Kindred Healthcare Third Quarter Results Exceed Company's Guidance

LOUISVILLE, Ky., Nov 01, 2010 (BUSINESS WIRE) -- --Company Raises 2010 EPS Range to $1.30 to $1.35 from $1.20 to $1.35

--Company Provides Fourth Quarter 2010 EPS Guidance Range of $0.38 to $0.43

--Company Announces Cluster Market Acquisitions in each of its Three Operating Divisions

Kindred Healthcare, Inc. (the "Company") /quotes/comstock/13*!knd/quotes/nls/knd (KND 14.67, -0.03, -0.20%) today announced its operating results for the third quarter ended September 30, 2010.

Highlights:

Consolidated revenues for the quarter totaled $1.0 billion, approximately the same as a year ago Diluted earnings per share were $0.13 compared to last year's $0.14 Hospital operating income was in line with expectations despite soft volumes Nursing and rehabilitation center admissions grew 9% in the third quarter compared to last year Peoplefirst Rehabilitation operating income rose 30% from the third quarter last year Overall results for the quarter benefited from effective cost controls across the organization Current quarter includes previously announced tax benefit of $0.07 per diluted share Transaction costs in the current quarter reduced earnings per diluted share by $0.01 Operating cash flows grew 18% to $68 million in the third quarter compared to last year Company announces cluster market acquisitions in each of its three operating divisions Company completed the acquisition of five long-term acute care ("LTAC") hospitals for $178 million in cash in its southern California cluster market Company acquired three owned nursing and rehabilitation centers for $38 million in cash in its Dallas-Fort Worth cluster market Company announced a definitive agreement to acquire a home health company in its Ohio cluster market

Continuing Operations

Consolidated revenues for the third quarter ended September 30, 2010 totaled $1.0 billion, approximately the same as last year's third quarter. Income from continuing operations for the third quarter of 2010 totaled $5.1 million or $0.13 per diluted share compared to $5.4 million or $0.14 per diluted share in the third quarter last year.

Third quarter 2010 operating results included pretax charges related to transaction costs of $0.8 million ($0.5 million net of income taxes or $0.01 per diluted share).

As expected, the Company recorded a $2.9 million or $0.07 per diluted share favorable income tax adjustment in the third quarter of 2010. This adjustment was included in the Company's previously issued third quarter earnings guidance.

Operating results for the third quarter of 2009 included a favorable income tax adjustment that increased net income by $1.7 million or $0.04 per diluted share.

For the nine months ended September 30, 2010, consolidated revenues increased 1% to $3.2 billion compared to the first nine months of 2009. Income from continuing operations totaled $36.4 million or $0.92 per diluted share for the first nine months of 2010 compared to $46.3 million or $1.18 per diluted share in the same period a year ago.

Consolidated operating results for the first nine months of 2010 included certain items that, in the aggregate, reduced net income by approximately $0.4 million or $0.01 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.

In the third quarter of 2010, the Company reported a loss from discontinued operations of $0.3 million or $0.01 per diluted share compared to breakeven results in the third quarter of 2009.

For the first nine months of 2010, the Company reported a loss from discontinued operations of $0.3 million or $0.01 per diluted share compared to a loss of $1.5 million or $0.04 per diluted share in the first nine months of 2009.

Operating results for the first nine months of 2009 included a loss on the divestiture of discontinued operations totaling $24.0 million or $0.61 per diluted share.

Management Commentary

Paul J. Diaz, President and Chief Executive Officer of the Company, remarked, "We are pleased to report good third quarter results. Our nursing and rehabilitation center admissions growth was solid and we generally did a good job of controlling our costs in each of our divisions. Peoplefirst Rehabilitation reported 30% growth in operating income and signed 54 net additional unaffiliated contracts during the quarter. However, the softness in hospital admissions, as well as reimbursement pressures in both our hospitals and nursing centers, negatively impacted otherwise strong operating results."

Commenting on the Company's cash flows, Mr. Diaz noted, "We continue to generate strong operating cash flows for investment and other capital uses to create value for our shareholders. Operating cash flows grew 18% to $68 million in the third quarter and 6% to $151 million for the first nine months of 2010 compared to last year. Likewise, free cash flows, defined as operating cash flows less routine capital spending, grew 13% to $39 million in the third quarter and 21% to $82 million for the first nine months of this year compared to a year ago. We believe that our operating cash flows will fund substantially all of our routine and development capital spending in 2010."

Mr. Diaz further commented, "Our development and acquisition efforts over the past several years have added a substantial number of successful new sites of service in our cluster markets, many of which have included owned real estate. While a number of our development projects have not yet reached stabilization, we now operate 40 owned facilities that have provided, after the allocation of corporate overhead, approximately $62 million or 30% of our consolidated income before interest, income taxes, depreciation and amortization ('EBITDA') over the past twelve months. Prudent investment of our free cash flows and unused borrowing capacity in owned real estate is one of several growth strategies that should further position us to enhance shareholder value in the future."

Earnings Guidance -- Continuing Operations

The Company raised its 2010 earnings guidance for continuing operations. The Company expects consolidated revenues for 2010 to approximate $4.3 billion. Operating income, or earnings before interest, income taxes, depreciation, amortization and rent, is expected to range from $569 million to $574 million. Rent expense is expected to approximate $358 million, while depreciation, amortization and net interest expense are expected to approximate $129 million. Income from continuing operations for 2010 is expected to approximate $51 million to $54 million or $1.30 to $1.35 per diluted share (based upon diluted shares of 38.9 million).

The Company also provided its earnings outlook for the fourth quarter of 2010, estimating diluted earnings per share between $0.38 to $0.43 (based upon diluted shares of 38.9 million).

With respect to the Company's liquidity, management noted that operating cash flows for fiscal 2010 should range between $190 million to $210 million.

The Company anticipates that routine capital spending (expenditures necessary to maintain existing facilities that generally do not increase capacity or add services) for 2010 will approximate $105 million to $110 million, hospital development capital spending (primarily new facility construction) should approximate $40 million to $45 million and nursing and rehabilitation center development capital spending (primarily the addition of transitional care services for higher acuity patients and new facility construction) should approximate $20 million to $25 million. Management expects that substantially all of these expenditures will be financed through internal sources.

The Company's earnings guidance for continuing operations reflects the anticipated impact of reimbursement changes related to the revised Medicare patient classification categories under the resource utilization grouping system ("RUGs IV") and related policies for nursing centers and rehabilitation therapy services that became effective on October 1, 2010. While not material to the fourth quarter, the five LTAC hospitals and three nursing and rehabilitation centers recently acquired by the Company are included in the Company's earnings guidance. The earnings guidance does not reflect any other reimbursement changes or acquisitions, nor does it include any divestitures or repurchases of common stock.

Mr. Diaz noted, "We look forward to continued progress in each of our operating divisions as we focus on the execution of our strategic operating plan. The fourth quarter of 2010 will present a number of operational challenges, including significant Medicare reimbursement changes in our nursing center and Peoplefirst rehabilitation businesses. Notwithstanding the reimbursement changes in our businesses, our continued focus on the quality of our services, our clinical outcomes and our value proposition as a low cost provider will continue to drive our operating results and business success."

Cluster Market Development Update

Completion of Vista Healthcare Acquisition

The Company also announced that its subsidiaries have completed the previously announced acquisition of five LTAC hospitals from Vista Healthcare, LLC ("Vista") for a purchase price of $178 million in cash (the "Vista Acquisition"). The Company financed the Vista Acquisition with proceeds from its revolving credit facility.

The Vista Acquisition includes four freestanding hospitals and one hospital-in-hospital with a total of 250 beds all located in southern California. The acquired assets currently generate annualized revenues of approximately $150 million and earnings before interest, income taxes, depreciation and amortization of approximately $27 million. The Company did not acquire the working capital of Vista or assume any of its liabilities. All of the Vista hospitals are leased.

Mr. Diaz commented, "The Vista Acquisition is a great opportunity for us to take advantage of the growing demand for our services in southern California. The Vista hospitals provide high quality services and care for patients with high acuity levels. We also believe that the clinical service offerings provided by Vista will allow us to attract more commercial and managed care business."

Mr. Diaz continued, "We are excited to have Vista's employees join our organization and believe they bring resources and expertise that will complement our existing operations and local teams. We look forward to integrating our operations with Vista as soon as possible and to the continued growth of our Hospital Division."

Acquisition of Three Dallas Nursing and Rehabilitation Centers

In September, the Company announced that its subsidiaries had completed the acquisition of three nursing and rehabilitation centers in the Dallas-Fort Worth market for a purchase price of $38 million in cash. The Company financed this transaction with proceeds from its revolving credit facility.

These three owned nursing and rehabilitation centers have a total of 405 beds and currently generate annualized revenues of approximately $24 million and earnings before interest, income taxes, depreciation and amortization of approximately $3 million. The Company acquired the real estate associated with these recently constructed nursing and rehabilitation centers but did not acquire the working capital or assume any of the liabilities associated with these nursing and rehabilitation centers.

Definitive Agreement to Acquire Home Health Company in Ohio

The Company also recently announced that its subsidiaries have signed a definitive agreement to acquire a home health company in Ohio. The financial terms of the transaction were not disclosed. The Company expects to finance the transaction with proceeds from its revolving credit facility.

The home health company operates ten locations primarily in the central and northeastern regions of Ohio. The Company currently operates two LTAC hospitals and nine nursing and rehabilitation centers within the service areas of these home health operations. In addition, the Company's Peoplefirst home care and hospice business currently provides hospice services in Columbus and Dayton, Ohio.

The assets being acquired currently generate annualized revenues of approximately $13 million and earnings before interest, income taxes, depreciation and amortization of approximately $2 million.

The transaction is subject to several regulatory approvals and other conditions to closing and is expected to close by the end of 2010.

Within the first year following the closing of the Vista Acquisition, the Dallas nursing and rehabilitation center transaction and the Ohio home health transaction, the Company expects to incur certain transition costs that are expected to range from $4 million to $6 million. Excluding these costs, the Company expects that these transactions will be slightly accretive to earnings in 2010 and $0.18 to $0.23 per diluted share accretive to earnings upon completion of the integration process. The Company's estimate of earnings accretion includes the expected negative impact of refinancing its current $500 million revolving credit facility, including both its existing indebtedness and the amounts used to finance these transactions.

Other Cluster Market Development Activities

With respect to the Company's ongoing development activities, Mr. Diaz remarked, "We are continuing to construct three additional hospitals that will open over the next 15 months. In the first nine months of this year, we acquired a combined 241-bed skilled nursing/assisted living facility to further expand our presence in the Cleveland market. In other cluster markets, we recently opened a new 74-bed replacement hospital in Houston and began construction of a new 120-bed transitional care center in Indianapolis. We also acquired two hospitals and two nursing centers that were previously leased and opened a new replacement hospital in Sacramento, California. Finally, the ongoing development of our five hospital-based subacute units, 36 transitional care centers and 94 transitional care units is on track."

Mr. Diaz concluded, "We are continuing to expand our continuum of post-acute care services in our key cluster markets to support the growing interest among public and private payors for integrated care. The Vista Acquisition adds five quality hospitals to our southern California cluster market. In the Dallas nursing and rehabilitation center transaction, we acquired three relatively new, owned facilities and plan to develop them into transitional care centers to complement our existing hospital services in the Dallas-Fort Worth cluster market, where we currently operate six hospitals. The Dallas transaction also expanded our owned real property base. These acquisitions, along with our ongoing development and acquisition activities, will allow us to better serve the needs of patients, residents, physicians and payors of healthcare in our cluster markets and reflect our continued confidence in our strategic plan."

Webcast of Conference Call

As previously announced, investors and the general public can access a live webcast of the third quarter 2010 conference call through a link on the Company's website at www.kindredhealthcare.com. The conference call will be held November 2, 2010 at 11:00 a.m. Eastern Time.

A telephone replay of the conference call will be available at approximately 2:00 p.m. on November 2 by dialing (719) 457-0820, access code: 3154807. The replay will be available through November 10.

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, development 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 Company's ability to integrate the operations of the acquired hospitals, nursing centers and home health operations and realize the anticipated revenues, economies of scale, cost synergies and productivity gains, (b) 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, (c) changes in the reimbursement rates or the methods or timing of payment from third party payors, including 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 centers, and the expiration of the Medicare Part B therapy cap exception process, (d) 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, (e) 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, (f) 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, (g) failure of the Company's facilities to meet applicable licensure and certification requirements, (h) the further consolidation and cost containment efforts of managed care organizations and other third party payors, (i) the Company's ability to meet its rental and debt service obligations, (j) the Company's ability to operate pursuant to the terms of its debt obligations and its master lease agreements with Ventas, Inc. /quotes/comstock/13*!vtr/quotes/nls/vtr (VTR 53.75, -0.04, -0.07%) , (k) the condition of the financial markets, including volatility and deterioration 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, (l) national and regional economic, financial, business and political conditions, including their effect on the availability and cost of labor, credit, materials and other services, (m) the Company's ability to control costs, particularly labor and employee benefit costs, (n) increased operating costs due to shortages in qualified nurses, therapists and other healthcare personnel, (o) the Company's ability to attract and retain key executives and other healthcare personnel, (p) the increase in the costs of defending and insuring against alleged professional liability 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, (q) the Company's ability to successfully reduce (by divestiture of operations or otherwise) its exposure to professional liability claims, (r) the Company's ability to successfully dispose of unprofitable facilities, (s) events or circumstances which could result in impairment of an asset or other charges, (t) changes in generally accepted accounting principles ("GAAP") or practices, and (u) 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.

As noted above, the Company's earnings release includes two financial measures referred to as (a) operating income and (b) EBITDA. The Company's management uses operating income and EBITDA as meaningful measures of operational performance in addition to other measures. The Company uses operating income and EBITDA to assess the relative performance of its operating divisions as well as the employees that operate these businesses. In addition, the Company believes these measurements are important because securities analysts and investors use these measurements 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 and EBITDA 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. Reconciliations of (a) the estimated operating income to income from continuing operations provided in the Company's earnings guidance and (b) actual EBITDA to income from continuing operations for the twelve months ended September 30, 2010 is included in this press release.

As noted above, the Company discusses 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.

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 $4.2 billion and approximately 54,700 employees in 40 states. At September 30, 2010, Kindred through its subsidiaries provided healthcare services in 650 locations, including 83 long-term acute care hospitals, 226 nursing and rehabilitation centers and a contract rehabilitation services business, Peoplefirst rehabilitation services, which served 341 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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