Kindred Healthcare Reports Solid First Quarter Results of $0.44 Per Diluted Share Excluding Certain Charges

Kindred Healthcare, Inc. (the "Company”) (NYSE:KND) today announced its operating results for the first quarter ended March 31, 2010. 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.

First Quarter Highlights:

• Consolidated revenues rose 2% to $1.1 billion
  • Each operating division reported revenue growth compared to last year
• Reported diluted earnings per share totaled $0.38, including $0.06 of certain charges
  • Excluding the charges, first quarter earnings were at the high end of the Company’s guidance range of $0.35 to $0.45 per diluted share
• Hospital volumes continued to improve
  • Reported admissions grew 3% from last year
  • Same-facility aggregate admissions grew 3%; same-facility commercial admissions grew 12%
  • Volume growth in the quarter was partially offset by softer Medicare and commercial pricing
• Nursing and rehabilitation center admissions grew 5% in the first quarter compared to last year
  • Reimbursement rates were generally in line with expectations
• Peoplefirst Rehabilitation continued to demonstrate consistent operating results
  • Division signed 28 net additional unaffiliated contracts compared to a loss of three contracts in the first quarter last year

First Quarter Results

Continuing Operations

Consolidated revenues for the first quarter ended March 31, 2010 rose 2% to $1.1 billion. Income from continuing operations for the first quarter of 2010 totaled $15.2 million or $0.38 per diluted share compared to $23.3 million or $0.60 per diluted share in the first quarter last year.

First quarter 2010 operating results included certain pretax charges related to severance and retirement costs of $2.9 million and transaction costs of $0.8 million. The combined effect of these costs reduced income from continuing operations by $2.3 million or $0.06 per diluted share.

Discontinued Operations

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

Other Quarterly Information

During the first quarter of 2010, the Company received a distribution of $22 million from its limited purpose insurance subsidiary to be used for general corporate purposes. The distribution, which had no impact on earnings, resulted primarily from the insurance subsidiary’s improved professional liability underwriting results. These funds were used to repay borrowings under the Company’s revolving credit facility.

Management Commentary

Paul J. Diaz, President and Chief Executive Officer of the Company, remarked, "We are pleased to report a good start to the year. Our hospital and nursing center admissions growth was solid and we generally did a good job of controlling our costs. However, the softness in reimbursement rates in both of these businesses presents a challenging environment.”

Commenting on the Company’s financial position, Mr. Diaz noted, "Our first quarter 2010 operating cash flows were in line with our expectations as we continued to focus on our accounts receivable collections. As a result, our accounts receivable balance at March 31, 2010 declined approximately $27 million from a year ago while our revenues continued to grow. As we have previously indicated to investors, we believe that our operating cash flows in 2010 will fund a significant portion of our routine and development capital spending.”

With respect to the Company’s ongoing development activities, Mr. Diaz remarked, "We are continuing to construct four additional hospitals that will open over the next couple of years, and we acquired a combined 241-bed nursing center/assisted living facility to further expand our presence in the Cleveland market. In other cluster markets, we recently opened a new 74-bed replacement hospital in Houston and began construction of a new 120-bed transitional care center in Indianapolis. We also acquired two hospitals and two nursing centers that were previously leased during the first quarter of 2010. Finally, the ongoing development of our 5 hospital-based subacute units, 32 transitional care centers and 102 transitional care units is on track.”

2010 Earnings Guidance – Continuing Operations

The Company maintained its 2010 earnings guidance for continuing operations. The Company expects consolidated revenues for 2010 to approximate $4.5 billion. Operating income, or earnings before interest, income taxes, depreciation, amortization and rent, is expected to range from $571 million to $579 million. Rent expense is expected to approximate $360 million, while depreciation, amortization and net interest expense are expected to approximate $128 million. The Company expects to report income from continuing operations for 2010 between $48 million to $54 million or $1.20 to $1.35 per diluted share (based upon diluted shares of 39 million).

The Company also provided its earnings outlook for the second quarter of 2010, estimating income from continuing operations to range from $12 million to $15 million or $0.30 to $0.40 per diluted share (based upon diluted shares of 39 million).

As previously indicated to investors, the Company continues to believe that the typical seasonal weakness in the third quarter will likely result in earnings per diluted share between break-even and $0.10 for the period.

The Company indicated that the earnings guidance for continuing operations reflects the operating results of $0.38 per diluted share reported in the first quarter as well as the anticipated impact of proposed rules issued by the Centers for Medicare and Medicaid Services ("CMS”) in April 2010 related to payment rates for long-term acute care ("LTAC”) hospitals effective October 1, 2010. The Company also indicated that the earnings guidance does not reflect any other reimbursement changes, any material acquisitions or divestitures, or any repurchases of common stock.

Mr. Diaz noted, "We look forward to continued progress in each of our operating divisions as we focus on the execution of our strategic operating plan. As in the past, high satisfaction levels from our patients, residents, customers, employees and physicians will continue to drive our operating results and business success.”

Webcast of Conference Call

As previously announced, investors and the general public can access a live webcast of the first quarter 2010 conference call through a link on the Company’s website at www.kindredhealthcare.com. The conference call will be held May 5, 2010 at 10:00 a.m. (Eastern Time).

A telephone replay of the conference call will be available at approximately 1:00 p.m. on May 5 by dialing (719) 457-0820, access code: 2183814. The replay will be available through May 13.

Investor Day

As previously announced, the Company will host its annual Investor Day in New York City on Thursday, May 6, 2010. The event will be webcast live beginning at 10:00 a.m. (Eastern Time) and conclude at approximately 1:00 p.m.

The webcast of this presentation may be accessed via the Company’s website, http://investors.kindredhealthcare.com, or at http://phx.corporate-ir.net/phoenix.zhtml?c=129959&p=irol-EventDetails&EventId=2767632.

Any written materials accompanying the Investor Day presentation will be available on the Company’s website at the time of the presentation and the webcast and written materials will be archived at http://investors.kindredhealthcare.com following the event.

Investors interested in attending the event should contact Ms. Teresa Kappner by email: teresa.kappner@kindredhealthcare.com or phone: (502) 596-7276.

Forward-Looking Statements

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

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

In addition to the factors set forth above, other factors that may affect the Company’s plans or results include, without limitation, (a) the impact of healthcare reform, which will initiate significant reforms to the United States healthcare system, including potential material changes to the delivery of healthcare services and the reimbursement paid for such services by the government or other third party payors. Healthcare reform will impact each of the Company’s businesses in some manner. Due to the substantial regulatory changes that will need to be implemented by CMS and others, and the numerous processes required to implement these reforms, the Company cannot predict which healthcare initiatives will be implemented at the federal or state level, the timing of any such reforms, or the effect such reforms or any other future legislation or regulation will have on the Company’s business, financial position, results of operations and liquidity, (b) changes in the reimbursement rates or the methods or timing of payment from third party payors, including the Medicare and Medicaid programs, changes arising from and related to the Medicare prospective payment system for LTAC hospitals, including potential changes in the Medicare payment rules, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, and changes in Medicare and Medicaid reimbursements for the Company’s nursing centers, and the expiration of the Medicare Part B therapy cap exception process, (c) the effects of additional legislative changes and government regulations, interpretation of regulations and changes in the nature and enforcement of regulations governing the healthcare industry, (d) the impact of the Medicare, Medicaid and SCHIP Extension Act of 2007 (the "SCHIP Extension Act”), including the ability of the Company’s hospitals to adjust to potential LTAC certification, medical necessity reviews and the moratorium on future hospital development, (e) the impact of the expiration of several moratoriums under the SCHIP Extension Act which could impact the short stay rules, the budget neutrality adjustment as well as implement the policy known as the "25 Percent Rule,” which would limit certain patient admissions, (f) failure of the Company’s facilities to meet applicable licensure and certification requirements, (g) the further consolidation and cost containment efforts of managed care organizations and other third party payors, (h) the Company’s ability to meet its rental and debt service obligations, (i) the Company’s ability to operate pursuant to the terms of its debt obligations and its master lease agreements with Ventas, Inc. (NYSE:VTR), (j) the condition of the financial markets, including volatility and deterioration in the equity, capital and credit markets, which could limit the availability and terms of debt and equity financing sources to fund the requirements of the Company’s businesses, or which could negatively impact the Company’s investment portfolio, (k) national and regional economic, financial, business and political conditions, including their effect on the availability and cost of labor, credit, materials and other services, (l) the Company’s ability to control costs, particularly labor and employee benefit costs, (m) increased operating costs due to shortages in qualified nurses, therapists and other healthcare personnel, (n) the Company’s ability to attract and retain key executives and other healthcare personnel, (o) the increase in the costs of defending and insuring against alleged professional liability claims and the Company’s ability to predict the estimated costs related to such claims, including the impact of differences in actuarial assumptions and estimates compared to eventual outcomes, (p) the Company’s ability to successfully reduce (by divestiture of operations or otherwise) its exposure to professional liability claims, (q) the Company’s ability to successfully pursue its development activities, including through acquisitions, and successfully integrate new operations, including the realization of anticipated revenues, economies of scale, cost savings and productivity gains associated with such operations, (r) the Company’s ability to successfully dispose of unprofitable facilities, (s) events or circumstances which could result in impairment of an asset or other charges, (t) changes in generally accepted accounting principles or practices, and (u) the Company’s ability to maintain an effective system of internal control over financial reporting.

In addition to the results provided in accordance with generally accepted accounting principles ("GAAP”), the Company has provided a non-GAAP measurement which presents operating results for the three months ended March 31, 2010 before certain charges or on a core basis. A reconciliation of the non-GAAP measurement to the GAAP operating results is included in this press release.

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

About Kindred Healthcare

Kindred Healthcare, Inc., a top-200 private employer in the United States, is a FORTUNE 500 healthcare services company based in Louisville, Kentucky with annual revenues of over $4.2 billion and approximately 53,800 employees in 40 states. At March 31, 2010, Kindred through its subsidiaries provided healthcare services in 619 locations, including 83 long-term acute care hospitals, 222 nursing and rehabilitation centers and a contract rehabilitation services business, Peoplefirst rehabilitation services, which served 314 non-affiliated facilities. Ranked one of Fortune magazine’s Most Admired Healthcare Companies in 2009 and 2010, 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.

KINDRED HEALTHCARE, INC.
Financial Summary
(Unaudited)
(In thousands, except per share amounts)
						Three months ended
						March 31,
						2010				2009
Revenues						$	1,089,837			$	1,069,474
Income from continuing operations						$	15,155			$	23,341
Discontinued operations, net of income taxes:
	Loss from operations						(154	)			(581	)
	Loss on divestiture of operations						(137	)			-
				Net income		$	14,864			$	22,760
Earnings per common share:
	Basic:
		Income from continuing operations				$	0.38			$	0.60
		Discontinued operations:
			Loss from operations				-				(0.02	)
			Loss on divestiture of operations				-				-
				Net income		$	0.38			$	0.58
	Diluted:
		Income from continuing operations				$	0.38			$	0.60
		Discontinued operations:
			Loss from operations				-				(0.02	)
			Loss on divestiture of operations				-				-
				Net income		$	0.38			$	0.58
Shares used in computing earnings per
	common share:
		Basic					38,626				38,184
		Diluted					38,859				38,315

KINDRED HEALTHCARE, INC.
Condensed Consolidated Statement of Operations
(Unaudited)
(In thousands, except per share amounts)
						Three months ended
						March 31,
						2010				2009
Revenues						$	1,089,837			$	1,069,474
Salaries, wages and benefits							627,175				615,218
Supplies							85,886				80,336
Rent							88,319				85,201
Other operating expenses							234,204				220,405
Other income							(3,084	)			(2,872	)
Depreciation and amortization							31,121				30,490
Interest expense							1,307				2,478
Investment income							(877	)			(1,475	)
							1,064,051				1,029,781
Income from continuing operations before income taxes							25,786				39,693
Provision for income taxes							10,631				16,352
	Income from continuing operations						15,155				23,341
Discontinued operations, net of income taxes:
	Loss from operations						(154	)			(581	)
	Loss on divestiture of operations						(137	)			-
				Net income		$	14,864			$	22,760
Earnings per common share:
	Basic:
		Income from continuing operations				$	0.38			$	0.60
		Discontinued operations:
			Loss from operations				-				(0.02	)
			Loss on divestiture of operations				-				-
				Net income		$	0.38			$	0.58
	Diluted:
		Income from continuing operations				$	0.38			$	0.60
		Discontinued operations:
			Loss from operations				-				(0.02	)
			Loss on divestiture of operations				-				-
				Net income		$	0.38			$	0.58
Shares used in computing earnings per
	common share:
		Basic					38,626				38,184
		Diluted					38,859				38,315

KINDRED HEALTHCARE, INC.
Condensed Consolidated Balance Sheet
(Unaudited)
(In thousands, except per share amounts)
						March 31,				December 31,
						2010				2009
ASSETS
Current assets:
	Cash and cash equivalents					$	14,675			$	16,303
	Cash - restricted						6,421				5,820
	Insurance subsidiary investments						64,253				106,834
	Accounts receivable less allowance for loss						663,654				610,959
	Inventories						22,228				22,303
	Deferred tax assets						46,391				42,791
	Income taxes						-				17,447
	Other						28,252				21,194
							845,874				843,651
Property and equipment							1,580,194				1,515,700
Accumulated depreciation							(790,577	)			(765,602	)
							789,617				750,098
Goodwill							81,382				81,223
Intangible assets less accumulated amortization							66,489				64,491
Assets held for sale							8,773				8,806
Insurance subsidiary investments							110,028				100,223
Deferred tax assets							114,966				110,930
Other							64,266				62,802
						$	2,081,395			$	2,022,224
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable					$	153,969			$	161,066
	Salaries, wages and other compensation						266,548				287,772
	Due to third party payors						26,589				28,261
	Professional liability risks						43,742				47,076
	Other accrued liabilities						77,279				78,358
	Income taxes						12,189				-
	Long-term debt due within one year						87				86
							580,403				602,619
Long-term debt							196,625				147,647
Professional liability risks							207,259				195,126
Deferred credits and other liabilities							114,278				110,238
Stockholders' equity:
Common stock, $0.25 par value; authorized 175,000 shares; issued 39,514 shares - March 31, 2010 and 39,104 shares - December 31, 2009
							9,878				9,776
	Capital in excess of par value						821,638				820,407
	Accumulated other comprehensive loss						(224	)			(423	)
	Retained earnings						151,538				136,834
							982,830				966,594
						$	2,081,395			$	2,022,224

KINDRED HEALTHCARE, INC.
Condensed Consolidated Statement of Cash Flows
(Unaudited)
(In thousands)
						Three months ended
						March 31,
						2010				2009
Cash flows from operating activities:
	Net income					$	14,864			$	22,760
	Adjustments to reconcile net income to net cash
		provided by (used in) operating activities:
		Depreciation and amortization					31,121				30,805
		Amortization of stock-based compensation costs					2,775				2,439
		Provision for doubtful accounts					6,431				7,016
		Deferred income taxes					(7,463	)			(2,179	)
		Loss on divestiture of discontinued operations					137				-
		Other					(163	)			204
		Change in operating assets and liabilities:
			Accounts receivable				(59,126	)			(86,415	)
			Inventories and other assets				(11,245	)			(7,535	)
			Accounts payable				(7,582	)			(12,264	)
			Income taxes				29,286				43,223
			Due to third party payors				(1,894	)			9,401
			Other accrued liabilities				(11,137	)			(5,535	)
				Net cash provided by (used in) operating activities			(13,996	)			1,920
Cash flows from investing activities:
	Routine capital expenditures						(14,815	)			(26,924	)
	Development capital expenditures						(7,567	)			(13,062	)
	Acquisitions						(47,696	)			(15,604	)
	Purchase of insurance subsidiary investments						(14,278	)			(36,257	)
	Sale of insurance subsidiary investments						53,211				54,092
	Net change in insurance subsidiary cash and cash equivalents						(5,575	)			20,458
	Other						(28	)			(953	)
				Net cash used in investing activities			(36,748	)			(18,250	)
Cash flows from financing activities:
	Proceeds from borrowings under revolving credit						389,600				390,800
	Repayment of borrowings under revolving credit						(340,600	)			(371,600	)
	Payment of deferred financing costs						(22	)			(309	)
	Issuance of common stock						35				-
	Other						103				94
				Net cash provided by financing activities			49,116				18,985
Change in cash and cash equivalents							(1,628	)			2,655
Cash and cash equivalents at beginning of period							16,303				140,795
Cash and cash equivalents at end of period						$	14,675			$	143,450

KINDRED HEALTHCARE, INC.
Condensed Consolidated Statement of Operations
(Unaudited)
(In thousands, except per share amounts)
																										First
						2009 Quarters																				Quarter
						First				Second				Third				Fourth				Year				2010
Revenues						$	1,069,474			$	1,073,054			$	1,057,488			$	1,069,991			$	4,270,007			$	1,089,837
Salaries, wages and benefits							615,218				620,830				629,077				617,961				2,483,086				627,175
Supplies							80,336				83,912				82,400				86,408				333,056				85,886
Rent							85,201				86,882				88,081				88,084				348,248				88,319
Other operating expenses							220,405				221,755				221,524				222,521				886,205				234,204
Other income							(2,872	)			(2,823	)			(2,870	)			(2,947	)			(11,512	)			(3,084	)
Depreciation and amortization							30,490				31,355				31,992				31,893				125,730				31,121
Interest expense							2,478				2,229				1,741				1,432				7,880				1,307
Investment income							(1,475	)			(1,033	)			(746	)			(1,159	)			(4,413	)			(877	)
							1,029,781				1,043,107				1,051,199				1,044,193				4,168,280				1,064,051
Income from continuing operations
	before income taxes						39,693				29,947				6,289				25,798				101,727				25,786
Provision for income taxes							16,352				12,409				901				9,453				39,115				10,631
	Income from continuing operations						23,341				17,538				5,388				16,345				62,612				15,155
Discontinued operations, net of income taxes:
	Income (loss) from operations						(581	)			(897	)			13				2,396				931				(154	)
	Gain (loss) on divestiture of operations						-				(24,051	)			52				567				(23,432	)			(137	)
				Net income (loss)		$	22,760			$	(7,410	)		$	5,453			$	19,308			$	40,111			$	14,864
Earnings (loss) per common share:
	Basic:
		Income from continuing operations				$	0.60			$	0.45			$	0.14			$	0.42			$	1.61			$	0.38
		Discontinued operations:
			Income (loss) from operations				(0.02	)			(0.02	)			-				0.06				0.02				-
			Gain (loss) on divestiture of operations				-				(0.62	)			-				0.01				(0.60	)			-
				Net income (loss)		$	0.58			$	(0.19	)		$	0.14			$	0.49			$	1.03			$	0.38
	Diluted:
		Income from continuing operations				$	0.60			$	0.45			$	0.14			$	0.42			$	1.60			$	0.38
		Discontinued operations:
			Income (loss) from operations				(0.02	)			(0.02	)			-				0.06				0.02				-
			Gain (loss) on divestiture of operations				-				(0.62	)			-				0.01				(0.60	)			-
				Net income (loss)		$	0.58			$	(0.19	)		$	0.14			$	0.49			$	1.02			$	0.38
Shares used in computing earnings (loss)
	per common share:
		Basic					38,184				38,307				38,398				38,465				38,339				38,626
		Diluted					38,315				38,415				38,524				38,693				38,502				38,859

KINDRED HEALTHCARE, INC.
Condensed Business Segment Data
(Unaudited)
(In thousands)
																											First
							2009 Quarters																				Quarter
							First				Second				Third				Fourth				Year				2010
Revenues:
	Hospital division						$	492,509			$	487,145			$	468,069			$	485,169			$	1,932,892			$	507,062
	Nursing center division							529,942				537,545				539,217				543,638				2,150,342				539,321
	Rehabilitation division							117,647				120,450				122,625				114,316				475,038				120,144
								1,140,098				1,145,140				1,129,911				1,143,123				4,558,272				1,166,527
	Eliminations							(70,624	)			(72,086	)			(72,423	)			(73,132	)			(288,265	)			(76,690	)
							$	1,069,474			$	1,073,054			$	1,057,488			$	1,069,991			$	4,270,007			$	1,089,837
Income from continuing operations:
Operating income (loss):
	Hospital division						$	100,899			$	91,027			$	78,674			$	93,211			$	363,811			$	95,033		(a,b)
	Nursing center division							75,574				79,522				73,383				77,111				305,590				70,249		(a,b)
	Rehabilitation division							15,453				13,599				10,912				10,628				50,592				14,635
	Corporate:
		Overhead						(34,087	)			(33,586	)			(33,843	)			(33,120	)			(134,636	)			(33,781	)	(a)
		Insurance subsidiary						(1,452	)			(1,182	)			(1,769	)			(1,782	)			(6,185	)			(480	)
								(35,539	)			(34,768	)			(35,612	)			(34,902	)			(140,821	)			(34,261	)
		Operating income						156,387				149,380				127,357				146,048				579,172				145,656
Rent								(85,201	)			(86,882	)			(88,081	)			(88,084	)			(348,248	)			(88,319	)
Depreciation and amortization								(30,490	)			(31,355	)			(31,992	)			(31,893	)			(125,730	)			(31,121	)
Interest, net								(1,003	)			(1,196	)			(995	)			(273	)			(3,467	)			(430	)
Income from continuing operations
	before income taxes							39,693				29,947				6,289				25,798				101,727				25,786
Provision for income taxes								16,352				12,409				901				9,453				39,115				10,631
							$	23,341			$	17,538			$	5,388			$	16,345			$	62,612			$	15,155
(a) Includes severance and retirement costs approximating $1.1 million for the hospital division, $0.5 million for the nursing center division and $1.3 million for corporate.
(b) Includes transaction costs approximating $0.4 million for the hospital division and $0.4 million for the nursing center division.

KINDRED HEALTHCARE, INC.
Condensed Consolidating Statement of Operations
(Unaudited)
(In thousands)
						First Quarter 2009																								First Quarter 2010
										Nursing																								Nursing
						Hospital				center				Rehabilitation																Hospital				center				Rehabilitation
						division				division				division				Corporate				Eliminations				Consolidated				division				division				division				Corporate				Eliminations				Consolidated
Revenues						$	492,509			$	529,942			$	117,647			$	-			$	(70,624	)		$	1,069,474			$	507,062			$	539,321			$	120,144			$	-			$	(76,690	)		$	1,089,837
Salaries, wages and benefits							218,245				272,482				98,196				26,295				-				615,218				227,641				273,242				100,512				25,780				-				627,175
Supplies							54,145				25,552				487				152				-				80,336				57,934				27,128				687				137				-				85,886
Rent							36,445				47,274				1,451				31				-				85,201				37,415				49,392				1,475				37				-				88,319
Other operating expenses							119,220				156,334				3,511				11,964				(70,624	)			220,405				126,454				168,702				4,310				11,428				(76,690	)			234,204
Other income							-				-				-				(2,872	)			-				(2,872	)			-				-				-				(3,084	)			-				(3,084	)
Depreciation and amortization							12,512				11,685				547				5,746				-				30,490				13,014				12,113				585				5,409				-				31,121
Interest expense							-				40				-				2,438				-				2,478				2				31				-				1,274				-				1,307
Investment income							(7	)			(58	)			(2	)			(1,408	)			-				(1,475	)			(1	)			(18	)			(1	)			(857	)			-				(877	)
							440,560				513,309				104,190				42,346				(70,624	)			1,029,781				462,459				530,590				107,568				40,124				(76,690	)			1,064,051
Income from continuing operations
before income taxes						$	51,949			$	16,633			$	13,457			$	(42,346	)		$	-				39,693			$	44,603			$	8,731			$	12,576			$	(40,124	)		$	-				25,786
Provision for income taxes																											16,352																								10,631
Income from continuing operations																										$	23,341																							$	15,155
Capital expenditures, excluding
acquisitions (including
discontinued operations):
		Routine				$	4,844			$	18,264			$	190			$	3,626			$	-			$	26,924			$	6,065			$	4,049			$	267			$	4,434			$	-			$	14,815
		Development					9,486				3,576				-				-				-				13,062				5,774				1,793				-				-				-				7,567
						$	14,330			$	21,840			$	190			$	3,626			$	-			$	39,986			$	11,839			$	5,842			$	267			$	4,434			$	-			$	22,382

KINDRED HEALTHCARE, INC.
Condensed Business Segment Data (Continued)
(Unaudited)
																First
						2009 Quarters										Quarter
						First		Second		Third		Fourth		Year		2010
Hospital data:
End of period data:
	Number of hospitals					82		82		82		83				83
	Number of licensed beds					6,520		6,520		6,520		6,580				6,580
Revenue mix %:
	Medicare					56		55		55		56		55		56
	Medicaid					10		10		11		9		10		9
	Medicare Advantage					10		11		9		9		10		10
	Commercial insurance and other					24		24		25		26		25		25
Admissions:
	Medicare					7,421		7,117		6,875		7,283		28,696		7,432
	Medicaid					1,052		1,053		1,165		984		4,254		997
	Medicare Advantage					1,094		1,091		926		919		4,030		1,129
	Commercial insurance and other					1,921		1,869		1,969		2,280		8,039		2,262
						11,488		11,130		10,935		11,466		45,019		11,820
Admissions mix %:
	Medicare					65		64		63		63		64		63
	Medicaid					9		9		11		9		9		8
	Medicare Advantage					9		10		8		8		9		10
	Commercial insurance and other					17		17		18		20		18		19
Patient days:
	Medicare					197,377		197,203		188,712		196,067		779,359		202,882
	Medicaid					50,868		50,485		53,585		47,352		202,290		47,813
	Medicare Advantage					35,229		36,806		29,912		30,315		132,262		34,524
	Commercial insurance and other					65,509		61,960		65,717		74,253		267,439		75,483
						348,983		346,454		337,926		347,987		1,381,350		360,702
Average length of stay:
	Medicare					26.6		27.7		27.4		26.9		27.2		27.3
	Medicaid					48.4		47.9		46.0		48.1		47.6		48.0
	Medicare Advantage					32.2		33.7		32.3		33.0		32.8		30.6
	Commercial insurance and other					34.1		33.2		33.4		32.6		33.3		33.4
	Weighted average					30.4		31.1		30.9		30.3		30.7		30.5

KINDRED HEALTHCARE, INC.
Condensed Business Segment Data (Continued)
(Unaudited)
																					First
						2009 Quarters															Quarter
						First			Second			Third			Fourth			Year			2010
Hospital data (continued):
Revenues per admission:
	Medicare					$	37,262		$	37,748		$	37,105		$	37,620		$	37,436		$	38,078
	Medicaid						45,160			45,759			43,640			43,314			44,465			45,738
	Medicare Advantage						46,387			46,950			47,597			47,807			47,141			45,187
	Commercial insurance and other						61,286			63,716			59,957			54,662			59,647			56,344
	Weighted average						42,872			43,769			42,805			42,314			42,935			42,899
Revenues per patient day:
	Medicare					$	1,401		$	1,362		$	1,352		$	1,397		$	1,378		$	1,395
	Medicaid						934			954			949			900			935			954
	Medicare Advantage						1,440			1,392			1,473			1,449			1,436			1,478
	Commercial insurance and other						1,797			1,922			1,796			1,678			1,793			1,688
	Weighted average						1,411			1,406			1,385			1,394			1,399			1,406
Medicare case mix index (discharged patients only)							1.22			1.23			1.19			1.18			1.21			1.21
Average daily census							3,878			3,807			3,673			3,782			3,785			4,008
Occupancy %							66.0			64.7			63.6			64.3			64.7			68.2
Annualized employee turnover %							21.3			22.1			22.8			22.1						21.8
Nursing center data:
End of period data:
	Number of nursing centers:
		Owned or leased					218			218			218			218						218
		Managed					4			4			4			4						4
							222			222			222			222						222
	Number of licensed beds:
		Owned or leased					27,138			27,138			27,086			27,038						27,038
		Managed					485			485			485			485						485
							27,623			27,623			27,571			27,523						27,523
Revenue mix %:
	Medicare						35			35			34			33			34			35
	Medicaid						41			41			42			43			42			41
	Medicare Advantage						6			6			6			6			6			6
	Private and other						18			18			18			18			18			18

KINDRED HEALTHCARE, INC.
Condensed Business Segment Data (Continued)
(Unaudited)
																					First
						2009 Quarters															Quarter
						First			Second			Third			Fourth			Year			2010
Nursing center data (continued):
Patient days (excludes managed facilities):
	Medicare						374,853			375,140			360,009			353,443			1,463,445			369,102
	Medicaid						1,326,654			1,323,157			1,357,596			1,368,198			5,375,605			1,312,517
	Medicare Advantage						80,352			82,652			84,322			86,449			333,775			87,692
	Private and other						403,320			415,510			415,467			403,166			1,637,463			397,550
							2,185,179			2,196,459			2,217,394			2,211,256			8,810,288			2,166,861
Patient day mix %:
	Medicare						17			17			16			16			17			17
	Medicaid						61			60			61			62			61			61
	Medicare Advantage						4			4			4			4			4			4
	Private and other						18			19			19			18			18			18
Revenues per patient day:
	Medicare Part A					$	457		$	459		$	464		$	466		$	461		$	470
	Total Medicare (including Part B)						497			500			508			510			503			513
	Medicaid						165			167			166			170			167			168
	Medicare Advantage						380			392			398			405			394			398
	Private and other						235			232			234			239			235			238
	Weighted average						243			245			243			246			244			249
Average daily census							24,280			24,137			24,102			24,035			24,138			24,076
Admissions (excludes managed facilities)							18,166			18,456			17,803			18,376			72,801			19,026
Occupancy %							89.3			88.9			88.9			88.9			89.0			89.0
Medicare average length of stay							34.8			35.5			36.3			35.1			35.4			33.7
Annualized employee turnover %							37.9			39.9			40.2			38.9						36.7
Rehabilitation data:
Revenue mix %:
	Company-operated						61			60			59			64			61			64
	Non-affiliated						39			40			41			36			39			36
Sites of service (at end of period)							661			659			660			622						619
Revenue per site						$	177,984		$	182,775		$	185,797		$	183,789		$	730,345		$	194,094
Therapist productivity %							84.8			84.8			83.5			83.8			84.2			83.8
Annualized employee turnover %							10.9			11.6			13.1			12.8						12.6

KINDRED HEALTHCARE, INC.
Earnings Per Common Share Reconciliation (a)
(Unaudited)
(In thousands, except per share amounts)
					Three months ended March 31,
					2010								2009
					Basic				Diluted				Basic				Diluted
Earnings:
	Income from continuing operations:
		As reported in Statement of Operations			$	15,155			$	15,155			$	23,341			$	23,341
		Allocation to participating unvested
		restricted stockholders				(277	)			(275	)			(441	)			(440	)
			Available to common stockholders		$	14,878			$	14,880			$	22,900			$	22,901
	Discontinued operations, net of income taxes:
		Loss from operations:
			As reported in Statement of Operations		$	(154	)		$	(154	)		$	(581	)		$	(581	)
			Allocation to participating unvested
			restricted stockholders			3				3				11				11
			Available to common stockholders		$	(151	)		$	(151	)		$	(570	)		$	(570	)
		Loss on divestiture of operations:
			As reported in Statement of Operations		$	(137	)		$	(137	)		$	-			$	-
			Allocation to participating unvested
			restricted stockholders			2				2				-				-
			Available to common stockholders		$	(135	)		$	(135	)		$	-			$	-
	Net income:
		As reported in Statement of Operations			$	14,864			$	14,864			$	22,760			$	22,760
		Allocation to participating unvested
			restricted stockholders			(272	)			(270	)			(430	)			(429	)
			Available to common stockholders		$	14,592			$	14,594			$	22,330			$	22,331
Shares used in the computation:
	Weighted average shares outstanding -
		basic computation				38,626				38,626				38,184				38,184
	Dilutive effect of employee stock options									233								131
	Adjusted weighted average shares
		outstanding - diluted computation								38,859								38,315
Earnings per common share:
	Income from continuing operations				$	0.38			$	0.38			$	0.60			$	0.60
	Discontinued operations:
		Loss from operations				-				-				(0.02	)			(0.02	)
		Loss on divestiture of operations				-				-				-				-
			Net income		$	0.38			$	0.38			$	0.58			$	0.58
(a) Earnings per common share are based upon the weighted average number of common shares outstanding during the respective periods. The diluted calculation of earnings per common share includes the dilutive effect of stock options. On January 1, 2009, the Company adopted the provisions of the authoritative guidance for determining whether instruments granted in share-based payment transactions are participating securities, which requires that certain unvested restricted stock be included as a participating security in the basic and diluted earnings per common share calculation pursuant to the two-class method.

KINDRED HEALTHCARE, INC.
Reconciliation of Non-GAAP Measurements to GAAP Results
(Unaudited)
(In thousands, except per share amounts and statistics)
In addition to the results provided in accordance with GAAP, the Company has provided a non-GAAP measurement which presents operating results for the three months ended March 31, 2010 before certain charges or on a core basis. The charges that were excluded from core operating results for the three months ended March 31, 2010 relate to severance, retirement and transaction costs.   This non-GAAP measurement is not intended to replace the presentation of the Company's financial results in accordance with GAAP. 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 for the three months ended March 31, 2010 that the Company believes are not representative of its ongoing operations due to the materiality and nature of the charges. The Company's core operating results also represent a key performance measure for the purposes of evaluating performance internally.
						Three
						months ended
						March 31, 2010
Detail of charges excluded from core operating results:
Severance and retirement costs							($2,906	)
Transaction costs							(770	)
							(3,676	)
Income tax benefit							1,415
Charges net of income taxes							(2,261	)
Allocation to participating unvested restricted stockholders							42
Available to common stockholders							($2,219	)
Weighted average diluted shares outstanding							38,859
Diluted loss per common share related to charges							($0.06	)
Reconciliation of income from continuing operations before charges:
Income from continuing operations before charges						$	17,416
Charges							(2,261	)
Reported income from continuing operations						$	15,155
Reconciliation of diluted earnings per common share from continuing operations before charges:
Diluted earnings per common share before charges						$	0.44
Charges							(0.06	)
Reported diluted earnings per common share						$	0.38
Reconciliation of effective income tax rate before charges:
Effective income tax rate before charges							40.9	%
Impact on effective income tax rate as a result of charges							0.3	%
Reported effective income tax rate							41.2	%

KINDRED HEALTHCARE, INC.
Reconciliation of Earnings Guidance for 2010 - Continuing Operations
(Unaudited)
(In millions, except per share amounts)
						Earnings Guidance Ranges (a)
						As of May 4, 2010						As of February 22, 2010
						Low			High			Low			High
Operating income						$	571		$	579		$	571		$	579
Rent							360			360			360			360
Depreciation and amortization							123			123			123			123
Interest, net							5			5			5			5
Income from continuing operations before income taxes							83			91			83			91
Provision for income taxes							35			37			35			37
Income from continuing operations							48			54			48			54
Allocation to participating unvested restricted stockholders							1			1			1			1
Available to common stockholders						$	47		$	53		$	47		$	53
Earnings per diluted share						$	1.20		$	1.35		$	1.20		$	1.35
Shares used in computing earnings per diluted share							39.0			39.0			39.0			39.0
(a) The Company indicated that the earnings guidance reflects the operating results of $0.38 per diluted share reported in the first quarter as well as the anticipated impact of proposed rules issued by CMS in April 2010 related to payment rates for LTAC hospitals effective October 1, 2010. The Company also indicated that the earnings guidance does not reflect any other reimbursement changes, any material acquisitions or divestitures, or any repurchases of common stock.