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Kindred Healthcare Reports Strong Second Quarter Results Following RehabCare Acquisition

LOUISVILLE, Ky. - (BUSINESS WIRE) - Kindred Healthcare, Inc. ("Kindred" or "the Company" ) (NYSE:KND) today announced its operating results for the second quarter ended June 30, 2011. As previously announced, the Company completed the acquisition of RehabCare Group, Inc. ("RehabCare" ) (formerly NYSE:RHB) on June 1, 2011. The Company's consolidated financial statements include the operating results of RehabCare since the closing of the transaction.

Second Quarter Highlights:

• Consolidated revenues rose 20% to $1.3 billion
  • RehabCare added $114 million in second quarter revenues
  • Same-store revenues grew in each operating division

• Excluding transaction-related charges, the Company reported improved operating margins
  • Adjusted operating income rose 22% to $181 million (14.0% of revenues) compared to $149 million (13.8% of revenues) in the second quarter last year
  • Adjusted income from continuing operations grew 40% to $23.4 million (1.8% of revenues) from $16.7 million (1.5% of revenues) in the second quarter last year
  • RehabCare acquisition was slightly accretive to second quarter earnings

• Company reported solid operational growth in the second quarter compared to last year
  • Hospital admissions rose 22% in the quarter; same-store admissions were relatively unchanged
  • Nursing center admissions increased 6% compared to the second quarter last year
  • Expanding rehabilitation therapy business now reaches 2,200 sites

• The Company continues to generate significant operating cash flows
  • Excluding transaction-related payments, year to date operating cash flows were up 42% from last year's first half

Second Quarter Results

Continuing Operations

Consolidated revenues for the second quarter ended June 30, 2011 rose 20% to $1.3 billion. The Company reported a loss from continuing operations for the second quarter of 2011 totaling $6.1 million or $0.14 per diluted share compared to income of $16.1 million or $0.41 per diluted share in the second quarter last year.

Excluding transaction-related charges, the Company's income from continuing operations grew 40% to $23.4 million or $0.53 per diluted share from $16.7 million or $0.42 per diluted share in the second quarter of 2010.

Management Commentary

Paul J. Diaz, President and Chief Executive Officer of the Company, remarked, "Our second quarter core operating results were outstanding, with our continued focus on quality, customer service and operating efficiencies leading the way to volume and earnings growth across the Company. We are pleased to report significant core earnings growth in the quarter while also completing the RehabCare acquisition and focusing on its transition."

Commenting on the RehabCare acquisition, Mr. Diaz further noted, "Having closed the acquisition one month in advance of our expectations, our support center and operating teams successfully completed all of the initial integration activities with minimal disruption to the business units. We have now completed the financial information systems conversions and will begin the roll-out of our hospital clinical information systems in the former RehabCare hospitals. These critical infrastructure investments are the foundation for our operating synergies and the ongoing benefits of our expanded size and scale. Based upon our initial success in this area, we now believe that we will realize approximately $55 million of cost synergies in 2012 and $65 million in cost synergies in 2013, significantly ahead of our previous estimates."

Mr. Diaz commented on the Company's ongoing development activities, "As we recently announced, we continue to advance our cluster market strategy through the selective development of our different businesses to meet the needs of our patients, physicians, managed care plans and other healthcare partners in our key markets. The new projects in Charleston, Dayton, Indianapolis, Seattle and Dallas will provide ongoing growth in our long-term acute care hospital, sub-acute and skilled nursing and rehabilitation businesses. In addition, our two new inpatient rehabilitation hospital projects in Austin and Houston will complement our existing operations in both of these markets. These exciting new projects are expected to be accretive to earnings beginning in 2013."

Finally, Mr. Diaz discussed the Company's improved liquidity, "Our operating cash flows continue to be a source of financial strength for Kindred as we continue to pursue our cluster market development strategy and reduce our leverage. Excluding transaction-related payments, our operating cash flows in the first half of 2011 increased 42% to $120 million from last year's adjusted $85 million."

Recent Regulatory Changes

The Centers for Medicare and Medicaid Services ("CMS" ) recently issued final rules that will impact the Company's businesses effective October 1, 2011.

On July 29, 2011, CMS issued final rules which, among other things, will reduce Medicare payments to nursing centers by 11.1% and change the reimbursement for the provision of group rehabilitation therapy services to Medicare beneficiaries. While the Company had anticipated a negative annual impact of approximately $30 million to $40 million for the budget neutrality adjustments, management now estimates that these rules could reduce the Company's annual revenues by approximately $85 million to $95 million in its nursing center business and approximately $10 million to $15 million in its rehabilitation therapy business. In addition, the Company believes that other technical changes required under the final rules may increase rehabilitation therapy costs by approximately $10 million to $15 million on an annual basis.

In addition, CMS also issued final rules that provided payment increases to inpatient rehabilitation facilities ("IRFs" ) and long-term acute care ("LTAC" ) hospitals. Among other things, CMS indicated that Medicare payment rates for IRFs are expected to increase at an annual rate of 2.2% and LTAC hospital payment rates are expected to rise 2.5%. Based upon its review of the final rules, management believes that the Medicare rate increase for the Company's LTAC hospitals will likely approximate 0.7% in 2012.

Mr. Diaz commented, "We recognize that CMS has a responsibility to achieve budget neutrality under the new RUGs IV reimbursement system. But the same rush to implementation that led to the current overpayments will now likely lead to an overcorrection that will negatively impact the interests of patients, residents, staff and job creation. We will continue to work with policymakers to re-consider a phase-in of the parity adjustment and the impact of the rehabilitation therapy and assessment process changes to maintain the stability of skilled nursing providers, the quality of their services and the accurate achievement of budget neutrality."

Earnings Guidance - Continuing Operations

Following the completion of the RehabCare acquisition, the Company resumed its prior practice of providing earnings guidance. The Company indicated that the earnings guidance for continuing operations reflects the anticipated impact of the previously discussed final rules recently issued by CMS related to payment rates for nursing centers, LTAC hospitals, IRFs and the Company's rehabilitation therapy business, all of which will be effective on October 1, 2011. The earnings guidance provided by the Company excludes the effect of (i) any transaction-related charges that have been recorded in prior periods or that may be incurred in the future, (ii) any other reimbursement changes, (iii) any material acquisitions or divestitures, or (iv) any repurchases of common stock.

The Company expects consolidated revenues for 2011 to approximate $5.6 billion. Operating income, or earnings before interest, income taxes, depreciation, amortization and rent, is expected to range from $775 million to $780 million. Rent expense is expected to approximate $400 million, while depreciation and amortization should approximate $164 million. Net interest expense is expected to approximate $69 million. The Company expects to report income from continuing operations for 2011 between $89 million to $93 million or $1.80 to $1.90 per diluted share (based upon diluted shares of 47 million).

Excluding transaction-related charges, the Company has reported diluted earnings per common share of $1.17 in the first half of 2011.

The Company also provided its earnings outlook for the third quarter of 2011, estimating diluted earnings per share between $0.25 and $0.30 (based upon diluted shares of 52 million). Management's estimated third quarter earnings range includes the expected impact of a $3 million favorable income tax adjustment ($0.05 per diluted share).

In addition, the Company provided its initial preliminary earnings guidance for fiscal 2012. The Company expects consolidated revenues for 2012 to approximate $6.4 billion. Operating income is expected to range from $911 million to $928 million. Rent expense is expected to approximate $445 million, while depreciation and amortization should approximate $200 million. Net interest expense is expected to approximate $110 million. The Company expects to report income from continuing operations for 2012 between $93 million to $104 million or $1.65 to $1.85 per diluted share (based upon diluted shares of 53 million).

Mr. Diaz noted, "When we announced the RehabCare acquisition in February, we provided to investors a pro forma 2011 earnings per diluted share range of $1.95 to $2.15 assuming that the acquisition had occurred on January 1, 2011 and we realized $25 million in pretax operating synergies. While we will operate the combined company for only seven months this year, we are pleased to provide core 2011 earnings guidance at a level that is close to our assumed full-year pro forma estimate."

Mr. Diaz continued, "Our 2012 preliminary earnings guidance reflects our significant outperformance in the first half of this year, our continuing efforts to grow the Company organically as well as our enhanced view of the operating synergies and lower than expected financing costs associated with the RehabCare acquisition. Despite the significant negative impact of the recently issued CMS rules for nursing centers and rehabilitation therapy, we will continue to find new growth opportunities that are available to us as a result of our diverse lines of business and larger size and scale as we look forward to 2012 and beyond."

Webcast of Conference Call

As previously announced, investors and the general public can access a live webcast of the second quarter 2011 conference call through a link on the Company's website at http://investors.kindredhealthcare.com or at www.earnings.com. The conference call will be held August 9, 2011 at 10:00 a.m. (Eastern Time).

A telephone replay of the conference call will be available at approximately 11:30 a.m. on August 9 by dialing (719) 457-0820, access code: 4145869. The replay will be available through August 18.

Forward-Looking Statements

This press release includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements regarding Kindred's expected future financial position, results of operations, cash flows, financing plans, business strategy, budgets, capital expenditures, competitive positions, growth opportunities, plans and objectives of management and statements containing the words such as "anticipate," "approximate," "believe," "plan," "estimate," "expect," "project," "could," "should," "will," "intend," "may" and other similar expressions, are forward-looking statements.

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

In addition to the factors set forth above, other factors that may affect Kindred's plans or results include, without limitation, (a) the impact of a final rule issued by CMS on July 29, 2011 providing for a 11.1% reduction in Medicare reimbursement to nursing centers as well as changes in payments for the provision of group rehabilitation therapy services, (b) other potential reimbursement changes resulting from the Budget Control Act of 2011, (c) Kindred's ability to integrate the operations of the acquired hospitals and rehabilitation services operations and realize the anticipated revenues, economies of scale, cost synergies and productivity gains in connection with the RehabCare acquisition and any other acquisitions that may be undertaken during 2011, as and when planned, including the potential for unanticipated issues, expenses and liabilities associated with those acquisitions, (d) the potential for diversion of management time and resources in seeking to integrate RehabCare's operations, (e) the potential failure to retain key employees of RehabCare, (f) the impact of Kindred's significantly increased levels of indebtedness as a result of the RehabCare acquisition on Kindred's funding costs, operating flexibility and ability to fund ongoing operations, development capital expenditures or other strategic acquisitions with additional borrowings, particularly in light of ongoing volatility in the credit and capital markets, (g) the impact of healthcare reform, which will initiate significant reforms to the United States healthcare system, including potential material changes to the delivery of healthcare services and the reimbursement paid for such services by the government or other third party payors. Healthcare reform will impact each of Kindred's businesses in some manner. Due to the substantial regulatory changes that will need to be implemented by CMS and others, and the numerous processes required to implement these reforms, Kindred cannot predict which healthcare initiatives will be implemented at the federal or state level, the timing of any such reforms, or the effect such reforms or any other future legislation or regulation will have on Kindred's business, financial position, results of operations and liquidity, (h) changes in the reimbursement rates or the methods or timing of payment from third party payors, including commercial payors and the Medicare and Medicaid programs, changes arising from and related to the Medicare prospective payment system for LTAC hospitals, including potential changes in the Medicare payment rules, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, and changes in Medicare and Medicaid reimbursements for nursing centers, and the expiration of the Medicare Part B therapy cap exception process, (i) the effects of additional legislative changes and government regulations, interpretation of regulations and changes in the nature and enforcement of regulations governing the healthcare industry, (j) Kindred's ability to successfully pursue its development activities, including through acquisitions, and successfully integrate new operations, including the realization of anticipated revenues, economies of scale, cost savings and productivity gains associated with such operations, (k) the impact of the Medicare, Medicaid and SCHIP Extension Act of 2007 (the "SCHIP Extension Act" ), including the ability of Kindred's hospitals to adjust to potential LTAC certification, medical necessity reviews and the moratorium on future hospital development, (l) the impact of the expiration of several moratoriums under the SCHIP Extension Act which could impact the short stay rules, the budget neutrality adjustment as well as implement the policy known as the "25 Percent Rule," which would limit certain patient admissions, (m) failure of Kindred's facilities to meet applicable licensure and certification requirements, (n) the further consolidation and cost containment efforts of managed care organizations and other third party payors, (o) Kindred's ability to meet its rental and debt service obligations, (p) Kindred's ability to operate pursuant to the terms of its debt obligations and its master lease agreements with Ventas, Inc. (NYSE:VTR), (q) the condition of the financial markets, including volatility and weakness in the equity, capital and credit markets, which could limit the availability and terms of debt and equity financing sources to fund the requirements of Kindred's businesses, or which could negatively impact Kindred's investment portfolio, (r) national and regional economic, financial, business and political conditions, including their effect on the availability and cost of labor, credit, materials and other services, (s) Kindred's ability to control costs, particularly labor and employee benefit costs, (t) increased operating costs due to shortages in qualified nurses, therapists and other healthcare personnel, (u) Kindred's ability to attract and retain key executives and other healthcare personnel, (v) the increase in the costs of defending and insuring against alleged professional liability and other claims and the ability to predict the estimated costs related to such claims, including the impact of differences in actuarial assumptions and estimates compared to eventual outcomes, (w) Kindred's ability to successfully reduce (by divestiture of operations or otherwise) its exposure to professional liability and other claims, (x) Kindred's ability to successfully dispose of unprofitable facilities, (y) events or circumstances which could result in the impairment of an asset or other charges, (z) changes in generally accepted accounting principles ("GAAP" ) or practices, and changes in tax accounting or tax laws (or authoritative interpretations relating to any of these matters), and (aa) Kindred's ability to maintain an effective system of internal control over financial reporting. Many of these factors are beyond Kindred's control. Kindred cautions investors that any forward-looking statements made by Kindred are not guarantees of future performance. Kindred disclaims any obligation to update any such factors or to announce publicly the results of any revisions to any of the forward-looking statements to reflect future events or developments.

In addition to the results provided in accordance with GAAP, the Company has provided non-GAAP measurements which present operating results and cash flows from operations for the second quarter and six months ended June 30, 2011 and 2010 before certain charges or on a core basis. A reconciliation of the non-GAAP measurements to the GAAP measurements is included in this press release.

As noted above, the Company's earnings release includes a financial measure referred to as operating income, or earnings before interest, income taxes, depreciation, amortization and rent. The Company's management uses operating income as a meaningful measure of operational performance in addition to other measures. The Company uses operating income to assess the relative performance of its operating divisions as well as the employees that operate these businesses. In addition, the Company believes this measurement is important because securities analysts and investors use this measurement to compare the Company's performance to other companies in the healthcare industry. The Company believes that income from continuing operations is the most comparable GAAP measure. Readers of the Company's financial information should consider income from continuing operations as an important measure of the Company's financial performance because it provides the most complete measure of its performance. Operating income should be considered in addition to, not as a substitute for, or superior to, financial measures based upon GAAP as an indicator of operating performance. A reconciliation of operating income to income from continuing operations provided in the Condensed Business Segment Data is included in this press release.

About Kindred Healthcare

Kindred Healthcare, Inc., a top-150 private employer in the United States, is a healthcare services company based in Louisville, Kentucky with annual revenues of $6 billion and approximately 76,300 employees in 46 states. At June 30, 2011, Kindred through its subsidiaries provided healthcare services in over 2,200 locations, including 120 long-term acute care hospitals, five inpatient rehabilitation hospitals, 224 nursing and rehabilitation centers, 22 sub-acute units, 20 hospice and home care locations, 104 inpatient rehabilitation units (hospital-based) and a contract rehabilitation services business, RehabCare, which served approximately 1,760 non-affiliated facilities. Ranked as one of Fortune magazine's Most Admired Healthcare Companies for three years in a row, Kindred's mission is to promote healing, provide hope, preserve dignity and produce value for each patient, resident, family member, customer, employee and shareholder we serve. For more information, go to www.kindredhealthcare.com.

KINDRED HEALTHCARE, INC.
Financial Summary
(Unaudited)
(In thousands, except per share amounts)
			Three months ended									Six months ended
			June 30,									June 30,
			2011					2010				2011				2010
Revenues			$	1,292,592				$	1,081,364			$	2,485,013			$	2,171,201
Income (loss) from continuing operations			$	(6,540	)			$	16,136			$	15,736			$	31,291
Discontinued operations, net of income taxes:
Income (loss) from operations				587					87				408				(67	)
Gain (loss) on divestiture of operations				-					54				-				(83	)
Income (loss) from discontinued operations				587					141				408				(150	)
Net income (loss)				(5,953	)				16,277				16,144				31,141
Loss attributable to noncontrolling interests				421					-				421				-
Income (loss) attributable to Kindred			$	(5,532	)			$	16,277			$	16,565			$	31,141
Amounts attributable to Kindred stockholders:
Income (loss) from continuing operations			$	(6,119	)			$	16,136			$	16,157			$	31,291
Income (loss) from discontinued operations				587					141				408				(150	)
Net income (loss)			$	(5,532	)			$	16,277			$	16,565			$	31,141
Earnings (loss) per common share:
Basic:
Income (loss) from continuing operations			$	(0.14	)			$	0.41			$	0.39			$	0.79
Discontinued operations:
Income (loss) from operations				0.01					-				0.01				-
Gain (loss) on divestiture of operations				-					-				-				-
Net income (loss)			$	(0.13	)			$	0.41			$	0.40			$	0.79
Diluted:
Income (loss) from continuing operations			$	(0.14	)			$	0.41			$	0.38			$	0.79
Discontinued operations:
Income (loss) from operations				0.01					-				0.01				-
Gain (loss) on divestiture of operations				-					-				-				-
Net income (loss)			$	(0.13	)			$	0.41			$	0.39			$	0.79
Shares used in computing earnings (loss) per common share:
Basic				43,231					38,756				41,145				38,691
Diluted				43,231					38,914				41,661				38,881

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,
			2011					2010					2011					2010
Revenues			$	1,292,592				$	1,081,364				$	2,485,013				$	2,171,201
Salaries, wages and benefits				765,133					612,205					1,443,828					1,239,380
Supplies				96,718					85,455					186,740					171,341
Rent				95,677					88,981					187,130					177,300
Other operating expenses				287,132					238,687					546,501					472,891
Other income				(2,880	)				(2,857	)				(5,665	)				(5,941	)
Depreciation and amortization				37,871					29,852					70,420					60,973
Interest expense				23,157					1,298					28,885					2,605
Investment (income) loss				(257	)				377					(752	)				(500	)
				1,302,551					1,053,998					2,457,087					2,118,049
Income (loss) from continuing operations before income taxes				(9,959	)				27,366					27,926					53,152
Provision (benefit) for income taxes				(3,419	)				11,230					12,190					21,861
Income (loss) from continuing operations				(6,540	)				16,136					15,736					31,291
Discontinued operations, net of income taxes:
Income (loss) from operations				587					87					408					(67	)
Gain (loss) on divestiture of operations				-					54					-					(83	)
Income (loss) from discontinued operations				587					141					408					(150	)
Net income (loss)				(5,953	)				16,277					16,144					31,141
Loss attributable to noncontrolling interests				421					-					421					-
Income (loss) attributable to Kindred			$	(5,532	)			$	16,277				$	16,565				$	31,141
Amounts attributable to Kindred stockholders:
Income (loss) from continuing operations			$	(6,119	)			$	16,136				$	16,157				$	31,291
Income (loss) from discontinued operations				587					141					408					(150	)
Net income (loss)			$	(5,532	)			$	16,277				$	16,565				$	31,141
Earnings (loss) per common share:
Basic:
Income (loss) from continuing operations			$	(0.14	)			$	0.41				$	0.39				$	0.79
Discontinued operations:
Income (loss) from operations				0.01					-					0.01					-
Gain (loss) on divestiture of operations				-					-					-					-
Net income (loss)			$	(0.13	)			$	0.41				$	0.40				$	0.79
Diluted:
Income (loss) from continuing operations			$	(0.14	)			$	0.41				$	0.38				$	0.79
Discontinued operations:
Income (loss) from operations				0.01					-					0.01					-
Gain (loss) on divestiture of operations				-					-					-					-
Net income (loss)			$	(0.13	)			$	0.41				$	0.39				$	0.79
Shares used in computing earnings (loss) per common share:
Basic				43,231					38,756					41,145					38,691
Diluted				43,231					38,914					41,661					38,881

KINDRED HEALTHCARE, INC.
Condensed Consolidated Balance Sheet
(Unaudited)
(In thousands, except per share amounts)
			June 30,					December 31,
			2011					2010
ASSETS
Current assets:
Cash and cash equivalents			$	52,399				$	17,168
Cash - restricted				5,457					5,494
Insurance subsidiary investments				61,519					76,753
Accounts receivable less allowance for loss				944,742					631,877
Inventories				30,762					24,327
Deferred tax assets				29,705					13,439
Income taxes				15,770					42,118
Other				35,266					24,862
				1,175,620					836,038
Property and equipment				1,939,698					1,754,170
Accumulated depreciation				(907,710	)				(857,623	)
				1,031,988					896,547
Goodwill				1,097,997					242,420
Intangible assets less accumulated amortization				499,920					92,883
Assets held for sale				7,073					7,167
Insurance subsidiary investments				110,633					101,210
Deferred tax assets				-					88,816
Other				133,365					72,334
Total assets			$	4,056,596				$	2,337,415
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable			$	217,034				$	174,495
Salaries, wages and other compensation				401,014					291,116
Due to third party payors				40,293					27,115
Professional liability risks				40,583					41,555
Other accrued liabilities				119,270					87,012
Long-term debt due within one year				10,435					91
				828,629					621,384
Long-term debt				1,433,257					365,556
Professional liability risks				227,986					207,669
Deferred tax liabilities				36,670					-
Deferred credits and other liabilities				127,304					111,047
Noncontrolling interests-redeemable				23,841					-
Equity:
Stockholders' equity:
Common stock, $0.25 par value; authorized 175,000 shares; issued 52,116 shares - June 30, 2011 and 39,495 shares - December 31, 2010				13,029					9,874
Capital in excess of par value				1,132,748					828,593
Accumulated other comprehensive income				317					135
Retained earnings				209,218					193,157
				1,355,312					1,031,759
Noncontrolling interests-nonredeemable				23,597					-
Total equity				1,378,909					1,031,759
Total liabilities and equity			$	4,056,596				$	2,337,415

KINDRED HEALTHCARE, INC.
Condensed Consolidated Statement of Cash Flows
(Unaudited)
(In thousands)
			Three months ended										Six months ended
			June 30,										June 30,
			2011					2010					2011					2010
Cash flows from operating activities:
Net income (loss)			$	(5,953	)			$	16,277				$	16,144				$	31,141
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization				37,871					29,852					70,420					60,973
Amortization of stock-based compensation costs				3,462					2,746					6,106					5,521
Payment of lender fees related to debt issuance				(46,232	)				-					(46,232	)				-
Provision for doubtful accounts				8,426					5,846					14,256					12,277
Deferred income taxes				(1,959	)				(3,264	)				(2,689	)				(10,727	)
(Gain) loss on divestiture of discontinued operations				-					(54	)				-					83
Other				2,017					1,089					2,387					926
Change in operating assets and liabilities:
Accounts receivable				(43,935	)				29,601					(80,575	)				(29,525	)
Inventories and other assets				870					4,759					(2,655	)				(6,486	)
Accounts payable				13,565					(596	)				1,217					(8,178	)
Income taxes				(12,950	)				(7,533	)				27,673					21,753
Due to third party payors				6,577					(130	)				3,555					(2,024	)
Other accrued liabilities				43,093					18,349					41,681					7,212
Net cash provided by operating activities				4,852					96,942					51,288					82,946
Cash flows from investing activities:
Routine capital expenditures				(33,950	)				(25,670	)				(58,668	)				(40,485	)
Development capital expenditures				(14,309	)				(12,288	)				(25,418	)				(19,855	)
Acquisitions, net of cash acquired				(651,952	)				(1,794	)				(659,979	)				(49,490	)
Sale of assets				-					-					1,714					-
Purchase of insurance subsidiary investments				(9,220	)				(9,840	)				(17,037	)				(24,118	)
Sale of insurance subsidiary investments				8,533					8,622					27,189					61,833
Net change in insurance subsidiary cash and cash equivalents				(2,744	)				(1,926	)				(4,044	)				(7,501	)
Change in other investments				-					2					1,000					2
Other				(161	)				609					(29	)				581
Net cash used in investing activities				(703,803	)				(42,285	)				(735,272	)				(79,033	)
Cash flows from financing activities:
Proceeds from borrowings under revolving credit				654,900					262,400					1,100,100					652,000
Repayment of borrowings under revolving credit				(814,900	)				(319,000	)				(1,275,100	)				(659,600	)
Proceeds from issuance of senior unsecured notes				550,000					-					550,000					-
Proceeds from issuance of term loan, net of discount				693,000					-					693,000					-
Repayment of other long-term debt				(345,666	)				(21	)				(345,688	)				(42	)
Payment of deferred financing costs				(6,443	)				(31	)				(6,860	)				(53	)
Issuance of common stock				1,604					-					3,019					35
Other				355					222					744					346
Net cash provided by (used in) financing activities				732,850					(56,430	)				719,215					(7,314	)
Change in cash and cash equivalents				33,899					(1,773	)				35,231					(3,401	)
Cash and cash equivalents at beginning of period				18,500					14,675					17,168					16,303
Cash and cash equivalents at end of period			$	52,399				$	12,902				$	52,399				$	12,902

KINDRED HEALTHCARE, INC.
Condensed Consolidated Statement of Operations
(Unaudited)
(In thousands, except per share amounts)
			2010 Quarters																				2011 Quarters
			First					Second					Third					Fourth					First					Second
Revenues			$	1,089,837				$	1,081,364				$	1,053,012				$	1,135,484				$	1,192,421				$	1,292,592
Salaries, wages and benefits				627,175					612,205					613,607					652,703					678,695					765,133
Supplies				85,886					85,455					83,753					87,103					90,022					96,718
Rent				88,319					88,981					89,295					90,777					91,453					95,677
Other operating expenses				234,204					238,687					234,968					240,750					259,369					287,132
Other income				(3,084	)				(2,857	)				(2,794	)				(2,687	)				(2,785	)				(2,880	)
Depreciation and amortization				31,121					29,852					29,167					31,412					32,549					37,871
Interest expense				1,307					1,298					1,642					2,843					5,728					23,157
Investment (income) loss				(877	)				377					(403	)				(342	)				(495	)				(257	)
				1,064,051					1,053,998					1,049,235					1,102,559					1,154,536					1,302,551
Income (loss) from continuing operations before income taxes				25,786					27,366					3,777					32,925					37,885					(9,959	)
Provision (benefit) for income taxes				10,631					11,230					(1,323	)				13,170					15,609					(3,419	)
Income (loss) from continuing operations				15,155					16,136					5,100					19,755					22,276					(6,540	)
Discontinued operations, net of income taxes:
Income (loss) from operations				(154	)				87					(260	)				1,125					(179	)				587
Gain (loss) on divestiture of operations				(137	)				54					86					(456	)				-					-
Income (loss) from discontinued operations				(291	)				141					(174	)				669					(179	)				587
Net income (loss)				14,864					16,277					4,926					20,424					22,097					(5,953	)
Loss attributable to noncontrolling interests				-					-					-					-					-					421
Income (loss) attributable to Kindred			$	14,864				$	16,277				$	4,926				$	20,424				$	22,097				$	(5,532	)
Amounts attributable to Kindred stockholders:
Income (loss) from continuing operations			$	15,155				$	16,136				$	5,100				$	19,755				$	22,276				$	(6,119	)
Income (loss) from discontinued operations				(291	)				141					(174	)				669					(179	)				587
Net income (loss)			$	14,864				$	16,277				$	4,926				$	20,424				$	22,097				$	(5,532	)
Earnings (loss) per common share:
Basic:
Income (loss) from continuing operations			$	0.38				$	0.41				$	0.13				$	0.50				$	0.56				$	(0.14	)
Discontinued operations:
Income (loss) from operations				-					-					(0.01	)				0.03					-					0.01
Gain (loss) on divestiture of operations				-					-					-					(0.01	)				-					-
Net income (loss)			$	0.38				$	0.41				$	0.12				$	0.52				$	0.56				$	(0.13	)
Diluted:
Income (loss) from continuing operations			$	0.38				$	0.41				$	0.13				$	0.50				$	0.55				$	(0.14	)
Discontinued operations:
Income (loss) from operations				-					-					(0.01	)				0.03					-					0.01
Gain (loss) on divestiture of operations				-					-					-					(0.01	)				-					-
Net income (loss)			$	0.38				$	0.41				$	0.12				$	0.52				$	0.55				$	(0.13	)
Shares used in computing earnings (loss) per common share:
Basic				38,626					38,756					38,778					38,790					39,035					43,231
Diluted				38,859					38,914					38,838					39,089					39,543					43,231

KINDRED HEALTHCARE, INC.
Condensed Business Segment Data
(Unaudited)
(In thousands)
			2010 Quarters																				2011 Quarters
			First					Second					Third					Fourth					First					Second
Revenues:
Hospital division			$	507,062				$	493,401				$	465,198				$	507,660				$	558,974				$	593,425
Nursing center division				539,321					542,215					539,914					566,435					567,472					568,199
Rehabilitation division:
Skilled nursing rehabilitation services				98,997					101,148					103,807					117,325					122,656					172,074
Hospital rehabilitation services				21,147					20,913					20,436					21,182					22,490					38,291
				120,144					122,061					124,243					138,507					145,146					210,365
				1,166,527					1,157,677					1,129,355					1,212,602					1,271,592					1,371,989
Eliminations				(76,690	)				(76,313	)				(76,343	)				(77,118	)				(79,171	)				(79,397	)
			$	1,089,837				$	1,081,364				$	1,053,012				$	1,135,484				$	1,192,421				$	1,292,592
Income (loss) from continuing operations:
Operating income (loss):
Hospital division			$	95,440				$	91,790				$	75,784				$	97,343				$	108,385				$	108,465
Nursing center division				70,614					76,529					69,363					86,912					87,350					93,532
Rehabilitation division:
Skilled nursing rehabilitation services				9,537					9,307					9,486					5,307					9,149					15,531
Hospital rehabilitation services				5,146					4,793					4,728					4,302					5,332					8,033
				14,683					14,100					14,214					9,609					14,481					23,564
Corporate:
Overhead				(33,831	)				(32,799	)				(34,329	)				(33,002	)				(38,315	)				(43,801	)
Insurance subsidiary				(480	)				(791	)				(783	)				(1,099	)				(602	)				(420	)
				(34,311	)				(33,590	)				(35,112	)				(34,101	)				(38,917	)				(44,221	)
Transaction costs (a)				(770	)				(955	)				(771	)				(2,148	)				(4,179	)				(34,851	)
Operating income				145,656					147,874					123,478					157,615					167,120					146,489
Rent				(88,319	)				(88,981	)				(89,295	)				(90,777	)				(91,453	)				(95,677	)
Depreciation and amortization				(31,121	)				(29,852	)				(29,167	)				(31,412	)				(32,549	)				(37,871	)
Interest, net				(430	)				(1,675	)				(1,239	)				(2,501	)				(5,233	)				(22,900	)	(b)
Income (loss) from continuing operations before income taxes				25,786					27,366					3,777					32,925					37,885					(9,959	)
Provision (benefit) for income taxes				10,631					11,230					(1,323	)				13,170					15,609					(3,419	)
			$	15,155				$	16,136				$	5,100				$	19,755				$	22,276				$	(6,540	)
(a) Transaction-related charges for the 2010 periods have been reclassified to conform with the current period presentation.
(b) Includes $11.8 million of financing costs associated with the acquisition of RehabCare.

KINDRED HEALTHCARE, INC.
Condensed Consolidating Statement of Operations
(Unaudited)
(In thousands)
			Second Quarter 2011
								Nursing					Rehabilitation division
			Hospital					center					Skilled nursing					Hospital															Transaction
			division					division					services					services					Total					Corporate					costs					Eliminations					Consolidated
Revenues			$	593,425				$	568,199				$	172,074				$	38,291				$	210,365				$	-				$	-				$	(79,397	)			$	1,292,592
Salaries, wages and benefits				273,260					270,347					148,236					28,086					176,322					30,354					14,866					(16	)				765,133
Supplies				67,612					27,870					1,006					37					1,043					193					-					-					96,718
Rent				43,997					49,562					1,791					33					1,824					294					-					-					95,677
Other operating expenses				144,088					176,450					7,301					2,135					9,436					16,554					19,985					(79,381	)				287,132
Other income				-					-					-					-					-					(2,880	)				-					-					(2,880	)
Depreciation and amortization				16,572					13,038					1,339					819					2,158					6,103					-					-					37,871
Interest expense				66					22					-					-					-					11,266					11,803					-					23,157
Investment income				(2	)				(20	)				(1	)				-					(1	)				(234	)				-					-					(257	)
				545,593					537,269					159,672					31,110					190,782					61,650					46,654					(79,397	)				1,302,551
Income (loss) from continuing operations before income taxes			$	47,832				$	30,930				$	12,402				$	7,181				$	19,583				$	(61,650	)			$	(46,654	)			$	-					(9,959	)
Provision (benefit) for income taxes																																												(3,419	)
Income (loss) from continuing operations																																											$	(6,540	)
Capital expenditures, excluding acquisitions (including discontinued operations):
Routine			$	11,809				$	8,000				$	217				$	72				$	289				$	13,852				$	-				$	-				$	33,950
Development				6,423					7,705					181					-					181					-					-					-					14,309
			$	18,232				$	15,705				$	398				$	72				$	470				$	13,852				$	-				$	-				$	48,259
			Second Quarter 2010
								Nursing					Rehabilitation division
			Hospital					center					Skilled nursing					Hospital															Transaction
			division					division					services					services					Total					Corporate					costs					Eliminations					Consolidated
Revenues			$	493,401				$	542,215				$	101,148				$	20,913				$	122,061				$	-				$	-				$	(76,313	)			$	1,081,364
Salaries, wages and benefits				221,086					264,653					86,551					15,431					101,982					24,484					-					-					612,205
Supplies				57,150					27,448					704					22					726					131					-					-					85,455
Rent				38,043					49,439					1,445					25					1,470					29					-					-					88,981
Other operating expenses				123,375					173,585					4,586					667					5,253					11,832					955					(76,313	)				238,687
Other income				-					-					-					-					-					(2,857	)				-					-					(2,857	)
Depreciation and amortization				12,549					11,185					558					68					626					5,492					-					-					29,852
Interest expense				1					29					-					-					-					1,268					-					-					1,298
Investment (income) loss				-					(17	)				(2	)				(1	)				(3	)				397					-					-					377
				452,204					526,322					93,842					16,212					110,054					40,776					955					(76,313	)				1,053,998
Income (loss) from continuing operations before income taxes			$	41,197				$	15,893				$	7,306				$	4,701				$	12,007				$	(40,776	)			$	(955	)			$	-					27,366
Provision (benefit) for income taxes																																												11,230
Income (loss) from continuing operations																																											$	16,136
Capital expenditures, excluding acquisitions (including discontinued operations):
Routine			$	7,954				$	9,135				$	258				$	23				$	281				$	8,300				$	-				$	-				$	25,670
Development				10,209					2,079					-					-					-					-					-					-					12,288
			$	18,163				$	11,214				$	258				$	23				$	281				$	8,300				$	-				$	-				$	37,958

KINDRED HEALTHCARE, INC.
Condensed Consolidating Statement of Operations (Continued)
(Unaudited)
(In thousands)
			Six months ended June 30, 2011
								Nursing					Rehabilitation division
			Hospital					center					Skilled nursing					Hospital															Transaction
			division					division					services					services					Total					Corporate					costs					Eliminations					Consolidated
Revenues			$	1,152,399				$	1,135,671				$	294,730				$	60,781				$	355,511				$	-				$	-				$	(158,568	)			$	2,485,013
Salaries, wages and benefits				526,322					543,517					256,419					44,734					301,153					58,020					14,866					(50	)				1,443,828
Supplies				129,459					54,995					1,890					60					1,950					336					-					-					186,740
Rent				84,296					98,946					3,489					61					3,550					338					-					-					187,130
Other operating expenses				279,768					356,277					11,741					2,622					14,363					30,447					24,164					(158,518	)				546,501
Other income				-					-					-					-					-					(5,665	)				-					-					(5,665	)
Depreciation and amortization				30,850					24,831					2,098					916					3,014					11,725					-					-					70,420
Interest expense				66					51					-					-					-					14,966					13,802					-					28,885
Investment income				(3	)				(40	)				(2	)				-					(2	)				(707	)				-					-					(752	)
				1,050,758					1,078,577					275,635					48,393					324,028					109,460					52,832					(158,568	)				2,457,087
Income from continuing operations before income taxes			$	101,641				$	57,094				$	19,095				$	12,388				$	31,483				$	(109,460	)			$	(52,832	)			$	-					27,926
Provision for income taxes																																												12,190
Income from continuing operations																																											$	15,736
Capital expenditures, excluding acquisitions (including discontinued operations):
Routine			$	23,953				$	16,155				$	472				$	97				$	569				$	17,991				$	-				$	-				$	58,668
Development				14,200					11,027					191					-					191					-					-					-					25,418
			$	38,153				$	27,182				$	663				$	97				$	760				$	17,991				$	-				$	-				$	84,086
			Six months ended June 30, 2010
								Nursing					Rehabilitation division
			Hospital					center					Skilled nursing					Hospital															Transaction
			division (a)					division (a)					services					services					Total					Corporate (a)					costs					Eliminations					Consolidated
Revenues			$	1,000,463				$	1,081,536				$	200,145				$	42,060				$	242,205				$	-				$	-				$	(153,003	)			$	2,171,201
Salaries, wages and benefits				448,727					537,895					171,574					30,920					202,494					50,264					-					-					1,239,380
Supplies				115,084					54,576					1,370					43					1,413					268					-					-					171,341
Rent				75,458					98,831					2,894					51					2,945					66					-					-					177,300
Other operating expenses				249,422					341,922					8,357					1,158					9,515					23,310					1,725					(153,003	)				472,891
Other income				-					-					-					-					-					(5,941	)				-					-					(5,941	)
Depreciation and amortization				25,563					23,298					1,081					130					1,211					10,901					-					-					60,973
Interest expense				3					60					-					-					-					2,542					-					-					2,605
Investment income				(1	)				(35	)				(3	)				(1	)				(4	)				(460	)				-					-					(500	)
				914,256					1,056,547					185,273					32,301					217,574					80,950					1,725					(153,003	)				2,118,049
Income from continuing operations before income taxes			$	86,207				$	24,989				$	14,872				$	9,759				$	24,631				$	(80,950	)			$	(1,725	)			$	-					53,152
Provision for income taxes																																												21,861
Income from continuing operations																																											$	31,291
Capital expenditures, excluding acquisitions (including discontinued operations):
Routine			$	14,019				$	13,184				$	486				$	62				$	548				$	12,734				$	-				$	-				$	40,485
Development				15,983					3,872					-					-					-					-					-					-					19,855
			$	30,002				$	17,056				$	486				$	62				$	548				$	12,734				$	-				$	-				$	60,340

(a)

Includes $2.9 million in aggregate of severance and retirement costs in salaries, wages and benefits (Hospital division - $ 1.1 million, Nursing center division - $0.5 million and Corporate - $1.3 million).

KINDRED HEALTHCARE, INC.
Condensed Business Segment Data
(Unaudited)
			2010 Quarters												2011 Quarters
			First			Second			Third			Fourth			First			Second
Hospital data:
End of period data:
Number of hospitals:
Long-term acute care			83			83			83			89			89			120
Inpatient rehabilitation			-			-			-			-			-			5
			83			83			83			89			89			125
Number of licensed beds:
Long-term acute care			6,580			6,576			6,563			6,887			6,889			8,609
Inpatient rehabilitation			-			-			-			-			-			183
			6,580			6,576			6,563			6,887			6,889			8,792
Revenue mix %:
Medicare			56			56			55			58			60			60
Medicaid			9			9			9			9			8			8
Medicare Advantage			10			10			10			9			10			10
Commercial insurance and other			25			25			26			24			22			22
Admissions:
Medicare			7,432			7,125			6,769			7,640			8,504			8,913
Medicaid			997			990			1,022			1,034			1,085			1,163
Medicare Advantage			1,129			1,106			936			1,071			1,172			1,348
Commercial insurance and other			2,262			2,048			1,978			2,020			2,282			2,290
			11,820			11,269			10,705			11,765			13,043			13,714
Admissions mix %:
Medicare			63			63			63			65			65			65
Medicaid			8			9			10			9			8			8
Medicare Advantage			10			10			9			9			9			10
Commercial insurance and other			19			18			18			17			18			17
Patient days:
Medicare			202,882			195,964			179,324			198,129			219,213			237,257
Medicaid			47,813			45,952			48,514			46,596			45,650			45,746
Medicare Advantage			34,524			36,000			31,186			32,868			35,639			39,503
Commercial insurance and other			75,483			70,651			70,198			69,585			70,522			72,759
			360,702			348,567			329,222			347,178			371,024			395,265
Average length of stay:
Medicare			27.3			27.5			26.5			25.9			25.8			26.6
Medicaid			48.0			46.4			47.5			45.1			42.1			39.3
Medicare Advantage			30.6			32.5			33.3			30.7			30.4			29.3
Commercial insurance and other			33.4			34.5			35.5			34.4			30.9			31.8
Weighted average			30.5			30.9			30.8			29.5			28.4			28.8

KINDRED HEALTHCARE, INC.
Condensed Business Segment Data (Continued)
(Unaudited)
			2010 Quarters																2011 Quarters
			First				Second				Third				Fourth				First				Second
Hospital data (continued):
Revenues per admission:
Medicare			$	38,078			$	38,938			$	37,675			$	38,368			$	39,439			$	40,089
Medicaid				45,738				42,774				42,910				41,704				42,432				41,576
Medicare Advantage				45,187				46,169				48,122				44,744				46,217				42,708
Commercial insurance and other				56,344				59,842				61,314				61,131				54,065				56,850
Weighted average				42,899				43,784				43,456				43,150				42,856				43,271
Revenues per patient day:
Medicare			$	1,395			$	1,416			$	1,422			$	1,479			$	1,530			$	1,506
Medicaid				954				922				904				925				1,009				1,057
Medicare Advantage				1,478				1,418				1,444				1,458				1,520				1,457
Commercial insurance and other				1,688				1,735				1,728				1,775				1,749				1,789
Weighted average				1,406				1,416				1,413				1,462				1,507				1,501
Medicare case mix index (discharged patients only)				1.21				1.21				1.19				1.17				1.21				1.22
Average daily census				4,008				3,830				3,579				3,774				4,122				4,344
Occupancy %				68.2				66.1				62.0				64.0				68.7				65.5
Annualized employee turnover %				21.8				22.6				22.3				22.0				21.2				22.1
Nursing and rehabilitation center data:
End of period data:
Number of facilities:
Nursing and rehabilitation centers:
Owned or leased				218				219				222				222				220				220
Managed				4				4				4				4				4				4
Assisted living facilities				6				7				7				7				6				6
				228				230				233				233				230				230
Number of licensed beds:
Nursing and rehabilitation centers:
Owned or leased				26,711				26,760				27,030				26,957				26,767				26,687
Managed				485				485				485				485				485				485
Assisted living facilities				327				463				463				463				413				413
				27,523				27,708				27,978				27,905				27,665				27,585
Revenue mix %:
Medicare				35				34				33				36				38				37
Medicaid				41				41				41				39				37				38
Medicare Advantage				6				7				7				7				7				7
Private and other				18				18				19				18				18				18

KINDRED HEALTHCARE, INC.
Condensed Business Segment Data (Continued)
(Unaudited)
			2010 Quarters																2011 Quarters
			First				Second				Third				Fourth				First				Second
Nursing and rehabilitation center data (continued):
Patient days (excludes managed facilities):
Medicare				369,102				363,149				346,837				344,018				370,395				358,760
Medicaid				1,312,517				1,292,246				1,289,643				1,287,739				1,232,620				1,229,517
Medicare Advantage				87,692				92,051				91,643				94,336				97,460				94,483
Private and other				397,550				415,921				437,413				453,357				425,414				435,667
				2,166,861				2,163,367				2,165,536				2,179,450				2,125,889				2,118,427
Patient day mix %:
Medicare				17				17				16				16				17				17
Medicaid				61				60				60				59				58				58
Medicare Advantage				4				4				4				4				5				4
Private and other				18				19				20				21				20				21
Revenues per patient day:
Medicare Part A			$	470			$	469			$	468			$	534			$	537			$	544
Total Medicare (including Part B)				513				515				519				587				579				589
Medicaid				168				171				171				171				172				173
Medicare Advantage				398				400				405				432				416				420
Private and other				238				234				232				228				235				240
Weighted average				249				250				249				260				267				268
Average daily census				24,076				23,773				23,538				23,690				23,621				23,279
Admissions (excludes managed facilities)				19,026				18,924				19,383				19,118				20,619				20,143
Occupancy %				89.0				87.3				86.8				86.4				86.9				85.9
Medicare average length of stay				33.7				35.2				34.3				33.0				32.9				33.4
Annualized employee turnover %				36.7				38.8				39.8				39.6				37.8				39.8
Rehabilitation data:
Skilled nursing rehabilitation services:
Revenue mix %:
Company-operated				57				56				55				49				47				34
Non-affiliated				43				44				45				51				53				66
Sites of service (at end of period)				554				568				595				635				641				1,848
Revenue per site			$	172,498			$	171,254			$	167,832			$	174,896			$	178,812			$	137,316
Therapist productivity %				83.8				84.2				82.1				78.6				80.6				81.6
Hospice and home care revenues			$	3,434			$	3,875			$	3,947			$	6,266			$	8,038			$	10,828
Hospital rehabilitation services:
Revenue mix %:
Company-operated				96				96				95				95				94				54
Non-affiliated				4				4				5				5				6				46
Sites of service (at end of period):
Inpatient rehabilitation units				-				-				-				1				1				104
LTAC hospitals				85				85				85				91				93				97
Sub-acute units				7				7				7				7				8				22
Outpatient units				10				11				11				12				12				119
Other				2				2				4				4				5				8
				104				105				107				115				119				350
Revenue per site			$	203,337			$	199,174			$	190,986			$	184,193			$	188,989			$	199,661
Annualized employee turnover %				12.6				14.2				15.4				14.4				14.5				17.1

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,
			2011										2010										2011										2010
			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			$	(6,119	)			$	(6,119	)			$	16,136				$	16,136				$	16,157				$	16,157				$	31,291				$	31,291
Allocation to participating unvested restricted stockholders				-					-					(300	)				(299	)				(296	)				(292	)				(578	)				(575	)
Available to common stockholders			$	(6,119	)			$	(6,119	)			$	15,836				$	15,837				$	15,861				$	15,865				$	30,713				$	30,716
Discontinued operations, net of income taxes:
Income (loss) from operations:
As reported in Statement of Operations			$	587				$	587				$	87				$	87				$	408				$	408				$	(67	)			$	(67	)
Allocation to participating unvested restricted stockholders				-					-					(2	)				(2	)				(7	)				(7	)				1					1
Available to common stockholders			$	587				$	587				$	85				$	85				$	401				$	401				$	(66	)			$	(66	)
Gain (loss) on divestiture of operations:
As reported in Statement of Operations			$	-				$	-				$	54				$	54				$	-				$	-				$	(83	)			$	(83	)
Allocation to participating unvested restricted stockholders				-					-					(1	)				(1	)				-					-					2					2
Available to common stockholders			$	-				$	-				$	53				$	53				$	-				$	-				$	(81	)			$	(81	)
Net income (loss):
As reported in Statement of Operations			$	(5,532	)			$	(5,532	)			$	16,277				$	16,277				$	16,565				$	16,565				$	31,141				$	31,141
Allocation to participating unvested restricted stockholders				-					-					(303	)				(302	)				(303	)				(299	)				(575	)				(572	)
Available to common stockholders			$	(5,532	)			$	(5,532	)			$	15,974				$	15,975				$	16,262				$	16,266				$	30,566				$	30,569
Shares used in the computation:
Weighted average shares outstanding - basic computation				43,231					43,231					38,756					38,756					41,145					41,145					38,691					38,691
Dilutive effect of employee stock options									-										158										516										190
Adjusted weighted average shares outstanding - diluted computation									43,231										38,914										41,661										38,881
Earnings (loss) per common share:
Income (loss) from continuing operations			$	(0.14	)			$	(0.14	)			$	0.41				$	0.41				$	0.39				$	0.38				$	0.79				$	0.79
Discontinued operations:
Income (loss) from operations				0.01					0.01					-					-					0.01					0.01					-					-
Gain (loss) on divestiture of operations				-					-					-					-					-					-					-					-
Net income (loss)			$	(0.13	)			$	(0.13	)			$	0.41				$	0.41				$	0.40				$	0.39				$	0.79				$	0.79

(a)

Earnings (loss) per common share are based upon the weighted average number of common shares outstanding during the respective periods. The diluted calculation of earnings (loss) per common share includes the dilutive effect of stock options. 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 (loss) per common share calculation pursuant to the two-class method.

KINDRED HEALTHCARE, INC.

Reconciliation of Non-GAAP Measurements to GAAP Results

(Unaudited)

(In thousands, except per share amounts and statistics)

In addition to the results provided in accordance with GAAP, the Company has provided a non-GAAP measurement which presents operating results for the second quarter and six months ended June 30, 2011 and 2010 before certain transaction-related charges or on a core basis. The charges that were excluded from core operating results for the second quarter and six months ended June 30, 2011 relate to transaction, financing and severance costs. The charges that were excluded from core operating results for the second quarter ended June 30, 2010 relate to transaction costs. The charges that are excluded from core operating results for the six months ended June 30, 2010 relate to transaction, severance and retirement costs.

The income tax benefit associated with the excluded charges was calculated using an effective income tax rate of 36.7% for the second quarter and six months ended June 30, 2011 and an effective income tax rate of 38.5% for the second quarter and six months ended June 30, 2010. Certain of the excluded charges for the second quarter and six months ended June 30, 2011 are not deductible for income tax purposes thus resulting in a lower effective income tax rate than the comparable prior year periods.

This non-GAAP measurement is not intended to replace the presentation of the Company's financial results in accordance with GAAP. The Company believes that the presentation of core operating results provides additional information to investors to facilitate the comparison between periods by excluding certain charges for the second quarter and six months ended June 30, 2011 and 2010 that the Company believes are not representative of its ongoing operations due to the materiality and nature of the charges. The Company's core operating results also represent a key performance measure for the purposes of evaluating performance internally.

			Three months ended										Six months ended
			June 30,										June 30,
			2011					2010					2011					2010
Detail of transaction-related charges excluded from core operating results:
Transaction costs				($19,985	)				($955	)				($24,164	)				($1,725	)
Financing costs (in connection with the RehabCare acquisition)				(11,803	)				-					(13,802	)				-
Severance and retirement costs				(14,866	)				-					(14,866	)				(2,906	)
				(46,654	)				(955	)				(52,832	)				(4,631	)
Income tax benefit				17,114					368					19,337					1,783
Charges net of income taxes				(29,540	)				(587	)				(33,495	)				(2,848	)
Allocation to participating unvested restricted stockholders				-					11					606					52
Available to common stockholders				($29,540	)				($576	)				($32,889	)				($2,796	)
Weighted average diluted shares outstanding				43,231					38,914					41,661					38,881
Diluted loss per common share related to charges				($0.68	)				($0.01	)				($0.79	)				($0.07	)
Reconciliation of adjusted operating income before transaction-related charges:
Operating income before transaction-related charges			$	181,340				$	148,829				$	352,639				$	298,161
Detail of transaction-related charges excluded from core operating results:
Transaction costs				(19,985	)				(955	)				(24,164	)				(1,725	)
Severance and retirement costs				(14,866	)				-					(14,866	)				(2,906	)
				(34,851	)				(955	)				(39,030	)				(4,631	)
Reported operating income			$	146,489				$	147,874				$	313,609				$	293,530
Reconciliation of adjusted income (loss) from continuing operations before transaction-related charges:
Amounts attributable to Kindred stockholders:
Income from continuing operations before transaction-related charges			$	23,421				$	16,723				$	49,652				$	34,139
Charges net of income taxes				(29,540	)				(587	)				(33,495	)				(2,848	)
Reported income (loss) from continuing operations				($6,119	)			$	16,136				$	16,157				$	31,291
Reconciliation of diluted income (loss) per common share from continuing operations before transaction-related charges:
Diluted income per common share before transaction-related charges			$	0.53				$	0.42				$	1.17				$	0.86
Charges net of income taxes				(0.68	)				(0.01	)				(0.79	)				(0.07	)
Other				0.01					-					-					-
Reported diluted income (loss) per common share from continuing operations				($0.14	)			$	0.41				$	0.38				$	0.79
Weighted average diluted shares used to compute diluted income (loss) per common share from continuing operations before transaction-related charges				43,756					38,914					41,661					38,881
Weighted average diluted shares outstanding				43,231					38,914					41,661					38,881
Reconciliation of effective income tax rate before transaction-related charges:
Effective income tax rate before transaction-related charges				37.3	%				40.9	%				39.0	%				40.9	%
Impact of transaction-related charges on effective income tax rate				(3.0	)%				0.1	%				4.6	%				0.2	%
Reported effective income tax rate				34.3	%				41.0	%				43.6	%				41.1	%

KINDRED HEALTHCARE, INC.

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

(Unaudited)

(In thousands)

In addition to the results provided in accordance with GAAP, the Company has provided a non-GAAP measurement which presents operating cash flows for the second quarter and six months ended June 30, 2011 and 2010 excluding certain payments, net of income tax benefit, or on an adjusted basis. The payments that were excluded from adjusted operating cash flows for the second quarter and six months ended June 30, 2011 relate to financing, transaction and severance costs, net of income tax benefit. The payments that were excluded from adjusted operating cash flows for the second quarter ended June 30, 2010 relate to transaction costs, net of income tax benefit. The payments that are excluded from adjusted operating cash flows for the six months ended June 30, 2010 relate to transaction, severance and retirement costs, net of income tax benefit.

The income tax benefit associated with the excluded payments was calculated using an effective income tax rate of 36.7% for the second quarter and six months ended June 30, 2011 and an effective income tax rate of 38.5% for the second quarter and six months ended June 30, 2010. Certain of the excluded payments for the second quarter and six months ended June 30, 2011 are not deductible for income tax purposes thus resulting in a lower effective income tax rate than the comparable prior year periods.

This non-GAAP measurement is not intended to replace the presentation of the Company's operating cash flows in accordance with GAAP. The Company believes that the presentation of adjusted operating cash flows provides additional information to investors to facilitate the comparison between periods by excluding certain payments for the second quarter and six months ended June 30, 2011 and 2010 that the Company believes are not representative of its ongoing operations due to the materiality and nature of the payments. The Company's adjusted operating cash flows also represent a key cash flow measure for the purposes of evaluating cash flows internally.

			Three months ended										Six months ended
			June 30,										June 30,
			2011					2010					2011					2010
Reconciliation of net cash flows provided by operating activities to adjusted cash flows:
Net cash provided by operating activities			$	4,852				$	96,942				$	51,288				$	82,946
Adjustments to remove certain payments:
Financing costs:
Capitalized as deferred financing costs				46,232					-					46,232					-
Charged to interest expense				13,074					-					13,074					-
Transaction costs				19,601					616					22,063					755
Severance and retirement costs				6,970					-					6,970					2,689
Benefit of reduced income tax payments resulting from financing, transaction and severance costs				(17,114	)				(368	)				(19,337	)				(1,783	)
				68,763					248					69,002					1,661
Adjusted operating cash flows			$	73,615				$	97,190				$	120,290				$	84,607

KINDRED HEALTHCARE, INC.
Reconciliation of Earnings Guidance for 2011 and 2012 - Continuing Operations
(Unaudited)
(In millions, except per share amounts)
			Earnings Guidance Ranges as of August 8, 2011 (a)
			2011								2012
			Low				High				Low				High
Operating income			$	775			$	780			$	911			$	928
Rent				400				400				445				445
Depreciation and amortization				164				164				200				200
Interest, net				69				69				110				110
Income from continuing operations before income taxes				142				147				156				173
Provision for income taxes				53				54				63				69
Income from continuing operations				89				93				93				104
Earnings attributable to noncontrolling interests				2				2				4				4
Income attributable to the Company				87				91				89				100
Allocation to participating unvested restricted stockholders				2				2				2				2
Available to common stockholders			$	85			$	89			$	87			$	98
Earnings per diluted share			$	1.80			$	1.90			$	1.65			$	1.85
Shares used in computing earnings per diluted share				47.0				47.0				53.0				53.0

(a)

The Company's earnings guidance reflects the anticipated impact of the final rules recently issued by CMS related to payment rates for nursing centers, LTAC hospitals, IRFs and the Company's rehabilitation therapy business, all of which will be effective on October 1, 2011. The Company's earnings guidance excludes the effect of (i) any transaction-related charges that have been recorded in prior periods or that may be incurred in the future, (ii) any other reimbursement changes, (iii) any material acquisitions or divestitures, or (iv) any repurchases of common stock.

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