Kindred Healthcare Reports Strong First Quarter Core Results

Kindred Healthcare Reports Strong First Quarter Core Results

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

Kindred Healthcare, Inc. (“Kindred” or the “Company”) (NYSE:KND) today announced its operating results for the first quarter ended March 31, 2013. All financial and statistical information included in this press release reflects the continuing operations of the Company’s businesses for all periods presented unless otherwise indicated.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A telephone replay of the conference call will be available at approximately 1:00 p.m. on May 2 by dialing (719) 457-0820, access code: 5104129. The replay will be available through May 12.

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. Statements in this press release concerning the Company’s business outlook or future economic performance, anticipated profitability, revenues, expenses or other financial items, and product or services line growth, together with other statements that are not historical facts, are forward-looking statements that are estimates reflecting the best judgment of the Company based upon currently available information.

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

In addition to the factors set forth above, other factors that may affect the Company’s plans, results or stock price include, without limitation, (a) the impact of healthcare reform, which will initiate significant changes to the United States healthcare system, including potential material changes to the delivery of healthcare services and the reimbursement paid for such services by the government or other third party payors, including reforms resulting from the Patient Protection and Affordable Care Act and the Healthcare Education and Reconciliation Act (collectively, the “ACA”) or future deficit reduction measures adopted at the federal or state level. Healthcare reform is affecting each of the Company’s businesses in some manner. Potential future efforts in the U.S. Congress to repeal, amend, modify or retract funding for various aspects of the ACA create additional uncertainty about the ultimate impact of the ACA on the Company and the healthcare industry. Due to the substantial regulatory changes that will need to be implemented by the Centers for Medicare and Medicaid Services (“CMS”) and others, and the numerous processes required to implement these reforms, the Company cannot predict which healthcare initiatives will be implemented at the federal or state level, the timing of any such reforms, or the effect such reforms or any other future legislation or regulation will have on the Company’s business, financial position, results of operations and liquidity, (b) the impact of final rules issued by CMS on August 1, 2012 which, among other things, will reduce Medicare reimbursement to the Company’s TC hospitals in 2013 and beyond by imposing a budget neutrality adjustment and modifying the short-stay outlier rules, (c) the impact of final rules issued by CMS on July 29, 2011 which significantly reduced Medicare reimbursement to the Company’s nursing and rehabilitation centers and changed payments for the provision of group therapy services effective October 1, 2011, (d) the impact of the Budget Control Act of 2011 (as amended by the American Taxpayer Relief Act of 2012 (the “Taxpayer Relief Act”)) which will automatically reduce federal spending by approximately $1.2 trillion split evenly between domestic and defense spending. The automatic 2% reduction on each claim submitted to Medicare began on April 1, 2013, (e) the impact of the Taxpayer Relief Act which, among other things, reduces Medicare payments by 50% for subsequent procedures when multiple therapy services are provided on the same day. At this time, the Company believes that the new rules related to multiple therapy services will reduce the Company’s Medicare revenues by $25 million to $30 million on an annual basis, (f) changes in the reimbursement rates or the methods or timing of payment from third party payors, including commercial payors and the Medicare and Medicaid programs, changes arising from and related to the Medicare prospective payment system for long-term acute care (“LTAC”) hospitals, including potential changes in the Medicare payment rules, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, and changes in Medicare and Medicaid reimbursement for the Company’s TC hospitals, nursing and rehabilitation centers, IRFs and home health and hospice operations, and the expiration of the Medicare Part B therapy cap exception process, (g) the effects of additional legislative changes and government regulations, interpretation of regulations and changes in the nature and enforcement of regulations governing the healthcare industry, (h) the ability of the Company’s hospitals to adjust to potential LTAC certification and medical necessity reviews, (i) the impact of the Company’s significantly increased levels of indebtedness as a result of the RehabCare Group, Inc. acquisition on the Company’s funding costs, operating flexibility and ability to fund ongoing operations, development capital expenditures or other strategic acquisitions with additional borrowings, (j) the Company’s ability to successfully pursue its development activities, including through acquisitions, and successfully integrate new operations, including the realization of anticipated revenues, economies of scale, cost savings and productivity gains associated with such operations, as and when planned, including the potential impact of unanticipated issues, expenses and liabilities associated with those activities, (k) the failure of the Company’s facilities to meet applicable licensure and certification requirements, (l) the further consolidation and cost containment efforts of managed care organizations and other third party payors, (m) the Company’s ability to meet its rental and debt service obligations, (n) the Company’s ability to operate pursuant to the terms of its debt obligations, and comply with its covenants thereunder, and its ability to operate pursuant to its master lease agreements with Ventas, (o) the condition of the financial markets, including volatility and weakness in the equity, capital and credit markets, which could limit the availability and terms of debt and equity financing sources to fund the requirements of the Company’s businesses, or which could negatively impact the Company’s investment portfolio, (p) national and regional economic, financial, business and political conditions, including their effect on the availability and cost of labor, credit, materials and other services, (q) the Company’s ability to control costs, particularly labor and employee benefit costs, (r) increased operating costs due to shortages in qualified nurses, therapists and other healthcare personnel, (s) the Company’s ability to attract and retain key executives and other healthcare personnel, (t) the increase in the costs of defending and insuring against alleged professional liability and other claims and the Company’s ability to predict the estimated costs related to such claims, including the impact of differences in actuarial assumptions and estimates compared to eventual outcomes, (u) the Company’s ability to successfully reduce (by divestiture of operations or otherwise) its exposure to professional liability and other claims, (v) the Company’s ability to successfully dispose of unprofitable facilities, (w) events or circumstances which could result in the impairment of an asset or other charges, such as the impact of Medicare reimbursement regulations that resulted in the Company recording significant impairment charges in 2012 and 2011, (x) changes in generally accepted accounting principles (“GAAP”) or practices, and changes in tax accounting or tax laws (or authoritative interpretations relating to any of these matters), and (y) the Company’s ability to maintain an effective system of internal control over financial reporting. Many of these factors are beyond the Company’s control. The Company cautions investors that any forward-looking statements made by the Company are not guarantees of future performance. The Company disclaims any obligation to update any such factors or to announce publicly the results of any revisions to any of the forward-looking statements to reflect future events or developments.

In addition to the results provided in accordance with GAAP, the Company has provided information in this release to compute certain non-GAAP measurements for the three months ended March 31, 2013 and 2012 before certain charges or on a core basis. A reconciliation of the non-GAAP measurements to the GAAP measurements is included in this press release.

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

Kindred Healthcare, Inc., a top-125 private employer in the United States, is a FORTUNE 500 healthcare services company based in Louisville, Kentucky with annual revenues of $6 billion and approximately 76,000 employees in 46 states. At March 31, 2013, Kindred through its subsidiaries provided healthcare services in 2,169 locations, including 116 transitional care hospitals, six inpatient rehabilitation hospitals, 204 nursing centers, 24 sub-acute units, 101 Kindred at Home hospice, home health and non-medical home care locations, 103 inpatient rehabilitation units (hospital-based) and a contract rehabilitation services business, RehabCare, which served 1,615 non-affiliated facilities. Ranked as one of Fortune magazine’s Most Admired Healthcare Companies for five years in a row, Kindred’s mission is to promote healing, provide hope, preserve dignity and produce value for each patient, resident, family member, customer, employee and shareholder we serve. For more information, go to .