KND Kindred Healthcare, Inc. (delisted)

Announces Plan to Exit the Skilled Nursing Facility Business;Announces Associated $70 Million to $100 Million Cost Realignment Initiative(1)

Enterprise Strategy Focused on Stronger Cash Flow, Higher Margin, Lower Capital Intensity Businesses

Third Quarter Consolidated Revenues of $1.8 Billion, GAAP Loss from Continuing Operations of $671 Million, GAAP Diluted Loss Per Share from Continuing Operations of $7.89 and EBITDAR Loss of $134 Million(2)

Results Reflect After-Tax Costs of $690 Million Primarily Including Non-Cash Impairments of $266 Million(3), Non-Cash Deferred Tax Asset Valuation Allowance of $366 Million, and Hospital Divestiture Costs of $47 Million(3)(4)

Core EBITDAR of $220 Million(2) and Core Diluted EPS from Continuing Operations of $0.05(2) in the Third Quarter

Third Quarter GAAP Operating Cash Flows of $36 million; Core Operating Cash Flows of $30 Million(2)

Updates Full Year 2016 Outlook

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

Benjamin A. Breier, President and Chief Executive Officer of the Company, commented, “We are taking proactive strategic steps to position Kindred for long-term success against the backdrop of dynamic changes in the healthcare services industry. Our plan to exit the skilled nursing facility business, together with the significant cost realignment initiative we are undertaking in connection with the exit, are substantial steps forward in our continuing effort to transform Kindred’s strategy and growth profile to enhance shareholder value.”

Mr. Breier added, “Over the past few years we have dramatically transformed the composition of Kindred, and our drivers of profitability and growth. Following our exit of the skilled nursing facility business and the associated cost realignment initiative, Kindred’s earnings stream, cash flow generation and leverage profile will be substantially improved, including significant reductions of fixed costs such as rent and capital expenditures. Over time, when complete, we expect approximately half of Kindred’s earnings before interest and income taxes (“EBIT”) to come from Kindred at Home, the nation’s largest home health, hospice and community care provider, roughly one-quarter of Kindred’s EBIT to come from our Long-Term Acute Care (“LTAC”) Hospital Division, and the remaining approximately one-quarter of EBIT from Kindred’s Rehabilitation Services Division, which includes one of the fastest growing inpatient rehabilitation facilities (“IRF”) businesses in the country.”

Plan to Exit the Skilled Nursing Facility Business

Mr. Breier continued, “Our strategic decision to exit the skilled nursing facility business as an owner and operator is the final step in a process that began years ago when Kindred operated approximately 300 skilled nursing facilities. This decision will reduce annual rent obligations by approximately $90 million and annual capital expenditures by approximately $30 million. In addition, Kindred will optimize its overhead structure by eliminating approximately $70 million to $100 million(1) of divisional and corporate overhead above the facility level, much of which is associated with supporting our skilled nursing facilities.”

     

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(1) See Forward-Looking Statements beginning on page 14. (2) See reconciliation of generally accepted accounting principles (“GAAP”) results to non-GAAP results beginning on page 14. As used herein, “EBITDAR” means earnings before interest, income taxes, depreciation, amortization and rent. (3) The income tax benefit used to compute after-tax cost is before the deferred tax valuation allowance is applied. (4) In connection with the previously announced sale of twelve hospitals to a group of entities under the name “Curahealth”, which are affiliates of a private investment fund sponsored by Nautic Partners, LLC, on October 1, 2016 (the “Curahealth Disposal”), the Company recorded a lease termination fee of $51.8 million ($31.4 million net of income taxes) and loss on sale of $8.1 million ($4.9 million net of income taxes) in the third quarter of 2016. In addition, the Company closed three LTAC hospitals in the third quarter and incurred facility closing and other costs totaling $17.6 million ($10.7 million net of income taxes).  

LTAC Criteria

Mr. Breier continued, “In preparation for LTAC patient criteria, during recent months we completed the strategic sale, swap or closure of 20 LTAC hospitals, executing a critical component of our multi-faceted criteria mitigation strategy. These actions leave Kindred with a meaningfully reshaped portfolio of 82 LTAC hospitals, with strategically reduced unused bed capacity in many of the markets we serve.

“Effective September 1, 2016, all of our ongoing LTAC hospitals were being reimbursed under the new criteria model. For the month of September, approximately 86% of our ongoing Hospital Division revenue came from Medicare compliant patients, managed care and commercial patients, and patients from other payors such as Medicaid. The remaining 14% of revenue was from Medicare site-neutral patients. The unmitigated revenue impact of LTAC criteria for the ongoing hospital portfolio in September was approximately $8 million.

“After two years of preparation, and based on early feedback, we are confident in our ability to successfully navigate through this transition. We continue to expect that by the end of 2017, on a run rate basis, we will mitigate roughly half of the impact of this reimbursement change. We expect to have many more insights on these trends and our experience with criteria once we complete our first full quarter,” remarked Mr. Breier.

Continued Growth in other Business Lines

Mr. Breier continued, “We remain optimistic about the growth opportunities in our home health, hospice, community care and IRF businesses. During the quarter, we acquired a large home health, hospice and community care business in Arkansas and continued to work through integration activities in our Kindred at Home (“KAH”) Division. We are pleased with the strong volume and revenue growth in KAH as well as our Kindred Hospital Rehabilitation Services (“KHRS”) business and will continue our efforts to expand these businesses through organic growth, acquisitions and joint venture arrangements.

“We also continue to make great progress in developing our post-acute benefits management capabilities. Our future will be driven by our ability to not only care for patients, but to manage populations through a unique bundle of technology-enabled care management capabilities. We believe these combined actions are setting the foundation for a stronger Kindred as we drive effective patient-centered care solutions and proactively address the changing healthcare marketplace,” remarked Mr. Breier.

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.

Third Quarter Consolidated Results(1):

• Consolidated revenues were $1.8 billion, a 1.6% year-over-year increase, while the GAAP loss from continuing operations was $671.3 million compared to a loss of $7.0 million in the same period in 2015. The increase in the GAAP loss from continuing operations was primarily attributable to non-cash goodwill and property impairment charges totaling $324.3 million ($266.1 million(2) net of income taxes), a non-cash deferred tax valuation allowance of $366.5 million and restructuring charges related to the sale or closure of 15 LTAC hospitals of $77.5 million ($47.0 million(2) net of income taxes). Core EBITDAR declined 6.9% to $220.1 million compared to $236.5 million in the same period in 2015, primarily due to declines in average daily census in both the Nursing Center and RehabCare business segments, lower Medicare revenue rates under LTAC patient criteria, and Hospital Division closing costs and labor pressures.
• GAAP operating cash flows were $36.0 million compared to $132.3 million for the same period a year ago. Core operating cash flows were $30.3 million compared to $128.4 million for the same period a year ago. Core free cash flows were $3.7 million compared to $82.3 million in the same period a year ago. The decline in both GAAP and core operating and free cash flows in the third quarter of 2016 was primarily attributable to certain timing differences and other items increasing cash required to fund working capital, much of which is expected to be transitional in nature and recouped over the balance of 2016 and into early 2017. Both GAAP and core operating and free cash flow were also impacted in the third quarter by lower earnings.

     

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(1) See reconciliation of GAAP results to non-GAAP results beginning on page 14. (2) The income tax benefit used to compute after-tax cost is before the deferred tax valuation allowance is applied.  

Third Quarter Consolidated Results(1)(Continued):

• GAAP diluted loss per share from continuing operations was $7.89 as compared to $0.20 a year ago. The increase in GAAP diluted loss per share from continuing operations was primarily attributable to an increase in certain charges in the third quarter of 2016. GAAP diluted loss per share in the third quarter of 2016 includes after-tax costs of $689.9 million or $7.94 per diluted share of charges related to impairments, deferred tax asset valuation allowance, restructuring, transaction, integration, and research and development costs. GAAP diluted loss per share in the third quarter of 2015 includes $40.2 million ($37.4 million net of income taxes) or $0.43 per diluted share of charges related to restructuring, transaction, integration and litigation costs. Core diluted earnings per share (“EPS”) from continuing operations was $0.05 as compared to $0.23 a year ago. The decline in core diluted EPS was attributable to the same factors discussed above that contributed to a decline in core EBITDAR, plus a 3% increase in aggregate rent, depreciation and amortization, and net interest expense.
• The Company recorded a $261.1 million non-cash goodwill impairment charge in the third quarter to reflect an adjustment to the carrying value of its Hospital Division reporting unit. The Company also recorded a $24.9 million non-cash property and equipment impairment charge primarily related to the Nursing Center Division.
• The Company recorded a $366.5 million non-cash deferred tax valuation allowance in the third quarter based upon current expectations of GAAP and taxable losses in 2016 combined with cumulative years of historical GAAP and taxable losses incurred primarily from restructuring and transactional activities, refinancing fees and litigation settlements. This non-cash charge is included in the third quarter income tax provision and will have no impact on the Company’s ability to utilize its net operating loss (“NOL”) carryforwards on a cash basis as Kindred earns taxable income in future periods.

Third Quarter Segment Results(1)(2):

KAH, which comprises our home health, hospice, community care and home-based primary care businesses, recorded third quarter revenues that increased 5.5% over the prior year period to $638.5 million with home health episodic admissions growing 3.7% and hospice average daily census growing 5.4% compared to the same period last year. Segment EBITDAR (GAAP) increased 4.6% to $106.4 million as compared to $101.7 million and core EBITDAR increased 4.1% to $106.4 million compared to $102.2 million, both compared to the prior year period. On a same-store basis, home health episodes grew 6.9% and hospice admissions grew 8.3% over the prior year period.

Kindred’s Hospital Division third quarter revenues declined 0.7% from the prior year period to $575.3 million due to its full entrance into LTAC patient criteria, and the closure of three LTAC hospitals within the period. These declines were offset partially by a 1% increase in same-hospital admissions and a 3.3% increase in same-hospital commercial revenue rates. Segment EBITDAR (GAAP) in the Hospital Division for the third quarter declined 13.9% to $82.8 million from $96.1 million a year ago, and core EBITDAR for the third quarter declined 14.8% to $82.8 million from $97.1 million a year ago, both due primarily to LTAC patient criteria and increases in labor costs. These results also reflect an unbudgeted EBITDAR decline compared to expectations in the third quarter of 2016 of $3.2 million related to the operations of LTAC hospitals acquired in a facility swap transaction in the second quarter of 2016, and $3.9 million related to the operations of three LTAC hospitals closed in the third quarter of 2016.

Kindred Rehabilitation Services (“KRS”) Division, which comprises our hospital-based rehabilitation segment, recorded third quarter revenues that declined 2.0% from the prior year period to $361.5 million. Segment EBITDAR (GAAP) for KRS increased 3.6% to $58.7 million as compared to $56.7 million in the prior year period and core EBITDAR increased 4.9% to $59.5 million compared to $56.7 million a year ago. Strong performance in the third quarter from KHRS IRFs was offset by the continuing impact of previously reported contract losses in RehabCare, which occurred primarily in 2015. The KHRS segment achieved strong revenue growth of 13.1%, and segment EBITDAR (GAAP) and core EBITDAR grew 17.4% and 19.2%, respectively, compared to the same period a year ago, with IRF same-hospital discharges growing 5.9% during the quarter. RehabCare revenues declined 12.3% to $192.5 million. RehabCare third quarter segment EBITDAR (GAAP) and core EBITDAR both declined 36.4% to $9.3 million from $14.5 million a year ago.

     

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(1) See reconciliation of GAAP results to non-GAAP results beginning on page 14. (2) See same-hospital and full segment data on pages 9 through 13.  

Third Quarter Segment Results(1)(2)(Continued):

Kindred’s Nursing Center Division third quarter revenues declined 0.1% to $270.3 million compared to the same period last year. Segment EBITDAR (GAAP) and core EBITDAR both declined 16.7% to $29.9 million compared to $35.9 million a year ago, as a result of a 0.7% decline in average daily census, patient mix deterioration and higher labor costs.

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 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, research and development, any further acquisitions or divestitures, any impairment charges, deferred tax asset valuation allowance, any further issuances of common stock or any repurchases of common stock.

Kindred today updated its outlook for 2016. Kindred expects:

• Annual revenues of approximately $7.2 billion (previously $7.2 billion to $7.3 billion).
• Core EBITDAR of $950 million to $970 million (previously $970 million to $1.010 billion). Please note that approximately $10 million of this adjustment was due to items previously excluded from guidance.(3)
• Core diluted EPS from continuing operations of $0.70 to $0.80 per share (previously $0.80 to $1.00 per share). Please note that approximately $0.03 per share of this adjustment was due to items previously excluded from guidance.(3)(4)

Mr. Breier concluded, “While our results for the third quarter were within our guidance range, we are reducing our financial outlook for the balance of 2016. Our change in expectations is primarily impacted by significant headwinds facing the skilled nursing facility business and labor cost challenges impacting both the Company and the healthcare industry in general. Our exposure to the challenges facing the nursing center industry is expected to amount to between $40 million to $50 million of EBITDAR compared to our operating plan for the year upon which our guidance was based. Our decision to reduce guidance for the balance of 2016, exit the skilled nursing facility business and substantially reduce our overhead is directly related to these challenges.”

The Company will update its outlook for 2017 with its fourth quarter earnings release in February 2017, which will reflect the planned exit from the skilled nursing facility business and associated cost realignment initiative.

Stephen D. Farber, Executive Vice President and Chief Financial Officer of Kindred, noted, “We expect our full exit from the skilled nursing facility business, upon completion, to be positive for future cash flows. In the near term, we have previously discussed our expectation that Kindred will generate roughly $300 million per year in core operating cash flows and approximately half of that amount in core free cash flows. With our revised earnings outlook for 2016, we would expect a relatively proportionate adjustment to cash flows. We also expect a number of timing-related working capital items to modestly impact Kindred’s cash flows over the balance of the year and into early 2017.”

     

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(1) See reconciliation of GAAP results to non-GAAP results beginning on page 14. (2) See same-hospital and full segment data on pages 9 through 13. (3) Contributing to the reduction of 2016 outlook are two events (a) the Curahealth Disposal and reduced hospital earnings, compared to the budget upon which previous guidance was based, and (b) reimbursement rate reductions announced by the Center for Medicare and Medicaid Services on August 2, 2016. Each of these required a $5 million reduction in core EBITDAR guidance and the latter required a $0.03 reduction in core diluted EPS guidance. (4) The EPS estimate is based upon an estimated weighted average annual diluted share count for 2016 of 87.5 million shares.  

2016 Outlook (Continued)

Mr. Farber continued, “Every quarter we experience routine working capital and initiative-related timing differences with cash flows that should be expected as a matter of course by those that follow and model the Company. In the third quarter these items accounted for much of the difference in year-over-year cash flow performance. For example, during the third quarter licensure transfers related to recent acquisitions had a $16 million temporary negative impact. These transfers are now complete and we expect to process the billing backlog before the end of the year. There are also frequent calendar-driven timing issues, such as an extra payroll cycle in the third quarter compared to prior year, which had a negative $30 million impact on cash flows this period, and one less Medicare payment cycle during the third quarter compared to the prior year, which had a negative impact on reported LTAC collections of approximately $35 million. Additionally, during the quarter two of our payors, one large commercial payor and one state Medicaid payor, both had systems problems that slowed down payment processing and increased accounts receivable in the third quarter by approximately $13 million.”

Mr. Farber concluded, “Cash flow remains a core focus for Kindred, and the non-cash deferred tax asset valuation allowance charge this quarter will have no impact on our ability to utilize our NOLs going forward as Kindred earns taxable income. Finally, we ended the quarter with excellent liquidity, with approximately $160 million drawn on our $900 million asset-based revolving credit facility.”

The Kindred Board of Directors declared a cash dividend of $0.12 per share on the Company’s common stock payable on December 9, 2016 to shareholders of record as of the close of business on November 21, 2016.

Conference Call

As previously announced, investors and the general public may access a live webcast of the third quarter 2016 conference call through a link on the Company’s website at http://investors.kindredhealthcare.com. The conference call will be held on November 8 at 9:00 a.m. (Eastern Time).

A telephone replay of the conference call will become available at approximately 12:00 p.m. on November 8 by dialing (719) 457-0820, access code: 6877746. The replay will be available through November 18.

Forward-Looking Statements and Non-GAAP Reconciliations

See page 14 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). As of October 1, 2016, Kindred through its subsidiaries had approximately 102,200 employees providing healthcare services in 2,702 locations in 46 states, including 82 LTAC hospitals, 19 inpatient rehabilitation hospitals, 91 nursing centers, 19 sub-acute units, 647 Kindred at Home home health, hospice and non-medical home care sites of service, 104 inpatient rehabilitation units (hospital-based) and contract rehabilitation service businesses which served 1,740 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 September 30, 2016.                   KINDRED HEALTHCARE, INC. Condensed Consolidated Statement of Operations (Unaudited) (In thousands, except per share amounts)   Three months ended Nine months ended September 30, September 30, 2016 2015 2016 2015   Revenues $ 1,793,527   $ 1,764,516   $ 5,473,568   $ 5,273,958     Salaries, wages and benefits 957,644 922,140 2,812,812 2,704,920 Supplies 95,500 96,551 294,326 288,059 Rent 98,415 95,436 296,025 282,955 Other operating expenses 217,364 207,837 649,915 617,681 General and administrative expenses 310,407 307,500 998,559 1,043,986 Other income (446 ) (650 ) (1,909 ) (1,699 ) Litigation contingency expense - 31,462 2,840 130,387 Impairment charges 324,289 - 338,208 6,726 Restructuring charges 81,463 3,349 88,223 8,793 Depreciation and amortization 40,382 39,329 121,320 116,889 Interest expense 59,862 56,440 175,417 176,128 Investment income   (1,810 )   (432 )   (2,561 )   (2,203 )   2,183,070     1,758,962     5,773,175     5,372,622   Income (loss) from continuing operations before income taxes (389,543 ) 5,554 (299,607 ) (98,664 ) Provision for income taxes   281,752     12,523     311,470     9,183   Loss from continuing operations (671,295 ) (6,969 ) (611,077 ) (107,847 ) Discontinued operations, net of income taxes: Income (loss) from operations (12 ) 2,269 2,422 (1,744 ) Gain on divestiture of operations   -     -     179     983   Income (loss) from discontinued operations   (12 )   2,269     2,601     (761 ) Net loss (671,307 ) (4,700 ) (608,476 ) (108,608 ) (Earnings) loss attributable to noncontrolling interests: Continuing operations (14,305 ) (9,900 ) (40,341 ) (30,482 ) Discontinued operations   (1 )   1     (6 )   32     (14,306 )   (9,899 )   (40,347 )   (30,450 ) Loss attributable to Kindred $ (685,613 ) $ (14,599 ) $ (648,823 ) $ (139,058 )   Amounts attributable to Kindred stockholders: Loss from continuing operations $ (685,600 ) $ (16,869 ) $ (651,418 ) $ (138,329 ) Income (loss) from discontinued operations   (13 )   2,270     2,595     (729 ) Net loss $ (685,613 ) $ (14,599 ) $ (648,823 ) $ (139,058 )   Loss per common share: Basic: Loss from continuing operations $ (7.89 ) $ (0.20 ) $ (7.51 ) $ (1.65 ) Discontinued operations: Income (loss) from operations - 0.03 0.03 (0.02 ) Gain on divestiture of operations   -     -     -     0.01   Income (loss) from discontinued operations   -     0.03     0.03     (0.01 ) Net loss $ (7.89 ) $ (0.17 ) $ (7.48 ) $ (1.66 )   Diluted: Loss from continuing operations $ (7.89 ) $ (0.20 ) $ (7.51 ) $ (1.65 ) Discontinued operations: Income (loss) from operations - 0.03 0.03 (0.02 ) Gain on divestiture of operations   -     -     -     0.01   Income (loss) from discontinued operations   -     0.03     0.03     (0.01 ) Net loss $ (7.89 ) $ (0.17 ) $ (7.48 ) $ (1.66 )   Shares used in computing loss per common share: Basic 86,869 86,184 86,766 83,960 Diluted 86,869 86,184 86,766 83,960   Cash dividends declared and paid per common share $ 0.12 $ 0.12 $ 0.36 $ 0.36     KINDRED HEALTHCARE, INC. Condensed Consolidated Balance Sheet (Unaudited) (In thousands, except per share amounts)         September 30, December 31, 2016 2015 ASSETS Current assets: Cash and cash equivalents $ 139,430 $ 98,758 Insurance subsidiary investments 105,346 106,638 Accounts receivable less allowance for loss 1,266,545 1,194,868 Inventories 25,262 27,791 Income taxes 12,416 11,790 Other   94,876     61,054   1,643,875 1,500,899   Property and equipment 2,070,421 2,162,398 Accumulated depreciation   (1,192,870 )   (1,190,402 ) 877,551 971,996   Goodwill 2,422,473 2,669,810 Intangible assets less accumulated amortization 804,602 755,655 Insurance subsidiary investments 195,517 204,498 Deferred tax assets - 104,130 Acquisition deposit - 18,489 Other   283,322     242,782   Total assets $ 6,227,340   $ 6,468,259   LIABILITIES AND EQUITY Current liabilities: Accounts payable $ 203,426 $ 187,061 Salaries, wages and other compensation 390,743 404,925 Due to third party payors 57,945 36,251 Professional liability risks 61,036 64,099 Other accrued liabilities 280,305 394,246 Long-term debt due within one year   27,889     24,630   1,021,344 1,111,212   Long-term debt 3,316,174 3,086,348 Professional liability risks 283,048 263,273 Deferred tax liabilities 200,334 - Deferred credits and other liabilities 354,246 301,379   Equity: Stockholders' equity:

Common stock, $0.25 par value; authorized 175,000 shares; issued 85,187 shares - September 30, 2016 and 83,792 shares - December 31, 2015

21,297 20,948 Capital in excess of par value 1,717,165 1,737,747 Accumulated other comprehensive loss (4,334 ) (2,632 ) Accumulated deficit   (905,137 )   (256,209 ) 828,991 1,499,854 Noncontrolling interests   223,203     206,193   Total equity   1,052,194     1,706,047   Total liabilities and equity $ 6,227,340   $ 6,468,259                     KINDRED HEALTHCARE, INC. Condensed Consolidated Statement of Cash Flows (Unaudited) (In thousands)   Three months ended Nine months ended September 30, September 30, 2016 2015 2016 2015 Cash flows from operating activities: Net loss $ (671,307 ) $ (4,700 ) $ (608,476 ) $ (108,608 )

Adjustments to reconcile net loss to net cash provided by operating activities:

Depreciation expense 34,914 31,867 103,306 95,325 Amortization of intangible assets 5,468 7,728 18,251 22,196 Amortization of stock-based compensation costs 3,015 3,194 13,058 15,764 Amortization of deferred financing costs 3,987 3,554 11,262 10,155 Payment of capitalized lender fees related to debt issuance (42 ) - (7,375 ) (28,012 ) Provision for doubtful accounts 10,009 11,014 30,955 29,817 Deferred income taxes (84,173 ) 3,556 (54,875 ) (894 ) Impairment charges 324,289 - 338,208 6,726 Gain on divestiture of discontinued operations - - (179 ) (983 ) Other 6,303 3,485 7,262 10,457 Change in operating assets and liabilities: Accounts receivable (42,832 ) 25,990 (143,953 ) (13,399 ) Inventories and other assets 11,871 8,767 (3,522 ) 44,181 Accounts payable 11,995 (353 ) 24,451 (12,788 ) Income taxes 364,925 37,491 365,705 33,646 Due to third party payors 24,809 15,008 20,317 (3,965 ) Other accrued liabilities   32,851     (14,311 )   (76,347 )   (6,551 ) Net cash provided by operating activities   36,082     132,290     38,048     93,067     Cash flows from investing activities: Routine capital expenditures (21,873 ) (35,422 ) (68,703 ) (80,691 ) Development capital expenditures (8,386 ) (5,760 ) (27,112 ) (12,066 ) Acquisitions, net of cash acquired (49,329 ) (2,002 ) (77,040 ) (663,757 ) Acquisition deposits - - 18,489 195,000 Sale of assets 3,739 3,884 4,962 7,061 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 (22,427 ) (16,357 ) (75,422 ) (59,186 ) Sale of insurance subsidiary investments 31,875 15,987 78,478 50,780 Net change in insurance subsidiary cash and cash equivalents (14,680 ) (2,633 ) 8,479 (8,396 ) Proceeds from note receivable - 25,000 - 25,000 Net change in other investments 51 176 (33,347 ) 375 Other   (150 )   1,383     (1,277 )   590   Net cash provided by (used in) investing activities   (81,180 )   (15,744 )   (172,493 )   828,148     Cash flows from financing activities: Proceeds from borrowings under revolving credit 489,200 259,700 1,267,200 1,414,850 Repayment of borrowings under revolving credit (388,100 ) (349,700 ) (1,215,800 ) (1,319,850 ) Proceeds from issuance of term loan, net of discount - - 198,100 199,000 Proceeds from other long-term debt - - 750 - Repayment of Gentiva debt - - - (1,177,363 ) Repayment of term loan (3,508 ) (3,003 ) (10,019 ) (9,008 ) Repayment of other long-term debt (276 ) (500 ) (826 ) (1,400 ) Payment of deferred financing costs (50 ) (301 ) (342 ) (3,284 ) Issuance of common stock in connection with employee benefit plans - 329 - 534

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

- - - (915 ) Payment of dividend for mandatory redeemable preferred stock (2,904 ) (2,703 ) (8,558 ) (8,135 ) Dividends paid (10,224 ) (10,065 ) (30,517 ) (30,067 ) Contributions made by noncontrolling interests 4,993 1,492 11,261 1,492 Distributions to noncontrolling interests (4,694 ) (10,685 ) (35,240 ) (31,823 ) Purchase of noncontrolling interests - - (1,000 ) - Other   35     245     108     1,457   Net cash provided by (used in) financing activities   84,472     (115,191 )   175,117     (964,512 ) Change in cash and cash equivalents 39,374 1,355 40,672 (43,297 ) Cash and cash equivalents at beginning of period   100,056     119,536     98,758     164,188   Cash and cash equivalents at end of period $ 139,430   $ 120,891   $ 139,430   $ 120,891       KINDRED HEALTHCARE, INC. Condensed Consolidated and Business Segment Data (Unaudited) (In thousands, except per share amounts)                                 Third quarter 2015 Quarters 2016 Quarters % change v. First Second Third Fourth First Second Third 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 $ 1,793,527 1.6 Operating expenses 1,645,791 1,584,873 1,568,189 1,583,985 1,604,855 1,591,898 1,986,221 26.7 Rent 91,788 95,731 95,436 96,934 97,517 100,093 98,415 3.1 Depreciation and amortization 38,935 38,625 39,329 40,362 40,681 40,257 40,382 2.7 Interest, net   61,777     56,140     56,008     55,664     57,245     57,559     58,052   3.6

Income (loss) from continuing operations before income taxes

(162,324 ) 58,106 5,554 4,004 37,673 52,263 (389,543 ) NM Provision (benefit) for income taxes   (27,736 )   24,396     12,523     (51,980 )   11,836     17,882     281,752   NM Income (loss) from continuing operations (134,588 ) 33,710 (6,969 ) 55,984 25,837 34,381 (671,295 ) NM Noncontrolling interests   (8,847 )   (11,735 )   (9,900 )   (12,082 )   (12,514 )   (13,522 )   (14,305 ) 44.5 Net income (loss) attributable to Kindred $ (143,435 ) $ 21,975   $ (16,869 ) $ 43,902   $ 13,323   $ 20,859   $ (685,600 ) NM   Diluted EPS $ (1.80 ) $ 0.25 $ (0.20 ) $ 0.50 $ 0.15 $ 0.23 $ (7.89 ) NM Diluted shares 79,575 86,402 86,184 87,232 87,249 87,500 86,869 0.8   Core presentation (a): EBITDAR $ 234,211 $ 261,800 $ 236,477 $ 247,839 $ 246,834 $ 267,895 $ 220,075 (6.9 ) Rent 91,199 95,528 95,436 96,934 97,517 100,093 98,069 2.8 Interest, net 44,346 56,140 56,008 55,664 57,245 57,559 58,052 3.6 Provision for income taxes 22,466 25,721 15,298 13,758 16,546 21,417 4,639 (69.7 ) Net income attributable to Kindred 28,418 34,051 20,506 29,039 22,331 34,031 4,340 (78.8 )   Core diluted EPS $ 0.34 $ 0.39 $ 0.23 $ 0.33 $ 0.25 $ 0.38 $ 0.05 (78.3 ) Diluted shares 82,422 86,402 86,892 87,232 87,249 87,500 87,529 0.7   Revenues by segment: Hospital division $ 640,483 $ 627,206 $ 579,497 $ 593,593 $ 643,299 $ 633,695 $ 575,323 (0.7 ) Kindred at Home: Home health 300,867 427,820 424,054 425,759 430,035 438,556 449,958 6.1 Hospice   119,057     178,005     181,140     178,325     176,426     185,641     188,575   4.1 419,924 605,825 605,194 604,084 606,461 624,197 638,533 5.5 Kindred Rehabilitation Services: Kindred Hospital Rehabilitation Services 151,564 152,544 149,435 155,579 165,774 169,815 169,018 13.1 RehabCare   252,595     236,791     219,518     206,582     204,248     196,075     192,480   (12.3 ) 404,159 389,335 368,953 362,161 370,022 365,890 361,498 (2.0 ) Nursing center division   274,308     273,870     270,510     273,387     272,227     272,395     270,259   (0.1 ) 1,738,874 1,896,236 1,824,154 1,833,225 1,892,009 1,896,177 1,845,613 1.2 Eliminations   (62,907 )   (62,761 )   (59,638 )   (52,276 )   (54,038 )   (54,107 )   (52,086 ) (12.7 ) $ 1,675,967   $ 1,833,475   $ 1,764,516   $ 1,780,949   $ 1,837,971   $ 1,842,070   $ 1,793,527   1.6

__________

NM = not meaningful

(a) See reconciliation of GAAP results to non-GAAP results beginning on page 14.

    KINDRED HEALTHCARE, INC. Condensed Consolidated and Business Segment Data (Continued) (Unaudited) (In thousands, except statistics)                                 Third quarter 2015 Quarters 2016 Quarters % change v. First Second Third Fourth First Second Third prior year Segment EBITDAR (GAAP) (a): Hospital division $ 134,111 $ 131,532 $ 96,108 $ 116,454 $ 135,495 $ 125,932 $ 82,752 (13.9 ) Kindred at Home: Home health 46,798 72,917 67,682 68,776 66,941 76,030 75,073 10.9 Hospice   16,996     27,887     34,025     30,212     24,866     31,329     31,326   (7.9 ) 63,794 100,804 101,707 98,988 91,807 107,359 106,399 4.6 Kindred Rehabilitation Services: Kindred Hospital Rehabilitation Services 44,564 44,531 42,141 44,891 47,870 50,469 49,470 17.4 RehabCare   15,708     14,681     14,544     (1,118 )   11,987     13,269     9,248   (36.4 ) 60,272 59,212 56,685 43,773 59,857 63,738 58,718 3.6 Nursing center division 36,963 39,877 35,923 36,601 30,100 33,662 29,922 (16.7 )     Core EBITDAR by segment (b): Hospital division $ 134,786 $ 131,532 $ 97,128 $ 117,675 $ 135,495 $ 125,932 $ 82,752 (14.8 ) Kindred at Home: Home health 46,798 72,917 68,155 68,826 65,803 75,859 75,073 10.2 Hospice   16,996     27,887     34,025     30,212     24,866     31,329     31,326   (7.9 ) 63,794 100,804 102,180 99,038 90,669 107,188 106,399 4.1 Kindred Rehabilitation Services: Kindred Hospital Rehabilitation Services 44,564 44,531 42,141 45,098 47,870 50,469 50,217 19.2 RehabCare   16,493     14,681     14,544     11,858     11,987     13,269     9,248   (36.4 ) 61,057 59,212 56,685 56,956 59,857 63,738 59,465 4.9 Nursing center division 36,963 40,461 35,923 36,601 30,100 33,662 29,922 (16.7 ) Support center   (62,389 )   (70,209 )   (55,439 ) (c)   (62,431 )   (69,287 )   (62,625 )   (58,463 ) (c) 5.5 $ 234,211   $ 261,800   $ 236,477   $ 247,839   $ 246,834   $ 267,895   $ 220,075   (6.9 )   EBITDAR margin by segment: Hospital division 20.9 21.0 16.6 19.6 21.1 19.9 14.4 (2.2 ) Kindred at Home: Home health 15.6 17.0 16.0 16.2 15.6 17.3 16.7 0.7 Hospice 14.3 15.7 18.8 16.9 14.1 16.9 16.6 (2.2 ) Kindred at Home 15.2 16.6 16.8 16.4 15.1 17.2 16.7 (0.1 ) Kindred Rehabilitation Services: Kindred Hospital Rehabilitation Services 29.4 29.2 28.2 28.9 28.9 29.7 29.3 1.1 RehabCare 6.2 6.2 6.6 (0.5 ) 5.9 6.8 4.8 (1.8 ) Kindred Rehabilitation Services 14.9 15.2 15.4 12.1 16.2 17.4 16.2 0.8 Nursing center division 13.5 14.6 13.3 13.4 11.1 12.4 11.1 (2.2 )   Core EBITDAR margin by segment: Hospital division 21.0 21.0 16.8 19.8 21.1 19.9 14.4 (2.4 ) Kindred at Home: Home health 15.6 17.0 16.1 16.2 15.3 17.3 16.7 0.6 Hospice 14.3 15.7 18.8 16.9 14.1 16.9 16.6 (2.2 ) Kindred at Home 15.2 16.6 16.9 16.4 15.0 17.2 16.7 (0.2 ) Kindred Rehabilitation Services: Kindred Hospital Rehabilitation Services 29.4 29.2 28.2 29.0 28.9 29.7 29.7 1.5 RehabCare 6.5 6.2 6.6 5.7 5.9 6.8 4.8 (1.8 ) Kindred Rehabilitation Services 15.1 15.2 15.4 15.7 16.2 17.4 16.4 1.0 Nursing center division 13.5 14.8 13.3 13.4 11.1 12.4 11.1 (2.2 ) Consolidated 14.0 14.3 13.4 13.9 13.4 14.5 12.3 (1.1 )

__________

(a) Segment EBITDAR includes reclassification of restructuring charges from segment EBITDAR to the new consolidated statement of operations caption, Restructuring charges, for all historical periods.

(b) See reconciliation of GAAP results to non-GAAP results beginning on page 14.

(c) Includes changes in estimate of $9 million and $4 million for the third quarters of 2015 and 2016, respectively, to lower incentive compensation costs recorded in prior periods.

                                  KINDRED HEALTHCARE, INC. Condensed Business Segment Data (Continued) (Unaudited)   Third quarter 2015 Quarters 2016 Quarters % change v. First Second Third Fourth First Second Third prior year Hospital division: End of period data: Number of transitional care hospitals 97 96 95 95 95 97 94 Number of licensed beds 7,147 7,124 7,094 7,094 7,089 7,067 6,890 Revenue mix %: Medicare 56.8 55.2 57.1 57.3 57.8 55.5 54.6 Medicaid 5.5 5.3 5.3 5.1 4.2 4.2 4.0 Medicare Advantage 11.9 11.6 10.8 11.1 11.5 12.0 12.1 Medicaid Managed 4.7 5.6 6.1 6.2 5.6 6.3 7.3 Commercial insurance and other 21.1 22.3 20.7 20.3 20.9 22.0 22.0 Admissions: Medicare 8,775 8,267 7,976 8,169 8,919 8,253 7,861 (1.4 ) Medicaid 610 610 556 520 463 386 375 (32.6 ) Medicare Advantage 1,555 1,352 1,212 1,304 1,453 1,382 1,327 9.5 Medicaid Managed 643 675 646 612 733 768 861 33.3 Commercial insurance and other   1,868   1,815   1,763   1,701   1,871   1,807   1,727 (2.0 )   13,451   12,719   12,153   12,306   13,439   12,596   12,151 - Patient days: Medicare 228,483 218,577 210,870 210,409 229,004 219,013 202,482 (4.0 ) Medicaid 28,663 25,213 23,167 21,795 21,134 19,409 16,781 (27.6 ) Medicare Advantage 48,448 44,740 39,585 41,079 45,760 47,697 43,241 9.2 Medicaid Managed 22,013 24,833 24,412 24,802 25,341 27,267 28,534 16.9 Commercial insurance and other   62,241   62,922   58,631   57,321   62,769   63,009   59,856 2.1   389,848   376,285   356,665   355,406   384,008   376,395   350,894 (1.6 ) Average length of stay: Medicare 26.0 26.4 26.4 25.8 25.7 26.5 25.8 (2.3 ) Medicaid 47.0 41.3 41.7 41.9 45.6 50.3 44.7 7.2 Medicare Advantage 31.2 33.1 32.7 31.5 31.5 34.5 32.6 (0.3 ) Medicaid Managed 34.2 36.8 37.8 40.5 34.6 35.5 33.1 (12.4 ) Commercial insurance and other 33.3 34.7 33.3 33.7 33.5 34.9 34.7 4.2 Weighted average 29.0 29.6 29.3 28.9 28.6 29.9 28.9 (1.4 ) Revenues per admission: Medicare $ 41,483 $ 41,892 $ 41,451 $ 41,656 $ 41,717 $ 42,579 $ 39,945 (3.6 ) Medicaid 57,594 54,795 55,415 57,724 57,928 69,797 61,338 10.7 Medicare Advantage 48,908 53,578 51,495 50,680 51,080 55,105 52,363 1.7 Medicaid Managed 46,740 51,950 54,976 60,263 49,287 51,696 48,631 (11.5 ) Commercial insurance and other 72,395 77,110 68,151 70,735 71,651 77,193 73,515 7.9 Weighted average 47,616 49,312 47,683 48,236 47,868 50,309 47,348 (0.7 ) Revenues per patient day: Medicare $ 1,593 $ 1,584 $ 1,568 $ 1,617 $ 1,625 $ 1,605 $ 1,551 (1.1 ) Medicaid 1,226 1,326 1,330 1,377 1,269 1,388 1,371 3.1 Medicare Advantage 1,570 1,619 1,577 1,609 1,622 1,597 1,607 1.9 Medicaid Managed 1,365 1,412 1,455 1,487 1,426 1,456 1,467 0.8 Commercial insurance and other 2,173 2,224 2,049 2,099 2,136 2,214 2,121 3.5 Weighted average 1,643 1,667 1,625 1,670 1,675 1,684 1,640 0.9

Medicare case mix index (discharged patients only)

1.166 1.163 1.150 1.164 1.163 1.179 1.172 1.9 Average daily census 4,332 4,135 3,877 3,863 4,220 4,136 3,814 (1.6 ) Occupancy % 69.2 66.1 62.2 62.2 68.0 67.5 61.6 (1.0 ) Same-hospital data: Revenues ($ 000s) (a) $ 634,975 $ 605,410 $ 555,282 $ 571,925 $ 643,413 $ 619,427 $ 556,091 0.1 Admissions: Medicare 8,652 8,031 7,659 7,933 8,919 8,083 7,571 (1.1 ) Medicaid 602 557 508 454 463 371 371 (27.0 ) Medicare Advantage 1,546 1,299 1,166 1,238 1,453 1,339 1,292 10.8 Medicaid Managed 640 640 619 590 733 761 861 39.1 Commercial insurance and other   1,840   1,746   1,680   1,624   1,871   1,751   1,658 (1.3 )   13,280   12,273   11,632   11,839   13,439   12,305   11,753 1.0 Patient days: Medicare 225,992 212,221 202,690 204,128 229,004 214,629 194,857 (3.9 ) Medicaid 28,458 22,999 21,203 19,481 21,134 18,340 16,467 (22.3 ) Medicare Advantage 48,276 42,863 37,272 39,122 45,760 46,522 41,955 12.6 Medicaid Managed 21,933 23,722 23,329 24,136 25,341 26,795 28,526 22.3 Commercial insurance and other   61,715   60,559   56,377   54,899   62,769   60,984   57,168 1.4   386,374   362,364   340,871   341,766   384,008   367,270   338,973 (0.6 ) Total average length of stay 29.1 29.5 29.3 28.9 28.6 29.8 28.8 (1.7 ) Total revenues per patient day $ 1,643 $ 1,671 $ 1,629 $ 1,673 $ 1,676 $ 1,687 $ 1,641 0.7

__________

(a) See reconciliation of same-hospital revenues to reported revenues for the Hospital Division on page 17.

                                  KINDRED HEALTHCARE, INC. Condensed Business Segment Data (Continued) (Unaudited)   Third quarter 2015 Quarters 2016 Quarters % change v. First Second Third Fourth First Second Third prior year Pro forma hospital data (a): End of period data: Number of transitional care hospitals 82 82 82 82 82 82 82 Number of licensed beds 6,112 6,112 6,112 6,112 6,107 6,107 6,107 Revenue mix %: Medicare 57.3 55.5 57.7 57.7 57.9 55.3 54.2 Medicaid 4.9 4.7 4.8 4.5 3.9 3.9 3.6 Medicare Advantage 11.6 11.4 10.4 11.1 11.4 11.9 12.4 Medicaid Managed 4.7 5.6 6.1 6.2 5.6 6.4 7.6 Commercial insurance and other 21.5 22.8 21.0 20.5 21.2 22.5 22.2 Admissions: Medicare 7,813 7,382 7,192 7,385 7,989 7,372 7,084 (1.5 ) Medicaid 530 548 511 447 430 358 343 (32.9 ) Medicare Advantage 1,330 1,143 1,065 1,123 1,261 1,198 1,188 11.5 Medicaid Managed 562 609 572 547 632 702 792 38.5 Commercial insurance and other   1,625   1,576   1,524   1,474   1,642   1,604   1,504 (1.3 )   11,860   11,258   10,864   10,976   11,954   11,234   10,911 0.4 Patient days: Medicare 204,423 195,427 190,223 190,718 204,796 194,955 181,518 (4.6 ) Medicaid 21,489 18,559 17,272 15,357 15,470 14,053 12,085 (30.0 ) Medicare Advantage 41,908 38,440 33,795 36,305 39,995 42,045 39,646 17.3 Medicaid Managed 19,537 22,351 21,700 22,063 22,421 24,893 26,698 23.0 Commercial insurance and other   54,988   54,697   51,485   50,779   55,455   55,653   53,015 3.0   342,345   329,474   314,475   315,222   338,137   331,599   312,962 (0.5 ) Average length of stay: Medicare 26.2 26.5 26.4 25.8 25.6 26.4 25.6 (3.0 ) Medicaid 40.5 33.9 33.8 34.4 36.0 39.3 35.2 4.1 Medicare Advantage 31.5 33.6 31.7 32.3 31.7 35.1 33.4 5.4 Medicaid Managed 34.8 36.7 37.9 40.3 35.5 35.5 33.7 (11.1 ) Commercial insurance and other 33.8 34.7 33.8 34.4 33.8 34.7 35.2 4.1 Weighted average 28.9 29.3 28.9 28.7 28.3 29.5 28.7 (0.7 ) Revenues per admission: Medicare $ 41,885 $ 42,228 $ 41,877 $ 41,948 $ 41,912 $ 42,845 $ 39,694 (5.2 ) Medicaid 52,950 48,186 49,075 53,935 51,710 62,187 54,801 11.7 Medicare Advantage 49,940 56,232 51,048 53,235 52,084 56,517 54,072 5.9 Medicaid Managed 48,002 52,017 55,653 61,296 51,511 52,419 50,027 (10.1 ) Commercial insurance and other 75,632 81,332 71,996 74,530 74,752 80,026 76,737 6.6 Weighted average 48,197 49,944 48,065 48,931 48,356 50,827 47,591 (1.0 ) Revenues per patient day: Medicare $ 1,601 $ 1,595 $ 1,583 $ 1,624 $ 1,635 $ 1,620 $ 1,549 (2.1 ) Medicaid 1,306 1,423 1,452 1,570 1,437 1,584 1,555 7.1 Medicare Advantage 1,585 1,672 1,609 1,647 1,642 1,610 1,620 0.7 Medicaid Managed 1,381 1,417 1,467 1,520 1,452 1,478 1,484 1.2 Commercial insurance and other 2,235 2,343 2,131 2,163 2,213 2,306 2,177 2.2 Weighted average 1,670 1,707 1,660 1,704 1,709 1,722 1,659 (0.1 )   Average daily census 3,804 3,621 3,418 3,426 3,716 3,644 3,402 (0.5 )

__________

(a) All historical statistics have been adjusted to present the ongoing hospital division portfolio.

    KINDRED HEALTHCARE, INC. Condensed Business Segment Data (Continued) (Unaudited)                                 Third quarter 2015 Quarters 2016 Quarters % change v. First Second Third Fourth First Second Third 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) 415 411 388 373 384 384 395 Revenue mix %: Medicare 80.9 80.4 80.0 80.0 79.8 79.3 78.1 Medicaid 2.1 2.1 2.1 2.1 2.1 2.1 2.5 Commercial and other 7.3 7.9 8.2 8.5 8.4 8.2 8.6 Commercial paid at episodic rates 9.7 9.6 9.7 9.4 9.7 10.4 10.8 Episodic revenues ($ 000s) $ 308,317 $ 324,027 $ 319,820 $ 320,698 $ 325,821 $ 332,193 $ 332,562 4.0 Total episodic admissions 69,936 67,808 66,753 66,157 71,426 70,212 69,219 3.7 Medicare episodic admissions 61,186 59,394 58,479 57,804 62,011 60,730 59,823 2.3 Total episodes 110,980 109,599 108,519 108,300 113,887 113,278 113,256 4.4 Episodes per admission 1.59 1.62 1.63 1.64 1.59 1.61 1.64 0.6 Revenue per episode $ 2,778 $ 2,956 $ 2,947 $ 2,961 $ 2,861 $ 2,933 $ 2,936 (0.4 ) Hospice: Sites of service (at end of period) 190 185 181 175 177 177 185 Admissions 13,164 12,574 12,091 12,129 13,234 13,149 12,916 6.8 Average length of stay 95 93 101 100 92 91 98 (3.0 ) Patient days 1,150,841 1,190,604 1,211,291 1,185,330 1,183,908 1,238,584 1,277,125 5.4 Revenue per patient day $ 151 $ 150 $ 150 $ 150 $ 149 $ 150 $ 148 (1.3 ) Average daily census 12,787 13,084 13,166 12,884 13,010 13,611 13,882 5.4

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

$ 65,530 $ 67,647 $ 67,338 $ 67,684 $ 66,305 $ 68,229 $ 75,978 12.8   Kindred Rehabilitation Services: Kindred Hospital Rehabilitation Services: Freestanding IRFs: End of period data: Number of IRFs 16 16 18 18 19 19 19 Number of licensed beds 829 829 919 919 969 969 969 Discharges (a) 3,806 3,927 3,941 4,317 4,448 4,646 4,644 17.8 Same-hospital discharges (a) 3,806 3,927 3,842 4,040 4,016 4,089 4,069 5.9 Occupancy % (a) 73.2 71.5 68.7 68.0 70.6 70.6 68.8 0.1 Average length of stay (a) 13.7 13.1 13.2 12.7 13.2 12.9 12.7 (3.8 ) Revenue per discharge (a) $ 19,517 $ 19,325 $ 18,992 $ 18,640 $ 19,731 $ 19,318 $ 19,599 3.2 Contract services: Sites of service (at end of period): Inpatient rehabilitation units 100 99 101 100 104 105 104 LTAC hospitals 120 120 119 119 119 121 120 Sub-acute units 8 8 7 7 7 7 7 Outpatient units   138   139   135   130   139   138   139   366   366   362   356   369   371   370   Revenue per site $ 211,151 $ 209,436 $ 206,041 $ 210,978 $ 211,417 $ 215,798 $ 210,810 2.3   RehabCare: Sites of service (at end of period) 1,829 1,789 1,821 1,798 1,767 1,759 1,754 Revenue per site $ 138,106 $ 132,359 $ 120,548 $ 114,896 $ 115,590 $ 111,470 $ 109,738 (9.0 )   Nursing center division: End of period data: Number of nursing centers 90 90 90 90 92 92 91 Number of licensed beds 11,535 11,535 11,535 11,535 11,815 11,815 11,568 Admissions (b) 10,376 9,831 9,558 9,237 9,815 9,480 9,698 1.5 Medicare average length of stay (b) 28.9 28.9 28.5 28.4 28.2 28.4 27.4 (3.9 ) Patient days (b) 861,278 852,691 851,332 845,924 846,578 842,681 845,037 (0.7 ) Revenues per patient day (b) $ 319 $ 321 $ 318 $ 323 $ 322 $ 323 $ 320 0.6 Average daily census (b) 9,570 9,370 9,254 9,195 9,303 9,260 9,185 (0.7 ) Occupancy % (b) 81.3 79.6 78.6 78.1 77.3 76.7 77.5 (1.4 )

__________

(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 ability to exit the skilled nursing facility business discussed herein, as well as the Company's ability to realize the anticipated benefits, cost savings and strategic gains from this initiative, 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, restructuring 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, 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, three hospitals that closed during 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, research and development, restructuring charges, debt amendment costs, 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, research and development, restructuring charges, debt amendment costs, 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 nine months ended September 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 67.1% and 6.9% for the three months ended September 30, 2016 and 2015, respectively, and 60.5% and 19.7% for the nine months ended September 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 deferred tax valuation allowance and the composition of charges that are non-deductible for income tax purposes, including the impairment charges and litigation contingency expense.   Three months ended Nine months ended September 30, September 30, 2016 2015 2016 2015 Reconciliation of income from continuing operations before charges:   As reported: Loss from continuing operations attributable to Kindred ($685,600 ) ($16,869 ) ($651,418 ) ($138,329 ) Diluted loss per common share from continuing operations ($7.89 ) ($0.20 ) ($7.51 ) ($1.65 ) Weighted average diluted shares outstanding 86,869 86,184 86,766 83,960   Detail of charges: Restructuring charges: Facility/branch divestitures and closings ($20,212 ) ($2,416 ) ($22,234 ) ($6,439 ) Severance costs (2,109 ) (125 ) (5,049 ) (523 ) Transaction costs   (492 )   -     (1,577 )   -   (22,813 ) (2,541 ) (28,860 ) (6,962 ) Lease termination costs (charged to rent expense) (58,650 ) (808 ) (59,363 ) (1,831 )   Impairment charges (324,289 ) - (338,208 ) - Research and development (3,288 ) - (7,227 ) - Litigation contingency expense - (31,462 ) (2,840 ) (130,387 ) Other retirement and severance costs - (666 ) (658 ) (5,627 ) Other facility/branch sales/closings/consolidations (821 ) (827 ) (821 ) (2,086 ) Business interruption settlements - - 1,309 - Debt amendment fees not capitalized - - (1,103 ) - Gentiva transaction costs: Professional and consulting fees (1,464 ) (1,113 ) (3,831 ) (35,178 ) Severance and retention 214 (1,956 ) (696 ) (58,831 ) Lease termination (charged to rent expense) (272 ) - (272 ) (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 ) Other transaction costs   (1,732 )   (777 )   (1,986 )   (3,750 ) (413,115 ) (40,150 ) (444,556 ) (275,606 ) Income tax benefit   (277,113 )   2,775     (268,868 )   54,302   Charges net of income taxes (690,228 ) (37,375 ) (713,424 ) (221,304 ) Noncontrolling interest adjustment related to impairment charges   288     -     1,304     -   (689,940 ) (37,375 ) (712,120 ) (221,304 ) Allocation to participating unvested restricted stockholders   -     -     -     -   Available to common stockholders   ($689,940 )   ($37,375 )   ($712,120 )   ($221,304 )   Diluted loss per common share related to charges ($7.94 ) ($0.43 ) ($8.21 ) ($2.64 )   Weighted average diluted shares outstanding 86,869 86,184 86,766 83,960   Core: Income from continuing operations before charges $ 4,340 $ 20,506 $ 60,702 $ 82,975 Diluted earnings per common share from continuing operations before charges (a) $ 0.05 $ 0.23 $ 0.68 $ 0.95

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

87,529 86,892 87,426 85,691   Reconciliation of effective income tax rate before charges: Effective income tax rate before charges 19.7 % 33.5 % 29.4 % 35.9 % Impact of charges on effective income tax rate   52.6 %   192.0 %   74.6 %   -26.6 % Reported effective income tax rate   72.3 %   225.5 %   104.0 %   9.3 %

__________

(a) For purposes of computing diluted earnings per common share before charges, income from continuing operations before charges was reduced by $0.1 million and $0.3 million for the three months ended September 30, 2016 and 2015, respectively, and by $1.3 million and $1.5 million for the nine months ended September 30, 2016 and 2015, respectively, 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:   Third quarter 2015 Quarters 2016 Quarters % change v. First Second Third Fourth First Second Third prior year Kindred $ 254,965 $ 360,173 $ 356,716 $ 358,075 $ 363,730 $ 370,327 $ 373,980 Gentiva   87,520     -     -     -     -   -     -   $ 342,485   $ 360,173   $ 356,716   $ 358,075   $ 363,730 $ 370,327   $ 373,980   4.8       A reconciliation of reported revenues to same-hospital revenues for the Hospital Division for each historical period follows:   Third quarter 2015 Quarters 2016 Quarters % change v. First Second Third Fourth First Second Third prior year Reported revenues $ 640,483 $ 627,206 $ 579,497 $ 593,593 $ 643,299 $ 633,695 $ 575,323 (0.7 ) Hospitals acquired and sold during 2016 (a) - (16,608 ) (14,679 ) (14,695 ) - (14,346 ) (13,731 ) Hospitals closed during 2016 (b) - - (7,376 ) (7,471 ) - - (5,447 ) Hospitals closed during 2015 (c)   (5,508 )   (5,188 )   (2,160 )   498     114   78     (54 ) Same-hospital revenues $ 634,975   $ 605,410   $ 555,282   $ 571,925   $ 643,413 $ 619,427   $ 556,091   0.1

__________

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

(b) Three hospitals closed during the third quarter of 2016.

(c) 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 September 30, 2016 Charges Gentiva Deferred Facility/ transaction tax Before As branch Impairment Research and Restructuring and Other valuation charges reported closings charges development charges integration transaction allowance Total ("core") Income (loss) from continuing operations: Segment EBITDAR: Hospital division $ 82,752 $ - $ - $ - $ - $ - $ - $ - $ - $ 82,752   Kindred at Home: Home health 75,073 - - - - - - - - 75,073 Hospice   31,326     -   -     -   -   -   -   -     -     31,326     106,399     -   -     -   -   -   -   -     -     106,399     Kindred Rehabilitation Services: Kindred Hospital Rehabilitation Services 49,470 747 - - - - - - 747 50,217 RehabCare   9,248     -   -     -   -   -   -   -     -     9,248     58,718     747   -     -   -   -   -   -     747     59,465     Nursing center division 29,922 - - - - - - - - 29,922   Support center (61,751 ) - - 3,288 - - - - 3,288 (58,463 ) Impairment charges (324,289 ) - 324,289 - - - - - 324,289 - Restructuring charges (22,813 ) - - - 22,813 - - - 22,813 - Transaction costs   (2,982 )   -   -     -   -   1,250   1,732   -     2,982     -   EBITDAR (134,044 ) 747 324,289 3,288 22,813 1,250 1,732 - 354,119 220,075 Rent (98,415 ) 74 - - - 272 - - 346 (98,069 ) Restructuring charges - rent (58,650 ) - - - 58,650 - - - 58,650 - Depreciation and amortization (40,382 ) - - - - - - - - (40,382 ) Interest, net   (58,052 )   -   -     -   -   -   -   -     -     (58,052 )

Income (loss) from continuing operations before income taxes

(389,543 ) 821 324,289 3,288 81,463 1,522 1,732 - 413,115 23,572 Provision (benefit) for income taxes   281,752     288   58,173     1,154   28,599   535   608   (366,470 )   (277,113 )   4,639   (671,295 ) 533 266,116 2,134 52,864 987 1,124 366,470 690,228 18,933 Noncontrolling interests   (14,305 )   -   (288 )   -   -   -   -   -     (288 )   (14,593 ) Income (loss) attributable to Kindred $ (685,600 ) $ 533 $ 265,828   $ 2,134 $ 52,864 $ 987 $ 1,124 $ 366,470   $ 689,940   $ 4,340     Diluted earnings (loss) per common share $ (7.89 ) $ 0.05

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

86,869 87,529       Three months ended September 30, 2015 Charges Gentiva Retirement Facility/ transaction Before As and branch Litigation Restructuring and Other charges reported severance closings contingency charges integration transaction Total ("core") Income from continuing operations: Segment EBITDAR: Hospital division $ 96,108 $ 666 $ 354 $ - $ - $ - $ - $ 1,020 $ 97,128   Kindred at Home: Home health 67,682 - 473 - - - - 473 68,155 Hospice   34,025     -   -     -   -   -   -   -     34,025     101,707     -   473     -   -   -   -   473     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 - Restructuring charges (2,541 ) - - - 2,541 - - 2,541 - Transaction costs   (3,846 )   -   -     -   -   3,069   777   3,846     -   EBITDAR 197,135 666 827 31,462 2,541 3,069 777 39,342 236,477 Rent (95,436 ) - - - - - - - (95,436 ) Restructuring charges - rent (808 ) - - - 808 - - 808 - Depreciation and amortization (39,329 ) - - - - - - - (39,329 ) Interest, net   (56,008 )   -   -     -   -   -   -   -     (56,008 )

Income from continuing operations before income taxes

5,554 666 827 31,462 3,349 3,069 777 40,150 45,704 Provision for income taxes   12,523     196   243     429   982   697   228   2,775     15,298   (6,969 ) $ 470 $ 584   $ 31,033 $ 2,367 $ 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     KINDRED HEALTHCARE, INC. Reconciliation of GAAP Results to Non-GAAP Measurements (Continued) (Unaudited) (In thousands, except per share amounts)                                                         Nine months ended September 30, 2016 Charges Gentiva Deferred Retirement Facility/ Business transaction tax Before As and branch interruption Litigation Impairment Research and Debt Restructuring and Other valuation charges reported severance closings settlements contingency charges development amendment charges integration transaction allowance Total ("core") Income (loss) from continuing operations: Segment EBITDAR: Hospital division $ 344,179 $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ 344,179   Kindred at Home: Home health 218,044 - - (1,309 ) - - - - - - - - (1,309 ) 216,735 Hospice   87,521     -   -   -     -   -     -   -   -   -   -     -     -     87,521     305,565     -   -   (1,309 )   -   -     -   -   -   -   -     -     (1,309 )   304,256     Kindred Rehabilitation Services: Kindred Hospital Rehabilitation Services 147,809 - 747 - - - - - - - - - 747 148,556 RehabCare   34,504     -   -   -     -   -     -   -   -   -   -     -     -     34,504     182,313     -   747   -     -   -     -   -   -   -   -     -     747     183,060     Nursing center division 93,684 - - - - - - - - - - - - 93,684   Support center (199,363 ) 658 - - - - 7,227 1,103 - - - - 8,988 (190,375 ) Litigation contingency expense (2,840 ) - - - 2,840 - - - - - - - 2,840 - Impairment charges (338,208 ) - - - - 338,208 - - - - - - 338,208 - Restructuring charges (28,860 ) - - - - - - - 28,860 - - - 28,860 - Transaction costs   (6,513 )   -   -   -     -   -     -   -   -   4,527   1,986     -     6,513     -   EBITDAR 349,957 658 747 (1,309 ) 2,840 338,208 7,227 1,103 28,860 4,527 1,986 - 384,847 734,804 Rent (296,025 ) - 74 - - - - - - 272 - - 346 (295,679 ) Restructuring charges - rent (59,363 ) - - - - - - - 59,363 - - - 59,363 - Depreciation and amortization (121,320 ) - - - - - - - - - - - - (121,320 ) Interest, net   (172,856 )   -   -   -     -   -     -   -   -   -   -     -     -     (172,856 )

Income (loss) from continuing operations before income taxes

(299,607 ) 658 821 (1,309 ) 2,840 338,208 7,227 1,103 88,223 4,799 1,986 - 444,556 144,949 Provision (benefit) for income taxes   311,470     235   293   (468 )   32   64,179     2,582   394   27,930   1,715   710     (366,470 )   (268,868 )   42,602   (611,077 ) 423 528 (841 ) 2,808 274,029 4,645 709 60,293 3,084 1,276 366,470 713,424 102,347 Noncontrolling interests   (40,341 )   -   -   -     -   (1,304 )   -   -   -   -   -     -     (1,304 )   (41,645 ) Income (loss) attributable to Kindred $ (651,418 ) $ 423 $ 528 $ (841 ) $ 2,808 $ 272,725   $ 4,645 $ 709 $ 60,293 $ 3,084 $ 1,276   $ 366,470   $ 712,120   $ 60,702     Diluted earnings (loss) per common share $ (7.51 ) $ 0.68

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

86,766 87,426       Nine months ended September 30, 2015 Charges Gentiva Gentiva Retirement Facility/ pre-closing transaction Before As and branch Litigation Impairment Restructuring financing and Other charges reported severance closings contingency charges charges costs integration transaction Total ("core") Income (loss) from continuing operations: Segment EBITDAR: Hospital division $ 361,751 $ 666 $ 1,029 $ - $ - $ - $ - $ - $ - $ 1,695 $ 363,446   Kindred at Home: Home health 187,397 - 473 - - - - - - 473 187,870 Hospice   78,908     -   -   -     -   -     -   -   -   -   78,908     266,305     -   473   -     -   -     -   -   -   473   266,778     Kindred Rehabilitation Services: Kindred Hospital Rehabilitation Services 131,236 - - - - - - - - - 131,236 RehabCare   44,933     785   -   -     -   -     -   -   -   785   45,718     176,169     785   -   -     -   -     -   -   -   785   176,954     Nursing center division 112,763 - 584 - - - - - - 584 113,347   Support center (192,213 ) 4,176 - - - - - - - 4,176 (188,037 ) Litigation contingency expense (130,387 ) - - 130,387 - - - - - 130,387 - Impairment charges (6,726 ) - - - 6,726 - - - - 6,726 - Restructuring charges (6,962 ) - - - - 6,962 - - - 6,962 - Transaction costs   (103,764 )   -   -   -     -   -     6,005   94,009   3,750   103,764   -   EBITDAR 476,936 5,627 2,086 130,387 6,726 6,962 6,005 94,009 3,750 255,552 732,488 Rent (282,955 ) - - - - - - 792 - 792 (282,163 ) Restructuring charges - rent (1,831 ) - - - - 1,831 - - - 1,831 - Depreciation and amortization (116,889 ) - - - - - - - - - (116,889 ) Interest, net   (173,925 )   -   -   -     -   -     17,431   -   -   17,431   (156,494 )

Income (loss) from continuing operations before income taxes

(98,664 ) 5,627 2,086 130,387 6,726 8,793 23,436 94,801 3,750 275,606 176,942 Provision (benefit) for income taxes   9,183     2,202   816   2,108     2,633   3,442     9,173   32,460   1,468   54,302   63,485   (107,847 ) $ 3,425 $ 1,270 $ 128,279   $ 4,093 $ 5,351   $ 14,263 $ 62,341 $ 2,282 $ 221,304 113,457 Noncontrolling interests   (30,482 )   (30,482 ) Income (loss) attributable to Kindred $ (138,329 ) $ 82,975     Diluted earnings (loss) per common share $ (1.65 ) $ 0.95

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

83,960 85,691     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 Business transaction Before As and interruption Litigation Impairment Research and Restructuring and Other charges reported severance settlements contingency charges development charges integration transaction Total ("core") Income from continuing operations: Segment EBITDAR: Hospital division $ 135,495 $ - $ - $ - $ - $ - $ - $ - $ - $ - $ 135,495   Kindred at Home: Home health 66,941 - (1,138 ) - - - - - - (1,138 ) 65,803 Hospice   24,866     -   -     -   -   -   -   -   -   -     24,866     91,807     -   (1,138 )   -   -   -   -   -   -   (1,138 )   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 - Restructuring charges (1,701 ) - - - - - 1,701 - - 1,701 - Transaction costs   (1,685 )   -   -     -   -   -   -   1,603   82   1,685     -   EBITDAR 233,367 658 (1,138 ) 1,910 7,788 863 1,701 1,603 82 13,467 246,834 Rent (97,517 ) - - - - - - - - - (97,517 ) Restructuring charges - rent (251 ) - - - - - 251 - - 251 - Depreciation and amortization (40,681 ) - - - - - - - - - (40,681 ) Interest, net   (57,245 )   -   -     -   -   -   -   -   -   -     (57,245 )

Income from continuing operations before income taxes

37,673 658 (1,138 ) 1,910 7,788 863 1,952 1,603 82 13,718 51,391 Provision for income taxes   11,836     226   (391 )   656   2,674   296   670   551   28   4,710     16,546   25,837 $ 432 $ (747 ) $ 1,254 $ 5,114 $ 567 $ 1,282 $ 1,052 $ 54 $ 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 Restructuring financing and Other charges reported severance closings contingency charges 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 46,798 - - - - - - - - - 46,798 Hospice   16,996     -   -     -   -   -   -   -   -   -     16,996     63,794     -   -     -   -   -   -   -   -   -     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 - Restructuring charges (1,619 ) - - - - 1,619 - - - 1,619 - Transaction costs   (94,702 )   -   -     -   -   -   6,005   86,598   2,099   94,702     -   EBITDAR 30,528 4,961 675 95,000 6,726 1,619 6,005 86,598 2,099 203,683 234,211 Rent (91,788 ) - - - - - - 589 - 589 (91,199 ) Restructuring charges - rent (352 ) - - - - 352 - - - 352 - 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 ) 4,961 675 95,000 6,726 1,971 23,436 87,187 2,099 222,055 59,731 Provision (benefit) for income taxes   (27,736 )   2,133   290     -   2,891   848   10,075   33,063   902   50,202     22,466   (134,588 ) $ 2,828 $ 385   $ 95,000 $ 3,835 $ 1,123 $ 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 June 30, 2016 Charges Gentiva Business transaction Before As interruption Litigation Impairment Research and Debt Restructuring and Other charges reported settlements contingency charges development amendment charges integration transaction Total ("core") Income from continuing operations: Segment EBITDAR: Hospital division $ 125,932 $ - $ - $ - $ - $ - $ - $ - $ - $ - $ 125,932   Kindred at Home: Home health 76,030 (171 ) - - - - - - - (171 ) 75,859 Hospice   31,329     -     -     -     -   -   -     -     -   -     31,329     107,359     (171 )   -     -     -   -   -     -     -   (171 )   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 33,662 - - - - - - - - - 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 - Restructuring charges (4,346 ) - - - - - 4,346 - - 4,346 - Transaction costs   (1,846 )   -     -     -     -   -   -     1,674     172   1,846     -   EBITDAR 250,634 (171 ) 930 6,131 3,076 1,103 4,346 1,674 172 17,261 267,895 Rent (100,093 ) - - - - - - - - - (100,093 ) Restructuring charges - rent (462 ) - - - - - 462 - - 462 - Depreciation and amortization (40,257 ) - - - - - - - - - (40,257 ) Interest, net   (57,559 )   -     -     -     -   -   -     -     -   -     (57,559 )

Income from continuing operations before income taxes

52,263 (171 ) 930 6,131 3,076 1,103 4,808 1,674 172 17,723 69,986 Provision for income taxes   17,882     (123 )   (1,307 )   4,403     2,209   792   (3,765 )   1,202     124   3,535     21,417   34,381 (48 ) 2,237 1,728 867 311 8,573 472 48 14,188 48,569 Noncontrolling interests   (13,522 )   -     -     (1,016 )   -   -   -     -     -   (1,016 )   (14,538 ) Income attributable to Kindred $ 20,859   $ (48 ) $ 2,237   $ 712   $ 867 $ 311 $ 8,573   $ 472   $ 48 $ 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 Restructuring and Other charges reported closings contingency charges integration transaction Total ("core") Income from continuing operations: Segment EBITDAR: Hospital division $ 131,532 $ - $ - $ - $ - $ - $ - $ 131,532   Kindred at Home: Home health 72,917 - - - - - - 72,917 Hospice   27,887     -     -     -     -   -   -     27,887     100,804     -     -     -     -   -   -     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 - Restructuring charges (2,802 ) - - 2,802 - - 2,802 - Transaction costs   (5,216 )   -     -     -     4,342   874   5,216     -   EBITDAR 249,273 584 3,925 2,802 4,342 874 12,527 261,800 Rent (95,731 ) - - - 203 - 203 (95,528 ) Restructuring charges - rent (671 ) - - 671 - - 671 - Depreciation and amortization (38,625 ) - - - - - - (38,625 ) Interest, net   (56,140 )   -     -     -     -   -   -     (56,140 )

Income from continuing operations before income taxes

58,106 584 3,925 3,473 4,545 874 13,401 71,507 Provision for income taxes   24,396     62     416     368     386   93   1,325     25,721   33,710 $ 522   $ 3,509   $ 3,105   $ 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)                                             Three months ended December 31, 2015 Charges RehabCare Gentiva Retirement Facility/ customer transaction Before As and branch contract Litigation Impairment Restructuring and Other charges reported severance closings litigation contingency charges 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 68,776 - 50 - - - - - - 50 68,826 Hospice   30,212     -   -   -   -     -   -   -   -   -     30,212     98,988     -   50   -   -     -   -   -   -   50     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 - Restructuring charges (3,288 ) - - - - - 3,288 - - 3,288 - Transaction costs   (5,367 )   -   -   -   -     -   -   4,189   1,178   5,367     -   EBITDAR 197,853 2,125 50 12,864 8,261 18,031 3,288 4,189 1,178 49,986 247,839 Rent (96,934 ) - - - - - - - - - (96,934 ) Restructuring charges - rent (889 ) - - - - - 889 - - 889 - Depreciation and amortization (40,362 ) - - - - - - - - - (40,362 ) Interest, net   (55,664 )   -   -   -   -     -   -   -   -   -     (55,664 )

Income from continuing operations before income taxes

4,004 2,125 50 12,864 8,261 18,031 4,177 4,189 1,178 50,875 54,879 Provision (benefit) for income taxes   (51,980 )   836   20   5,062   50,329     6,205   1,643   1,487   156   65,738     13,758   55,984 $ 1,289 $ 30 $ 7,802 $ (42,068 ) $ 11,826 $ 2,534 $ 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 Nine months ended September 30, September 30, 2016 2015 2016 2015   Reconciliation of net cash flows provided by operating activities to free cash flows: Net cash flows provided by operating activities $ 36,082 $ 132,290 $ 38,048 $ 93,067

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

Transaction, severance, retirement and retention 8,898 5,251 20,989 102,100 Business interruption settlements - - (1,309 ) - Ventas, Inc. lease termination fee - - 3,500 40,000 Capitalized lender fees related to debt refinancing 42 - 7,375 28,012 Other debt refinancing costs (expensed) 291 13,438 917 40,439 Other lease termination fees - - - 353 Litigation   3,074     -     133,523     16,575     12,305     18,689     164,995     227,479  

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

48,387 150,979 203,043 320,546 Benefit of reduced income tax payments resulting from certain payments   (18,048 )   (22,541 )   (46,674 )   (56,295 )

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

30,339 128,438 156,369 264,251   Less routine capital expenditures (21,873 ) (35,422 ) (68,703 ) (80,691 ) Less distributions to noncontrolling interests   (4,694 )   (10,685 )   (35,240 )   (31,823 ) Free cash flows excluding certain items (core free cash flows) $ 3,772   $ 82,331   $ 52,426   $ 151,737    

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