Edgar Filing: KINDRED HEALTHCARE, INC

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Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2013

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission file number: 001-14057

KINDRED HEALTHCARE, INC.

(Exact name of registrant as specified in its charter)


Delaware		61-1323993
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

680 South Fourth Street Louisville, KY		40202-2412
(Address of principal executive offices)		(Zip Code)

(502) 596-7300

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class of Common Stock		Outstanding at April 30, 2013
Common stock, $0.25 par value		54,037,557 shares

KINDRED HEALTHCARE, INC.

FORM 10-Q

INDEX


		Page

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited):

	Condensed Consolidated Statement of Operations – for the three months ended March 31, 2013 and 2012		3

	Condensed Consolidated Statement of Comprehensive Income – for the three months ended March 31, 2013 and 2012		4

	Condensed Consolidated Balance Sheet – March 31, 2013 and December 31, 2012		5

	Condensed Consolidated Statement of Cash Flows – for the three months ended March 31, 2013 and 2012		6

	Notes to Condensed Consolidated Financial Statements		7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		34

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		61

Item 4.	Controls and Procedures		62

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings		63

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		63

Item 6.	Exhibits		63

KINDRED HEALTHCARE, INC.

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)

(In thousands, except per share amounts)


	Three months ended March 31,
	2013			2012
Revenues	$	1,554,908		$	1,537,931

Salaries, wages and benefits		943,773			921,359
Supplies		105,808			108,533
Rent		105,978			104,313
Other operating expenses		305,503			296,365
Other income		(993	)		(3,143	)
Impairment charges		436			848
Depreciation and amortization		51,196			46,986
Interest expense		28,174			26,578
Investment income		(91	)		(288	)

		1,539,784			1,501,551

Income from continuing operations before income taxes		15,124			36,380
Provision for income taxes		5,620			14,765

Income from continuing operations		9,504			21,615
Discontinued operations, net of income taxes:
Loss from operations		(4,787	)		(1,803	)
Loss on divestiture of operations		(1,244	)		(1,170	)

Loss from discontinued operations		(6,031	)		(2,973	)

Net income		3,473			18,642
Earnings attributable to noncontrolling interests		(416	)		(451	)

Income attributable to Kindred	$	3,057		$	18,191

Amounts attributable to Kindred stockholders:
Income from continuing operations	$	9,088		$	21,164
Loss from discontinued operations		(6,031	)		(2,973	)

Net income	$	3,057		$	18,191

Earnings per common share:
Basic:
Income from continuing operations	$	0.17		$	0.40
Discontinued operations:
Loss from operations		(0.09	)		(0.03	)
Loss on divestiture of operations		(0.02	)		(0.02	)

Loss from discontinued operations		(0.11	)		(0.05	)

Net income	$	0.06		$	0.35

Diluted:
Income from continuing operations	$	0.17		$	0.40
Discontinued operations:
Loss from operations		(0.09	)		(0.03	)
Loss on divestiture of operations		(0.02	)		(0.02	)

Loss from discontinued operations		(0.11	)		(0.05	)

Net income	$	0.06		$	0.35

Shares used in computing earnings per common share:
Basic		52,062			51,603
Diluted		52,083			51,638

See accompanying notes.

KINDRED HEALTHCARE, INC.

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)


	Three months ended March 31,
	2013			2012
Net income	$	3,473		$	18,642
Other comprehensive income:
Available-for-sale securities (Note 8):
Change in unrealized investment gains		1,613			1,202
Reclassification of (gains) losses realized in net income		119			(77	)

Net change		1,732			1,125
Interest rate swaps (Note 1):
Change in unrealized gains (losses)		844			(131	)
Reclassification of (gains) losses realized in net income, net of payments		(5	)		201

Net change		839			70
Income tax benefit related to items of other comprehensive income		(937	)		(420	)

Other comprehensive income		1,634			775

Comprehensive income		5,107			19,417
Earnings attributable to noncontrolling interests		(416	)		(451	)

Comprehensive income attributable to Kindred	$	4,691		$	18,966

See accompanying notes.

KINDRED HEALTHCARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited)

(In thousands, except per share amounts)


	March 31, 2013			December 31, 2012
ASSETS
Current assets:
Cash and cash equivalents	$	42,664		$	50,007
Cash—restricted		5,263			5,197
Insurance subsidiary investments		91,057			86,168
Accounts receivable less allowance for loss of $32,656 – March 31, 2013 and $23,959 – December 31, 2012		1,094,750			1,038,605
Inventories		32,057			32,021
Deferred tax assets		11,366			12,663
Income taxes		1,835			13,573
Other		39,781			35,532

		1,318,773			1,273,766
Property and equipment		2,202,083			2,226,903
Accumulated depreciation		(1,088,591	)		(1,083,777	)

		1,113,492			1,143,126
Goodwill		1,041,266			1,041,266
Intangible assets less accumulated amortization of $40,601 – March 31, 2013 and $34,854 – December 31, 2012		434,020			439,767
Assets held for sale		2,793			4,131
Insurance subsidiary investments		146,985			116,424
Other		220,330			219,466

Total assets	$	4,277,659		$	4,237,946

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	193,263		$	210,668
Salaries, wages and other compensation		390,701			389,009
Due to third party payors		34,392			35,420
Professional liability risks		67,859			54,088
Other accrued liabilities		152,241			137,204
Long-term debt due within one year		8,363			8,942

		846,819			835,331
Long-term debt		1,671,279			1,648,706
Professional liability risks		240,070			236,630
Deferred tax liabilities		10,588			9,764
Deferred credits and other liabilities		213,570			214,671
Commitments and contingencies (Note 9)

Equity:
Stockholders’ equity:
Common stock, $0.25 par value; authorized 175,000 shares; issued 54,047 shares – March 31, 2013 and 53,280 shares – December 31, 2012		13,512			13,320
Capital in excess of par value		1,143,950			1,145,922
Accumulated other comprehensive loss		(248	)		(1,882	)
Retained earnings		101,509			98,799

		1,258,723			1,256,159
Noncontrolling interests		36,610			36,685

Total equity		1,295,333			1,292,844

Total liabilities and equity	$	4,277,659		$	4,237,946

See accompanying notes.

KINDRED HEALTHCARE, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

(In thousands)


	Three months ended March 31,
	2013			2012
Cash flows from operating activities:
Net income	$	3,473		$	18,642
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		52,954			48,690
Amortization of stock-based compensation costs		2,248			1,802
Amortization of deferred financing costs		2,613			2,357
Provision for doubtful accounts		11,266			7,496
Deferred income taxes		(344	)		(3,662	)
Impairment charges		436			867
Loss on divestiture of discontinued operations		1,244			1,170
Other		420			277
Change in operating assets and liabilities:
Accounts receivable		(67,411	)		(57,197	)
Inventories and other assets		(8,147	)		(15,905	)
Accounts payable		(15,790	)		(9,550	)
Income taxes		12,170			31,242
Due to third party payors		(1,028	)		(8,976	)
Other accrued liabilities		30,729			(20,678	)

Net cash provided by (used in) operating activities		24,833			(3,425	)

Cash flows from investing activities:
Routine capital expenditures		(22,370	)		(22,106	)
Development capital expenditures		(2,388	)		(10,622	)
Acquisitions, net of cash acquired		—			(50,448	)
Acquisition deposit		—			(16,866	)
Sale of assets		5,060			1,110
Purchase of insurance subsidiary investments		(10,836	)		(13,773	)
Sale of insurance subsidiary investments		10,002			14,006
Net change in insurance subsidiary cash and cash equivalents		(33,096	)		(13,123	)
Change in other investments		319			269
Other		(144	)		(749	)

Net cash used in investing activities		(53,453	)		(112,302	)

Cash flows from financing activities:
Proceeds from borrowings under revolving credit		483,500			515,400
Repayment of borrowings under revolving credit		(459,200	)		(397,000	)
Repayment of other long-term debt		(2,666	)		(2,666	)
Payment of deferred financing costs		(202	)		(43	)
Distribution made to noncontrolling interests		(491	)		(1,388	)
Issuance of common stock		4			—
Other		332			—

Net cash provided by financing activities		21,277			114,303

Change in cash and cash equivalents		(7,343	)		(1,424	)
Cash and cash equivalents at beginning of period		50,007			41,561

Cash and cash equivalents at end of period	$	42,664		$	40,137

Supplemental information:
Interest payments	$	13,092		$	12,108
Income tax refunds		9,631			13,956

See accompanying notes.

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 – BASIS OF PRESENTATION

Business

Kindred Healthcare, Inc. is a healthcare services company that through its subsidiaries operates transitional care (“TC”) hospitals, inpatient rehabilitation hospitals (“IRFs”), nursing centers, assisted living facilities, a contract rehabilitation services business and a home health and hospice business across the United States (collectively, the “Company” or “Kindred”). At March 31, 2013, the Company’s hospital division operated 116 TC hospitals (licensed as long-term acute care (“LTAC”) hospitals under the Medicare program) and six IRFs in 26 states. The Company’s nursing center division operated 204 nursing centers and six assisted living facilities in 26 states. The Company’s rehabilitation division provided rehabilitation services primarily in hospitals and long-term care settings. The Company’s home health and hospice division provided home health, hospice and private duty services from 101 locations in ten states.

In recent years, the Company has completed several transactions related to the divestiture of unprofitable hospitals and nursing centers to improve its future operating results. For accounting purposes, the operating results of these businesses and the losses associated with these transactions have been classified as discontinued operations in the accompanying unaudited condensed consolidated statement of operations for all periods presented. Assets held for sale at March 31, 2013 have been measured at the lower of carrying value or estimated fair value less costs of disposal and have been classified as held for sale in the accompanying unaudited condensed consolidated balance sheet. See Note 3 for a summary of discontinued operations.

Recently issued accounting requirements

In February 2013, the Financial Accounting Standards Board (the “FASB”) amended its authoritative guidance issued in December 2011 related to the deferral of the requirement to present reclassification adjustments out of accumulated other comprehensive income in both the statement in which net income is presented and the statement in which other comprehensive income is presented. The amended provisions require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under United States generally accepted accounting principles to be reclassified to net income in its entirety in the same reporting period. For all other amounts, an entity is required to cross-reference to other disclosures that provide additional details about these amounts. All other requirements of the original June 2011 update were not impacted by the amendment which became effective for all interim and annual reporting periods beginning after December 15, 2012. The adoption of the guidance did not have a material impact on the Company’s business, financial position, results of operations or liquidity.

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 1 – BASIS OF PRESENTATION (Continued)

Equity

The following table sets forth the changes in equity attributable to noncontrolling interests and equity attributable to Kindred stockholders for the three months ended March 31, 2013 and 2012 (in thousands):


For the three months ended March 31, 2013:	Redeemable noncontrolling interests			Amounts attributable to Kindred stockholders			Nonredeemable noncontrolling interests			Total equity
Balance at December 31, 2012	$	—		$	1,256,159		$	36,685		$	1,292,844
Comprehensive income:
Net income		—			3,057			416			3,473
Other comprehensive income		—			1,634			—			1,634

		—			4,691			416			5,107
Issuance of common stock in connection with employee benefit plans		—			4			—			4
Shares tendered by employees for statutory tax withholdings upon issuance of common stock		—			(2,810	)		—			(2,810	)
Income tax provision in connection with the issuance of common stock under employee benefit plans		—			(1,569	)		—			(1,569	)
Stock-based compensation amortization		—			2,248			—			2,248
Distribution made to noncontrolling interests		—			—			(491	)		(491	)

Balance at March 31, 2013	$	—		$	1,258,723		$	36,610		$	1,295,333


For the three months ended March 31, 2012:
Balance at December 31, 2011	$	9,704		$	1,288,921		$	31,620		$	1,320,541
Comprehensive income:
Net income		155			18,191			296			18,487
Other comprehensive income		—			775			—			775

		155			18,966			296			19,262
Shares tendered by employees for statutory tax withholdings upon issuance of common stock		—			(1,796	)		—			(1,796	)
Income tax provision in connection with the issuance of common stock under employee benefit plans		—			(2,082	)		—			(2,082	)
Stock-based compensation amortization		—			1,802			—			1,802
Distribution made to noncontrolling interests		(327	)		—			(1,061	)		(1,061	)

Balance at March 31, 2012	$	9,532		$	1,305,811		$	30,855		$	1,336,666

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 1 – BASIS OF PRESENTATION (Continued)

Derivative financial instruments

In December 2011, the Company entered into two interest rate swap agreements to hedge its floating interest rate on an aggregate of $225 million of outstanding senior secured term loan facility debt (the “Term Loan Facility”) entered into in June 2011. The interest rate swaps have an effective date of January 9, 2012, and expire on January 11, 2016. The Company is required to make payments based upon a fixed interest rate of 1.8925% calculated on the notional amount of $225 million. In exchange, the Company will receive interest on $225 million at a variable interest rate that is based upon the three-month London Interbank Offered Rate (“LIBOR”), subject to a minimum rate of 1.5%. The Company determined the interest rate swaps continue to be effective cash flow hedges at March 31, 2013. The fair value of the interest rate swaps recorded in other accrued liabilities was $1.8 million and $2.6 million at March 31, 2013 and December 31, 2012, respectively.

Other information

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q of Regulation S-X and do not include all of the disclosures normally required by generally accepted accounting principles or those normally required in annual reports on Form 10-K. Accordingly, these financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended December 31, 2012 filed with the Securities and Exchange Commission (the “SEC”) on Form 10-K. The accompanying condensed consolidated balance sheet at December 31, 2012 was derived from audited consolidated financial statements, but does not include all disclosures required by generally accepted accounting principles.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the Company’s customary accounting practices. Management believes that financial information included herein reflects all adjustments necessary for a fair presentation of interim results and, except as otherwise disclosed, all such adjustments are of a normal and recurring nature.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles and include amounts based upon the estimates and judgments of management. Actual amounts may differ from those estimates.

Reclassifications

Certain prior period amounts have been reclassified to conform with the current period presentation.

NOTE 2 – ACQUISITION

In March 2012, the Company acquired the real estate of a previously leased hospital for $50.4 million. Annual rent associated with the hospital aggregated $4.1 million. The fair value of the asset acquired was measured using discounted cash flow methodologies which are considered Level 3 inputs (as described in Note 10).

The purchase price of this hospital resulted from negotiations with the landlord that were based upon both the historical and expected future cash flows of the hospital and real estate values. This acquisition was financed through operating cash flows and borrowings under the Company’s revolving credit facility.

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 3 – DISCONTINUED OPERATIONS

In accordance with the authoritative guidance for the impairment or disposal of long-lived assets, the divestitures of unprofitable businesses discussed in Note 1 have been accounted for as discontinued operations. Accordingly, the results of operations of these businesses for all periods presented and the losses associated with these transactions have been classified as discontinued operations, net of income taxes, in the accompanying unaudited condensed consolidated statement of operations. At March 31, 2013, the Company held for sale one hospital.

On April 27, 2012, the Company announced that it would not renew seven renewal bundles containing 54 nursing centers (the “Expiring Facilities”) under operating leases with Ventas, Inc. (“Ventas”) that expire on April 30, 2013. The Expiring Facilities contain 6,140 licensed nursing center beds and generated revenues of approximately $475 million for the year ended December 31, 2012. The current annual rent for these facilities approximates $57 million. The Company has also entered into an agreement with Ventas to provide Ventas with more flexibility to accelerate the transfer of the Expiring Facilities, as well as to extend the term of the leases as necessary to facilitate these transfers. The Company may be required to pay for additional capital obligations for the Expiring Facilities under the master lease agreements with Ventas. The Company transferred the operations of 19 of the 54 nursing centers to new operators during the three months ended March 31, 2013. The Company reclassified the results of operations and losses associated with the 19 divestitures to discontinued operations, net of income taxes, for all periods presented. The Company will continue to operate the remaining 35 Expiring Facilities and include the Expiring Facilities in its results from continuing operations through the expiration of the lease term, and for such additional time period as required to transfer operations to new operators. When the Company terminates its operations of the remaining Expiring Facilities, these facilities will be reclassified to discontinued operations.

A summary of discontinued operations follows (in thousands):


	Three months ended March 31,
	2013			2012
Revenues	$	28,505		$	46,733

Salaries, wages and benefits		15,612			23,845
Supplies		1,713			2,762
Rent		3,670			5,384
Other operating expenses		13,530			15,966
Other expense		108			—
Impairment charges		—			19
Depreciation		1,758			1,704
Interest expense		2			—
Investment income		(8	)		(4	)

		36,385			49,676

Loss from operations before income taxes		(7,880	)		(2,943	)
Income tax benefit		(3,093	)		(1,140	)

Loss from operations		(4,787	)		(1,803	)
Loss on divestiture operations		(1,244	)		(1,170	)

Loss from discontinued operations	$	(6,031	)	$	(2,973	)

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 3 – DISCONTINUED OPERATIONS (Continued)

The following table sets forth certain discontinued operating data by business segment (in thousands):


	Three months ended March 31,
	2013			2012
Revenues:
Hospital division	$	(56	)	$	3,785
Nursing center division		28,561			42,948

	$	28,505		$	46,733

Operating income (loss):
Hospital division	$	(673	)	$	(1,746	)
Nursing center division		(1,785	)		5,887

	$	(2,458	)	$	4,141

Rent:
Hospital division	$	16		$	375
Nursing center division		3,654			5,009

	$	3,670		$	5,384

Depreciation:
Hospital division	$	4		$	257
Nursing center division		1,754			1,447

	$	1,758		$	1,704

A summary of the net assets held for sale follows (in thousands):


	March 31, 2013			December 31, 2012
Long-term assets:
Property and equipment, net	$	2,793		$	4,126
Other		—			5

		2,793			4,131
Current liabilities (included in other accrued liabilities)		(29	)		—

	$	2,764		$	4,131

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 4 – REVENUES

Revenues are recorded based upon estimated amounts due from patients and third party payors for healthcare services provided, including anticipated settlements under reimbursement agreements with Medicare, Medicaid, Medicare Advantage and other third party payors.

A summary of revenues by payor type follows (in thousands):


	Three months ended March 31,
	2013			2012
Medicare	$	675,050		$	665,509
Medicaid		243,281			246,216
Medicare Advantage		116,880			111,508
Other		602,639			598,113

		1,637,850			1,621,346
Eliminations		(82,942	)		(83,415	)

	$	1,554,908		$	1,537,931

NOTE 5 – EARNINGS PER SHARE

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. The Company follows the provisions of the authoritative guidance for determining whether instruments granted in share-based payment transactions are participating securities, which requires that unvested restricted stock that entitles the holder to receive nonforfeitable dividends before vesting 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.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 5 – EARNINGS PER SHARE (Continued)

A computation of earnings per common share follows (in thousands, except per share amounts):


	Three months ended March 31,
	2013						2012
	Basic			Diluted			Basic			Diluted
Earnings:
Amounts attributable to Kindred stockholders:
Income from continuing operations:
As reported in Statement of Operations	$	9,088		$	9,088		$	21,164		$	21,164
Allocation to participating unvested restricted stockholders		(256	)		(256	)		(289	)		(289	)

Available to common stockholders	$	8,832		$	8,832		$	20,875		$	20,875

Discontinued operations, net of income taxes:
Loss from operations:
As reported in Statement of Operations	$	(4,787	)	$	(4,787	)	$	(1,803	)	$	(1,803	)
Allocation to participating unvested restricted stockholders		135			135			25			25

Available to common stockholders	$	(4,652	)	$	(4,652	)	$	(1,778	)	$	(1,778	)

Loss on divestiture of operations:
As reported in Statement of Operations	$	(1,244	)	$	(1,244	)	$	(1,170	)	$	(1,170	)
Allocation to participating unvested restricted stockholders		35			35			16			16

Available to common stockholders	$	(1,209	)	$	(1,209	)	$	(1,154	)	$	(1,154	)

Loss from discontinued operations:
As reported in Statement of Operations	$	(6,031	)	$	(6,031	)	$	(2,973	)	$	(2,973	)
Allocation to participating unvested restricted stockholders		170			170			41			41

Available to common stockholders	$	(5,861	)	$	(5,861	)	$	(2,932	)	$	(2,932	)

Net income:
As reported in Statement of Operations	$	3,057		$	3,057		$	18,191		$	18,191
Allocation to participating unvested restricted stockholders		(86	)		(86	)		(248	)		(248	)

Available to common stockholders	$	2,971		$	2,971		$	17,943		$	17,943

Shares used in the computation:
Weighted average shares outstanding–basic computation		52,062			52,062			51,603			51,603

Dilutive effect of employee stock options					21						35

Adjusted weighted average shares outstanding–diluted computation					52,083						51,638

Earnings per common share:
Income from continuing operations	$	0.17		$	0.17		$	0.40		$	0.40
Discontinued operations:
Loss from operations		(0.09	)		(0.09	)		(0.03	)		(0.03	)
Loss on divestiture of operations		(0.02	)		(0.02	)		(0.02	)		(0.02	)

Loss from discontinued operations		(0.11	)		(0.11	)		(0.05	)		(0.05	)

Net income	$	0.06		$	0.06		$	0.35		$	0.35

Number of antidilutive stock options excluded from shares used in the diluted earnings per common share computation					1,274						2,562

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 6 – BUSINESS SEGMENT DATA

The Company is organized into four operating divisions: the hospital division, the nursing center division, the rehabilitation division and the home health and hospice division. Based upon the authoritative guidance for business segments, the operating divisions represent five reportable operating segments, including (1) hospitals, (2) nursing centers, (3) skilled nursing rehabilitation services, (4) hospital rehabilitation services and (5) home health and hospice services. These reportable operating segments are consistent with information used by the Company’s President and Chief Operating Officer to assess performance and allocate resources. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies. Prior period segment information has been reclassified to conform with the current period presentation.

For segment purposes, the Company defines operating income as earnings before interest, income taxes, depreciation, amortization and rent. Segment operating income reported for each of the Company’s operating segments excludes impairment charges, transaction costs and the allocation of corporate overhead.

On January 1, 2013, the Company transferred the operations of its hospital-based sub-acute unit business from the hospital division to the nursing center division. Historical amounts have been reclassified to conform with the current period presentation.

Segment operating income for the three months ended March 31, 2013 included one-time bonus costs paid to approximately 50,000 employees who do not participate in the Company’s incentive compensation program of $25.9 million (hospital division – $8.8 million, nursing center division – $9.7 million, rehabilitation division – $6.3 million (skilled nursing rehabilitation services – $5.0 million and hospital rehabilitation services – $1.3 million), home health and hospice division – $0.8 million and corporate – $0.3 million).

Segment operating income for the hospital division for the three months ended March 31, 2013 also included employee retention costs of $0.3 million incurred in connection with the planned divestiture of 17 non-strategic facilities.

Segment operating income for the nursing center division for the three months ended March 31, 2013 also included employee retention costs of $0.4 million incurred in connection with the nonrenewal of 54 nursing centers leased from Ventas.

Segment operating income for the hospital division for the three months ended March 31, 2012 included severance costs of $2.0 million and other costs of $0.1 million incurred in connection with the closing of a regional office.

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 6 – BUSINESS SEGMENT DATA (Continued)

The following table sets forth certain data by business segment (in thousands):


	Three months ended March 31,
	2013			2012
Revenues:
Hospital division	$	748,214		$	749,383
Nursing center division		502,703			512,148
Rehabilitation division:
Skilled nursing rehabilitation services		260,789			257,014
Hospital rehabilitation services		74,523			74,369

		335,312			331,383
Home health and hospice division		51,621			28,432

		1,637,850			1,621,346
Eliminations:
Skilled nursing rehabilitation services		(52,889	)		(53,612	)
Hospital rehabilitation services		(27,994	)		(28,161	)
Nursing centers		(2,059	)		(1,642	)

		(82,942	)		(83,415	)

	$	1,554,908		$	1,537,931

Income from continuing operations:
Operating income (loss):
Hospital division	$	161,819		$	161,826
Nursing center division		51,178			63,906
Rehabilitation division:
Skilled nursing rehabilitation services		15,278			14,323
Hospital rehabilitation services		18,132			16,116

		33,410			30,439
Home health and hospice division		2,786			2,341
Corporate:
Overhead		(45,582	)		(42,728	)
Insurance subsidiary		(509	)		(482	)

		(46,091	)		(43,210	)
Impairment charges		(436	)		(848	)
Transaction costs		(2,285	)		(485	)

Operating income		200,381			213,969
Rent		(105,978	)		(104,313	)
Depreciation and amortization		(51,196	)		(46,986	)
Interest, net		(28,083	)		(26,290	)

Income from continuing operations before income taxes		15,124			36,380
Provision for income taxes		5,620			14,765

	$	9,504		$	21,615

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 6 – BUSINESS SEGMENT DATA (Continued)


	Three months ended March 31,
	2013		2012
Rent:
Hospital division	$	53,148	$	53,151
Nursing center division		49,766		48,451
Rehabilitation division:
Skilled nursing rehabilitation services		1,235		1,440
Hospital rehabilitation services		17		78

		1,252		1,518
Home health and hospice division		1,186		615
Corporate		626		578

	$	105,978	$	104,313

Depreciation and amortization:
Hospital division	$	23,941	$	22,346
Nursing center division		12,720		11,262
Rehabilitation division:
Skilled nursing rehabilitation services		3,112		2,660
Hospital rehabilitation services		2,331		2,324

		5,443		4,984
Home health and hospice division		1,526		898
Corporate		7,566		7,496

	$	51,196	$	46,986

Capital expenditures, excluding acquisitions (including discontinued operations):
Hospital division:
Routine	$	10,271	$	10,345
Development		2,388		9,949

		12,659		20,294

Nursing center division:
Routine		5,819		4,229
Development		—		673

		5,819		4,902

Rehabilitation division:
Skilled nursing rehabilitation services:
Routine		605		326
Development		—		—

		605		326

Hospital rehabilitation services:
Routine		32		46
Development		—		—

		32		46

Home health and hospice division:
Routine		195		124
Development		—		—

		195		124

Corporate:
Routine:
Information systems		5,289		6,864
Other		159		172

	$	24,758	$	32,728

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 6 – BUSINESS SEGMENT DATA (Continued)


	March 31, 2013		December 31, 2012
Assets at end of period:
Hospital division	$	2,148,491	$	2,129,303
Nursing center division		619,505		626,016
Rehabilitation division:
Skilled nursing rehabilitation services		354,590		336,445
Hospital rehabilitation services		338,874		340,668

		693,464		677,113
Home health and hospice division		204,457		202,156
Corporate		611,742		603,358

	$	4,277,659	$	4,237,946

Goodwill:
Hospital division	$	747,065	$	747,065
Rehabilitation division:
Skilled nursing rehabilitation services		—		—
Hospital rehabilitation services		168,019		168,019

		168,019		168,019
Home health and hospice division		126,182		126,182

	$	1,041,266	$	1,041,266

NOTE 7 – INSURANCE RISKS

The Company insures a substantial portion of its professional liability risks and workers compensation risks through its wholly owned limited purpose insurance subsidiary. Provisions for loss for these risks are based upon management’s best available information including actuarially determined estimates.

The allowance for professional liability risks includes an estimate of the expected cost to settle reported claims and an amount, based upon past experiences, for losses incurred but not reported. These liabilities are necessarily based upon estimates and, while management believes that the provision for loss is adequate, the ultimate liability may be in excess of, or less than, the amounts recorded. To the extent that expected ultimate claims costs vary from historical provisions for loss, future earnings will be charged or credited.

The provision for loss for insurance risks, including the cost of coverage maintained with unaffiliated commercial insurance carriers, follows (in thousands):


	Three months ended March 31,
	2013		2012
Professional liability:
Continuing operations	$	21,605	$	17,951
Discontinued operations		3,860		798
Workers compensation:
Continuing operations	$	14,894	$	14,319
Discontinued operations		578		652

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 7 – INSURANCE RISKS (Continued)

A summary of the assets and liabilities related to insurance risks included in the accompanying unaudited condensed consolidated balance sheet follows (in thousands):


	March 31, 2013						December 31, 2012
	Professional liability		Workers compensation		Total		Professional liability		Workers compensation		Total
Assets:
Current:
Insurance subsidiary investments	$	55,196	$	35,861	$	91,057	$	53,133	$	33,035	$	86,168
Reinsurance recoverables		4,116		—		4,116		5,382		—		5,382
Other		—		150		150		—		150		150

		59,312		36,011		95,323		58,515		33,185		91,700
Non-current:
Insurance subsidiary investments		71,685		75,300		146,985		46,546		69,878		116,424
Reinsurance and other recoverables		63,741		73,965		137,706		58,025		76,794		134,819
Deposits		4,238		1,574		5,812		3,977		1,574		5,551
Other		—		40		40		—		40		40

		139,664		150,879		290,543		108,548		148,286		256,834

	$	198,976	$	186,890	$	385,866	$	167,063	$	181,471	$	348,534

Liabilities:
Allowance for insurance risks:
Current	$	67,859	$	39,978	$	107,837	$	54,088	$	37,096	$	91,184
Non-current		240,070		154,742		394,812		236,630		156,265		392,895

	$	307,929	$	194,720	$	502,649	$	290,718	$	193,361	$	484,079

Provisions for loss for professional liability risks retained by the Company’s limited purpose insurance subsidiary have been discounted based upon actuarial estimates of claim payment patterns using a discount rate of 1% to 5% depending upon the policy year. The discount rate was 1% for the 2013 and 2012 policy years. The discount rates are based upon the risk free interest rate for the respective year. Amounts equal to the discounted loss provision are funded annually. The Company does not fund the portion of professional liability risks related to estimated claims that have been incurred but not reported. Accordingly, these liabilities are not discounted. If the Company did not discount any of the allowances for professional liability risks, these balances would have approximated $310.6 million at March 31, 2013 and $293.3 million at December 31, 2012.

Provisions for loss for workers compensation risks retained by the Company’s limited purpose insurance subsidiary are not discounted and amounts equal to the loss provision are funded annually.

NOTE 8 – INSURANCE SUBSIDIARY INVESTMENTS

The Company maintains investments, consisting principally of cash and cash equivalents, debt securities, equities and certificates of deposit for the payment of claims and expenses related to professional liability and workers compensation risks. These investments have been categorized as available-for-sale and are reported at fair value.

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 8 – INSURANCE SUBSIDIARY INVESTMENTS (Continued)

The cost for equities, amortized cost for debt securities and estimated fair value of the Company’s insurance subsidiary investments follows (in thousands):


	March 31, 2013									December 31, 2012
	Cost		Unrealized gains		Unrealized losses			Fair value		Cost		Unrealized gains		Unrealized losses			Fair value
Cash and cash equivalents (a)	$	173,258	$	—	$	—		$	173,258	$	140,162	$	—	$	—		$	140,162
Debt securities:
Debt securities issued by U.S. government agencies		19,919		74		(1	)		19,992		16,624		89		—			16,713
Corporate bonds		19,538		85		(20	)		19,603		21,352		118		(16	)		21,454
U.S. Treasury notes		5,666		3		—			5,669		6,131		3		—			6,134

		45,123		162		(21	)		45,264		44,107		210		(16	)		44,301
Equities by industry:
Consumer		2,171		986		—			3,157		2,171		599		(15	)		2,755
Industrials		2,039		532		(27	)		2,544		2,039		331		(53	)		2,317
Healthcare		1,474		429		—			1,903		1,474		179		(14	)		1,639
Technology		1,482		374		—			1,856		1,482		268		(70	)		1,680
Financial services		1,419		466		(61	)		1,824		1,419		284		(86	)		1,617
Other		2,411		1,041		(70	)		3,382		2,554		706		(243	)		3,017

		10,996		3,828		(158	)		14,666		11,139		2,367		(481	)		13,025
Certificates of deposit		4,850		4		—			4,854		5,101		3		—			5,104

	$	234,227	$	3,994	$	(179	)	$	238,042	$	200,509	$	2,580	$	(497	)	$	202,592

(a)	Includes $3.1 million and $3.7 million of money market funds at March 31, 2013 and December 31, 2012, respectively.

The Company’s investment policy governing insurance subsidiary investments precludes the investment portfolio managers from selling any security at a loss without prior authorization from the Company. The investment managers also limit the exposure to any one issue, issuer or type of investment. The Company intends, and has the ability, to hold insurance subsidiary investments for a long duration without the necessity of selling securities to fund the underwriting needs of its insurance subsidiary. This ability to hold securities allows sufficient time for recovery of temporary declines in the market value of equity securities and the par value of debt securities as of their stated maturity date.

The Company considered the severity and duration of its unrealized losses at March 31, 2013 and recognized a $0.1 million pretax-other-than-temporary impairment in the first quarter of 2013 for various investments held in its insurance subsidiary investment portfolio. The Company considered the severity and duration of its unrealized losses at March 31, 2012 for various investments held in its insurance subsidiary investment portfolio and determined that these unrealized losses were temporary and did not record any impairment losses related to these investments.

As a result of deterioration in professional liability and workers compensation underwriting results of the Company’s limited purpose insurance subsidiary in 2012 and 2011, the Company made capital contributions of $14.2 million and $8.6 million during the three months ended March 31, 2013 and 2012, respectively, to its limited purpose insurance subsidiary. These transactions were completed in accordance with applicable regulations. Neither capital contribution had any impact on earnings.

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 9 – CONTINGENCIES

Management continually evaluates contingencies based upon the best available information. In addition, allowances for losses are provided currently for disputed items that have continuing significance, such as certain third party reimbursements and deductions that continue to be claimed in current cost reports and tax returns.

Management believes that allowances for losses have been provided to the extent necessary and that its assessment of contingencies is reasonable.

Principal contingencies are described below:

Revenues—Certain third party payments are subject to examination by agencies administering the various reimbursement programs. The Company is contesting certain issues raised in audits of prior year cost reports.

Professional liability risks—The Company has provided for losses for professional liability risks based upon management’s best available information including actuarially determined estimates. Ultimate claims costs may differ from the provisions for loss. See Note 7.

Income taxes—The Company is subject to various federal and state income tax audits in the ordinary course of business. Such audits could result in increased tax payments, interest and penalties.

Litigation—The Company is a party to various legal actions (some of which are not insured), and regulatory and other governmental audits and investigations in the ordinary course of business. The Company cannot predict the ultimate outcome of pending litigation and regulatory and other governmental audits and investigations. These matters could potentially subject the Company to sanctions, damages, recoupments, fines and other penalties. The U.S. Department of Justice (the “DOJ”), the Centers for Medicare and Medicaid Services (“CMS”) or other federal and state enforcement and regulatory agencies may conduct additional investigations related to the Company’s businesses in the future which may, either individually or in the aggregate, have a material adverse effect on the Company’s business, financial position, results of operations and liquidity. See Note 12.

Other indemnifications—In the ordinary course of business, the Company enters into contracts containing standard indemnification provisions and indemnifications specific to a transaction, such as a disposal of an operating facility. These indemnifications may cover claims related to employment-related matters, governmental regulations, environmental issues and tax matters, as well as patient, third party payor, supplier and contractual relationships. Obligations under these indemnities generally are initiated by a breach of the terms of a contract or by a third party claim or event.

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 10 – FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

The Company follows the provisions of the authoritative guidance for fair value measurements, which addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under generally accepted accounting principles.

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The guidance related to fair value measures establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes three levels of inputs that may be used to measure fair value:


Level 1		Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as certain U.S. Treasury, other U.S. Government and agency asset backed debt securities that are highly liquid and are actively traded in over-the-counter markets.

Level 2		Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3		Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 10 – FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS (Continued)

The Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis and any associated losses are summarized below (in thousands):


	Fair value measurements							Assets/liabilities at fair value			Total losses
	Level 1		Level 2			Level 3		Assets/liabilities at fair value			Total losses
March 31, 2013:
Recurring:
Assets:
Available-for-sale debt securities:
Debt securities issued by U.S. government agencies	$	—	$	19,992		$	—	$	19,992		$	—
Corporate bonds		—		19,603			—		19,603			—
U.S. Treasury notes		5,669		—			—		5,669			—

		5,669		39,595			—		45,264			—
Available-for-sale equity securities		14,666		—			—		14,666			—
Money market funds		6,527		—			—		6,527			—
Certificates of deposit		—		4,854			—		4,854			—

Total available-for-sale investments		26,862		44,449			—		71,311			—
Deposits held in money market funds		347		4,238			—		4,585			—

	$	27,209	$	48,687		$	—	$	75,896		$	—

Liabilities:
Interest rate swaps	$	—	$	(1,804	)	$	—	$	(1,804	)	$	—

Non-recurring:
Assets:
Hospital available for sale	$	—	$	—		$	3,250	$	3,250		$	(1,250	)
Property and equipment		—		—			29		29			(436	)

	$	—	$	—		$	3,279	$	3,279		$	(1,686	)

Liabilities	$	—	$	—		$	—	$	—		$	—

December 31, 2012:
Recurring:
Assets:
Available-for-sale debt securities:
Debt securities issued by U.S. government agencies	$	—	$	16,713		$	—	$	16,713		$	—
Corporate bonds		—		21,454			—		21,454			—
U.S. Treasury notes		6,134		—			—		6,134			—

		6,134		38,167			—		44,301			—
Available-for-sale equity securities		13,025		—			—		13,025			—
Money market funds		7,438		—			—		7,438			—
Certificates of deposit		—		5,104			—		5,104			—

Total available-for-sale investments		26,597		43,271			—		69,868			—
Deposits held in money market funds		347		3,978			—		4,325			—

	$	26,944	$	47,249		$	—	$	74,193		$	—

Liabilities:
Interest rate swaps	$	—	$	(2,649	)	$	—	$	(2,649	)	$	—

Non-recurring:
Assets:
Hospital available for sale	$	—	$	—		$	105	$	105		$	(569	)
Property and equipment		—		—			286		286			(3,630	)
Goodwill—skilled nursing rehabilitation services		—		—			—		—			(107,899	)
Intangible assets—Medicare license		—		—			—		—			(2,530	)

	$	—	$	—		$	391	$	391		$	(114,628	)

Liabilities	$	—	$	—		$	—	$	—		$	—

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 10 – FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS (Continued)

Recurring measurements

The Company’s available-for-sale investments held by its limited purpose insurance subsidiary consist of debt securities, equities, money market funds and certificates of deposit. These available-for-sale investments and the insurance subsidiary’s cash and cash equivalents of $170.2 million as of March 31, 2013 and $136.5 million as of December 31, 2012, classified as insurance subsidiary investments, are maintained for the payment of claims and expenses related to professional liability and workers compensation risks.

The Company also has available-for-sale investments totaling $3.4 million as of March 31, 2013 and $3.7 million as of December 31, 2012 related to a deferred compensation plan that is maintained for certain of the Company’s current and former employees.

The fair value of actively traded debt and equity securities and money market funds are based upon quoted market prices and are generally classified as Level 1. The fair value of inactively traded debt securities and certificates of deposit are based upon either quoted market prices of similar securities or observable inputs such as interest rates using either a market or income valuation approach and are generally classified as Level 2. The Company’s investment advisors obtain and review pricing for each security. The Company is responsible for the determination of fair value and as such the Company reviews the pricing information from its advisors in determining reasonable estimates of fair value. Based upon the Company’s internal review procedures, there were no adjustments to the prices during the three months ended March 31, 2013 or March 31, 2012.

The Company’s deposits held in money market funds consist primarily of cash and cash equivalents held for general corporate purposes.

The fair value of the derivative liability associated with the interest rate swaps is estimated using industry-standard valuation models, which are Level 2 measurements. Such models project future cash flows and discount the future amounts to a present value using market-based observable inputs, including interest rate curves.

The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments. The carrying value is equal to fair value for financial instruments that are based upon quoted market prices or current market rates. The Company’s long-term debt is based upon Level 2 inputs.


	March 31, 2013				December 31, 2012
(In thousands)	Carrying value		Fair value		Carrying value		Fair value
Cash and cash equivalents	$	42,664	$	42,664	$	50,007	$	50,007
Cash–restricted		5,263		5,263		5,197		5,197
Insurance subsidiary investments		238,042		238,042		202,592		202,592
Tax refund escrow investments		207		207		207		207
Long-term debt, including amounts due within one year (excluding capital lease obligations totaling $26,000 and $0.6 million at March 31, 2013 and December 31, 2012, respectively)		1,679,616		1,687,614		1,657,039		1,630,649

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 10 – FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS (Continued)

Non-recurring measurements

In the first quarter of 2013, the Company reduced the fair value of a hospital held for sale based upon a pending offer, which resulted in a pretax loss of $1.3 million recorded in discontinued operations. The primary reason for the reduction was to compensate for certain real estate restrictions associated with the property. The fair value of the asset was measured using a Level 3 input of the pending offer.

CMS issued final rules which, among other things, significantly reduced Medicare payments to nursing centers and changed the reimbursement for the provision for group rehabilitation therapy services to Medicare beneficiaries beginning October 1, 2011 (the “2011 CMS Rules”). The Company recorded pretax impairment charges aggregating $0.4 million in the first quarter of 2013 for property and equipment expenditures in the nursing center asset groups that were determined to be impaired by the 2011 CMS Rules. These charges reflected the amount by which the carrying value of certain assets exceeded their estimated fair value. The fair value of property and equipment was measured using Level 3 inputs such as replacement costs factoring in depreciation, economic obsolesce and inflation trends.

NOTE 11 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION

The accompanying unaudited condensed consolidating financial information has been prepared and presented pursuant to SEC Regulation S-X, Rule 3-10, “Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered.” The Company’s private placement of $550 million of senior notes due 2019 (the “Notes”) issued on June 1, 2011 are fully and unconditionally guaranteed, subject to certain customary release provisions, by substantially all of the Company’s domestic 100% owned subsidiaries. The equity method has been used with respect to the parent company’s investment in subsidiaries.

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 11 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

The following unaudited condensed consolidating financial data present the financial position of the parent company/issuer, the guarantor subsidiaries and the non-guarantor subsidiaries as of March 31, 2013 and December 31, 2012, and the respective results of operations and cash flows for the three months ended March 31, 2013 and March 31, 2012.

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)


	Three months ended March 31, 2013
(In thousands)	Parent company/ issuer			Guarantor subsidiaries			Non-guarantor subsidiaries			Consolidating and eliminating adjustments			Consolidated
Revenues	$	—		$	1,455,428		$	128,501		$	(29,021	)	$	1,554,908

Salaries, wages and benefits		3			898,450			45,320			—			943,773
Supplies		—			96,965			8,843			—			105,808
Rent		—			97,950			8,028			—			105,978
Other operating expenses		—			282,144			52,380			(29,021	)		305,503
Other income		—			(993	)		—			—			(993	)
Impairment charges		—			436			—			—			436
Depreciation and amortization		—			48,082			3,114			—			51,196
Management fees		—			(3,059	)		3,059			—			—
Intercompany interest (income) expense from affiliates		(26,874	)		23,218			3,656			—			—
Interest expense (income)		27,033			(3,955	)		5,096			—			28,174
Investment income		—			(42	)		(49	)		—			(91	)
Equity in net income of consolidating affiliates		(3,126	)		—			—			3,126			—

		(2,964	)		1,439,196			129,447			(25,895	)		1,539,784

Income (loss) from continuing operations before income taxes		2,964			16,232			(946	)		(3,126	)		15,124
Provision (benefit) for income taxes		(93	)		5,587			126			—			5,620

Income (loss) from continuing operations		3,057			10,645			(1,072	)		(3,126	)		9,504
Discontinued operations, net of income taxes:
Loss from operations		—			(4,787	)		—			—			(4,787	)
Loss on divestiture of operations		—			(1,244	)		—			—			(1,244	)

Loss from discontinued operations		—			(6,031	)		—			—			(6,031	)

Net income (loss)		3,057			4,614			(1,072	)		(3,126	)		3,473
Earnings attributable to noncontrolling interests		—			—			(416	)		—			(416	)

Income (loss) attributable to Kindred	$	3,057		$	4,614		$	(1,488	)	$	(3,126	)	$	3,057

Comprehensive income	$	4,691		$	4,614		$	54		$	(4,252	)	$	5,107

Comprehensive income (loss) attributable to Kindred	$	4,691		$	4,614		$	(362	)	$	(4,252	)	$	4,691

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 11 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss) (Continued)


	Three months ended March 31, 2012
(In thousands)	Parent company/ issuer			Guarantor subsidiaries			Non-guarantor subsidiaries			Consolidating and eliminating adjustments			Consolidated
Revenues	$	—		$	1,436,195		$	126,848		$	(25,112	)	$	1,537,931

Salaries, wages and benefits		69			877,470			43,820			—			921,359
Supplies		—			98,536			9,997			—			108,533
Rent		—			96,400			7,913			—			104,313
Other operating expenses		3			271,560			49,914			(25,112	)		296,365
Other income		—			(3,143	)		—			—			(3,143	)
Impairment charges		—			848			—			—			848
Depreciation and amortization		—			43,605			3,381			—			46,986
Management fees		—			(3,348	)		3,348			—			—
Intercompany interest (income) expense from affiliates		(27,907	)		24,277			3,630			—			—
Interest expense (income)		26,293			(4,762	)		5,047			—			26,578
Investment income		—			(23	)		(265	)		—			(288	)
Equity in net income of consolidating affiliates		(17,218	)		—			—			17,218			—

		(18,760	)		1,401,420			126,785			(7,894	)		1,501,551

Income from continuing operations before income taxes		18,760			34,775			63			(17,218	)		36,380
Provision for income taxes		569			14,089			107			—			14,765

Income (loss) from continuing operations		18,191			20,686			(44	)		(17,218	)		21,615
Discontinued operations, net of income taxes:
Loss from operations		—			(1,803	)		—			—			(1,803	)
Loss on divestiture of operations		—			(1,170	)		—			—			(1,170	)

Loss from discontinued operations		—			(2,973	)		—			—			(2,973	)

Net income (loss)		18,191			17,713			(44	)		(17,218	)		18,642
Earnings attributable to noncontrolling interests		—			—			(451	)		—			(451	)

Income (loss) attributable to Kindred	$	18,191		$	17,713		$	(495	)	$	(17,218	)	$	18,191

Comprehensive income	$	18,966		$	17,713		$	688		$	(17,950	)	$	19,417

Comprehensive income attributable to Kindred	$	18,966		$	17,713		$	237		$	(17,950	)	$	18,966

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 11 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

Condensed Consolidating Balance Sheet


	As of March 31, 2013
(In thousands)	Parent company/ issuer		Guarantor subsidiaries		Non-guarantor subsidiaries		Consolidating and eliminating adjustments			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	—	$	31,989	$	10,675	$	—		$	42,664
Cash—restricted		—		5,263		—		—			5,263
Insurance subsidiary investments		—		—		91,057		—			91,057
Accounts receivable, net		—		991,184		103,566		—			1,094,750
Inventories		—		29,035		3,022		—			32,057
Deferred tax assets		—		11,366		—		—			11,366
Income taxes		—		1,425		410		—			1,835
Other		—		36,484		3,297		—			39,781

		—		1,106,746		212,027		—			1,318,773

Property and equipment, net		—		1,062,014		51,478		—			1,113,492
Goodwill		—		771,533		269,733		—			1,041,266
Intangible assets, net		—		411,345		22,675		—			434,020
Assets held for sale		—		2,793		—		—			2,793
Insurance subsidiary investments		—		—		146,985		—			146,985
Investment in subsidiaries		225,800		—		—		(225,800	)		—
Intercompany		2,691,072		—		—		(2,691,072	)		—
Deferred tax assets		—		—		13,326		(13,326	)		—
Other		44,958		103,310		72,062		—			220,330

	$	2,961,830	$	3,457,741	$	788,286	$	(2,930,198	)	$	4,277,659

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	49	$	179,025	$	14,189	$	—		$	193,263
Salaries, wages and other compensation		—		344,850		45,851		—			390,701
Due to third party payors		—		34,392		—		—			34,392
Professional liability risks		—		15,289		52,570		—			67,859
Other accrued liabilities		28,004		116,081		8,156		—			152,241
Long-term debt due within one year		8,000		105		258		—			8,363

		36,053		689,742		121,024		—			846,819
Long-term debt		1,667,054		330		3,895		—			1,671,279
Intercompany		—		2,348,784		342,288		(2,691,072	)		—
Professional liability risks		—		62,376		177,694		—			240,070
Deferred tax liabilities		—		23,914		—		(13,326	)		10,588
Deferred credits and other liabilities		—		140,014		73,556		—			213,570
Commitments and contingencies
Equity:
Stockholders’ equity		1,258,723		192,581		33,219		(225,800	)		1,258,723
Noncontrolling interests		—		—		36,610		—			36,610

		1,258,723		192,581		69,829		(225,800	)		1,295,333

	$	2,961,830	$	3,457,741	$	788,286	$	(2,930,198	)	$	4,277,659

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 11 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

Condensed Consolidating Balance Sheet (Continued)


	As of December 31, 2012
(In thousands)	Parent company/ issuer		Guarantor subsidiaries		Non-guarantor subsidiaries		Consolidating and eliminating adjustments			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	—	$	37,370	$	12,637	$	—		$	50,007
Cash—restricted		—		5,197		—		—			5,197
Insurance subsidiary investments		—		—		86,168		—			86,168
Accounts receivable, net		—		940,524		98,081		—			1,038,605
Inventories		—		29,023		2,998		—			32,021
Deferred tax assets		—		12,663		—		—			12,663
Income taxes		—		13,187		386		—			13,573
Other		—		15,118		20,414		—			35,532

		—		1,053,082		220,684		—			1,273,766

Property and equipment, net		—		1,090,523		52,603		—			1,143,126
Goodwill		—		771,533		269,733		—			1,041,266
Intangible assets, net		—		417,092		22,675		—			439,767
Assets held for sale		—		4,131		—		—			4,131
Insurance subsidiary investments		—		—		116,424		—			116,424
Investment in subsidiaries		221,799		—		—		(221,799	)		—
Intercompany		2,655,242		—		—		(2,655,242	)		—
Deferred tax assets		1,040		—		13,932		(14,972	)		—
Other		47,364		108,143		63,959		—			219,466

	$	2,925,445	$	3,444,504	$	760,010	$	(2,892,013	)	$	4,237,946

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	168	$	195,268	$	15,232	$	—		$	210,668
Salaries, wages and other compensation		—		345,223		43,786		—			389,009
Due to third party payors		—		35,420		—		—			35,420
Professional liability risks		—		3,623		50,465		—			54,088
Other accrued liabilities		16,724		111,113		9,367		—			137,204
Long-term debt due within one year		8,000		102		840		—			8,942

		24,892		690,749		119,690		—			835,331
Long-term debt		1,644,394		358		3,954		—			1,648,706
Intercompany		—		2,328,711		326,531		(2,655,242	)		—
Professional liability risks		—		68,116		168,514		—			236,630
Deferred tax liabilities		—		24,736		—		(14,972	)		9,764
Deferred credits and other liabilities		—		143,722		70,949		—			214,671
Commitments and contingencies
Equity:
Stockholders’ equity		1,256,159		188,112		33,687		(221,799	)		1,256,159
Noncontrolling interests		—		—		36,685		—			36,685

		1,256,159		188,112		70,372		(221,799	)		1,292,844

	$	2,925,445	$	3,444,504	$	760,010	$	(2,892,013	)	$	4,237,946

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 11 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

Condensed Consolidating Statement of Cash Flows


	Three months ended March 31, 2013
(In thousands)	Parent company/ issuer			Guarantor subsidiaries			Non-guarantor subsidiaries			Consolidating and eliminating adjustments			Consolidated
Net cash provided by operating activities	$	11,229		$	7,981		$	5,623		$	—		$	24,833

Cash flows from investing activities:
Routine capital expenditures		—			(20,142	)		(2,228	)		—			(22,370	)
Development capital expenditures		—			(2,222	)		(166	)		—			(2,388	)
Sale of assets		—			5,060			—			—			5,060
Purchase of insurance subsidiary investments		—			—			(10,836	)		—			(10,836	)
Sale of insurance subsidiary investments		—			—			10,002			—			10,002
Net change in insurance subsidiary cash and cash equivalents		—			—			(33,096	)		—			(33,096	)
Change in other investments		—			319			—			—			319
Capital contribution to insurance subsidiary		—			(14,220	)		—			14,220			—
Other		—			(144	)		—			—			(144	)

Net cash used in investing activities		—			(31,349	)		(36,324	)		14,220			(53,453	)

Cash flows from financing activities:
Proceeds from borrowings under revolving credit		483,500			—			—			—			483,500
Repayment of borrowings under revolving credit		(459,200	)		—			—			—			(459,200	)
Repayment of other long-term debt		(2,000	)		(25	)		(641	)		—			(2,666	)
Payment of deferred financing costs		(202	)		—			—			—			(202	)
Distribution made to noncontrolling interests		—			—			(491	)		—			(491	)
Issuance of common stock		4			—			—			—			4
Capital contribution to insurance subsidiary		—			—			14,220			(14,220	)
Other		—			332			—			—			332
Change in intercompany accounts		(33,331	)		17,680			15,651			—			—

Net cash provided by (used in) financing activities		(11,229	)		17,987			28,739			(14,220	)		21,277

Change in cash and cash equivalents		—			(5,381	)		(1,962	)		—			(7,343

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company