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Kindred Healthcare Reports Third Quarter 2017 Results

November 6, 2017

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

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

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

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

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

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

Company Updates Outlook for 2018

LOUISVILLE, Ky.--(BUSINESS WIRE)--Nov. 6, 2017-- Kindred Healthcare, Inc. (“Kindred” or the “Company”) (NYSE:KND) today announced its operating results for the third quarter ended September 30, 2017.

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

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

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

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

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

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

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

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

Third Quarter Consolidated Results(1):

  • Consolidated revenues were $1.48 billion, a 5.5% year-over-year decrease, primarily attributable to the impact of the transition to LTAC patient criteria and the sale or closure of 21 LTAC hospitals since the third quarter of 2016. GAAP loss from continuing operations was $18.4 million compared to a loss of $649.2 million in the same period a year ago. The reduction in the loss was primarily due to a $359.1 million decrease in the deferred tax asset valuation allowance, a $243.8 million decrease in impairment charges and a $39.1 million decrease related to restructuring charges, all partially offset by the impact of the Hurricanes, LTAC patient criteria and the sale or closure of the 21 LTAC hospitals noted above. Core EBITDAR declined to $156.9 million compared to $185.6 million and Core EBITDA declined to $83.9 million compared to $109.0 million in the same period of 2016, both primarily due to the impact of the Hurricanes, LTAC patient criteria and the sale or closure of the 21 LTAC hospitals noted above.
  • GAAP operating cash flows were $8.5 million compared to $36.4 million for the same period a year ago. Core operating cash flows were $29.8 million compared to $29.5 million for the same period a year ago. Core free cash flows were $3.3 million compared to $2.9 million in the same period a year ago. GAAP operating cash flows declined
________
(1) See reconciliation of GAAP results to non-GAAP results beginning on page 15. The Company defines Segment adjusted operating income (loss) as EBITDAR for each of the Company’s operating segments, excluding litigation contingency expense, impairment charges, restructuring charges, transaction costs and the allocation of support center overhead. During the first quarter of 2017, the Company revised its definition of “core” non-GAAP measures. See “Non-GAAP Measures” beginning on page 15 for a discussion regarding the revised definitions. For comparability, core results for 2016 were revised to conform to the current year presentation.

Third Quarter Consolidated Results(1)(Continued):

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

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

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

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

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

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

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(1) See reconciliation of GAAP results to non-GAAP results beginning on page 15. During the first quarter of 2017, the Company revised its definition of “core” non-GAAP measures. See “Non-GAAP Measures” beginning on page 15 for a discussion regarding the revised definitions. For comparability, core results for 2016 were revised to conform to the current year presentation.
(2) See same-hospital and full segment data on pages 10 through 14.
(3) For each of the Company’s segments, Segment adjusted operating income (loss) is a measure of performance used by the Company’s chief operating decision makers in accordance with “Accounting Standard Codification 280 – Segment Reporting.” The Company defines Segment adjusted operating income (loss) as EBITDAR for each of the Company’s operating segments, excluding litigation contingency expense, impairment charges, restructuring charges, transaction costs, and the allocation of support center overhead.
   

Third Quarter Segment Results(1)(Continued):

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

Discontinued Operations – Loss on Divestiture of Skilled Nursing Facility Business

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

Insurance Program Distributions and Restructuring

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

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

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

2018 Outlook(2)

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

The Company’s 2018 Outlook does not take into account the effect of any reimbursement changes, any further acquisitions or divestitures, and any further issuances or repurchases of common stock.

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

2018 Outlook(1)(Continued):

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

For the 2018 Outlook, Kindred anticipates:

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

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

  • Total rent expense of approximately $295 million to $300 million;
  • Depreciation and amortization expense of approximately $100 million;
  • Interest expense of approximately $235 million to $240 million, including $17 million of amortization of deferred financing fees;
  • Noncontrolling interest expense of approximately $45 million to $50 million;
  • An effective book tax rate of approximately 35%;
  • Weighted average shares outstanding of approximately 90.0 million;
  • Routine capital expenditures of approximately $60 million; and
  • Available tax net operating loss (“NOLs”) as of January 1, 2018 of $550 million to $600 million.

Cash Flow(1)

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

Conference Call

As previously announced, investors and the general public may access a live webcast of the third quarter 2017 conference call through a link on the Company’s website at http://investors.kindredhealthcare.com. The conference call will be held on November 7 at 9:00 a.m. (Eastern Time).

A telephone replay of the conference call will become available at approximately 12:00 p.m. on November 7 by dialing (719) 457-0820, access code: 2677758. The phone replay will be available through November 17 and the online replay will be available through December 7.

Forward-Looking Statements and Non-GAAP Reconciliations

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

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

About Kindred Healthcare

Kindred Healthcare, Inc., a top-105 private employer in the United States, is a FORTUNE 500 healthcare services company based in Louisville, Kentucky with annual revenues of approximately $6.1 billion(1). At September 30, 2017, Kindred’s continuing operations, through its subsidiaries, had approximately 86,400 employees providing healthcare services in 2,475 locations in 45 states, including 77 LTAC hospitals, 19 inpatient rehabilitation hospitals, 16 sub-acute units, 609 Kindred at Home home health, hospice and non-medical home care sites of service, 101 inpatient rehabilitation units (hospital-based) and contract rehabilitation service businesses which served 1,653 non-affiliated sites of service. Ranked as one of Fortune magazine’s Most Admired Healthcare Companies for eight years, Kindred’s mission is to promote healing, provide hope, preserve dignity and produce value for each patient, resident, family member, customer, employee and shareholder we serve. For more information, go to www.kindredhealthcare.com. You can also follow us on Twitter and Facebook.

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(1) Revenues from continuing operations for the last twelve months ended September 30, 2017.
   

 

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

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

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

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

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

Income (loss) from continuing operations before income taxes

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

__________

(a)

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

   
n/m = not meaningful.
                                 
                                             
KINDRED HEALTHCARE, INC.
Condensed Consolidated and Business Segment Data (Continued)
(Unaudited)
(In thousands, except statistics)
                                             
                                            Third quarter
                2016 Quarters   2017 Quarters   % change v.
                First   Second   Third   Fourth   First   Second   Third   prior year
Segment adjusted operating income (loss):                                
  Kindred at Home:                                
    Home health   $ 66,941     $ 76,030     $ 75,073     $ 61,487     $ 63,750     $ 76,592     $ 66,431     (11.5 )
    Hospice       24,866       31,329       31,326       28,805       27,581       32,784       34,761     11.0  
                  91,807       107,359       106,399       90,292       91,331       109,376       101,192     (4.9 )
  Hospital division     136,416       127,510       83,940       93,778       93,438       91,580       61,455     (26.8 )
  Kindred Rehabilitation Services:                                
    Kindred Hospital Rehabilitation Services     48,119       50,729       49,759       49,728       51,760       53,422       49,151     (1.2 )
    RehabCare     8,820       10,254       6,740       3,421       7,896       (14,305 )     7,619     13.0  
                  56,939       60,983       56,499       53,149       59,656       39,117       56,770     0.5  
                                             
Core EBITDAR by segment (a):                                
  Kindred at Home:                                
    Home health   $ 65,803     $ 75,859     $ 75,073     $ 61,185     $ 63,750     $ 75,797     $ 66,431     (11.5 )
    Hospice       24,866       31,329       31,326       27,668       27,581       32,784       34,761     11.0  
                  90,669       107,188       106,399       88,853       91,331       108,581       101,192     (4.9 )
  Hospital division     136,416       127,510       83,940       93,148       93,438       90,572       61,455     (26.8 )
  Kindred Rehabilitation Services:                                
    Kindred Hospital Rehabilitation Services     48,119       50,729       49,759       49,728       51,760       53,422       49,151     (1.2 )
    RehabCare     8,820       10,254       6,740       3,421       7,896       10,999       5,376     (20.2 )
                  56,939       60,983       56,499       53,149       59,656       64,421       54,527     (3.5 )
  Support center expenses     (71,159 )     (64,265 )     (59,535 )     (54,334 )     (60,014 )     (62,572 )     (60,323 )   1.3  
  Litigation contingency expense     (885 )     (180 )     -       -       -       -       -      
  Transaction costs     (82 )     (172 )     (1,732 )     (387 )     -       -       -      
                $ 211,898     $ 231,064     $ 185,571     $ 180,429     $ 184,411     $ 201,002     $ 156,851     (15.5 )
                                             
Segment adjusted operating income (loss) margin:                                
  Kindred at Home:                                
    Home health     15.6       17.3       16.7       13.8       14.1       16.7       14.6     (2.1 )
    Hospice       14.1       16.9       16.6       15.5       15.4       17.7       18.4     1.8  
      Kindred at Home     15.1       17.2       16.7       14.3       14.5       17.0       15.8     (0.9 )
  Hospital division     20.9       19.8       14.3       17.2       16.8       16.9       12.2     (2.1 )
  Kindred Rehabilitation Services:                                
    Kindred Hospital Rehabilitation Services     28.8       29.6       29.2       29.0       29.1       29.9       28.3     (0.9 )
    RehabCare     4.4       5.3       3.5       1.8       4.0       (7.4 )     4.3     0.8  
      Kindred Rehabilitation Services     15.5       16.7       15.7       14.7       15.9       10.5       16.1     0.4  
                                             
Core EBITDAR margin by segment (a):                                
  Kindred at Home:                                
    Home health     15.3       17.3       16.7       13.8       14.1       16.5       14.6     (2.1 )
    Hospice       14.1       16.9       16.6       14.9       15.4       17.7       18.4     1.8  
      Kindred at Home     15.0       17.2       16.7       14.1       14.5       16.8       15.8     (0.9 )
  Hospital division     20.9       19.8       14.3       17.1       16.8       16.7       12.2     (2.1 )
  Kindred Rehabilitation Services:                                
    Kindred Hospital Rehabilitation Services     28.8       29.6       29.2       29.0       29.1       29.9       28.3     (0.9 )
    RehabCare     4.4       5.3       3.5       1.8       4.0       5.7       3.0     (0.5 )
      Kindred Rehabilitation Services     15.5       16.7       15.7       14.7       15.9       17.3       15.5     (0.2 )
  Consolidated     13.2       14.4       11.9       11.9       12.0       13.1       10.6     (1.3 )
                                             

__________

(a)

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

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

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

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

__________

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

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

                               
  End of period data:                                
    Number of transitional care hospitals     95     97     94     82       82       81       77      
    Number of licensed beds     7,089     7,067     6,890     6,107       6,107       6,041       5,797      
  Revenues (000s)   $ 643,299   $ 633,695   $ 575,323   $ 530,746     $ 540,280     $ 525,458     $ 487,012     (15.3 )
  Revenue mix %:                                
    Medicare     57.8     55.5     54.6     53.5       52.8       50.3       50.6      
    Medicaid     4.2     4.2     4.0     4.5       3.9       5.0       4.3      
    Medicare Advantage     11.5     12.0     12.1     11.0       12.2       12.3       12.3      
    Medicaid Managed     5.6     6.3     7.3     8.0       9.1       9.1       10.1      
    Commercial insurance and other     20.9     22.0     22.0     23.0       22.0       23.3       22.7      
                                         
  Patient criteria data:                                
    Revenues:                                
      Compliant patients                 88.5 %     86.0 %     88.3 %     89.1 %    
      Site neutral                 11.5 %     14.0 %     11.7 %     10.9 %    
                                         
    Revenues per patient day:                                
      Compliant patients               $ 1,853     $ 1,816     $ 1,806     $ 1,799      
      Site neutral                 926       1,041       1,053       1,067      
      Total                 1,662       1,645       1,667       1,674      
                                         
  Admissions:                                
    Medicare     8,919     8,253     7,861     7,351       7,529       6,743       6,073     (22.7 )
    Medicaid     463     386     375     336       354       381       362     (3.5 )
    Medicare Advantage     1,453     1,382     1,327     1,210       1,354       1,239       1,197     (9.8 )
    Medicaid Managed     733     768     861     787       851       903       861     -  
    Commercial insurance and other     1,871     1,807     1,727     1,488       1,614       1,608       1,483     (14.1 )
              13,439     12,596     12,151     11,172       11,702       10,874       9,976     (17.9 )
  Patient days:                                
    Medicare     229,004     219,013     202,482     186,290       187,738       173,916       158,083     (21.9 )
    Medicaid     21,134     19,409     16,781     12,181       13,334       13,333       13,429     (20.0 )
    Medicare Advantage     45,760     47,697     43,241     37,526       41,020       40,555       38,338     (11.3 )
    Medicaid Managed     25,341     27,267     28,534     29,275       32,713       32,635       31,249     9.5  
    Commercial insurance and other     62,769     63,009     59,856     54,148       53,695       54,809       49,895     (16.6 )
              384,008     376,395     350,894     319,420       328,500       315,248       290,994     (17.1 )
  Average length of stay:                                
    Medicare     25.7     26.5     25.8     25.3       24.9       25.8       26.0     0.8  
    Medicaid     45.6     50.3     44.7     36.3       37.7       35.0       37.1     (17.0 )
    Medicare Advantage     31.5     34.5     32.6     31.0       30.3       32.7       32.0     (1.8 )
    Medicaid Managed     34.6     35.5     33.1     37.2       38.4       36.1       36.3     9.7  
    Commercial insurance and other     33.5     34.9     34.7     36.4       33.3       34.1       33.6     (3.2 )
    Weighted average     28.6     29.9     28.9     28.6       28.1       29.0       29.2     1.0  
  Revenues per admission:                                
    Medicare   $ 41,717   $ 42,579   $ 39,945   $ 38,602     $ 37,867     $ 39,219     $ 40,577     1.6  
    Medicaid     57,928     69,797     61,338     70,333       60,091       69,304       57,365     (6.5 )
    Medicare Advantage     51,080     55,105     52,363     48,387       48,555       51,958       50,301     (3.9 )
    Medicaid Managed     49,287     51,696     48,631     54,238       57,736       53,159       57,172     17.6  
    Commercial insurance and other     71,651     77,193     73,515     82,066       73,750       76,007       74,435     1.3  
    Weighted average     47,868     50,309     47,348     47,507       46,170       48,322       48,818     3.1  
  Revenues per patient day:                                
    Medicare   $ 1,625   $ 1,605   $ 1,551   $ 1,523     $ 1,519     $ 1,521     $ 1,559     0.5  
    Medicaid     1,269     1,388     1,371     1,940       1,595       1,980       1,546     12.8  
    Medicare Advantage     1,622     1,597     1,607     1,560       1,603       1,587       1,571     (2.2 )
    Medicaid Managed     1,426     1,456     1,467     1,458       1,502       1,471       1,575     7.4  
    Commercial insurance and other     2,136     2,214     2,121     2,255       2,217       2,230       2,212     4.3  
    Weighted average     1,675     1,684     1,640     1,662       1,645       1,667       1,674     2.1  
                                         
  Medicare case mix index (discharged patients only)     1.163     1.179     1.172     1.153       1.172       1.171       1.180     0.7  
  Average daily census     4,220     4,136     3,814     3,472       3,650       3,464       3,163     (17.1 )
  Occupancy %     68.0     67.5     61.6     64.1       67.6       64.3       59.9     (2.8 )
                                   
                                         
KINDRED HEALTHCARE, INC.
Condensed Business Segment Data (Continued)
(Unaudited)
                                         
                                        Third quarter
            2016 Quarters   2017 Quarters   % change v.
            First   Second   Third   Fourth   First   Second   Third   prior year
Same-hospital data (a):                                
  End of period data:                                
    Number of transitional care hospitals     74     74     77     77       74       74       77      
    Number of licensed beds     5,680     5,680     5,797     5,797       5,680       5,680       5,797      
  Revenues (000s)   $ 545,731   $ 540,907   $ 502,208   $ 514,762     $ 515,148     $ 502,007     $ 482,149     (4.0 )
  Revenue mix %:                                
    Medicare     58.0     55.2     53.9     53.1       52.0       50.2       50.6      
    Medicaid     3.8     3.9     3.6     4.5       4.2       5.2       4.3      
    Medicare Advantage     11.2     11.7     12.3     11.0       12.1       11.9       12.4      
    Medicaid Managed     5.9     6.8     7.9     8.3       9.4       9.4       10.1      
    Commercial insurance and other     21.1     22.4     22.3     23.1       22.3       23.3       22.6      
                                         
  Patient criteria data:                                
    Revenues:                                
      Compliant patients                 88.7 %     86.0 %     88.5 %     89.1 %    
      Site neutral                 11.3 %     14.0 %     11.5 %     10.9 %    
                                         
    Revenues per patient day:                                
      Compliant patients               $ 1,860     $ 1,827     $ 1,811     $ 1,799      
      Site neutral                 924       1,049       1,060       1,067      
      Total                 1,669       1,656       1,674       1,673      
                                         
  Admissions:                                
    Medicare     7,524     6,946     6,758     7,023       7,045       6,408       6,018     (10.9 )
    Medicaid     391     334     333     328       351       377       361     8.4  
    Medicare Advantage     1,178     1,101     1,140     1,160       1,274       1,150       1,190     4.4  
    Medicaid Managed     629     694     783     784       830       865       851     8.7  
    Commercial insurance and other     1,500     1,467     1,415     1,416       1,507       1,507       1,468     3.7  
              11,222     10,542     10,429     10,711       11,007       10,307       9,888     (5.2 )
  Patient days:                                
    Medicare     193,263     184,241     173,863     178,719       175,712       165,065       156,412     (10.0 )
    Medicaid     14,382     13,304     11,631     11,923       13,580       13,180       13,433     15.5  
    Medicare Advantage     37,161     39,474     38,245     36,329       38,640       37,685       38,098     (0.4 )
    Medicaid Managed     22,332     24,736     26,552     29,216       32,097       31,858       30,816     16.1  
    Commercial insurance and other     51,709     52,030     51,043     52,162       51,097       52,033       49,402     (3.2 )
              318,847     313,785     301,334     308,349       311,126       299,821       288,161     (4.4 )
  Average length of stay:                                
    Medicare     25.7     26.5     25.7     25.4       24.9       25.8       26.0     1.2  
    Medicaid     36.8     39.8     34.9     36.4       38.7       35.0       37.2     6.6  
    Medicare Advantage     31.5     35.9     33.5     31.3       30.3       32.8       32.0     (4.5 )
    Medicaid Managed     35.5     35.6     33.9     37.3       38.7       36.8       36.2     6.8  
    Commercial insurance and other     34.5     35.5     36.1     36.8       33.9       34.5       33.7     (6.6 )
    Weighted average     28.4     29.8     28.9     28.8       28.3       29.1       29.1     0.7  
  Revenues per admission:                                
    Medicare   $ 42,061   $ 43,021   $ 40,020   $ 38,946     $ 38,018     $ 39,353     $ 40,513     1.2  
    Medicaid     52,717     63,223     54,880     70,959       61,618       68,915       57,689     5.1  
    Medicare Advantage     51,952     57,600     54,398     48,889       48,906       52,111       50,241     (7.6 )
    Medicaid Managed     51,560     52,725     50,360     54,345       58,187       54,199       57,158     13.5  
    Commercial insurance and other     76,679     82,451     79,176     83,792       76,366       77,666       74,312     (6.1 )
    Weighted average     48,630     51,310     48,155     48,059       46,802       48,705       48,761     1.3  
  Revenues per patient day:                                
    Medicare   $ 1,638   $ 1,622   $ 1,556   $ 1,530     $ 1,524     $ 1,528     $ 1,559     0.2  
    Medicaid     1,433     1,587     1,571     1,952       1,593       1,971       1,550     (1.3 )
    Medicare Advantage     1,647     1,607     1,621     1,561       1,612       1,590       1,569     (3.2 )
    Medicaid Managed     1,452     1,479     1,485     1,458       1,505       1,472       1,578     6.3  
    Commercial insurance and other     2,224     2,325     2,195     2,275       2,252       2,249       2,208     0.6  
    Weighted average     1,712     1,724     1,667     1,669       1,656       1,674       1,673     0.4  
                                         
  Average daily census     3,504     3,448     3,275     3,352       3,457       3,295       3,132     (4.4 )

__________

(a)

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

                     

Forward-Looking Statements

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

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

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

Non-GAAP Measures

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

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

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

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

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

Non-GAAP Measures (Continued)

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

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

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

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

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

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

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

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

The income tax benefit associated with the excluded charges, including the deferred tax valuation allowance for the three months and nine months ended September 30, 2017, was calculated using an effective income tax rate of 6.0% and 72.9% for the three months ended September 30, 2017 and 2016, respectively, and 18.1% and 66.9% for the nine months ended September 30, 2017 and 2016, respectively. The difference in the effective income tax rate compared to the same prior year period is primarily attributable to the change in the amount of deferred tax valuation allowance and, for 2016, the composition of charges that are non-deductible for income tax purposes, including the impairment charges.

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

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

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

__________

(a) For purposes of computing diluted earnings (loss) per common share before charges, income (loss) from continuing operations before charges was reduced by $0.1 million for the three months ended September 30, 2016, and by $0.3 million and $1.2 million for the nine months ended September 30, 2017 and 2016, respectively, for the allocation of income to participating unvested restricted stockholders.
   
   
     
                                     
KINDRED HEALTHCARE, INC.
Reconciliation of GAAP Results to Non-GAAP Measures (Continued)
(Unaudited)
(In thousands)
                                     
In addition to the results provided in accordance with GAAP, the Company has provided information in this earnings release to compute certain non-GAAP measures for the quarters of 2016 and 2017, before certain charges or on a core basis. The charges that were excluded from core operating results are denoted in the table below.
                                     
                                     
            2016 Quarters   2017 Quarters
            First   Second   Third   Fourth   First   Second   Third

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

                           
                                     
As reported:                            
 

Income (loss) from continuing operations attributable to Kindred

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

Sub-acute units and one skilled nursing facility

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

__________

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

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

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

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

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

Loss from continuing operations before income taxes

   

(19,614

)

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

Diluted shares used in computing loss per common share

    87,597                           87,597      
                                             
                Three months ended September 30, 2016
                    Charges    
                                Gentiva   Deferred        
                                transaction   tax       Before
                As   Impairment   Research and   Restructuring   and   valuation       charges
                reported   charges   development   charges   integration   allowance   Total   ("core") (a)
Income (loss) from continuing operations:                                
Segment adjusted operating income:                                
  Kindred at Home:                                
    Home health   $ 75,073     $ -     $ -   $ -   $ -     $ -     $ -     $ 75,073  
    Hospice       31,326       -       -     -     -       -       -       31,326  
                  106,399       -       -     -     -       -       -       106,399  
                                             
  Hospital division     83,940       -       -     -     -       -       -       83,940  
                                             
  Kindred Rehabilitation Services:                                
    Kindred Hospital Rehabilitation Services     49,759       -       -     -     -       -       -       49,759  
    RehabCare     6,740       -       -     -     -       -       -       6,740  
                  56,499       -       -     -     -       -       -       56,499  
                                             
Support center expenses     (62,823 )     -       3,288     -     -       -       3,288       (59,535 )
Impairment charges     (297,276 )     297,276       -     -     -       -       297,276       -  
Restructuring charges     (22,813 )     -       -     22,813     -       -       22,813       -  
Transaction costs     (2,982 )     -       -     -     1,250       -       1,250       (1,732 )
Building rent       (66,946 )     -       -     -     272       -       272       (66,674 )
Equipment rent     (9,911 )     -       -     -     -       -       -       (9,911 )
Restructuring charges - rent     (58,650 )     -       -     58,650     -       -       58,650       -  
Depreciation and amortization     (32,995 )     -       -     -     -       -       -       (32,995 )
Interest, net         (58,059 )     -       -     -     -       -       -       (58,059 )

Income (loss) from continuing operations before income taxes

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

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

    86,869                               87,529  

__________

(a)

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

   
                                                         
KINDRED HEALTHCARE, INC.
Reconciliation of GAAP Results to Non-GAAP Measures (Continued)
(Unaudited)
(In thousands, except per share amounts)
                                                         
                                                         
                Nine months ended September 30, 2017        
                    Charges            
                                        Deferred                
                    Business   RehabCare               tax       Before        
                As   interruption   collection   Litigation   Impairment   Restructuring   valuation       charges        
                reported   settlements   litigation   contingency   charges   charges   allowance   Total   ("core") (a)        
Income (loss) from continuing operations:                                            
Segment adjusted operating income (loss):                                            
  Kindred at Home:                                            
    Home health   $ 206,773     $ (795 )   $ -     $ -     $ -   $ -   $ -     $ (795 )   $ 205,978          
    Hospice       95,126       -       -       -       -     -     -       -       95,126          
                  301,899       (795 )     -       -       -     -     -       (795 )     301,104          
                                                         
  Hospital division     246,473       (1,008 )     -       -       -     -     -       (1,008 )     245,465          
                                                         
  Kindred Rehabilitation Services:                                            
    Kindred Hospital Rehabilitation Services     154,333       -       -       -       -     -     -       -       154,333          
    RehabCare     1,210       -       23,061       -       -     -     -       23,061       24,271          
                  155,543       -       23,061       -       -     -     -       23,061       178,604          
                                                         
Support center expenses     (182,909 )     -       -       -       -     -     -       -       (182,909 )        
Litigation contingency expense     (4,000 )             4,000                   4,000       -          
Impairment charges     (136,303 )     -       -       -       136,303     -     -       136,303       -          
Restructuring charges     (25,592 )     -       -       -       -     25,592     -       25,592       -          
Building rent       (193,939 )     -       -       -       -     -     -       -       (193,939 )        
Equipment rent     (26,285 )     -       -       -       -     -     -       -       (26,285 )        
Restructuring charges - rent     (5,964 )     -       -       -       -     5,964     -       5,964       -          
Depreciation and amortization     (80,279 )     -       -       -       -     -     -       -       (80,279 )        
Interest, net         (177,833 )     -       -       -       -     -     -       -       (177,833 )        

Income (loss) from continuing operations before income taxes

   

(129,189

)

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

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

    87,398                                   88,057          
                                                         
                Nine months ended September 30, 2016
                    Charges    
                                            Gentiva   Deferred        
                    Business                       transaction   tax       Before
                As   interruption   Litigation   Impairment   Research and   Debt   Restructuring   and   valuation       charges
                reported   settlements   contingency   charges   development   amendment   charges   integration   allowance   Total   ("core") (a)
Income from continuing operations:                                            
Segment adjusted operating income:                                            
  Kindred at Home:                                            
    Home health   $ 218,044     $ (1,309 )   $ -     $ -     $ -   $ -   $ -     $ -     $ -     $ (1,309 )   $ 216,735  
    Hospice       87,521       -       -       -       -     -     -       -       -       -       87,521  
                  305,565       (1,309 )     -       -       -     -     -       -       -       (1,309 )     304,256  
                                                         
  Hospital division     347,866       -       -       -       -     -     -       -       -       -       347,866  
                                                         
  Kindred Rehabilitation Services:                                            
    Kindred Hospital Rehabilitation Services     148,607       -       -       -       -     -     -       -       -       -       148,607  
    RehabCare     25,814       -       -       -       -     -     -       -       -       -       25,814  
                  174,421       -       -       -       -     -     -       -       -       -       174,421  
                                                         
Support center expenses     (203,289 )     -       -       -       7,227     1,103     -       -       -       8,330       (194,959 )
Litigation contingency expense     (2,840 )     -       1,775       -       -     -     -       -       -       1,775       (1,065 )
Impairment charges     (311,195 )     -       -       311,195       -     -     -       -       -       311,195       -  
Restructuring charges     (24,850 )     -       -       -       -     -     24,850       -       -       24,850       -  
Transaction costs     (6,513 )     -       -       -       -     -     -       4,527       -       4,527       (1,986 )
Building rent       (199,956 )     -       -       -       -     -     -       272       -       272       (199,684 )
Equipment rent     (31,280 )     -       -       -       -     -     -       -       -       -       (31,280 )
Restructuring charges - rent     (59,363 )     -       -       -       -     -     59,363       -       -       59,363       -  
Depreciation and amortization     (99,747 )     -       -       -       -     -     -       -       -       -       (99,747 )
Interest, net         (172,879 )     -       -       -       -     -     -       -       -       -       (172,879 )

Income from continuing operations before income taxes

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

Diluted shares used in computing earnings per common share

    86,766                                           87,426  

__________

(a)

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

                                                 
KINDRED HEALTHCARE, INC.
Reconciliation of GAAP Results to Non-GAAP Measures (Continued)
(Unaudited)
(In thousands, except per share amounts)
                                                 
                                                 
                Three months ended March 31, 2017            
                    Charges                
                            Deferred                    
                            tax       Before            
                As   Impairment   Restructuring   valuation       charges            
                reported   charges   charges   allowance   Total   ("core") (a)            
Income from continuing operations:                                    
Segment adjusted operating income:                                    
  Kindred at Home:                                    
    Home health   $ 63,750     $ -     $ -   $ -     $ -   $ 63,750              
    Hospice       27,581       -       -     -       -     27,581              
                  91,331       -       -     -       -     91,331              
                                                 
  Hospital division     93,438       -       -     -       -     93,438              
                                                 
  Kindred Rehabilitation Services:                                    
    Kindred Hospital Rehabilitation Services     51,760       -       -     -       -     51,760              
    RehabCare     7,896       -       -     -       -     7,896              
                  59,656       -       -     -       -     59,656              
                                                 
Support center expenses     (60,014 )     -       -     -       -     (60,014 )            
Impairment charges     (474 )     474       -     -       474     -              
Restructuring charges     (8,101 )     -       8,101     -       8,101     -              
Building rent       (64,656 )     -       -     -       -     (64,656 )            
Equipment rent     (8,887 )     -       -     -       -     (8,887 )            
Restructuring charges - rent     (1,905 )     -       1,905     -       1,905     -              
Depreciation and amortization     (29,820 )     -       -     -       -     (29,820 )            
Interest, net         (58,819 )     -       -     -       -     (58,819 )            

Income from continuing operations before income taxes

   

11,749

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

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

    87,085                       87,744              
                                                 
                Three months ended March 31, 2016
                    Charges    
                                        Gentiva        
                    Business                   transaction       Before
                As   interruption   Litigation   Impairment   Research and   Restructuring   and       charges
                reported   settlements   contingency   charges   development   charges   integration   Total   ("core") (a)
Income from continuing operations:                                    
Segment adjusted operating income:                                    
  Kindred at Home:                                    
    Home health   $ 66,941     $ (1,138 )   $ -   $ -     $ -   $ -     $ -   $ (1,138 )   $ 65,803  
    Hospice       24,866       -       -     -       -     -       -     -       24,866  
                  91,807       (1,138 )     -     -       -     -       -     (1,138 )     90,669  
                                                 
  Hospital division     136,416       -       -     -       -     -       -     -       136,416  
                                                 
  Kindred Rehabilitation Services:                                    
    Kindred Hospital Rehabilitation Services     48,119       -       -     -       -     -       -     -       48,119  
    RehabCare     8,820       -       -     -       -     -       -     -       8,820  
                  56,939       -       -     -       -     -       -     -       56,939  
                                                 
Support center expenses     (72,022 )     -       -     -       863     -       -     863       (71,159 )
Litigation contingency expense     (1,910 )     -       1,025     -       -     -       -     1,025       (885 )
Impairment charges     (7,788 )     -       -     7,788       -     -       -     7,788       -  
Restructuring charges     (1,701 )     -       -     -       -     1,701       -     1,701       -  
Transaction costs     (1,685 )     -       -     -       -     -       1,603     1,603       (82 )
Building rent       (65,985 )     -       -     -       -     -       -     -       (65,985 )
Equipment rent     (10,158 )     -       -     -       -     -       -     -       (10,158 )
Restructuring charges - rent     (251 )     -       -     -       -     251       -     251       -  
Depreciation and amortization     (33,554 )     -       -     -       -     -       -     -       (33,554 )
Interest, net         (57,253 )     -       -     -       -     -       -     -       (57,253 )

Income from continuing operations before income taxes

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

Diluted shares used in computing earnings per common share

    87,249                                   87,249  

__________

(a)

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

   
                                                     
KINDRED HEALTHCARE, INC.
Reconciliation of GAAP Results to Non-GAAP Measures (Continued)
(Unaudited)
(In thousands, except per share amounts)
                                                     
                                                     
                Three months ended June 30, 2017        
                    Charges            
                                    Deferred                
                    Business   RehabCare           tax       Before        
                As   interruption   collection   Impairment   Restructuring   valuation       charges        
                reported   settlements   litigation   charges   charges   allowance   Total   ("core") (a)        
Income (loss) from continuing operations:                                        
Segment adjusted operating income (loss):                                        
  Kindred at Home:                                        
    Home health   $ 76,592     $ (795 )   $ -     $ -     $ -   $ -     $ (795 )   $ 75,797          
    Hospice       32,784       -       -       -       -     -       -       32,784          
                  109,376       (795 )     -       -       -     -       (795 )     108,581          
                                                     
  Hospital division     91,580       (1,008 )     -       -       -     -       (1,008 )     90,572          
                                                     
  Kindred Rehabilitation Services:                                        
    Kindred Hospital Rehabilitation Services     53,422       -       -       -       -     -       -       53,422          
    RehabCare     (14,305 )     -       25,304       -       -     -       25,304       10,999          
                  39,117       -       25,304       -       -     -       25,304       64,421          
                                                     
Support center expenses     (62,572 )     -       -       -       -     -       -       (62,572 )        
Impairment charges     (135,829 )     -       -       135,829       -     -       135,829       -          
Restructuring charges     (3,116 )     -       -       -       3,116     -       3,116       -          
Building rent       (64,861 )     -       -       -       -     -       -       (64,861 )        
Equipment rent     (8,861 )     -       -       -       -     -       -       (8,861 )        
Restructuring charges - rent     (1,934 )     -       -       -       1,934     -       1,934       -          
Depreciation and amortization     (25,651 )     -       -       -       -     -       -       (25,651 )        
Interest, net         (58,573 )     -       -       -       -     -       -       (58,573 )        

Income (loss) from continuing operations before income taxes

   

(121,324

)

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

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

    87,506                               88,165          
                                                     
                Three months ended June 30, 2016
                    Charges    
                                            Gentiva        
                    Business                       transaction       Before
                As   interruption   Litigation   Impairment   Research and   Debt   Restructuring   and       charges
                reported   settlements   contingency   charges   development   amendment   charges   integration   Total   ("core") (a)
Income from continuing operations:                                        
Segment adjusted operating income:                                        
  Kindred at Home:                                        
    Home health   $ 76,030     $ (171 )   $ -     $ -     $ -   $ -     $ -     $ -     $ (171 )   $ 75,859  
    Hospice       31,329       -       -       -       -     -       -       -       -       31,329  
                  107,359       (171 )     -       -       -     -       -       -       (171 )     107,188  
                                                     
  Hospital division     127,510       -       -       -       -     -       -       -       -       127,510  
                                                     
  Kindred Rehabilitation Services:                                        
    Kindred Hospital Rehabilitation Services     50,729       -       -       -       -     -       -       -       -       50,729  
    RehabCare     10,254       -       -       -       -     -       -       -       -       10,254  
                  60,983       -       -       -       -     -       -       -       -       60,983  
                                                     
Support center expenses     (68,444 )     -       -       -       3,076     1,103       -       -       4,179       (64,265 )
Litigation contingency expense     (930 )     -       750       -       -     -       -       -       750       (180 )
Impairment charges     (6,131 )     -       -       6,131       -     -       -       -       6,131       -  
Restructuring charges     (336 )     -       -       -       -     -       336       -       336       -  
Transaction costs     (1,846 )     -       -       -       -     -       -       1,674       1,674       (172 )
Building rent       (67,025 )     -       -       -       -     -       -       -       -       (67,025 )
Equipment rent     (11,211 )     -       -       -       -     -       -       -       -       (11,211 )
Restructuring charges - rent     (462 )     -       -       -       -     -       462       -       462       -  
Depreciation and amortization     (33,198 )     -       -       -       -     -       -       -       -       (33,198 )
Interest, net         (57,567 )     -       -       -       -     -       -       -       -       (57,567 )

Income from continuing operations before income taxes

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

Diluted shares used in computing earnings per common share

    87,500                                       87,500  

___________

(a)

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

                                                 
KINDRED HEALTHCARE, INC.
Reconciliation of GAAP Results to Non-GAAP Measures (Continued)
(Unaudited)
(In thousands, except per share amounts)
                                                 
                                                 
                Three months ended December 31, 2016
                    Charges    
                                    Gentiva   Deferred        
                    Business               transaction   tax       Before
                As   interruption   Impairment   Research and   Restructuring   and   valuation       charges
                reported   settlements   charges   development   charges   integration   allowance   Total   ("core") (a)
Income (loss) from continuing operations:                                    
Segment adjusted operating income:                                    
  Kindred at Home:                                    
    Home health   $ 61,487     $ (302 )   $ -     $ -     $ -     $ -     $ -     $ (302 )   $ 61,185  
    Hospice       28,805       (1,137 )     -       -       -       -       -       (1,137 )     27,668  
                  90,292       (1,439 )     -       -       -       -       -       (1,439 )     88,853  
                                                 
  Hospital division     93,778       (630 )     -       -       -       -       -       (630 )     93,148  
                                                 
  Kindred Rehabilitation Services:                                    
    Kindred Hospital Rehabilitation Services     49,728       -       -       -       -       -       -       -       49,728  
    RehabCare     3,421       -       -       -       -       -       -       -       3,421  
                  53,149       -       -       -       -       -       -       -       53,149  
                                                 
Support center expenses     (58,627 )     -       -       4,293       -       -       -       4,293       (54,334 )
Impairment charges     (3,534 )     -       3,534       -       -       -       -       3,534       -  
Restructuring charges     (9,884 )     -       -       -       9,884       -       -       9,884       -  
Transaction costs     (2,166 )     -       -       -       -       1,779       -       1,779       (387 )
Building rent       (64,350 )     -       -       -       -       -       -       -       (64,350 )
Equipment rent     (8,649 )     -       -       -       -       -       -       -       (8,649 )
Restructuring charges - rent     (2,029 )     -       -       -       2,029       -       -       2,029       -  
Depreciation and amortization     (32,072 )     -       -       -       -       -       -       -       (32,072 )
Interest, net         (58,625 )     -       -       -       -       -       -       -       (58,625 )

Income (loss) from continuing operations before income taxes

   

(2,717

)

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

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

    86,904                                   87,641  

__________

   
(a)

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

                           
                         
KINDRED HEALTHCARE, INC.
Reconciliation of GAAP Results to Non-GAAP Measures (Continued)
(Unaudited)
(In thousands)
                         
                         
            Three months ended   Nine months ended
            September 30,   September 30,
            2017   2016   2017   2016
                         

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

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

__________

(a)

The Company has estimated that it will not pay federal and state income taxes (where state unitary or consolidated tax returns are allowed) in 2017 due to anticipated loss associated with the sale of the Company's skilled nursing facility business. In 2016, the Company did not pay these taxes as a result of a consolidated taxable loss. These cash savings in both years are recognized in GAAP cash flows and offer additional sources of cash when evaluating the Company's cash flow generating capability before certain payments. Combining the Company's October 2017 insurance restructuring activities with the completion of the sale of the skilled nursing facility business, the Company anticipates it will have approximately $550 million to $600 million of net operating losses that should offset approximately 90% of core book tax estimates until exhausted.

     

 

Source: Kindred Healthcare, Inc.

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