Download Adjusted Free Cash Flow

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (date of earliest event reported): March 8, 2011
HealthSouth Corporation
(Exact Name of Registrant as Specified in its Charter)
Delaware
(State or Other Jurisdiction of Incorporation)
001-10315
(Commission File Number)
63-0860407
(IRS Employer Identification No.)
3660 Grandview Parkway, Suite 200, Birmingham, Alabama 35243
(Address of Principal Executive Offices, Including Zip Code)
(205) 967-7116
(Registrant’s Telephone Number, Including Area Code)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of
the following provisions:

Written communication pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
ITEM 7.01. Regulation FD Disclosure .
HealthSouth Corporation (the “Company”) will participate in the Raymond James 32 nd Annual Institutional Investors Conference in
Orlando, Florida on March 6-9, 2011. HealthSouth President and Chief Executive Officer, Jay Grinney, will make a presentation on Tuesday,
March 8 th , at 1:05 p.m. ET using the slides attached to this Current Report on Form 8-K as Exhibit 99.1.
The Company will also participate in the Goldman Sachs Leveraged Finance Healthcare Conference in New York City on March 8,
2011. HealthSouth Senior Vice President and Treasurer, Ed Fay, will make a presentation at 3:05 p.m. ET using the slides attached to this
Current Report on Form 8-K as Exhibit 99.1.
Both presentations will address, among other things, the Company’s strategy and financial performance and discuss industry trends
and dynamics. The presentations will be webcast live and will be available at http://investor.healthsouth.com by clicking on an available link.
While the format of certain slides may have changed, the slide presentation attached to this Current Report on Form 8-K as Exhibit
99.1 contains substantially the same information as previously provided in a Current Report on Form 8-K dated February 17, 2011.
In the slide presentation attached to this Current Report on Form 8-K as Exhibit 99.1, the Company will provide its observations for
the first quarter of 2011. These observations are:
 Volume : January and February 2011 exhibited strong discharge growth against easy comparatives from the first quarter of 2010.
Discharge growth for the year ended December 31, 2011 is on track to be between 2.5% and 3.5%, as period-over-period
comparatives become tougher as the year progresses.
 Pricing : Pricing for the first quarter of 2011includes a net Medicare price increase of approximately 2% that became effective
October 1, 2010. Comparisons with the first quarter of 2010 will be impacted by the April 1, 2010 reduction of 25 basis points to
Medicare pricing resulting from the implementation of the Patient Protection and Affordable Care Act.
The Company uses “same store” comparisons to explain the changes in certain performance metrics and line items within its financial
statements. Same store comparisons are calculated based on hospitals open throughout both the full current periods and throughout the full
prior periods presented. These comparisons include the financial results of market consolidation transactions in existing markets, as it is
difficult to determine, with precision, the incremental impact of these transactions on the Company’s results of operations.
The information in this Current Report on Form 8-K, including the information set forth in Exhibit 99.1, shall not be deemed “filed”
for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), nor shall it be incorporated by reference
in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in
such a filing.
Note Regarding Presentation of Non-GAAP Financial Measures
The financial data contained in the slide presentation attached as Exhibit 99.1 includes non-GAAP financial measures, including the
Company’s leverage ratio and Adjusted EBITDA. The leverage ratio referenced therein is defined as the ratio of consolidated total debt to
Adjusted EBITDA for the trailing four quarters. The Company believes its leverage ratio and Adjusted EBITDA are measures of its ability to
service its debt and its ability to make capital expenditures. Additionally, the leverage ratio is a standard measurement used by investors to
gauge the creditworthiness of an institution. The Company’s credit agreement also includes a maximum leverage ratio financial covenant that
allows the Company to deduct up to $75 million of cash on hand from consolidated total debt.
The Company uses Adjusted EBITDA on a consolidated basis as a liquidity measure. The Company believes this financial measure on
a consolidated basis is important in analyzing its liquidity because it is the key component of certain material covenants contained within the
Company’s credit agreement, which is discussed in
more detail in Note 8, Long-term Debt , to the consolidated financial statements included in its Annual Report on Form 10-K for the year ended
December 31, 2010 (the “2010 Form 10-K”). These covenants are material terms of the credit agreement, and the credit agreement represents a
substantial portion of the Company’s liquidity. Non-compliance with these financial covenants under the credit agreement – its interest
coverage ratio and its leverage ratio – could result in the Company’s lenders requiring the Company to immediately repay all amounts
borrowed. If the Company anticipated a potential covenant violation, it would seek relief from its lenders, which would have some cost to the
Company, and such relief might not be on terms favorable to those in the Company’s existing credit agreement. In addition, if the Company
cannot satisfy these financial covenants, it would be prohibited under the credit agreement from engaging in certain activities, such as incurring
additional indebtedness, making certain payments, and acquiring and disposing of assets. Consequently, Adjusted EBITDA is critical to the
Company’s assessment of its liquidity.
In general terms, the credit agreement definition of Adjusted EBITDA, referred to as “Adjusted Consolidated EBITDA” there, allows
(or in the case of 2009 and prior, has allowed) the Company to add back to or subtract from consolidated net income unusual non-cash or
non-recurring items. These items include, but may not be limited to, (1) amounts associated with government, class action, and related
settlements, (2) amounts related to discontinued operations and closed locations, (3) charges in respect of professional fees for reconstruction
and restatement of financial statements, including fees paid to outside professional firms for matters related to internal controls and legal fees
for continued litigation and support matters discussed in Note 21, Settlements , and Note 22, Contingencies and Other Commitments , to the
consolidated financial statements included in the 2010 Form 10-K, (4) stock-based compensation expense, (5) net investment and other income
(including interest income), and (6) fees associated with the Company’s divestiture activities.
In accordance with the credit agreement, the Company is allowed to add certain other items to the calculation of Adjusted EBITDA,
and there may also be certain other deductions required. This includes the interest income associated with income tax recoveries, as discussed
in Note 19, Income Taxes , to the consolidated financial statements included in the 2010 Form 10-K. In addition, the Company is allowed to
add non-recurring cash gains, such as the cash proceeds from the UBS Settlement (see Note 21, Settlements , to the consolidated financial
statements included in the 2010 Form 10-K) to the calculation of Adjusted EBITDA. As these adjustments may not be indicative of the
Company’s ongoing performance, they have been excluded from Adjusted EBITDA presented herein and in the slide presentation attached as
Exhibit 99.1.
However, Adjusted EBITDA is not a measure of financial performance under generally accepted accounting principles in the United
States of America (“GAAP”), and the items excluded from Adjusted EBITDA are significant components in understanding and assessing
financial performance. Therefore, Adjusted EBITDA should not be considered a substitute for net income or cash flows from operating,
investing, or financing activities. The Company reconciles Adjusted EBITDA to net income, which reconciliation is set forth in the slide
presentation attached as Exhibit 99.1, and to net cash provided by operating activities, which reconciliation is set forth below. Because
Adjusted EBITDA is not a measurement determined in accordance with GAAP and is thus susceptible to varying calculations, Adjusted
EBITDA, as presented, may not be comparable to other similarly titled measures of other companies. Revenues and expenses are measured in
accordance with the policies and procedures described in the 2010 Form 10-K.
The Company also uses adjusted income from continuing operations and the related per share amounts, which amounts are also
referred to as “adjusted earnings per share,” as analytical indicators to assess its performance. Management believes the presentation of
adjusted income from continuing operations and the related per share amounts provides useful information to management and investors about
the Company’s operating business before taking into account certain items that are non-operational or infrequent in nature. These measures are
not defined measures of financial performance under GAAP and should not be considered as alternatives to net income and net income per
share attributable to HealthSouth common shareholders. Because these measures are not measures determined in accordance with GAAP and
are susceptible to varying calculations, they may not be comparable to other similarly titled measures presented by other companies. See the
consolidated statements of operations included in the 2010 Form 10-K for the GAAP measures of net income, income from continuing
operations, and basic and diluted earnings per common share. A reconciliation of net income to adjusted income from continuing operations,
and the related per share amounts, is included in the slide presentation attached as Exhibit 99.1.
The Company also uses adjusted free cash flow as an analytical indicator to assess its performance. Management believes the
presentation of adjusted free cash flow provides investors an efficient means by which they can evaluate the Company’s capacity to reduce debt
and pursue development activities. The calculation of adjusted free cash flow is included in the slide presentation attached as Exhibit 99.1. This
measure is not a defined measure of financial performance under GAAP and should not be considered as an alternative to net cash provided by
operating activities. Our definition of adjusted free cash flow is limited and does not represent residual cash flows available for discretionary
spending. Because this measure is not determined in accordance with GAAP and is susceptible to varying calculations, it may not be
comparable to other similarly titled measures presented by other companies. See the consolidated statements of cash flows included in the 2010
Form 10-K for the GAAP measures of cash flows from operating, investing, and financing activities. A reconciliation of net cash provided by
operating activities to adjusted free cash flow is presented below.
Reconciliation of Net Cash Provided by Operating Activities to Adjusted EBITDA
For the Year Ended December 31,
2009
2008
(In Millions)
331.0 $
406.1 $
227.2
(18.5 )
(33.1 )
(27.0 )
17.2
8.8
44.4
2010
Net cash provided by operating activities
Provision for doubtful accounts
Professional fees—accounting, tax, and legal
Interest expense and amortization
of debt discounts and fees
UBS Settlement proceeds, gross
Equity in net income of nonconsolidated
affiliates
Net income in noncontrolling interests
in continuing operations
Amortization of debt discounts and fees
Distributions from nonconsolidated affiliates
Current portion of income tax expense (benefit)
Change in assets and liabilities
Change in government, class action,
and related settlements liability
Other operating cash used in (provided by)
discontinued operations
Other
Adjusted EBITDA
$
125.9
-
$
125.8
(100.0 )
2007
$
230.6
(33.2 )
51.6
159.5
-
229.4
-
10.1
4.6
10.6
10.3
(40.8 )
(6.3 )
(8.1 )
1.9
5.4
(33.4 )
(6.6 )
(8.6 )
(7.3 )
0.8
(29.8 )
(6.5 )
(10.9 )
(73.8 )
53.1
(31.4 )
(7.8 )
(5.3 )
(330.4 )
8.0
2.9
11.2
7.4
171.4
4.7
2.0
427.4
13.5
1.2
383.0
$
$
(11.4 )
(1.6 )
341.2
$
10.5
14.6
318.3
Reconciliation of Net Cash Provided by Operating Activities to Adjusted Free Cash Flow
For the Year Ended December 31,
2009
2008
(In Millions)
331.0 $
406.1 $
227.2
4.7
13.5
(11.4 )
2010
Net cash provided by operating activities
Impact of discontinued operations
Net cash provided by operating activities
of continuing operations
Capital expenditures for maintenance
Net settlements on interest rate swaps
Dividends paid on convertible perpetual
preferred stock
Distributions paid to noncontrolling interest
of consolidated affiliates
Non-recurring items:
UBS Settlement proceeds, less fees to
derivative plaintiffs' attorneys
Income tax refunds related to prior periods
Cash paid for professional fees - accounting,
tax, and legal
Cash paid for government, class action, and
related settlements
Adjusted free cash flow
$
$
2007
$
230.6
10.5
335.7
(39.5 )
(44.7 )
419.6
(34.1 )
(42.2 )
215.8
(42.6 )
(20.7 )
241.1
(24.6 )
0.1
(26.0 )
(26.0 )
(26.0 )
(26.0 )
(34.4 )
(32.7 )
(33.4 )
(23.1 )
(13.5 )
(73.8 )
(63.7 )
(90.4 )
(457.8 )
17.2
15.3
18.2
51.6
2.9
197.7
$
11.2
173.6
$
7.4
28.3
$
171.4
(67.3 )
For the year ended December 31, 2010, net cash used in investing activities was $125.9 million and resulted primarily from capital
expenditures, net settlement payments related to interest rate swaps, acquisitions of businesses, and net purchases of restricted investments
offset by a decrease in restricted cash and proceeds from the sale of our hospital in Baton Rouge. Net cash used in financing activities during
the year ended December 31, 2010 was $237.7 million and resulted primarily from net debt payments, distributions paid to noncontrolling
interests of consolidated affiliates, dividends paid on the Company’s convertible perpetual preferred stock, and debt amendment and issuance
costs.
For the year ended December 31, 2009, net cash used in investing activities was $133.0 million and resulted primarily from capital
expenditures and net settlement payments related to interest rate swaps. Net cash used in financing activities during the year ended December
31, 2009 was $224.3 million and resulted primarily from net debt payments, distributions paid to noncontrolling interests of consolidated
affiliates, dividends paid on the Company’s convertible perpetual preferred stock, and debt amendment and issuance costs.
For the year ended December 31, 2008, net cash used in investing activities was $40.0 million and resulted primarily from capital
expenditures, including expenditures associated with development activities, and net settlement payments related to an interest rate swap offset
by proceeds from asset disposals, including our corporate campus. Net cash used in financing activities during the year ended December 31,
2008 was $176.0 million and resulted primarily from net debt payments made during the period, as well as distributions paid to noncontrolling
interests of consolidated affiliates and dividends paid on the Company’s perpetual preferred stock, offset by proceeds from the issuance of
common stock.
For the year ended December 31, 2007, net cash provided by investing activities was $1,184.5 million and resulted primarily from the
proceeds from the divestitures of the Company’s surgery centers, outpatient, and diagnostic divisions. Net cash used in financing activities
during the year ended December 31, 2007 was $1,436.6 million and resulted primarily from net debt payments primarily using the net proceeds
from the divestitures discussed above.
Forward-Looking Statements
The information contained in this Current Report on Form 8-K and the slide presentation attached as Exhibit 99.1 includes certain
estimates, projections, and other forward-looking information that reflect the Company’s current views with respect to future events and
financial performance. These estimates, projections, and other forward-looking information are based on assumptions the Company believes, as
of the date hereof, are reasonable. Inevitably, there will be differences between such estimates and actual results, and those differences may be
material.
There can be no assurance that any estimates, projections, or forward-looking information will be realized.
All such estimates, projections, and forward-looking information speak only as of the date hereof. The Company undertakes no duty to
publicly update or revise the information contained herein.
You are cautioned not to place undue reliance on the estimates, projections, and other forward-looking information in the earnings
release and supplemental slides as they are based on current expectations and general assumptions and are subject to various risks,
uncertainties, and other factors, including those set forth in the 2010 Form 10-K, and in other documents the Company previously filed with the
SEC, many of which are beyond the Company’s control. These factors may cause actual results to differ materially from the views, beliefs, and
estimates expressed herein.
ITEM 9.01. Financial Statements and Exhibits
(d)
Exhibits
99.1
Slide presentation of HealthSouth Corporation used in connection with its March 8, 2011 presentation at the Raymond James
32 nd Annual Institutional Investors Conference in Orlando, Florida and its March 8, 2011 presentation at the Goldman Sachs
Leveraged Finance Healthcare Conference in New York City.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned hereunto duly authorized.
HEALTHSOUTH Corporation
By:
/s/ J OHN P. W HITTINGTON
Name: John P. Whittington
Title: Executive Vice President,
General
Counsel, and Corporate
Secretary
Dated: March 8, 2011
Exhibit 99.1
The information contained in this presentation includes certain estimates, projections and other forwardlooking information that reflect our current views with respect to future events, strategy, capital
expenditures and financial performance. These estimates, projections and other forward-looking
information are based on assumptions that HealthSouth believes, as of the date hereof, are reasonable.
Inevitably, there will be differences between such estimates and actual events or results, and those
differences may be material.
There can be no assurance that any estimates, projections or forward-looking information will be realized.
All such estimates, projections and forward-looking information speak only as of the date hereof.
HealthSouth undertakes no duty to publicly update or revise the information contained herein.
You are cautioned not to place undue reliance on the estimates, projections and other forward-looking
information in this presentation as they are based on current expectations and general assumptions and
are subject to various risks, uncertainties and other factors, including those set forth in the Form 10-K for the
year ended December 31, 2010, and in other documents we previously filed with the SEC, many of which
are beyond our control, that may cause actual events or results to differ materially from the views, beliefs
and estimates expressed herein.
Note Regarding Presentation of Non-GAAP Financial Measures
The following presentation includes certain “non-GAAP financial measures” as defined in Regulation G
under the Securities Exchange Act of 1934. Schedules are attached that reconcile the non-GAAP financial
measures included in the following presentation to the most directly comparable financial measures
calculated and presented in accordance with Generally Accepted Accounting Principles in the United
States. Our Form 8-K, dated March 8, 2011, to which the following supplemental slides are attached as
Exhibit 99.1, provides further explanation and disclosure regarding our use of non-GAAP financial measures
and should be read in conjunction with these supplemental slides.
Forward-Looking Statements
2
Exhibit 99.1
Inpatient Rehabilitation Hospitals (“IRF”)
Outpatient Rehabilitation Satellite Clinics
Long-Term Acute Care Hospitals (“LTCH”)
Hospital-Based Home Health Agencies
Employees
Revenue in 2010
Inpatient Discharges in 2010
Outpatient Visits in 2010
Number of States
Exchange (Symbol)
3
Largest Provider of Inpatient Rehabilitative Healthcare Services in the U.S.
Our Company
Marketshare
~ 8% of IRFs
~ 17% of Licensed Beds
~ 22% of Patients Served
Exhibit 99.1
Our Hospitals
Major Services
• Rehabilitation Physicians: manage and treat medical needs of patients
• Rehabilitation Nurses: oversee treatment programs of patients
• Physical Therapists: address physical function, mobility, safety
• Occupational Therapists: promote independence and re-integration
• Speech-Language Therapists: treat communication & swallowing disorders
• Case Managers: coordinate care plan with physician, caregivers and family
• Post-discharge services: outpatient therapy and home health
4
Exhibit 99.1
Our Patients
5
Most Common Conditions (2010)
1. Stroke
17.2%
2. Neurological
3. Debility
11.3%
4. Fracture
5. Knee/Hip
6. Other
15.2%
of
the
lower
replacement
orthopedic
extremity
9.5%
conditions
9.5%
11.0%
7. Brain
injury
8. Cardiac
9. Spinal
10. All
7.4%
conditions
cord
other
injury
4.3%
3.6%
11.0%
Referral Sources
94% Acute Care Hospitals
5% Physician Offices
1% Skilled Nursing Facilities
Admission to an IRF
• Physicians and acute care
hospital case managers are key
decision-makers.
• All IRF patients must meet
reasonable and necessary criteria
and must be admitted by a
physician .
• All IRF patients must be medically
stable and have potential to
tolerate three hours of therapy per
day (minimum) .
• IRF patients receive 24-hour, 7
days a week nursing care .
• Average length of stay (ALOS) =
14.1 days
Exhibit 99.1
Our Quality
FIM Gain
Change in
Functional
Independence
Measurement
(based on an 18
point assessment)
from admission to
discharge
6
(1)
Average = Expected, Risk-adjusted
• Inpatient rehabilitation hospitals evaluate all patients at admission and upon
discharge to determine their functional status.
− The Functional Independence Measurement (“FIM”) patient assessment
instrument is used for these evaluations.
• The difference between the FIM scores at admission and upon discharge is called
the “FIM Gain.”
− The greater the FIM Gain, the greater the patient’s level of independence, the
better the patient outcome.
Exhibit 99.1
The 1,171 total and the 91 for HLS do not include HealthSouth Rehabilitation Hospital of Northern Virginia; Rehabilitation Hospital of Southwest Virginia;
Rehabilitation Hospital of Mesa, AZ; and Rehabilitation Hospital of Fredericksburg, VA. that were opened after the data collection. Desert Canyon
Rehabilitation Hospital and HealthSouth Sugar Land Rehabilitation Hospital, currently owned by HLS, were included in the 139 non-HLS freestanding.
(2) In 2009, HealthSouth averaged 1,177 total Medicare and non-Medicare discharges in its 90 consolidated hospitals and 6 long-term acute care hospitals.
Sources : FY 2011 CMS Rate Setting File - see slide 28
(1)
7
Total Inpatient Rehabilitation Facilities (IRFs): 1,171 (1)
Our Cost-Effectiveness
HealthSouth
differentiates
itself by
providing
superior quality
care at a
lower cost.
Exhibit 99.1
Our Payors (2010)
Prospective Payment System (“PPS”)
• Payments based on Case Mix Groups
(“CMGs”)
– Diagnosis of patient’s illness
• Fixed payment per CMG adjusted for:
– Acuity/severity
– Regional wage differential
• Per diems for “short stays”
Per Diem or CMG
• Negotiated rate
• Some are “tiered” for acuity/severity
Variety of methodologies
Varies by state
Variety of methodologies
Medicare
Managed Care
• Includes managed
Medicare
Other Third-Party Payors
Medicaid
Workers’ Comp./
Patients/Other
Payment Methodology
Payor Source
8
70.5%
21.5%
2.3 %
4.0%
1.7%
Exhibit 99.1
Our Track Record
(1)
Reconciliation to GAAP provided on slides 29 and 31-35.
9
Exhibit 99.1
Historical Performance
10
Leverage Ratio (1)
(billions)
(1)
Reconciliation to GAAP provided on slides 29-35.
Interest Expense
$229
$126
Exhibit 99.1
Business Outlook: 2011 to 2013
Business Model
• Adjusted EBITDA CAGR: 5-8% (1)
• Adjusted Free Cash Flow CAGR: 12-17% (1)
Strategy
2010
2011
2012
2013
Deleveraging (2)
Goal: < 4.0x
debt to EBITDA
Longer-Term Goal: ~ 3.0x
debt to EBITDA (3.5x goal achieved at year-end 2010)
Growth
Organic growth (includes capacity expansions)
De novos (~ 2-3/year)
IRF acquisitions (~ 2-3/year)
Opportunistic, disciplined acquisitions
of complementary post-acute services
Key Operational
Initiatives
• Beacon (Management Reporting
Software) = Labor / outcomes / quality optimization
• TeamWorks = Care Management
• “CPR” (Comfort, Professionalism, Respect) Initiative
(1)
(2)
Reconciliation to GAAP provided on slides 29-35.
Exclusive of any E&Y recovery.
11
Exhibit 99.1
Business Outlook: Revenue Assumptions
12
Revenue
Volume
• 2.5% to 3.5% annual growth (excludes
acquisitions)
• Includes bed expansions, de novos
and unit consolidations
Medicare
Managed
Care
Other
We believe based on the 2011 Medicare rule for IRFs, HealthSouth should realize an increase of approximately 2.1% annually.
(2) Management estimates
(1)
Exhibit 99.1
Business Outlook: Expense Assumptions
Expense
Salaries & Benefits (1)
Hospital Expenses
• Other operating and supplies
tracking with inflation
4.5% of revenue
(excludes stock-based compensation)
Salaries
& Benefits
Hospital
Expenses
(1)
Salaries, Wages and Benefits: 85% Salaries and Wages; 15% Benefits
13
Exhibit 99.1
Adjusted Free Cash Flow (1) Assumptions
(1)
Reconciliation to GAAP provided on slide 30.
• Items that will affect Adjusted Free Cash Flow in 2011 :
+ Cash settlements for interest rate swaps will be $33.8 million lower in 2011.
− Interest expense will be approximately $4 million per quarter higher in 2011 than 2010,
prior to any repayment/refinancing of the 10.75% senior notes.
+ Interest expense will be reduced with any repayment/refinancing of 10.75% senior notes
callable in June 2011.
– Maintenance capital expenditures are estimated to be approximately $20 million higher
in 2011 than 2010.
• 2010 working capital benefited from a shift in timing of interest payments related to the
refinancing in Q4 2010, offset by the $6.9 million unwind fee related to the termination of
the two forward-starting interest rate swaps.
HealthSouth’s GAAP income statement will be affected by a
number of items that will not affect cash flow from operating
activities or adjusted free cash flow:
• Normalized GAAP tax rate resulting from the valuation
allowance reversal in Q4 2010.
• Loss on early extinguishment of debt
Multi-Year Adjusted Free Cash Flow 12% to 17% CAGR
14
Exhibit 99.1
Free Cash Flow Reinvestment
15
• $500 million of 10.75% notes callable June 2011
• Growth in core business
•
•
•
•
•
Bed expansions
Hospital acquisitions
Acute care IRF unit acquisition/consolidation
De novo hospitals
Lower capital cost
• Share repurchase
• Offset shares underlying convertible preferred
shares
• Offset shares issued in settlement of securities
litigation
Adjusted free cash flow CAGR: 12-17%
• Acquisitions of complementary business
Exhibit 99.1
2011 Guidance - Adjusted EBITDA
Adjusted EBITDA (1)
$440 million to $450 million
(1)
Reconciliation to GAAP provided on slides 29 and 31-35.
Considerations:
 2010 bad debt expense was 0.9% of revenue; expect 2011 bad debt expense to
be approximately 1.5% of revenue, in line with historical average
 Medicare pricing in Q4 2011 will be reduced by a TBD productivity adjustment,
which we estimate to be 100 basis points.
 Outpatient revenues subject to approximately $1.4 million reduction related to
the 25% rate reduction for reimbursement of therapy expenses for multiple therapy
services (Medicare physician fee schedule for calendar year 2011CMS).
Reflects:
• 2.9% to 5.3% growth over 2010
• 7.2% to 8.4% CAGR over 2009
16
Exhibit 99.1
Income Tax Considerations
GAAP Considerations:
• Valuation allowance reduced at YE 2010 by approximately $825 million resulting in a
$736.6 million benefit to 2010 income tax provision.
• As of 12/31/10, the Company had a remaining valuation allowance of approximately
$113 million, primarily related to state NOLs.
Future Cash Tax Payments:
• Expects to pay approximately $6-8 million per year of income tax.
• Does not expect to pay significant federal income taxes for up to 10 years.
• HealthSouth is not currently subject to an annual use limitation (“AUL”) under Internal
Revenue Code Section 382 (“Section 382”). A “change of ownership,” as defined by
Section 382, would subject us to an AUL, which is equal to the market capitalization of
the Company at the time of the “change of ownership” multiplied by the long-term
tax exempt rate.
17
Exhibit 99.1
2011 Guidance - EPS
Diluted Earnings per Share from
Continuing Operations Attributable
to HealthSouth (1)
$1.01 to $1.06
Considerations:
 Assumes provision for income tax of 40%;
cash taxes expected to be $6-$8 million.
 Guidance does not include any
repayment/refinancing of the 10.75%
senior notes callable in June 2011, which
would affect the following items:
• Interest expense which is currently
forecasted to be approximately $4
million per quarter higher in Q1, Q2, and
Q3 2011 vs. prior periods in 2010.
• Does not include “loss on early
extinguishment of debt” (non-cash)
• Depreciation is estimated to be higher
as a result of capital expenditures in
prior periods.
HealthSouth is transitioning EPS guidance to a
GAAP measure.
(1)
Income from continuing operations attributable to HealthSouth
(2)
Current period amounts in income tax provision; see slides 31 and 35
(3)
Total income tax provision for
(4)
Adjusted income from continuing operations; see slides 31 and 35
full-year 2010, including the reversal of a substantial portion of the Company's valuation allowance against deferred tax assets.
18
Exhibit 99.1
• Volume:
– January and February 2011 exhibited strong discharge growth against easy comps from
Q1 2010.
– Full-year 2011 on track for 2.5% to 3.5 % discharge growth (comps become tougher as
the year progresses).
• Pricing :
– Includes net Medicare price increase of approximately 2% effective Oct. 1, 2010.
– Comps will be impacted by the April 1, 2010, reduction (25 bps) of Medicare pricing
resulting from PPACA implementation.
• Senior Notes Offering:
– HealthSouth completed a $120 million senior notes offering through a reopening of its
7.25% senior notes due 2018 and its 7.75% senior notes due 2022.
– Issued at a premium to par
– Net proceeds from the offering were $122.0 million.
 $45 million of the net proceeds were utilized to pay down the revolving credit facility.
We intend to use the balance to redeem a portion of the 10.75% senior notes.
− Blended yield of add-on is approximately 7.0%
 The impact on Q1 2011 interest expense is an increase of $0.5 million.
Q1 2011 Observations
19
Exhibit 99.1
(1)
Reconciliation to GAAP provided on slides 29-35.
The HealthSouth Value Proposition
Poised for Growth
Financial Strength/Strong
Cash Flow Generation
Industry Leading Position
Attractive Healthcare Sector
20
Exhibit 99.1
Appendix
21
Exhibit 99.1
(2) Includes $77.0 million of the net proceeds from the notes reopening. We intend to use this portion of the net proceeds to redeem a
portion of the 10.75% senior notes.
Debt Maturity Profile (1)
22
Corporate
Rating
Revolver Rating
Senior Notes
Rating
S&P
B+
Moodys
B1
BB
B+
Ba1
B2
Call schedule:
June 15, 2011 (price 105.375);
June 15, 2012 (price 103.583);
June 15, 2013 (price 101.792);
June 15, 2014 and thereafter
(price 100.000)
Pro Forma for Notes Re-opening
$46 LC
$500
Revolver
L+350
Exhibit 99.1
June 15, 2014 and thereafter
(price 100.000)
Pro Forma for Notes Re-opening
$46 LC
$500
Revolver
L+350
Exhibit 99.1
Sources
$ Million (1)
Assumed
Call Price (3)
Cash on hand
$100.0
105.375
Revolving credit facility (LIBOR + 350 bps) (2)
$100.0
105.375
New senior notes (assumed yield of 7.00%)
$100.0
105.375
Accounting effect for early repayment/ refinancing :
“Loss on early extinguishment of debt” = ~$8 million per $100 million of the 10.75% senior notes.
Options for Addressing the 10.75% Senior Notes
(millions)
Illustrative only
(2) Assumes 3M LIBOR of 0.302%
(3) Call schedule: June 15, 2011 (price 105.375); June 15, 2012 (price 103.583); June 15, 2013 (price 101.792); June 15, 2014 and
thereafter (price 100.000)
(1)
We can utilize a number of sources to repay/refinance the 10.75% notes.
Illustration of Potential Interest Expense Reduction by Funding Source
23
Exhibit 99.1
Annual
Cash
Savings
$10.2
$6.4
$3.2
Illustrative only
Assumes 3M LIBOR of 0.302%
(3) Call schedule: June 15, 2011 (price 105.375); June 15, 2012 (price 103.583); June 15, 2013 (price 101.792); June 15, 2014 and
thereafter (price 100.000)
(1)
(2)
We can utilize a number of sources to repay/refinance the 10.75% notes.
Illustration of Potential Interest Expense Reduction by Funding Source
23
Exhibit 99.1
Debt Schedule and Interest Expense
(1) The annualized interest expense does not reflect any anticipated pay down of the 10.75% or the impact of the re-opening of the
7.25% and the 7.75% senior notes.
(2) On March 7, 2011, the Company closed on a public offering of $60 million in aggregate principal amount of its 7.25% senior
notes due 2018 at a public offering price of 103.25% of the principal amount and $60 million in aggregate principal amount of its
7.75% senior notes due 2022 at a public offering price of 103.50%.
(3) Based on 2010 and 2009 Adjusted EBITDA of $427.4 million and $383.0 million, respectively; reconciliation to GAAP provided on
slides 29 and 31-35.
(4) Based on debt balances as of December 31, 2010 and assumes 3 month LIBOR of 0.302%.
24
Exhibit 99.1
Data provided by UDSMR, a data gathering and analysis organization for the rehabilitation industry; represents ~ 65-70% of industry,
including HealthSouth sites.
(2) Includes consolidated HealthSouth inpatient rehabilitation hospitals and long-term acute care hospitals classified as same store during
that time period.
(1)
Historic Discharge Growth vs. Industry
• HealthSouth’s
volume growth has
outpaced
competitors’.
• TeamWorks =
standardized and
enhanced sales &
marketing
• Bed additions will
help facilitate
continued organic
growth.
UDS Industry Sites (1)
HLS Same Store (2)
10.7%
9.4%
5.6%
2.6%
4.6%
5.5%
5.8%
5.8%
5.3%
2.5%
2.2%
1.1%
25
Exhibit 99.1
enhanced sales &
marketing
• Bed additions will
help facilitate
continued organic
growth.
UDS Industry Sites (1)
HLS Same Store (2)
10.7%
9.4%
5.6%
2.6%
4.6%
5.5%
5.8%
5.8%
5.3%
2.5%
2.2%
1.1%
25
Exhibit 99.1
Note: These numbers are program spending only and do not include beneficiary copayments.
Source : Centers for Medicare and Medicaid Services, Office of the Actuary (MedPAC June 2010 Data Book - Page 130), 2009 and 2010
Medicare Trustees Report
Medicare Spending on Post-Acute Services
Skilled nursing
facilities 18.1%
Home health
agencies 17.7%
Inpatient
rehabilitation
hospitals 8.4%
Long-term acute
care hospitals 5.7%
26
2009
Medicare
Margin
Post-Acute Settings
Inpatient rehabilitation
spending (% of total
Medicare spending)
Exhibit 99.1
2009
Medicare
Margin
Post-Acute Settings
Inpatient rehabilitation
spending (% of total
Medicare spending)
Exhibit 99.1
Inpatient Rehabilitation
Facility
Skilled Nursing
Facility
Long-Term Acute
Care Hospital
Home Health
Hospice
No
Yes; RUGS IV and
MDS 3.0
implemented
October 1, 2010
No
Yes; would be required
as part of PPACA starting
in 2014
Yes: Required by PPACA
beginning in 2013; Modified
wage index system being
phased in over 7-year period
beginning in FY 2010
1. Re-basing payment
system
2. Major outlier payment
adjustments
No
No
Yes; will occur when
MMSEA relief expires
(short stay outliers)
3.
Upcoding adjustments
No
No
Yes; occurring in FY
2011
4.
Patient criteria
No; 60% Rule
already in place
No
5.
Healthcare Reform
Future Regulatory Risk
• Productivity
adjustments
• Bundling pilot
established
• Value based
purchasing
• Hospital Acquired
Infections
6.
Other
Study dictated as
part of MMSEA; Industry
developing criteria
No
No
No
•
Begins FY 2012
•
Begins FY 2012
•
Begins FY 2012
•
Begins 2015
•
Begins 2013
•
By 2013
•
By 2013
•
By 2013
•
By 2013
•
N/A
•
Pilot begins 2016
•
Post 2012
•
Pilot begins 2016
•
Post 2012
•
Pilot begins 2016
•
Post 2012
25% Rule regulatory
relief expires in
2012/2013;
prohibition on new
LTCHs through 2012
•
N/A
• N/A
• Post 2012
• Post 2012
N/A
Forecast error
being implemented
in FY 2011
Post-Acute Regulatory Risks
Sources :
Yes; 10% cap per agency;
2.5% taken out of outlier
pool (per PPACA)
Yes; occurring in CY 2011 (
-3.79%), and
potential further reduction
2012
PPACA requires a patient physician “face-to-face”
encounter; new therapy
coverage
Healthcare Reform Bill (PPACA, HERA),CMS Regulatory published rules and MMSEA
27
Exhibit 99.1
Limits on transfer
of ownership
MedPac recommending
overhaul of payment system
methodology in FY 2013
• Productivity
adjustments
• Bundling pilot
established
• Value based
purchasing
• Hospital Acquired
Infections
6.
Other
•
Begins FY 2012
•
Begins FY 2012
•
Begins FY 2012
•
Begins 2015
•
Begins 2013
•
By 2013
•
By 2013
•
By 2013
•
By 2013
•
N/A
•
Pilot begins 2016
•
Post 2012
•
Pilot begins 2016
•
Post 2012
•
Pilot begins 2016
•
Post 2012
25% Rule regulatory
relief expires in
2012/2013;
prohibition on new
LTCHs through 2012
•
N/A
• N/A
• Post 2012
• Post 2012
N/A
Forecast error
being implemented
in FY 2011
Post-Acute Regulatory Risks
Sources :
Healthcare Reform Bill (PPACA, HERA),CMS Regulatory published rules and MMSEA
27
Exhibit 99.1
Limits on transfer
of ownership
MedPac recommending
overhaul of payment system
methodology in FY 2013
CMS Fiscal Year 2011 IRF Rate Setting File Analysis
Notes:
(1) All data provided was filtered and compiled from the Centers for Medicare and
Medicaid Services (CMS) Fiscal Year 2011 IRF rate setting Final Rule file found at
http://www.cms.hhs.gov/InpatientRehabFacPPS/07_DataFiles.asp#TopOfPage. The
data presented was developed entirely by CMS and is based on its definitions
which are different in form and substance from the criteria HealthSouth uses for
external reporting purposes. Because CMS does not provide its detailed
methodology, HealthSouth is not able to reconstruct the CMS projections or the
calculation.
( 2) The CMS file contains data for each of the 1,171 inpatient rehabilitation facilities
used to estimate the policy updates for the FY 2011 IRF-PPS Final Rule. Most of the
data represents historical information from the CMS fiscal year 2009 period and
does not reflect the same HealthSouth hospitals in operation today. The data
presented was separated into three categories: Freestanding, Units, and
HealthSouth. HealthSouth is a subset of Freestanding and the Total.
28
Exhibit 99.1
data represents historical information from the CMS fiscal year 2009 period and
does not reflect the same HealthSouth hospitals in operation today. The data
presented was separated into three categories: Freestanding, Units, and
HealthSouth. HealthSouth is a subset of Freestanding and the Total.
28
Exhibit 99.1
(1)
Notes on page 35.
Net Cash Provided by Operating Activities
29
Exhibit 99.1
Adjusted Free Cash Flow
(1) Q4 2010 and full-year 2010 working capital benefited from a shift in timing of interest payments related to the refinancing in Q4 2010.
(2) Q4 2010 and full-year 2010 were negatively affected by the $6.9 million unwind fee related to the termination of two forward-starting
interest rate swaps, which is included in cash provided by operating activities and not included in the net settlements on interest rate
swaps.
30
Exhibit 99.1
Reconciliation of Net Income to Adjusted Income from Continuing Operations and
Adjusted EBITDA (1) (3) (4)
(1) (2) (3) (4) - Notes on page 35.
31
Exhibit 99.1
(1 ) (2) (3) (4)
- Notes on page 35.
32
Exhibit 99.1
(1 ) (2) (3) (4)
- Notes on page 35.
33
Exhibit 99.1
34
(1 ) (2) (3) (4)
- Notes on page 35.
Exhibit 99.1
Reconciliation Notes
1. Adjusted income from continuing operations and Adjusted EBITDA are non-GAAP
financial measures. The Company’s leverage ratio (total consolidated debt to
Adjusted EBITDA for the trailing four quarters) is, likewise, a non-GAAP financial
measure. Management and some members of the investment community utilize
adjusted income from continuing operations as a financial measure and Adjusted
EBITDA and the leverage ratio as liquidity measures on an ongoing basis. These
measures are not recognized in accordance with GAAP and should not be viewed as
an alternative to GAAP measures of performance or liquidity. In evaluating these
adjusted measures, the reader should be aware that in the future HealthSouth may
incur expenses similar to the adjustments set forth above.
2. Per share amounts for each period presented are based on basic weighted average
common shares outstanding for all amounts except adjusted income from continuing
operations per diluted share, which is based on diluted weighted average shares
outstanding. The difference in shares between the basic and diluted shares
outstanding is primarily related to our convertible perpetual preferred stock.
3. Adjusted income from continuing operations per diluted share and Adjusted EBITDA
are two components of our historical guidance.
4. The Company’s credit agreement allows certain other items to be added to arrive at
Adjusted EBITDA, and there may be certain other deductions required.
35
Exhibit 99.1
operations per diluted share, which is based on diluted weighted average shares
outstanding. The difference in shares between the basic and diluted shares
outstanding is primarily related to our convertible perpetual preferred stock.
3. Adjusted income from continuing operations per diluted share and Adjusted EBITDA
are two components of our historical guidance.
4. The Company’s credit agreement allows certain other items to be added to arrive at
Adjusted EBITDA, and there may be certain other deductions required.
35
Exhibit 99.1