Kindred Healthcare Announces Fourth Quarter Results and Plans for Ventas Lease Renewals

Business Wire, Inc.

Excluding Certain Items, Company Reports Fourth Quarter Continuing Operations Diluted EPS of $0.27 Compared to $0.54 in 2010; Full Year EPS of $1.80 Up 17% from Last Year’s $1.54

Company Reports GAAP Continuing Operations Loss of $1.42 per Diluted Share in the Fourth Quarter and $1.21 for the Year

Company Reduces Fiscal 2012 Earnings Guidance to $1.35 to $1.55

Company Intends to Allow Ventas Leases for 54 Nursing Centers and 10 Hospitals to Expire in 2013

LOUISVILLE, Ky.--(BUSINESS WIRE)-- Kindred Healthcare, Inc. (“Kindred” or the “Company”) (NYSE:KND) today announced its operating results for the fourth quarter and year ended December 31, 2011 as well as its intentions with respect to the renewal of facility leases with its primary landlord, Ventas, Inc. (“Ventas”) (NYSE:VTR). The Company’s consolidated financial statements include the operating results of RehabCare Group, Inc. (“RehabCare”) since the closing of the acquisition on June 1, 2011.

Highlights (operating data adjusted to exclude certain items):

• Favorable impact of RehabCare acquisition negated by fourth quarter regulatory changes
  • Initial quarter under new RUGs IV and rehabilitation therapy rule changes more challenging than expected
  • Annual impact of new Medicare rules now estimated at $150 million
• Fourth quarter consolidated continuing operations key metrics compared to last year
  • Revenues grew 34% to $1.5 billion
  • Operating income rose 25% to $200 million
  • Income from continuing operations fell 35% to $14 million
  • Diluted earnings per share declined 50% to $0.27
• Fourth quarter operating summary
  • Hospital revenues rose 40%; same-store revenues increased 5% while admissions rose 4%
  • Medicare cuts materially hampered nursing center and rehabilitation therapy results
  • Home health and hospice business reported strong results
• Company continues to generate significant operating cash flows
  • Excluding transaction-related payments, full year operating cash flows grew 11% to $238 million
• Company reduces 2012 earnings guidance
  • RehabCare synergy estimate rises to $70 million from $62 million
  • Company expects to implement $50 million to $55 million of additional cost reductions
• Company expects non-renewal of seven Ventas bundles containing 64 facilities in April 2013
  • Future growth prospects for these facilities considered limited
  • Many of the facilities do not align with the Company’s operating plan and cluster market strategy
  • Expected 2013 EPS dilution of $0.10 to $0.15 from these divestitures considered manageable
  • Divestitures will improve the Company’s capital structure over the long term

Fourth Quarter Results

Continuing Operations

Consolidated revenues for the fourth quarter ended December 31, 2011 increased 34% to $1.5 billion compared to $1.1 billion in the same period in 2010. The Company reported a loss from continuing operations for the fourth quarter of 2011 of $72.8 million or $1.42 per diluted share compared to income of $19.7 million or $0.50 per diluted share in the fourth quarter of 2010. Operating results for the fourth quarter of 2011 included asset impairment charges, transaction-related costs and a loss on a hospital divestiture that reduced income from continuing operations by $86.7 million or $1.69 per diluted share. Operating results for the fourth quarter of 2010 included transaction-related costs that reduced income from continuing operations by $1.6 million or $0.04 per diluted share.

During the fourth quarter of 2011, the Company recorded approximately $102 million of pretax asset impairment charges to reflect circumstances in which the carrying value of certain assets exceeded their fair value. Goodwill impairment charges of approximately $46 million resulted primarily from the worse than expected decline in operating results in the Company’s rehabilitation division related to Medicare reimbursement changes that became effective on October 1, 2011. The Company also wrote off approximately $54 million of certain hospital and nursing and rehabilitation center intangible assets as part of its regular annual asset impairment testing. In addition, the Company wrote off approximately $2 million of leasehold improvements expended in the quarter at facilities that were considered impaired in a prior period.

Fiscal Year Results

Continuing Operations

Consolidated revenues for the year ended December 31, 2011 increased 27% to $5.5 billion compared to $4.4 billion in the previous year. The Company reported a loss from continuing operations of $56.0 million or $1.21 per diluted share in 2011 compared to income of $56.1 million or $1.42 per diluted share in 2010.

Operating results in 2011 included asset impairment charges, transaction-related costs and a loss on a hospital divestiture that reduced income from continuing operations by $141.1 million or $3.05 per diluted share. Operating results in 2010 included certain items that reduced income from continuing operations by $4.9 million or $0.12 per diluted share.

Management Commentary

Paul J. Diaz, President and Chief Executive Officer of the Company, commented, “Despite a very difficult fourth quarter brought on by significant Medicare cuts in both our nursing center and our rehabilitation therapy businesses, fiscal 2011 was an exceptional year for Kindred. Our acquisition of RehabCare in June added meaningful depth and strength to our core hospital and rehabilitation divisions and I am pleased with the highly successful integration of the organizations and the realization of significant cost synergies. Excluding asset impairment charges, transaction-related items and a loss on a hospital divestiture, our full-year diluted earnings per share from continuing operations of $1.80 were 17% higher than the adjusted $1.54 per share in 2010.”

Mr. Diaz further noted, “In addition to the RehabCare acquisition, we successfully completed a number of transactions to expand our growing home health and hospice business. We expect these acquisitions to continue, primarily in our cluster markets, and we are excited that this business will contribute meaningfully to our earnings going forward.”

Commenting on the Company’s liquidity and capital resources, Mr. Diaz noted, “Excluding transaction- related payments, our operating cash flows in 2011 grew 11% to $238 million. These results allow us to fund our routine capital spending internally, with the balance available to fund our ongoing acquisition and cluster market development activities. In addition, our $343 million of unused revolving credit capacity at December 31, 2011 provides significant capital for future growth.”

Mr. Diaz also commented on the Company’s recently issued 2011 Quality and Social Responsibility Report, “Kindred is proud to issue its fifth annual Quality and Social Responsibility Report to fulfill our commitment to be transparent about our quality results and our ongoing efforts to improve the care and services for our patients and residents.” Mr. Diaz noted that the report links the Company’s quality initiatives with its Continue the Care and cluster market strategies. “Both policymakers and the marketplace are demanding that healthcare providers participate in coordinated care strategies to improve quality, reduce avoidable hospitalizations and lower costs. Kindred’s cluster market strategy is designed to leverage Kindred’s national scale to build a continuum of post-acute services in local healthcare delivery markets to achieve these shared goals. Kindred is aggressively developing a post-acute continuum of service lines in local markets, including long-term acute care (“LTAC”) hospitals, inpatient rehabilitation facilities, sub-acute or transitional care, and home health and hospice services, in order to partner with physician groups, hospitals, health systems and payors to better manage episodes of care while at the same time improving quality and lowering costs.”

Earnings Guidance – Continuing Operations

The Company updated its earnings guidance for 2012. The earnings guidance provided by the Company excludes the effect of (i) any transaction-related charges, (ii) any other reimbursement changes, (iii) any acquisitions or divestitures, (iv) any impairment charges, or (v) any repurchases of common stock.

The Company expects consolidated revenues for 2012 to approximate $6.3 billion. Operating income, or earnings before interest, income taxes, depreciation, amortization and rent, is expected to range from $868 million to $884 million. Rent expense is expected to approximate $434 million, while depreciation and amortization should approximate $197 million. Net interest expense is expected to approximate $107 million. The Company expects to report income from continuing operations for 2012 between $73 million to $83 million or $1.35 to $1.55 per diluted share (based upon diluted shares of 52.5 million). The Company’s previous earnings per diluted share range for 2012 was $1.65 to $1.85.

As a result of the significant volatility in its earnings in connection with recent changes in Medicare reimbursements, the Company is suspending its practice of providing quarterly earnings guidance at this time.

The Company also indicated that it expects cash flows from operations in 2012 to range from $240 million to $260 million. Routine capital expenditures in 2012 are expected to range from $130 million to $140 million, including approximately $16 million of expenditures to complete the information systems integration of RehabCare. The Company’s expected routine capital expenditures also include approximately $11 million to upgrade the clinical information systems in its hospital, nursing center and home health businesses.

In addition, the Company continues its ongoing development of several previously announced projects. At December 31, 2011, projects related to the replacement, expansion and upgrade of its hospitals in Dayton, Ohio and Charleston, South Carolina, as well as the development of two new inpatient rehabilitation hospitals in Texas will be completed at an aggregate additional cost of approximately $23 million through 2013 (these expenditures are not included in the routine capital spending estimates discussed above).

Mr. Diaz remarked, “Our 2012 operating plan includes several initiatives to improve our operating results. These plans relate primarily to synergies associated with the RehabCare acquisition, changes in compensation and employee benefit programs and continued reductions in overhead costs.”

“Our fourth quarter operating results included the realization of approximately $40 million of annualized RehabCare integration synergies. For 2012, we expect these synergies to approach $70 million, up from our previous estimate of $62 million. In addition, we are implementing plans to reduce compensation, employee benefit and overhead costs by approximately $50 million to $55 million over the balance of 2012. These cost reductions should be fully implemented by the end of the third quarter.”

Mr. Diaz commented further, “Our 2012 earnings outlook reflects a more difficult than expected operating environment under the recent RUGs IV and rehabilitation therapy Medicare rule changes. While we continue to believe that federal policymakers have over-reached in their attempt to adjust the RUGs IV rules, we must intensify our efforts to adjust our operations while still maintaining the quality of our services. Nevertheless, our strategic goals to expand our cluster market development and accelerate growth in areas like home health and contract therapy have not changed in light of current reimbursement pressures.”

Ventas Lease Renewals

Under its master lease agreements with Ventas, the Company has 73 nursing and rehabilitation centers and 16 LTAC hospitals within ten separate renewal bundles currently subject to lease renewals. The Company has until April 30, 2012 to exercise these renewals for an additional five-year term. Each renewal bundle contains both nursing and rehabilitation centers and LTAC hospitals. The master lease agreements require that the Company renew all or none of the facilities within a renewal bundle.

The Company intends to renew three renewal bundles containing 19 nursing and rehabilitation centers and six LTAC hospitals (collectively, the “Renewal Facilities”). The Renewal Facilities contain 2,178 licensed nursing and rehabilitation center beds and 616 licensed hospital beds and generated revenues of approximately $434 million for the year ended December 31, 2011. The current annual rent for the Renewal Facilities approximates $46 million.

The Company also announced that it does not intend to renew seven renewal bundles containing 54 nursing and rehabilitation centers and ten LTAC hospitals (collectively, the “Expiring Facilities”). The Expiring Facilities contain 6,140 licensed nursing and rehabilitation center beds and 1,066 licensed hospital beds and generated revenues of approximately $790 million for the year ended December 31, 2011. The current annual rent for the Expiring Facilities approximates $77 million. The Company will continue to operate the Expiring Facilities and include the Expiring Facilities in its results from continuing operations through the expiration of the lease term in April 2013.

Management believes that the divestiture of the Expiring Facilities could reduce the Company’s consolidated earnings per diluted share by $0.10 to $0.15 in 2013, but will not otherwise materially impact the Company’s cash flows or financial position. This estimate is based upon a number of assumptions, including the Company’s estimated impact of the recent and impending Medicare reimbursement reductions for nursing centers and LTAC hospitals and its ability to achieve overhead savings in connection with these divestitures.

Mr. Diaz remarked, “At this time, we believe it is important to give investors our views on the Ventas renewals. We have evaluated the lease renewals as we would any acquisition. The Renewal Facilities generally meet our targeted investment returns and rent coverage ratios after capital expenditures and otherwise fit within our strategic operating plan.”

Mr. Diaz continued, “While in general the individual Expiring Facilities are good assets, these bundles as a whole do not satisfy our targeted investment returns or fit within our strategic operating plan. The majority of the Expiring Facilities are outside our cluster markets and many of the nursing and rehabilitation centers that are predominantly chronic care and Medicaid dependent are not well suited for our higher acuity, transitional care strategy. Under our operating model, these facilities also have limited growth opportunities and our expected earnings from these operations do not support the allocation of capital, risk or management time over the renewal period. Given the current reimbursement environment, particularly around nursing centers, we believe that our capital investments and management efforts are best focused in other areas of growth including home health, acute rehabilitation units, newer owned LTAC and inpatient rehabilitation hospitals, as well as investments in new integrated care models. In addition, we believe that, over time, these divestitures will substantially improve our capital structure by reducing our lease obligations and related leverage and the earnings leakage associated with rent escalators.”

“As we have stated previously, we are focused on five key business strategies. First, we must be successful in our core operations by providing quality care and efficiently managing our costs. Second, we remain focused on accelerating our cluster market strategy both from an operational and capital investment perspective. In addition, we will continue to expand our home health and hospice operations. We also are active in developing new integrated care and payment models with other healthcare providers and payors that will be responsive to changes in the marketplace. Finally, we remain focused on re-deploying assets and management time to higher margin businesses. Exiting the Expiring Facilities is another significant step in our re-deployment strategy.”

Mr. Diaz concluded, “Over the next year, we will cooperate with Ventas as it finds suitable tenants for the Expiring Facilities and effectuate an orderly transition of our patients, employees and operations to the new tenants.”

The effectiveness of the renewals is contingent upon there being no event of default under the master lease agreements upon the renewal effective date in April 2013. Additional information regarding the master lease agreements is contained in the Company’s Form 10-K for the year ended December 31, 2010 and copies of the master lease agreements filed with the Securities and Exchange Commission.

Conference Call

As previously announced, investors and the general public may access a live webcast of the fourth 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 February 24 at 11:00 a.m. (Eastern Time).

A telephone replay of the conference call will become available at approximately 2:00 p.m. on February 24 by dialing 888-203-1112, access code: 8694041. The replay will be available through March 4.

Forward-Looking Statements

This press release includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements regarding the 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.

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

In addition to the factors set forth above, other factors that may affect the Company’s plans or results include, without limitation, (a) the impact of healthcare reform, which will initiate significant reforms to the United States healthcare system, including potential material changes to the delivery of healthcare services and the reimbursement paid for such services by the government or other third party payors. Healthcare reform will impact each of the Company’s businesses in some manner. Due to the substantial regulatory changes that will need to be implemented by 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 July 29, 2011 which significantly reduced Medicare reimbursement to nursing centers and changed payments for the provision of group therapy services effective October 1, 2011, (c) the impact of the Budget Control Act of 2011 which will automatically reduce federal spending by approximately $1.2 trillion split evenly between domestic and defense spending. At this time, the Company believes this will result in an automatic 2% reduction on each claim submitted to Medicare beginning February 1, 2013, (d) 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 the Company’s nursing and rehabilitation centers, inpatient rehabilitation hospitals and home health and hospice operations, and the expiration of the Medicare Part B therapy cap exception process, (e) 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, (f) the impact of the Medicare, Medicaid and SCHIP Extension Act of 2007 (the “SCHIP Extension Act”), including the ability of the Company’s hospitals to adjust to potential LTAC certification, medical necessity reviews and the moratorium on future hospital development, (g) the impact of the expiration of several moratoriums in 2012 under the SCHIP Extension Act which could impact the short stay rules, the budget neutrality adjustment as well as implement the “25 Percent Rule,” which would limit certain patient admissions, (h) the Company’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 undertaken, as and when planned, including the potential for unanticipated issues, expenses and liabilities associated with those acquisitions, (i) the potential for diversion of management time and resources in seeking to integrate RehabCare’s operations, (j) the impact of the Company’s significantly increased levels of indebtedness as a result of the RehabCare 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, particularly in light of ongoing volatility in the credit and capital markets, (k) 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, (l) the potential failure to retain key employees of RehabCare, (m) failure of the Company’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) the Company’s ability to meet its rental and debt service obligations, (p) the Company’s ability to operate pursuant to the terms of its debt obligations, including its obligations under financings undertaken to complete the RehabCare acquisition, and the Company’s ability to operate pursuant to its master lease agreements with Ventas, (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 the Company’s businesses, or which could negatively impact the Company’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) the Company’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) the Company’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 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, (w) the Company’s ability to successfully reduce (by divestiture of operations or otherwise) its exposure to professional liability and other claims, (x) the Company’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) 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 non-GAAP measurements which present operating results and cash flows from operations for the fourth quarters and years ended December 31, 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 77,800 employees in 46 states. At December 31, 2011, Kindred through its subsidiaries provided healthcare services in 2,200 locations, including 121 long-term acute care hospitals, five inpatient rehabilitation hospitals, 224 nursing and rehabilitation centers, 25 sub-acute units, 51 hospice and home care locations, 102 inpatient rehabilitation units (hospital-based) and a contract rehabilitation services business, RehabCare, which served approximately 1,670 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.

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KINDRED HEALTHCARE, INC.
Financial Summary
(In thousands, except per share amounts)
			Three months ended										Year ended
			December 31,										December 31,
			2011					2010					2011					2010
Revenues			$	1,522,688				$	1,135,484				$	5,521,763				$	4,359,697
Income (loss) from continuing operations			$	(72,914	)			$	19,755				$	(56,271	)			$	56,146
Discontinued operations, net of income taxes:
Income from operations				1,025					1,125					2,552					798
Loss on divestiture of operations				-					(456	)				-					(453	)
Income from discontinued operations				1,025					669					2,552					345
Net income (loss)				(71,889	)				20,424					(53,719	)				56,491
Loss attributable to noncontrolling interests				58					-					238					-
Income (loss) attributable to Kindred			$	(71,831	)			$	20,424				$	(53,481	)			$	56,491
Amounts attributable to Kindred stockholders:
Income (loss) from continuing operations			$	(72,856	)			$	19,755				$	(56,033	)			$	56,146
Income from discontinued operations				1,025					669					2,552					345
Net income (loss)			$	(71,831	)			$	20,424				$	(53,481	)			$	56,491
Earnings (loss) per common share:
Basic:
Income (loss) from continuing operations			$	(1.42	)			$	0.50				$	(1.21	)			$	1.42
Discontinued operations:
Income from operations				0.02					0.03					0.05					0.02
Loss on divestiture of operations				-					(0.01	)				-					(0.01	)
Net income (loss)			$	(1.40	)			$	0.52				$	(1.16	)			$	1.43
Diluted:
Income (loss) from continuing operations			$	(1.42	)			$	0.50				$	(1.21	)			$	1.42
Discontinued operations:
Income from operations				0.02					0.03					0.05					0.02
Loss on divestiture of operations				-					(0.01	)				-					(0.01	)
Net income (loss)			$	(1.40	)			$	0.52				$	(1.16	)			$	1.43
Shares used in computing earnings (loss) per common share:
Basic				51,335					38,790					46,280					38,738
Diluted				51,335					39,089					46,280					38,954

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KINDRED HEALTHCARE, INC.
Condensed Consolidated Statement of Operations
(In thousands, except per share amounts)
			Three months ended										Year ended
			December 31,										December 31,
			2011					2010					2011					2010
Revenues			$	1,522,688				$	1,135,484				$	5,521,763				$	4,359,697
Salaries, wages and benefits				911,417					652,703					3,255,815					2,505,690
Supplies				107,760					87,103					402,014					342,197
Rent				106,616					90,777					399,257					357,372
Other operating expenses				312,674					240,750					1,164,480					948,609
Other income				(2,711	)				(2,687	)				(11,191	)				(11,422	)
Impairment charges				102,569					-					129,281					-
Depreciation and amortization				48,227					31,412					165,594					121,552
Interest expense				26,244					2,843					80,919					7,090
Investment income				(242	)				(342	)				(1,031	)				(1,245	)
				1,612,554					1,102,559					5,585,138					4,269,843
Income (loss) from continuing operations before income taxes				(89,866	)				32,925					(63,375	)				89,854
Provision (benefit) for income taxes				(16,952	)				13,170					(7,104	)				33,708
Income (loss) from continuing operations				(72,914	)				19,755					(56,271	)				56,146
Discontinued operations, net of income taxes:
Income from operations				1,025					1,125					2,552					798
Loss on divestiture of operations				-					(456	)				-				(453	)
Income from discontinued operations				1,025					669					2,552					345
Net income (loss)				(71,889	)				20,424					(53,719	)				56,491
Loss attributable to noncontrolling interests				58					-					238					-
Income (loss) attributable to Kindred			$	(71,831	)			$	20,424				$	(53,481	)			$	56,491
Amounts attributable to Kindred stockholders:
Income (loss) from continuing operations			$	(72,856	)			$	19,755				$	(56,033	)			$	56,146
Income from discontinued operations				1,025					669					2,552					345
Net income (loss)			$	(71,831	)			$	20,424				$	(53,481	)			$	56,491
Earnings (loss) per common share:
Basic:
Income (loss) from continuing operations			$	(1.42	)</td>			$	0.50				$	(1.21	)			$	1.42
Discontinued operations:
Income from operations				0.02					0.03					0.05					0.02
Loss on divestiture of operations				-					(0.01	)				-					(0.01	)
Net income (loss)			$	(1.40	)			$	0.52				$	(1.16	)			$	1.43
Diluted:
Income (loss) from continuing operations			$	(1.42	)			$	0.50				$	(1.21	)			$	1.42
Discontinued operations:
Income from operations				0.02					0.03					0.05					0.02
Loss on divestiture of operations				-					(0.01	)				-					(0.01	)
Net income (loss)			$	(1.40	)			$	0.52				$	(1.16	)			$	1.43
Shares used in computing earnings (loss) per common share:
Basic				51,335					38,790					46,280					38,738
Diluted				51,335					39,089					46,280					38,954

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KINDRED HEALTHCARE, INC.
Condensed Consolidated Balance Sheet
(In thousands, except per share amounts)
			December 31,					December 31,
			2011					2010
ASSETS
Current assets:
Cash and cash equivalents			$	41,561				$	17,168
Cash - restricted				5,551					5,494
Insurance subsidiary investments				70,425					76,753
Accounts receivable less allowance for loss				994,700					631,877
Inventories				31,060					24,327
Deferred tax assets				17,785					13,439
Income taxes				39,513					42,118
Other				32,687					24,862
				1,233,282					836,038
Property and equipment				1,975,063					1,754,170
Accumulated depreciation				(916,022	)				(857,623	)
				1,059,041					896,547
Goodwill				1,084,655					242,420
Intangible assets less accumulated amortization				447,207					92,883
Assets held for sale				5,612					7,167
Insurance subsidiary investments				110,227					101,210
Deferred tax assets				-					88,816
Other				198,469					72,334
Total assets			$	4,138,493				$	2,337,415
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable			$	216,801				$	174,495
Salaries, wages and other compensation				407,493					291,116
Due to third party payors				37,306				27,115
Professional liability risks				46,010					41,555
Other accrued liabilities				130,693					87,012
Long-term debt due within one year				10,620					91
				848,923					621,384
Long-term debt				1,531,882					365,556
Professional liability risks				217,717					207,669
Deferred tax liabilities				17,955					-
Deferred credits and other liabilities				191,771					111,047
Noncontrolling interests-redeemable				9,704					-
Equity:
Stockholders' equity:
Common stock, $0.25 par value; authorized 175,000 shares; issued 52,116 shares - December 31, 2011 and 39,495 shares - December 31, 2010				13,029					9,874
Capital in excess of par value				1,138,189					828,593
Accumulated other comprehensive income (loss)				(1,469	)				135
Retained earnings				139,172					193,157
				1,288,921					1,031,759
Noncontrolling interests-nonredeemable				31,620					-
Total equity				1,320,541					1,031,759
Total liabilities and equity			$	4,138,493				$	2,337,415

KINDRED HEALTHCARE, INC.
Condensed Consolidated Statement of Cash Flows
(In thousands)
			Three months ended										Year ended
			December 31,										December 31,
			2011					2010					2011					2010
Cash flows from operating activities:
Net income (loss)			$	(71,889	)			$	20,424				$	(53,719	)			$	56,491
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization				48,227					31,412					165,594					121,552
Amortization of stock-based compensation costs				3,208					2,600					12,819					10,714
Payment of lender fees related to debt issuance				-					-					(46,232	)				-
Provision for doubtful accounts				13,084					6,010					35,133					24,397
Deferred income taxes				5,170					35,190					195					21,446
Impairment charges				102,569					-					129,281					-
Loss on divestiture of discontinued operations				-					456					-					453
Other				4,053					2,118					5,518					252
Change in operating assets and liabilities:
Accounts receivable				(36,758	)				(23,853	)				(144,830	)				(45,232	)
Inventories and other assets				(4,451	)				(6,720	)				(802	)				(14,294	)
Accounts payable				299					25,139					685					9,446
Income taxes				(25,537	)				(22,272	)				(4,745	)				3,462
Due to third party payors				(4,130	)				(8,886	)				568					1,213
Other accrued liabilities				2,055					(2,485	)				54,241					20,088
Net cash provided by operating activities				35,900					59,133					153,706					209,988
Cash flows from investing activities:
Routine capital expenditures				(37,640	)				(39,788	)				(132,903	)				(108,896	)
Development capital expenditures				(18,085	)				(27,622	)				(87,655	)				(67,841	)
Acquisitions, net of cash acquired				(4,551	)				(191,925	)				(715,458	)				(279,794	)
Sale of assets				-					649					1,714					649
Purchase of insurance subsidiary investments				(9,719	)				(9,229	)				(35,623	)				(43,913	)
Sale of insurance subsidiary investments				8,720					9,765					46,307					82,736
Net change in insurance subsidiary cash and cash equivalents				(9,343	)				2,091					(14,213	)				(8,521	)
Change in other investments				3					-					1,003					2
Other				180					(317	)				(512	)				962
Net cash used in investing activities				(70,435	)				(256,376	)				(937,340	)				(424,616	)
Cash flows from financing activities:
Proceeds from borrowings under revolving credit				493,500					920,900					2,126,800					2,030,800
Repayment of borrowings under revolving credit				(448,500	)				(720,400	)				(2,198,300	)				(1,812,800	)
Proceeds from issuance of senior unsecured notes				-					-					550,000					-
Proceeds from issuance of term loan, net of discount				-					-					693,000					-
Repayment of other long-term debt				(2,645	)				(22	)				(350,878	)				(86	)
Payment of deferred financing costs				(383	)				(1,417	)				(9,098	)				(2,831	)
Issuance of common stock				-					14					3,019					49
Purchase of noncontrolling interests in subsidiaries				-					-					(7,292	)				-
Other				29					15					776					361
Net cash provided by financing activities				42,001					199,090					808,027					215,493
Change in cash and cash equivalents				7,466					1,847					24,393					865
Cash and cash equivalents at beginning of period				34,095					15,321					17,168					16,303
Cash and cash equivalents at end of period			$	41,561				$	17,168				$	41,561				$	17,168

KINDRED HEALTHCARE, INC.
Condensed Consolidated Statement of Operations
(In thousands, except per share amounts)
			2010 Quarters																									2011 Quarters
			First					Second					Third					Fourth					Year					First					Second					Third					Fourth					Year
Revenues			$	1,089,837				$	1,081,364				$	1,053,012				$	1,135,484				$	4,359,697				$	1,192,421				$	1,292,592				$	1,514,062				$	1,522,688				$	5,521,763
Salaries, wages and benefits				627,175					612,205					613,607					652,703					2,505,690					678,695					765,133					900,570					911,417					3,255,815
Supplies				85,886					85,455					83,753					87,103					342,197					90,022					96,718					107,514					107,760					402,014
Rent				88,319					88,981					89,295					90,777					357,372					91,453					95,677					105,511					106,616					399,257
Other operating expenses				234,204					238,687					234,968					240,750					948,609					259,369					287,132					305,305					312,674					1,164,480
Other income				(3,084	)				(2,857	)				(2,794	)				(2,687	)				(11,422	)				(2,785	)				(2,880	)				(2,815	)				(2,711	)				(11,191	)
Impairment charges				-					-					-					-					-					-					-					26,712					102,569					129,281
Depreciation and amortization				31,121					29,852					29,167					31,412					121,552					32,549					37,871					46,947					48,227					165,594
Interest expense				1,307					1,298										2,843					7,090					5,728					23,157					25,790					26,244					80,919
Investment (income) loss				(877	)				377					(403	)				(342	)				(1,245	)				(495	)				(257	)				(37	)				(242	)				(1,031	)
				1,064,051					1,053,998					1,049,235					1,102,559					4,269,843				1,154,536					1,302,551					1,515,497					1,612,554					5,585,138
Income (loss) from continuing operations before income taxes				25,786					27,366					3,777					32,925					89,854					37,885					(9,959	)				(1,435	)				(89,866	)				(63,375	)
Provision (benefit) for income taxes				10,631					11,230					(1,323	)				13,170					33,708					15,609					(3,419	)				(2,342	)				(16,952	)				(7,104	)
Income (loss) from continuing operations				15,155					16,136					5,100					19,755					56,146					22,276					(6,540	)				907					(72,914	)				(56,271	)
Discontinued operations, net of income taxes:
Income (loss) from operations				(154	)				87					(260	)				1,125					798					(179	)				587					1,119					1,025					2,552
Gain (loss) on divestiture of operations				(137	)				54					86					(456	)				(453	)				-					-					-					-					-
Income (loss) from discontinued operations				(291	)				141					(174	)				669					345					(179	)				587					1,119					1,025					2,552
Net income (loss)				14,864					16,277					4,926					20,424					56,491					22,097					(5,953	)				2,026					(71,889	)				(53,719	)
(Earnings) loss attributable to noncontrolling interests				-					-					-					-					-					-					421					(241	)				58					238
Income (loss) attributable to Kindred			$	14,864				$	16,277				$	4,926				$	20,424				$	56,491				$	22,097				$	(5,532	)			$	1,785				$	(71,831	)			$	(53,481	)
Amounts attributable to Kindred stockholders:
Income (loss) from continuing operations			$	15,155				$	16,136				$	5,100				$	19,755				$	56,146				$	22,276				$	(6,119	)			$	666				$	(72,856	)			$	(56,033	)
Income (loss) from discontinued operations				(291	)				141					(174	)				669					345					(179	)				587					1,119					1,025					2,552
Net income (loss)			$	14,864				$	16,277				$	4,926				$	20,424				$	56,491				$	22,097				$	(5,532	)			$	1,785				$	(71,831	)			$	(53,481	)
Earnings (loss) per common share:
Basic:
Income (loss) from continuing operations			$	0.38				$	0.41				$	0.13				$	0.50				$	1.42				$	0.56				$	(0.14	)			$	0.01				$	(1.42	)			$	(1.21	)
Discontinued operations:
Income (loss) from operations				-					-					(0.01	)				0.03					0.02					-					0.01					0.02					0.02					0.05
Gain (loss) on divestiture of operations				-					-					-					(0.01	)				(0.01	)				-					-					-					-					-
Net income (loss)			$	0.38				$	0.41				$	0.12				$	0.52				$	1.43				$	0.56				$	(0.13	)			$	0.03				$	(1.40	)			$	(1.16	)
Diluted:
Income (loss) from continuing operations			$	0.38				$	0.41				$	0.13				$	0.50				$	1.42				$	0.55				$	(0.14	)			$	0.01				$	(1.42	)			$	(1.21	)
Discontinued operations:
Income (loss) from operations				-					-					(0.01	)				0.03					0.02					-					0.01					0.02					0.02					0.05
Gain (loss) on divestiture of operations				-					-					-					(0.01	)				(0.01	)				-					-					-					-					-
Net income (loss)			$	0.38				$	0.41				$	0.12				$	0.52				$	1.43				$	0.55				$	(0.13	)			$	0.03				$	(1.40	)			$	(1.16	)
Shares used in computing earnings (loss) per common share:
Basic				38,626					38,756					38,778					38,790					38,738					39,035					43,231					51,329					51,335					46,280
Diluted				38,859					38,914					38,838					39,089					38,954					39,543					43,231					51,406					51,335					46,280

<td>

<td>

KINDRED HEALTHCARE, INC.
Condensed Business Segment Data
(In thousands)
			2010 Quarters																									2011 Quarters
			First					Second					Third					Fourth					Year					First					Second					Third					Fourth						Year
Revenues:
Hospital division			$	507,062				$	493,401				$	465,198				$	507,660				$	1,973,321				$	558,974				$	593,425				$	684,781				$	712,812					$	2,549,992
Nursing center division				539,321					542,215					539,914					566,435					2,187,885					567,472					568,199					571,226					547,202						2,254,099
Rehabilitation division:
Skilled nursing rehabilitation services				95,563					97,273					99,860					111,059					403,755					114,618					161,246					252,574					246,720						775,158
Hospital rehabilitation services				21,147					20,913					20,436					21,182					83,678					22,490					38,291					69,811					70,232						200,824
				116,710					118,186					120,296					132,241					487,433					137,108					199,537					322,385					316,952						975,982
Home health and hospice division				3,434					3,875					3,947					6,266					17,522					8,038					10,828					15,419					26,451						60,736
				1,166,527					1,157,677					1,129,355					1,212,602					4,666,161					1,271,592					1,371,989					1,593,811					1,603,417						5,840,809
Eliminations:
Skilled nursing rehabilitation services				(56,127	)				(55,809	)				(56,323	)				(56,365	)				(224,624	)				(57,081	)				(57,587	)				(57,922	)				(57,087	)					(229,677	)
Hospital rehabilitation services				(20,226	)				(20,034	)				(19,502	)				(20,034	)				(79,796	)				(21,225	)				(20,706	)				(20,528	)				(22,167	)					(84,626	)
Home health and hospice				(337	)				(470	)			(518	)				(719	)				(2,044	)				(865	)				(1,104	)				(1,299	)				(1,475	)					(4,743	)
				(76,690	)				(76,313	)				(76,343	)				(77,118	)				(306,464	)				(79,171	)				(79,397	)				(79,749	)				(80,729	)					(319,046	)
			$	1,089,837			$	1,081,364				$	1,053,012				$	1,135,484				$	4,359,697				$	1,192,421				$	1,292,592				$	1,514,062				$	1,522,688					$	5,521,763
Income (loss) from continuing operations:
Operating income (loss):
Hospital division			$	95,440				$	91,790				$	75,784				$	97,343				$	360,357				$	108,385				$	108,465				$	125,701				$	144,891		(a)			$	487,442
Nursing center division				70,614					76,529					69,363					86,912					303,418					87,350					93,532					89,592					67,791						338,265
Rehabilitation division:
Skilled nursing rehabilitation services				9,575					9,325					9,580					5,223					33,703					9,159					15,978					27,575					13,204						65,916
Hospital rehabilitation services				5,146					4,793					4,728					4,302					18,969					5,332					8,033					15,606					14,760						43,731
				14,721					14,118					14,308					9,525					52,672					14,491					24,011					43,181					27,964						109,647
Home health and hospice division				(38	)				(18	)				(94	)				84					(66	)				(10	)			(447	)				1,107					2,453						3,103
Corporate:
Overhead				(33,831	)				(32,799	)				(34,329	)				(33,002	)				(133,961	)				(38,315	)				(43,801	)				(48,806	)				(43,878	)					(174,800	)
Insurance subsidiary				(480	)			(791	)				(783	)				(1,099	)				(3,153	)				(602	)				(420	)				(750	)				(534	)					(2,306	)
				(34,311	)				(33,590	)				(35,112	)				(34,101	)				(137,114	)				(38,917	)				(44,221	)				(49,556	)				(44,412	)					(177,106	)
Impairment charges (b)				-					-					-					-					-					-					-					(26,712	)				(102,569	)					(129,281	)
Transaction costs (c)				(770	)				(955	)				(771	)				(2,148	)				(4,644	)				(4,179	)				(34,851	)				(6,537	)				(5,139	)					(50,706	)
Operating income				145,656					147,874					123,478					157,615					574,623					167,120					146,489					176,776					90,979						581,364
Rent				(88,319	)				(88,981	)				(89,295	)				(90,777	)				(357,372	)				(91,453	)				(95,677	)				(105,511	)				(106,616	)	(d)				(399,257	)
Depreciation and amortization				(31,121	)				(29,852	)				(29,167	)				(31,412	)				(121,552	)				(32,549	)				(37,871	)				(46,947	)				(48,227	)					(165,594	)
Interest, net				(430	)				(1,675	)				(1,239	)				(2,501	)				(5,845	)				(5,233	)				(22,900	)				(25,753	)				(26,002	)					(79,888	)
Income (loss) from continuing operations before income taxes				25,786					27,366					3,777					32,925					89,854					37,885					(9,959	)				(1,435	)				(89,866	)					(63,375	)
Provision (benefit) for income taxes				10,631					11,230					(1,323	)				13,170					33,708					15,609					(3,419	)				(2,342	)				(16,952	)					(7,104	)
			$	15,155				$	16,136				$	5,100				$	19,755				$	56,146				$	22,276				$	(6,540	)			$	907				$	(72,914	)				$	(56,271	)
(a) Includes loss on divestiture of a hospital of $1.5 million.
(b) Impairment charges for the third quarter of 2011 have been reclassified to conform with the current period presentation.
(c) Transaction costs for the 2010 periods have been reclassified to conform with the current period presentation.
(d) Includes lease cancellation charge of $1.8 million in connection with the RehabCare acquisition.

<td class="bwpadl0 bwvertalignt bwalignl"> Impairment charges

<td colspan="3">

KINDRED HEALTHCARE, INC.
Condensed Consolidating Statement of Operations
(In thousands)
			Three months ended December 31, 2011
								Nursing					Rehabilitation division														Home										Transaction-
			Hospital					center					Skilled nursing</td>					Hospital									health and										related
			division (a)					division					services					services				Total					hospice					Corporate					costs					Eliminations					Consolidated
Revenues			$	712,812				$	547,202				$	246,720				$	70,232			$	316,952				$	26,451				$	-				$	-				$	(80,729	)			$	1,522,688
Salaries, wages and benefits				321,657					269,454					221,404					50,151				271,555					19,155					28,976					647					(27	)				911,417
Supplies				77,124					28,450					843					67				910					1,025					251					-					-					107,760
Rent				52,299					49,748					1,415					72				1,487					568					695					1,819					-					106,616
Other operating expenses				169,140					181,507					11,269					5,254				16,523					3,818					17,896					4,492					(80,702	)				312,674
Other income				-					-					-					-				-					-					(2,711	)				-					-					(2,711	)
			54,325					2,245					45,999					-				45,999					-					-															102,569
Depreciation and amortization				22,448					12,554					2,617					2,349				4,966					902					7,357					-					-					48,227
Interest expense				228					26					-					-				-					1					25,989					-					-					26,244
Investment income				(3	)				(28	)				-					-				-					(1	)				(210	)				-					-					(242	)
				697,218					543,956					283,547					57,893				341,440					25,468					78,243					6,958					(80,729	)				1,612,554
Income (loss) from continuing operations before income taxes			$	15,594				$	3,246				$	(36,827	)			$	12,339			$	(24,488	)			$	983				$	(78,243	)			$	(6,958	)			$	-					(89,866	)
Income tax benefit																																																(16,952	)
Loss from continuing operations																																															$	(72,914	)
Capital expenditures, excluding acquisitions (including discontinued operations):
Routine			$	9,521				$	7,577				$	1,031				$	60			$	1,091				$	65				$	19,386				$	-				$	-				$	37,640
Development				13,157					4,027					-					-				-					901					-					-					-					18,085
			$	22,678				$	11,604				$	1,031				$	60			$	1,091				$	966				$	19,386				$	-				$	-				$	55,725
			Three months ended December 31, 2010
					Nursing					Rehabilitation division														Home										Transaction-
			Hospital					center					Skilled nursing					Hospital									health and										related
			division					division					services					services				Total					hospice					Corporate					costs					Eliminations					Consolidated
Revenues			$	507,660				$	566,435				$	111,059			</td>	$	21,182			$	132,241				$	6,266				$	-				$	-				$	(77,118	)			$	1,135,484
Salaries, wages and benefits				230,028					274,784					102,835					16,213				119,048					4,719					23,813					357					(46	)				652,703
Supplies				57,884					28,131					573					39				612					332					144					-					-					87,103
Rent				39,406					49,647					1,540					27				1,567					122					35					-					-					90,777
Other operating expenses				122,405					176,608					2,428					628				3,056					1,131					12,831					1,791					(77,072	)				240,750
Other income				-					-					-					-				-					-					(2,687	)				-					-					(2,687	)
Depreciation and amortization				13,421					11,646					646					99				745					85					5,515					-					-					31,412
Interest expense				2					35					-					-				-					-					2,806					-					-					2,843
Investment income				(2	)				(14	)				(2	)				-				(2	)				-					(324	)				-					-					(342	)
				463,144					540,837					108,020					17,006				125,026					6,389					42,133					2,148					(77,118	)				1,102,559
Income (loss) from continuing operations before income taxes			$	44,516				$	25,598				$	3,039				$	4,176			$	7,215				$	(123	)			$	(42,133	)			$	(2,148	)			$	-					32,925
Provision for income taxes																																																13,170
Income from continuing operations																																															$	19,755
Capital expenditures, excluding acquisitions (including discontinued operations):
Routine			$	13,835				$	12,292				$	1,547				$	208			$	1,755				$	61				$	11,845				$	-				$	-				$	39,788
Development				12,257					15,365					-					-				-					-					-					-					-					27,622 </td>
			$	26,092				$	27,657				$	1,547				$	208			$	1,755				$	61				$	11,845				$	-				$	-				$	67,410
(a) Includes loss on divestiture of a hospital of $1.5 million in other operating expenses.

<td>

KINDRED HEALTHCARE, INC.
Condensed Consolidating Statement of Operations
(In thousands)
			Year ended December 31, 2011
								Nursing					Rehabilitation division															Home										Transaction-
			Hospital					center					Skilled nursing					Hospital										health and										related
			division (a)					division					services					services					Total					hospice					Corporate					costs					Eliminations					Consolidated
Revenues			$	2,549,992				$	2,254,099				$	775,158				$	200,824				$	975,982				$	60,736				$	-				$	-				$	(319,046	)			$	5,521,763
Salaries, wages and benefits				1,164,486					1,085,476					679,177					144,147					823,324					45,378					120,478					16,769					(96	)				3,255,815
Supplies				283,628					112,095					2,826					189					3,015					2,438					838					-					-					402,014
Rent				189,332					198,556					6,275					228					6,503					1,366					1,681					1,819					-					399,257
Other operating expenses				614,436					718,263					27,239					12,757					39,996					9,817					66,981					33,937					(318,950	)				1,164,480
Other income				-					-					-					-					-					-					(11,191	)				-					-					(11,191	)
Impairment charges				57,427					25,855					45,999					-					45,999					-					-															129,281
Depreciation and amortization				74,910					50,040					7,191					5,637					12,828					1,449					26,367					-					-					165,594
Interest expense				500					102					-					-					-					1					66,514					13,802					-					80,919
Investment income				(7	)				(86	)				(3	)				(1	)				(4	)				(1	)				(933	)				-					-					(1,031	)
				2,384,712					2,190,301					768,704					162,957					931,661					60,448					270,735					66,327					(319,046	)				5,585,138
Income (loss) from continuing operations before income taxes			$	165,280				$	63,798				$	6,454				$	37,867				$	44,321				$	288				$	(270,735	)			$	(66,327	)			$	-					(63,375	)
Income tax benefit																																																	(7,104	)
Loss from continuing operations																																																$	(56,271	)
Capital expenditures, excluding acquisitions (including discontinued operations):
Routine			$	46,393				$	34,304				$	1,700				$	238				$	1,938				$	164				$	50,104				$	-				$	-				$	132,903
Development				67,321					19,167					-					-					-					1,167					-					-					-					87,655
			$	113,714				$	53,471				$	1,700				$	238				$	1,938				$	1,331				$	50,104				$	-				$	-				$	220,558
			Year ended December 31, 2010
								Nursing					Rehabilitation division															Home										Transaction-
			Hospital					center					Skilled nursing					Hospital										health and										related
			division (b)					division (b)					services					services					Total					hospice					Corporate (b)					costs					Eliminations					Consolidated
Revenues			$	1,973,321				$	2,187,885				$	403,755				$	83,678				$	487,433				$	17,522				$	-				$	-				$	(306,464	)			$	4,359,697
Salaries, wages and benefits				894,345					1,080,344					356,171					62,173					418,344					12,880					99,480					357					(60	)				2,505,690
Supplies				228,157					110,266					2,003					106					2,109					1,108					557					-					-					342,197
Rent				152,986					198,105					5,644					106					5,750					386					145					-					-					357,372
Other operating expenses				490,462					693,857					11,878					2,430					14,308					3,600					48,499					4,287					(306,404	)				948,609
Other income				-					-					-					-					-					-					(11,422	)				-					-					(11,422	)
Depreciation and amortization				51,639					45,471					2,169					306					2,475					234					21,733					-					-					121,552
Interest expense				5					131					-					-					-					-				6,954					-					-					7,090
Investment income				(3	)				(70	)				(5	)				(1	)				(6	)				-					(1,166	)				-					-					(1,245	)
				1,817,591					2,128,104					377,860					65,120					442,980					18,208					164,780					4,644				(306,464	)				4,269,843
Income from continuing operations before income taxes			$	155,730				$	59,781				$	25,895				$	18,558				$	44,453				$	(686	)			$	(164,780	)			$	(4,644	)			$	-					89,854
Provision for income taxes																																																	33,708
Income from continuing operations																																																$	56,146
Capital expenditures, excluding acquisitions (including discontinued operations):
Routine			$	36,967				$	37,024				$	2,356				$	293				$	2,649				$	66				$	32,190				$	-				$	-				$	108,896
Development				41,140					26,701					-					-					-					-					-					-					-					67,841
			$	78,107				$	63,725				$	2,356				$	293				$	2,649				$	66				$	32,190				$	-				$	-				$	176,737
(a) Includes loss on divestiture of a hospital of $1.5 million in other operating expenses.
(b) 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			Year			First			Second			Third			Fourth			Year
Hospital division data:
End of period data:
Number of hospitals:
Long-term acute care			83		83			83			89						89			120			120			121
Inpatient rehabilitation			-			-			-			-						-			5			5			5
			83			83			83			89						89			125			125			126
Number of licensed beds:
Long-term acute care			6,580			6,576			6,563			6,887						6,889			8,609			8,597			8,597
Inpatient rehabilitation			-			-			-			-						-			183			183			183
			6,580			6,576			6,563			6,887						6,889			8,792			8,780			8,780
Revenue mix %:
Medicare</org>			56			56			55			58			56			60			60			60			62			60
Medicaid			9			9			9			9			9			8			8			8			7			8
Medicare Advantage			10			10			10			9			10			10			10			10			10			10
Commercial insurance and other			25			25			26			24			25			22			22			22			21			22
Admissions:
Medicare			7,432			7,125			6,769			7,640			28,966			8,504			8,913			11,002			11,682			40,101
Medicaid			997			990			1,022			1,034			4,043			1,085			1,163			1,236			1,163			4,647
Medicare Advantage			1,129			1,106			936			1,071			4,242			1,172			1,348			1,609		</td>	1,549			5,678
Commercial insurance and other			2,262			2,048			1,978			2,020			8,308			2,282			2,290			2,669			2,853			10,094
			11,820			11,269			10,705			11,765			45,559			13,043			13,714			16,516			17,247			60,520
Admissions mix %:
Medicare			63			63			63			65			64			65			65			67			68			66
Medicaid			8			9			10			9			9			8			8			7			7			8
Medicare Advantage			10			10			9			9			9			9			10			10			9			9
Commercial insurance and other			19			18			18			17			18			18			17			16			16			17
Patient days:
Medicare			202,882			195,964			179,324			198,129			776,299			219,213			237,257			275,561			285,358			1,017,389
Medicaid			47,813			45,952			48,514			46,596			188,875			45,650			45,746			48,911			48,648			188,955
Medicare Advantage			34,524			36,000			31,186			32,868			134,578			35,639			39,503			47,819			47,738			170,699
Commercial insurance and other			75,483			70,651			70,198			69,585			285,917			70,522			72,759			83,375			84,677			311,333
			360,702			348,567			329,222			347,178			1,385,669			371,024			395,265			455,666			466,421			1,688,376
Average length of stay:
Medicare			27.3			27.5			26.5			25.9			26.8			25.8			26.6			25.0			24.4			25.4
Medicaid			48.0			46.4			47.5			45.1			46.7			42.1			39.3			39.6			41.8			40.7
Medicare Advantage			30.6			32.5			33.3			30.7			31.7			30.4			29.3			29.7			30.8			30.1
Commercial insurance and other			33.4			34.5			35.5			34.4			34.4			30.9			31.8			31.2			29.7			30.8
Weighted average			30.5			30.9			30.8			29.5			30.4			28.4			28.8			27.6			27.0			27.9

<tr>

</table>

KINDRED HEALTHCARE, INC.
Condensed Business Segment Data (Continued)
(Unaudited)
			2010 Quarters																				2011 Quarters
			First				Second				Third				Fourth				Year				First				Second				Third				Fourth				Year
Hospital division data (continued):
Revenues per admission:
Medicare			$	38,078			$	38,938			$	37,675			$	38,368			$	38,272			$	39,439 </td>			$	40,089			$	37,408			$	37,643			$	38,503
Medicaid				45,738				42,774				42,910				41,704				43,266				42,432				41,576				40,720				44,618				42,309
Medicare Advantage				45,187				46,169				48,122				44,744				45,979				46,217				42,708				43,616				46,154				44,630
Commercial insurance and other				56,344				59,842				61,314				61,131				59,553				54,065				56,850				57,216				52,465				55,078
Weighted average				42,899				43,784				43,456				43,150				43,313				42,856				43,271				41,462				41,330				42,135
Revenues per patient day:
Medicare			$	1,395			$	1,416			$	1,422			$	1,479			$	1,428			$	1,530			$	1,506			$	1,494			$	1,541			$	1,518
Medicaid				954				922				904				925				926				1,009				1,057				1,029				1,067				1,041
Medicare Advantage				1,478				1,418				1,444				1,458				1,449				1,520				1,457				1,468				1,498				1,485
Commercial insurance and other				1,688				1,735				1,728				1,775				1,730				1,749				1,789				1,832				1,768				1,786
Weighted average				1,406				1,416				1,413				1,462				1,424				1,507				1,501				1,503				1,528				1,510
Medicare case mix index (discharged patients only)				1.21				1.21				1.19				1.17				1.19				1.21				1.22				1.17				1.14				1.18
Average daily census				4,008				3,830				3,579			3,774				3,796				4,122				4,344				4,953				5,070				4,626
Occupancy %				68.2				66.1				62.0				64.0				65.1				68.7				65.5				62.6				63.5				64.8
Annualized employee turnover %				21.8				22.6				22.3				22.0								21.2				22.1				21.4				20.3
Nursing center division data:
End of period data:
Number of facilities:
Nursing and rehabilitation centers:
Owned or leased				218				219				222				222								220				220				220				220
Managed				4				4				4				4								4				4				4				4
Assisted living facilities				6				7				7				7								6				6				6				6
				228				230				233				233								230				230				230				230
Number of licensed beds:
Nursing and rehabilitation centers:
Owned or leased				26,711				26,760				27,030				26,957								26,767				26,687				26,687				26,663
Managed				485				485				485				485								485				485				485				485
Assisted living facilities				327				463				463				463								413				413				413				413
				27,523				27,708				27,978				27,905								27,665				27,585				27,585				27,561
Revenue mix %:
Medicare				35				34				33				36				35				38				37				36				33				36
Medicaid				41				41				41				39				40				37				38				38				40				38
Medicare Advantage				6				7				7				7				7				7				7				7				7				7
Private and other				18				18				19				18				18				18				18				19				20				19

KINDRED HEALTHCARE, INC.
Condensed Business Segment Data (Continued)
(Unaudited)
			2010 Quarters																				2011 Quarters
			First				Second				Third				Fourth				Year				First				Second				Third				Fourth				Year
Nursing center division data (continued):
Patient days (excludes managed facilities):
Medicare				369,102				363,149				346,837				344,018				1,423,106				370,395				358,760				345,362				334,156				1,408,673
Medicaid				1,312,517				1,292,246				1,289,643				1,287,739				5,182,145				1,232,620				1,229,517				1,255,418				1,248,442				4,965,997
Medicare Advantage				87,692				92,051				91,643				94,336				365,722				97,460				94,483				95,751				95,730				383,424
Private and other				397,550				415,921				437,413				453,357				1,704,241				425,414				435,667				436,074				441,362				1,738,517
				2,166,861				2,163,367				2,165,536				2,179,450				8,675,214				2,125,889				2,118,427				2,132,605				2,119,690				8,496,611
Patient day mix %:
Medicare				17				17				16				16				16				17				17				16				16				17
Medicaid				61				60				60				59				60				58				58				59				59				58
Medicare Advantage				4				4				4				4				4				5				4				5				4				5
Private and other				18				19				20				21				20				20				21				20				21				20
Revenues per patient day:
Medicare Part A			$	470			$	469			$	468			$	534			$	485			$	537			$	544			$	550			$	491			$	531
Total Medicare (including Part B)				513				515				519				587				533				579				589				599				544				578
Medicaid				168				171				171				171				170				172				173				174				176				174
Medicare Advantage				398				400				405				432				409				416				420				421				405				415
Private and other				238				234				232				228				233				235				240				243				241				240
Weighted average				249				250 </td>				249				260				252				267				268				268				258				265
Average daily census				24,076				23,773				23,538				23,690				23,768				23,621				23,279				23,180				23,040				23,278
Admissions (excludes managed facilities)				19,026				18,924				19,383				19,118				76,451				20,619				20,143				20,118				19,914				80,794
Occupancy %			89.0				87.3				86.8				86.4				87.4				86.9				85.9				85.5				85.1				85.9
Medicare average length of stay				33.7				35.2				34.3				33.0				34.0				32.9				33.4				33.0				32.1				32.8
Annualized employee turnover %				36.7				38.8				39.8				39.6								37.8				39.8				40.2				39.2
Rehabilitation division data:
Skilled nursing rehabilitation services:
Revenue mix %:
Company-operated				59				57				56				51				56				50				36				23				23				30
Non-affiliated				41				43				44				49				44				50				64				77				77				70
Sites of service (at end of period)				554				568				595				635								641				1,848				1,835				1,774
Revenue per site			$	172,498			$	171,254			$	167,832			$	174,896			$	686,480			$	178,812			$	137,316			$	137,643			$	139,077			$	592,848
Therapist productivity %				83.8				84.2				82.1				78.6				82.0				80.6				81.6				80.5				80.1				80.4
Hospital rehabilitation services:
Company-operated				96				96				95				95				95				94				54				29				32				42
Non-affiliated				4				4				5				5				5				6				46				71				68				58
Sites of service (at end of period):
Inpatient rehabilitation units				-				-				-				1								1				104				102				102
LTAC hospitals				85				85				85				91								93				97				99				115
Sub-acute units				7				7				7				7								8				22				23				25
Outpatient units				10				11				11				12								12				119				114				115
Other				2				2				4				4								5				8				7				8
				104				105				107				115								119				350				345				365
Revenue per site			$	203,337			$	199,174			$	190,986			$	184,193			$	777,690			$	188,989			$	199,661			$	202,352			$	192,410			$	783,412
Annualized employee turnover %				12.6				14.2				15.4				14.4								14.5				17.1				16.5				16.5

<td class="bwsinglebottom">  

<td>

KINDRED HEALTHCARE, INC.
Earnings (Loss) Per Common Share Reconciliation (a)
(In thousands, except per share amounts)
			Three months ended December 31,																				Year ended December 31,
			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			$	(72,856	)			$	(72,856	)			$	19,755				$	19,755				$	(56,033	)			$	(56,033	)			$	56,146				$	56,146
Allocation to participating unvested restricted stockholders				-					-					(347	)				(344	)				-					-					(1,015	)				(1,009	)
Available to common stockholders			$	(72,856	)			$	(72,856	)			$	19,408				$	19,411				$ </td>	(56,033	)			$	(56,033	)			$	55,131				$	55,137
Discontinued operations, net of income taxes:
Income from operations:
As reported in Statement of Operations			$	1,025				$	1,025				$	1,125				$	1,125				$	2,552				$	2,552				$	798				$	798
Allocation to participating unvested restricted stockholders			-					-					(20	)				(20	)				-					-					(14	)				(14	)
Available to common stockholders			$	1,025				$	1,025				$	1,105				$	1,105				$	2,552				$	2,552				$	784				$	784
Loss on divestiture of operations:
As reported in Statement of Operations			$	-				$	-				$	(456	)			$	(456	)			$	-				$	-				$	(453	)			$	(453	)
Allocation to participating unvested restricted stockholders				-					-					8					8					-					-					8					8
Available to common stockholders			$	-				$	-				$	(448	)			$	(448	)			$	-				$	-				$	(445	)			$	(445	)
Net income (loss):
As reported in Statement of Operations			$	(71,831	)			$	(71,831	)			$	20,424				$	20,424				$	(53,481	)			$	(53,481	)			$	56,491				$	56,491
Allocation to participating unvested restricted stockholders				-					-					(359	)				(356	)				-					-					(1,021	)				(1,015	)
Available to common stockholders			$	(71,831	)			$	(71,831	)			$	20,065				$	20,068				$	(53,481	)			$	(53,481	)			$	55,470				$	55,476
Shares used in the computation:
Weighted average shares outstanding - basic computation				51,335					51,335					38,790					38,790					46,280					46,280					38,738					38,738
Dilutive effect of employee stock options									-										137										-										135
Dilutive effect of performance-based restricted shares									-										162										-										81
Adjusted weighted average shares outstanding - diluted computation									51,335										39,089										46,280										38,954
Earnings (loss) per common share:
Income (loss) from continuing operations			$	(1.42	)			$	(1.42	)			$	0.50				$	0.50				$	(1.21	)			$	(1.21	)			$	1.42				$	1.42
Discontinued operations:
Income from operations				0.02					0.02					0.03					0.03					0.05					0.05					0.02					0.02
Loss on divestiture of operations				-					-					(0.01	)				(0.01	)				-					-					(0.01	)				(0.01	)
Net income (loss)			$	(1.40	)			$	(1.40	)			$	0.52				$	0.52				$	(1.16	)			$	(1.16	)			$	1.43				$	1.43
(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 fourth quarters and years ended December 31, 2011 and 2010 before certain charges or on a core basis. The charges that were excluded from core operating results for the fourth quarter ended December 31, 2011 relate to transaction, severance, lease cancellation, loss on hospital divestiture and impairment charges. The charges that were excluded from core operating results for the year ended December 31, 2011 relate to transaction, financing, severance, lease cancellation, loss on hospital divestiture and impairment charges. The charges that were excluded from core operating results for the fourth quarter ended December 31, 2010 relate to transaction costs. The charges that are excluded from core operations results for the year ended December 31, 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 21.9% and 28.4% for the fourth quarter and year ended December 31, 2011, respectively, and an effective income tax rate of 25.3% and 34.7% for the fourth quarter and year ended December 31, 2010, respectively. Certain of the excluded charges for the fourth quarter and year ended December 31, 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 fourth quarter and year ended December 31, 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										Year ended
			December 31,										December 31,
			2011					2010					2011					2010
Detail of charges excluded from core operating results:
Transaction costs				($4,492	)				($2,148	)				($33,937	)				($4,644	)
Financing costs (in connection with the RehabCare acquisition)				-					-					(13,802	)				-
Severance and retirement costs (in connection with the RehabCare acquisition for 2011 periods)				(647	)				-					(16,769	)				(2,906	)
Lease cancellation charge (in connection with the RehabCare acquisition)				(1,819	)				-					(1,819	)				-
Loss on hospital divestiture				(1,490	)				-					(1,490	)				-
Impairment charges				(102,569	)				-					(129,281	)				-
				(111,017	)				(2,148	)				(197,098	)				(7,550	)
Income tax benefit				24,313					543					56,021					2,623
Charges net of income taxes				(86,704	)				(1,605	)				(141,077	)				(4,927	)
Allocation to participating unvested restricted stockholders				-					28					-					89
Available to common stockholders				($86,704	)				($1,577	)				($141,077	)				($4,838	)
Weighted average diluted shares outstanding				51,335					39,089					46,280					38,954
Diluted loss per common share related to charges				($1.69	)				($0.04	)				($3.05	)				($0.12	)
Reconciliation of adjusted operating income before charges:
Operating income before charges			$	200,177				$	159,763				$	762,841				$	582,173
Detail of charges excluded from core operating results:
Transaction costs				(4,492	)				(2,148	)				(33,937	)				(4,644	)
Severance and retirement costs				(647	)				-					(16,769	)				(2,906	)
Loss on hospital divestiture				(1,490	)				-					(1,490	)				-
Impairment charges				(102,569	)				-					(129,281	)				-
				(109,198	)				(2,148	)				(181,477	)				(7,550	)
Reported operating income			$	90,979				$	157,615				$	581,364				$	574,623
Reconciliation of adjusted income from continuing operations before charges:
Amounts attributable to Kindred stockholders:
Income from continuing operations before charges			$	13,848				$	21,360				$	85,044				$ </td>	61,073
Charges net of income taxes				(86,704	)				(1,605	)				(141,077	)				(4,927	)
Reported income (loss) from continuing operations				($72,856	)			$	19,755					($56,033	)			$	56,146
Reconciliation of diluted income per common share from continuing operations before charges:
Diluted income per common share before charges (a)			$	0.27				$	0.54				$	1.80				$	1.54
Charges net of income taxes as computed above				(1.69	)				(0.04	)				(3.05	)				(0.12	)
Other				-					-					0.04					-
Reported diluted income (loss) per common share from continuing operations				($1.42	)			$	0.50					($1.21	)			$	1.42
Weighted average diluted shares used to compute diluted income (loss) per common share from continuing operations before charges				51,371					39,089					46,587					38,954
Reconciliation of effective income tax rate before charges:
Effective income tax rate before charges				34.8	%				39.1	%				36.6	%				37.3	%
Impact of charges on effective income tax rate				-15.9	%				0.9	%				-25.4	%				0.2	%
Reported effective income tax rate				18.9	%				40.0	%				11.2	%				37.5	%
(a) For purposes of computing diluted earnings per common share before charges, income from continuing operations before charges was reduced by $0.2 million and $0.4 million for the fourth quarters ended December 31, 2011 and 2010, respectively, and $1.4 million and $1.1 million for the years ended December 31, 2011 and 2010, respectively, for the allocation of income to participating unvested restricted stockholders.

</tr>

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 fourth quarters and years ended December 31, 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 fourth quarter ended December 31, 2011 relate to transaction and severance costs, net of income tax benefit. The payments that were excluded from adjusted operating cash flows for the year ended December 31, 2011 relate to financing, transaction and severance costs, net of income tax benefit. The payments that were excluded from operating cash flows for the fourth quarter ended December 31, 2010 relate to transaction costs, net of income tax benefit. The payments that are excluded from adjusted operating cash flows for the year ended December 31, 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 38.3% and 30.1% for the fourth quarter and year ended December 31, 2011, respectively, and an effective income tax rate of 25.3% and 34.7% for the fourth quarter and year ended December 31, 2010, respectively. Certain of the excluded payments for the fourth quarters and years ended December 31, 2011 and 2010 are not deductible for income tax purposes resulting in variances in the effective income tax rate compared to 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 fourth quarters and years ended December 31, 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										Year ended
			December 31,										December 31,
			2011					2010					2011					2010
Reconciliation of net cash flows provided by operating activities to adjusted operating cash flows:
Net cash provided by operating activities			$	35,900				$	59,133				$	153,706				$	209,988
Adjustments to remove certain payments:
Financing costs:
Capitalized as deferred financing costs				-					-					46,232					-
Charged to interest expense				-					-					13,074					-
Transaction costs				4,369					2,111					33,827					3,821
Severance and retirement costs				1,038					-					11,303					2,689
Benefit of reduced income tax payments resulting from financing, transaction, severance and retirement costs				(2,656	)				(543	)				(20,502	)				(2,623	)
				2,751					1,568					83,934					3,887
Adjusted operating cash flows			$	38,651				$	60,701				$	237,640				$	213,875

KINDRED HEALTHCARE, INC.
Reconciliation of Earnings Guidance for 2012 - Continuing Operations
(Unaudited)
(In millions, except per share amounts)
			As of February 23, 2012										As of November 2, 2011
			Low					High					Low					High
Operating income			$	868				$	884				$	911				$	928
Rent				434					434					445					445
Depreciation and amortization				197					197					200					200
Interest, net				107					107					110					110
Income from continuing operations before income taxes				130					146					156					173
Provision for income taxes				54					60					63					69
Income from continuing operations				76				86					93					104
Earnings attributable to noncontrolling interests				(3	)				(3	)				(4	)				(4	)
Income from continuing operations attributable to the Company				73					83					89					100
Allocation to participating unvested restricted stockholders				(2	)				(2	)				(2	)				(2	)
Available to common stockholders			$	71				$	81				$	87				$	98
Earnings per diluted share			$	1.35				$	1.55				$	1.65				$	1.85
Shares used in computing earnings per diluted share				52.5					52.5					53.0					53.0
(a) The Company's earnings guidance excludes the effect of (i) any transaction-related charges, (ii) any other reimbursement changes, (iii) any acquisitions or divestitures, (iv) any impairment charges, or (v) any repurchases of common stock.

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

Source: Kindred Healthcare, Inc.

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