Edgar Filing: REHABCARE GROUP INC

Form 425

Filed pursuant to Rule 425 under the Securities Act of 1933 and deemed filed

pursuant to Rule 14a-12 under the Securities Exchange Act of 1934

Filing Person: Kindred Healthcare, Inc.

Commission File No.: 001-14057

Subject Company: RehabCare Group, Inc.

Commission File No.: 001-14655

LOGO


Contact:		Richard A. Lechleiter
		Executive Vice President and
		Chief Financial Officer
		(502) 596-7734

KINDRED HEALTHCARE FOURTH QUARTER RESULTS

EXCEED COMPANY’S GUIDANCE

Continuing Operations Income of $0.50 per Diluted Share Tops Guidance of $0.43

Quarter’s Continuing Operations EPS Up 19% Over Last Year

Full Year Operating Cash Flows Exceed $200 Million for Second Consecutive Year

LOUISVILLE, Ky. (February 8, 2011) – Kindred Healthcare, Inc. (“Kindred” or “the Company”) (NYSE:KND) today announced its operating results for the fourth quarter and year ended December 31, 2010. All financial and statistical information included in this press release reflects the continuing operations of the Company’s businesses for all periods presented unless otherwise indicated.

Financial and Operating Highlights:

•

Fourth quarter consolidated results show strong growth compared to last year

•

Revenues grew 6% to $1.1 billion

•

Operating income rose 8% to $158 million

•

Income from continuing operations increased 21% to $20 million

•

Diluted earnings per share from continuing operations grew 19% to $0.50

•

Hospitals report growth from last year’s fourth quarter

•

Recent acquisitions drove hospital revenues up 5% to $508 million

•

Operating income grew 3% to $96 million

•

Nursing and rehabilitation centers successfully transitioned to new Medicare payment system in fourth quarter

•

Revenue growth of 4% driven by increased patient acuity and a corresponding increase in the intensity of physician, nursing, respiratory and rehabilitation therapy services provided

•

Admissions grew 4% even as length of stay declined two days and more patients returned home faster

•

Division reports solid 13% growth in operating income

•

Peoplefirst Rehabilitation adds to customer base and adjusts to new Medicare rules in fourth quarter

•

Division reports 21% revenue growth primarily driven by new customers

•

Operating income declined by 15% due to higher therapist costs, the RUGs IV and concurrent therapy rule changes and acquisition-related costs

•

Full-year operating cash flows exceed $200 million for second consecutive year

•

Routine and development capital expenditures were fully funded through internal sources in both years

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680 South Fourth Street Louisville, Kentucky 40202

502.596.7300 www.kindredhealthcare.com

Kindred Healthcare Fourth Quarter Results Exceed Company’s Guidance

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February 8, 2011

Fourth Quarter Results

Continuing Operations

Consolidated revenues for the fourth quarter ended December 31, 2010 increased 6% to $1.14 billion compared to $1.07 billion in the same period last year. Income from continuing operations for the fourth quarter of 2010 totaled $19.7 million or $0.50 per diluted share compared to $16.3 million or $0.42 per diluted share in the fourth quarter last year. Operating results for the fourth quarter of 2010 included acquisition-related costs that reduced income from continuing operations by approximately $1.6 million or $0.04 per diluted share.

Discontinued Operations

From time to time, the Company enters into transactions related to the divestiture of unprofitable businesses. For accounting purposes, the historical operating results of these businesses and gains or losses associated with these operations have been classified as discontinued operations in the Company’s consolidated statement of operations for all historical periods.

For the fourth quarter of 2010, the Company reported income from discontinued operations totaling $1.1 million or $0.03 per diluted share compared to $2.4 million or $0.06 per diluted share in the fourth quarter of 2009.

In the fourth quarter of 2010, the Company reported a loss of $0.4 million or $0.01 per diluted share related to the divestiture of discontinued operations. During the same period in 2009, the Company recorded a gain of $0.6 million or $0.01 per diluted share related to these divestitures.

Fiscal Year Results

Continuing Operations

Consolidated revenues for the year ended December 31, 2010 increased 2% to $4.4 billion compared to $4.3 billion in the previous year. Income from continuing operations totaled $56.1 million or $1.42 per diluted share in 2010 compared to $62.6 million or $1.60 per diluted share in 2009.

Operating results in 2010 included certain items that reduced income from continuing operations by approximately $2.0 million or $0.05 per diluted share. Operating results in 2009 included certain items that increased income from continuing operations by approximately $1.8 million or $0.04 per diluted share.

Discontinued Operations

The Company reported income from discontinued operations totaling $0.8 million or $0.02 per diluted share in 2010 and $0.9 million or $0.02 per diluted share in 2009.

Losses on the divestiture of discontinued operations totaled $0.4 million or $0.01 per diluted share for 2010 compared to $23.4 million or $0.60 per diluted share for 2009.

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February 8, 2011

Management Commentary

“We are pleased with our fourth quarter operating results,” remarked Paul J. Diaz, President and Chief Executive Officer of the Company. “Our performance was particularly noteworthy in the context of a very busy quarter that included the successful transition of our nursing and rehabilitation centers and rehabilitation therapy business to the new Medicare reimbursement rules and the smooth integration of three recent cluster market acquisitions that included five hospitals, three nursing and rehabilitation centers and a home health company.”

Commenting further on the Company’s fourth quarter results, Mr. Diaz noted “Despite continued volume challenges, our hospital business reported positive results, as we successfully added five acquired hospitals in southern California and opened a new hospital in Illinois. The successful operational and clinical transition to the new RUGs IV Medicare payment system in both our nursing and rehabilitation centers and our Peoplefirst rehabilitation therapy business resulted from the significant efforts of thousands of our caregivers across the Company. Finally, our 6,000 therapists in Peoplefirst also worked through the new Medicare rules related to RUGs IV and the related concurrent therapy policy while adding 64 more customers to our growing contract therapy business.”

Mr. Diaz noted, “For the second consecutive year, our operating cash flows exceeded $200 million. As a result, all of our routine and development capital spending was funded internally, providing the Company with the additional financial flexibility to deploy its $600 million revolving credit facility to fund cluster market acquisitions.”

Mr. Diaz also commented on the Company’s 2010 Quality and Social Responsibility Report, “The Company is proud to issue its fourth 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 private markets 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 hospitals, inpatient rehabilitation facilities, subacute or transitional care, long term care, including Alzheimer’s and dementia care, and home care and hospice services, in order to partner with hospitals, health systems and payors to better manage episodes of care while at the same time improving quality and lowering costs.”

Acquisition of RehabCare Group, Inc.

In a separate release earlier today, the Company announced the execution of a definitive agreement to acquire RehabCare Group, Inc. (“RehabCare”) (NYSE:RHB).

Company Suspends 2011 Earnings Guidance

In connection with the pending acquisition of RehabCare, the Company has suspended its fiscal 2011 earnings guidance.

Conference Call

As noted in today’s separate announcement of the RehabCare acquisition, a joint conference call to discuss the pending transaction will be held at 8:30 a.m. EST on Tuesday, February 8, 2011. The conference call can be accessed by dialing (913) 312-1305. Investors can access a live webcast of a conference call through a link on Kindred’s website at www.kindredhealthcare.com.

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Kindred Healthcare Fourth Quarter Results Exceed Company’s Guidance

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February 8, 2011

A telephone replay of the conference call will be available at approximately 11:30 a.m. on February 8 by dialing (719) 457-0820, access code: 7191328. The replay will be available through February 16.

Forward-Looking Statements

This press release includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. 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 (the “SEC”).

In addition to the factors set forth above, other factors that may affect the Company’s plans or results include, without limitation, (a) the receipt of all required licensure and regulatory approvals and the satisfaction of the closing conditions to the RehabCare acquisition, including approval of the pending transaction by the stockholders of the respective companies, and the Company’s ability to complete the required financing as contemplated by the financing commitment, (b) 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 that may be undertaken during 2011, as and when planned, including the potential for unanticipated issues, expenses and liabilities associated with those acquisitions and the risk that RehabCare fails to meet its expected financial and operating targets, (c) the potential for diversion of management time and resources in seeking to complete the RehabCare acquisition and integrate its operations, (d) the potential failure to retain key employees of RehabCare, (e) 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 with additional borrowings, particularly in light of ongoing volatility in the credit and capital markets, (f) the potential for dilution to the Company’s stockholders as a result of the RehabCare acquisition, (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 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 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, (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 long-term acute care (“LTAC”) hospitals, including potential changes in the Medicare payment rules, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, and changes in Medicare and Medicaid 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) the ability to successfully pursue development activities, including through acquisitions, and successfully integrate new operations, including the

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Kindred Healthcare Fourth Quarter Results Exceed Company’s Guidance

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February 8, 2011

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 the Company’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 any 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 ability to meet rental and debt service obligations, (p) the ability of the Company to operate pursuant to the terms of its debt obligations, including the Company’s obligations under financings undertaken to complete the RehabCare acquisition, and the ability of the Company to operate pursuant to 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 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 ability of the Company 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 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) the Company’s ability to successfully reduce (by divestiture of operations or otherwise) its exposure to professional liability and other claims, (x) the 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 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.

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.

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

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Kindred Healthcare Fourth Quarter Results Exceed Company’s Guidance

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February 8, 2011

Additional Information About this Transaction

In connection with the pending transaction with RehabCare, Kindred will file with the SEC a Registration Statement on Form S-4 that will include a joint proxy statement of Kindred and RehabCare that also constitutes a prospectus of Kindred. Kindred and RehabCare will mail the definitive proxy statement/prospectus to their respective stockholders. WE URGE INVESTORS AND SECURITY HOLDERS TO READ THE JOINT PROXY STATEMENT/PROSPECTUS REGARDING THE PENDING TRANSACTION WHEN IT BECOMES AVAILABLE BECAUSE IT WILL CONTAIN IMPORTANT INFORMATION. You may obtain a free copy of the joint proxy statement/prospectus (when available) and other related documents filed by Kindred and RehabCare with the SEC at the SEC’s website at www.sec.gov. The joint proxy statement/prospectus (when available) and the other documents filed by Kindred and RehabCare with the SEC may also be obtained for free by accessing Kindred’s website at www.kindredhealthcare.com and clicking on the “Investors” link then clicking on the link for “SEC Filings” or by accessing RehabCare’s website at www.rehabcare.com and clicking on the “Investor Information” link and then clicking on the link for “SEC Filings”.

Participants in this Transaction

Kindred, RehabCare and their respective directors, executive officers and certain other members of management and employees may be soliciting proxies from their respective stockholders in favor of the pending transaction. Information regarding the persons who may, under the rules of the SEC, be considered participants in the solicitation of stockholders in connection with the pending transaction will be set forth in the joint proxy statement/prospectus when it is filed with the SEC. You can find information about Kindred’s executive officers and directors in Kindred’s definitive proxy statement filed with the SEC on April 1, 2010. You can find information about RehabCare’s executive officers and directors in its definitive proxy statement filed with the SEC on March 23, 2010. You can obtain free copies of these documents from Kindred or RehabCare, respectively, using the contact information above.

About Kindred Healthcare

Kindred Healthcare, Inc., a top-200 private employer in the United States, is a FORTUNE 500 healthcare services company based in Louisville, Kentucky with annual revenues of over $4.3 billion and approximately 56,800 employees in 40 states. At December 31, 2010, Kindred through its subsidiaries provided healthcare services in 696 locations, including 89 long-term acute care hospitals, 226 nursing and rehabilitation centers and a contract rehabilitation services business, Peoplefirst rehabilitation services, which served 381 non-affiliated facilities. Ranked as one of Fortune magazine’s Most Admired Healthcare Companies in 2009 and 2010, 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 Fourth Quarter Results Exceed Company’s Guidance

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February 8, 2011

KINDRED HEALTHCARE, INC.

Financial Summary

(In thousands, except per share amounts)


	Three months ended					Year ended
	December 31,					December 31,
	2010			2009		2010			2009

Revenues	$	1,135,484		$	1,069,991	$	4,359,697		$	4,270,007


Income from continuing operations	$	19,755		$	16,345	$	56,146		$	62,612
Discontinued operations, net of income taxes:
Income from operations		1,125			2,396		798			931
Gain (loss) on divestiture of operations		(456	)		567		(453	)		(23,432	)

Net income	$	20,424		$	19,308	$	56,491		$	40,111


Earnings per common share:
Basic:
Income from continuing operations	$	0.50		$	0.42	$	1.42		$	1.61
Discontinued operations:
Income from operations		0.03			0.06		0.02			0.02
Gain (loss) on divestiture of operations		(0.01	)		0.01		(0.01	)		(0.60	)

Net income	$	0.52		$	0.49	$	1.43		$	1.03


Diluted:
Income from continuing operations	$	0.50		$	0.42	$	1.42		$	1.60
Discontinued operations:
Income from operations		0.03			0.06		0.02			0.02
Gain (loss) on divestiture of operations		(0.01	)		0.01		(0.01	)		(0.60	)

Net income	$	0.52		$	0.49	$	1.43		$	1.02


Shares used in computing earnings per common share:
Basic		38,790			38,465		38,738			38,339
Diluted		39,089			38,693		38,954			38,502

Kindred Healthcare Fourth Quarter Results Exceed Company’s Guidance

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February 8, 2011

KINDRED HEALTHCARE, INC.

Condensed Consolidated Statement of Operations

(In thousands, except per share amounts)


	Three months ended						Year ended
	December 31,						December 31,
	2010			2009			2010			2009

Revenues	$	1,135,484		$	1,069,991		$	4,359,697		$	4,270,007


Salaries, wages and benefits		652,703			617,961			2,505,690			2,483,086
Supplies		87,103			86,408			342,197			333,056
Rent		90,777			88,084			357,372			348,248
Other operating expenses		240,750			222,521			948,609			886,205
Other income		(2,687	)		(2,947	)		(11,422	)		(11,512	)
Depreciation and amortization		31,412			31,893			121,552			125,730
Interest expense		2,843			1,432			7,090			7,880
Investment income		(342	)		(1,159	)		(1,245	)		(4,413	)

		1,102,559			1,044,193			4,269,843			4,168,280


Income from continuing operations before income taxes		32,925			25,798			89,854			101,727
Provision for income taxes		13,170			9,453			33,708			39,115

Income from continuing operations		19,755			16,345			56,146			62,612
Discontinued operations, net of income taxes:
Income from operations		1,125			2,396			798			931
Gain (loss) on divestiture of operations		(456	)		567			(453	)		(23,432	)

Net income	$	20,424		$	19,308		$	56,491		$	40,111


Earnings per common share:
Basic:
Income from continuing operations	$	0.50		$	0.42		$	1.42		$	1.61
Discontinued operations:
Income from operations		0.03			0.06			0.02			0.02
Gain (loss) on divestiture of operations		(0.01	)		0.01			(0.01	)		(0.60	)

Net income	$	0.52		$	0.49		$	1.43		$	1.03


Diluted:
Income from continuing operations	$	0.50		$	0.42		$	1.42		$	1.60
Discontinued operations:
Income from operations		0.03			0.06			0.02			0.02
Gain (loss) on divestiture of operations		(0.01	)		0.01			(0.01	)		(0.60	)

Net income	$	0.52		$	0.49		$	1.43		$	1.02


Shares used in computing earnings per common share:
Basic		38,790			38,465			38,738			38,339
Diluted		39,089			38,693			38,954			38,502

Kindred Healthcare Fourth Quarter Results Exceed Company’s Guidance

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February 8, 2011

KINDRED HEALTHCARE, INC.

Condensed Consolidated Balance Sheet

(In thousands, except per share amounts)


	December 31,			December 31,
	2010			2009
ASSETS
Current assets:
Cash and cash equivalents	$	17,168		$	16,303
Cash - restricted		5,494			5,820
Insurance subsidiary investments		76,753			106,834
Accounts receivable less allowance for loss		631,877			610,959
Inventories		24,327			22,303
Deferred tax assets		13,439			42,791
Income taxes		42,118			17,447
Other		24,862			21,194

		836,038			843,651

Property and equipment		1,754,170			1,515,700
Accumulated depreciation		(857,623	)		(765,602	)

		896,547			750,098

Goodwill		242,420			81,223
Intangible assets less accumulated amortization		92,883			64,491
Assets held for sale		7,167			8,806
Insurance subsidiary investments		101,210			100,223
Deferred tax assets		88,816			110,930
Other		72,334			62,802

	$	2,337,415		$	2,022,224

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	174,495		$	161,066
Salaries, wages and other compensation		291,116			287,772
Due to third party payors		27,115			28,261
Professional liability risks		41,555			47,076
Other accrued liabilities		87,012			78,358
Long-term debt due within one year		91			86

		621,384			602,619

Long-term debt		365,556			147,647
Professional liability risks		207,669			195,126
Deferred credits and other liabilities		111,047			110,238

Stockholders’ equity:
Common stock, $0.25 par value; authorized 175,000 shares; issued 39,495 shares - December 31, 2010 and 39,104 shares - December 31, 2009		9,874			9,776
Capital in excess of par value		828,593			820,407
Accumulated other comprehensive income (loss)		135			(423	)
Retained earnings		193,157			136,834

		1,031,759			966,594

	$	2,337,415		$	2,022,224

Kindred Healthcare Fourth Quarter Results Exceed Company’s Guidance

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February 8, 2011

KINDRED HEALTHCARE, INC.

Condensed Consolidated Statement of Cash Flows

(In thousands)


	Three months ended						Year ended
	December 31,						December 31,
	2010			2009			2010			2009
Cash flows from operating activities:
Net income	$	20,424		$	19,308		$	56,491		$	40,111
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		31,412			31,893			121,552			126,404
Amortization of stock-based compensation costs		2,600			2,357			10,714			9,905
Provision for doubtful accounts		6,010			7,573			24,397			29,320
Deferred income taxes		35,190			16,097			21,446			10,876
(Gain) loss on divestiture of discontinued operations		456			(567	)		453			23,432
Other		2,118			6			252			(1,186	)
Change in operating assets and liabilities:
Accounts receivable		(23,853	)		46,828			(45,232	)		(29,247	)
Inventories and other assets		(6,720	)		(5,631	)		(14,294	)		(17,386	)
Accounts payable		25,139			34			9,446			(4,088	)
Income taxes		(22,272	)		(3,365	)		3,462			35,009
Due to third party payors		(8,886	)		(2,029	)		1,213			(6,369	)
Other accrued liabilities		(2,485	)		(20,993	)		20,088			16,939

Net cash provided by operating activities		59,133			91,511			209,988			233,720


Cash flows from investing activities:
Routine capital expenditures		(39,788	)		(23,082	)		(108,896	)		(97,550	)
Development capital expenditures		(27,622	)		(9,669	)		(67,841	)		(48,058	)
Acquisitions		(191,925	)		—			(279,794	)		(83,432	)
Sale of assets		649			11,948			649			25,967
Purchase of insurance subsidiary investments		(9,229	)		(25,997	)		(43,913	)		(103,477	)
Sale of insurance subsidiary investments		9,765			24,733			82,736			122,410
Net change in insurance subsidiary cash and cash equivalents		2,091			5,153			(8,521	)		22,005
Change in other investments		—			—			2			2,002
Other		(317	)		(339	)		962			3,538

Net cash used in investing activities		(256,376	)		(17,253	)		(424,616	)		(156,595	)


Cash flows from financing activities:
Proceeds from borrowings under revolving credit		920,900			261,900			2,030,800			1,214,400
Repayment of borrowings under revolving credit		(720,400	)		(365,300	)		(1,812,800	)		(1,416,100	)
Payment of deferred financing costs		(1,417	)		(251	)		(2,831	)		(855	)
Issuance of common stock		14			389			49			957
Other		(7	)		4			275			(19	)

Net cash provided by (used in) financing activities		199,090			(103,258	)		215,493			(201,617	)

Change in cash and cash equivalents		1,847			(29,000	)		865			(124,492	)
Cash and cash equivalents at beginning of period		15,321			45,303			16,303			140,795

Cash and cash equivalents at end of period	$	17,168		$	16,303		$	17,168		$	16,303

Kindred Healthcare Fourth Quarter Results Exceed Company’s Guidance

Page 11

February 8, 2011

KINDRED HEALTHCARE, INC.

Supplemental Cash Flow Data

(In thousands)


	Three months ended						Year ended
	December 31,						December 31,
	2010			2009			2010			2009
Reconciliation of net cash flows provided by operating activities to free cash flows:
Net cash provided by operating activities	$	59,133		$	91,511		$	209,988		$	233,720
Less routine capital expenditures		(39,788	)		(23,082	)		(108,896	)		(97,550	)

Free cash flows available for investment and other capital uses	$	19,345		$	68,429		$	101,092		$	136,170

Routine capital expenditures represent expenditures necessary to maintain existing facilities that generally do not increase capacity or add services. As disclosed in the accompanying Condensed Consolidated Statement of Cash Flows, the Company also expends discretionary capital for the development of new facilities or the expansion of services at existing facilities. Due to the discretionary nature of these capital expenditures, they are excluded from the computation of free cash flows available for investment and other capital uses.

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

Kindred Healthcare Fourth Quarter Results Exceed Company’s Guidance

Page 12

February 8, 2011

KINDRED HEALTHCARE, INC.

Condensed Consolidated Statement of Operations

(In thousands, except per share amounts)


	2009 Quarters															2010 Quarters
	First			Second			Third			Fourth			Year			First			Second			Third			Fourth			Year

Revenues	$	1,069,474		$	1,073,054		$	1,057,488		$	1,069,991		$	4,270,007		$	1,089,837		$	1,081,364		$	1,053,012		$	1,135,484		$	4,359,697


Salaries, wages and benefits		615,218			620,830			629,077			617,961			2,483,086			627,175			612,205			613,607			652,703			2,505,690
Supplies		80,336			83,912			82,400			86,408			333,056			85,886			85,455			83,753			87,103			342,197
Rent		85,201			86,882			88,081			88,084			348,248			88,319			88,981			89,295			90,777			357,372
Other operating expenses		220,405			221,755			221,524			222,521			886,205			234,204			238,687			234,968			240,750			948,609
Other income		(2,872	)		(2,823	)		(2,870	)		(2,947	)		(11,512	)		(3,084	)		(2,857	)		(2,794	)		(2,687	)		(11,422	)
Depreciation and amortization		30,490			31,355			31,992			31,893			125,730			31,121			29,852			29,167			31,412			121,552
Interest expense		2,478			2,229			1,741			1,432			7,880			1,307			1,298			1,642			2,843			7,090
Investment (income) loss		(1,475	)		(1,033	)		(746	)		(1,159	)		(4,413	)		(877	)		377			(403	)		(342	)		(1,245	)

		1,029,781			1,043,107			1,051,199			1,044,193			4,168,280			1,064,051			1,053,998			1,049,235			1,102,559			4,269,843


Income from continuing operations before income taxes		39,693			29,947			6,289			25,798			101,727			25,786			27,366			3,777			32,925			89,854
Provision (benefit) for income taxes		16,352			12,409			901			9,453			39,115			10,631			11,230			(1,323	)		13,170			33,708

Income from continuing operations		23,341			17,538			5,388			16,345			62,612			15,155			16,136			5,100			19,755			56,146
Discontinued operations, net of income taxes:
Income (loss) from operations		(581	)		(897	)		13			2,396			931			(154	)		87			(260	)		1,125			798
Gain (loss) on divestiture of operations		—			(24,051	)		52			567			(23,432	)		(137	)		54			86			(456	)		(453	)

Net income (loss)	$	22,760		$	(7,410	)	$	5,453		$	19,308		$	40,111		$	14,864		$	16,277		$	4,926		$	20,424		$	56,491


Earnings (loss) per common share:
Basic:
Income from continuing operations	$	0.60		$	0.45		$	0.14		$	0.42		$	1.61		$	0.38		$	0.41		$	0.13		$	0.50		$	1.42
Discontinued operations:
Income (loss) from operations		(0.02	)		(0.02	)		—			0.06			0.02			—			—			(0.01	)		0.03			0.02
Gain (loss) on divestiture of operations		—			(0.62	)		—			0.01			(0.60	)		—			—			—			(0.01	)		(0.01	)

Net income (loss)	$	0.58		$	(0.19	)	$	0.14		$	0.49		$	1.03		$	0.38		$	0.41		$	0.12		$	0.52		$	1.43


Diluted:
Income from continuing operations	$	0.60		$	0.45		$	0.14		$	0.42		$	1.60		$	0.38		$	0.41		$	0.13		$	0.50		$	1.42
Discontinued operations:
Income (loss) from operations		(0.02	)		(0.02	)		—			0.06			0.02			—			—			(0.01	)		0.03			0.02
Gain (loss) on divestiture of operations		—			(0.62	)		—			0.01			(0.60	)		—			—			—			(0.01	)		(0.01	)

Net income (loss)	$	0.58		$	(0.19	)	$	0.14		$	0.49		$	1.02		$	0.38		$	0.41		$	0.12		$	0.52		$	1.43


Shares used in computing earnings (loss) per common share:
Basic		38,184			38,307			38,398			38,465			38,339			38,626			38,756			38,778			38,790			38,738
Diluted		38,315			38,415			38,524			38,693			38,502			38,859			38,914			38,838			39,089			38,954

Kindred Healthcare Fourth Quarter Results Exceed Company’s Guidance

Page 13

February 8, 2011

KINDRED HEALTHCARE, INC.

Condensed Business Segment Data

(In thousands)


	2009 Quarters															2010 Quarters
	First			Second			Third			Fourth			Year			First			Second			Third			Fourth			Year
Revenues:
Hospital division	$	492,509		$	487,145		$	468,069		$	485,169		$	1,932,892		$	507,062		$	493,401		$	465,198		$	507,660		$	1,973,321

Nursing center division		529,942			537,545			539,217			543,638			2,150,342			539,321			542,215			539,914			566,435			2,187,885

Rehabilitation division		117,647			120,450			122,625			114,316			475,038			120,144			122,061			124,243			138,507			504,955

		1,140,098			1,145,140			1,129,911			1,143,123			4,558,272			1,166,527			1,157,677			1,129,355			1,212,602			4,666,161

Eliminations		(70,624	)		(72,086	)		(72,423	)		(73,132	)		(288,265	)		(76,690	)		(76,313	)		(76,343	)		(77,118	)		(306,464	)

	$	1,069,474		$	1,073,054		$	1,057,488		$	1,069,991		$	4,270,007		$	1,089,837		$	1,081,364		$	1,053,012		$	1,135,484		$	4,359,697


Income from continuing operations:
Operating income (loss):
Hospital division	$	100,899		$	91,027		$	78,674		$	93,211		$	363,811		$	95,033		$	90,893		$	75,373		$	95,801	(a)	$	357,100

Nursing center division		75,574			79,522			73,383			77,111			305,590			70,249			76,493			69,077			86,853			302,672

Rehabilitation division		15,453			13,599			10,912			10,628			50,592			14,635			14,078			14,148			9,062	(a)		51,923

Corporate:
Overhead		(34,087	)		(33,586	)		(33,843	)		(33,120	)		(134,636	)		(33,781	)		(32,799	)		(34,337	)		(33,002	)		(133,919	)
Insurance subsidiary		(1,452	)		(1,182	)		(1,769	)		(1,782	)		(6,185	)		(480	)		(791	)		(783	)		(1,099	)		(3,153	)

		(35,539	)		(34,768	)		(35,612	)		(34,902	)		(140,821	)		(34,261	)		(33,590	)		(35,120	)		(34,101	)		(137,072	)

Operating income		156,387			149,380			127,357			146,048			579,172			145,656			147,874			123,478			157,615			574,623
Rent		(85,201	)		(86,882	)		(88,081	)		(88,084	)		(348,248	)		(88,319	)		(88,981	)		(89,295	)		(90,777	)		(357,372	)
Depreciation and amortization		(30,490	)		(31,355	)		(31,992	)		(31,893	)		(125,730	)		(31,121	)		(29,852	)		(29,167	)		(31,412	)		(121,552	)
Interest, net		(1,003	)		(1,196	)		(995	)		(273	)		(3,467	)		(430	)		(1,675	)		(1,239	)		(2,501	)		(5,845	)

Income from continuing operations before income taxes		39,693			29,947			6,289			25,798			101,727			25,786			27,366			3,777			32,925			89,854
Provision (benefit) for income taxes		16,352			12,409			901			9,453			39,115			10,631			11,230			(1,323	)		13,170			33,708

	$	23,341		$	17,538		$	5,388		$	16,345		$	62,612		$	15,155		$	16,136		$	5,100		$	19,755		$	56,146

(a)	Includes acquisition-related costs approximating $1.5 million for the hospital division and $0.6 million for the rehabilitation division.

Kindred Healthcare Fourth Quarter Results Exceed Company’s Guidance

Page 14

February 8, 2011

KINDRED HEALTHCARE, INC.

Condensed Consolidating Statement of Operations

(In thousands)


	Fourth Quarter 2009																		Fourth Quarter 2010
				Nursing																		Nursing
	Hospital			center			Rehabilitation												Hospital			center			Rehabilitation
	division			division			division			Corporate			Eliminations			Consolidated			division			division			division			Corporate			Eliminations			Consolidated

Revenues	$	485,169		$	543,638		$	114,316		$	—		$	(73,132	)	$	1,069,991		$	507,660		$	566,435		$	138,507		$	—		$	(77,118	)	$	1,135,484


Salaries, wages and benefits		218,409			278,379			96,976			24,197			—			617,961			230,385			274,784			123,767			23,813			(46	)		652,703
Supplies		56,802			28,231			1,158			218			(1	)		86,408			57,884			28,131			944			144			—			87,103
Rent		37,153			49,525			1,373			33			—			88,084			39,406			49,647			1,689			35			—			90,777
Other operating expenses		116,747			159,917			5,554			13,434			(73,131	)		222,521			123,590			176,667			4,734			12,831			(77,072	)		240,750
Other income		—			—			—			(2,947	)		—			(2,947	)		—			—			—			(2,687	)		—			(2,687	)
Depreciation and amortization		13,127			12,500			611			5,655			—			31,893			13,421			11,646			830			5,515			—			31,412
Interest expense		(1	)		32			—			1,401			—			1,432			2			35			—			2,806			—			2,843
Investment income		(2	)		(20	)		(2	)		(1,135	)		—			(1,159	)		(2	)		(14	)		(2	)		(324	)		—			(342	)

		442,235			528,564			105,670			40,856			(73,132	)		1,044,193			464,686			540,896			131,962			42,133			(77,118	)		1,102,559


Income from continuing operations before income taxes	$	42,934		$	15,074		$	8,646		$	(40,856	)	$	—			25,798		$	42,974		$	25,539		$	6,545		$	(42,133	)	$	—			32,925

Provision for income taxes																	9,453																		13,170

Income from continuing operations																$	16,345																	$	19,755


Capital expenditures, excluding acquisitions (including discontinued operations):
Routine	$	6,311		$	5,130		$	412		$	11,229		$	—		$	23,082		$	13,835		$	12,292		$	1,816		$	11,845		$	—		$	39,788
Development		9,606			63			—			—			—			9,669			12,257			15,365			—			—			—			27,622

	$	15,917		$	5,193		$	412		$	11,229		$	—		$	32,751		$	26,092		$	27,657		$	1,816		$	11,845		$	—		$	67,410

Kindred Healthcare Fourth Quarter Results Exceed Company’s Guidance

Page 15

February 8, 2011

KINDRED HEALTHCARE, INC.

Condensed Consolidating Statement of Operations (Continued)

(In thousands)


	Year ended December 31, 2009																		Year ended December 31, 2010
				Nursing																		Nursing
	Hospital			center			Rehabilitation												Hospital			center			Rehabilitation
	division			division			division			Corporate			Eliminations			Consolidated			division			division			division			Corporate			Eliminations			Consolidated

Revenues	$	1,932,892		$	2,150,342		$	475,038		$	—		$	(288,265	)	$	4,270,007		$	1,973,321		$	2,187,885		$	504,955		$	—		$	(306,464	)	$	4,359,697


Salaries, wages and benefits		875,788			1,102,975			402,986			101,337			—			2,483,086			894,702			1,080,344			431,224			99,480			(60	)		2,505,690
Supplies		221,529			108,038			2,827			664			(2	)		333,056			228,157			110,266			3,217			557			—			342,197
Rent		147,494			194,835			5,778			141			—			348,248			152,986			198,105			6,136			145			—			357,372
Other operating expenses		471,764			633,739			18,633			50,332			(288,263	)		886,205			493,362			694,603			18,591			48,457			(306,404	)		948,609
Other income		—			—			—			(11,512	)		—			(11,512	)		—			—			—			(11,422	)		—			(11,422	)
Depreciation and amortization		51,932			48,631			2,291			22,876			—			125,730			51,639			45,471			2,709			21,733			—			121,552
Interest expense		2			130			1			7,747			—			7,880			5			131			—			6,954			—			7,090
Investment income		(7	)		(111	)		(8	)		(4,287	)		—			(4,413	)		(3	)		(70	)		(6	)		(1,166	)		—			(1,245	)

		1,768,502			2,088,237			432,508			167,298			(288,265	)		4,168,280			1,820,848			2,128,850			461,871			164,738			(306,464	)		4,269,843

Income from continuing operations before income taxes	$	164,390		$	62,105		$	42,530		$	(167,298	)	$	—			101,727		$	152,473		$	59,035		$	43,084		$	(164,738	)	$	—			89,854

Provision for income taxes																	39,115																		33,708

Income from continuing operations																$	62,612																	$	56,146


Capital expenditures, excluding acquisitions (including discontinued operations):
Routine	$	26,716		$	39,663		$	1,043		$	30,128		$	—		$	97,550		$	36,967		$	37,024		$	2,715		$	32,190		$	—		$	108,896
Development		42,371			5,687			—			—			—			48,058			41,140			26,701			—			—			—			67,841

	$	69,087		$	45,350		$	1,043		$	30,128		$	—		$	145,608		$	78,107		$	63,725		$	2,715		$	32,190		$	—		$	176,737

Kindred Healthcare Fourth Quarter Results Exceed Company’s Guidance

Page 16

February 8, 2011

KINDRED HEALTHCARE, INC.

Condensed Business Segment Data (Continued)

(Unaudited)


	2009 Quarters										2010 Quarters
	First		Second		Third		Fourth		Year		First		Second		Third		Fourth		Year
Hospital data:
End of period data:
Number of hospitals		82		82		82		83				83		83		83		89
Number of licensed beds		6,520		6,520		6,520		6,580				6,580		6,576		6,563		6,887

Revenue mix %:
Medicare		56		55		55		56		55		56		56		55		58		56
Medicaid		10		10		11		9		10		9		9		9		9		9
Medicare Advantage		10		11		9		9		10		10		10		10		9		10
Commercial insurance and other		24		24		25		26		25		25		25		26		24		25

Admissions:
Medicare		7,421		7,117		6,875		7,283		28,696		7,432		7,125		6,769		7,640		28,966
Medicaid		1,052		1,053		1,165		984		4,254		997		990		1,022		1,034		4,043
Medicare Advantage		1,094		1,091		926		919		4,030		1,129		1,106		936		1,071		4,242
Commercial insurance and other		1,921		1,869		1,969		2,280		8,039		2,262		2,048		1,978		2,020		8,308

		11,488		11,130		10,935		11,466		45,019		11,820		11,269		10,705		11,765		45,559

Admissions mix %:
Medicare		65		64		63		63		64		63		63		63		65		64
Medicaid		9		9		11		9		9		8		9		10		9		9
Medicare Advantage		9		10		8		8		9		10		10		9		9		9
Commercial insurance and other		17		17		18		20		18		19		18		18		17		18

Patient days:
Medicare		197,377		197,203		188,712		196,067		779,359		202,882		195,964		179,324		198,129		776,299
Medicaid		50,868		50,485		53,585		47,352		202,290		47,813		45,952		48,514		46,596		188,875
Medicare Advantage		35,229		36,806		29,912		30,315		132,262		34,524		36,000		31,186		32,868		134,578
Commercial insurance and other		65,509		61,960		65,717		74,253		267,439		75,483		70,651		70,198		69,585		285,917

		348,983		346,454		337,926		347,987		1,381,350		360,702		348,567		329,222		347,178		1,385,669

Average length of stay:
Medicare		26.6		27.7		27.4		26.9		27.2		27.3		27.5		26.5		25.9		26.8
Medicaid		48.4		47.9		46.0		48.1		47.6		48.0		46.4		47.5		45.1		46.7
Medicare Advantage		32.2		33.7		32.3		33.0		32.8		30.6		32.5		33.3		30.7		31.7
Commercial insurance and other		34.1		33.2		33.4		32.6		33.3		33.4		34.5		35.5		34.4		34.4
Weighted average		30.4		31.1		30.9		30.3		30.7		30.5		30.9		30.8		29.5		30.4

Kindred Healthcare Fourth Quarter Results Exceed Company’s Guidance

Page 17

February 8, 2011

KINDRED HEALTHCARE, INC.

Condensed Business Segment Data (Continued)

(Unaudited)


	2009 Quarters										2010 Quarters
	First		Second		Third		Fourth		Year		First		Second		Third		Fourth		Year
Hospital data (continued):
Revenues per admission:
Medicare	$	37,262	$	37,748	$	37,105	$	37,620	$	37,436	$	38,078	$	38,938	$	37,675	$	38,368	$	38,272
Medicaid		45,160		45,759		43,640		43,314		44,465		45,738		42,774		42,910		41,704		43,266
Medicare Advantage		46,387		46,950		47,597		47,807		47,141		45,187		46,169		48,122		44,744		45,979
Commercial insurance and other		61,286		63,716		59,957		54,662		59,647		56,344		59,842		61,314		61,131		59,553
Weighted average		42,872		43,769		42,805		42,314		42,935		42,899		43,784		43,456		43,150		43,313

Revenues per patient day:
Medicare	$	1,401	$	1,362	$	1,352	$	1,397	$	1,378	$	1,395	$	1,416	$	1,422	$	1,479	$	1,428
Medicaid		934		954		949		900		935		954		922		904		925		926
Medicare Advantage		1,440		1,392		1,473		1,449		1,436		1,478		1,418		1,444		1,458		1,449
Commercial insurance and other		1,797		1,922		1,796		1,678		1,793		1,688		1,735		1,728		1,775		1,730
Weighted average		1,411		1,406		1,385		1,394		1,399		1,406		1,416		1,413		1,462		1,424

Medicare case mix index (discharged patients only)		1.22		1.23		1.19		1.18		1.21		1.21		1.21		1.19		1.17		1.19

Average daily census		3,878		3,807		3,673		3,782		3,785		4,008		3,830		3,579		3,774		3,796
Occupancy %		66.0		64.7		63.6		64.3		64.7		68.2		66.1		62.0		64.0		65.1

Annualized employee turnover %		21.3		22.1		22.8		22.1				21.8		22.6		22.3		22.0

Nursing and rehabilitation center data:
End of period data:
Number of facilities:
Nursing and rehabilitation centers:
Owned or leased		218		218		218		218				218		219		222		222
Managed		4		4		4		4				4		4		4		4
Assisted living facilities		6		6		6		6				6		7		7		7

		228		228		228		228				228		230		233		233

Number of licensed beds:
Nursing and rehabilitation centers:
Owned or leased		26,821		26,821		26,769		26,711				26,711		26,760		27,030		26,957
Managed		485		485		485		485				485		485		485		485
Assisted living facilities		317		317		317		327				327		463		463		463

		27,623		27,623		27,571		27,523				27,523		27,708		27,978		27,905

Revenue mix %:
Medicare		35		35		34		33		34		35		34		33		36		35
Medicaid		41		41		42		43		42		41		41		41		39		40
Medicare Advantage		6		6		6		6		6		6		7		7		7		7
Private and other		18		18		18		18		18		18		18		19		18		18

Kindred Healthcare Fourth Quarter Results Exceed Company’s Guidance

Page 18

February 8, 2011

KINDRED HEALTHCARE, INC.

Condensed Business Segment Data (Continued)

(Unaudited)


	2009 Quarters										2010 Quarters
	First		Second		Third		Fourth		Year		First		Second		Third		Fourth		Year
Nursing and rehabilitation center data (continued):
Patient days (excludes managed facilities):
Medicare		374,853		375,140		360,009		353,443		1,463,445		369,102		363,149		346,837		344,018		1,423,106
Medicaid		1,326,654		1,323,157		1,357,596		1,368,198		5,375,605		1,312,517		1,292,246		1,289,643		1,287,739		5,182,145
Medicare Advantage		80,352		82,652		84,322		86,449		333,775		87,692		92,051		91,643		94,336		365,722
Private and other		403,320		415,510		415,467		403,166		1,637,463		397,550		415,921		437,413		453,357		1,704,241

		2,185,179		2,196,459		2,217,394		2,211,256		8,810,288		2,166,861		2,163,367		2,165,536		2,179,450		8,675,214

Patient day mix %:
Medicare		17		17		16		16		17		17		17		16		16		16
Medicaid		61		60		61		62		61		61		60		60		59		60
Medicare Advantage		4		4		4		4		4		4		4		4		4		4
Private and other		18		19		19		18		18		18		19		20		21		20

Revenues per patient day:
Medicare Part A	$	457	$	459	$	464	$	466	$	461	$	470	$	469	$	468	$	534	$	485
Total Medicare (including Part B)		497		500		508		510		503		513		515		519		587		533
Medicaid		165		167		166		170		167		168		171		171		171		170
Medicare Advantage		380		392		398		405		394		398		400		405		432		409
Private and other		235		232		234		239		235		238		234		232		228		233
Weighted average		243		245		243		246		244		249		250		249		260		252

Average daily census		24,280		24,137		24,102		24,035		24,138		24,076		23,773		23,538		23,690		23,768
Admissions (excludes managed facilities)		18,166		18,456		17,803		18,376		72,801		19,026		18,924		19,383		19,118		76,451
Occupancy %		89.3		88.9		88.9		88.9		89.0		89.0		87.3		86.8		86.4		87.4
Medicare average length of stay		34.8		35.5		36.3		35.1		35.4		33.7		35.2		34.3		33.0		34.0

Annualized employee turnover %		37.9		39.9		40.2		38.9				36.7		38.8		39.8		39.6

Rehabilitation data:
Revenue mix %:
Company-operated		61		60		59		64		61		64		63		61		56		61
Non-affiliated		39		40		41		36		39		36		37		39		44		39

Sites of service (at end of period)		661		659		660		622				619		633		650		696
Revenue per site	$	177,984	$	182,775	$	185,797	$	183,789	$	730,345	$	194,094	$	192,829	$	191,142	$	199,004	$	777,069

Therapist productivity %		84.8		84.8		83.5		83.8		84.2		83.8		84.2		82.1		78.6		82.0

Annualized employee turnover %		10.9		11.6		13.1		12.8				12.6		14.2		15.4		14.4

Kindred Healthcare Fourth Quarter Results Exceed Company’s Guidance

Page 19

February 8, 2011

KINDRED HEALTHCARE, INC.

Earnings Per Common Share Reconciliation (a)

(In thousands, except per share amounts)


	Three months ended December 31,												Year ended December 31,
	2010						2009						2010						2009
	Basic			Diluted			Basic			Diluted			Basic			Diluted			Basic			Diluted
Earnings:
Income from continuing operations:
As reported in Statement of Operations	$	19,755		$	19,755		$	16,345		$	16,345		$	56,146		$	56,146		$	62,612		$	62,612
Allocation to participating unvested restricted stockholders		(347	)		(344	)		(260	)		(259	)		(1,015	)		(1,009	)		(1,094	)		(1,090	)

Available to common stockholders	$	19,408		$	19,411		$	16,085		$	16,086		$	55,131		$	55,137		$	61,518		$	61,522

Discontinued operations, net of income taxes:
Income from operations:
As reported in Statement of Operations	$	1,125		$	1,125		$	2,396		$	2,396		$	798		$	798		$	931		$	931
Allocation to participating unvested restricted stockholders		(20	)		(20	)		(38	)		(38	)		(14	)		(14	)		(16	)		(16	)

Available to common stockholders	$	1,105		$	1,105		$	2,358		$	2,358		$	784		$	784		$	915		$	915

Gain (loss) on divestiture of operations:
As reported in Statement of Operations	$	(456	)	$	(456	)	$	567		$	567		$	(453	)	$	(453	)	$	(23,432	)	$	(23,432	)
Allocation to participating unvested restricted stockholders		8			8			(9	)		(9	)		8			8			409			408

Available to common stockholders	$	(448	)	$	(448	)	$	558		$	558		$	(445	)	$	(445	)	$	(23,023	)	$	(23,024	)

Net income:
As reported in Statement of Operations	$	20,424		$	20,424		$	19,308		$	19,308		$	56,491		$	56,491		$	40,111		$	40,111
Allocation to participating unvested restricted stockholders		(359	)		(356	)		(307	)		(306	)		(1,021	)		(1,015	)		(701	)		(698	)

Available to common stockholders	$	20,065		$	20,068		$	19,001		$	19,002		$	55,470		$	55,476		$	39,410		$	39,413


Shares used in the computation:
Weighted average shares outstanding - basic computation		38,790			38,790			38,465			38,465			38,738			38,738			38,339			38,339

Dilutive effect of employee stock options					137						158						135						128
Dilutive effect of performance-based restricted shares					162						70						81						35

Adjusted weighted average shares outstanding - diluted computation					39,089						38,693						38,954						38,502

Earnings per common share:
Income from continuing operations	$	0.50		$	0.50		$	0.42		$	0.42		$	1.42		$	1.42		$	1.61		$	1.60
Discontinued operations:
Income from operations		0.03			0.03			0.06			0.06			0.02			0.02			0.02			0.02
Gain (loss) on divestiture of operations		(0.01	)		(0.01	)		0.01			0.01			(0.01	)		(0.01	)		(0.60	)		(0.60	)

Net income	$	0.52		$	0.52		$	0.49		$	0.49		$	1.43		$	1.43		$	1.03		$	1.02

(a)

Earnings per common share are based upon the weighted average number of common shares outstanding during the respective periods. The diluted calculation of earnings per common share includes the dilutive effect of stock options. On January 1, 2009, the Company adopted the provisions of the authoritative guidance for determining whether instruments granted in share-based payment transactions are participating securities, which requires that certain unvested restricted stock be included as a participating security in the basic and diluted earnings per common share calculation pursuant to the two-class method.