Kindred Healthcare fourth quarter consolidated revenues increase 2% to $1.55 billion

Kindred Healthcare, Inc. ("Kindred" or the "Company") (NYSE:KND) today announced its operating results for the fourth quarter and year ended December 31, 2012. The Company's consolidated financial statements include the operating results of RehabCare Group, Inc. ("RehabCare") since the closing of the acquisition on June 1, 2011. All financial and statistical information included in this press release reflects the continuing operations of the Company's businesses for all periods presented unless otherwise indicated.

Operating and Financial Highlights:

• Fourth quarter consolidated revenues grew 2%
  • Hospital and home health combined for revenue gains of 6% compared to last year
• Hospital division posted solid fourth quarter results
  • Fourth quarter revenues grew 3% and operating income rose 8%
  • While overall admissions were soft, same-store non-government admissions rose 2% compared to last year
• RehabCare division fourth quarter revenues grew 1% while operating income climbed 53%
  • Operating results were bolstered by 27% growth in hospital-based rehabilitation services as well as strong cash collections and a related $8 million bad debt benefit
  • New Medicare Part B therapy caps reduced skilled rehabilitation therapy operating income by approximately $6 million in the quarter
• Fourth quarter home health and hospice division revenues and operating income nearly doubled from last year
  • Annualized revenues reach $200 million
  • Home health and hospice operations now reside in 12 of 21 Kindred integrated care markets
• Company posted strong full-year cash flows in 2012
  • Operating cash flows less routine and development capital spending totaled $97 million
• Company maintains strong financial position entering 2013
  • Cash flows in excess of routine and development capital spending in 2013 should approximate $90 million
  • Available credit capacity approximated $420 million at December 31, 2012

Fourth Quarter Results

Continuing Operations

Consolidated revenues for the fourth quarter ended December 31, 2012 increased 2% to $1.55 billion compared to $1.52 billion in the same period in 2011. The Company reported a loss from continuing operations for the fourth quarter of 2012 of $80.7 million or $1.56 per diluted share compared to a loss of $65.5 million or $1.28 per diluted share in the fourth quarter of 2011. Operating results for the fourth quarter of 2012 included (a) an asset impairment charge, (b) severance and restructuring costs, (c) transaction-related costs and (d) employee retention costs associated with the upcoming disposal of 54 nursing centers leased from Ventas, Inc. ("Ventas") (NYSE:VTR) that reduced income from continuing operations by $105.3 million or $2.04 per diluted share. Operating results for the fourth quarter of 2011 included asset impairment charges, transaction-related costs and a loss on a hospital divestiture that reduced income from continuing operations by $79.9 million or $1.56 per diluted share.

During the fourth quarter of 2012, the Company recorded a $108 million goodwill impairment charge to reflect circumstances in which the carrying value of certain assets exceeded their fair value. The impairment charge resulted primarily from the expected decline in operating results in the Company's rehabilitation division related to previously announced Medicare reimbursement changes that were recently enacted by Congress in connection with the American Taxpayer Relief Act of 2012 (the "Taxpayer Relief Act").

Fiscal Year Results

Continuing Operations

Consolidated revenues for the year ended December 31, 2012 increased 12% to $6.2 billion compared to $5.5 billion in the previous year. The Company reported a loss from continuing operations of $33.4 million or $0.65 per diluted share in 2012 compared to a loss of $47.8 million or $1.04 per diluted share in 2011.

In addition to the charges noted above in the discussion of fourth quarter results, operating results in 2012 included (a) costs incurred in connection with the closing of a regional office, (b) lease cancellation charges and other costs incurred in connection with two hospital closings and the cancellation of a sub-acute unit project and (c) a charge in connection with an employment-related lawsuit, all of which reduced income from continuing operations by $114.1 million or $2.21 per diluted share. Operating results in 2011 included certain items that reduced income from continuing operations by $134.3 million or $2.90 per diluted share, most of which were related to asset impairment charges and the RehabCare acquisition.

Discontinued Operations

During 2012, the Company entered into transactions related to the divestiture of unprofitable businesses qualifying as discontinued operations. For accounting purposes, the historical operating results and losses on the disposal of these businesses have been classified as discontinued operations in the Company's consolidated statement of operations for all historical periods.

The Company will account for the divestiture of 54 nursing centers leased from Ventas as discontinued operations in 2013.

Management Commentary

Paul J. Diaz, Kindred's Chief Executive Officer, commented, "In 2012, Kindred continued to make progress in improving quality and patient satisfaction and delivering better clinical outcomes for patients in settings across the post-acute continuum. We want to thank our care givers and colleagues throughout our organization who delivered on Kindred's promise of hope, healing and recovery, as they worked to advance our mission in spite of a very challenging operating environment."

Commenting on the Company's recently issued 2012 Quality and Social Responsibility Report, Mr. Diaz noted, "Kindred is proud to issue its sixth annual Quality and Social Responsibility Report to fulfill our commitment to be transparent about our quality results and our ongoing efforts to improve the care and services for our patients and residents." Mr. Diaz also noted that the report links the Company's quality initiatives with its Continue the Care and integrated care market strategies. "Both policymakers and the marketplace are demanding that healthcare providers participate in coordinated care strategies to improve care transitions, reduce avoidable hospitalizations and lower costs. Kindred's integrated care market strategy is designed to leverage Kindred's national scale to build a continuum of post-acute services in local healthcare delivery markets to achieve these shared goals. Kindred is aggressively developing a post-acute continuum of service lines in local markets, including transitional care hospitals, inpatient rehabilitation facilities, sub-acute or transitional care, and home health and hospice services, in order to partner with physician groups, hospitals, health systems and payors to better manage episodes of care while at the same time improving quality and lowering costs."

Mr. Diaz remarked, "From an operational standpoint, we finished the year with a solid quarter. Excluding certain items, our continuing operations earnings per diluted share of $0.46 in the fourth quarter was a significant improvement from the comparable $0.28 per share reported last year following major Medicare cuts in both our nursing center and rehabilitation therapy divisions."

Mr. Diaz further noted, "For the full year, we are pleased to report that we met our core earnings objectives that we estimated at the beginning of the year. Our hospital results were solid, we maintained stability in our nursing center division, our rehabilitation therapy division made great progress in the midst of several Medicare reimbursement changes and we doubled the size of our home health and hospice business. I would characterize 2012 as solid year for Kindred as we met or exceeded most of our clinical and financial goals."

Commenting on the Company's strategic initiatives, Mr. Diaz noted, "In 2012, we continued to grow and enhance our integrated care market capabilities, particularly in home health and hospice services, while advancing a strategy to reposition our business mix with the goal of improving our long-term growth, profitability and financial position. Specifically, we completed three home health and hospice acquisitions that added $75 million of annualized revenues and we acquired three previously leased facilities for approximately $103 million that will benefit our balance sheet leverage over time. We also continued to move forward with the divestiture of 54 nursing centers leased from Ventas. In addition, our process to divest other non-strategic assets continues and will result in further changes to our business mix over the course of 2013 and beyond. We also continue to evaluate our active pipeline of acquisition opportunities in our integrated care markets in an effort to advance our strategy, strengthen the Company and enhance shareholder value going forward."

Mr. Diaz added, "Our significant operating cash flows in excess of routine and development capital spending, as well as our $420 million of available credit going into 2013, provide the financial strength to further reposition the Company's business mix and advance our Continue the Care strategy in our integrated care markets."

Looking forward to 2013, Mr. Diaz remarked, "The volume momentum that we saw in December has carried over nicely into our first quarter. Based on our January results, we believe that the new year is off to a strong start."

Earnings Guidance - Continuing Operations

The Company maintained its previous earnings guidance for 2013. The Company expects consolidated revenues for 2013 to approximate $5.9 billion. Operating income, or earnings before interest, income taxes, depreciation, amortization and rent, is expected to range from $794 million to $810 million. Rent expense is expected to approximate $387 million, while depreciation and amortization should approximate $189 million. Net interest expense is expected to approximate $113 million. The Company expects to report income from continuing operations for 2013 between $60 million and $70 million or $1.10 to $1.30 per diluted share (based upon diluted shares of 52.7 million).

The Company re-affirmed its operating cash flow guidance for 2013 at a range between $230 million and $250 million. Estimated routine capital expenditures for 2013 are expected to range from $120 million to $130 million. In addition to its routine capital expenditures, the Company re-affirmed that its development of new or replacement transitional care ("TC") hospitals, transitional care centers, and inpatient rehabilitation hospitals ("IRFs") will approximate $20 million to $30 million in 2013. Operating cash flows in excess of the Company's routine and development capital spending programs, which are expected to approximate $90 million for 2013, will be available to repay debt and fund acquisitions.

The Company's earnings guidance for 2013 assumes (a) reductions in Medicare payments for rehabilitation therapy services, including those contained in the Taxpayer Relief Act, expected to range from $25 million to $30 million on an annual basis, and (b) sequestration cuts of 2% related to all of its Medicare revenues that will begin on April 1, 2013. In addition, the guidance assumes that the previously announced exit in 2013 from 54 nursing centers leased from Ventas will be reflected as discontinued operations effective January 1, 2013. The earnings guidance also excludes the effect of any other reimbursement changes, any future acquisitions or dispositions, any impairment charges, and any repurchases of common stock.

In light of the significant reimbursement pressures in 2012, and the expected further reimbursement reductions that are projected to aggregate approximately $100 million in 2013, the Company has focused its efforts on reducing costs and streamlining its operations across the enterprise without impacting the quality of its services. These initiatives have been pursued under the direction of an internal project management team commonly referred to as Project Apollo. Among other things, Project Apollo is driving various structural changes in human resources, sales, marketing and finance under a shared service model that more efficiently meets the needs of the Company's four major operating divisions. Other areas of emphasis include a re-design of the Company's employee health plan (including the introduction of higher deductible plans complimented by Company-funded health savings accounts) as well as certain refinements to employee compensation using a market-based total rewards program.

Project Apollo is expected to result in $60 million to $70 million of cost savings in 2013, with a fully implemented annual impact of more than $90 million in 2014.

In the context of Project Apollo, the Company recently initiated a pay freeze across the enterprise and is pursuing certain other cost reductions in 2013. However, in an effort to remain competitive in the marketplace (without increasing its structural costs), the Company will pay a one-time bonus to approximately 47,000 employees who do not participate in the Company's incentive compensation program. The aggregate pretax cost of this one-time item is expected to approximate $25 million and is not included in the Company's annual 2013 earnings guidance.

While the Company does not provide quarterly earnings guidance, investors are advised that the Company's new employee health plan for 2013 requires that a larger portion of the Company's costs be funded in the first quarter of the year. While the Company expects its aggregate employee health costs for the full year to be flat with 2012 levels, first quarter 2013 costs will be approximately $8 million higher than the same period last year and the subsequent three fiscal quarters will, in aggregate, be lower in costs by the same amount.