KINDRED HEALTHCARE SECOND QUARTER RESULTS AT HIGH END OF COMPANY’S EARNINGS GUIDANCE

Company Reports $0.38 per Diluted Share from Continuing Operations,
Including $0.05 Positive Impact of Certain Items

Second Quarter Earnings Guidance, Excluding Certain Items, Ranged from $0.29 to $0.34

Company Raises 2008 Reported EPS Range to $1.50 to $1.60 from $1.40 to $1.50

Company Provides Third Quarter 2008 EPS Guidance of $0.20 to $0.25

Louisville, KY (July 31, 2008) – Kindred Healthcare, Inc. (the “Company”) (NYSE:KND) today announced its operating results for the second quarter ended June 30, 2008.

Second Quarter Highlights:

• Consolidated revenues exceeded $1 billion
  - Excluding the institutional pharmacy business that was spun off in July 2007,
  revenues grew 9% compared to the second quarter of 2007
  
  
Diluted earnings per share reported at $0.38
- Results included a positive impact of $0.05 per diluted share from certain items
- The Company’s second quarter EPS guidance range was $0.29 to $0.34, excluding certain items


Strong hospital admissions growth
- Reported hospital admissions grew 7% compared to last year’s second quarter
- Same-store aggregate admissions grew 6%
- Same-store non-government admissions grew 19%


Continued improvement in nursing center results
- Second quarter revenues and operating income were up over last year’s same period
- Revenue quality mix improved to 57.0% from 56.3% in the second quarter of 2007

Continued revenue and contract growth in Peoplefirst rehabilitation services
- Quarterly revenues were up 25% from last year’s second quarter
- Second quarter operating income grew 12%

Continuing Operations

Consolidated revenues for the second quarter ended June 30, 2008 totaled $1.0 billion, a decline of 4% from last year’s second quarter. The decline was primarily attributable to the July 2007 spin-off of the Company’s institutional pharmacy business (the “Spin-off”). Excluding the institutional pharmacy business, revenues rose approximately 9% in the second quarter of 2008 compared to the same period in 2007. Net income from continuing operations for the second quarter of 2008 totaled $14.7 million or $0.38 per diluted share compared to $9.7 million or $0.24 per diluted share in the second quarter last year. For accounting purposes, the Spin-off was not treated as a discontinued operation. Accordingly, the Company’s historical consolidated results of operations have not been retroactively restated to reflect the Spin-off.

Operating results for the second quarter of 2008 included certain items that, in the aggregate, increased net income by $2.0 million or $0.05 per diluted share. These items included pretax income of $10.3 million related to the favorable settlement of a prior year nursing center Medicaid cost report dispute, a pretax charge of $5.1 million related to a hospital asset impairment and a pretax charge of $1.9 million related to a prior period rent escalator adjustment for ten leased facilities.

Operating results for the second quarter of 2007 included certain items that, in the aggregate, reduced net income by approximately $3.3 million or $0.08 per diluted share.

For the six months ended June 30, 2008, consolidated revenues totaled $2.1 billion compared to $2.2 billion in the first half of 2007. Net income from continuing operations totaled $29.7 million or $0.77 per diluted share for the first six months of 2008 compared to $26.2 million or $0.65 per diluted share in the same period a year ago.

Consolidated operating results for the first half of 2008 included the items discussed above that, in the aggregate, increased net income by approximately $2.0 million or $0.05 per diluted share. Operating results for the first half of 2007 included certain items that, in the aggregate, reduced net income by approximately $5.8 million or $0.14 per diluted share.

Discontinued Operations

During the past few years, the Company has entered into transactions related to the divestiture of unprofitable businesses. For accounting purposes, the historical operating results of these businesses and losses associated with these operations have been classified as discontinued operations in the Company’s consolidated statement of operations for all historical periods.

In the second quarter of 2008, the Company reported net income from discontinued operations totaling $1.1 million or $0.03 per diluted share compared to a net loss of $1.9 million or $0.05 per diluted share in the second quarter of 2007.

For the first six months of 2008, the Company reported net income from discontinued operations of $0.8 million or $0.02 per diluted share compared to a net loss of $3.3 million or $0.08 per diluted share in the first half of 2007.

In the second quarter of 2008, the Company recorded a net gain of $5.9 million or $0.15 per diluted share related primarily to the divestiture of a hospital that had been held for sale. In the second quarter of 2007, the Company recorded a net loss of $69.7 million or $1.71 per diluted share related primarily to a divestiture transaction with Ventas, Inc. (“Ventas”) (NYSE:VTR).

Management Commentary

Paul J. Diaz, President and Chief Executive Officer of the Company, remarked, “Our overall performance in the second quarter was in line with our expectations as we continued to make progress in each of our three operating divisions. Our efforts to improve the quality of our services and better retain and develop our employees continued to result in strong volume and revenue growth as well as further improvements in professional liability, workers compensation and employee health costs.”

Commenting on the Company’s second quarter operations, Mr. Diaz noted, “Our hospital revenue growth of 7% was driven by 7% growth in overall admissions as well as 6% growth in same-store admissions. Solid growth in non-government admissions and steady payment rates in this category also contributed to our hospital top-line growth. Excluding the favorable prior year Medicaid cost report settlement, our nursing center revenues grew 7% and operating income grew 11% in the second quarter compared to the same period last year as a result of higher patient volumes, improved quality mix, lower employee turnover and improved operating efficiencies. Peoplefirst rehabilitation services reported another solid quarter, with revenues increasing 25% and operating income growing 12% compared to the second quarter last year.”

Mr. Diaz continued, “Notwithstanding our good overall results for the quarter, our hospital results were softer than we expected due primarily to cost management issues and shortfalls in some of our newer facilities. In the second half of the year, we believe that we can improve our performance in these areas.”

With respect to the Company’s ongoing development activities, Mr. Diaz remarked, “We are continuing to develop seven additional hospitals that will open over the next couple of years, and we are reviewing other acquisitions and development opportunities in each of our operating divisions.”

2008 Earnings Guidance – Continuing Operations

The Company raised its 2008 earnings guidance for continuing operations. The Company expects consolidated revenues for 2008 to approximate $4.2 billion. Operating income, or earnings before interest, income taxes, depreciation, amortization and rents, is expected to range from $578 million to $585 million. Rent expense is expected to approximate $349 million, while depreciation, amortization and net interest expense are expected to approximate $130 million. Net income from continuing operations for 2008 is expected to approximate $59 million to $62 million or $1.50 to $1.60 per diluted share (based upon diluted shares of 39 million).

The Company also provided its earnings outlook for the third quarter of 2008, estimating net income from continuing operations to range from $8 million to $10 million or $0.20 to $0.25 per diluted share (based upon diluted shares of 39 million).

The Company indicated that the earnings guidance reflects the estimated impact of (a) a proposed rule issued by the Centers for Medicare and Medicaid Services (“CMS”) on April 14, 2008 related to the re-weighting of payments under the prospective payment system for long-term acute care (“LTAC”) hospitals and (b) the final rule issued by CMS on July 31, 2008 related to changes in Medicare payments to nursing centers. The Company also indicated that the earnings guidance does not reflect any material acquisitions or divestitures and does not take into account any repurchases of common stock.

Mr. Diaz noted, “We look forward to continued progress in each of our operating divisions as we focus on the execution of our strategic operating plan. As in the past, we expect some seasonal weakness in the third quarter, particularly in our hospital business, followed by stronger fourth quarter performance.”

Webcast of Conference Call

As previously announced, investors and the general public can access a live webcast of the second quarter 2008 conference call through a link on Kindred’s website at www.kindredhealthcare.com. The conference call will be held August 1, 2008 at 10:00 a.m. Eastern Time.

A telephone replay of the conference call will be available at approximately 1:00 p.m. on August 1 by dialing (719) 457-0820, access code: 9933774. The replay will be available through August 9.

Forward-Looking Statements

This press release includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements regarding the Company’s expected future financial position, results of operations, cash flows, financing plans, business strategy, budgets, capital expenditures, competitive positions, growth opportunities, plans and objectives of management and statements containing the words such as “anticipate,” “approximate,” “believe,” “plan,” “estimate,” “expect,” “project,” “could,” “should,” “will,” “intend,” “may” and other similar expressions, are forward-looking statements.

Such forward-looking statements are inherently uncertain, and stockholders and other potential investors must recognize that actual results may differ materially from the Company’s expectations as a result of a variety of factors, including, without limitation, those discussed below. Such forward-looking statements are based upon management’s current expectations and include known and unknown risks, uncertainties and other factors, many of which the Company is unable to predict or control, that may cause the Company’s actual results or performance to differ materially from any future results or performance expressed or implied by such forward-looking statements. These statements involve risks, uncertainties and other factors discussed below and detailed from time to time in the Company’s filings with the Securities and Exchange Commission.

In addition to the factors set forth above, other factors that may affect the Company’s plans or results include, without limitation, (a) changes in the reimbursement rates or the methods or timing of payment from third party payors, including the Medicare and Medicaid programs, changes arising from and related to the Medicare prospective payment system for LTAC hospitals, including potential changes in the Medicare payment rules, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, and changes in Medicare and Medicaid reimbursements for the Company’s nursing centers; (b) the impact of the Medicare, Medicaid and SCHIP Extension Act of 2007, including the ability of the Company’s hospitals to adjust to potential LTAC certification and the three-year moratorium on future hospital development; (c) the Company’s ability to operate pursuant to the terms of its debt obligations and its master leases with Ventas; (d) the Company’s ability to meet its rental and debt service obligations; (e) the Company’s ability to attract and retain key executives and other healthcare personnel; (f) increased operating costs due to shortages in qualified nurses, therapists and other healthcare personnel; (g) the effects of healthcare reform and government regulations, interpretation of regulations and changes in the nature and enforcement of regulations governing the healthcare industry; (h) failure of the Company’s facilities to meet applicable licensure and certification requirements; (i) national and regional economic conditions, including their effect on the availability and cost of labor, materials and other services; (j) the Company’s ability to control costs, particularly labor and employee benefit costs; (k) the Company’s ability to successfully pursue its development activities and successfully integrate new operations, including the realization of anticipated revenues, economies of scale, cost savings and productivity gains associated with such operations; (l) the increase in the costs of defending and insuring against alleged professional liability claims and the Company’s ability to predict the estimated costs related to such claims; (m) the Company’s ability to successfully reduce (by divestiture of operations or otherwise) its exposure to professional liability claims; (n) the further consolidation of managed care organizations and other third party payors; (o) the Company’s ability to successfully dispose of unprofitable facilities; (p) changes in generally accepted accounting principles or practices; and (q) the Company’s ability to maintain an effective system of internal controls over financial reporting. Many of these factors are beyond the Company’s control. The Company cautions investors that any forward-looking statements made by the Company are not guarantees of future performance. The Company disclaims any obligation to update any such factors or to announce publicly the results of any revisions to any of the forward-looking statements to reflect future events or developments.

As noted above, the Company’s earnings guidance includes the financial measure referred to as operating income. The Company’s management uses operating income as a meaningful measure of operational performance in addition to other measures. The Company uses operating income to assess the relative performance of its operating divisions as well as the employees that operate these businesses. In addition, the Company believes this measurement is important because securities analysts and investors use this measurement to compare the Company’s performance to other companies in the healthcare industry. The Company believes that net income from continuing operations is the most comparable measure, in relation to generally accepted accounting principles, to operating income. Readers of the Company’s financial information should consider net income from continuing operations as an important measure of the Company’s financial performance because it provides the most complete measure of its performance. Operating income should be considered in addition to, not as a substitute for, or superior to, financial measures based upon generally accepted accounting principles as an indicator of operating performance. A reconciliation of the estimated operating income to net income from continuing operations provided in the Company’s earnings guidance is included in this press release.

About Kindred Healthcare

Kindred Healthcare, Inc. is a healthcare services company, based in Louisville, Kentucky, with annual revenues of over $4 billion. At June 30, 2008, Kindred through its subsidiaries provided healthcare services in 656 locations in 40 states, including 83 long-term acute care hospitals, 228 skilled nursing centers and a contract rehabilitation services business, Peoplefirst rehabilitation services, which served 345 non-affiliated facilities. Kindred’s 53,900 employees are committed to providing high quality patient care and outstanding customer service to become the most trusted and respected provider of healthcare services in every community we serve. For more information, go to www.kindredhealthcare.com.

Click here to view the 2nd Quarter Results.

CONTACT:
Richard A. Lechleiter
Executive Vice President and Chief Financial Officer
(502) 596-7734

Return to Press Releases