Kindred Healthcare Reports Second Quarter 2017 Results

Results Adjusted to Reflect Discontinued Operations Accounting Treatment for Skilled Nursing Facility Business

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Consolidated Revenues of $1.53 Billion, GAAP Loss from Continuing Operations of $108 Million(1), GAAP Diluted Loss Per Share from Continuing Operations of $1.36(1) and EBITDAR of $36 Million(2) in the Second Quarter

Results Reflect After-Tax Costs of $136 Million Primarily Related to Non-Cash Impairments of $82 Million and a Non-Cash Deferred Tax Asset Valuation Allowance of $37 Million

Core EBITDAR of $198 Million(3) and Core Diluted EPS from Continuing Operations of $0.19(3) in the Second Quarter

Second Quarter GAAP Operating Cash Flows and Core Operating Cash Flows of $93 Million(3) and Core Free Cash Flows of $62 Million(3)

Company Updates Outlook for 2017 and 2018

Kindred Healthcare, Inc. (“Kindred” or the “Company”) (NYSE:KND) today announced its operating results for the second quarter ended June 30, 2017.

Benjamin A. Breier, President and Chief Executive Officer of the Company, commented, “We are pleased to report strong second quarter operating results in line with expectations. We made solid progress growing our Kindred at Home and Kindred Rehabilitation Services divisions. Strong top line growth and another sequential decline in labor costs drove increased profitability in both businesses. The growth in these businesses, solid cash flow performance and our enterprise-wide cost realignment initiatives position Kindred for future success.”

Mr. Breier continued, “The second quarter was a historical one for Kindred, marked by the execution of the definitive agreement to sell our skilled nursing facility business. After more than two decades of nursing center operations, this announcement clears the way to closing that chapter of Kindred’s story, and turns the page to the future of integrated post-acute care. We expect these sales to be completed by the end of 2017, and believe they will significantly enhance shareholder value and increase our focus on higher margin, faster growing and less capital intensive businesses, all of which will increase the fundamental cash generating capacity of our enterprise.”

Mr. Breier added, “Our Hospital Division continued to advance its mitigation strategy, navigating through its third full quarter of long-term acute care (“LTAC”) patient criteria. Operating results were largely in line with our previously stated expectations. LTAC compliant revenue increased to 88% from 86% in the first quarter. Managed care and commercial volumes increased 8.2% for the second quarter of 2017 on a same-hospital basis as compared to the prior year period.”

Mr. Breier noted, “Kindred’s Hospital Division continues to advance its portfolio optimization initiative with the pending closure of five additional non-strategic LTAC hospitals. As announced earlier this week, Kindred is converting one of those LTAC hospitals in Indianapolis, Indiana into an inpatient rehabilitation facility (“IRF”) joint venture with Community Health Network. We expect to further optimize our LTAC portfolio with additional closures, consolidations and IRF conversions over the coming quarters.”

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(1)

Results reflect after-tax costs of $136.4 million or $1.56 per diluted share related to impairment charges, deferred tax asset valuation allowance, RehabCare collection litigation, restructuring charges and business interruption settlements.

(2)

Results reflect pretax costs of $162.5 million related to impairment charges, RehabCare collection litigation, restructuring charges and business interruption settlements. As used herein, “EBITDAR” means earnings before interest, income taxes, depreciation, amortization and total rent. See reconciliation of generally accepted accounting principles (“GAAP”) results to non-GAAP results beginning on page 14.

(3)

See reconciliation of GAAP results to non-GAAP results beginning on page 14. During the first quarter of 2017, the Company revised its definition of “core” non-GAAP measures. See “Non-GAAP Measures” beginning on page 14 for a discussion regarding the revised definitions. For comparability, core results for 2016 have been revised to conform to the current year presentation.

Mr. Breier concluded, “We are very proud of the progress our teammates made over the first half of the year. Advancing our exit from the skilled nursing facility business in its entirety, working through our LTAC patient criteria mitigation strategy, and growing our Kindred at Home and Kindred Rehabilitation Services divisions set the stage for additional progress in the coming quarters. As detailed in the 2017 and 2018 Outlook section below, we expect these efforts to result in financial performance next year of approximately $6.2 billion of revenue, $830 million of Core EBITDAR, $0.80 of Core diluted earnings per share (“EPS”) from continuing operations, and a midpoint expectation of $180 million of Core free cash flows and cash benefits from utilization of net operating losses (“NOLs”)(1). I would like to extend my deep appreciation and sincere thanks to the thousands of caregivers and teammates whose contribution is critical to improving the lives of the more than one million patients we care for each year.”

All financial and statistical information included in this earnings release reflects the continuing operations of the Company’s businesses for all periods presented unless otherwise indicated. As a result of developments in the second quarter of 2017 related to the planned divestiture of the Company’s skilled nursing facility business, the operating results, direct overhead and losses associated with this business were classified, for accounting purposes, as discontinued operations for all periods presented. These changes include the transfer of profits from applicable RehabCare contracts servicing the Company’s skilled nursing facility business to discontinued operations, but do not include any allocations of indirect overhead related to the skilled nursing facility business. In addition, the Company has reclassified certain retained businesses and expenses previously reported in the Nursing Center Division to other business segments in continuing operations for all periods presented.

Second Quarter Consolidated Results(2):

Consolidated revenues were $1.53 billion, a 4.6% year-over-year decrease, primarily attributable to the impact of the transition to LTAC patient criteria and the sale or closure of 16 LTAC hospitals primarily during the second half of 2016. GAAP loss from continuing operations was $108.2 million compared to income of $28.0 million in the same period a year ago, primarily due to a $129.7 million pretax increase in impairment charges, a deferred tax asset valuation allowance of $36.7 million, a $25.3 million pretax charge for certain RehabCare contract terminations for non-payment and related collection litigation (“RehabCare Collection Litigation”) and the impact of LTAC patient criteria. Core EBITDAR declined to $198.0 million compared to $228.2 million in the same period of 2016, primarily due to LTAC patient criteria and the sale or closure of the 16 LTAC hospitals noted above.
GAAP operating cash flows were $92.7 million compared to $135.2 million for the same period a year ago. Core operating cash flows were $92.3 million compared to $126.3 million for the same period a year ago. Core free cash flows were $62.4 million compared to $83.3 million in the same period a year ago. GAAP operating cash flows, Core operating cash flows and Core free cash flows declined compared to the prior year period primarily due to LTAC patient criteria and an increase in net working capital in the second quarter of 2017 compared to the prior year period.
GAAP diluted loss per share from continuing operations was $1.36 as compared to GAAP diluted EPS from continuing operations of $0.21 a year ago. This decrease was primarily due to an increase in impairment charges, a deferred tax asset valuation allowance of $36.7 million, a provision for the RehabCare Collection Litigation and LTAC patient criteria. Core diluted EPS from continuing operations was $0.19 as compared to $0.33 for the same period last year. The decline in Core diluted EPS was primarily attributable to LTAC patient criteria.
The Company recorded a pretax $134.6 million non-cash impairment charge in the second quarter to reflect the write-off of the full carrying value of RehabCare trade name and customer contract intangible assets based upon various factors, including the estimated reduction in earnings resulting from the previously announced definitive agreement to dispose of the Company’s skilled nursing facility business and the impact of the RehabCare Collection Litigation.

Second Quarter Segment Results(2)(3):

Our Kindred at Home Division, which comprises the Company’s home health, hospice, community care and home-based primary care businesses, recorded second quarter revenues that increased 3.2% over the prior year period to $644.5 million. On a

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(1)

See “2017 and 2018 Outlook” below for further details. All forward-looking non-GAAP financial measures are provided only on a non-GAAP basis 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 measures to GAAP financial measures is not available without unreasonable effort and the Company is unable to assess the probable significance of the unavailable information.

(2)

(3)

See full segment data on pages 9 through 13.

Second Quarter Segment Results(1)(2)(3)(Continued):

same-store basis, home health admissions increased 2.8% and episodic admissions were flat while same-store hospice admissions declined 3.0% over the prior year period. Segment adjusted operating income and Core EBITDAR increased 1.9% and 1.3%, respectively, for the second quarter of 2017 as compared to the prior year period. Home health direct labor costs per visit declined 3.0% and hospice direct labor costs per patient day declined 1.8% in the second quarter of 2017 both as compared to the first quarter of 2017.

Kindred’s Hospital Division second quarter revenues declined to $540.8 million from $645.4 million in the prior year period primarily due to the elimination of approximately $70 million of revenue related to the sale or closure of the 16 LTAC hospitals primarily during the second half of 2016, the impact of LTAC patient criteria and a 2.0% decline in same-hospital admissions compared to last year. For the second quarter of 2017, approximately 88% (92% excluding Texas LTAC hospitals) of same-hospital revenue came from LTAC compliant patients, which include all patients except Medicare site neutral patients, an increase from approximately 86% (89% excluding Texas LTAC hospitals) in the first quarter of 2017. Same-hospital managed care and commercial volumes increased 8.2% in the second quarter of 2017 compared to the prior year period. Segment adjusted operating income and Core EBITDAR for the second quarter declined to $91.6 million and $90.6 million, respectively, compared to $127.5 million for both Segment adjusted operating income and Core EBITDAR a year ago. The declines were primarily due to the elimination of approximately $8 million of Segment adjusted operating income and Core EBITDAR related to the sale or closure of the 16 LTAC hospitals noted above, the impact of LTAC patient criteria, and increases in labor and other costs.

Kindred Rehabilitation Services increased second quarter revenues by 2.2% to $369.3 million as compared to $361.3 million in the prior year period. Segment adjusted operating income decreased to $36.1 million as compared to $58.1 million in the prior year period, primarily as a result of the RehabCare Collection Litigation. Core EBITDAR increased to $61.4 million as compared to $58.1 million in the prior year period. The Kindred Hospital Rehabilitation Services segment achieved revenue growth of 4.3% to $178.4 million, and Segment adjusted operating income and Core EBITDAR both grew to $53.4 million, an increase of 5.3% compared to the same period a year ago, as a result of the development of new IRFs and a 6.7% increase in revenue per discharge while same-IRF discharges were flat compared to prior year. RehabCare revenues increased 0.4% to $190.9 million for the second quarter. RehabCare Segment adjusted operating income (loss) decreased to a loss of $17.3 million compared to income of $7.4 million in the prior year period, primarily due to the RehabCare Collection Litigation. RehabCare Core EBITDAR increased 8.7% to $8.0 million primarily due to cost reduction initiatives and efforts to terminate unprofitable contracts, partially offset by census decline and wage rate pressure.

Discontinued Operations – Loss on Divestiture of Skilled Nursing Facility Business

During the second quarter of 2017, the Company recorded $288.8 million of pretax charges related to the planned divestiture of its skilled nursing facility business, including a $262.3 million lease termination accrual, $18.0 million of transaction costs and $8.5 million of retention costs.

2017 and 2018 Outlook(4)

All forward-looking non-GAAP financial measures used to provide “2017 Outlook” and “2018 Outlook” (collectively, “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 assess the probable significance of the unavailable information.

The Company’s Outlook does not take into account the effect of any reimbursement changes, any further acquisitions or divestitures, and any further issuances or repurchases of common stock.

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(1)

(2)

See same-hospital and full segment data on pages 9 through 13.

(3)

For each of the Company’s segments, Segment adjusted operating income (loss) is a measure of performance used by the Company’s chief operating decision makers in accordance with “Accounting Standard Codification 280 – Segment Reporting.” The Company defines Segment adjusted operating income (loss) as EBITDAR, excluding litigation contingency expense, impairment charges, restructuring charges, transaction costs, and the allocation of support center overhead.

(4)

See Forward-Looking Statements beginning on page 14.

2017 and 2018 Outlook(1)(Continued):

Stephen D. Farber, Executive Vice President and Chief Financial Officer of Kindred, commented, “As a reminder, when the Company established its 2017 Outlook, it included a midpoint expectation for 2017 Core EBITDAR of $930 million, with a range of $910 million to $950 million. As discussed above, the Company is now reflecting its skilled nursing facility business in discontinued operations. For consistency, this change would require that the Company’s previous 2017 Core EBITDAR Outlook be adjusted by approximately $140 million(2).”

Mr. Farber noted, “There are additional factors that should be considered with updating expectations for our 2017 performance. For example, we expect roughly $30 million of benefit, on a full-year basis, from various cost reduction efforts and anticipated new RehabCare contracts signed in connection with the sale of the skilled nursing facility business. We expect the full amount of these items to benefit 2018, but the impact on 2017 is completely dependent on the timing of multiple transaction closings, which are uncertain but expected to occur in phases over the remainder of 2017. Also as discussed above, we are closing five additional LTAC hospitals, including the conversion of an LTAC hospital to an IRF, each of which has uncertain timing, lease termination, wind-down and other costs. These and other items will have both positive and negative impacts on Kindred’s reported results for the balance of 2017.”

Mr. Farber continued, “For the second half of 2017, we expect our third quarter to follow normal seasonal trends, making it the softest quarter of the year. Due to ongoing and widely reported inpatient volume trends, as well as continued labor pressure in our Hospital Division, the Company is expecting to finish the year towards the lower end of its previous outlook range.”

Mr. Farber concluded, “Given the complexity and uncertain timing of these items over the next several months, it is not practical to update our 2017 Outlook and we are limiting our commentary for the balance of 2017 to the items discussed above. As such, we are focusing on updating and expanding our outlook for 2018. The items identified above should be largely complete and incorporated on a run-rate basis in Kindred’s results by the end of 2017, and estimates for these items are reflected in the Company’s 2018 Outlook below.”

For the 2018 Outlook, Kindred anticipates:

Annual revenues at the midpoint of approximately $6.2 billion;
Core EBITDAR at the midpoint of approximately $830 million; and
Core diluted EPS from continuing operations at the midpoint of approximately $0.80.

In determining these items, Kindred utilized the following 2018 estimates:

Total rent expense of approximately $300 million;
Depreciation and amortization expense of approximately $100 million;
Interest expense of approximately $245 million, including $17 million of amortization of deferred financing fees;
Noncontrolling interest expense of approximately $45 million to $50 million;
An effective book tax rate of approximately 34%;
Weighted average shares outstanding of approximately 90.0 million; and
Routine capital expenditures of approximately $60 million.

Please note:

Annual revenues have been adjusted from approximately $6.3 billion in the previous 2018 Outlook to $6.2 billion in the current 2018 Outlook primarily to reflect the impact of recent and anticipated LTAC hospital closures and consolidations;
Core EBITDAR has been adjusted from $840 million in the previous 2018 Outlook to $830 million in the current 2018 Outlook to reflect recent and anticipated LTAC hospital closures and consolidations. Since these hospitals have similar levels of Core EBITDAR and lease expense, the simultaneous elimination of Core EBITDAR and lease expense are expected to have an immaterial impact on Core earnings before income taxes, depreciation and amortization, and Core diluted EPS from continuing operations; and

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(1)

See Forward-Looking Statements beginning on page 14.

(2)

Reflects the impact of Core EBITDAR of the skilled nursing facility business reclassified to discontinued operations, its direct overhead, as well as the profits from applicable RehabCare contracts servicing the skilled nursing facilities being sold.

2017 and 2018 Outlook(1)(Continued):

Core EBITDAR includes an estimated $30 million contribution, as noted above, from forecasted cost savings and new RehabCare contract signings anticipated in connection with the sale of the Company’s skilled nursing facility business.

Cash Flow(1)

Mr. Farber commented, “Cash flow is a primary focus for Kindred. We are very pleased with our strong second quarter cash flow performance that was in line with our expectations, and enabled us to reduce funded debt by $48 million during the quarter. We finished the quarter with excellent liquidity, with $157 million drawn on our $900 million revolving credit facility. After the sale of the skilled nursing facility business, we anticipate Kindred will have approximately $800 million of NOLs. As we have previously discussed, these NOLs should offset approximately 90% of book tax estimates for many years, and significantly augment cash generation. Combining Core free cash flows plus tax-related cash flows from utilizing Kindred’s NOLs, we expect cash results for 2018 on this basis at a midpoint expectation of $180 million.”

Conference Call

As previously announced, investors and the general public may access a live webcast of the second quarter 2017 conference call through a link on the Company’s website at http://investors.kindredhealthcare.com. The conference call will be held on August 4 at 9:00 a.m. (Eastern Time).

A telephone replay of the conference call will become available at approximately 12:00 p.m. on August 4 by dialing (719) 457-0820, access code: 4930738. The phone replay will be available through August 14 and the online replay will be available through September 4.

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-100 private employer in the United States, is a FORTUNE 500 healthcare services company based in Louisville, Kentucky with annual revenues of approximately $6.1 billion(2). At June 30, 2017, Kindred’s continuing operations, through its subsidiaries, had approximately 88,100 employees providing healthcare services in 2,540 locations in 45 states, including 81 LTAC hospitals, 19 inpatient rehabilitation hospitals, 19 sub-acute units, 614 Kindred at Home home health, hospice and non-medical home care sites of service, 102 inpatient rehabilitation units (hospital-based) and contract rehabilitation service businesses which served 1,705 non-affiliated sites of service. Ranked as one of Fortune magazine’s Most Admired Healthcare Companies for eight 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)

See Forward-Looking Statements beginning on page 14.

(2)

Revenues from continuing operations for the last twelve months ended June 30, 2017. 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, 2017 2016 2017 2016 Revenues $ 1,532,022 $ 1,605,374 $ 3,067,740 $ 3,205,862 Salaries, wages and benefits 833,703 842,840 1,673,516 1,678,420 Supplies 77,784 89,151 157,885 178,210 Building rent 64,861 67,025 129,517 133,010 Equipment rent 8,861 11,211 17,748 21,369 Other operating expenses 182,161 167,607 340,985 333,334 General and administrative expenses 266,156 283,610 541,659 586,894 Other income (2,287 ) (505 ) (2,257 ) (2,338 ) Litigation contingency expense - 930 - 2,840 Impairment charges 135,829 6,131 136,303 13,919 Restructuring charges 5,050 798 15,056 2,750 Depreciation and amortization 25,651 33,198 55,471 66,752 Interest expense 60,801 58,053 120,129 115,542 Investment income (2,228 ) (486 ) (2,737 ) (722 ) 1,656,342 1,559,563 3,183,275 3,129,980 Income (loss) from continuing operations before income taxes (124,320 ) 45,811 (115,535 ) 75,882 Provision (benefit) for income taxes (16,116 ) 17,851 (13,882 ) 28,261 Income (loss) from continuing operations (108,204 ) 27,960 (101,653 ) 47,621 Discontinued operations, net of income taxes: Income from operations 8,870 9,437 17,701 15,031 Gain (loss) on divestiture of operations (294,039 ) (83 ) (300,205 ) 179 Income (loss) from discontinued operations (285,169 ) 9,354 (282,504 ) 15,210 Net income (loss) (393,373 ) 37,314 (384,157 ) 62,831 Earnings attributable to noncontrolling interests: Continuing operations (10,791 ) (8,847 ) (21,274 ) (16,698 ) Discontinued operations (4,954 ) (4,678 ) (9,435 ) (9,343 ) (15,745 ) (13,525 ) (30,709 ) (26,041 ) Income (loss) attributable to Kindred $ (409,118 ) $ 23,789 $ (414,866 ) $ 36,790 Amounts attributable to Kindred stockholders: Income (loss) from continuing operations $ (118,995 ) $ 19,113 $ (122,927 ) $ 30,923 Income (loss) from discontinued operations (290,123 ) 4,676 (291,939 ) 5,867 Net income (loss) $ (409,118 ) $ 23,789 $ (414,866 ) $ 36,790 Earnings (loss) per common share: Basic: Income (loss) from continuing operations $ (1.36 ) $ 0.22 $ (1.41 ) $ 0.35 Discontinued operations: Income from operations 0.04 0.05 0.10 0.07 Gain (loss) on divestiture of operations (3.36 ) - (3.44 ) - Income (loss) from discontinued operations (3.32 ) 0.05 (3.34 ) 0.07 Net income (loss) $ (4.68 ) $ 0.27 $ (4.75 ) $ 0.42 Diluted: Income (loss) from continuing operations $ (1.36 ) $ 0.21 $ (1.41 ) $ 0.35 Discontinued operations: Income from operations 0.04 0.05 0.10 0.06 Gain (loss) on divestiture of operations (3.36 ) - (3.44 ) - Income (loss) from discontinued operations (3.32 ) 0.05 (3.34 ) 0.06 Net income (loss) $ (4.68 ) $ 0.26 $ (4.75 ) $ 0.41 Shares used in computing earnings (loss) per common share: Basic 87,506 86,836 87,297 86,713 Diluted 87,506 87,500 87,297 87,374 Cash dividends declared and paid per common share $ - $ 0.12 $ 0.12 $ 0.24 KINDRED HEALTHCARE, INC. Condensed Consolidated Balance Sheet (Unaudited) (In thousands, except per share amounts) June 30, December 31, 2017 2016 ASSETS Current assets: Cash and cash equivalents $ 130,047 $ 137,061 Insurance subsidiary investments 97,076 108,966 Accounts receivable less allowance for loss 1,224,442 1,172,078 Inventories 21,951 22,438 Income taxes 5,718 10,067 Assets held for sale 282,341 289,450 Other 61,990 63,693 1,823,565 1,803,753 Property and equipment 1,537,821 1,531,598 Accumulated depreciation (938,054 ) (912,978 ) 599,767 618,620 Goodwill 2,427,668 2,427,074 Intangible assets less accumulated amortization 623,454 770,108 Insurance subsidiary investments 207,427 204,929 Other 296,088 288,240 Total assets $ 5,977,969 $ 6,112,724 LIABILITIES AND EQUITY Current liabilities: Accounts payable $ 180,618 $ 203,925 Salaries, wages and other compensation 372,090 397,486 Due to third party payors 28,177 41,320 Professional liability risks 55,330 65,284 Accrued lease termination fees 267,804 5,224 Other accrued liabilities 281,984 264,512 Long-term debt due within one year 21,539 27,977 1,207,542 1,005,728 Long-term debt 3,303,539 3,215,062 Professional liability risks 310,516 295,311 Deferred tax liabilities 185,960 201,808 Deferred credits and other liabilities 354,361 353,294 Equity:

Stockholders’ equity:

Common stock, $0.25 par value; authorized 175,000 shares; issued 87,025 shares - June 30, 2017 and 85,166 shares - December 31, 2016

21,756 21,291 Capital in excess of par value 1,705,228 1,710,231 Accumulated other comprehensive income 1,836 1,573 Accumulated deficit (1,335,410 ) (920,544 ) 393,410 812,551 Noncontrolling interests 222,641 228,970 Total equity 616,051 1,041,521 Total liabilities and equity $ 5,977,969 $ 6,112,724 KINDRED HEALTHCARE, INC. Condensed Consolidated Statement of Cash Flows (Unaudited) (In thousands) Three months ended Six months ended June 30, June 30, 2017 2016 2017 2016 Cash flows from operating activities: Net income (loss) $ (393,373 ) $ 37,314 $ (384,157 ) $ 62,831

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

Depreciation expense 26,005 34,435 56,305 68,392 Amortization of intangible assets 4,360 5,957 9,020 12,783 Amortization of stock-based compensation costs 4,855 5,639 7,987 10,043 Amortization of deferred financing costs 4,352 3,708 8,484 7,275 Payment of capitalized lender fees related to debt amendment - (7,333 ) (5,403 ) (7,333 ) Provision for doubtful accounts 35,966 9,221 47,184 20,946 Deferred income taxes (17,047 ) 17,802 (15,820 ) 29,298 Impairment charges 136,415 6,131 137,572 13,919 (Gain) loss on divestiture of discontinued operations 294,039 83 300,205 (179 ) Other 762 656 6,812 959 Change in operating assets and liabilities: Accounts receivable (13,390 ) (13,229 ) (99,223 ) (101,121 ) Inventories and other assets 1,939 (10,161 ) (2,518 ) (15,393 ) Accounts payable 2,187 23,077 (22,310 ) 12,456 Income taxes 2,058 707 4,349 853 Due to third party payors (6,304 ) 351 (13,143 ) (4,492 ) Other accrued liabilities 9,845 20,850 (35,313 ) (106,369 ) Net cash provided by operating activities 92,669 135,208 31 4,868 Cash flows from investing activities: Routine capital expenditures (17,396 ) (28,724 ) (29,337 ) (46,830 ) Development capital expenditures (5,857 ) (8,707 ) (11,296 ) (18,726 ) Acquisitions, net of cash acquired (3,500 ) (1,372 ) (6,650 ) (27,711 ) Acquisition deposits - - - 18,489 Sale of assets - 142 - 1,223 Purchase of insurance subsidiary investments (68,300 ) (20,154 ) (90,608 ) (52,995 ) Sale of insurance subsidiary investments 49,077 15,713 67,776 46,603 Net change in insurance subsidiary cash and cash equivalents 27,113 13,201 33,525 23,159 Net change in other investments (273 ) 583 (244 ) (33,398 ) Other (108 ) 792 46 (1,127 ) Net cash used in investing activities (19,244 ) (28,526 ) (36,788 ) (91,313 ) Cash flows from financing activities: Proceeds from borrowings under revolving credit 309,000 244,300 787,600 778,000 Repayment of borrowings under revolving credit (349,900 ) (524,600 ) (693,300 ) (827,700 ) Proceeds from issuance of term loan, net of discount - 198,100 - 198,100 Proceeds from other long-term debt - - - 750 Repayment of term loan (3,508 ) (3,508 ) (7,017 ) (6,511 ) Repayment of other long-term debt (339 ) (270 ) (623 ) (550 ) Payment of deferred financing costs (50 ) (141 ) (129 ) (292 ) Issuance of common stock in connection with employee benefit plans 32 - 32 - Payment of dividend for mandatory redeemable preferred stock (3,065 ) (2,853 ) (6,075 ) (5,654 ) Dividends paid - (10,225 ) (10,228 ) (20,293 ) Contributions made by noncontrolling interests 113 1,900 113 6,268 Distributions to noncontrolling interests (12,500 ) (14,231 ) (38,301 ) (30,546 ) Purchase of noncontrolling interests - - - (1,000 ) Payroll tax payments for equity awards issuance (74 ) (180 ) (2,329 ) (2,829 ) Net cash provided by (used in) financing activities (60,291 ) (111,708 ) 29,743 87,743 Change in cash and cash equivalents 13,134 (5,026 ) (7,014 ) 1,298 Cash and cash equivalents at beginning of period 116,913 105,082 137,061 98,758 Cash and cash equivalents at end of period $ 130,047 $ 100,056 $ 130,047 $ 100,056 KINDRED HEALTHCARE, INC. Condensed Consolidated and Business Segment Data (Unaudited) (In thousands, except per share amounts) Second quarter 2016 Quarters 2017 Quarters % change v. First Second Third Fourth First Second prior year Condensed consolidated statement of operations data: GAAP presentation: Revenues $ 1,600,488 $ 1,605,374 $ 1,560,760 $ 1,511,976 $ 1,535,718 $ 1,532,022 (4.6 ) Operating expenses 1,403,467 1,390,562 1,760,982 1,353,386 1,364,751 1,498,396 7.8 Building rent 65,985 67,025 66,946 64,350 64,656 64,861 (3.2 ) Equipment rent 10,158 11,211 9,911 8,649 8,887 8,861 (21.0 ) Depreciation and amortization 33,554 33,198 32,995 32,072 29,820 25,651 (22.7 ) Interest, net 57,253 57,567 58,059 58,625 58,819 58,573 1.7

Income (loss) from continuing operations before income taxes

30,071 45,811 (368,133 ) (5,106 ) 8,785 (124,320 ) n/m Provision (benefit) for income taxes 10,410 17,851 285,003 998 2,234 (16,116 ) n/m Income (loss) from continuing operations 19,661 27,960 (653,136 ) (6,104 ) 6,551 (108,204 ) n/m Noncontrolling interests (7,851 ) (8,847 ) (9,574 ) (8,575 ) (10,483 ) (10,791 ) n/m Net income (loss) attributable to Kindred $ 11,810 $ 19,113 $ (662,710 ) $ (14,679 ) $ (3,932 ) $ (118,995 ) n/m Diluted EPS $ 0.13 $ 0.21 $ (7.63 ) $ (0.17 ) $ (0.05 ) $ (1.36 ) n/m Diluted shares 87,249 87,500 86,869 86,904 87,085 87,506 - Core presentation (a): EBITDAR $ 209,114 $ 228,173 $ 183,055 $ 178,040 $ 181,447 $ 198,006 (13.2 ) Building rent 65,985 67,025 66,674 64,350 64,656 64,861 (3.2 ) Equipment rent 10,158 11,211 9,911 8,649 8,887 8,861 (21.0 ) Provision for income taxes 14,632 19,761 2,963 1,006 7,923 11,834 (40.1 ) Noncontrolling interests (7,851 ) (9,863 ) (9,862 ) (8,575 ) (10,483 ) (11,111 ) 12.7 Net income attributable to Kindred 19,681 29,548 2,591 4,763 859 17,115 (42.1 ) Core diluted EPS $ 0.22 $ 0.33 $ 0.03 $ 0.05 $ 0.01 $ 0.19 (42.4 ) Diluted shares 87,249 87,500 87,529 87,641 87,744 88,165 0.8 Revenues by segment: Kindred at Home: Home health $ 430,035 $ 438,556 $ 449,958 $ 444,073 $ 450,831 $ 459,176 4.7 Hospice 176,426 185,641 188,575 186,161 179,378 185,281 (0.2 ) 606,461 624,197 638,533 630,234 630,209 644,457 3.2 Hospital division 654,098 645,406 588,943 545,864 556,646 540,809 (16.2 ) Kindred Rehabilitation Services: Kindred Hospital Rehabilitation Services 167,045 171,095 170,308 171,352 178,115 178,439

4.3

RehabCare 198,297 190,169 187,456 186,943 194,354 190,906

0.4

365,342 361,264 357,764 358,295 372,469 369,345

2.2

1,625,901 1,630,867 1,585,240 1,534,393 1,559,324 1,554,611

(4.7

)

Eliminations (25,413 ) (25,493 ) (24,480 ) (22,417 ) (23,606 ) (22,589 )

(11.4

)

$ 1,600,488 $ 1,605,374 $ 1,560,760 $ 1,511,976 $ 1,535,718 $ 1,532,022

(4.6

)

__________

(a) See reconciliation of GAAP results to non-GAAP results beginning on page 14. During the first quarter of 2017, the Company revised its definitions of “core” non-GAAP measures. See “Non-GAAP Measures” beginning on page 14 for a discussion regarding the revised definitions. For comparability, core results for 2016 have been revised to conform to the current year presentation. n/m = not meaningful. KINDRED HEALTHCARE, INC. Condensed Consolidated and Business Segment Data (Continued) (Unaudited) (In thousands, except statistics) Second quarter 2016 Quarters 2017 Quarters % change v. First Second Third Fourth First Second prior year Segment adjusted operating income (loss): Kindred at Home: Home health $ 66,941 $ 76,030 $ 75,073 $ 61,487 $ 63,750 $ 76,592 0.7 Hospice 24,866 31,329 31,326 28,805 27,581 32,784 4.6 91,807 107,359 106,399 90,292 91,331 109,376 1.9 Hospital division 136,416 127,510 83,940 93,778 93,438 91,580 (28.2 ) Kindred Rehabilitation Services: Kindred Hospital Rehabilitation Services 48,119 50,729 49,759 49,728 51,760 53,422 5.3 RehabCare 6,036 7,363 4,224 1,032 4,932 (17,301 ) (335.0 ) 54,155 58,092 53,983 50,760 56,692 36,121 (37.8 ) Core EBITDAR by segment (a): Kindred at Home: Home health $ 65,803 $ 75,859 $ 75,073 $ 61,185 $ 63,750 $ 75,797 (0.1 ) Hospice 24,866 31,329 31,326 27,668 27,581 32,784 4.6 90,669 107,188 106,399 88,853 91,331 108,581 1.3 Hospital division 136,416 127,510 83,940 93,148 93,438 90,572 (29.0 ) Kindred Rehabilitation Services: Kindred Hospital Rehabilitation Services 48,119 50,729 49,759 49,728 51,760 53,422 5.3 RehabCare 6,036 7,363 4,224 1,032 4,932 8,003 8.7 54,155 58,092 53,983 50,760 56,692 61,425 5.7 Support center expenses (71,159 ) (64,265 ) (59,535 ) (54,334 ) (60,014 ) (62,572 ) (2.6 ) Litigation contingency expense (885 ) (180 ) - - - - Transaction costs (82 ) (172 ) (1,732 ) (387 ) - - $ 209,114 $ 228,173 $ 183,055 $ 178,040 $ 181,447 $ 198,006 (13.2 ) Segment adjusted operating income (loss) margin: Kindred at Home: Home health 15.6 17.3 16.7 13.8 14.1 16.7 (0.6 ) Hospice 14.1 16.9 16.6 15.5 15.4 17.7 0.8 Kindred at Home 15.1 17.2 16.7 14.3 14.5 17.0 (0.2 ) Hospital division 20.9 19.8 14.3 17.2 16.8 16.9 (2.9 ) Kindred Rehabilitation Services: Kindred Hospital Rehabilitation Services 28.8 29.6 29.2 29.0 29.1 29.9 0.3 RehabCare 3.0 3.9 2.3 0.6 2.5 (9.1 ) (13.0 ) Kindred Rehabilitation Services 14.8 16.1 15.1 14.2 15.2 9.8 (6.3 ) Core EBITDAR margin by segment (a): Kindred at Home: Home health 15.3 17.3 16.7 13.8 14.1 16.5 (0.8 ) Hospice 14.1 16.9 16.6 14.9 15.4 17.7 0.8 Kindred at Home 15.0 17.2 16.7 14.1 14.5 16.8 (0.4 ) Hospital division 20.9 19.8 14.3 17.1 16.8 16.7 (3.1 ) Kindred Rehabilitation Services: Kindred Hospital Rehabilitation Services 28.8 29.6 29.2 29.0 29.1 29.9 0.3 RehabCare 3.0 3.9 2.3 0.6 2.5 4.2 0.3 Kindred Rehabilitation Services 14.8 16.1 15.1 14.2 15.2 16.6 0.5 Consolidated 13.1 14.2 11.7 11.8 11.8 12.9 (1.3 )

__________

(0.8

)

Same-store total episodic admissions 70,416 69,317 68,211 66,784 72,911 69,207

(0.2

)

Medicare episodic admissions 62,011 60,730 59,823 59,540 62,404 58,575

(3.5

)

Total episodes 113,887 113,278 113,256 111,164 114,964 113,579

0.3

Episodes per admission 1.59 1.61 1.64 1.65 1.57 1.63

1.2

Revenue per episode $ 2,861 $ 2,933 $ 2,936 $ 2,909 $ 2,843 $ 2,944

0.4

Hospice: Sites of service (at end of period) 177 177 185 183 180 177 Admissions 13,234 13,149 12,916 12,660 13,649 12,561

(4.5

)

Same-store admissions 12,761 12,743 12,541 12,362 13,332 12,363

(3.0

)

Average length of stay 92 91 98 100 96 94

3.3

Patient days 1,183,908 1,238,584 1,277,125 1,246,152 1,193,061 1,215,619

(1.9

)

Average daily census 13,010 13,611 13,882 13,545 13,256 13,358

(1.9

)

Revenue per patient day $ 149 $ 150 $ 148 $ 149 $ 150 $ 152

1.3

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

$ 66,305 $ 68,229 $ 75,978 $ 74,875 $ 74,095 $ 74,222 8.8 Kindred Rehabilitation Services: Kindred Hospital Rehabilitation Services: Freestanding IRFs: End of period data: Number of IRFs 19 19 19 19 19 19 Number of licensed beds 969 969 969 995 995 995 Discharges (a) 4,448 4,646 4,644 4,671 4,775 4,766 2.6 Same-hospital discharges (a) 4,295 4,535 4,546 4,538 4,393 4,517 (0.4 ) Occupancy % (a) 70.6 70.6 68.8 66.5 71.4 70.0 (0.8 ) Average length of stay (a) 13.2 12.9 12.7 12.6 12.8 12.8 (0.8 ) Revenue per discharge (a) $ 19,731 $ 19,318 $ 19,599 $ 19,486 $ 20,097 $ 20,620 6.7 Contract services: Sites of service (at end of period): Inpatient rehabilitation units 104 105 104 102 101 102 LTAC hospitals 119 121 120 119 119 116 Sub-acute units 7 7 7 5 7 6 Outpatient units 139 138 139 132 129 121 369 371 370 358 356 345 Revenue per site $ 211,417 $ 215,798 $ 210,810 $ 220,733 $ 227,100 $ 228,534 5.9 RehabCare: Sites of service (at end of period) 1,767 1,759 1,754 1,718 1,703 1,734 Revenue per site $ 112,222 $ 108,113 $ 106,873 $ 108,814 $ 114,125 $ 110,095 1.8

__________

(a) Excludes non-consolidating IRF.

KINDRED HEALTHCARE, INC. Condensed Business Segment Data (Continued) (Unaudited) Second quarter 2016 Quarters 2017 Quarters % change v. First Second Third Fourth First Second prior year

Hospitals (excluding sub-acute units and skilled nursing facility):

End of period data: Number of transitional care hospitals 95 97 94 82 82 81 Number of licensed beds 7,089 7,067 6,890 6,107 6,107 6,041 Revenues (000s) $ 643,299 $ 633,695 $ 575,323 $ 530,746 $ 540,280 $ 525,458 (17.1 ) Revenue mix %: Medicare 57.8 55.5 54.6 53.5 52.8 50.3 Medicaid 4.2 4.2 4.0 4.5 3.9 5.0 Medicare Advantage 11.5 12.0 12.1 11.0 12.2 12.3 Medicaid Managed 5.6 6.3 7.3 8.0 9.1 9.1 Commercial insurance and other 20.9 22.0 22.0 23.0 22.0 23.3 Patient criteria data: Revenues: Compliant patients 88.5 % 86.0 % 88.3 % Site neutral 11.5 % 14.0 % 11.7 % Revenues per patient day: Compliant patients $ 1,853 $ 1,816 $ 1,806 Site neutral 926 1,041 1,053 Total 1,662 1,645 1,667 Admissions: Medicare 8,919 8,253 7,861 7,351 7,529 6,743 (18.3 ) Medicaid 463 386 375 336 354 381 (1.3 ) Medicare Advantage 1,453 1,382 1,327 1,210 1,354 1,239 (10.3 ) Medicaid Managed 733 768 861 787 851 903 17.6 Commercial insurance and other 1,871 1,807 1,727 1,488 1,614 1,608 (11.0 ) 13,439 12,596 12,151 11,172 11,702 10,874 (13.7 ) Patient days: Medicare 229,004 219,013 202,482 186,290 187,738 173,916 (20.6 ) Medicaid 21,134 19,409 16,781 12,181 13,334 13,333 (31.3 ) Medicare Advantage 45,760 47,697 43,241 37,526 41,020 40,555 (15.0 ) Medicaid Managed 25,341 27,267 28,534 29,275 32,713 32,635 19.7 Commercial insurance and other 62,769 63,009 59,856 54,148 53,695 54,809 (13.0 ) 384,008 376,395 350,894 319,420 328,500 315,248 (16.2 ) Average length of stay: Medicare 25.7 26.5 25.8 25.3 24.9 25.8 (2.8 ) Medicaid 45.6 50.3 44.7 36.3 37.7 35.0 (30.4 ) Medicare Advantage 31.5 34.5 32.6 31.0 30.3 32.7 (5.2 ) Medicaid Managed 34.6 35.5 33.1 37.2 38.4 36.1 1.8 Commercial insurance and other 33.5 34.9 34.7 36.4 33.3 34.1 (2.2 ) Weighted average 28.6 29.9 28.9 28.6 28.1 29.0 (3.0 ) Revenues per admission: Medicare $ 41,717 $ 42,579 $ 39,945 $ 38,602 $ 37,867 $ 39,219 (7.9 ) Medicaid 57,928 69,797 61,338 70,333 60,091 69,304 (0.7 ) Medicare Advantage 51,080 55,105 52,363 48,387 48,555 51,958 (5.7 ) Medicaid Managed 49,287 51,696 48,631 54,238 57,736 53,159 2.8 Commercial insurance and other 71,651 77,193 73,515 82,066 73,750 76,007 (1.5 ) Weighted average 47,868 50,309 47,348 47,507 46,170 48,322 (3.9 ) Revenues per patient day: Medicare $ 1,625 $ 1,605 $ 1,551 $ 1,523 $ 1,519 $ 1,521 (5.2 ) Medicaid 1,269 1,388 1,371 1,940 1,595 1,980 42.7 Medicare Advantage 1,622 1,597 1,607 1,560 1,603 1,587 (0.6 ) Medicaid Managed 1,426 1,456 1,467 1,458 1,502 1,471 1.0 Commercial insurance and other 2,136 2,214 2,121 2,255 2,217 2,230 0.7 Weighted average 1,675 1,684 1,640 1,662 1,645 1,667 (1.0 ) Medicare case mix index (discharged patients only) 1.163 1.179 1.172 1.153 1.172 1.171 (0.7 ) Average daily census 4,220 4,136 3,814 3,472 3,650 3,464 (16.2 ) Occupancy % 68.0 67.5 61.6 64.1 67.6 64.3 (4.7 ) KINDRED HEALTHCARE, INC. Condensed Business Segment Data (Continued) (Unaudited) Second quarter 2016 Quarters 2017 Quarters % change v. First Second Third Fourth First Second prior year Same-hospital data (a): End of period data: Number of transitional care hospitals 77 77 77 77 77 77 Number of licensed beds 5,894 5,894 5,894 5,894 5,894 5,894 Revenues (000s) $ 557,237 $ 552,040 $ 503,652 $ 516,917 $ 523,704 $ 510,763 (7.5 ) Revenue mix %: Medicare 58.1 55.3 54.0 53.0 52.3 50.4 Medicaid 3.8 3.9 3.7 4.6 4.1 5.1 Medicare Advantage 11.2 11.7 12.2 11.0 12.1 12.0 Medicaid Managed 5.8 6.7 7.9 8.2 9.4 9.3 Commercial insurance and other 21.1 22.4 22.2 23.2 22.1 23.2 Patient criteria data: Revenues: Compliant patients 88.7 % 85.9 % 88.4 % Site neutral 11.3 % 14.1 % 11.6 % Revenues per patient day: Compliant patients $ 1,860 $ 1,821 $ 1,809 Site neutral 924 1,049 1,058 Total 1,670 1,650 1,670 Admissions: Medicare 7,722 7,100 6,787 7,046 7,225 6,568 (7.5 ) Medicaid 395 342 343 336 354 381 11.4 Medicare Advantage 1,203 1,128 1,151 1,166 1,307 1,184 5.0 Medicaid Managed 632 702 791 787 849 891 26.9 Commercial insurance and other 1,543 1,512 1,442 1,434 1,543 1,542 2.0 11,495 10,784 10,514 10,769 11,278 10,566 (2.0 ) Patient days: Medicare 198,076 188,342 174,752 178,964 179,933 168,583 (10.5 ) Medicaid 14,670 13,547 12,085 12,175 13,587 13,307 (1.8 ) Medicare Advantage 37,960 40,229 38,033 36,496 39,536 38,690 (3.8 ) Medicaid Managed 22,421 24,893 26,687 29,284 32,701 32,363 30.0 Commercial insurance and other 52,803 53,313 51,153 52,688 51,732 52,818 (0.9 ) 325,930 320,324 302,710 309,607 317,489 305,761 (4.5 ) Average length of stay: Medicare 25.7 26.5 25.7 25.4 24.9 25.7 (3.2 ) Medicaid 37.1 39.6 35.2 36.2 38.4 34.9 (11.8 ) Medicare Advantage 31.6 35.7 33.0 31.3 30.2 32.7 (8.4 ) Medicaid Managed 35.5 35.5 33.7 37.2 38.5 36.3 2.4 Commercial insurance and other 34.2 35.3 35.5 36.7 33.5 34.3 (2.9 ) Weighted average 28.4 29.7 28.8 28.8 28.2 28.9 (2.6 ) Revenues per admission: Medicare $ 41,951 $ 42,976 $ 40,050 $ 38,855 $ 37,886 $ 39,155 (8.9 ) Medicaid 53,157 62,759 54,745 70,243 61,194 68,882 9.8 Medicare Advantage 51,858 57,332 53,664 48,813 48,567 51,814 (9.6 ) Medicaid Managed 51,511 52,424 50,079 54,280 57,873 53,413 1.9 Commercial insurance and other 76,054 81,993 77,444 83,620 74,989 76,792 (6.3 ) Weighted average 48,476 51,191 47,903 48,000 46,436 48,340 (5.6 ) Revenues per patient day: Medicare $ 1,635 $ 1,620 $ 1,555 $ 1,530 $ 1,521 $ 1,525 (5.9 ) Medicaid 1,431 1,584 1,554 1,939 1,594 1,972 24.5 Medicare Advantage 1,643 1,608 1,624 1,560 1,606 1,586 (1.4 ) Medicaid Managed 1,452 1,478 1,484 1,459 1,503 1,471 (0.5 ) Commercial insurance and other 2,222 2,325 2,183 2,276 2,237 2,242 (3.6 ) Weighted average 1,710 1,723 1,664 1,670 1,650 1,670 (3.1 ) Average daily census 3,582 3,520 3,290 3,365 3,528 3,360 (4.5 )

__________

(a) All historical statistics have been adjusted to present the ongoing hospital division portfolio excluding four hospitals acquired during the second quarter of 2016. See reconciliation of same-hospital revenues to reported hospital revenues on page 17.

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 and the expected timing of such exit, including the receipt of all required regulatory approvals and the satisfaction of the closing conditions for the transaction, as well as the Company’s ability to realize the anticipated benefits, sale proceeds, cost savings and strategic gains from this transaction, 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 words such as “anticipate,” “approximate,” “believe,” “plan,” “estimate,” “expect,” “project,” “could,” “would,” “should,” “will,” “intend,” “hope,” “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, and 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 (the “SEC”).

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 Measures

In addition to the results provided in accordance with GAAP, the Company has provided information in this earnings release using certain non-GAAP measures. The use of these non-GAAP measures is 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.

During the first quarter of 2017, the Company revised its definitions of “core” non-GAAP measures. As revised, the Company’s core non-GAAP measures, including core net income attributable to Kindred, core EBITDAR, core diluted EPS, core operating cash flows and core free cash flows, no longer exclude (1) transaction, integration, research and development, and litigation contingency expenses that are not individually material, (2) non-restructuring related facility closing charges, and (3) non-executive or non-restructuring related severance, retirement and retention costs. For comparability, “core” results for 2016 have been revised to conform to the current year presentation.

EBITDAR: The Company defines EBITDAR as earnings before interest, income taxes, depreciation, amortization and total rent, and believes that the presentation of EBITDAR is useful to investors because creditors, securities analysts and investors use EBITDAR 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, Segment adjusted operating income (loss) 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 adjusted operating income (loss) as EBITDAR, excluding litigation contingency expense, impairment charges, restructuring charges, transaction costs, and the allocation of support center overhead.

Non-GAAP Measures (Continued)

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 impairments, business interruption settlements, restructuring charges, debt amendment costs, executive or restructuring-related severance, retirement and retention costs, restructuring-related facility closing charges, and material transaction, integration, litigation, and research and development costs. 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 measures of operational performance that are meaningful to investors, and for the measurement 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.

Same-Hospital Revenues: The same-hospital revenues are calculated by excluding from the Company’s Hospital Division revenues the results from one hospital that closed during the second quarter of 2017, four hospitals acquired in 2016, 15 hospitals sold in 2016, and three hospitals that closed during 2016. 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 business interruption settlements, restructuring charges, debt amendment costs, executive or restructuring-related severance, retirement and retention costs, restructuring-related facility closing charges, and material transaction, integration, litigation, and research and development costs, 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 business interruption settlements, restructuring charges, debt amendment costs, executive or restructuring-related severance, retirement and retention costs, restructuring-related facility closing charges, and material transaction, integration, litigation, and research and development costs, 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 Measures

(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 measures for the three months ended June 30, 2017 and 2016, and for the six months ended June 30, 2017 and 2016, 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, including the deferred tax valuation allowance for the three months and six months ended June 30, 2017, was calculated using an effective income tax rate of 17.0% and 14.3% for the three months ended June 30, 2017 and 2016, respectively, and 19.2% and 24.1% for the six months ended June 30, 2017 and 2016, respectively. The difference in the effective income tax rate compared to the same prior year period is primarily attributable to the deferred tax valuation allowance and, for 2016, 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, 2017 2016 2017 2016 Reconciliation of income from continuing operations before charges: As reported: Income (loss) from continuing operations attributable to Kindred ($118,995 ) $ 19,113 ($122,927 ) $ 30,923 Diluted income (loss) per common share from continuing operations ($1.36 ) $ 0.21 ($1.41 ) $ 0.35 Weighted average diluted shares outstanding 87,506 87,500 87,297 87,374 Detail of charges: Restructuring charges: Facility/branch divestitures and closings ($2,842 ) $ 759 ($8,202 ) $ 418 Retention and severance costs (274 ) (446 ) (3,015 ) (1,370 ) Transaction costs - (649 ) - (1,085 ) (3,116 ) (336 ) (11,217 ) (2,037 ) Lease termination costs (charged to rent restructuring charges) (1,934 ) (462 ) (3,839 ) (713 ) Impairment charges (135,829 ) (6,131 ) (136,303 ) (13,919 ) RehabCare Collection Litigation (25,304 ) - (25,304 ) - Research and development - (3,076 ) - (3,939 ) Litigation contingency expense - (750 ) - (1,775 ) Business interruption settlements 1,803 171 1,803 1,309 Debt amendment fees not capitalized - (1,103 ) - (1,103 ) Gentiva transaction costs: Professional and consulting fees - (1,319 ) - (2,367 ) Severance and retention - (355 ) - (910 ) (164,380 ) (13,361 ) (174,860 ) (25,454 ) Income tax benefit 64,684 1,910 68,808 6,132 Deferred tax valuation allowance (36,734 ) - (35,169 ) - Charges net of income taxes (136,430 ) (11,451 ) (141,221 ) (19,322 ) Noncontrolling interests 320 1,016 320 1,016 (136,110 ) (10,435 ) (140,901 ) (18,306 ) Allocation to participating unvested restricted stockholders - 248 - 353 Available to common stockholders ($136,110 ) ($10,187 ) ($140,901 ) ($17,953 ) Diluted loss per common share related to charges ($1.56 ) ($0.12 ) ($1.61 ) ($0.20 ) Weighted average diluted shares outstanding 87,506 87,500 87,297 87,374 Core: Income from continuing operations attributable to Kindred before charges $ 17,115 $ 29,548 $ 17,974 $ 49,229 Diluted earnings per common share from continuing operations before charges (a) $ 0.19 $ 0.33 $ 0.20 $ 0.55

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

88,165 87,500 87,956 87,374 Reconciliation of effective income tax rate before charges: Effective income tax rate before charges 29.5 % 33.4 % 33.3 % 33.9 % Impact of charges on effective income tax rate -16.5 % 5.6 % -21.3 % 3.3 % Reported effective income tax rate 13.0 % 39.0 % 12.0 % 37.2 %

__________

(a) For purposes of computing diluted earnings per common share before charges, income from continuing operations before charges was reduced by $0.5 million and $0.7 million for the three months ended June 30, 2017 and 2016, respectively, and by $0.4 million and $1.0 million for the six months ended June 30, 2017 and 2016, respectively, for the allocation of income to participating unvested restricted stockholders. KINDRED HEALTHCARE, INC. Reconciliation of GAAP Results to Non-GAAP Measures (Continued) (Unaudited) (In thousands) A reconciliation of revenues for home health for each historical period follows: Second quarter 2016 Quarters 2017 Quarters % change v. First Second Third Fourth First Second prior year Home health $ 363,730 $ 370,327 $ 373,980 $ 369,198 $ 376,736 $ 384,954 3.9 Community care and other 66,305 68,229 75,978 74,875 74,095 74,222 Reported home health revenues $ 430,035 $ 438,556 $ 449,958 $ 444,073 $ 450,831 $ 459,176 4.7 A reconciliation of revenues for the Hospital Division for each historical period follows: Second quarter 2016 Quarters 2017 Quarters % change v. First Second Third Fourth First Second prior year Transitional care hospitals $ 643,299 $ 633,695 $ 575,323 $ 530,746 $ 540,280 $ 525,458 (17.1 )

Sub-acute units and one skilled nursing facility

10,799 11,711 13,620 15,118 16,366 15,351 Reported hospital division revenues $ 654,098 $ 645,406 $ 588,943 $ 545,864 $ 556,646 $ 540,809 (16.2 ) A reconciliation of reported hospital revenues to same-hospital revenues for each historical period follows: Second quarter 2016 Quarters 2017 Quarters % change v. First Second Third Fourth First Second prior year Transitional care hospitals $ 643,299 $ 633,695 $ 575,323 $ 530,746 $ 540,280 $ 525,458 (17.1 ) Hospitals acquired during 2016 (a) - (2,836 ) (10,655 ) (9,958 ) (11,717 ) (12,470 ) Hospitals sold during 2016 (b) (71,941 ) (64,084 ) (47,098 ) 732 449 (623 ) Hospital closed during 2017 (c) (5,850 ) (5,871 ) (5,010 ) (4,420 ) (5,276 ) (2,159 ) Hospitals closed during 2016 (d) (8,271 ) (8,864 ) (8,908 ) (183 ) (32 ) 557 Same-hospital revenues $ 557,237 $ 552,040 $ 503,652 $ 516,917 $ 523,704 $ 510,763 (7.5 )

__________

(a) Four hospitals acquired during the second quarter of 2016.

(b) Three hospitals sold during the second quarter of 2016 and 12 hospitals sold during the fourth quarter of 2016.

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

KINDRED HEALTHCARE, INC. Reconciliation of GAAP Results to Non-GAAP Measures (Continued) (Unaudited) (In thousands, except per share amounts) Three months ended June 30, 2017 Charges Deferred Business RehabCare tax Before As interruption Collection Impairment Restructuring valuation charges reported settlements Litigation charges charges allowance Total

(“core”) (a)

Income (loss) from continuing operations: Segment adjusted operating income (loss): Kindred at Home: Home health $ 76,592 $ (795 ) $ - $ - $ - $ - $ (795 ) $ 75,797 Hospice 32,784 - - - - - - 32,784 109,376 (795 ) - - - - (795 ) 108,581 Hospital division 91,580 (1,008 ) - - - - (1,008 ) 90,572 Kindred Rehabilitation Services: Kindred Hospital Rehabilitation Services 53,422 - - - - - - 53,422 RehabCare (17,301 ) - 25,304 - - - 25,304 8,003 36,121 - 25,304 - - - 25,304 61,425 Support center expenses (62,572 ) - - - - - - (62,572 ) Impairment charges (135,829 ) - - 135,829 - - 135,829 - Restructuring charges (3,116 ) - - - 3,116 - 3,116 - Building rent (64,861 ) - - - - - - (64,861 ) Equipment rent (8,861 ) - - - - - - (8,861 ) Restructuring charges - rent (1,934 ) - - - 1,934 - 1,934 - Depreciation and amortization (25,651 ) - - - - - - (25,651 ) Interest, net (58,573 ) - - - - - - (58,573 )

Income (loss) from continuing operations before income taxes

(124,320 ) (1,803 ) 25,304 135,829 5,050 - 164,380 40,060 Provision (benefit) for income taxes (16,116 ) (709 ) 9,957 53,449 1,987 (36,734 ) 27,950 11,834 (108,204 ) (1,094 ) 15,347 82,380 3,063 36,734 136,430 28,226 Noncontrolling interests (10,791 ) - (320 ) - - - (320 ) (11,111 ) Income (loss) attributable to Kindred $ (118,995 ) $ (1,094 ) $ 15,027 $ 82,380 $ 3,063 $ 36,734 $ 136,110 $ 17,115 Diluted earnings (loss) per common share $ (1.36 ) $ 0.19

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

87,506 88,165 Three months ended June 30, 2016 Charges Gentiva Business transaction Before As interruption Litigation Impairment Research and Debt Restructuring and charges reported settlements contingency charges development amendment charges integration Total

(“core”) (a)

Income from continuing operations: Segment adjusted operating income: Kindred at Home: Home health $ 76,030 $ (171 ) $ - $ - $ - $ - $ - $ - $ (171 ) $ 75,859 Hospice 31,329 - - - - - - - - 31,329 107,359 (171 ) - - - - - - (171 ) 107,188 Hospital division 127,510 - - - - - - - - 127,510 Kindred Rehabilitation Services: Kindred Hospital Rehabilitation Services 50,729 - - - - - - - - 50,729 RehabCare 7,363 - - - - - - - - 7,363 58,092 - - - - - - - - 58,092 Support center expenses (68,444 ) - - - 3,076 1,103 - - 4,179 (64,265 ) Litigation contingency expense (930 ) - 750 - - - - - 750 (180 ) Impairment charges (6,131 ) - - 6,131 - - - - 6,131 - Restructuring charges (336 ) - - - - - 336 - 336 - Transaction costs (1,846 ) - - - - - - 1,674 1,674 (172 ) Building rent (67,025 ) - - - - - - - - (67,025 ) Equipment rent (11,211 ) - - - - - - - - (11,211 ) Restructuring charges - rent (462 ) - - - - - 462 - 462 - Depreciation and amortization (33,198 ) - - - - - - - - (33,198 ) Interest, net (57,567 ) - - - - - - - - (57,567 )

Income from continuing operations before income taxes

45,811 (171 ) 750 6,131 3,076 1,103 798 1,674 13,361 59,172 Provision for income taxes 17,851 (129 ) (1,511 ) 4,633 2,324 833 (5,505 ) 1,265 1,910 19,761 27,960 (42 ) 2,261 1,498 752 270 6,303 409 11,451 39,411 Noncontrolling interests (8,847 ) - - (1,016 ) - - - - (1,016 ) (9,863 ) Income attributable to Kindred $ 19,113 $ (42 ) $ 2,261 $ 482 $ 752 $ 270 $ 6,303 $ 409 $ 10,435 $ 29,548 Diluted earnings per common share $ 0.21 $ 0.33

Diluted shares used in computing earnings per common share

87,500 87,500

__________

(a) During the first quarter of 2017, the Company revised its definitions of “core” non-GAAP measures. See “Non-GAAP Measures” beginning on page 14 for a discussion regarding the revised definitions. For comparability, core results for 2016 have been revised to conform to the current year presentation. KINDRED HEALTHCARE, INC. Reconciliation of GAAP Results to Non-GAAP Measures (Continued) (Unaudited) (In thousands, except per share amounts) Six months ended June 30, 2017 Charges Deferred Business RehabCare tax Before As interruption Collection Impairment Restructuring valuation charges reported settlements Litigation charges charges allowance Total

(“core”) (a)

Income (loss) from continuing operations: Segment adjusted operating income (loss): Kindred at Home: Home health $ 140,342 $ (795 ) $ - $ - $ - $ - $ (795 ) $ 139,547 Hospice 60,365 - - - - - - 60,365 200,707 (795 ) - - - - (795 ) 199,912 Hospital division 185,018 (1,008 ) - - - - (1,008 ) 184,010 Kindred Rehabilitation Services: Kindred Hospital Rehabilitation Services 105,182 - - - - - - 105,182 RehabCare (12,369 ) - 25,304 - - - 25,304 12,935 92,813 - 25,304 - - - 25,304 118,117 Support center expenses (122,586 ) - - - - - - (122,586 ) Impairment charges (136,303 ) - - 136,303 - - 136,303 - Restructuring charges (11,217 ) - - - 11,217 - 11,217 - Building rent (129,517 ) - - - - - - (129,517 ) Equipment rent (17,748 ) - - - - - - (17,748 ) Restructuring charges - rent (3,839 ) - - - 3,839 - 3,839 - Depreciation and amortization (55,471 ) - - - - - - (55,471 ) Interest, net (117,392 ) - - - - - - (117,392 )

Income (loss) from continuing operations before income taxes

(115,535 ) (1,803 ) 25,304 136,303 15,056 - 174,860 59,325 Provision (benefit) for income taxes (13,882 ) (709 ) 9,957 53,635 5,925 (35,169 ) 33,639 19,757 (101,653 ) (1,094 ) 15,347 82,668 9,131 35,169 141,221 39,568 Noncontrolling interests (21,274 ) - (320 ) - - - (320 ) (21,594 ) Income (loss) attributable to Kindred $ (122,927 ) $ (1,094 ) $ 15,027 $ 82,668 $ 9,131 $ 35,169 $ 140,901 $ 17,974 Diluted earnings (loss) per common share $ (1.41 ) $ 0.20

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

87,297 87,956 Six months ended June 30, 2016 Charges Gentiva Business transaction Before As interruption Litigation Impairment Research and Debt Restructuring and charges reported settlements contingency charges development amendment charges integration Total

(“core”) (a)

Income from continuing operations: Segment adjusted operating income: Kindred at Home: Home health $ 142,971 $ (1,309 ) $ - $ - $ - $ - $ - $ - $ (1,309 ) $ 141,662 Hospice 56,195 - - - - - - - - 56,195 199,166 (1,309 ) - - - - - - (1,309 ) 197,857 Hospital division 263,926 - - - - - - - - 263,926 Kindred Rehabilitation Services: Kindred Hospital Rehabilitation Services 98,848 - - - - - - - - 98,848 RehabCare 13,399 - - - - - - - - 13,399 112,247 - - - - - - - - 112,247 Support center expenses (140,466 ) - - - 3,939 1,103 - - 5,042 (135,424 ) Litigation contingency expense (2,840 ) - 1,775 - - - - - 1,775 (1,065 ) Impairment charges (13,919 ) - - 13,919 - - - - 13,919 - Restructuring charges (2,037 ) - - - - - 2,037 - 2,037 - Transaction costs (3,531 ) - - - - - - 3,277 3,277 (254 ) Building rent (133,010 ) - - - - - - - - (133,010 ) Equipment rent (21,369 ) - - - - - - - - (21,369 ) Restructuring charges - rent (713 ) - - - - - 713 - 713 - Depreciation and amortization (66,752 ) - - - - - - - - (66,752 ) Interest, net (114,820 ) - - - - - - - - (114,820 )

Income from continuing operations before income taxes

75,882 (1,309 ) 1,775 13,919 3,939 1,103 2,750 3,277 25,454 101,336 Provision for income taxes 28,261 (634 ) (473 ) 6,746 1,909 534 (3,538 ) 1,588 6,132 34,393 47,621 (675 ) 2,248 7,173 2,030 569 6,288 1,689 19,322 66,943 Noncontrolling interests (16,698 ) - - (1,016 ) - - - - (1,016 ) (17,714 ) Income attributable to Kindred $ 30,923 $ (675 ) $ 2,248 $ 6,157 $ 2,030 $ 569 $ 6,288 $ 1,689 $ 18,306 $ 49,229 Diluted earnings per common share $ 0.35 $ 0.55

Diluted shares used in computing earnings per common share

87,374 87,374

__________

(a)

During the first quarter of 2017, the Company revised its definitions of “core” non-GAAP measures. See “Non-GAAP Measures” beginning on page 14 for a discussion regarding the revised definitions. For comparability, core results for 2016 have been revised to conform to the current year presentation.

KINDRED HEALTHCARE, INC. Reconciliation of GAAP Results to Non-GAAP Measures (Continued) (Unaudited) (In thousands, except per share amounts) Three months ended March 31, 2017 Charges Deferred tax Before As Impairment Restructuring valuation charges reported charges charges allowance Total

(“core”) (a)

Income from continuing operations: Segment adjusted operating income: Kindred at Home: Home health $ 63,750 $ - $ - $ - $ - $ 63,750 Hospice 27,581 - - - - 27,581 91,331 - - - - 91,331 Hospital division 93,438 - - - - 93,438 Kindred Rehabilitation Services: Kindred Hospital Rehabilitation Services 51,760 - - - - 51,760 RehabCare 4,932 - - - - 4,932 56,692 - - - - 56,692 Support center expenses (60,014 ) - - - - (60,014 ) Impairment charges (474 ) 474 - - 474 - Restructuring charges (8,101 ) - 8,101 - 8,101 - Building rent (64,656 ) - - - - (64,656 ) Equipment rent (8,887 ) - - - - (8,887 ) Restructuring charges - rent (1,905 ) - 1,905 - 1,905 - Depreciation and amortization (29,820 ) - - - - (29,820 ) Interest, net (58,819 ) - - - - (58,819 )

Income from continuing operations before income taxes

8,785

474 10,006 - 10,480 19,265 Provision for income taxes 2,234 187 3,937 1,565 5,689 7,923 6,551 $ 287 $ 6,069 $ (1,565 ) $ 4,791 11,342 Noncontrolling interests (10,483 ) (10,483 ) Income (loss) attributable to Kindred $ (3,932 ) $ 859 Diluted earnings (loss) per common share $ (0.05 ) $ 0.01

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

87,085 87,744 Three months ended March 31, 2016 Charges Gentiva Business transaction Before As interruption Litigation Impairment Research and Restructuring and charges reported settlements contingency charges development charges integration Total

(“core”) (a)

Income from continuing operations: Segment adjusted operating income: 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 Hospital division 136,416 - - - - - - - 136,416 Kindred Rehabilitation Services: Kindred Hospital Rehabilitation Services 48,119 - - - - - - - 48,119 RehabCare 6,036 - - - - - - - 6,036 54,155 - - - - - - - 54,155 Support center expenses (72,022 ) - - - 863 - - 863 (71,159 ) Litigation contingency expense (1,910 ) - 1,025 - - - - 1,025 (885 ) Impairment charges (7,788 ) - - 7,788 - - - 7,788 - Restructuring charges (1,701 ) - - - - 1,701 - 1,701 - Transaction costs (1,685 ) - - - - - 1,603 1,603 (82 ) Building rent (65,985 ) - - - - - - - (65,985 ) Equipment rent (10,158 ) - - - - - - - (10,158 ) Restructuring charges - rent (251 ) - - - - 251 - 251 - Depreciation and amortization (33,554 ) - - - - - - - (33,554 ) Interest, net (57,253 ) - - - - - - - (57,253 )

Income from continuing operations before income taxes

30,071 (1,138 ) 1,025 7,788 863 1,952 1,603 12,093 42,164 Provision for income taxes 10,410 (397 ) 358 2,719 301 681 560 4,222 14,632 19,661 $ (741 ) $ 667 $ 5,069 $ 562 $ 1,271 $ 1,043 $ 7,871 27,532 Noncontrolling interests (7,851 ) (7,851 ) Income attributable to Kindred $ 11,810 $ 19,681 Diluted earnings per common share $ 0.13 $ 0.22

Diluted shares used in computing earnings per common share

87,249 87,249

__________

(a) During the first quarter of 2017, the Company revised its definitions of “core” non-GAAP measures. See “Non-GAAP Measures” beginning on page 14 for a discussion regarding the revised definitions. For comparability, core results for 2016 have been revised to conform to the current year presentation. KINDRED HEALTHCARE, INC. Reconciliation of GAAP Results to Non-GAAP Measures (Continued) (Unaudited) (In thousands, except per share amounts) Three months ended September 30, 2016 Charges Gentiva Deferred transaction tax Before As Impairment Research and Restructuring and valuation charges reported charges development charges integration allowance Total

(“core”) (a)

Income (loss) from continuing operations: Segment adjusted operating income: Kindred at Home: Home health $ 75,073 $ - $ - $ - $ - $ - $ - $ 75,073 Hospice 31,326 - - - - - - 31,326 106,399 - - - - - - 106,399 Hospital division 83,940 - - - - - - 83,940 Kindred Rehabilitation Services: Kindred Hospital Rehabilitation Services 49,759 - - - - - - 49,759 RehabCare 4,224 - - - - - - 4,224 53,983 - - - - - - 53,983 Support center expenses (62,823 ) - 3,288 - - - 3,288 (59,535 ) Impairment charges (297,276 ) 297,276 - - - - 297,276 - Restructuring charges (22,813 ) - - 22,813 - - 22,813 - Transaction costs (2,982 ) - - - 1,250 - 1,250 (1,732 ) Building rent (66,946 ) - - - 272 - 272 (66,674 ) Equipment rent (9,911 ) - - - - - - (9,911 ) Restructuring charges - rent (58,650 ) - - 58,650 - - 58,650 - Depreciation and amortization (32,995 ) - - - - - - (32,995 ) Interest, net (58,059 ) - - - - - - (58,059 )

Income (loss) from continuing operations before income taxes

(368,133 ) 297,276 3,288 81,463 1,522 - 383,549 15,416 Provision for income taxes 285,003 52,052 1,234 30,573 571 (366,470 ) (282,040 ) 2,963 (653,136 ) 245,224 2,054 50,890 951 366,470 665,589 12,453 Noncontrolling interests (9,574 ) (288 ) - - - - (288 ) (9,862 ) Income (loss) attributable to Kindred $ (662,710 ) $ 244,936 $ 2,054 $ 50,890 $ 951 $ 366,470 $ 665,301 $ 2,591 Diluted earnings (loss) per common share $ (7.63 ) $ 0.03

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

86,869 87,529 Three months ended December 31, 2016 Charges Gentiva Deferred Business transaction tax Before As interruption Impairment Research and Restructuring and valuation charges reported settlements charges development charges integration allowance Total

(“core”) (a)

Income (loss) from continuing operations: Segment adjusted operating income: Kindred at Home: Home health $ 61,487 $ (302 ) $ - $ - $ - $ - $ - $ (302 ) $ 61,185 Hospice 28,805 (1,137 ) - - - - - (1,137 ) 27,668 90,292 (1,439 ) - - - - - (1,439 ) 88,853 Hospital division 93,778 (630 ) - - - - - (630 ) 93,148 Kindred Rehabilitation Services: Kindred Hospital Rehabilitation Services 49,728 - - - - - - - 49,728 RehabCare 1,032 - - - - - - - 1,032 50,760 - - - - - - - 50,760 Support center expenses (58,627 ) - - 4,293 - - - 4,293 (54,334 ) Impairment charges (3,534 ) - 3,534 - - - - 3,534 - Restructuring charges (9,884 ) - - - 9,884 - - 9,884 - Transaction costs (2,166 ) - - - - 1,779 - 1,779 (387 ) Building rent (64,350 ) - - - - - - - (64,350 ) Equipment rent (8,649 ) - - - - - - - (8,649 ) Restructuring charges - rent (2,029 ) - - - 2,029 - - 2,029 - Depreciation and amortization (32,072 ) - - - - - - - (32,072 ) Interest, net (58,625 ) - - - - - - - (58,625 )

Income (loss) from continuing operations before income taxes

(5,106 ) (2,069 ) 3,534 4,293 11,913 1,779 - 19,450 14,344 Provision for income taxes 998 (2,381 ) 4,067 4,940 13,710 1,674 (22,002 ) 8 1,006 (6,104 ) $ 312 $ (533 ) $ (647 ) $ (1,797 ) $ 105 $ 22,002 $ 19,442 13,338 Noncontrolling interests (8,575 ) (8,575 ) Income (loss) attributable to Kindred $ (14,679 ) $ 4,763 Diluted earnings (loss) per common share $ (0.17 ) $ 0.05

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

86,904 87,641

__________

(a) During the first quarter of 2017, the Company revised its definitions of “core” non-GAAP measures. See “Non-GAAP Measures” beginning on page 14 for a discussion regarding the revised definitions. For comparability, core results for 2016 have been revised to conform to the current year presentation. KINDRED HEALTHCARE, INC. Reconciliation of GAAP Results to Non-GAAP Measures (Continued) (Unaudited) (In thousands) Three months ended Six months ended June 30, June 30, 2017 2016 2017 2016

Reconciliation of net cash flows provided by operating activities to core operating cash flows and core free cash flows:

Net cash flows provided by operating activities $ 92,669 $ 135,208 $ 31 $ 4,868

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

Transaction, severance, research and development, and retention 2,231 6,092 9,217 10,933 Business interruption settlements (1,803 ) (171 ) (3,796 ) (1,309 ) Lease termination fees - restructuring 2,035 3,500 4,033 3,500 Capitalized lender fees related to debt amendment - 7,333 5,403 7,333 Other debt refinancing costs (expensed) - 626 - 626 Litigation 750 1,900 9,286 129,569 3,213 19,280 24,143 150,652

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

95,882 154,488 24,174 155,520 Benefit of reduced income tax payments resulting from certain payments (a) (3,596 ) (28,224 ) (3,596 ) (28,224 )

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

92,286 126,264 20,578 127,296 Less routine capital expenditures (17,396 ) (28,724 ) (29,337 ) (46,830 ) Less distributions to noncontrolling interests (12,500 ) (14,231 ) (38,301 ) (30,546 ) Free cash flows excluding certain items (core free cash flows) $ 62,390 $ 83,309 ($47,060 ) $ 49,920

__________

(a) The Company has estimated that it will not pay federal and state income taxes (where state unitary or consolidated tax returns are allowed) in 2017 due to anticipated loss associated with the sale of the Company’s skilled nursing facility business. In 2016, the Company did not pay these taxes as a result of a consolidated taxable loss. These cash savings in both years are recognized in GAAP cash flows and offer additional sources of cash when evaluating the Company’s cash flow generating capability before certain payments. After the sale of the skilled nursing facility business, the Company anticipates it will have approximately $800 million of net operating losses that should offset approximately 90% of core book tax estimates until exhausted.

View source version on businesswire.com: http://www.businesswire.com/news/home/20170803006408/en/

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

Kindred Healthcare (NYSE:KND)
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