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Kindred Healthcare Reports Second Quarter 2017 Results

August 3, 2017

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

----------------------

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

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

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

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

Company Updates Outlook for 2017 and 2018

LOUISVILLE, Ky.--(BUSINESS WIRE)--Aug. 3, 2017-- Kindred Healthcare, Inc. (“Kindred” or the “Company”) (NYSE:KND) today announced its operating results for the second quarter ended June 30, 2017.

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

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

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

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

__________

(1)

 

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

(2)

 

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

(3)

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

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

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

Second Quarter Consolidated Results(2):

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

Second Quarter Segment Results(2)(3):

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

__________

(1)

  See “2017 and 2018 Outlook” below for further details. All forward-looking non-GAAP financial measures are provided only on a non-GAAP basis due to the inherent difficulty of forecasting the timing or amount of items that would be included in the most directly comparable forward-looking GAAP financial measures. As a result, reconciliation of the forward-looking non-GAAP measures to GAAP financial measures is not available without unreasonable effort and the Company is unable to assess the probable significance of the unavailable information.

(2)

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

(3)

  See full segment data on pages 9 through 13.
     

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

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

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

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

Discontinued Operations – Loss on Divestiture of Skilled Nursing Facility Business

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

2017 and 2018 Outlook(4)

All forward-looking non-GAAP financial measures used to provide “2017 Outlook” and “2018 Outlook” (collectively, “Outlook”) are provided only on a non-GAAP basis. This is due to the inherent difficulty of forecasting the timing or amount of items that would be included in the most directly comparable forward-looking GAAP financial measures. As a result, reconciliation of the forward-looking non-GAAP financial measures to GAAP financial measures is not available without unreasonable effort and the Company is unable to assess the probable significance of the unavailable information.

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

__________

(1)

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

(2)

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

(3)

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

(4)

  See Forward-Looking Statements beginning on page 14.
     

2017 and 2018 Outlook(1)(Continued):

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

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

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

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

For the 2018 Outlook, Kindred anticipates:

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

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

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

Please note:

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

__________

(1)

  See Forward-Looking Statements beginning on page 14.

(2)

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

2017 and 2018 Outlook(1)(Continued):

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

Cash Flow(1)

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

Conference Call

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

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

Forward-Looking Statements and Non-GAAP Reconciliations

See page 14 for important disclosures regarding the Company’s forward-looking statements and the non-GAAP financial reconciliations that follow.

About Kindred Healthcare

Kindred Healthcare, Inc., a top-100 private employer in the United States, is a FORTUNE 500 healthcare services company based in Louisville, Kentucky with annual revenues of approximately $6.1 billion(2). At June 30, 2017, Kindred’s continuing operations, through its subsidiaries, had approximately 88,100 employees providing healthcare services in 2,540 locations in 45 states, including 81 LTAC hospitals, 19 inpatient rehabilitation hospitals, 19 sub-acute units, 614 Kindred at Home home health, hospice and non-medical home care sites of service, 102 inpatient rehabilitation units (hospital-based) and contract rehabilitation service businesses which served 1,705 non-affiliated sites of service. Ranked as one of Fortune magazine’s Most Admired Healthcare Companies for eight years, Kindred’s mission is to promote healing, provide hope, preserve dignity and produce value for each patient, resident, family member, customer, employee and shareholder we serve. For more information, go to www.kindredhealthcare.com. You can also follow us on Twitter and Facebook.

__________

(1)

  See Forward-Looking Statements beginning on page 14.

(2)

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

Stockholders’ equity:

           

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

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

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

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

Income (loss) from continuing operations before income taxes

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

4.3

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

0.4

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

2.2

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

(4.7

)

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

(11.4

)

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

(4.6

)

__________

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

__________

(a)   See reconciliation of GAAP results to non-GAAP results beginning on page 14. During the first quarter of 2017, the Company revised its definitions of “core” non-GAAP measures. See “Non-GAAP Measures” beginning on page 14 for a discussion regarding the revised definitions. For comparability, core results for 2016 have been revised to conform to the current year presentation.
     
   
KINDRED HEALTHCARE, INC.
Condensed Business Segment Data
(Unaudited)
                                             
                                          Second quarter
      2016 Quarters     2017 Quarters     % change v.
      First     Second     Third     Fourth     First     Second     prior year
Kindred at Home:                                            
Home Health:                                            
Sites of service (at end of period)       384       384       395       390       379       377        
Revenue mix %:                                            
Medicare       79.8       79.3       78.1       77.9       76.7       75.7        
Medicaid       2.1       2.1       2.5       1.9       1.7       1.7        
Commercial and other       8.4       8.2       8.6       10.6       11.5       11.4        
Commercial paid at episodic rates       9.7       10.4       10.8       9.6       10.1       11.2        
Episodic revenues ($ 000s)     $ 325,821     $ 332,193     $ 332,562     $ 323,398     $ 326,881     $ 334,420     0.7  
Total admissions       88,696       87,084       86,761       87,148       94,510       89,018     2.2  
Same-store total admissions       87,394       85,922       85,382       86,056       93,922       88,300     2.8  
Total episodic admissions       71,426       70,212       69,219       67,501       73,270       69,657    

(0.8

)

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

(0.2

)

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

(3.5

)

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

0.3

 
Episodes per admission       1.59       1.61       1.64       1.65       1.57       1.63    

1.2

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

0.4

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

(4.5

)

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

(3.0

)

Average length of stay       92       91       98       100       96       94    

3.3

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

(1.9

)

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

(1.9

)

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

1.3

 

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

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

__________

 

(a) Excludes non-consolidating IRF.

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

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

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

__________

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

Forward-Looking Statements

This earnings release includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements include, but are not limited to, all statements regarding the Company’s ability to exit the skilled nursing facility business and the expected timing of such exit, including the receipt of all required regulatory approvals and the satisfaction of the closing conditions for the transaction, as well as the Company’s ability to realize the anticipated benefits, sale proceeds, cost savings and strategic gains from this transaction, all statements regarding the Company’s expected future financial position, results of operations, cash flows, dividends, financing plans, business strategy, budgets, capital expenditures, competitive positions, growth opportunities, plans and objectives of management, government investigations, regulatory matters, and statements containing words such as “anticipate,” “approximate,” “believe,” “plan,” “estimate,” “expect,” “project,” “could,” “would,” “should,” “will,” “intend,” “hope,” “may,” “potential,” “upside,” and other similar expressions. Statements in this earnings release concerning the Company’s business outlook or future economic performance, anticipated profitability, revenues, expenses, dividends or other financial items, and product or services line growth, and expected outcome of government investigations and other regulatory matters, together with other statements that are not historical facts, are forward-looking statements that are estimates reflecting the best judgment of the Company based upon currently available information.

Such forward-looking statements are inherently uncertain, and stockholders and other potential investors must recognize that actual results may differ materially from the Company’s expectations as a result of a variety of factors. Such forward-looking statements are based upon management’s current expectations and include known and unknown risks, uncertainties and other factors, many of which the Company is unable to predict or control, that may cause the Company’s actual results, performance, or plans to differ materially from any future results, performance or plans expressed or implied by such forward-looking statements. These statements involve risks, uncertainties, and other factors detailed from time to time in the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K filed with the Securities and Exchange Commission (the “SEC”).

Many of these factors are beyond the Company’s control. The Company cautions investors that any forward-looking statements made by the Company are not guarantees of future performance. The Company disclaims any obligation to update any such factors or to announce publicly the results of any revisions to any of the forward-looking statements to reflect future events or developments.

Non-GAAP Measures

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

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

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

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

Non-GAAP Measures (Continued)

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

Same-Hospital Revenues: The same-hospital revenues are calculated by excluding from the Company’s Hospital Division revenues the results from one hospital that closed during the second quarter of 2017, four hospitals acquired in 2016, 15 hospitals sold in 2016, and three hospitals that closed during 2016. The Company believes the presentation of same-hospital revenues provides investors, equity analysts and others with useful information regarding the performance of the Company’s hospital operations that are comparable for the periods presented.

For EBITDAR, core net income attributable to Kindred, and core EBITDAR, the Company believes that income (loss) from continuing operations is the most comparable GAAP measure. For core diluted EPS, the Company believes that GAAP diluted earnings (loss) per share from continuing operations is the most comparable GAAP measure. Readers of the Company’s financial information should consider income (loss) from continuing operations and diluted earnings (loss) per share from continuing operations as important measures of the Company’s financial performance, because they provide the most complete measures of its performance. For same-hospital revenues, the Company believes that reported hospital segment revenues is the most comparable GAAP measure. Readers of the Company’s financial information should consider reported hospital segment revenues as an important measure of the Company’s Hospital Division financial performance because it provides the most complete measure of its performance. Operating results presented on a core basis, as well as a same-hospital basis, should be considered in addition to, not as a substitute for, or superior to, financial measures based upon GAAP as an indicator of operating performance.

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

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

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

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

 

KINDRED HEALTHCARE, INC.

Reconciliation of GAAP Results to Non-GAAP Measures

(Unaudited)

(In thousands, except per share amounts and statistics)
 
In addition to the results provided in accordance with GAAP, the Company has provided information in this earnings release to compute certain non-GAAP measures for the three months ended June 30, 2017 and 2016, and for the six months ended June 30, 2017 and 2016, before certain charges or on a core basis. The charges that were excluded from core operating results are denoted in the tables below.
 

The income tax benefit associated with the excluded charges, including the deferred tax valuation allowance for the three months and six months ended June 30, 2017, was calculated using an effective income tax rate of 17.0% and 14.3% for the three months ended June 30, 2017 and 2016, respectively, and 19.2% and 24.1% for the six months ended June 30, 2017 and 2016, respectively. The difference in the effective income tax rate compared to the same prior year period is primarily attributable to the deferred tax valuation allowance and, for 2016, the composition of charges that are non-deductible for income tax purposes, including the impairment charges and litigation contingency expense.

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

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

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

__________

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

Sub-acute units and one skilled nursing facility

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

__________

                                         

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

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

(c) One hospital closed during the second 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 June 30, 2017            
            Charges                  
                                    Deferred                        
            Business     RehabCare                 tax           Before            
      As     interruption     Collection     Impairment     Restructuring     valuation           charges            
      reported     settlements     Litigation     charges     charges     allowance     Total    

(“core”) (a)

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

Income (loss) from continuing operations before income taxes

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

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

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

(“core”) (a)

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

Income from continuing operations before income taxes

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

Diluted shares used in computing earnings per common share

      87,500                                                         87,500  

__________

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

(“core”) (a)

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

Income (loss) from continuing operations before income taxes

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

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

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

(“core”) (a)

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

Income from continuing operations before income taxes

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

Diluted shares used in computing earnings per common share

      87,374                                                         87,374  

__________

(a)  

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

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

(“core”) (a)

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

Income from continuing operations before income taxes

     

8,785

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

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

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

(“core”) (a)

Income from continuing operations:                                                      
Segment adjusted operating income:                                                      
Kindred at Home:                                                      
Home health     $ 66,941       $ (1,138 )     $ -     $ -       $ -     $ -       $ -     $ (1,138 )     $ 65,803  
Hospice       24,866         -         -       -         -       -         -       -         24,866  
        91,807         (1,138 )       -       -         -       -         -       (1,138 )       90,669  
                                                       
Hospital division       136,416         -         -       -         -       -         -       -         136,416  
                                                       
Kindred Rehabilitation Services:                                                      
Kindred Hospital Rehabilitation Services       48,119         -         -       -         -       -         -       -         48,119  
RehabCare       6,036         -         -       -         -       -         -       -         6,036  
        54,155         -         -       -         -       -         -       -         54,155  
                                                       
Support center expenses       (72,022 )       -         -       -         863       -         -       863         (71,159 )
Litigation contingency expense       (1,910 )       -         1,025       -         -       -         -       1,025         (885 )
Impairment charges       (7,788 )       -         -       7,788         -       -         -       7,788         -  
Restructuring charges       (1,701 )       -         -       -         -       1,701         -       1,701         -  
Transaction costs       (1,685 )       -         -       -         -       -         1,603       1,603         (82 )
Building rent       (65,985 )       -         -       -         -       -         -       -         (65,985 )
Equipment rent       (10,158 )       -         -       -         -       -         -       -         (10,158 )
Restructuring charges - rent       (251 )       -         -       -         -       251         -       251         -  
Depreciation and amortization       (33,554 )       -         -       -         -       -         -       -         (33,554 )
Interest, net       (57,253 )       -         -       -         -       -         -       -         (57,253 )

Income from continuing operations before income taxes

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

Diluted shares used in computing earnings per common share

      87,249                                                   87,249  

__________

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

(“core”) (a)

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

Income (loss) from continuing operations before income taxes

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

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

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

(“core”) (a)

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

Income (loss) from continuing operations before income taxes

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

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

      86,904                                                   87,641  

__________

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

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

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

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

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

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

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

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

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

__________

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

 

Source: Kindred Healthcare, Inc.

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