152      10,891      11,023      45,055        11,867
Medicaid           984         1,009       1,006       941         3,940         778
Medicare           1,658       1,757       1,616       1,579       6,610         1,734
Advantage
Commercial
insurance and      2,868       2,630       2,661       2,509       10,668        2,512
other
                   17,499      16,548      16,174      16,052      66,273        16,891
Admissions mix
%:
Medicare           69          67          67          69          68            70
Medicaid           6           6           6           6           6             5
Medicare           9           11          10          10          10            10
Advantage
Commercial
insurance and      16          16          17          15          16            15
other
                                                                                 
Patient days:
Medicare           293,746     278,614     270,555     275,008     1,117,923     290,942
Medicaid           38,487      36,654      40,169      38,045      153,355       35,447
Medicare           46,824      49,672      47,659      46,193      190,348       48,784
Advantage
Commercial
insurance and      84,372      81,957      81,445      77,562      325,336       82,466
other
                   463,429     446,897     439,828     436,808     1,786,962     457,639
Average length
of stay:
Medicare           24.5        25.0        24.8        24.9        24.8          24.5
Medicaid           39.1        36.3        39.9        40.4        38.9          45.6
Medicare           28.2        28.3        29.5        29.3        28.8          28.1
Advantage
Commercial
insurance and      29.4        31.2        30.6        30.9        30.5          32.8
other
Weighted           26.5        27.0        27.2        27.2        27.0          27.1
average
                                                                                 


KINDRED HEALTHCARE, INC.
Condensed Business Segment Data (Continued)
(Unaudited)
                                                                       
                                                                                    First
                   2012 Quarters                                                    Quarter
                   First        Second       Third        Fourth       Year         2013
Hospital
division data
(continued):
Revenues per
admission:
Medicare           $ 39,256     $ 39,467     $ 39,188     $ 40,479     $ 39,591     $ 39,697
Medicaid             44,447       42,787       43,272       43,492       43,494       51,806
Medicare             43,923       42,639       45,885       45,646       44,473       43,949
Advantage
Commercial
insurance and        56,549       59,427       58,134       60,903       58,678       63,940
other
Weighted             42,824       43,178       43,228       44,356       43,382       44,297
average
                                                                                    
Revenues per
patient day:
Medicare           $ 1,602      $ 1,580      $ 1,577      $ 1,622      $ 1,596      $ 1,619
Medicaid             1,136        1,178        1,084        1,076        1,117        1,137
Medicare             1,555        1,508        1,556        1,560        1,544        1,562
Advantage
Commercial
insurance and        1,922        1,907        1,899        1,970        1,924        1,948
other
Weighted             1,617        1,599        1,590        1,630        1,609        1,635
average
                                                                                    
Medicare case
mix index            1.18         1.17         1.15         1.14         1.16         1.18
(discharged
patients only)
                                                                                    
Average daily        5,093        4,911        4,781        4,748        4,882        5,085
census
Occupancy %          67.4         64.6         63.5         63.1         64.6         67.4
                                                                                    
Annualized
employee             21.8         22.2         21.1         20.1                      21.1
turnover %
                                                                                    
Nursing center
division data:
End of period
data:
Number of
facilities:
Nursing and
rehabilitation
centers:
Owned or             201          201          201          200                       200
leased
Managed              4            4            4            4                         4
Assisted
living              6           6           6           6                        6
facilities
                    211         211         211         210                      210
Number of
licensed beds:
Nursing and
rehabilitation
centers:
Owned or             24,431       24,479       24,479       24,425                    24,425
leased
Managed              485          485          485          485                       485
Assisted
living              413         341         341         341                      341
facilities
                    25,329      25,305      25,305      25,251                   25,251
Revenue mix %:
Medicare             35           34           33           33           34           33
Medicaid             39           40           40           40           40           39
Medicare             7            7            7            7            7            8
Advantage
Private and          19           19           20           20           19           20
other
                                                                                    

<td class="bwp*Story too large*

KINDRED HEALTHCARE, INC.
Condensed Business Segment Data (Continued)
(Unaudited)
                                                                                        
                                                                                                     First
                     2012 Quarters                                                                   Quarter
                     First           Second          Third           Fourth          Year            2013
Nursing center
division data
(continued):
Patient days
(a):
Medicare               331,857         319,333         308,218         305,987         1,265,395       310,180
Medicaid               1,129,717       1,129,200       1,139,559       1,130,949       4,529,425       1,094,229
Medicare               91,477          86,441          84,245          82,879          345,042         93,117
Advantage
Private and           398,634        388,137        400,106        398,918        1,585,795      382,837
other
                      1,951,685      1,923,111      1,932,128      1,918,733      7,725,657      1,880,363
                                                                                                     
Patient day mix
% (a):
Medicare               17              17              16              16              16              17
Medicaid               58              59              59              59              59              58
Medicare               5               4               4               4               4               5
Advantage
Private and            20              20              21              21              21              20
other
                                                                                                     
Revenues per
patient day (a):
Medicare Part A      $ 483           $ 483           $ 490           $ 505           $ 490           $ 497
Total Medicare
(including Part        533             535             543             548             539             540
B)
Medicaid               177             179             179             182             179             181
Medicaid (net of
provider taxes)        157             158             159             161             159             160
(b)
Medicare               410             406             410             414             410             409
Advantage
Private and            245             246             248             249             247             257
other
Weighted average       263             262             261             264             262             267
                                                                                                     
Average daily          21,447          21,133          21,001          20,856          21,108          20,893
census (a)
Admissions (a)         19,386          18,188          17,878          18,292          73,744          19,439
Occupancy % (a)        85.1            84.0            83.4            82.9            83.9            83.0
Medicare average
length of stay         31.9            32.3            32.7            31.4            32.1            30.6
(a)
                                                                                                     
Annualized
employee               37.9            40.0            39.8            39.5                            38.9
turnover %
                                                                                                     
Rehabilitation
division data:
Skilled nursing
rehabilitation
services:
Revenue mix %:
Company-operated       21              20              20              20              20              20
Non-affiliated         79              80              80              80              80              80
                                                                                                     
Sites of service
(at end of             1,722           1,730           1,735           1,726                           1,729
period)
Revenue per site     $ 149,253       $ 148,521       $ 147,098       $ 143,437       $ 588,309       $ 150,832
                                                                                                     
Therapist              80.3            80.4            80.5            80.5            80.4            81.1
productivity %
                                                                                                     
Hospital
rehabilitation
services:
Revenue mix %:
Company-operated       38              38              37              37              38              38
Non-affiliated         62              62

[TRUNCATED]