KND Kindred Healthcare, Inc. (delisted)

Consolidated Revenues of $1.48 Billion, GAAP Loss from Continuing Operations of $18 Million(1), GAAP Diluted Loss Per Share from Continuing Operations of $0.33(1), EBITDAR of $141 Million(2) and EBITDA of $66 Million(3) in the Third Quarter

Results Reflect After-Tax Costs of $19 Million Primarily Related to Restructuring Charges of $11 Million and a Non-Cash Deferred Tax Asset Valuation Allowance of $7 Million

GAAP and Core Results Include Negative Pretax Earnings Impact of $16 Million from Hurricanes and $3 Million from LTAC Hospital Closures and Diluted EPS Impact of $0.11 from Hurricanes and $0.02 from LTAC Closures

Core EBITDAR of $157 Million(4), Core EBITDA of $84 Million(4) and Core Diluted Loss Per Share from Continuing Operations of $0.11(4) in the Third Quarter

Third Quarter GAAP Operating Cash Flows of $8 Million(4), Core Operating Cash Flows of $30 Million(4) and Core Free Cash Flows of $3 Million(4)

Company Generated $281 Million of Cash Primarily from Restructuring Certain Funding Mechanisms for Insurance Programs;Proceeds Utilized to Reduce Financial Leverage(5)

Company Updates Outlook for 2018

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

Benjamin A. Breier, President and Chief Executive Officer of the Company, commented, “We are pleased to report third quarter results ahead of expectations. We made good progress during the quarter on each of our ongoing key initiatives, including our plan to fully exit the skilled nursing facility business and our continuing efforts to mitigate the impact of long-term acute care (“LTAC”) patient criteria. The third quarter also presented unexpected challenges for our business, including two major hurricanes that impacted Florida and Houston, Texas. Thanks to the talented and dedicated teammates across our organization, Kindred delivered solid operating results, when adjusted for the one-time impact of Hurricanes Irma and Harvey (the “Hurricanes”) and LTAC closure costs incurred during the quarter. The GAAP and Core pretax earnings impact of the Hurricanes for the quarter was $16 million, which primarily affected both Segment adjusted operating income and Core EBITDAR of the Hospital and Kindred at Home Divisions by approximately $10 million and $5 million, respectively.”

In addressing recent Home Health regulatory activity, Mr. Breier commented, “We are pleased the Centers for Medicare and Medicaid Services (“CMS”) decided last week not to finalize the proposed Home Health Groupings Model in order to further engage stakeholders in developing a system that shifts the focus from volume of services to a more patient-centered model. We commend CMS for considering the unanimous voice of patient advocates, the home health provider community, and bipartisan Congressional leaders and for continuing an open dialogue with stakeholders regarding system design. Kindred looks forward to ongoing engagement and collaboration with CMS and Congress to develop a reformed model that strikes the right balance in promoting high quality home healthcare in a fiscally responsible manner.”

________ (1) Results reflect after-tax costs of $19.4 million or $0.22 per diluted share related to restructuring, deferred tax asset valuation allowance, litigation and the favorable settlement of a RehabCare collection litigation. (2) Results reflect pretax costs of $16.1 million related to restructuring, litigation and the favorable settlement of a RehabCare collection litigation. 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 15. The Company will not provide consolidated EBITDAR in future earnings releases. (3) Results reflect pretax costs of $18.3 million related to restructuring, litigation and the favorable settlement of a RehabCare collection litigation. As used herein, “EBITDA” means earnings before interest, income taxes, depreciation and amortization. See reconciliation of GAAP results to non-GAAP results beginning on page 15. (4) See reconciliation of GAAP results to non-GAAP results beginning on page 15. During the first quarter of 2017, the Company revised its definition of “core” non-GAAP measures. See “Non-GAAP Measures” beginning on page 15 for a discussion regarding the revised definitions. For comparability, core results for 2016 were revised to conform to the current year presentation. (5) This amount includes a $30 million distribution the Company received from its wholly owned captive insurance subsidiary in the third quarter of 2017, with the majority of proceeds and corresponding leverage reduction completed in October 2017. For further information on this distribution and subsequent insurance restructuring, see page 4.  

Mr. Breier continued, “Regarding the skilled nursing facility business, we have completed the sale and transition of operations to new operators for 68 of the 89 skilled nursing facilities and four of the seven assisted living facilities. We expect that nearly all of the remaining facilities and operations will be divested by the end of 2017. Importantly, our RehabCare business has executed agreements with many of the new operators, resulting in the continuation of services to 45 sites of service; this is in line with expectations for our 2018 Outlook, and we anticipate signing additional contracts for a portion of the facilities yet to transition. We continue to believe that the sale of our skilled nursing facility business will significantly enhance shareholder value, enable us to sharpen our focus on higher margin and faster growing businesses, and further advance our efforts to transform Kindred.”

Mr. Breier added, “The success of our ongoing LTAC patient criteria mitigation strategy resulted in our Hospital Division delivering operating results that were largely in line with expectations. LTAC compliant revenue increased to 89% from 88% in the second quarter. Managed care and commercial volumes increased 5.1% for the third quarter of 2017 on a same-hospital basis as compared to the prior year period.”

Mr. Breier concluded, “Kindred’s Hospital Division continued to execute on its portfolio optimization initiative by closing five LTAC hospitals since the end of last quarter, including one that will be converted to an inpatient rehabilitation facility (“IRF”) joint venture. We expect to further optimize our LTAC portfolio with additional closures, consolidations and IRF conversions over the coming quarters.”

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 previously disclosed, while the operating results, direct overhead, losses associated with the skilled nursing facility business divestiture and elimination of intercompany profits for certain applicable RehabCare contracts are classified as discontinued operations, they do not include any allocations of indirect overhead related to the skilled nursing facility business. In the third quarter of 2017, the Company reclassified from discontinued operations to continuing operations for all periods presented historical intercompany profits from certain RehabCare contracts that were retained with new operators of divested skilled nursing facilities. The impact of the retained contracts to third quarter 2017 loss from continuing operations before income taxes, Core EBITDAR and Core EBITDA was $2.0 million.

Based on recent discussions with the staff of the Securities and Exchange Commission (the “SEC”), and consistent with similar actions by other companies, the Company will discontinue the use of consolidated EBITDAR as a performance measure and replace it with consolidated EBITDA when reporting its historical results and 2018 Outlook beginning in the fourth quarter of 2017. In order to assist investors with the transition, the Company is presenting in this earnings release both historical consolidated EBITDAR and EBITDA as well as its 2018 Outlook for these measures. The Company will not provide consolidated EBITDAR in future earnings releases. The Company will continue to report Segment adjusted operating income (loss), which is the performance measure used by the Company’s chief operating decision makers in accordance with “Accounting Standard Codification 280 – Segment Reporting,” and Core EBITDAR by segment.(1)

Third Quarter Consolidated Results(1):

• Consolidated revenues were $1.48 billion, a 5.5% year-over-year decrease, primarily attributable to the impact of the transition to LTAC patient criteria and the sale or closure of 21 LTAC hospitals since the third quarter of 2016. GAAP loss from continuing operations was $18.4 million compared to a loss of $649.2 million in the same period a year ago. The reduction in the loss was primarily due to a $359.1 million decrease in the deferred tax asset valuation allowance, a $243.8 million decrease in impairment charges and a $39.1 million decrease related to restructuring charges, all partially offset by the impact of the Hurricanes, LTAC patient criteria and the sale or closure of the 21 LTAC hospitals noted above. Core EBITDAR declined to $156.9 million compared to $185.6 million and Core EBITDA declined to $83.9 million compared to $109.0 million in the same period of 2016, both primarily due to the impact of the Hurricanes, LTAC patient criteria and the sale or closure of the 21 LTAC hospitals noted above.
• GAAP operating cash flows were $8.5 million compared to $36.4 million for the same period a year ago. Core operating cash flows were $29.8 million compared to $29.5 million for the same period a year ago. Core free cash flows were $3.3 million compared to $2.9 million in the same period a year ago. GAAP operating cash flows declined

________ (1) See reconciliation of GAAP results to non-GAAP results beginning on page 15. The Company defines Segment adjusted operating income (loss) as EBITDAR for each of the Company’s operating segments, excluding litigation contingency expense, impairment charges, restructuring charges, transaction costs and the allocation of support center overhead. During the first quarter of 2017, the Company revised its definition of “core” non-GAAP measures. See “Non-GAAP Measures” beginning on page 15 for a discussion regarding the revised definitions. For comparability, core results for 2016 were revised to conform to the current year presentation.

Third Quarter Consolidated Results(1)(Continued):

compared to the prior year period due to severance, retention and transactions costs associated with the skilled nursing facility business divestiture, approximately $20 million from temporary billing delays and $16 million decline in operating results both associated with the Hurricanes. Core operating cash flows and Core free cash flows increased slightly compared to the prior year period despite the temporary billing delays and operating declines from the Hurricanes.

• GAAP diluted loss per share from continuing operations was $0.33 as compared to GAAP diluted loss per share from continuing operations of $7.58 a year ago. Both GAAP and Core diluted loss per share include a $0.11 per diluted share negative impact from the Hurricanes. The reduction in the GAAP diluted loss per share was primarily due to a decrease in deferred tax asset valuation allowance, impairment charges and restructuring charges, partially offset by the impact of the Hurricanes, LTAC patient criteria and the sale or closure of the 21 LTAC hospitals noted above. Core diluted loss per share from continuing operations was $0.11, as compared to Core diluted earnings per share (“EPS”) of $0.05 for the same period last year. Besides the impact of the Hurricanes, the decline in Core diluted EPS was primarily attributable to LTAC patient criteria.

Third Quarter Segment Results(1)(2)(3):

Our Kindred at Home Division recorded third quarter revenues that increased 0.6% over the prior year period to $642.1 million. The Hurricanes negatively impacted division revenue by $4.7 million and Segment adjusted operating income by $4.8 million. On a same-store basis, home health admissions increased 0.9% while same-store hospice admissions declined 4.3% over the prior year period. Segment adjusted operating income and Core EBITDAR both decreased 4.9% to $101.2 million for the third quarter of 2017 as compared to the prior year period as a result of the Hurricanes and patient mix shift in home health from Medicare to managed care and commercial patients. Home health direct labor costs per visit declined 3.7% and hospice direct labor costs per patient day declined 0.6% in the third quarter of 2017 both as compared to the third quarter of 2016.

Kindred’s Hospital Division third quarter revenues declined 14.6% to $503.1 million from $588.9 million in the prior year period primarily due to the elimination of approximately $70 million of revenue related to the sale or closure of 21 LTAC hospitals since the third quarter of 2016, the impact of LTAC patient criteria and a 5.2% decline in same-hospital admissions compared to last year. The Hurricanes negatively impacted division revenue by $2.8 million and Segment adjusted operating income by $9.9 million. For the third quarter of 2017, approximately 89% (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 88% (92% excluding Texas LTAC hospitals) in the second quarter of 2017. Same-hospital managed care and commercial volumes increased 5.1% in the third quarter of 2017 compared to the prior year period. Segment adjusted operating income and Core EBITDAR for the third quarter both declined to $61.5 million compared to $83.9 million for both Segment adjusted operating income and Core EBITDAR a year ago. The declines were primarily due to the impact of LTAC patient criteria, the Hurricanes, increases in labor and other costs and the elimination of approximately $4 million of Segment adjusted operating income and Core EBITDAR related to the sale or closure of the 21 LTAC hospitals noted above.

Kindred Rehabilitation Services third quarter revenues declined by 2.1% to $352.7 million as compared to $360.3 million in the prior year period, primarily due to operating fewer sites of service in RehabCare. The Hurricanes negatively impacted division revenue by $0.6 million and Segment adjusted operating income by $1.1 million. Segment adjusted operating income increased to $56.8 million as compared to $56.5 million in the prior year period. Core EBITDAR decreased to $54.5 million as compared to $56.5 million in the prior year period. The Kindred Hospital Rehabilitation Services (“KHRS”) segment achieved revenue growth of 2.0% to $173.6 million from $170.3 million a year ago due primarily to IRF revenues increasing 6.2% to $96.7 million as compared to $91.0 million in the prior year primarily due to IRF development and a 3.7% increase in revenue per discharge. KHRS Segment adjusted operating income and Core EBITDAR both declined to $49.2 million, a decrease of 1.2% compared to the same period a year ago, primarily as a result of contract losses from closed affiliated LTAC hospitals and the Hurricanes. The IRFs contributed $32.8 million to KHRS Segment adjusted operating income, a 3.6% increase over prior year, including a $0.4 million impact from the Hurricanes. RehabCare revenues declined 5.7% to $179.1 million for the third quarter of 2017, primarily due to operating fewer sites of service. RehabCare Segment adjusted operating income increased to $7.6 million

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(1) See reconciliation of GAAP results to non-GAAP results beginning on page 15. During the first quarter of 2017, the Company revised its definition of “core” non-GAAP measures. See “Non-GAAP Measures” beginning on page 15 for a discussion regarding the revised definitions. For comparability, core results for 2016 were revised to conform to the current year presentation. (2) See same-hospital and full segment data on pages 10 through 14. (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 for each of the Company’s operating segments, excluding litigation contingency expense, impairment charges, restructuring charges, transaction costs, and the allocation of support center overhead.  

Third Quarter Segment Results(1)(Continued):

compared to $6.7 million in the prior year period, primarily due to the favorable settlement of collection litigation. RehabCare Core EBITDAR declined 20.2% to $5.4 million, primarily due to operating fewer sites of service and wage rate pressure.

Discontinued Operations – Loss on Divestiture of Skilled Nursing Facility Business

During the third quarter of 2017, the Company recorded $51.3 million of pretax charges related to the planned divestiture of its skilled nursing facility business, including a loss of $17.9 million related to certain skilled nursing facilities subject to sale- leaseback accounting provisions, $2.7 million of lease termination costs, $23.8 million of transaction costs and $6.9 million of retention costs.

Insurance Program Distributions and Restructuring

In the third quarter of 2017, as a result of improved underwriting results from the Company’s wholly owned captive insurance subsidiary, Cornerstone Insurance Company (“Cornerstone”), the Company received a distribution of $30 million (the “September Distribution”). The September Distribution was used to repay a portion of the Company’s outstanding $900 million asset-based loan revolving credit facility (“ABL”), which had $156 million outstanding as of September 30, 2017, and did not have any impact on earnings or operating cash flows in the third quarter of 2017.

In October, in connection with the review of its insurance programs as part of the skilled nursing facility business exit, the Company restructured the funding mechanisms and certain other elements of its insurance programs. With respect to its workers compensation program, approximately $115 million of restricted cash collateral deposits were replaced with letters of credit and approximately $21 million of other cash deposits were released. In addition, certain funding mechanisms associated with the Company’s professional liability insurance and reinsurance agreements were modified such that approximately $106 million of cash deposits maintained at Cornerstone and $4 million of other cash deposits were released to the parent company. In both cases, no changes were made to the financial risk transfer aspects of the Company’s insurance arrangements with third parties. Also in October, as a result of further improvement in Cornerstone’s underwriting results, the Company received an additional distribution of $5 million from Cornerstone (the “October Distribution”). In aggregate, the approximately $281 million generated from the October insurance restructuring, the September Distribution and the October Distribution was used to repay in its entirety the Company’s ABL balance and to increase cash reserves. The Company expects that there will be additional cash savings from these activities over the duration of the fourth quarter that will offset approximately $11 million of estimated costs in the same period associated with the insurance restructuring.

Mr. Breier commented, “The successful restructuring of our insurance program allowed us to deliver in a significant and immediate way on our commitment to reduce our leverage. The $281 million of liberated funds represents more than half of our 2018 Outlook for EBITDA and nearly two years of projected core free cash flows. We intend to continue to explore other initiatives to delever by reducing our funded debt and growing EBITDA.”

2018 Outlook(2)

All forward-looking non-GAAP financial measures used to provide the “2018 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 2018 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.

________

(1) See reconciliation of GAAP results to non-GAAP results beginning on page 15. During the first quarter of 2017, the Company revised its definition of “core” non-GAAP measures. See “Non-GAAP Measures” beginning on page 15 for a discussion regarding the revised definitions. For comparability, core results for 2016 were revised to conform to the current year presentation. (2) See Forward-Looking Statements beginning on page 15.  

2018 Outlook(1)(Continued):

Stephen D. Farber, Executive Vice President and Chief Financial Officer of Kindred, commented, “As we have previously discussed, given the complexity and uncertain timing of several items over the remainder of the year, the Company is not providing a 2017 outlook but is instead focusing investors on its 2018 Outlook, which reflects the Company’s successful restructuring and repositioning activities in 2017. We are also expanding our 2018 Outlook to incorporate ranges for key items with this release.”

For the 2018 Outlook, Kindred anticipates:

• Annual revenues of $6.2 billion, with a range of $6.1 billion to $6.3 billion;
• Core EBITDAR of $815 million, with a range of $800 million to $830 million(2);
• Core EBITDA of $515 million, with a range of $500 million to $530 million; and
• Core diluted EPS from continuing operations of $0.75, with a range of $0.65 to $0.85.

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

• Total rent expense of approximately $295 million to $300 million;
• Depreciation and amortization expense of approximately $100 million;
• Interest expense of approximately $235 million to $240 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 35%;
• Weighted average shares outstanding of approximately 90.0 million;
• Routine capital expenditures of approximately $60 million; and
• Available tax net operating loss (“NOLs”) as of January 1, 2018 of $550 million to $600 million.

Cash Flow(1)

Mr. Farber commented, “We expect the fourth quarter of 2017 to be our strongest core operating cash flow quarter of the year, and expect to end the year with excellent liquidity, leaving no outstanding borrowings under our $900 million ABL and a large unrestricted cash balance. In addition to the previously discussed successful efforts this year to restructure the Company’s funding of its insurance programs, we expect 2018 Core free cash flows from continuing operations plus tax-related cash flows from utilizing Kindred’s NOL carry forwards to approximate $175 million at the midpoint of an estimated range. We intend to apply this cash flow primarily to repay debt and expect our adjusted debt(3) to EBITDAR(4) leverage to approximate 5.5x by the end of 2018.”

Conference Call

As previously announced, investors and the general public may access a live webcast of the third quarter 2017 conference call through a link on the Company’s website at http://investors.kindredhealthcare.com. The conference call will be held on November 7 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 7 by dialing (719) 457-0820, access code: 2677758. The phone replay will be available through November 17 and the online replay will be available through December 7.

Forward-Looking Statements and Non-GAAP Reconciliations

See page 15 for important disclosures regarding the Company’s forward-looking statements and the non-GAAP financial reconciliations that follow.

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(1) See Forward-Looking Statements beginning on page 15. (2) As previously discussed, after this earnings release, the Company will not provide consolidated EBITDAR in future earnings releases, including a 2018 Outlook for Core EBITDAR. (3) Adjusted debt includes current and long-term debt plus annual total rent expense multiplied by six less cash. (4) The Company will not provide consolidated EBITDAR in future earnings releases and will replace adjusted debt to EBITDAR leverage with debt to EBITDA leverage which excludes total rent expense multiplied by six in the numerator and includes total rent expense in the denominator.  

About Kindred Healthcare

Kindred Healthcare, Inc., a top-105 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(1). At September 30, 2017, Kindred’s continuing operations, through its subsidiaries, had approximately 86,400 employees providing healthcare services in 2,475 locations in 45 states, including 77 LTAC hospitals, 19 inpatient rehabilitation hospitals, 16 sub-acute units, 609 Kindred at Home home health, hospice and non-medical home care sites of service, 101 inpatient rehabilitation units (hospital-based) and contract rehabilitation service businesses which served 1,653 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) Revenues from continuing operations for the last twelve months ended September 30, 2017.                 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, 2017 2016 2017 2016   Revenues $ 1,477,141   $ 1,563,276   $ 4,550,841   $ 4,774,813     Salaries, wages and benefits 830,558 867,611 2,504,074 2,546,031 Supplies 73,344 85,469 231,229 263,679 Building rent 64,422 66,946 193,939 199,956 Equipment rent 8,537 9,911 26,285 31,280 Other operating expenses 155,949 167,453 496,934 500,787 General and administrative expenses 258,834 262,051 800,493 848,945 Other income (638 ) (341 ) (2,895 ) (2,679 ) Litigation contingency expense 4,000 - 4,000 2,840 Impairment charges - 297,276 136,303 311,195 Restructuring charges 16,500 81,463 31,556 84,213 Depreciation and amortization 24,808 32,995 80,279 99,747 Interest expense 61,146 59,856 181,275 175,398 Investment income   (705 )   (1,797 )   (3,442 )   (2,519 )   1,496,755     1,928,893     4,680,030     5,058,873   Loss from continuing operations before income taxes (19,614 ) (365,617 ) (129,189 ) (284,060 ) Provision (benefit) for income taxes   (1,225 )   283,630     (15,107 )   314,106   Loss from continuing operations (18,389 ) (649,247 ) (114,082 ) (598,166 ) Discontinued operations, net of income taxes: Loss from operations (13,612 ) (22,060 ) (1,871 ) (10,489 ) Gain (loss) on divestiture of operations   (49,663 )   -     (349,868 )   179   Loss from discontinued operations   (63,275 )   (22,060 )   (351,739 )   (10,310 ) Net loss (81,664 ) (671,307 ) (465,821 ) (608,476 ) Earnings attributable to noncontrolling interests: Continuing operations (10,960 ) (9,574 ) (32,234 ) (26,272 ) Discontinued operations   (3,162 )   (4,732 )   (12,597 )   (14,075 )   (14,122 )   (14,306 )   (44,831 )   (40,347 ) Loss attributable to Kindred $ (95,786 ) $ (685,613 ) $ (510,652 ) $ (648,823 )   Amounts attributable to Kindred stockholders: Loss from continuing operations $ (29,349 ) $ (658,821 ) $ (146,316 ) $ (624,438 ) Loss from discontinued operations   (66,437 )   (26,792 )   (364,336 )   (24,385 ) Net loss $ (95,786 ) $ (685,613 ) $ (510,652 ) $ (648,823 )   Loss per common share: Basic: Loss from continuing operations $ (0.33 ) $ (7.58 ) $ (1.67 ) $ (7.20 ) Discontinued operations: Loss from operations (0.19 ) (0.31 ) (0.17 ) (0.28 ) Gain (loss) on divestiture of operations   (0.57 )   -     (4.00 )   -   Loss from discontinued operations   (0.76 )   (0.31 )   (4.17 )   (0.28 ) Net loss $ (1.09 ) $ (7.89 ) $ (5.84 ) $ (7.48 )   Diluted: Loss from continuing operations $ (0.33 ) $ (7.58 ) $ (1.67 ) $ (7.20 ) Discontinued operations: Loss from operations (0.19 ) (0.31 ) (0.17 ) (0.28 ) Gain (loss) on divestiture of operations   (0.57 )   -     (4.00 )   -   Loss from discontinued operations   (0.76 )   (0.31 )   (4.17 )   (0.28 ) Net loss $ (1.09 ) $ (7.89 ) $ (5.84 ) $ (7.48 )   Shares used in computing loss per common share: Basic 87,597 86,869 87,398 86,766 Diluted 87,597 86,869 87,398 86,766   Cash dividends declared and paid per common share $ - $ 0.12 $ 0.12 $ 0.36           KINDRED HEALTHCARE, INC. Condensed Consolidated Balance Sheet (Unaudited) (In thousands, except per share amounts)   September 30, December 31, 2017 2016 ASSETS Current assets: Cash and cash equivalents $ 130,364 $ 137,061 Insurance subsidiary investments 98,079 108,966 Accounts receivable less allowance for loss 1,218,200 1,172,078 Inventories 21,491 22,438 Income taxes 4,983 10,067 Assets held for sale 79,051 289,450 Other   66,463     63,693   1,618,631 1,803,753   Property and equipment 1,686,504 1,531,598 Accumulated depreciation   (956,644 )   (912,978 ) 729,860 618,620   Goodwill 2,424,831 2,427,074 Intangible assets less accumulated amortization 612,277 770,108 Insurance subsidiary investments 184,417 204,929 Other   301,735     288,240   Total assets $ 5,871,751   $ 6,112,724   LIABILITIES AND EQUITY Current liabilities: Accounts payable $ 176,353 $ 203,925 Salaries, wages and other compensation 370,213 397,486 Due to third party payors 48,791 41,320 Professional liability risks 55,668 65,284 Accrued lease termination fees 109,113 5,224 Other accrued liabilities 264,957 264,512 Long-term debt due within one year   18,247     27,977   1,043,342 1,005,728   Long-term debt 3,302,936 3,215,062 Professional liability risks 315,322 295,311 Deferred tax liabilities 182,065 201,808 Deferred credits and other liabilities 497,436 353,294   Equity: Stockholders' equity:

Common stock, $0.25 par value; authorized 175,000 shares; issued 86,980 shares - September 30, 2017 and 85,166 shares - December 31, 2016

21,745 21,291 Capital in excess of par value 1,710,480 1,710,231 Accumulated other comprehensive income 2,929 1,573 Accumulated deficit   (1,431,196 )   (920,544 ) 303,958 812,551 Noncontrolling interests   226,692     228,970   Total equity   530,650     1,041,521   Total liabilities and equity $ 5,871,751   $ 6,112,724                   KINDRED HEALTHCARE, INC. Condensed Consolidated Statement of Cash Flows (Unaudited) (In thousands)   Three months ended Nine months ended September 30, September 30, 2017 2016 2017 2016 Cash flows from operating activities: Net loss $ (81,664 ) $ (671,307 ) $ (465,821 ) $ (608,476 )

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

Depreciation expense 22,696 34,914 79,001 103,306 Amortization of intangible assets 2,889 5,468 11,909 18,251 Amortization of stock-based compensation costs 5,329 3,015 13,316 13,058 Amortization of deferred financing costs 4,363 3,987 12,847 11,262 Payment of capitalized lender fees related to debt amendment - (42 ) (5,403 ) (7,375 ) Provision for doubtful accounts 10,327 10,009 57,511 30,955 Deferred income taxes (3,788 ) 279,172 (19,608 ) 308,470 Impairment charges - 324,289 137,572 338,208 (Gain) loss on divestiture of discontinued operations 49,663 - 349,868 (179 ) Other 9,299 6,303 16,111 7,262 Change in operating assets and liabilities: Accounts receivable (3,976 ) (42,832 ) (103,199 ) (143,953 ) Inventories and other assets (6,999 ) 11,871 (9,517 ) (3,522 ) Accounts payable (3,903 ) 11,995 (26,213 ) 24,451 Income taxes 2,369 1,615 6,718 2,468 Due to third party payors 20,614 24,809 7,471 20,317 Other accrued liabilities   (18,738 )   33,101     (54,051 )   (73,268 ) Net cash provided by operating activities   8,481     36,367     8,512     41,235     Cash flows from investing activities: Routine capital expenditures (16,463 ) (21,873 ) (45,800 ) (68,703 ) Development capital expenditures (6,415 ) (8,386 ) (17,711 ) (27,112 ) Acquisitions, net of cash acquired - (49,329 ) (6,650 ) (77,040 ) Acquisition deposits - - - 18,489 Sale of assets 5,494 3,739 5,494 4,962 Purchase of insurance subsidiary investments (18,047 ) (22,427 ) (108,655 ) (75,422 ) Sale of insurance subsidiary investments 50,087 31,875 117,863 78,478 Net change in insurance subsidiary cash and cash equivalents (10,053 ) (14,680 ) 23,472 8,479 Net change in other investments 5,088 51 4,844 (33,347 ) Other   (81 )   (150 )   (35 )   (1,277 ) Net cash provided by (used in) investing activities   9,610     (81,180 )   (27,178 )   (172,493 )   Cash flows from financing activities: Proceeds from borrowings under revolving credit 426,700 489,200 1,214,300 1,267,200 Repayment of borrowings under revolving credit (427,300 ) (388,100 ) (1,120,600 ) (1,215,800 ) Proceeds from issuance of term loan, net of discount - - - 198,100 Proceeds from other long-term debt - - - 750 Repayment of term loan (3,508 ) (3,508 ) (10,525 ) (10,019 ) Repayment of other long-term debt (217 ) (276 ) (840 ) (826 ) Payment of deferred financing costs (170 ) (50 ) (299 ) (342 ) Issuance of common stock in connection with employee benefit plans - - 32 - Payment of dividend for mandatory redeemable preferred stock (3,120 ) (2,904 ) (9,195 ) (8,558 ) Dividends paid - (10,224 ) (10,228 ) (30,517 ) Contributions made by noncontrolling interests - 4,993 113 11,261 Distributions to noncontrolling interests (10,071 ) (4,694 ) (48,372 ) (35,240 ) Purchase of noncontrolling interests - - - (1,000 ) Payroll tax payments for equity awards issuance   (88 )   (250 )   (2,417 )   (3,079 ) Net cash provided by (used in) financing activities   (17,774 )   84,187     11,969     171,930   Change in cash and cash equivalents 317 39,374 (6,697 ) 40,672 Cash and cash equivalents at beginning of period   130,047     100,056     137,061     98,758   Cash and cash equivalents at end of period $ 130,364   $ 139,430   $ 130,364   $ 139,430                           KINDRED HEALTHCARE, INC. Condensed Consolidated and Business Segment Data (Unaudited) (In thousands, except per share amounts)   Third quarter 2016 Quarters 2017 Quarters % change v. First Second Third Fourth First Second Third prior year Condensed consolidated statement of operations data: GAAP presentation: Revenues $ 1,603,272 $ 1,608,265 $ 1,563,276 $ 1,514,365 $ 1,538,682 $ 1,535,018 $ 1,477,141 (5.5 ) Operating expenses 1,403,467 1,390,562 1,760,982 1,353,386 1,364,751 1,498,396 1,338,547 (24.0 ) Building rent 65,985 67,025 66,946 64,350 64,656 64,861 64,422 (3.8 ) Equipment rent 10,158 11,211 9,911 8,649 8,887 8,861 8,537 (13.9 ) Depreciation and amortization 33,554 33,198 32,995 32,072 29,820 25,651 24,808 (24.8 ) Interest, net   57,253     57,567     58,059     58,625     58,819     58,573     60,441   4.1

Income (loss) from continuing operations before income taxes

32,855 48,702 (365,617 ) (2,717 ) 11,749 (121,324 ) (19,614 ) (94.6 ) Provision (benefit) for income taxes   11,462     19,014     283,630     156     2,234     (16,116 )   (1,225 ) (100.4 ) Income (loss) from continuing operations 21,393 29,688 (649,247 ) (2,873 ) 9,515 (105,208 ) (18,389 ) (97.2 ) Noncontrolling interests   (7,851 )   (8,847 )   (9,574 )   (8,575 )   (10,483 )   (10,791 )   (10,960 ) 14.5 Net income (loss) attributable to Kindred $ 13,542   $ 20,841   $ (658,821 ) $ (11,448 ) $ (968 ) $ (115,999 ) $ (29,349 ) (95.5 )   Diluted EPS $ 0.15 $ 0.23 $ (7.58 ) $ (0.13 ) $ (0.01 ) $ (1.33 ) $ (0.33 ) (95.6 ) Diluted shares 87,249 87,500 86,869 86,904 87,085 87,506 87,597 0.8   Core presentation (a): EBITDAR $ 211,898 $ 231,064 $ 185,571 $ 180,429 $ 184,411 $ 201,002 $ 156,851 (15.5 ) Building rent 65,985 67,025 66,674 64,350 64,656 64,861 64,422 (3.4 ) Equipment rent 10,158 11,211 9,911 8,649 8,887 8,861 8,537 (13.9 ) EBITDA 135,755 152,828 108,986 107,430 110,868 127,280 83,892 (23.0 ) Provision (benefit) for income taxes 15,728 20,898 3,953 1,946 9,089 13,013 (2,329 ) n/m Noncontrolling interests (7,851 ) (9,863 ) (9,862 ) (8,575 ) (10,483 ) (11,111 ) (10,960 ) 11.1 Net income (loss) attributable to Kindred 21,369 31,302 4,117 6,212 2,657 18,932 (9,988 ) n/m   Core diluted EPS $ 0.24 $ 0.35 $ 0.05 $ 0.07 $ 0.03 $ 0.21 $ (0.11 ) n/m Diluted shares 87,249 87,500 87,529 87,641 87,744 88,165 87,597 0.1   Revenues by segment: Kindred at Home: Home health $ 430,035 $ 438,556 $ 449,958 $ 444,073 $ 450,831 $ 459,176 $ 453,684 0.8 Hospice   176,426     185,641     188,575     186,161     179,378     185,281     188,414   (0.1 ) 606,461 624,197 638,533 630,234 630,209 644,457 642,098 0.6 Hospital division 654,098 645,406 588,943 545,864 556,646 540,809 503,138 (14.6 ) Kindred Rehabilitation Services: Kindred Hospital Rehabilitation Services 167,045 171,095 170,308 171,352 178,115 178,439 173,638 2.0 RehabCare   201,081     193,060     189,972     189,332     197,318     193,902     179,095   (5.7 )   368,126     364,155     360,280     360,684     375,433     372,341     352,733   (2.1 ) 1,628,685 1,633,758 1,587,756 1,536,782 1,562,288 1,557,607 1,497,969 (5.7 ) Eliminations   (25,413 )   (25,493 )   (24,480 )   (22,417 )   (23,606 )   (22,589 )   (20,828 ) (14.9 ) $ 1,603,272   $ 1,608,265   $ 1,563,276   $ 1,514,365   $ 1,538,682   $ 1,535,018   $ 1,477,141   (5.5 )  

__________

(a)

See reconciliation of GAAP results to non-GAAP results beginning on page 15. During the first quarter of 2017, the Company revised its definitions of “core” non-GAAP measures. See “Non-GAAP Measures” beginning on page 15 for a discussion regarding the revised definitions. For comparability, core results for 2016 were 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)   Third quarter 2016 Quarters 2017 Quarters % change v. First Second Third Fourth First Second Third prior year Segment adjusted operating income (loss): Kindred at Home: Home health $ 66,941 $ 76,030 $ 75,073 $ 61,487 $ 63,750 $ 76,592 $ 66,431 (11.5 ) Hospice   24,866     31,329     31,326     28,805     27,581     32,784     34,761   11.0 91,807 107,359 106,399 90,292 91,331 109,376 101,192 (4.9 ) Hospital division 136,416 127,510 83,940 93,778 93,438 91,580 61,455 (26.8 ) Kindred Rehabilitation Services: Kindred Hospital Rehabilitation Services 48,119 50,729 49,759 49,728 51,760 53,422 49,151 (1.2 ) RehabCare   8,820     10,254     6,740     3,421     7,896     (14,305 )   7,619   13.0 56,939 60,983 56,499 53,149 59,656 39,117 56,770 0.5   Core EBITDAR by segment (a): Kindred at Home: Home health $ 65,803 $ 75,859 $ 75,073 $ 61,185 $ 63,750 $ 75,797 $ 66,431 (11.5 ) Hospice   24,866     31,329     31,326     27,668     27,581     32,784     34,761   11.0 90,669 107,188 106,399 88,853 91,331 108,581 101,192 (4.9 ) Hospital division 136,416 127,510 83,940 93,148 93,438 90,572 61,455 (26.8 ) Kindred Rehabilitation Services: Kindred Hospital Rehabilitation Services 48,119 50,729 49,759 49,728 51,760 53,422 49,151 (1.2 ) RehabCare   8,820     10,254     6,740     3,421     7,896     10,999     5,376   (20.2 ) 56,939 60,983 56,499 53,149 59,656 64,421 54,527 (3.5 ) Support center expenses (71,159 ) (64,265 ) (59,535 ) (54,334 ) (60,014 ) (62,572 ) (60,323 ) 1.3 Litigation contingency expense (885 ) (180 ) - - - - - Transaction costs   (82 )   (172 )   (1,732 )   (387 )   -     -     -   $ 211,898   $ 231,064   $ 185,571   $ 180,429   $ 184,411   $ 201,002   $ 156,851   (15.5 )   Segment adjusted operating income (loss) margin: Kindred at Home: Home health 15.6 17.3 16.7 13.8 14.1 16.7 14.6 (2.1 ) Hospice 14.1 16.9 16.6 15.5 15.4 17.7 18.4 1.8 Kindred at Home 15.1 17.2 16.7 14.3 14.5 17.0 15.8 (0.9 ) Hospital division 20.9 19.8 14.3 17.2 16.8 16.9 12.2 (2.1 ) Kindred Rehabilitation Services: Kindred Hospital Rehabilitation Services 28.8 29.6 29.2 29.0 29.1 29.9 28.3 (0.9 ) RehabCare 4.4 5.3 3.5 1.8 4.0 (7.4 ) 4.3 0.8 Kindred Rehabilitation Services 15.5 16.7 15.7 14.7 15.9 10.5 16.1 0.4   Core EBITDAR margin by segment (a): Kindred at Home: Home health 15.3 17.3 16.7 13.8 14.1 16.5 14.6 (2.1 ) Hospice 14.1 16.9 16.6 14.9 15.4 17.7 18.4 1.8 Kindred at Home 15.0 17.2 16.7 14.1 14.5 16.8 15.8 (0.9 ) Hospital division 20.9 19.8 14.3 17.1 16.8 16.7 12.2 (2.1 ) Kindred Rehabilitation Services: Kindred Hospital Rehabilitation Services 28.8 29.6 29.2 29.0 29.1 29.9 28.3 (0.9 ) RehabCare 4.4 5.3 3.5 1.8 4.0 5.7 3.0 (0.5 ) Kindred Rehabilitation Services 15.5 16.7 15.7 14.7 15.9 17.3 15.5 (0.2 ) Consolidated 13.2 14.4 11.9 11.9 12.0 13.1 10.6 (1.3 )  

__________

(a)

See reconciliation of GAAP results to non-GAAP results beginning on page 15. During the first quarter of 2017, the Company revised its definitions of “core” non-GAAP measures. See “Non-GAAP Measures” beginning on page 15 for a discussion regarding the revised definitions. For comparability, core results for 2016 were revised to conform to the current year presentation.

                        KINDRED HEALTHCARE, INC. Condensed Business Segment Data (Unaudited)   Third quarter 2016 Quarters 2017 Quarters % change v. First Second Third Fourth First Second Third prior year Kindred at Home: Home Health: Sites of service (at end of period) 384 384 395 390 379 377 376 Revenue mix %: Medicare 79.8 79.3 78.1 77.9 76.7 75.7 74.0 Medicaid 2.1 2.1 2.5 1.9 1.7 1.7 1.7 Commercial and other 8.4 8.2 8.6 10.6 11.5 11.4 12.7 Commercial paid at episodic rates 9.7 10.4 10.8 9.6 10.1 11.2 11.6 Episodic revenues ($ 000s) $ 325,821 $ 332,193 $ 332,562 $ 323,398 $ 326,881 $ 334,420 $ 320,279 (3.7 ) Total admissions 88,696 87,084 86,761 87,148 94,510 89,018 87,156 0.5 Same-store total admissions 87,394 85,922 85,511 86,056 93,922 88,300 86,312 0.9 Total episodic admissions 71,426 70,212 69,219 67,501 73,270 69,657 67,790 (2.1 ) Same-store total episodic admissions 70,416 69,317 68,285 66,784 72,911 69,207 67,191 (1.6 ) Medicare episodic admissions 62,011 60,730 59,823 59,540 62,404 58,575 56,772 (5.1 ) Total episodes 113,887 113,278 113,256 111,164 114,964 113,579 111,488 (1.6 ) Episodes per admission 1.59 1.61 1.64 1.65 1.57 1.63 1.64 - Revenue per episode $ 2,861 $ 2,933 $ 2,936 $ 2,909 $ 2,843 $ 2,944 $ 2,873 (2.1 ) Hospice: Sites of service (at end of period) 177 177 185 183 180 177 178 Admissions 13,234 13,149 12,916 12,660 13,649 12,561 12,236 (5.3 ) Same-store admissions 12,761 12,743 12,541 12,362 13,332 12,363 11,997 (4.3 ) Average length of stay 92 91 98 100 96 94 97 (1.0 ) Patient days 1,183,908 1,238,584 1,277,125 1,246,152 1,193,061 1,215,619 1,239,094 (3.0 ) Average daily census 13,010 13,611 13,882 13,545 13,256 13,358 13,468 (3.0 ) Revenue per patient day $ 149 $ 150 $ 148 $ 149 $ 150 $ 152 $ 152 2.7

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

$ 66,305 $ 68,229 $ 75,978 $ 74,875 $ 74,095 $ 74,222 $ 79,720 4.9   Kindred Rehabilitation Services: Kindred Hospital Rehabilitation Services: Freestanding IRFs: End of period data: Number of IRFs 19 19 19 19 19 19 19 Number of licensed beds 969 969 969 995 995 995 995 Discharges (a) 4,448 4,646 4,644 4,671 4,775 4,766 4,755 2.4 Same-hospital discharges (a) 4,295 4,535 4,546 4,538 4,393 4,517 4,477 (1.5 ) Occupancy % (a) 70.6 70.6 68.8 66.5 71.4 70.0 68.8 - Average length of stay (a) 13.2 12.9 12.7 12.6 12.8 12.8 12.7 - Revenue per discharge (a) $ 19,731 $ 19,318 $ 19,599 $ 19,486 $ 20,097 $ 20,620 $ 20,329 3.7 Contract services: Sites of service (at end of period): Inpatient rehabilitation units 104 105 104 102 101 102 101 LTAC hospitals 119 121 120 119 119 116 110 Sub-acute units 7 7 7 5 7 6 6 Outpatient units   139   138   139   132   129   121   123   369   371   370   358   356   345   340   Revenue per site $ 211,417 $ 215,798 $ 210,810 $ 220,733 $ 227,100 $ 228,534 $ 222,504 5.5   RehabCare: Sites of service (at end of period) 1,767 1,759 1,754 1,718 1,703 1,734 1,624 Revenue per site $ 113,798 $ 109,756 $ 108,308 $ 110,204 $ 115,865 $ 111,823 $ 110,281 1.8  

__________

(a) Excludes non-consolidating IRF.                           KINDRED HEALTHCARE, INC. Condensed Business Segment Data (Continued) (Unaudited)   Third quarter 2016 Quarters 2017 Quarters % change v. First Second Third Fourth First Second Third 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 77 Number of licensed beds 7,089 7,067 6,890 6,107 6,107 6,041 5,797 Revenues (000s) $ 643,299 $ 633,695 $ 575,323 $ 530,746 $ 540,280 $ 525,458 $ 487,012 (15.3 ) Revenue mix %: Medicare 57.8 55.5 54.6 53.5 52.8 50.3 50.6 Medicaid 4.2 4.2 4.0 4.5 3.9 5.0 4.3 Medicare Advantage 11.5 12.0 12.1 11.0 12.2 12.3 12.3 Medicaid Managed 5.6 6.3 7.3 8.0 9.1 9.1 10.1 Commercial insurance and other 20.9 22.0 22.0 23.0 22.0 23.3 22.7   Patient criteria data: Revenues: Compliant patients 88.5 % 86.0 % 88.3 % 89.1 % Site neutral 11.5 % 14.0 % 11.7 % 10.9 %   Revenues per patient day: Compliant patients $ 1,853 $ 1,816 $ 1,806 $ 1,799 Site neutral 926 1,041 1,053 1,067 Total 1,662 1,645 1,667 1,674   Admissions: Medicare 8,919 8,253 7,861 7,351 7,529 6,743 6,073 (22.7 ) Medicaid 463 386 375 336 354 381 362 (3.5 ) Medicare Advantage 1,453 1,382 1,327 1,210 1,354 1,239 1,197 (9.8 ) Medicaid Managed 733 768 861 787 851 903 861 - Commercial insurance and other   1,871   1,807   1,727   1,488     1,614     1,608     1,483   (14.1 )   13,439   12,596   12,151   11,172     11,702     10,874     9,976   (17.9 ) Patient days: Medicare 229,004 219,013 202,482 186,290 187,738 173,916 158,083 (21.9 ) Medicaid 21,134 19,409 16,781 12,181 13,334 13,333 13,429 (20.0 ) Medicare Advantage 45,760 47,697 43,241 37,526 41,020 40,555 38,338 (11.3 ) Medicaid Managed 25,341 27,267 28,534 29,275 32,713 32,635 31,249 9.5 Commercial insurance and other   62,769   63,009   59,856   54,148     53,695     54,809     49,895   (16.6 )   384,008   376,395   350,894   319,420     328,500     315,248     290,994   (17.1 ) Average length of stay: Medicare 25.7 26.5 25.8 25.3 24.9 25.8 26.0 0.8 Medicaid 45.6 50.3 44.7 36.3 37.7 35.0 37.1 (17.0 ) Medicare Advantage 31.5 34.5 32.6 31.0 30.3 32.7 32.0 (1.8 ) Medicaid Managed 34.6 35.5 33.1 37.2 38.4 36.1 36.3 9.7 Commercial insurance and other 33.5 34.9 34.7 36.4 33.3 34.1 33.6 (3.2 ) Weighted average 28.6 29.9 28.9 28.6 28.1 29.0 29.2 1.0 Revenues per admission: Medicare $ 41,717 $ 42,579 $ 39,945 $ 38,602 $ 37,867 $ 39,219 $ 40,577 1.6 Medicaid 57,928 69,797 61,338 70,333 60,091 69,304 57,365 (6.5 ) Medicare Advantage 51,080 55,105 52,363 48,387 48,555 51,958 50,301 (3.9 ) Medicaid Managed 49,287 51,696 48,631 54,238 57,736 53,159 57,172 17.6 Commercial insurance and other 71,651 77,193 73,515 82,066 73,750 76,007 74,435 1.3 Weighted average 47,868 50,309 47,348 47,507 46,170 48,322 48,818 3.1 Revenues per patient day: Medicare $ 1,625 $ 1,605 $ 1,551 $ 1,523 $ 1,519 $ 1,521 $ 1,559 0.5 Medicaid 1,269 1,388 1,371 1,940 1,595 1,980 1,546 12.8 Medicare Advantage 1,622 1,597 1,607 1,560 1,603 1,587 1,571 (2.2 ) Medicaid Managed 1,426 1,456 1,467 1,458 1,502 1,471 1,575 7.4 Commercial insurance and other 2,136 2,214 2,121 2,255 2,217 2,230 2,212 4.3 Weighted average 1,675 1,684 1,640 1,662 1,645 1,667 1,674 2.1   Medicare case mix index (discharged patients only) 1.163 1.179 1.172 1.153 1.172 1.171 1.180 0.7 Average daily census 4,220 4,136 3,814 3,472 3,650 3,464 3,163 (17.1 ) Occupancy % 68.0 67.5 61.6 64.1 67.6 64.3 59.9 (2.8 )                         KINDRED HEALTHCARE, INC. Condensed Business Segment Data (Continued) (Unaudited)   Third quarter 2016 Quarters 2017 Quarters % change v. First Second Third Fourth First Second Third prior year Same-hospital data (a): End of period data: Number of transitional care hospitals 74 74 77 77 74 74 77 Number of licensed beds 5,680 5,680 5,797 5,797 5,680 5,680 5,797 Revenues (000s) $ 545,731 $ 540,907 $ 502,208 $ 514,762 $ 515,148 $ 502,007 $ 482,149 (4.0 ) Revenue mix %: Medicare 58.0 55.2 53.9 53.1 52.0 50.2 50.6 Medicaid 3.8 3.9 3.6 4.5 4.2 5.2 4.3 Medicare Advantage 11.2 11.7 12.3 11.0 12.1 11.9 12.4 Medicaid Managed 5.9 6.8 7.9 8.3 9.4 9.4 10.1 Commercial insurance and other 21.1 22.4 22.3 23.1 22.3 23.3 22.6   Patient criteria data: Revenues: Compliant patients 88.7 % 86.0 % 88.5 % 89.1 % Site neutral 11.3 % 14.0 % 11.5 % 10.9 %   Revenues per patient day: Compliant patients $ 1,860 $ 1,827 $ 1,811 $ 1,799 Site neutral 924 1,049 1,060 1,067 Total 1,669 1,656 1,674 1,673   Admissions: Medicare 7,524 6,946 6,758 7,023 7,045 6,408 6,018 (10.9 ) Medicaid 391 334 333 328 351 377 361 8.4 Medicare Advantage 1,178 1,101 1,140 1,160 1,274 1,150 1,190 4.4 Medicaid Managed 629 694 783 784 830 865 851 8.7 Commercial insurance and other   1,500   1,467   1,415   1,416     1,507     1,507     1,468   3.7   11,222   10,542   10,429   10,711     11,007     10,307     9,888   (5.2 ) Patient days: Medicare 193,263 184,241 173,863 178,719 175,712 165,065 156,412 (10.0 ) Medicaid 14,382 13,304 11,631 11,923 13,580 13,180 13,433 15.5 Medicare Advantage 37,161 39,474 38,245 36,329 38,640 37,685 38,098 (0.4 ) Medicaid Managed 22,332 24,736 26,552 29,216 32,097 31,858 30,816 16.1 Commercial insurance and other   51,709   52,030   51,043   52,162     51,097     52,033     49,402   (3.2 )   318,847   313,785   301,334   308,349     311,126     299,821     288,161   (4.4 ) Average length of stay: Medicare 25.7 26.5 25.7 25.4 24.9 25.8 26.0 1.2 Medicaid 36.8 39.8 34.9 36.4 38.7 35.0 37.2 6.6 Medicare Advantage 31.5 35.9 33.5 31.3 30.3 32.8 32.0 (4.5 ) Medicaid Managed 35.5 35.6 33.9 37.3 38.7 36.8 36.2 6.8 Commercial insurance and other 34.5 35.5 36.1 36.8 33.9 34.5 33.7 (6.6 ) Weighted average 28.4 29.8 28.9 28.8 28.3 29.1 29.1 0.7 Revenues per admission: Medicare $ 42,061 $ 43,021 $ 40,020 $ 38,946 $ 38,018 $ 39,353 $ 40,513 1.2 Medicaid 52,717 63,223 54,880 70,959 61,618 68,915 57,689 5.1 Medicare Advantage 51,952 57,600 54,398 48,889 48,906 52,111 50,241 (7.6 ) Medicaid Managed 51,560 52,725 50,360 54,345 58,187 54,199 57,158 13.5 Commercial insurance and other 76,679 82,451 79,176 83,792 76,366 77,666 74,312 (6.1 ) Weighted average 48,630 51,310 48,155 48,059 46,802 48,705 48,761 1.3 Revenues per patient day: Medicare $ 1,638 $ 1,622 $ 1,556 $ 1,530 $ 1,524 $ 1,528 $ 1,559 0.2 Medicaid 1,433 1,587 1,571 1,952 1,593 1,971 1,550 (1.3 ) Medicare Advantage 1,647 1,607 1,621 1,561 1,612 1,590 1,569 (3.2 ) Medicaid Managed 1,452 1,479 1,485 1,458 1,505 1,472 1,578 6.3 Commercial insurance and other 2,224 2,325 2,195 2,275 2,252 2,249 2,208 0.6 Weighted average 1,712 1,724 1,667 1,669 1,656 1,674 1,673 0.4   Average daily census 3,504 3,448 3,275 3,352 3,457 3,295 3,132 (4.4 )

__________

(a)

All historical statistics have been adjusted to present the ongoing hospital division portfolio excluding three hospitals acquired during the second quarter of 2016. See reconciliation of same-hospital revenues to reported hospital revenues on page 19.

 

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 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 (loss) attributable to Kindred, core EBITDAR, core EBITDA, 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 were 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 for each of the Company’s operating segments, excluding litigation contingency expense, impairment charges, restructuring charges, transaction costs, and the allocation of support center overhead.

EBITDA: The Company defines EBITDA as earnings before interest, income taxes, depreciation, and amortization, and believes that the presentation of EBITDA is useful to investors because creditors, securities analysts and investors use EBITDA to compare the performance and valuation of companies in the healthcare industry before consideration of non-cash depreciation and amortization expense, and financing costs, which can vary significantly among companies.

Non-GAAP Measures (Continued)

Core Operating Results: The Company calculates core operating results, including core net income (loss) attributable to Kindred, core EBITDAR, core EBITDA, 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, deferred tax asset valuation allowance, 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 (loss) attributable to Kindred, core EBITDAR, core EBITDA, 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 four hospitals that closed during the third quarter of 2017, one hospital that closed during the second quarter of 2017, three 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 (loss) attributable to Kindred, core EBITDAR, and core EBITDA, 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 revenue 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 September 30, 2017 and 2016, and for the nine months ended September 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 nine months ended September 30, 2017, was calculated using an effective income tax rate of 6.0% and 72.9% for the three months ended September 30, 2017 and 2016, respectively, and 18.1% and 66.9% for the nine months ended September 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 change in the amount of deferred tax valuation allowance and, for 2016, the composition of charges that are non-deductible for income tax purposes, including the impairment charges.

  Three months ended Nine months ended September 30, September 30, 2017 2016 2017 2016 Reconciliation of income (loss) from continuing operations before charges:   As reported: Loss from continuing operations attributable to Kindred ($29,349 ) ($658,821 ) ($146,316 ) ($624,438 ) Diluted loss per common share from continuing operations ($0.33 ) ($7.58 ) ($1.67 ) ($7.20 ) Weighted average diluted shares outstanding 87,597 86,869 87,398 86,766   Detail of charges: Restructuring charges: Facility/branch divestitures and closings ($8,723 ) ($20,212 ) ($16,925 ) ($19,794 ) Retention and severance costs (5,652 ) (2,109 ) (8,667 ) (3,479 ) Transaction costs -     (492 )   -     (1,577 ) (14,375 ) (22,813 ) (25,592 ) (24,850 ) Lease termination costs (charged to rent restructuring charges) (2,125 ) (58,650 ) (5,964 ) (59,363 )   Impairment charges - (297,276 ) (136,303 ) (311,195 ) RehabCare collection litigation 2,243 - (23,061 ) - Research and development - (3,288 ) - (7,227 ) Litigation contingency expense (4,000 ) - (4,000 ) (1,775 ) Business interruption settlements - - 1,803 1,309 Debt amendment fees not capitalized - - - (1,103 ) Gentiva transaction costs: Professional and consulting fees - (1,464 ) - (3,831 ) Severance and retention - 214 - (696 ) Lease termination (charged to building rent expense) -     (272 )   -     (272 ) (18,257 ) (383,549 ) (193,117 ) (409,003 ) Income tax benefit 6,303 86,793 75,111 92,943 Deferred tax valuation allowance (7,407 )   (366,470 )   (40,231 )   (366,470 ) Charges net of income taxes (19,361 ) (663,226 ) (158,237 ) (682,530 ) Noncontrolling interests -     288     320     1,304   (19,361 ) (662,938 ) (157,917 ) (681,226 ) Allocation to participating unvested restricted stockholders -     -     -     -   Available to common stockholders ($19,361 )   ($662,938 )   ($157,917 )   ($681,226 )   Diluted loss per common share related to charges ($0.22 ) ($7.63 ) ($1.81 ) ($7.85 )   Weighted average diluted shares outstanding 87,597 86,869 87,398 86,766   Core: Income (loss) from continuing operations attributable to Kindred before charges ($9,988 ) $ 4,117 $ 11,601 $ 56,788 Diluted earnings (loss) per common share from continuing operations before charges (a) ($0.11 ) $ 0.05 $ 0.13 $ 0.64

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

87,597 87,529 88,057 87,426   Reconciliation of effective income tax rate before charges: Effective income tax rate before charges 171.6 % 22.0 % 30.9 % 32.5 % Impact of charges on effective income tax rate -165.4 %   55.6 %   -19.2 %   78.1 % Reported effective income tax rate 6.2 %   77.6 %   11.7 %   110.6 %

__________

(a) For purposes of computing diluted earnings (loss) per common share before charges, income (loss) from continuing operations before charges was reduced by $0.1 million for the three months ended September 30, 2016, and by $0.3 million and $1.2 million for the nine months ended September 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)   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 quarters of 2016 and 2017, before certain charges or on a core basis. The charges that were excluded from core operating results are denoted in the table below.     2016 Quarters 2017 Quarters First Second Third Fourth First Second Third

Reconciliation of income (loss) from continuing operations before charges:

  As reported:

Income (loss) from continuing operations attributable to Kindred

$ 13,542 $ 20,841 ($658,821 ) ($11,448 ) ($968 ) ($115,999 ) ($29,349 ) Depreciation and amortization 33,554 33,198 32,995 32,072 29,820 25,651 24,808 Interest, net 57,253 57,567 58,059 58,625 58,819 58,573 60,441 Provision (benefit) for income taxes 11,462 19,014 283,630 156 2,234 (16,116 ) (1,225 ) Noncontrolling interest   7,851     8,847     9,574     8,575     10,483     10,791     10,960   EBITDA 123,662 139,467 (274,563 ) 87,980 100,388 (37,100 ) 65,635 Building rent 65,985 67,025 66,946 64,350 64,656 64,861 64,422 Equipment rent 10,158 11,211 9,911 8,649 8,887 8,861 8,537 Restructuring charges - rent   251     462     58,650     2,029     1,905     1,934     2,125   EBITDAR 200,056 218,165 (139,056 ) 163,008 175,836 38,556 140,719   Detail of charges: Restructuring charges: Facility/branch divestitures and closings 341 (759 ) 20,212 3,745 5,360 2,842 8,723 Retention and severance costs 924 446 2,109 5,302 2,741 274 5,652 Transaction costs   436     649     492     837     -     -     -   1,701 336 22,813 9,884 8,101 3,116 14,375 Impairment charges 7,788 6,131 297,276 3,534 474 135,829 - RehabCare collection litigation - - - - - 25,304 (2,243 ) Research and development 863 3,076 3,288 4,293 - - - Litigation contingency expense 1,025 750 - - - - 4,000 Business interruption settlements (1,138 ) (171 ) - (2,069 ) - (1,803 ) - Debt amendment fees not capitalized - 1,103 - - - - - Gentiva transaction costs: Professional and consulting fees 1,048 1,319 1,464 1,779 - - - Severance and retention   555     355     (214 )   -     -     -     -     11,842     12,899     324,627     17,421     8,575     162,446     16,132   Core EBITDAR 211,898 231,064 185,571 180,429 184,411 201,002 156,851 Less: Building rent (65,985 ) (67,025 ) (66,946 ) (64,350 ) (64,656 ) (64,861 ) (64,422 ) Equipment rent (10,158 ) (11,211 ) (9,911 ) (8,649 ) (8,887 ) (8,861 ) (8,537 ) Lease termination (charged to building rent)   -     -     272     -     -     -     -   Core EBITDA $ 135,755   $ 152,828   $ 108,986   $ 107,430   $ 110,868   $ 127,280   $ 83,892                           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: Third quarter 2016 Quarters 2017 Quarters % change v. First Second Third Fourth First Second Third prior year Home health $ 363,730 $ 370,327 $ 373,980 $ 369,198 $ 376,736 $ 384,954 $ 373,964 - Community care and other   66,305     68,229     75,978     74,875     74,095     74,222     79,720   4.9 Reported home health revenues $ 430,035   $ 438,556   $ 449,958   $ 444,073   $ 450,831   $ 459,176   $ 453,684   0.8     A reconciliation of revenues for the Hospital Division for each historical period follows: Third quarter 2016 Quarters 2017 Quarters % change v. First Second Third Fourth First Second Third prior year Transitional care hospitals $ 643,299 $ 633,695 $ 575,323 $ 530,746 $ 540,280 $ 525,458 $ 487,012 (15.3 )

Sub-acute units and one skilled nursing facility

  10,799     11,711     13,620     15,118     16,366     15,351     16,126   Reported hospital division revenues $ 654,098   $ 645,406   $ 588,943   $ 545,864   $ 556,646   $ 540,809   $ 503,138   (14.6 )     A reconciliation of reported hospital revenues to same-hospital revenues for each historical period follows: Third quarter 2016 Quarters 2017 Quarters % change v. First Second Third Fourth First Second Third prior year Transitional care hospitals $ 643,299 $ 633,695 $ 575,323 $ 530,746 $ 540,280 $ 525,458 $ 487,012 (15.3 ) Hospitals acquired during 2016 (a) - (2,217 ) - - (9,724 ) (10,164 ) - Hospitals sold during 2016 (b) (71,941 ) (64,084 ) (47,098 ) 732 449 (623 ) (168 ) Hospitals closed during 2017 (c) (17,356 ) (17,623 ) (17,109 ) (16,533 ) (15,825 ) (13,221 ) (4,607 ) Hospitals closed during 2016 (d)   (8,271 )   (8,864 )   (8,908 )   (183 )   (32 )   557     (88 ) Same-hospital revenues $ 545,731   $ 540,907   $ 502,208   $ 514,762   $ 515,148   $ 502,007   $ 482,149   (4.0 )  

__________

(a) Three 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.

(c) One hospital closed during the second quarter of 2017 and four hospitals closed during the third quarter of 2017.

(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 September 30, 2017 Charges Deferred RehabCare tax Before As collection Litigation Restructuring valuation charges reported litigation contingency charges allowance Total ("core") (a) Income (loss) from continuing operations: Segment adjusted operating income: Kindred at Home: Home health $ 66,431 $ - $ - $ - $ - $ - $ 66,431 Hospice   34,761     -     -   -   -     -     34,761     101,192     -     -   -   -     -     101,192     Hospital division 61,455 - - - - - 61,455   Kindred Rehabilitation Services: Kindred Hospital Rehabilitation Services 49,151 - - - - - 49,151 RehabCare   7,619     (2,243 )   -   -   -     (2,243 )   5,376     56,770     (2,243 )   -   -   -     (2,243 )   54,527     Support center expenses (60,323 ) - - - - - (60,323 ) Litigation contingency expense (4,000 ) - 4,000 - - 4,000 - Restructuring charges (14,375 ) - - 14,375 - 14,375 - Building rent (64,422 ) - - - - - (64,422 ) Equipment rent (8,537 ) - - - - - (8,537 ) Restructuring charges - rent (2,125 ) - - 2,125 - 2,125 - Depreciation and amortization (24,808 ) - - - - - (24,808 ) Interest, net   (60,441 )   -     -   -   -     -     (60,441 )

Loss from continuing operations before income taxes

(19,614

)

(2,243 ) 4,000 16,500 - 18,257 (1,357 ) Income tax benefit   (1,225 )   (883 )   1,574   5,612   (7,407 )   (1,104 )   (2,329 ) (18,389 ) $ (1,360 ) $ 2,426 $ 10,888 $ 7,407   $ 19,361   972 Noncontrolling interests   (10,960 )   (10,960 ) Loss attributable to Kindred $ (29,349 ) $ (9,988 )   Diluted loss per common share $ (0.33 ) $ (0.11 )

Diluted shares used in computing loss per common share

87,597 87,597   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   6,740     -     -   -   -     -     -     6,740     56,499     -     -   -   -     -     -     56,499     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

(365,617 ) 297,276 3,288 81,463 1,522 - 383,549 17,932 Provision for income taxes   283,630     53,509     1,268   31,429   587     (366,470 )   (279,677 )   3,953   (649,247 ) 243,767 2,020 50,034 935 366,470 663,226 13,979 Noncontrolling interests   (9,574 )   (288 )   -   -   -     -     (288 )   (9,862 ) Income (loss) attributable to Kindred $ (658,821 ) $ 243,479   $ 2,020 $ 50,034 $ 935   $ 366,470   $ 662,938   $ 4,117     Diluted earnings (loss) per common share $ (7.58 ) $ 0.05

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

86,869 87,529

__________

(a)

During the first quarter of 2017, the Company revised its definitions of “core” non-GAAP measures. See “Non-GAAP Measures” beginning on page 15 for a discussion regarding the revised definitions. For comparability, core results for 2016 were 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)     Nine months ended September 30, 2017 Charges Deferred Business RehabCare tax Before As interruption collection Litigation Impairment Restructuring valuation charges reported settlements litigation contingency charges charges allowance Total ("core") (a) Income (loss) from continuing operations: Segment adjusted operating income (loss): Kindred at Home: Home health $ 206,773 $ (795 ) $ - $ - $ - $ - $ - $ (795 ) $ 205,978 Hospice   95,126     -     -     -     -   -   -     -     95,126     301,899     (795 )   -     -     -   -   -     (795 )   301,104     Hospital division 246,473 (1,008 ) - - - - - (1,008 ) 245,465   Kindred Rehabilitation Services: Kindred Hospital Rehabilitation Services 154,333 - - - - - - - 154,333 RehabCare   1,210     -     23,061     -     -   -   -     23,061     24,271     155,543     -     23,061     -     -   -   -     23,061     178,604     Support center expenses (182,909 ) - - - - - - - (182,909 ) Litigation contingency expense (4,000 ) 4,000 4,000 - Impairment charges (136,303 ) - - - 136,303 - - 136,303 - Restructuring charges (25,592 ) - - - - 25,592 - 25,592 - Building rent (193,939 ) - - - - - - - (193,939 ) Equipment rent (26,285 ) - - - - - - - (26,285 ) Restructuring charges - rent (5,964 ) - - - - 5,964 - 5,964 - Depreciation and amortization (80,279 ) - - - - - - - (80,279 ) Interest, net   (177,833 )   -     -     -     -   -   -     -     (177,833 )

Income (loss) from continuing operations before income taxes

(129,189

)

(1,803 ) 23,061 4,000 136,303 31,556 - 193,117 63,928 Provision (benefit) for income taxes   (15,107 )   (709 )   9,074     1,574     53,635   11,537   (40,231 )   34,880     19,773   (114,082 ) (1,094 ) 13,987 2,426 82,668 20,019 40,231 158,237 44,155 Noncontrolling interests   (32,234 )   -     (320 )   -     -   -   -     (320 )   (32,554 ) Income (loss) attributable to Kindred $ (146,316 ) $ (1,094 ) $ 13,667   $ 2,426   $ 82,668 $ 20,019 $ 40,231   $ 157,917   $ 11,601     Diluted earnings (loss) per common share $ (1.67 ) $ 0.13

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

87,398 88,057   Nine months ended September 30, 2016 Charges Gentiva Deferred Business transaction tax Before As interruption Litigation Impairment Research and Debt Restructuring and valuation charges reported settlements contingency charges development amendment charges integration allowance Total ("core") (a) Income from continuing operations: Segment adjusted operating income: 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     Hospital division 347,866 - - - - - - - - - 347,866   Kindred Rehabilitation Services: Kindred Hospital Rehabilitation Services 148,607 - - - - - - - - - 148,607 RehabCare   25,814     -     -     -     -   -   -     -     -     -     25,814     174,421     -     -     -     -   -   -     -     -     -     174,421     Support center expenses (203,289 ) - - - 7,227 1,103 - - - 8,330 (194,959 ) Litigation contingency expense (2,840 ) - 1,775 - - - - - - 1,775 (1,065 ) Impairment charges (311,195 ) - - 311,195 - - - - - 311,195 - Restructuring charges (24,850 ) - - - - - 24,850 - - 24,850 - Transaction costs (6,513 ) - - - - - - 4,527 - 4,527 (1,986 ) Building rent (199,956 ) - - - - - - 272 - 272 (199,684 ) Equipment rent (31,280 ) - - - - - - - - - (31,280 ) Restructuring charges - rent (59,363 ) - - - - - 59,363 - - 59,363 - Depreciation and amortization (99,747 ) - - - - - - - - - (99,747 ) Interest, net   (172,879 )   -     -     -     -   -   -     -     -     -     (172,879 )

Income from continuing operations before income taxes

(284,060 ) (1,309 ) 1,775 311,195 7,227 1,103 84,213 4,799 - 409,003 124,943 Provision for income taxes   314,106     (512 )   (381 )   55,762     2,827   431   32,939     1,877     (366,470 )   (273,527 )   40,579   (598,166 ) (797 ) 2,156 255,433 4,400 672 51,274 2,922 366,470 682,530 84,364 Noncontrolling interests   (26,272 )   -     -     (1,304 )   -   -   -     -     -     (1,304 )   (27,576 ) Income attributable to Kindred $ (624,438 ) $ (797 ) $ 2,156   $ 254,129   $ 4,400 $ 672 $ 51,274   $ 2,922   $ 366,470   $ 681,226   $ 56,788     Diluted earnings per common share $ (7.20 ) $ 0.64

Diluted shares used in computing earnings per common share

86,766 87,426

__________

(a)

During the first quarter of 2017, the Company revised its definitions of “core” non-GAAP measures. See “Non-GAAP Measures” beginning on page 15 for a discussion regarding the revised definitions. For comparability, core results for 2016 were 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   7,896     -     -   -     -   7,896     59,656     -     -   -     -   59,656     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

11,749

474 10,006 - 10,480 22,229 Provision for income taxes   2,234     187     3,937   2,731     6,855   9,089   9,515 $ 287   $ 6,069 $ (2,731 ) $ 3,625 13,140 Noncontrolling interests   (10,483 )   (10,483 ) Income (loss) attributable to Kindred $ (968 ) $ 2,657     Diluted earnings (loss) per common share $ (0.01 ) $ 0.03

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   8,820     -     -   -     -   -     -   -     8,820     56,939     -     -   -     -   -     -   -     56,939     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

32,855 (1,138 ) 1,025 7,788 863 1,952 1,603 12,093 44,948 Provision for income taxes   11,462     (401 )   362   2,747     304   689     565   4,266     15,728   21,393 $ (737 ) $ 663 $ 5,041   $ 559 $ 1,263   $ 1,038 $ 7,827   29,220 Noncontrolling interests   (7,851 )   (7,851 ) Income attributable to Kindred $ 13,542   $ 21,369     Diluted earnings per common share $ 0.15 $ 0.24

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 15 for a discussion regarding the revised definitions. For comparability, core results for 2016 were 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 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   (14,305 )   -     25,304     -     -   -     25,304     10,999     39,117     -     25,304     -     -   -     25,304     64,421     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

(121,324

)

(1,803 ) 25,304 135,829 5,050 - 164,380 43,056 Provision (benefit) for income taxes   (16,116 )   (709 )   9,957     53,449     1,987   (35,555 )   29,129     13,013   (105,208 ) (1,094 ) 15,347 82,380 3,063 35,555 135,251 30,043 Noncontrolling interests   (10,791 )   -     (320 )   -     -   -     (320 )   (11,111 ) Income (loss) attributable to Kindred $ (115,999 ) $ (1,094 ) $ 15,027   $ 82,380   $ 3,063 $ 35,555   $ 134,931   $ 18,932     Diluted earnings (loss) per common share $ (1.33 ) $ 0.21

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   10,254     -     -     -     -   -     -     -     -     10,254     60,983     -     -     -     -   -     -     -     -     60,983     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

48,702 (171 ) 750 6,131 3,076 1,103 798 1,674 13,361 62,063 Provision for income taxes   19,014     (129 )   (1,511 )   (2,962 )   2,324   833     2,064     1,265     1,884     20,898   29,688 (42 ) 2,261 9,093 752 270 (1,266 ) 409 11,477 41,165 Noncontrolling interests   (8,847 )   -     -     (1,016 )   -   -     -     -     (1,016 )   (9,863 ) Income attributable to Kindred $ 20,841   $ (42 ) $ 2,261   $ 8,077   $ 752 $ 270   $ (1,266 ) $ 409   $ 10,461   $ 31,302     Diluted earnings per common share $ 0.23 $ 0.35

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 15 for a discussion regarding the revised definitions. For comparability, core results for 2016 were 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 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   3,421     -     -     -     -     -     -     -     3,421     53,149     -     -     -     -     -     -     -     53,149     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

(2,717

)

(2,069 ) 3,534 4,293 11,913 1,779 - 19,450 16,733 Provision for income taxes   156     (2,574 )   4,396     5,341     14,819     1,810     (22,002 )   1,790     1,946   (2,873 ) $ 505   $ (862 ) $ (1,048 ) $ (2,906 ) $ (31 ) $ 22,002   $ 17,660   14,787 Noncontrolling interests   (8,575 )   (8,575 ) Income (loss) attributable to Kindred $ (11,448 ) $ 6,212     Diluted earnings (loss) per common share $ (0.13 ) $ 0.07

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 15 for a discussion regarding the revised definitions. For comparability, core results for 2016 were 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 Nine months ended September 30, September 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 $ 8,481 $ 36,367 $ 8,512 $ 41,235 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 27,102 7,025 36,319 17,958 Business interruption settlements - - (3,796 ) (1,309 ) Lease termination fees - restructuring 1,898 - 5,931 3,500 Capitalized lender fees related to debt amendment - 42 5,403 7,375 Other debt refinancing costs (expensed) - 291 - 917 Litigation   3,307     3,074     12,593     132,643     32,307     10,432     56,450     161,084   Net cash flows provided by operating activities excluding certain items before income tax benefit of certain payments 40,788 46,799 64,962 202,319 Benefit of reduced income tax payments resulting from certain payments (a) (10,978 ) (17,295 ) (14,574 ) (45,519 ) Net cash flows provided by operating activities excluding         certain items (core operating cash flows) 29,810 29,504 50,388 156,800   Less routine capital expenditures (16,463 ) (21,873 ) (45,800 ) (68,703 ) Less distributions to noncontrolling interests   (10,071 )   (4,694 )   (48,372 )   (35,240 ) Free cash flows excluding certain items (core free cash flows) $ 3,276   $ 2,937     ($43,784 ) $ 52,857        

__________

(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. Combining the Company's October 2017 insurance restructuring activities with the completion of the sale of the skilled nursing facility business, the Company anticipates it will have approximately $550 million to $600 million of net operating losses that should offset approximately 90% of core book tax estimates until exhausted.

 

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