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Kindred Healthcare Announces Second Quarter Results

Kindred Healthcare, Inc. (the Company or Kindred) (NYSE:KND) today announced its operating results for the second quarter ended June 30, 2007. During the second quarter of 2007, the Company completed certain transactions related to the disposition of 22 nursing centers and one hospital. Accordingly, the Companys historical consolidated results of operations and related statistics have been restated to reflect these facilities as discontinued operations for all periods presented.

Continuing Operations

Consolidated revenues for the second quarter ended June 30, 2007 increased 5% to $1.1 billion from $1.0 billion for the same period in 2006. Net income from continuing operations for the second quarter of 2007 totaled $9.7 million or $0.24 per diluted share compared to $26.5 million or $0.62 per diluted share in the second quarter of 2006.

Operating results for the second quarter of 2007 included certain items that, in the aggregate, reduced net income by $3.3 million or $0.08 per diluted share. These items included a pretax charge of $2.8 million for professional fees and other costs incurred in connection with the recently completed spin-off of Kindreds institutional pharmacy business, and a pretax charge of $3.4 million for employee severance costs. The Company also recorded a pretax charge of $4.6 million related to an unfavorable judgment rendered in connection with a civil dispute with a hospital vendor. In addition, operating results for the second quarter of 2007 included pretax income of $5.5 million related to a favorable settlement of a rehabilitation therapy contract dispute from prior years.

For the six months ended June 30, 2007, consolidated revenues increased 8% to $2.2 billion from $2.0 billion in the first half of 2006. Net income from continuing operations totaled $26.2 million or $0.65 per diluted share for the first six months of 2007 compared to $50.7 million or $1.21 per diluted share in the same period a year ago.

Consolidated operating results for the first half of 2007 included certain items that, in the aggregate, reduced net income by approximately $5.8 million or $0.14 per diluted share. Operating results for the first half of 2006 included certain items that, in the aggregate, reduced net income by approximately $0.6 million or $0.01 per diluted share.

Discontinued Operations

As previously announced, the Company completed a transaction with Ventas, Inc. (Ventas) (NYSE:VTR) on June 29, 2007 in which the Company purchased for resale 21 nursing centers and one hospital. In addition, the Company terminated a nursing center lease with another landlord in the second quarter of 2007. For accounting purposes, the historical operating results of these facilities and related losses associated with their disposition have been classified as discontinued operations in the Companys consolidated statement of operations for all periods presented.

In the second quarter of 2007, the Company reported a net loss from discontinued operations totaling $1.9 million or $0.05 per diluted share compared to net income of $3.5 million or $0.08 per diluted share in the second quarter of 2006. Operating results for the second quarter of 2006 included favorable pretax adjustments totaling $9.9 million ($6.1 million net of income taxes or $0.14 per diluted share) resulting from a change in estimate for professional liability reserves related to prior years.

For the first six months of 2007, the Company reported a net loss from discontinued operations of $3.3 million or $0.08 per diluted share compared to net income of $3.1 million or $0.07 per diluted share in the first half of 2006. Operating results for the first half of 2006 included favorable pretax adjustments totaling $16.9 million ($10.4 million net of income taxes or $0.25 per diluted share) resulting from a change in estimate for professional liability reserves related to prior years.

In the second quarter of 2007, the Company recorded a net loss of $69.7 million or $1.71 per diluted share related primarily to the divestiture transaction with Ventas. The Company expects to sell the 22 facilities acquired from Ventas and the related operations for $80 million to $90 million by the end of 2007.

Recent Developments

Board Authorization for up to $100 Million in Common Stock Repurchases

The Company also announced that its Board of Directors has authorized up to $100 million in common stock repurchases. The authorization allows for repurchases of up to $50 million of common stock during 2007 and the remainder during 2008. The Company intends to finance any repurchases from operating cash flows or from borrowings under its revolving credit facility. The authorization includes both open market purchases as well as private transactions.

Spin-off of Institutional Pharmacy Business

As previously announced, the Company completed the spin-off of its institutional pharmacy business on July 31, 2007 (the Spin-off). Following the Spin-off, the Companys institutional pharmacy subsidiary was merged with the institutional pharmacy operations of AmerisourceBergen Corporation (NYSE:ABC) to form a new publicly traded company, PharMerica Corporation (PharMerica) (NYSE:PMC). In connection with these transactions, Kindred shareholders received approximately 50% of the common stock of PharMerica on a tax-free basis and the Company received a tax-free cash distribution of $125 million. These proceeds were used to repay borrowings under the Companys revolving credit facility.

For accounting purposes, the Companys institutional pharmacy business will not be accounted for as a discontinued operation. Accordingly, the Companys historical consolidated results of operations will not be retroactively restated as a result of the Spin-off.

Management Commentary

Paul J. Diaz, President and Chief Executive Officer of the Company, remarked, Despite continued improvements in our nursing center business and solid performance from Peoplefirst rehabilitation services, our second quarter results were below our expectations due to softness in our hospital Medicare volumes and non-government rates. Excluding the Spin-off transaction costs, our KPS pharmacy business was negatively impacted by $1.3 million of additional bad debt costs and $0.5 million of additional reserves for Medicare Part D co-payment issues.

Mr. Diaz further noted, During the first half of 2007, we made progress on a number of fronts. Our overall operating results for the first half of 2007 were good and we completed several initiatives to better position the Company for future growth. The previously announced transaction to dispose of 11 under-performing nursing centers in the first quarter and the second quarter transaction with Ventas to eliminate another 22 under-performing facilities will enhance our future operations and allow management to focus on more profitable operations. In addition, the changes made to the Ventas master leases related to insurance requirements and bed management opportunities should provide additional future growth in our existing facilities. With respect to our ongoing development activities, we recently opened two new hospitals in Pittsburgh and Cleveland and we expect to add eight new hospitals to our portfolio over the next two years. In addition, we are reviewing other opportunities to acquire nursing centers that will complement our strategic plan similar to the Ocadian and Commonwealth nursing center acquisitions that are performing well compared to plan. We also recently announced the acquisition of a nursing center/assisted living facility in Cleveland that fits into our cluster market strategy. Finally, we are excited about the recently completed spin-off of our KPS pharmacy business and the long-term growth prospects for our shareholders resulting from their equity interest in the new PharMerica.

Mr. Diaz continued, We believe that the underlying operating fundamentals of our hospital, nursing center and rehabilitation therapy businesses are solid and that our efforts related to quality, customer service and employee retention will continue to build value for all of our constituents. In addition, the recently announced enhancements to our credit facility will provide significant financial flexibility as we continue to pursue our strategic growth plan and seek ways to create additional value for shareholders.

Earnings Guidance

Following the Spin-off, the Company re-established 2007 earnings guidance for its continuing operations and introduced preliminary continuing operations earnings guidance for 2008. The Companys prior earnings guidance for 2007 continuing operations did not include the impact of the Spin-off.

For 2007, the Company expects consolidated revenues to approximate $4.2 billion. Operating income, or earnings before interest, income taxes, depreciation, amortization and rents, is expected to range from $556 million to $563 million. Unallocated corporate overhead (included in operating income) is expected to approximate between $150 million to $152 million. Rent expense is expected to approximate $349 million, while depreciation, amortization and net interest expense is expected to approximate $118 million. Net income from continuing operations for 2007 is expected to approximate $51 million to $55 million or $1.25 to $1.35 per diluted share (based upon diluted shares of 40.7 million).

The Company indicated that the 2007 earnings guidance includes the operations of KPS through July 31, 2007 but does not include any costs resulting from the Spin-off. The earnings guidance also excludes the employee severance costs and disclosed litigation items recorded in the second quarter of 2007. In addition, the Companys 2007 earnings guidance also includes the estimated impact of the recent hospital Medicare reimbursement rule that is expected to reduce hospital revenues by approximately $22 million in the second half of 2007 (including the impact of a lower than expected market basket increase). The guidance does not include any other significant changes in reimbursements, the effects of any other material acquisitions or divestitures or the impact of the recently approved $100 million stock repurchase program.

Mr. Diaz remarked, In the first half of 2007, we reported diluted earnings per share of $0.65, including the impact of disclosed items that reduced diluted earnings per share by $0.14. Over the balance of this year, we expect to report diluted earnings per share of $0.46 to $0.56 excluding one-time items. Further, as we previously indicated to investors and consistent with prior years, we expect that third quarter results will be seasonally weak followed by a strong rebound in the fourth quarter. In particular, we expect that diluted earnings per share in the third quarter of 2007 will approximate $0.05 to $0.10 per share and that diluted earnings per share in the fourth quarter of 2007 will approximate $0.41 to $0.46 per share. While it is our normal policy to provide annual earnings guidance, we are providing this information for the next two quarters in light of the complexities associated with the Spin-off.

With respect to the Companys re-established earnings guidance for 2007, Mr. Diaz continued, Despite our earnings shortfall in the second quarter, our new annual 2007 earnings guidance that reflects the Spin-off is substantially equivalent to our prior guidance of $1.50 to $1.60 per diluted share that assumed a full year of KPS operations. The loss of KPS operations for the last five months of 2007 reduced prior earnings guidance by approximately $0.30 per diluted share. However, the interest savings from the $125 million tax-free distribution, expected overhead reductions and the favorable impact of the information services agreement with PharMerica should add $0.10 to $0.15 per diluted share to our earnings in the second half of 2007.

For 2008, the Company expects consolidated revenues to approximate $4.1 billion. Operating income is expected to range from $556 million to $563 million. Unallocated corporate overhead (included in operating income) is expected to approximate between $150 million to $152 million. Rent expense is expected to approximate $356 million, while depreciation, amortization and net interest expense is expected to approximate $116 million. Net income from continuing operations for 2008 is expected to approximate $48 million to $52 million or $1.15 to $1.25 per diluted share (based upon diluted shares of 41.7 million).

The Company indicated that the 2008 earnings guidance excludes the operations of the KPS institutional pharmacy business and does not include any unusual items. In addition, the guidance does not include any other significant changes in reimbursement, the effects of any material acquisitions or divestitures or the impact of the recently approved $100 million stock repurchase program.

Mr. Diaz commented, We are providing our preliminary view of 2008 so that investors can better understand a full year of Kindred operations without the institutional pharmacy business. Looking forward, we are encouraged by the progress weve made in our three remaining business segments and the opportunities we have to further enhance shareholder value.

Forward-Looking Statements

This press 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. All statements regarding the Companys expected future financial position, results of operations, cash flows, financing plans, business strategy, budgets, capital expenditures, competitive positions, growth opportunities, plans and objectives of management and statements containing the words such as anticipate,approximate, believe,plan, estimate,expect, project,could, should,will, intend,may and other similar expressions, are forward-looking statements.

Such forward-looking statements are inherently uncertain, and stockholders and other potential investors must recognize that actual results may differ materially from the Companys expectations as a result of a variety of factors, including, without limitation, those discussed below. Such forward-looking statements are based upon managements 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 Companys actual results or performance to differ materially from any future results or performance expressed or implied by such forward-looking statements. These statements involve risks, uncertainties and other factors discussed below and detailed from time to time in the Companys filings with the Securities and Exchange Commission.

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

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

About Kindred Healthcare

Kindred Healthcare, Inc. (NYSE:KND) is a Fortune 500 healthcare services company, based in Louisville, Kentucky, with annual revenues of over $4 billion that provides services in approximately 560 locations in 39 states. Kindred through its subsidiaries operates long-term acute care hospitals, skilled nursing centers and a contract rehabilitation services business, Peoplefirst Rehabilitation Services, across the United States. Kindreds 51,000 employees are committed to providing high quality patient care and outstanding customer service to become the most trusted and respected provider of healthcare services in every community we serve. For more information, go to www.kindredhealthcare.com.

KINDRED HEALTHCARE, INC.
Financial Summary
(Unaudited)
(In thousands, except per share amounts)
Three months ended Six months ended
June 30, June 30,
2007 2006 2007 2006
Revenues $ 1,096,245 $ 1,040,814 $ 2,205,234 $ 2,037,938
Income from continuing operations $ 9,643 $ 26,464 $ 26,168 $ 50,713
Discontinued operations, net of income taxes:
Income (loss) from operations (1,874 ) 3,517 (3,300 ) 3,070
Loss on divestiture of operations (69,702 ) (308 ) (76,968 ) (151 )
Net income (loss) $ (61,933 ) $ 29,673 $ (54,100 ) $ 53,632
Earnings (loss) per common share:
Basic:
Income from continuing operations $ 0.24 $ 0.64 $ 0.66 $ 1.29
Discontinued operations:
Income (loss) from operations (0.05 ) 0.08 (0.08 ) 0.08
Loss on divestiture of operations (1.76 ) (0.01 ) (1.95 ) -
Net income (loss) $ (1.57 ) $ 0.71 $ (1.37 ) $ 1.37
Diluted:
Income from continuing operations $ 0.24 $ 0.62 $ 0.65 $ 1.21
Discontinued operations:
Income (loss) from operations (0.05 ) 0.08 (0.08 ) 0.07
Loss on divestiture of operations (1.71 ) (0.01 ) (1.91 ) -
Net income (loss) $ (1.52 ) $ 0.69 $ (1.34 ) $ 1.28

Shares used in computing earnings (loss) per common share:

Basic 39,591 41,695 39,403 39,150
Diluted 40,645 42,956 40,426 42,082
KINDRED HEALTHCARE, INC.
Condensed Consolidated Statement of Operations
(Unaudited)
(In thousands, except per share amounts)
Three months ended Six months ended

June 30,

June 30,
2007 2006 2007 2006
Revenues $ 1,096,245 $ 1,040,814 $ 2,205,234 $ 2,037,938
Salaries, wages and benefits 603,047 561,284 1,206,599 1,102,264
Supplies 181,121 165,313 362,756 326,438
Rent 88,273 71,235 172,945 136,906
Other operating expenses 177,587 168,209 360,021 330,394
Depreciation and amortization 30,388 28,664 58,590 55,428
Interest expense 2,692 3,533 6,287 6,182
Investment income (3,617 ) (3,443 ) (7,450 ) (7,133 )
1,079,491 994,795 2,159,748 1,950,479

Income from continuing operations before income taxes

16,754 46,019 45,486 87,459
Provision for income taxes 7,111 19,555 19,318 36,746
Income from continuing operations 9,643 26,464 26,168 50,713
Discontinued operations, net of income taxes:
Income (loss) from operations (1,874 ) 3,517 (3,300 ) 3,070
Loss on divestiture of operations (69,702 ) (308 ) (76,968 ) (151 )
Net income (loss) $ (61,933 ) $ 29,673 $ (54,100 ) $ 53,632
Earnings (loss) per common share:
Basic:
Income from continuing operations $ 0.24 $ 0.64 $ 0.66 $ 1.29
Discontinued operations:
Income (loss) from operations (0.05 ) 0.08 (0.08 ) 0.08
Loss on divestiture of operations (1.76 ) (0.01 ) (1.95 ) -
Net income (loss)

$

(1.57

)

$ 0.71 $ (1.37 ) $ 1.37
Diluted:
Income from continuing operations $ 0.24 $ 0.62 $ 0.65 $ 1.21
Discontinued operations:
Income (loss) from operations (0.05 ) 0.08 (0.08 ) 0.07
Loss on divestiture of operations (1.71 ) (0.01 ) (1.91 ) -
Net income $ (1.52 ) $ 0.69 $ (1.34 ) $ 1.28

Shares used in computing earnings (loss) per common share:

Basic 39,591 41,695 39,403 39,150
Diluted 40,645 42,956 40,426 42,082
KINDRED HEALTHCARE, INC.
Condensed Consolidated Balance Sheet
(Unaudited)
(In thousands, except per share amounts)
June 30, December 31,
2007 2006
ASSETS
Current assets:
Cash and cash equivalents $ 17,559 $ 20,857
Cash - restricted 5,325 5,757
Insurance subsidiary investments 223,940 227,865
Accounts receivable less allowance for loss 617,254 588,166
Inventories 48,258 49,533
Deferred tax assets 105,984 62,512
Assets held for sale 76,946 9,113
Income taxes 4,806 10,652
Other 30,257 28,106
1,130,329 1,002,561
Property and equipment 1,027,658 1,027,112
Accumulated depreciation (504,642 ) (475,882 )
523,016 551,230
Goodwill 107,368 107,852
Intangible assets less accumulated amortization 114,273 117,345
Insurance subsidiary investments 47,242 52,977
Deferred tax assets 111,264 96,252
Other 93,329 87,910
$ 2,126,821 $ 2,016,127
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 133,025 $ 158,085
Salaries, wages and other compensation 271,984 280,039
Due to third party payors 32,172 27,784
Professional liability risks 67,974 65,497
Other accrued liabilities 92,108 75,522
Long-term debt due within one year 74 71
597,337 606,998
Long-term debt 252,052 130,090
Professional liability risks 198,426 184,749
Deferred credits and other liabilities 117,727 98,712
Stockholders' equity:

Common stock, $0.25 par value; authorized 175,000 shares; issued 40,917 shares - June 30, 2007 and 39,978 shares - December 31, 2006

10,229 9,994
Capital in excess of par value 812,594 793,054
Accumulated other comprehensive income 1,707 1,246
Retained earnings 136,749 191,284
961,279 995,578
$ 2,126,821 $ 2,016,127
KINDRED HEALTHCARE, INC.
Condensed Consolidated Statement of Cash Flows
(Unaudited)
(In thousands)
Three months ended Six months ended
June 30, June 30,
2007 2006 2007 2006
Cash flows from operating activities:
Net income (loss) $ (61,933 ) $ 29,673 $ (54,100 ) $ 53,632

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

Depreciation and amortization 31,682 30,439 61,103 58,893

Amortization of stock-based compensation costs

4,572 5,269 8,152 9,963
Provision for doubtful accounts 9,687 10,172 16,882 18,889
Deferred income taxes (9,484 ) (14,937 ) (14,915 ) (14,937 )
Loss on divestiture of discontinued operations 69,702 308 76,968 151
Other (863 ) 155 (1,515 ) (1,449 )
Change in operating assets and liabilities:
Accounts receivable 1,764 (32,156 ) (45,428 ) (125,834 )
Inventories and other assets 2,808 8,965 (2,910 ) (10,012 )
Accounts payable (5,523 ) 2,390 (16,614 ) 6,039
Income taxes 10,894 3,386 27,081 19,680
Due to third party payors 6,570 (3,273 ) 4,388 (6,956 )
Other accrued liabilities 13,458 2,219 21,500 10,181
Net cash provided by operating activities 73,334 42,610 80,592 18,240
Cash flows from investing activities:
Purchase of property and equipment (44,734 ) (36,740 ) (78,756 ) (62,035 )
Acquisitions (175,612 ) (508 ) (215,254 ) (123,581 )
Sale of assets 2,740 - 79,906 10,305
Purchase of insurance subsidiary investments (41,201 ) (43,549 ) (91,879 ) (84,280 )
Sale of insurance subsidiary investments 46,797 36,324 98,284 94,884

Net change in insurance subsidiary cash and cash equivalents

(20,312 ) 2,679 4,681 (5,473 )
Net change in other investments 14 1,844 14 1,844
Other 3,691 668 (3,423 ) 2,960
Net cash used in investing activities (228,617 ) (39,282 ) (206,427 ) (165,376 )
Cash flows from financing activities:
Proceeds from borrowings under revolving credit 439,000 408,800 875,800 655,300
Repayment of borrowings under revolving credit (300,400 ) (377,900 ) (753,800 ) (512,700 )
Repayment of long-term debt (18 ) (1,533 ) (35 ) (2,973 )
Payment of deferred financing costs (235 ) (461 ) (306 ) (947 )
Issuance of common stock 8,878 142,898 9,748 143,188
Repurchase of common stock - (194,310 ) - (194,310 )
Other 5,854 10,201 (8,870 ) (8,807 )

Net cash provided by (used in) financing activities

153,079 (12,305 ) 122,537 78,751
Change in cash and cash equivalents (2,204 ) (8,977 ) (3,298 ) (68,385 )
Cash and cash equivalents at beginning of period 19,763 24,012 20,857 83,420
Cash and cash equivalents at end of period $ 17,559 $ 15,035 $ 17,559 $ 15,035
KINDRED HEALTHCARE, INC.
Condensed Consolidated Statement of Operations
(Unaudited)
(In thousands, except per share amounts)
2006 Quarters 2007 Quarters
First Second Third Fourth First Second
Revenues $ 997,124 $ 1,040,814 $ 1,024,144 $ 1,067,970 $ 1,108,989 $ 1,096,245
Salaries, wages and benefits 540,980 561,284 567,716 573,126 603,552 603,047
Supplies 161,125 165,313 168,379 181,509 181,635 181,121
Rent 65,671 71,235 78,458 82,299 84,672 88,273
Other operating expenses 162,185 168,209 168,683 170,405 182,434 177,587
Depreciation and amortization 26,764 28,664 30,808 31,186 28,202 30,388
Interest expense 2,649 3,533 4,667 3,071 3,595 2,692
Investment income (3,690 ) (3,443 ) (3,528 ) (3,834 ) (3,833 ) (3,617 )
955,684 994,795 1,015,183 1,037,762 1,080,257 1,079,491
Income from continuing operations before income taxes
41,440 46,019 8,961 30,208 28,732 16,754
Provision for income taxes 17,191 19,555 4,397 8,822 12,207 7,111
Income from continuing operations 24,249 26,464 4,564 21,386 16,525 9,643
Discontinued operations, net of income taxes:
Income (loss) from operations (447 ) 3,517 (1,752 ) 762 (1,426 ) (1,874 )
Gain (loss) on divestiture of operations 157 (308 ) 126 (7 ) (7,266 ) (69,702 )
Net income (loss) $ 23,959 $ 29,673 $ 2,938 $ 22,141 $ 7,833 $ (61,933 )
Earnings (loss) per common share:
Basic:
Income from continuing operations $ 0.66 $ 0.64 $ 0.12 $ 0.55 $ 0.42 $ 0.24
Discontinued operations:
Income (loss) from operations (0.01 ) 0.08 (0.05 ) 0.02 (0.03 ) (0.05 )
Gain (loss) on divestiture of operations - (0.01 ) - - (0.19 ) (1.76 )
Net income (loss) $ 0.65 $ 0.71 $ 0.07 $ 0.57 $ 0.20 $ (1.57 )
Diluted:
Income from continuing operations $ 0.59 $ 0.62 $ 0.11 $ 0.54 $ 0.41 $ 0.24
Discontinued operations:
Income (loss) from operations (0.01 ) 0.08 (0.04 ) 0.02 (0.03 ) (0.05 )
Gain (loss) on divestiture of operations - (0.01 ) - - (0.18 ) (1.71 )
Net income (loss) $ 0.58 $ 0.69 $ 0.07 $ 0.56 $ 0.20 $ (1.52 )

Shares used in computing earnings (loss) per common share:

Basic 36,576 41,695 39,014 39,120 39,212 39,591
Diluted 41,091 42,956 39,769 39,784 39,997 40,645
KINDRED HEALTHCARE, INC.
Condensed Business Segment Data
(Unaudited)
(In thousands)
2006 Quarters 2007 Quarters
First Second Third Fourth First Second
Revenues:
Hospital division $ 426,269 $ 435,787 $ 402,884 $ 445,730 $ 459,806 $ 437,473
Health services division 426,602 459,036 463,944 469,738 485,635 496,399
Rehabilitation division 71,162 74,376 76,003 78,565 83,756 85,288
Pharmacy division 157,214 159,926 170,443 165,025 174,704 173,407
1,081,247 1,129,125 1,113,274 1,159,058 1,203,901 1,192,567
Eliminations:
Rehabilitation (51,321 ) (54,448 ) (54,394 ) (55,374 ) (58,917 ) (59,251 )
Pharmacy (32,802 ) (33,863 ) (34,736 ) (35,714 ) (35,995 ) (37,071 )
(84,123 ) (88,311 ) (89,130 ) (91,088 ) (94,912 ) (96,322 )
$ 997,124 $ 1,040,814 $ 1,024,144 $ 1,067,970 $ 1,108,989 $ 1,096,245
Income from continuing operations:
Operating income (loss):
Hospital division $ 102,970 $ 104,772 $ 73,890 $ 103,113 $ 99,748

$

85,696

(a)

Health services division 48,077 62,598 59,784 71,393 61,669

71,953

(a)

Rehabilitation division 4,239 8,453 8,857 8,813 10,044 9,097
Pharmacy division 16,729 15,139 16,152 441 9,243

7,883

(b)

Corporate:
Overhead (37,334 ) (43,257 ) (37,683 ) (38,883 ) (37,794 )

(38,506

)

(a,b,c)

Insurance subsidiary (1,847 ) (1,697 ) (1,634 ) (1,947 ) (1,542 ) (1,633 )
(39,181 ) (44,954 ) (39,317 ) (40,830 ) (39,336 ) (40,139 )
Operating income 132,834 146,008 119,366 142,930 141,368 134,490
Rent (65,671 ) (71,235 ) (78,458 ) (82,299 ) (84,672 ) (88,273 )
Depreciation and amortization (26,764 ) (28,664 ) (30,808 ) (31,186 ) (28,202 ) (30,388 )
Interest, net 1,041 (90 ) (1,139 ) 763 238 925

Income from continuing operations before income taxes

41,440 46,019 8,961 30,208 28,732 16,754
Provision for income taxes 17,191 19,555 4,397 8,822 12,207 7,111
$ 24,249 $ 26,464 $ 4,564 $ 21,386 $ 16,525 $ 9,643

(a) Includes employee severance costs of $1.7 million (hospital division), $0.7 million (health services division) and $1.0 million (corporate overhead).

(b) Includes professional fees and other costs incurred in connection with the recently completed spin-off of Kindred's institutional pharmacy business of $2.4 million (pharmacy division) and $0.4 million (corporate overhead).

(c) Includes an unfavorable judgment rendered in connection with a civil dispute with a hospital vendor of $4.6 million and a favorable settlement of a rehabilitation therapy contract dispute from prior years of $5.5 million.

KINDRED HEALTHCARE, INC.
Condensed Business Segment Data (Continued)
(Unaudited)
(In thousands)
2006 Quarters 2007 Quarters
First Second Third Fourth First Second
Rent:
Hospital division $ 26,134 $ 29,099 $ 31,950 $ 33,903 $ 34,648 $ 36,129
Health services division 37,310 39,851 44,053 45,799 47,239 48,985
Rehabilitation division 869 897 932 999 1,069 1,133
Pharmacy division 1,280 1,316 1,448 1,510 1,642 1,943
Corporate 78 72 75 88 74 83
$ 65,671 $ 71,235 $ 78,458 $ 82,299 $ 84,672 $ 88,273
Depreciation and amortization:
Hospital division $ 10,902 $ 11,452 $ 12,142 $ 11,789 $ 9,083 $ 10,027
Health services division 8,410 9,302 9,949 10,590 10,981 11,825
Rehabilitation division 80 115 127 211 236 273
Pharmacy division 1,797 1,857 2,594 2,587 2,816 2,760
Corporate 5,575 5,938 5,996 6,009 5,086 5,503
$ 26,764 $ 28,664 $ 30,808 $ 31,186 $ 28,202 $ 30,388

Capital expenditures, excluding acquisitions (including discontinued operations):

Hospital division $ 15,365 $ 14,105 $ 16,535 $ 24,149 $ 20,765 $ 25,909
Health services division 5,225 11,151 12,849 12,004 6,696 10,460
Rehabilitation division 19 130 146 308 118 253
Pharmacy division 2,057 2,219 2,581 2,994 1,712 1,613
Corporate:
Information systems 2,514 8,958 5,376 11,298 4,457 5,765
Other 115 177 232 567 274 734
$ 25,295 $ 36,740 $ 37,719 $ 51,320 $ 34,022 $ 44,734
KINDRED HEALTHCARE, INC.
Condensed Business Segment Data (Continued)
(Unaudited)
2006 Quarters 2007 Quarters
First Second Third Fourth First Second
Hospital data:
End of period data:
Number of hospitals 79 79 79 80 81 81
Number of licensed beds 6,127 6,143 6,139 6,199 6,319 6,378
Revenue mix % (a):
Medicare 64 62 60 58 60 58
Medicaid 7 9 10 13 10 10
Private and other 29 29 30 29 30 32
Admissions:
Medicare 7,729 7,278 6,912 7,403 7,745 7,160
Medicaid 913 1,018 1,031 1,023 1,067 1,021
Private and other 1,903 1,944 1,874 1,980 2,278 2,249
10,545 10,240 9,817 10,406 11,090 10,430
Admissions mix %:
Medicare 73 71 70 71 70 69
Medicaid 9 10 11 10 10 10
Private and other 18 19 19 19 20 21
Patient days:
Medicare 209,795 209,644 198,213 212,602 213,622 205,545
Medicaid 37,608 50,155 51,658 53,650 53,346 52,286
Private and other 65,772 70,440 71,425 75,549 83,292 85,941
313,175 330,239 321,296 341,801 350,260 343,772
Average length of stay:
Medicare 27.1 28.8 28.7 28.7 27.6 28.7
Medicaid 41.2 49.3 50.1 52.4 50.0 51.2
Private and other 34.6 36.2 38.1 38.2 36.6 38.2
Weighted average 29.7 32.2 32.7 32.8 31.6 33.0
Revenues per admission (a):
Medicare $ 35,182 $ 36,959 $ 34,788 $ 35,156 $ 35,532 $ 35,373
Medicaid 34,196 40,107 40,599 54,035 42,911 44,265
Private and other 64,701 64,801 64,338 65,753 60,940 61,807
Weighted average 40,424 42,557 41,040 42,834 41,461 41,944
Revenues per patient day (a):
Medicare $ 1,296 $ 1,283 $ 1,213 $ 1,224 $ 1,288 $ 1,232
Medicaid 830 814 810 1,030 858 864
Private and other 1,872 1,788 1,688 1,723 1,667 1,617
Weighted average 1,361 1,319 1,254 1,304 1,313 1,272
Medicare case mix index (discharged patients only) 1.11 1.12 1.11 1.06 1.11 1.10
Average daily census 3,480 3,629 3,492 3,715 3,892 3,778
Occupancy % 66.1 64.2 62.0 65.9 68.4 65.6

(a) Includes income related to certain Medicare reimbursement issues of $1.8 million in the first quarter of 2006, $4.3 million in the second quarter of 2006 and $2.3 million in the fourth quarter of 2006.

KINDRED HEALTHCARE, INC.
Condensed Business Segment Data (Continued)
(Unaudited)
2006 Quarters 2007 Quarters

First Second Third Fourth First Second
Nursing center data:
End of period data:
Number of nursing centers:
Owned or leased 215 215 215 215 223 223
Managed 5 5 5 5 4 4
220 220 220 220 227 227
Number of licensed beds:
Owned or leased 27,573 27,583 27,583 27,568 28,481 28,477
Managed 605 605 605 605 485 485
28,178 28,188 28,188 28,173 28,966 28,962
Revenue mix %:
Medicare 36 35 33 34 35 35
Medicaid 45 46 47 46 44 44
Private and other 19 19 20 20 21 21
Patient days (excludes managed facilities):
Medicare 367,955 387,950 367,674 371,975 389,354 390,142
Medicaid 1,347,751 1,413,797 1,442,757 1,434,336 1,405,392 1,417,578
Private and other 370,701 403,844 426,256 426,115 432,145 448,605
2,086,407 2,205,591 2,236,687 2,232,426 2,226,891 2,256,325
Patient day mix %:
Medicare 18 18 16 17 18 17
Medicaid 64 64 65 64 63 63
Private and other 18 18 19 19 19 20
Revenues per patient day:
Medicare Part A $ 378 $ 379 $ 382 $ 399 $ 406 $ 408
Total Medicare (including Part B) 413 412 420 436 442 444
Medicaid 144 148 150 150 152 153
Private and other 218 221 220 218 231 237
Weighted average 204 208 208 210 218 220
Average daily census 23,182 24,237 24,312 24,266 24,743 24,795
Occupancy % 87.9 88.3 88.5 88.4 88.2 87.4
Rehabilitation data:
Revenue mix %:
Company-operated 78 78 75 74 74 69
Non-affiliated 22 22 25 26 26 31
Pharmacy data:
Number of customer licensed beds at end of period:
Company-operated 30,449 30,287 30,232 30,232 28,341 28,520
Non-affiliated 63,683 65,036 72,268 72,339 74,985 73,951
94,132 95,323 102,500 102,571 103,326 102,471

KINDRED HEALTHCARE, INC.

Reconciliation of Earnings Guidance for 2007 and 2008 Continuing Operations

(Unaudited)

(In millions, except per share amounts)

Earnings Guidance Ranges
2007 (a)2008

As of
August 7, 2007

As of
April 30, 2007

As of
August 7, 2007

LowHighLowHighLowHigh

Operating income before unallocated corporate overhead

$ 706 $ 715 $ 737 $ 746 $ 706 $ 715
Unallocated corporate overhead (150 ) (152 ) (157 ) (159 ) (150 ) (152 )
Operating income 556 563 580 587 556 563
Rent (349 ) (349 ) (347 ) (347 ) (356 ) (356 )
Depreciation and amortization (118 ) (118 ) (118 ) (118 ) (114 ) (114 )
Interest, net --(9 ) (9 ) (2 ) (2 )
Income from continuing operations before income taxes 89 96 106 113 84 91
Provision for income taxes 384146493639
Income from continuing operations $51$55$60$64$48$52
Earnings per diluted share $ 1.25 $ 1.35 $ 1.50 $ 1.60 $ 1.15 $ 1.25
Shares used in computing earnings per diluted share 40.7 40.7 40.0 40.0 41.7 41.7

(a)   Excludes certain disclosed items that reduced net income by approximately $5.8 million or $0.14 per diluted share in the first six months of 2007.

Contacts:

Kindred Healthcare, Inc.
Richard A. Lechleiter
Executive Vice President and Chief Financial Officer
502-596-7734

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