KND Kindred Healthcare, Inc. (delisted)

Company Reaffirms Full Year Outlook for 2016

Consolidated Revenues of $1.84 billion, GAAP Income from Continuing Operations of $34 million, GAAP Diluted EPS from Continuing Operations of $0.23 and EBITDAR of $251 million(1) in the Second Quarter Include Net Costs of $18 million Related to Impairments, Litigation, Transaction, Integration, Research and Development, Debt Amendment, Other Restructuring Costs, and Gain on Facility Swap

Core EBITDAR of $268 million(1) and Core Diluted EPS from Continuing Operations of $0.38(1) in the Second Quarter

Second Quarter GAAP Operating Cash Flows of $135 million; Core Operating Cash Flows of $126 million(1)

Kindred Healthcare, Inc. (“Kindred” or the “Company”) (NYSE:KND) today announced its operating results for the second quarter ended June 30, 2016.

Benjamin A. Breier, President and Chief Executive Officer of the Company, commented, “We are pleased to report a solid second quarter with results at the high end of our expectations. Notably, our Kindred at Home (“KAH”) and Kindred Hospital Rehabilitation Services (“KHRS”) businesses both achieved strong sequential and year-over-year volume growth and operating performance. Our Hospital Division increased same-facility admissions and same-facility patient days and delivered stable second quarter results in line with our expectations. We are pleased that the Hospital Division’s performance has continued its significant improvement from the operating trends experienced in the second half of 2015. Solid execution remains our top priority across the Company as we drive effective patient-centered care solutions and adapt to a changing regulatory and operating environment. As always, I thank Kindred’s 102,000 teammates for the exceptional care, hope and dignity that they provide to more than one million patients we see at Kindred each year.”

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.

Second Quarter Consolidated Highlights(1):

• Consolidated revenues were $1.84 billion, a 0.5% year-over-year increase, while GAAP income from continuing operations increased 2% to $34.4 million from $33.7 million in the same period in 2015. Core EBITDAR increased 2.3% to $267.9 million compared to $261.8 million in the same period in 2015. The increase in GAAP income from continuing operations and core EBITDAR are both due primarily to revenue growth and operating margin improvement in the KAH and KHRS businesses.
• GAAP operating cash flows increased to $135.1 million compared to $100.4 million for the same period a year ago. Core operating cash flows were $126.4 million compared to core operating cash flows of $97.7 million for the same period a year ago. Core free cash flows were $83.5 million compared to core free cash flows of $63.1 million in the same period a year ago.

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(1) See reconciliation of generally accepted accounting principles (“GAAP”) results to non-GAAP results beginning on page 12. As used herein, “EBITDAR” means earnings before interest, income taxes, depreciation, amortization and rent.  

Second Quarter Consolidated Highlights(1): (Continued)

• GAAP diluted earnings per share (“EPS”) from continuing operations was $0.23 and core diluted EPS from continuing operations was $0.38 based upon 87.5 million weighted average diluted shares. In the same period a year ago, the Company reported GAAP diluted EPS of $0.25, while core diluted EPS was $0.39 based upon 86.4 million weighted average diluted shares. GAAP diluted EPS in the second quarter of 2016 includes $17.7 million ($13.2 million net of income taxes of $3.5 million and noncontrolling interests of $1.0 million) or $0.15 per diluted share of charges related to property and intangible asset impairments, litigation, transaction, integration, research and development, debt amendment, and other restructuring costs, and a gain on facility swap. GAAP diluted EPS in the second quarter of 2015 includes $13.4 million ($12.1 million net of income taxes of $1.3 million) or $0.14 per diluted share of charges related to transaction, integration, litigation, and other restructuring costs.
• The Kindred Board of Directors declared a cash dividend of $0.12 per share on the Company’s common stock payable on September 2, 2016 to shareholders of record as of the close of business on August 18, 2016.

Second Quarter Segment Highlights(1)(2):

KAH second quarter revenues increased 3% over the prior year period to $624.2 million with home health episodic admissions growing 3.5% and hospice average daily census growing 4% compared to the same period last year. Segment EBITDAR (GAAP) for KAH increased 8.6% to $107.0 million as compared to $98.6 million in the prior year period and core EBITDAR increased 6.3% to $107.2 million compared to $100.8 million a year ago. These results were achieved despite a 10% net reduction in home health branches and an 8.3% net reduction in hospice branches since the beginning of 2015, primarily from branch consolidations. Average home health revenue per branch grew 12.6% and average hospice revenue per branch grew 6.1% during the last twelve months compared to a year ago.

Kindred’s Hospital Division second quarter revenues increased 1.0% over the prior year period to $633.7 million, as a result of a 1% increase in revenues per patient day compared to the same period last year. Same-hospital admissions were up 0.3% during the quarter and same-hospital patient days were up 1.4%. Segment EBITDAR (GAAP) in the Hospital Division for the second quarter decreased 3.3% to $126.6 million from $131.0 million a year ago and core EBITDAR for the second quarter decreased 4.3% to $125.9 million from $131.5 million a year ago as operating expenses per patient day increased 2% in the second quarter compared to a year ago.

Kindred Rehabilitation Services Division second quarter revenues declined 6.0% to $365.9 million, while both segment EBITDAR (GAAP) and core EBITDAR increased 7.6% to $63.7 million compared to $59.2 million in the same period last year. Strong performance in the second quarter from KHRS freestanding inpatient rehabilitation hospitals (“IRFs”) was offset by the impact of previously reported contract losses in RehabCare that occurred primarily in the first half of 2015. The KHRS segment achieved strong revenue growth of 11.3%, and both segment EBITDAR (GAAP) and core EBITDAR grew 13.3% compared to the same period a year ago, with IRF same-hospital discharges growing 4.1% during the quarter. RehabCare revenues declined 17.2% to $196.1 million from a year ago, while segment EBITDAR (GAAP), core EBITDAR and operating margins continued to stabilize in the second quarter. RehabCare second quarter segment and core EBITDAR increased to $13.3 million from $12.0 million and operating margins increased to 6.8% from 5.9%, both compared to the first quarter of 2016.

Kindred’s Nursing Center Division second quarter revenues declined 0.5% to $272.4 million compared to the same period last year. Segment EBITDAR (GAAP) decreased 25.6% to $29.7 million and core EBITDAR decreased 16.8% to $33.7 million, each the result of a 1.2% decline in average daily census, start-up losses of $1 million at two newly opened transitional care centers, higher contract labor costs, and for segment EBITDAR (GAAP), $4.0 million of facility closure and restructuring costs.

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(1) See reconciliation of GAAP results to non-GAAP results beginning on page 12. (2) See same-hospital and full segment data on pages 8 through 11.  

2016 Outlook

All forward-looking non-GAAP financial measures contained in this section “2016 Outlook” are provided only on a non-GAAP basis. This is due to the inherent difficulty of forecasting the timing or amount of items that would be included in the most directly comparable forward-looking GAAP financial measures. As a result, reconciliation of the forward-looking non-GAAP financial measures to GAAP financial measures is not available without unreasonable effort and the Company is unable to address the probable significance of the unavailable information.

The Company’s outlook does not reflect the potential impact of the previously announced definitive agreement to sell 12 long-term acute care (“LTAC”) hospitals to Curahealth, LLC (“Curahealth”). The Company will make the appropriate adjustments following the closing of the transaction.

The Company’s outlook also excludes transaction costs, the effect of any reimbursement changes, debt refinancing costs, severance, retirement, retention, restructuring costs, litigation and related contingency expense, integration costs, business interruption settlements, a gain on swap of facilities, research and development, any further acquisitions or divestitures, any impairment charges, any further issuances of common stock or any repurchases of common stock.

Kindred today reaffirmed its outlook for 2016. Kindred expects:

• Annual revenues of approximately $7.250 billion, with a range of $7.2 billion to $7.3 billion
• Core EBITDAR of approximately $990 million, with a range of $970 million to $1.010 billion
• Core diluted EPS from continuing operations of approximately $0.90, with a range of $0.80 to $1.00(1)

Following the Securities and Exchange Commission’s recently updated Compliance and Disclosure Interpretations on the use of non-GAAP financial measures, the Company has discontinued reporting adjusted core diluted EPS from continuing operations.

For the third quarter of 2016, the Company expects core EBITDAR to approximate $220 million to $235 million and core diluted EPS from continuing operations to approximate $0.02 to $0.12.

Additionally, Kindred reaffirmed its preliminary outlook for 2017 core EBITDAR of at least $1 billion.

Mr. Breier commented, “We continue our efforts to grow our home health, hospice and inpatient rehabilitation businesses through organic growth, acquisitions and new joint venture arrangements and we remain enthusiastic about the growth opportunities in these businesses. We also remain focused on our preparations for LTAC patient criteria and related mitigation initiatives, including the ongoing optimization of our LTAC hospital portfolio. Our previously announced transaction with Curahealth and our facility swap transaction with Select Medical Holdings Corporation (NYSE:SEM) reflect our commitment to this strategy. We believe our diversified portfolio of assets, coordinated over an episode of care, with the key enablers we have developed, continue to put Kindred in a unique position to become the Post-Acute Benefits Management leader in the many markets we now serve.”

Stephen D. Farber, Executive Vice President and Chief Financial Officer of Kindred, added, “We are very pleased with our strong second quarter cash flow performance that was in line with our expectations, and coupled with our recent financing, enabled us to end the quarter with excellent liquidity, with approximately $59 million drawn on our $900 million asset-based revolving credit facility. We continue to expect to generate roughly $300 million per year in core operating cash flows and approximately half of that amount in core free cash flows.”

Cash Dividend

The Company announced that its Board of Directors has approved the payment of a cash dividend of $0.12 per share of common stock to be paid on September 2, 2016 to shareholders of record as of the close of business on August 18, 2016.

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(1) The EPS estimate is based upon an estimated weighted average annual diluted share count for 2016 of 88 million shares.  

Conference Call

As previously announced, investors and the general public may access a live webcast of the second quarter 2016 conference call through a link on the Company’s website at http://investors.kindredhealthcare.com. The conference call will be held on August 5 at 10:00 a.m. (Eastern Time).

A telephone replay of the conference call will become available at approximately 1:00 p.m. on August 5 by dialing (719) 457-0820, access code: 3224094. The replay will be available through August 14.

Forward-Looking Statements and Non-GAAP Reconciliations

See page 12 for important disclosures regarding the Company’s forward-looking statements and the non-GAAP financial reconciliations that follow.

About Kindred Healthcare

Kindred Healthcare, Inc., a top-90 private employer in the United States, is a FORTUNE 500 healthcare services company based in Louisville, Kentucky with annual revenues of approximately $7.2 billion(1). At June 30, 2016, Kindred through its subsidiaries had approximately 101,800 employees providing healthcare services in 2,684 locations in 46 states, including 97 transitional care hospitals, 19 inpatient rehabilitation hospitals, 92 nursing centers, 19 sub-acute units, 617 Kindred at Home home health, hospice and non-medical home care sites of service, 105 inpatient rehabilitation units (hospital-based) and contract rehabilitation service businesses which served 1,735 non-affiliated sites of service. Ranked as one of Fortune magazine’s Most Admired Healthcare Companies for seven years, 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. You can also follow us on Twitter and Facebook.

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(1) Revenues based upon Kindred consolidated revenues for the twelve months ended June 30, 2016.     KINDRED HEALTHCARE, INC. Condensed Consolidated Statement of Operations (Unaudited) (In thousands, except per share amounts)             Three months ended Six months ended June 30, June 30, 2016 2015 2016 2015   Revenues $ 1,842,070   $ 1,833,475   $ 3,680,041   $ 3,509,442     Salaries, wages and benefits 928,954 935,687 1,855,168 1,782,780 Supplies 99,410 98,237 198,826 191,508 Rent 100,555 96,402 198,323 188,542 Other operating expenses 217,850 212,117 432,551 409,844 General and administrative expenses 338,672 334,805 694,199 740,907 Other income (511 ) (569 ) (1,463 ) (1,049 ) Litigation contingency expense 930 3,925 2,840 98,925 Impairment charges 6,131 - 13,919 6,726 Depreciation and amortization 40,257 38,625 80,938 77,560 Interest expense 58,056 57,170 115,555 119,688 Investment income   (497 )   (1,030 )   (751 )   (1,771 )   1,789,807     1,775,369     3,590,105     3,613,660   Income (loss) from continuing operations before income taxes 52,263 58,106 89,936 (104,218 ) Provision (benefit) for income taxes   17,882     24,396     29,718     (3,340 ) Income (loss) from continuing operations 34,381 33,710 60,218 (100,878 ) Discontinued operations, net of income taxes: Income (loss) from operations 3,016 (589 ) 2,434 (4,013 ) Gain (loss) on divestiture of operations   (83 )   983     179     983   Income (loss) from discontinued operations   2,933     394     2,613     (3,030 ) Net income (loss) 37,314 34,104 62,831 (103,908 ) (Earnings) loss attributable to noncontrolling interests: Continuing operations (13,522 ) (11,735 ) (26,036 ) (20,582 ) Discontinued operations   (3 )   2     (5 )   31     (13,525 )   (11,733 )   (26,041 )   (20,551 ) Income (loss) attributable to Kindred $ 23,789   $ 22,371   $ 36,790   $ (124,459 )   Amounts attributable to Kindred stockholders: Income (loss) from continuing operations $ 20,859 $ 21,975 $ 34,182 $ (121,460 ) Income (loss) from discontinued operations   2,930     396     2,608     (2,999 ) Net income (loss) $ 23,789   $ 22,371   $ 36,790   $ (124,459 )   Earnings (loss) per common share: Basic: Income (loss) from continuing operations $ 0.24 $ 0.25 $ 0.39 $ (1.47 ) Discontinued operations: Income (loss) from operations 0.03 (0.01 ) 0.03 (0.05 ) Gain (loss) on divestiture of operations   -     0.01     -     0.01   Income (loss) from discontinued operations   0.03     -     0.03     (0.04 ) Net income (loss) $ 0.27   $ 0.25   $ 0.42   $ (1.51 )   Diluted: Income (loss) from continuing operations $ 0.23 $ 0.25 $ 0.38 $ (1.47 ) Discontinued operations: Income (loss) from operations 0.03 (0.01 ) 0.03 (0.05 ) Gain (loss) on divestiture of operations   -     0.01     -     0.01   Income (loss) from discontinued operations   0.03     -     0.03     (0.04 ) Net income (loss) $ 0.26   $ 0.25   $ 0.41   $ (1.51 )   Shares used in computing earnings (loss) per common share: Basic 86,836 86,045 86,713 82,828 Diluted 87,500 86,402 87,374 82,828   Cash dividends declared and paid per common share $ 0.12 $ 0.12 $ 0.24 $ 0.24     KINDRED HEALTHCARE, INC. Condensed Consolidated Balance Sheet (Unaudited) (In thousands, except per share amounts)       June 30, December 31, 2016 2015 ASSETS Current assets: Cash and cash equivalents $ 100,056 $ 98,758 Insurance subsidiary investments 96,330 106,638 Accounts receivable less allowance for loss 1,264,540 1,194,868 Inventories 28,178 27,791 Income taxes 11,223 11,790 Other   70,384     61,054   1,570,711 1,500,899   Property and equipment 2,165,547 2,162,398 Accumulated depreciation   (1,226,072 )   (1,190,402 ) 939,475 971,996   Goodwill 2,690,202 2,669,810 Intangible assets less accumulated amortization 781,203 755,655 Assets held for sale 4,459 613 Insurance subsidiary investments 199,075 204,498 Deferred tax assets 81,324 104,130 Acquisition deposit - 18,489 Other   281,073     242,169   (a) Total assets $ 6,547,522   $ 6,468,259   LIABILITIES AND EQUITY Current liabilities: Accounts payable $ 196,952 $ 187,061 Salaries, wages and other compensation 419,251 404,925 Due to third party payors 33,136 36,251 Professional liability risks 60,367 64,099 Other accrued liabilities 271,972 394,246 Long-term debt due within one year   27,793     24,630   1,009,471 1,111,212   Long-term debt 3,218,679 3,086,348 (a) Professional liability risks 277,844 263,273 Deferred credits and other liabilities 312,001 301,379   Equity: Stockholders' equity: Common stock, $0.25 par value; authorized 175,000 shares; issued 85,266 shares - June 30, 2016 and 83,792 shares - December 31, 2015 21,317 20,948 Capital in excess of par value 1,724,018 1,737,747 Accumulated other comprehensive loss (4,892 ) (2,632 ) Accumulated deficit   (219,514 )   (256,209 ) 1,520,929 1,499,854 Noncontrolling interests   208,598     206,193   Total equity   1,729,527     1,706,047   Total liabilities and equity $ 6,547,522   $ 6,468,259  

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(a)

The balance sheet at December 31, 2015 includes a correction made during the second quarter ended June 30, 2016 to present capitalized lender fees of $47.0 million as an offset to long-term debt rather than the previous reporting of these amounts as other long-term assets. This presentation is in accordance with GAAP and is consistent with the presentation at June 30, 2016.

    KINDRED HEALTHCARE, INC. Condensed Consolidated Statement of Cash Flows (Unaudited) (In thousands)                 Three months ended Six months ended June 30, June 30, 2016 2015 2016 2015 Cash flows from operating activities: Net income (loss) $ 37,314 $ 34,104 $ 62,831 $ (103,908 )

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

Depreciation expense 34,435 31,313 68,392 63,458 Amortization of intangible assets 5,957 7,536 12,783 14,468 Amortization of stock-based compensation costs 5,639 6,746 10,043 12,570 Amortization of deferred financing costs 3,708 3,539 7,275 6,601 Payment of capitalized lender fees related to debt issuance (7,333 ) - (7,333 ) (28,012 ) Provision for doubtful accounts 9,221 10,511 20,946 18,803 Deferred income taxes 17,802 21,130 29,298 (4,450 ) Impairment charges 6,131 - 13,919 6,726 (Gain) loss on divestiture of discontinued operations 83 (983 ) (179 ) (983 ) Other 656 4,975 959 6,972 Change in operating assets and liabilities: Accounts receivable (13,229 ) (7,733 ) (101,121 ) (39,389 ) Inventories and other assets (10,161 ) (17,608 ) (15,393 ) 35,414 Accounts payable 23,077 (12,900 ) 12,456 (12,435 ) Income taxes 707 1,923 780 (3,845 ) Due to third party payors 351 (3,554 ) (4,492 ) (18,973 ) Other accrued liabilities   20,670     21,380     (109,198 )   7,760   Net cash provided by (used in) operating activities   135,028     100,379     1,966     (39,223 )   Cash flows from investing activities: Routine capital expenditures (28,724 ) (24,500 ) (46,830 ) (45,269 ) Development capital expenditures (8,707 ) (518 ) (18,726 ) (6,306 ) Acquisitions, net of cash acquired (1,372 ) (2,684 ) (27,711 ) (661,755 ) Acquisition deposits - - 18,489 195,000 Sale of assets 142 2,229 1,223 3,177 Proceeds from senior unsecured notes offering held in escrow - - - 1,350,000 Interest in escrow for senior unsecured notes - - - 23,438 Purchase of insurance subsidiary investments (20,154 ) (16,911 ) (52,995 ) (42,829 ) Sale of insurance subsidiary investments 15,713 12,764 46,603 34,793 Net change in insurance subsidiary cash and cash equivalents 13,201 (5,205 ) 23,159 (5,763 ) Net change in other investments 583 175 (33,398 ) 199 Other   792     (798 )   (1,127 )   (793 ) Net cash provided by (used in) investing activities   (28,526 )   (35,448 )   (91,313 )   843,892     Cash flows from financing activities: Proceeds from borrowings under revolving credit 244,300 347,700 778,000 1,155,150 Repayment of borrowings under revolving credit (524,600 ) (360,100 ) (827,700 ) (970,150 ) Proceeds from issuance of term loan, net of discount 198,100 - 198,100 199,000 Proceeds from other long-term debt - - 750 - Repayment of Gentiva debt - - - (1,177,363 ) Repayment of term loan (3,508 ) (6,005 ) (6,511 ) (6,005 ) Repayment of other long-term debt (270 ) (459 ) (550 ) (900 ) Payment of deferred financing costs (141 ) (445 ) (292 ) (2,983 ) Issuance of common stock in connection with employee benefit plans - 139 - 205

Payment of costs associated with issuance of common stock and tangible equity units

- - - (915 ) Payment of dividend for mandatory redeemable preferred stock (2,853 ) (2,654 ) (5,654 ) (5,432 ) Dividends paid (10,225 ) (10,027 ) (20,293 ) (20,002 ) Contributions made by noncontrolling interests 1,900 - 6,268 - Distributions to noncontrolling interests (14,231 ) (10,119 ) (30,546 ) (21,138 ) Purchase of noncontrolling interests - - (1,000 ) - Other   -     50     73     1,212   Net cash provided by (used in) financing activities   (111,528 )   (41,920 )   90,645     (849,321 ) Change in cash and cash equivalents (5,026 ) 23,011 1,298 (44,652 ) Cash and cash equivalents at beginning of period   105,082     96,525     98,758     164,188   Cash and cash equivalents at end of period $ 100,056   $ 119,536   $ 100,056   $ 119,536       KINDRED HEALTHCARE, INC. Condensed Consolidated and Business Segment Data (Unaudited) (In thousands, except per share amounts)                 Second quarter 2015 Quarters 2016 Quarters % change v. First Second Third Fourth First Second prior year Condensed consolidated income statement data: GAAP presentation: Revenues $ 1,675,967 $ 1,833,475 $ 1,764,516 $ 1,780,949 $ 1,837,971 $ 1,842,070 0.5 Operating expenses 1,645,439 1,584,202 1,567,381 1,583,096 1,604,604 1,591,436 0.5 Rent 92,140 96,402 96,244 97,823 97,768 100,555 4.3 Depreciation and amortization 38,935 38,625 39,329 40,362 40,681 40,257 4.2 Interest, net   61,777     56,140     56,008     55,664     57,245     57,559   2.5

Income (loss) from continuing operations before income taxes

(162,324 ) 58,106 5,554 4,004 37,673 52,263 (10.1 ) Provision (benefit) for income taxes   (27,736 )   24,396     12,523     (51,980 )   11,836     17,882   (26.7 ) Income (loss) from continuing operations (134,588 ) 33,710 (6,969 ) 55,984 25,837 34,381 2.0 Noncontrolling interests   (8,847 )   (11,735 )   (9,900 )   (12,082 )   (12,514 )   (13,522 ) 15.2 Net income (loss) attributable to Kindred $ (143,435 ) $ 21,975   $ (16,869 ) $ 43,902   $ 13,323   $ 20,859   (5.1 )   Diluted EPS $ (1.80 ) $ 0.25 $ (0.20 ) $ 0.50 $ 0.15 $ 0.23 (8.0 ) Diluted shares 79,575 86,402 86,184 87,232 87,249 87,500 1.3   Core presentation (a): EBITDAR $ 234,211 $ 261,800 $ 236,477 $ 247,839 $ 246,834 $ 267,895 2.3 Rent 91,199 95,528 95,436 96,934 97,517 100,093 4.8 Interest, net 44,346 56,140 56,008 55,664 57,245 57,559 2.5 Provision for income taxes 22,466 25,721 15,298 13,758 16,546 21,417 (16.7 ) Net income attributable to Kindred 28,418 34,051 20,506 29,039 22,331 34,031 (0.1 )   Core diluted EPS $ 0.34 $ 0.39 $ 0.23 $ 0.33 $ 0.25 $ 0.38 (2.6 ) Diluted shares 82,422 86,402 86,892 87,232 87,249 87,500 1.3   Revenues by segment: Hospital division $ 640,483 $ 627,206 $ 579,497 $ 593,593 $ 643,299 $ 633,695 1.0 Kindred at Home: Home health 300,867 427,820 424,054 425,759 430,035 438,556 2.5 Hospice   119,057     178,005     181,140     178,325     176,426     185,641   4.3 419,924 605,825 605,194 604,084 606,461 624,197 3.0 Kindred Rehabilitation Services: Kindred Hospital Rehabilitation Services 151,564 152,544 149,435 155,579 165,774 169,815 11.3 RehabCare   252,595     236,791     219,518     206,582     204,248     196,075   (17.2 ) 404,159 389,335 368,953 362,161 370,022 365,890 (6.0 ) Nursing center division   274,308     273,870     270,510     273,387     272,227     272,395   (0.5 ) 1,738,874 1,896,236 1,824,154 1,833,225 1,892,009 1,896,177 - Eliminations   (62,907 )   (62,761 )   (59,638 )   (52,276 )   (54,038 )   (54,107 ) (13.8 ) $ 1,675,967   $ 1,833,475   $ 1,764,516   $ 1,780,949   $ 1,837,971   $ 1,842,070   0.5     (a) See reconciliation of GAAP results to non-GAAP results beginning on page 12.     KINDRED HEALTHCARE, INC. Condensed Consolidated and Business Segment Data (Continued) (Unaudited) (In thousands, except statistics)                       Second quarter 2015 Quarters 2016 Quarters % change v. First Second Third Fourth First Second prior year Segment EBITDAR (GAAP): Hospital division $ 134,111 $ 130,967 $ 95,983 $ 116,454 $ 134,571 $ 126,589 (3.3 ) Kindred at Home: Home health 45,696 72,329 65,584 67,032 66,941 75,790 4.8 Hospice   16,479     26,238     33,707     28,668     24,525     31,225   19.0 62,175 98,567 99,291 95,700 91,466 107,015 8.6 Kindred Rehabilitation Services: Kindred Hospital Rehabilitation Services 44,564 44,531 42,141 44,891 47,870 50,469 13.3 RehabCare   15,708     14,681     14,544     (1,118 )   11,987     13,269   (9.6 ) 60,272 59,212 56,685 43,773 59,857 63,738 7.6 Nursing center division 36,963 39,877 35,923 36,601 30,100 29,652 (25.6 )     Core EBITDAR by segment (a): Hospital division $ 134,786 $ 131,532 $ 97,128 $ 117,675 $ 135,495 $ 125,932 (4.3 ) Kindred at Home: Home health 46,798 72,917 68,155 68,826 65,803 75,859 4.0 Hospice   16,996     27,887     34,025     30,212     24,866     31,329   12.3 63,794 100,804 102,180 99,038 90,669 107,188 6.3 Kindred Rehabilitation Services: Kindred Hospital Rehabilitation Services 44,564 44,531 42,141 45,098 47,870 50,469 13.3 RehabCare   16,493     14,681     14,544     11,858     11,987     13,269   (9.6 ) 61,057 59,212 56,685 56,956 59,857 63,738 7.6 Nursing center division 36,963 40,461 35,923 36,601 30,100 33,662 (16.8 ) Support center   (62,389 )   (70,209 )   (55,439 )   (62,431 )   (69,287 )   (62,625 ) 10.8 $ 234,211   $ 261,800   $ 236,477   $ 247,839   $ 246,834   $ 267,895   2.3   EBITDAR margin by segment: Hospital division 20.9 20.9 16.6 19.6 20.9 20.0 (0.9 ) Kindred at Home: Home health 15.2 16.9 15.5 15.7 15.6 17.3 0.4 Hospice 13.8 14.7 18.6 16.1 13.9 16.8 2.1 Kindred at Home 14.8 16.3 16.4 15.8 15.1 17.1 0.8 Kindred Rehabilitation Services: Kindred Hospital Rehabilitation Services 29.4 29.2 28.2 28.9 28.9 29.7 0.5 RehabCare 6.2 6.2 6.6 (0.5 ) 5.9 6.8 0.6 Kindred Rehabilitation Services 14.9 15.2 15.4 12.1 16.2 17.4 2.2 Nursing center division 13.5 14.6 13.3 13.4 11.1 10.9 (3.7 )   Core EBITDAR margin by segment: Hospital division 21.0 21.0 16.8 19.8 21.1 19.9 (1.1 ) Kindred at Home: Home health 15.6 17.0 16.1 16.2 15.3 17.3 0.3 Hospice 14.3 15.7 18.8 16.9 14.1 16.9 1.2 Kindred at Home 15.2 16.6 16.9 16.4 15.0 17.2 0.6 Kindred Rehabilitation Services: Kindred Hospital Rehabilitation Services 29.4 29.2 28.2 29.0 28.9 29.7 0.5 RehabCare 6.5 6.2 6.6 5.7 5.9 6.8 0.6 Kindred Rehabilitation Services 15.1 15.2 15.4 15.7 16.2 17.4 2.2 Nursing center division 13.5 14.8 13.3 13.4 11.1 12.4 (2.4 ) Consolidated 14.0 14.3 13.4 13.9 13.4 14.5 0.2     (a) See reconciliation of GAAP results to non-GAAP results beginning on page 12.     KINDRED HEALTHCARE, INC. Condensed Business Segment Data (Continued) (Unaudited)                   Second quarter 2015 Quarters 2016 Quarters % change v. First Second Third Fourth First Second prior year Hospital division: End of period data: Number of transitional care hospitals 97 96 95 95 95 97 Number of licensed beds 7,147 7,124 7,094 7,094 7,089 7,067 Revenue mix %: Medicare 56.8 55.2 57.1 57.3 57.8 55.5 Medicaid 5.5 5.3 5.3 5.1 4.2 4.2 Medicare Advantage 11.9 11.6 10.8 11.1 11.5 12.0 Medicaid Managed 4.7 5.6 6.1 6.2 5.6 6.3 Commercial insurance and other 21.1 22.3 20.7 20.3 20.9 22.0 Admissions: Medicare 8,775 8,267 7,976 8,169 8,919 8,253 (0.2 ) Medicaid 610 610 556 520 463 386 (36.7 ) Medicare Advantage 1,555 1,352 1,212 1,304 1,453 1,382 2.2 Medicaid Managed 643 675 646 612 733 768 13.8 Commercial insurance and other   1,868   1,815   1,763   1,701   1,871   1,807 (0.4 )   13,451   12,719   12,153   12,306   13,439   12,596 (1.0 ) Patient days: Medicare 228,483 218,577 210,870 210,409 229,004 219,013 0.2 Medicaid 28,663 25,213 23,167 21,795 21,134 19,409 (23.0 ) Medicare Advantage 48,448 44,740 39,585 41,079 45,760 47,697 6.6 Medicaid Managed 22,013 24,833 24,412 24,802 25,341 27,267 9.8 Commercial insurance and other   62,241   62,922   58,631   57,321   62,769   63,009 0.1   389,848   376,285   356,665   355,406   384,008   376,395 - Average length of stay: Medicare 26.0 26.4 26.4 25.8 25.7 26.5 0.4 Medicaid 47.0 41.3 41.7 41.9 45.6 50.3 21.8 Medicare Advantage 31.2 33.1 32.7 31.5 31.5 34.5 4.2 Medicaid Managed 34.2 36.8 37.8 40.5 34.6 35.5 (3.5 ) Commercial insurance and other 33.3 34.7 33.3 33.7 33.5 34.9 0.6 Weighted average 29.0 29.6 29.3 28.9 28.6 29.9 1.0 Revenues per admission: Medicare $ 41,483 $ 41,892 $ 41,451 $ 41,656 $ 41,717 $ 42,579 1.6 Medicaid 57,594 54,795 55,415 57,724 57,928 69,797 27.4 Medicare Advantage 48,908 53,578 51,495 50,680 51,080 55,105 2.9 Medicaid Managed 46,740 51,950 54,976 60,263 49,287 51,696 (0.5 ) Commercial insurance and other 72,395 77,110 68,151 70,735 71,651 77,193 0.1 Weighted average 47,616 49,312 47,683 48,236 47,868 50,309 2.0 Revenues per patient day: Medicare $ 1,593 $ 1,584 $ 1,568 $ 1,617 $ 1,625 $ 1,605 1.3 Medicaid 1,226 1,326 1,330 1,377 1,269 1,388 4.7 Medicare Advantage 1,570 1,619 1,577 1,609 1,622 1,597 (1.4 ) Medicaid Managed 1,365 1,412 1,455 1,487 1,426 1,456 3.1 Commercial insurance and other 2,173 2,224 2,049 2,099 2,136 2,214 (0.4 ) Weighted average 1,643 1,667 1,625 1,670 1,675 1,684 1.0

Medicare case mix index (discharged patients only)

1.166 1.163 1.150 1.164 1.163 1.179 1.4 Average daily census 4,332 4,135 3,877 3,863 4,220 4,136 - Occupancy % 69.2 66.1 62.2 62.2 68.0 67.5 2.1 Same-hospital data: Revenues ($ 000s) (a) $ 634,975 $ 605,410 $ 562,658 $ 579,396 $ 643,413 $ 619,427 2.3 Admissions: Medicare 8,652 8,031 7,769 8,039 8,919 8,083 0.6 Medicaid 602 557 519 466 463 371 (33.4 ) Medicare Advantage 1,546 1,299 1,179 1,255 1,453 1,339 3.1 Medicaid Managed 640 640 619 590 733 761 18.9 Commercial insurance and other   1,840   1,746   1,713   1,653   1,871   1,751 0.3   13,280   12,273   11,799   12,003   13,439   12,305 0.3 Patient days: Medicare 225,992 212,221 205,802 207,010 229,004 214,629 1.1 Medicaid 28,458 22,999 21,502 20,001 21,134 18,340 (20.3 ) Medicare Advantage 48,276 42,863 37,863 39,656 45,760 46,522 8.5 Medicaid Managed 21,933 23,722 23,329 24,136 25,341 26,795 13.0 Commercial insurance and other   61,715   60,559   57,199   55,701   62,769   60,984 0.7   386,374   362,364   345,695   346,504   384,008   367,270 1.4 Total average length of stay 29.1 29.5 29.3 28.9 28.6 29.8 1.0 Total revenues per patient day $ 1,643 $ 1,671 $ 1,628 $ 1,672 $ 1,676 $ 1,687 1.0

_____________

(a) See reconciliation of same-hospital revenues to reported revenues for the Hospital Division on page 15.     KINDRED HEALTHCARE, INC. Condensed Business Segment Data (Continued) (Unaudited)                     Second quarter 2015 Quarters 2016 Quarters % change v. First Second Third Fourth First Second prior year

Kindred at Home (data combined to include Kindred and Gentiva for each historical period):

Home Health: Sites of service (at end of period) 415 411 388 373 384 384 Revenue mix %: Medicare 80.9 80.4 80.0 80.0 79.8 79.3 Medicaid 2.1 2.1 2.1 2.1 2.1 2.1 Commercial and other 7.3 7.9 8.2 8.5 8.4 8.2 Commercial paid at episodic rates 9.7 9.6 9.7 9.4 9.7 10.4 Episodic revenues ($ 000s) $ 308,317 $ 324,027 $ 319,820 $ 320,698 $ 325,821 $ 332,193 2.5 Total episodic admissions 69,936 67,808 66,753 66,157 71,426 70,212 3.5 Medicare episodic admissions 61,186 59,394 58,479 57,804 62,011 60,730 2.2 Total episodes 110,980 109,599 108,519 108,300 113,887 113,278 3.4 Episodes per admission 1.59 1.62 1.63 1.64 1.59 1.61 (0.6 ) Revenue per episode $ 2,778 $ 2,956 $ 2,947 $ 2,961 $ 2,861 $ 2,933 (0.8 ) Hospice: Sites of service (at end of period) 190 185 181 175 177 177 Admissions 13,164 12,574 12,091 12,129 13,234 13,149 4.6 Average length of stay 95 93 101 100 92 91 (2.2 ) Patient days 1,150,841 1,190,604 1,211,291 1,185,330 1,183,908 1,238,584 4.0 Revenue per patient day $ 151 $ 150 $ 150 $ 150 $ 149 $ 150 - Average daily census 12,787 13,084 13,166 12,884 13,010 13,611 4.0

Community Care and other revenues (included in Home Health business segment) ($ 000s)

$ 65,530 $ 67,647 $ 67,338 $ 67,684 $ 66,305 $ 68,229 0.9   Kindred Rehabilitation Services: Kindred Hospital Rehabilitation Services: Freestanding IRFs: End of period data: Number of IRFs 16 16 18 18 19 19 Number of licensed beds 829 829 919 919 969 969 Discharges (a) 3,806 3,927 3,941 4,317 4,448 4,646 18.3 Same-hospital discharges (a) 3,806 3,927 3,842 4,040 4,016 4,089 4.1 Occupancy % (a) 73.2 71.5 68.7 68.0 70.6 70.6 (1.3 ) Average length of stay (a) 13.7 13.1 13.2 12.7 13.2 12.9 (1.5 ) Revenue per discharge (a) $ 19,517 $ 19,325 $ 18,992 $ 18,640 $ 19,731 $ 19,318 - Contract services: Sites of service (at end of period): Inpatient rehabilitation units 100 99 101 100 104 105 LTAC hospitals 120 120 119 119 119 121 Sub-acute units 8 8 7 7 7 7 Outpatient units   138   139   135   130   139   138   366   366   362   356   369   371   Revenue per site $ 211,151 $ 209,436 $ 206,041 $ 210,978 $ 211,417 $ 215,798 3.0   RehabCare: Sites of service (at end of period) 1,829 1,789 1,821 1,798 1,767 1,759 Revenue per site $ 138,106 $ 132,359 $ 120,548 $ 114,896 $ 115,590 $ 111,470 (15.8 )   Nursing center division: End of period data: Number of nursing centers 90 90 90 90 92 92 Number of licensed beds 11,535 11,535 11,535 11,535 11,815 11,815 Admissions (b) 10,376 9,831 9,558 9,237 9,815 9,480 (3.6 ) Medicare average length of stay (b) 28.9 28.9 28.5 28.4 28.2 28.4 (1.7 ) Patient days (b) 861,278 852,691 851,332 845,924 846,578 842,681 (1.2 ) Revenues per patient day (b) $ 319 $ 321 $ 318 $ 323 $ 322 $ 323 0.6 Average daily census (b) 9,570 9,370 9,254 9,195 9,303 9,260 (1.2 ) Occupancy % (b) 81.3 79.6 78.6 78.1 77.3 76.7 (3.6 )   (a) Excludes non-consolidating IRF. (b) Excludes managed facilities.  

Forward-Looking Statements

This earnings 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. These forward-looking statements include, but are not limited to, all statements regarding the Company’s expected future financial position, results of operations, cash flows, dividends, financing plans, business strategy, budgets, capital expenditures, competitive positions, growth opportunities, plans and objectives of management, government investigations, regulatory matters, and statements containing the words such as “anticipate,” “approximate,” “believe,” “plan,” “estimate,” “expect,” “project,” “could,” “would,” “should,” “will,” “intend,” “may,” “potential,” “upside,” and other similar expressions. Statements in this earnings release concerning the Company’s business outlook or future economic performance, anticipated profitability, revenues, expenses, dividends or other financial items, product or services line growth, and expected outcome of government investigations and other regulatory matters, 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. 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, performance or plans to differ materially from any future results, performance or plans expressed or implied by such forward-looking statements. These statements involve risks, uncertainties and other factors detailed from time to time in the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K filed with the Securities and Exchange Commission.

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.

Non-GAAP Measurements

In addition to the results provided in accordance with GAAP, the Company has provided information in this earnings release to compute certain non-GAAP measures. The use of these non-GAAP measures are not intended to replace the presentation of the Company’s financial results in accordance with GAAP. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in the following pages of this earnings release.

EBITDAR: The Company defines EBITDAR as earnings before interest, income taxes, depreciation, amortization and rent, and believes that the presentation of EBITDAR is useful to the investors because creditors, securities analysts and investors use EBITDAR as a measure of earnings used to compare the performance of companies in the healthcare industry before consideration of the capital structure of fixed assets and financing costs, which can vary significantly among companies.

For each of the Company’s segments, EBITDAR is a measure of performance used by the Company’s chief operating decision makers in accordance with “Accounting Standard Codification 280—Segment Reporting.” In this context, the Company defines segment EBITDAR as earnings before interest, income taxes, depreciation, amortization and rent, excluding litigation contingency expense, impairment charges, transaction costs and the allocation of support center overhead.

Core Operating Results: The Company calculates core operating results, including core net income attributable to Kindred, core EBITDAR and core diluted EPS, by excluding charges related to transaction, integration, severance, retirement, retention, impairments, business interruption settlements, research and development, restructuring, debt amendment costs, gain on facility swap and litigation. The Company believes that the presentation of core operating results provides additional information to investors to facilitate the comparison between periods by excluding certain charges that are not representative of its ongoing operations due to the materiality and nature of the charges. The Company’s management uses core net income attributable to Kindred, core EBITDAR and core diluted EPS as meaningful measures of operational performance, and for the attainment of internal incentive compensation goals, in addition to other measures. The Company uses these measures to assess the relative performance and attainment of internal incentive compensation goals of its operating divisions, as well as the employees that operate these businesses. In addition, the Company believes these measures are important, because securities analysts and investors use these measures to compare the Company’s performance to other companies in the healthcare industry.

Non-GAAP Measurements (Continued)

Same-Hospital Revenues: The same-hospital revenues are calculated by excluding from the Company's Hospital Division revenues the results from five hospitals acquired in 2016, three hospitals sold in 2016 and two hospitals that closed during 2015. The Company believes the presentation of same-hospital revenues provides investors, equity analysts and others with useful information regarding the performance of the Company's hospital operations that are comparable for the periods presented.

For EBITDAR, core net income attributable to Kindred, and core EBITDAR, the Company believes that income (loss) from continuing operations is the most comparable GAAP measure. For core diluted EPS, the Company believes that GAAP diluted earnings (loss) per share from continuing operations is the most comparable GAAP measure. Readers of the Company’s financial information should consider income (loss) from continuing operations and diluted earnings (loss) per share from continuing operations as important measures of the Company’s financial performance, because they provide the most complete measures of its performance. For same-hospital revenues, the Company believes that reported hospital segment revenues is the most comparable GAAP measure. Readers of the Company’s financial information should consider reported hospital segment revenues as an important measure of the Company’s Hospital Division financial performance because it provides the most complete measure of its performance. Operating results presented on a core basis, as well as a same-hospital basis, 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.

Also in this earnings release, the Company provides the financial measures of operating cash flows and free cash flows excluding certain items, which the Company refers to as core operating cash flows and core free cash flows, respectively.

Core Operating Cash Flows: The Company defines core operating cash flows as operating cash flows excluding payments related to transaction, severance, retirement, retention, business interruption settlements, restructuring, debt refinancing costs, and fees and litigation, net of income tax benefits. The Company believes that core operating cash flows provide important information to investors for comparability to other companies that use similar measures. Management uses core operating cash flows to evaluate consolidated operating performance and in making decisions related to acquisitions, development capital expenditures, dividends, long-term debt repayments and other uses.

Core Free Cash Flows: The Company defines core free cash flows as operating cash flows excluding payments related to transaction, severance, retirement, retention, business interruption settlements, restructuring, debt refinancing costs, and fees and litigation, net of income tax benefits but including routine capital expenditures and distributions to noncontrolling interests. The Company believes that core free cash flows provide important information to investors for comparability to other companies that use similar measures. Management uses core free cash flows in making decisions related to acquisitions, development capital expenditures, dividends, long-term debt repayments and other uses.

The Company recognizes that core operating cash flows and core free cash flows are non-GAAP measures and are not intended to replace the presentation of the Company’s cash flows in accordance with GAAP. For core operating cash flows and core free cash flows, the Company believes net cash flows provided by operating activities is the most comparable GAAP measure. Readers of the Company’s financial information should consider net cash flows provided by operating activities as an important measure because it provides the most complete measure of cash provided by operating activities. Core operating cash flows and core free cash flows should be considered in addition to, not as a substitute for, or superior to, financial measures based upon GAAP as an indicator of the Company’s cash flows provided by operating activities.

  KINDRED HEALTHCARE, INC. Reconciliation of GAAP Results to Non-GAAP Measurements (Unaudited) (In thousands, except per share amounts and statistics)           In addition to the results provided in accordance with GAAP, the Company has provided information in this earnings release to compute certain non-GAAP measurements for the three months and six months ended June 30, 2016 and 2015 before certain charges or on a core basis. The charges that were excluded from core operating results are denoted in the tables below.   The income tax benefit associated with the excluded charges was calculated using an effective income tax rate of 19.9% and 9.9% for the three months ended June 30, 2016 and 2015, respectively, and 26.2% and 21.9% for the six months ended June 30, 2016 and 2015, respectively. The difference in the effective income tax rate for both periods compared to the same prior year periods is attributable to the composition of charges that are non-deductible for income tax purposes, including the impairment charges and litigation contingency expense.   Three months ended Six months ended June 30, June 30, 2016 2015 2016 2015 Reconciliation of income from continuing operations before charges:   As reported: Income (loss) from continuing operations attributable to Kindred $ 20,859 $ 21,975 $ 34,182 ($121,460 ) Diluted earnings (loss) per common share from continuing operations $ 0.23 $ 0.25 $ 0.38 ($1.47 ) Weighted average diluted shares outstanding 87,500 86,402 87,374 82,828   Detail of charges: Litigation contingency expense ($930 ) ($3,925 ) ($2,840 ) ($98,925 ) Retirement and severance costs (2,016 ) - (3,598 ) (4,961 ) Facility/branch closings/consolidations (2,784 ) (3,386 ) (3,125 ) (5,680 ) Impairment charges (6,131 ) - (13,919 ) - Business interruption settlements 171 - 1,309 - Research and development (3,076 ) - (3,939 ) - Gain on facility swap 1,103 - 1,103 - Debt amendment fees not capitalized (1,103 ) - (1,103 ) - Gentiva transaction and integration costs: Professional and consulting fees (1,319 ) (1,931 ) (2,367 ) (34,065 ) Severance and retention (355 ) (2,411 ) (910 ) (56,875 ) Lease termination (charged to rent expense) - (203 ) - (792 ) Pre-closing financing charges (charged to general and administrative expenses) - - - (6,005 ) Pre-closing financing charges (charged to interest expense) - - - (17,431 ) Trade name impairment charges - - - (6,726 ) Lease termination (charged to rent expense) (462 ) (671 ) (713 ) (1,023 ) Other transaction costs   (821 )   (874 )   (1,339 )   (2,973 ) (17,723 ) (13,401 ) (31,441 ) (235,456 ) Income tax benefit   3,535     1,325     8,245     51,527   Charges net of income taxes (14,188 ) (12,076 ) (23,196 ) (183,929 ) Noncontrolling interest adjustment related to impairment charges   1,016     -     1,016     -   (13,172 ) (12,076 ) (22,180 ) (183,929 ) Allocation to participating unvested restricted stockholders   313     211     428     -   Available to common stockholders   ($12,859 )   ($11,865 )   ($21,752 )   ($183,929 ) Diluted loss per common share related to charges ($0.15 ) ($0.14 ) ($0.25 ) ($2.22 ) Weighted average diluted shares outstanding 87,500 86,402 87,374 82,828   Core: Income from continuing operations before charges $ 34,031 $ 34,051 $ 56,362 $ 62,469 Diluted earnings per common share from continuing operations before charges (a) $ 0.38 $ 0.39 $ 0.63 $ 0.73

Weighted average diluted shares outstanding used to compute earnings per common share from continuing operations before charges

87,500 86,402 87,374 84,560   Reconciliation of effective income tax rate before charges: Effective income tax rate before charges 30.6 % 36.0 % 31.3 % 36.7 % Impact of charges on effective income tax rate   3.6 %   6.0 %   1.7 %   -33.5 % Reported effective income tax rate   34.2 %   42.0 %   33.0 %   3.2 %

____________

(a) For purposes of computing diluted earnings per common share before charges, income from continuing operations before charges was reduced by $0.8 million and $0.6 million for the three months ended June 30, 2016 and 2015, respectively, and by $1.1 million for both the six months ended June 30, 2016 and 2015, for the allocation of income to participating unvested restricted stockholders.     KINDRED HEALTHCARE, INC. Reconciliation of GAAP Results to Non-GAAP Measurements (Continued) (Unaudited) (In thousands)                 A reconciliation of combined Kindred and Gentiva home health revenues (excluding community care) for each historical period follows:   Second quarter 2015 Quarters 2016 Quarters % change v. First Second Third Fourth First Second prior year Kindred $ 254,965 $ 360,173 $ 356,716 $ 358,075 $ 363,730 $ 370,327 Gentiva   87,520     -     -     -     -   -   $ 342,485   $ 360,173   $ 356,716   $ 358,075   $ 363,730 $ 370,327   2.8         A reconciliation of reported revenues to same-hospital revenues for the Hospital Division for each historical period follows:   Second quarter 2015 Quarters 2016 Quarters % change v. First Second Third Fourth First Second prior year Reported revenues $ 640,483 $ 627,206 $ 579,497 $ 593,593 $ 643,299 $ 633,695 1.0 Hospitals acquired and sold during 2016 (a) - (16,608 ) (14,679 ) (14,695 ) - (14,346 ) Hospitals closed during 2015 (b)   (5,508 )   (5,188 )   (2,160 )   498     114   78   Same-hospital revenues $ 634,975   $ 605,410   $ 562,658   $ 579,396   $ 643,413 $ 619,427   2.3  

____________

(a)

Five hospitals acquired and three hospitals sold during the second quarter of 2016.

(b)

One hospital closed during the second quarter of 2015 and one hospital closed during the third quarter of 2015.

    KINDRED HEALTHCARE, INC. Reconciliation of GAAP Results to Non-GAAP Measurements (Continued) (Unaudited) (In thousands, except per share amounts)                                       Three months ended June 30, 2016 Charges Facility/ Gentiva Retirement branch Business transaction Before As and closings/ interruption Gain on Litigation Impairment Research and Debt and Other charges reported severance consolidations settlements facility swap contingency charges development amendment integration transaction Total ("core") Income from continuing operations: Segment EBITDAR: Hospital division $ 126,589 $ 446 $ - $ - $ (1,103 ) $ - $ - $ - $ - $ - $ - $ (657 ) $ 125,932   Kindred at Home: Home health 75,790 - 240 (171 ) - - - - - - - 69 75,859 Hospice   31,225     -   104   -     -     -     -     -   -   -   -   104     31,329     107,015     -   344   (171 )   -     -     -     -   -   -   -   173     107,188     Kindred Rehabilitation Services: Kindred Hospital Rehabilitation Services 50,469 - - - - - - - - - - - 50,469 RehabCare   13,269     -   -   -     -     -     -     -   -   -   -   -     13,269     63,738     -   -   -     -     -     -     -   -   -   -   -     63,738     Nursing center division 29,652 1,570 2,440 - - - - - - - - 4,010 33,662   Support center (66,804 ) - - - - - - 3,076 1,103 - - 4,179 (62,625 ) Litigation contingency expense (930 ) - - - - 930 - - - - - 930 - Impairment charges (6,131 ) - - - - - 6,131 - - - - 6,131 - Transaction costs   (2,495 )   -   -   -     -     -     -     -   -   1,674   821   2,495     -   EBITDAR 250,634 2,016 2,784 (171 ) (1,103 ) 930 6,131 3,076 1,103 1,674 821 17,261 267,895 Rent (100,555 ) - 462 - - - - - - - - 462 (100,093 ) Depreciation and amortization (40,257 ) - - - - - - - - - - - (40,257 ) Interest, net   (57,559 )   -   -   -     -     -     -     -   -   -   -   -     (57,559 )

Income from continuing operations before income taxes

52,263 2,016 3,246 (171 ) (1,103 ) 930 6,131 3,076 1,103 1,674 821 17,723 69,986 Provision for income taxes   17,882     1,448   2,331   (123 )   (8,010 )   (1,307 )   4,403     2,209   792   1,202   590   3,535     21,417   34,381 568 915 (48 ) 6,907 2,237 1,728 867 311 472 231 14,188 48,569 Noncontrolling interests   (13,522 )   -   -   -     -     -     (1,016 )   -   -   -   -   (1,016 )   (14,538 ) Income attributable to Kindred $ 20,859   $ 568 $ 915 $ (48 ) $ 6,907   $ 2,237   $ 712   $ 867 $ 311 $ 472 $ 231 $ 13,172   $ 34,031     Diluted earnings per common share $ 0.23 $ 0.38

Diluted shares used in computing earnings per common share

87,500 87,500   Three months ended June 30, 2015 Charges Gentiva Facility/ transaction Before As branch Litigation and Other charges reported closings contingency integration transaction Total ("core") Income from continuing operations: Segment EBITDAR: Hospital division $ 130,967 $ 565 $ - $ - $ - $ 565 $ 131,532   Kindred at Home: Home health 72,329 588 - - - 588 72,917 Hospice   26,238     1,649   -   -     -     1,649     27,887     98,567     2,237   -   -     -     2,237     100,804     Kindred Rehabilitation Services: Kindred Hospital Rehabilitation Services 44,531 - - - - - 44,531 RehabCare   14,681     -   -   -     -     -     14,681     59,212     -   -   -     -     -     59,212     Nursing center division 39,877 584 - - - 584 40,461   Support center (70,209 ) - - - - - (70,209 ) Litigation contingency expense (3,925 ) - 3,925 - - 3,925 - Transaction costs   (5,216 )   -   -   4,342     874     5,216     -   EBITDAR 249,273 3,386 3,925 4,342 874 12,527 261,800 Rent (96,402 ) 671 - 203 - 874 (95,528 ) Depreciation and amortization (38,625 ) - - - - - (38,625 ) Interest, net   (56,140 )   -   -   -     -     -     (56,140 )

Income from continuing operations before income taxes

58,106 4,057 3,925 4,545 874 13,401 71,507 Provision for income taxes   24,396     430   416   386     93     1,325     25,721   33,710 $ 3,627 $ 3,509 $ 4,159   $ 781   $ 12,076   45,786 Noncontrolling interests   (11,735 )   (11,735 ) Income attributable to Kindred $ 21,975   $ 34,051     Diluted earnings per common share $ 0.25 $ 0.39

Diluted shares used in computing earnings per common share

86,402 86,402     KINDRED HEALTHCARE, INC. Reconciliation of GAAP Results to Non-GAAP Measurements (Continued) (Unaudited) (In thousands, except per share amounts)                                     Six months ended June 30, 2016 Charges Facility/ Gentiva Retirement branch Business transaction Before As and closings/ interruption Gain on Litigation Impairment Research and Debt and Other charges reported severance consolidations settlements facility swap contingency charges development amendment integration transaction Total ("core") Income from continuing operations: Segment EBITDAR: Hospital division $ 261,160 $ 1,370 $ - $ - $ (1,103 ) $ - $ - $ - $ - $ - $ - $ 267 $ 261,427   Kindred at Home: Home health 142,731 - 240 (1,309 ) - - - - - - - (1,069 ) 141,662 Hospice   55,750     -   445   -     -     -   -     -   -   -     -   445     56,195     198,481     -   685   (1,309 )   -     -   -     -   -   -     -   (624 )   197,857     Kindred Rehabilitation Services: Kindred Hospital Rehabilitation Services 98,339 - - - - - - - - - - - 98,339 RehabCare   25,256     -   -   -     -     -   -     -   -   -     -   -     25,256     123,595     -   -   -     -     -   -     -   -   -     -   -     123,595     Nursing center division 59,752 1,570 2,440 - - - - - - - - 4,010 63,762   Support center (137,612 ) 658 - - - - - 3,939 1,103 - - 5,700 (131,912 ) Litigation contingency expense (2,840 ) - - - - 2,840 - - - - - 2,840 - Impairment charges (13,919 ) - - - - - 13,919 - - - - 13,919 - Transaction costs   (4,616 )   -   -   -     -     -   -     -   -   3,277     1,339   4,616     -   EBITDAR 484,001 3,598 3,125 (1,309 ) (1,103 ) 2,840 13,919 3,939 1,103 3,277 1,339 30,728 514,729 Rent (198,323 ) - 713 - - - - - - - - 713 (197,610 ) Depreciation and amortization (80,938 ) - - - - - - - - - - - (80,938 ) Interest, net   (114,804 )   -   -   -     -     -   -     -   -   -     -   -     (114,804 )

Income from continuing operations before income taxes

89,936 3,598 3,838 (1,309 ) (1,103 ) 2,840 13,919 3,939 1,103 3,277 1,339 31,441 121,377 Provision for income taxes   29,718     1,591     1,698     (579 )     (4,934 )     40     6,157       1,742     488     1,450       592     8,245     37,963   60,218 2,007 2,140 (730 ) 3,831 2,800 7,762 2,197 615 1,827 747 23,196 83,414 Noncontrolling interests   (26,036 )   -   -   -     -     -   (1,016 )   -   -   -     -   (1,016 )   (27,052 ) Income attributable to Kindred $ 34,182   $ 2,007 $ 2,140 $ (730 ) $ 3,831   $ 2,800 $ 6,746   $ 2,197 $ 615 $ 1,827   $ 747 $ 22,180   $ 56,362     Diluted earnings per common share $ 0.38 $ 0.63

Diluted shares used in computing earnings per common share

87,374 87,374   Six months ended June 30, 2015 Charges Gentiva Gentiva Retirement Facility/ pre-closing transaction Before As and branch Litigation Impairment financing and Other charges reported severance closings contingency charges costs integration transaction Total ("core") Income (loss) from continuing operations: Segment EBITDAR: Hospital division $ 265,078 $ - $ 1,240 $ - $ - $ - $ - $ - $ 1,240 $ 266,318   Kindred at Home: Home health 118,025 - 1,690 - - - - - 1,690 119,715 Hospice   42,717     -   2,166   -     -     -   -     -   2,166   44,883     160,742     -   3,856   -     -     -   -     -   3,856   164,598     Kindred Rehabilitation Services: Kindred Hospital Rehabilitation Services 89,095 - - - - - - - - 89,095 RehabCare   30,389     785   -   -     -     -   -     -   785   31,174     119,484     785   -   -     -     -   -     -   785   120,269     Nursing center division 76,840 - 584 - - - - - 584 77,424   Support center (136,774 ) 4,176 - - - - - - 4,176 (132,598 ) Litigation contingency expense (98,925 ) - - 98,925 - - - - 98,925 - Impairment charges (6,726 ) - - - 6,726 - - - 6,726 - Transaction costs   (99,918 )   -   -   -     -     6,005   90,940     2,973   99,918   -   EBITDAR 279,801 4,961 5,680 98,925 6,726 6,005 90,940 2,973 216,210 496,011 Rent (188,542 ) - 1,023 - - - 792 - 1,815 (186,727 ) Depreciation and amortization (77,560 ) - - - - - - - - (77,560 ) Interest, net   (117,917 )   -   -   -     -     17,431   -     -   17,431   (100,486 )

Income (loss) from continuing operations before income taxes

(104,218 ) 4,961 6,703 98,925 6,726 23,436 91,732 2,973 235,456 131,238 Provision (benefit) for income taxes   (3,340 )   1,977   2,672   1,564     2,681     9,341   32,107     1,185   51,527   48,187   (100,878 ) $ 2,984 $ 4,031 $ 97,361   $ 4,045   $ 14,095 $ 59,625   $ 1,788 $ 183,929 83,051 Noncontrolling interests   (20,582 )   (20,582 ) Income (loss) attributable to Kindred $ (121,460 ) $ 62,469     Diluted earnings (loss) per common share $ (1.47 ) $ 0.73

Diluted shares used in computing earnings (loss) per common share

82,828 84,560     KINDRED HEALTHCARE, INC. Reconciliation of GAAP Results to Non-GAAP Measurements (Continued) (Unaudited) (In thousands, except per share amounts)                                 Three months ended March 31, 2016 Charges Gentiva Retirement Facility/ Business transaction Before As and branch interruption Litigation Impairment Research and and Other charges reported severance closings settlements contingency charges development integration transaction Total ("core") Income from continuing operations: Segment EBITDAR: Hospital division $ 134,571 $ 924 $ - $ - $ - $ - $ - $ - $ - $ 924 $ 135,495   Kindred at Home: Home health 66,941 - - (1,138 ) - - - - - (1,138 ) 65,803 Hospice   24,525     -   341   -     -   -   -   -   -   341     24,866     91,466     -   341   (1,138 )   -   -   -   -   -   (797 )   90,669     Kindred Rehabilitation Services: Kindred Hospital Rehabilitation Services 47,870 - - - - - - - - - 47,870 RehabCare   11,987     -   -   -     -   -   -   -   -   -     11,987     59,857     -   -   -     -   -   -   -   -   -     59,857     Nursing center division 30,100 - - - - - - - - - 30,100   Support center (70,808 ) 658 - - - - 863 - - 1,521 (69,287 ) Litigation contingency expense (1,910 ) - - - 1,910 - - - - 1,910 - Impairment charges (7,788 ) - - - - 7,788 - - - 7,788 - Transaction costs   (2,121 )   -   -   -     -   -   -   1,603   518   2,121     -   EBITDAR 233,367 1,582 341 (1,138 ) 1,910 7,788 863 1,603 518 13,467 246,834 Rent (97,768 ) - 251 - - - - - - 251 (97,517 ) Depreciation and amortization (40,681 ) - - - - - - - - - (40,681 ) Interest, net   (57,245 )   -   -   -     -   -   -   -   -   -     (57,245 )

Income from continuing operations before income taxes

37,673 1,582 592 (1,138 ) 1,910 7,788 863 1,603 518 13,718 51,391 Provision for income taxes   11,836     543   203   (391 )   656   2,674   296   551   178   4,710     16,546   25,837 $ 1,039 $ 389 $ (747 ) $ 1,254 $ 5,114 $ 567 $ 1,052 $ 340 $ 9,008   34,845 Noncontrolling interests   (12,514 )   (12,514 ) Income attributable to Kindred $ 13,323   $ 22,331     Diluted earnings per common share $ 0.15 $ 0.25

Diluted shares used in computing earnings per common share

87,249 87,249   Three months ended March 31, 2015 Charges Gentiva Gentiva Retirement Facility/ pre-closing transaction Before As and branch Litigation Impairment financing and Other charges reported severance closings contingency charges costs integration transaction Total ("core") Income (loss) from continuing operations: Segment EBITDAR: Hospital division $ 134,111 $ - $ 675 $ - $ - $ - $ - $ - $ 675 $ 134,786   Kindred at Home: Home health 45,696 - 1,102 - - - - - 1,102 46,798 Hospice   16,479     -   517   -     -   -   -   -   517   16,996     62,175     -   1,619   -     -   -   -   -   1,619   63,794     Kindred Rehabilitation Services: Kindred Hospital Rehabilitation Services 44,564 - - - - - - - - 44,564 RehabCare   15,708     785   -   -     -   -   -   -   785   16,493     60,272     785   -   -     -   -   -   -   785   61,057     Nursing center division 36,963 - - - - - - - - 36,963   Support center (66,565 ) 4,176 - - - - - - 4,176 (62,389 ) Litigation contingency expense (95,000 ) - - 95,000 - - - - 95,000 - Impairment charges (6,726 ) - - - 6,726 - - - 6,726 - Transaction costs   (94,702 )   -   -   -     -   6,005   86,598   2,099   94,702   -   EBITDAR 30,528 4,961 2,294 95,000 6,726 6,005 86,598 2,099 203,683 234,211 Rent (92,140 ) - 352 - - - 589 - 941 (91,199 ) Depreciation and amortization (38,935 ) - - - - - - - - (38,935 ) Interest, net   (61,777 )   -   -   -     -   17,431   -   -   17,431   (44,346 )

Income (loss) from continuing operations before income taxes

(162,324 ) 4,961 2,646 95,000 6,726 23,436 87,187 2,099 222,055 59,731 Provision (benefit) for income taxes   (27,736 )   2,133   1,138   -     2,891   10,075   33,063   902   50,202   22,466   (134,588 ) $ 2,828 $ 1,508 $ 95,000   $ 3,835 $ 13,361 $ 54,124 $ 1,197 $ 171,853 37,265 Noncontrolling interests   (8,847 )   (8,847 ) Income (loss) attributable to Kindred $ (143,435 ) $ 28,418     Diluted earnings (loss) per common share $ (1.80 ) $ 0.34

Diluted shares used in computing earnings (loss) per common share

79,575 82,422     KINDRED HEALTHCARE, INC. Reconciliation of GAAP Results to Non-GAAP Measurements (Continued) (Unaudited) (In thousands, except per share amounts)                             Three months ended September 30, 2015 Charges Gentiva Retirement Facility/ transaction Before As and branch Litigation and Other charges reported severance closings contingency integration transaction Total ("core") Income (loss) from continuing operations: Segment EBITDAR: Hospital division $ 95,983 $ 666 $ 479 $ - $ - $ - $ 1,145 $ 97,128   Kindred at Home: Home health 65,584 - 2,571 - - - 2,571 68,155 Hospice   33,707     -   318   -   -     -   318   34,025     99,291     -   2,889   -   -     -   2,889   102,180     Kindred Rehabilitation Services: Kindred Hospital Rehabilitation Services 42,141 - - - - - - 42,141 RehabCare   14,544     -   -   -   -     -   -   14,544     56,685     -   -   -   -     -   -   56,685     Nursing center division 35,923 - - - - - - 35,923   Support center (55,439 ) - - - - - - (55,439 ) Litigation contingency expense (31,462 ) - - 31,462 - - 31,462 - Transaction costs   (3,846 )   -   -   -   3,069     777   3,846   -   EBITDAR 197,135 666 3,368 31,462 3,069 777 39,342 236,477 Rent (96,244 ) - 808 - - - 808 (95,436 ) Depreciation and amortization (39,329 ) - - - - - - (39,329 ) Interest, net   (56,008 )   -   -   -   -     -   -   (56,008 )

Income from continuing operations before income taxes

5,554 666 4,176 31,462 3,069 777 40,150 45,704 Provision for income taxes   12,523     196   1,225   429   697     228   2,775   15,298   (6,969 ) $ 470 $ 2,951 $ 31,033 $ 2,372   $ 549 $ 37,375 30,406 Noncontrolling interests   (9,900 )   (9,900 ) Income (loss) attributable to Kindred $ (16,869 ) $ 20,506     Diluted earnings (loss) per common share $ (0.20 ) $ 0.23

Diluted shares used in computing earnings (loss) per common share

86,184 86,892   Three months ended December 31, 2015 Charges RehabCare Gentiva Retirement Facility/ customer transaction Before As and branch contract Litigation Impairment and Other charges reported severance closings litigation contingency charges integration transaction Total ("core") Income from continuing operations: Segment EBITDAR: Hospital division $ 116,454 $ 1,221 $ - $ - $ - $ - $ - $ - $ 1,221 $ 117,675   Kindred at Home: Home health 67,032 - 1,794 - - - - - 1,794 68,826 Hospice   28,668     -   1,544   -   -     -   -   -     1,544     30,212     95,700     -   3,338   -   -     -   -   -     3,338     99,038     Kindred Rehabilitation Services: Kindred Hospital Rehabilitation Services 44,891 207 - - - - - - 207 45,098 RehabCare   (1,118 )   112   -   12,864   -     -   -   -     12,976     11,858     43,773     319   -   12,864   -     -   -   -     13,183     56,956     Nursing center division 36,601 - - - - - - - - 36,601   Support center (63,016 ) 585 - - - - - - 585 (62,431 ) Litigation contingency expense (8,261 ) - - - 8,261 - - 8,261 - Impairment charges (18,031 ) - - - - 18,031 - - 18,031 - Transaction costs   (5,367 )   -   -   -   -     -   4,189   1,178     5,367     -   EBITDAR 197,853 2,125 3,338 12,864 8,261 18,031 4,189 1,178 49,986 247,839 Rent (97,823 ) - 889 - - - - - 889 (96,934 ) Depreciation and amortization (40,362 ) - - - - - - - - (40,362 ) Interest, net   (55,664 )   -   -   -   -     -   -   -     -     (55,664 )

Income from continuing operations before income taxes

4,004 2,125 4,227 12,864 8,261 18,031 4,189 1,178 50,875 54,879 Provision (benefit) for income taxes   (51,980 )   836   1,663   5,062   50,329     6,205   1,487   156     65,738     13,758   55,984 $ 1,289 $ 2,564 $ 7,802 $ (42,068 ) $ 11,826 $ 2,702 $ 1,022   $ (14,863 ) 41,121 Noncontrolling interests   (12,082 )   (12,082 ) Income attributable to Kindred $ 43,902   $ 29,039     Diluted earnings per common share $ 0.50 $ 0.33

Diluted shares used in computing earnings per common share

87,232 87,232   KINDRED HEALTHCARE, INC. Reconciliation of GAAP Results to Non-GAAP Measurements (Continued) (Unaudited) (In thousands)                   Three months ended Six months ended June 30, June 30, 2016 2015 2016 2015   Reconciliation of net cash flows provided by operating activities to free cash flows: Net cash flows provided by (used in) operating activities $ 135,028 $ 100,379 $ 1,966 ($39,223 )

Adjustments to remove certain payments (including payments made for discontinued operations) included in net cash flows provided by (used in) operating activities:

Transaction, severance, retirement and retention 6,712 14,509 12,091 96,849 Business interruption settlements (171 ) - (1,309 ) - Ventas, Inc. lease termination fee 3,500 - 3,500 40,000 Capitalized lender fees related to debt refinancing 7,333 - 7,333 28,012 Other debt refinancing costs (expensed) 626 - 626 27,001 Other lease termination fees - - - 353 Litigation   2,030     16,575     130,449     16,575     20,030     31,084     152,690     208,790  

Net cash flows provided by operating activities excluding certain items before income tax benefit of certain payments

155,058 131,463 154,656 169,567 Benefit of reduced income tax payments resulting from certain payments   (28,626 )   (33,754 )   (28,626 )   (33,754 )

Net cash flows provided by operating activities excluding certain items (core operating cash flows)

126,432 97,709 126,030 135,813   Less routine capital expenditures (28,724 ) (24,500 ) (46,830 ) (45,269 ) Less distributions to noncontrolling interests   (14,231 )   (10,119 )   (30,546 )   (21,138 ) Free cash flows excluding certain items (core free cash flows) $ 83,477   $ 63,090   $ 48,654   $ 69,406  

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Kindred Healthcare, Inc.Todd Flowers, 502-596-6569Investor Relations