EX-99.1 3 exhibit99-2.htm EXHIBIT 99.2 exhibit99-2.htm
 
Second Quarter 2010
Earnings Call






Supplemental Slides
Exhibit 99-2
 
 
 
Exhibit 99-2
Page 2
The information contained in this presentation includes certain estimates, projections and other forward-
looking information that reflect our current views with respect to future events 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 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, 2009, our Form 10-Q for the quarters ended March 31, 2010, and June 30,
2010, when filed, and in other documents we previously filed with the SEC, many of which are beyond our
control, that may cause actual 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 August 2, 2010, to which the following supplemental slides are attached as
Exhibit 99.2, 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
 
 
 
Exhibit 99-2
Page 3
Table of Contents
 
 
 
Exhibit 99-2
Page 4
Q2 2010 Highlights
ü Discharge growth of 2.2%
 – Same-store discharge growth = 1.3%
 – Sequential discharge growth = 3.6%
ü Revenue growth of 3.2%
 – Driven by pricing and volume growth
ü Adjusted Consolidated EBITDA growth of 10.3%
 – Continued emphasis on quality outcomes
 – Continued disciplined expense management and labor productivity gains
ü Adjusted EPS growth of 12.8%
ü Leverage ratio reduced to 4.1x (1) from 4.3x at year-end
 – Net debt leverage ratio is 3.7x (1) (2)
 ü Disciplined growth:
 – Purchased Desert Canyon Rehabilitation Hospital, a 50-bed inpatient rehabilitation hospital located
 in southwest Las Vegas, NV, on June 1, 2010.
 – Began accepting patients at HealthSouth Rehabilitation Hospital of Northern Virginia, a 40-bed
 inpatient rehabilitation hospital located in Aldie, VA, on June 14, 2010.
(1) Based on trailing, four-quarter Adjusted Consolidated EBITDA of $400.7 million; reconciliation to GAAP provided on slides 28 through 29.
(2)  Net debt leverage ratio = total debt minus cash and cash equivalents of $172.6 million divided by Adjusted Consolidated EBITDA.
 
 
 
Exhibit 99-2
Page 5
FIM Gain
LOS Efficiency
LOS Efficiency = Functional gain
divided by length of stay
Source: UDSmr Database - On Demand
Report: Q2 2010 Report
FIM Gain = Change in Functional
Independent Measurement (based
on an 18 point assessment) from
Admission to Discharge
** Average = Expected, Risk-adjusted LOS Efficiency
High-Quality Care
* Average = Expected, Risk-adjusted FIM Change Average
 
 
 
Exhibit 99-2
Page 6
Revenues (Q2 2010 vs. Q2 2009)
• Inpatient revenue growth was driven by:
 – 2.25% Medicare price increase
 – Discharge growth of 2.2% quarter over quarter
• Outpatient revenue declined primarily as a result of six fewer outpatient rehabilitation
 satellite clinics quarter over quarter.
 
 
 
Exhibit 99-2
Page 7
Expenses (Q2 2010 vs. Q2 2009)
• Disciplined expense management
• Solid labor productivity as reflected in lower EPOB
 
 
 
Exhibit 99-2
Page 8
Adjusted Consolidated EBITDA (1)
(1) Reconciliation to GAAP provided on slides 28 through 29.
In arriving at Adjusted Consolidated EBITDA, the following were excluded from line items:
(2) Stock-based compensation expense of $4.0, $2.9, $7.8 and $6.6 million, respectively, reduced general and administrative expenses.
(3) Impairments related to investments of $0.0, $0.1, $0.0 and $0.9 million, respectively, increased other income.
(4) Noncontrolling interests related to discontinued operations of $0.0, $0.2, $0.0 and $0.5 million, respectively, reduced noncontrolling interests.
Adjusted Consolidated
EBITDA Change
  Q2  6 Months
 +$9.7M +$17.7M
 +10.3% +9.2%
Improvements driven
by:
•pricing;
•volume; and
•disciplined expense
management.
Improvements benefited
from:
•lower bad debt expense
 • $4.9 million charge to
 equity in net income of
 nonconsolidated affiliates
 in Q2 2009
Offset by:
•$4.6 million increase in
professional liability
reserves
 
 
 
Exhibit 99-2
Page 9
Adjusted Income per Diluted Share (1)
 
(1) Reconciliation to GAAP provided on slides 28 through 29.
Adjusted EPS Change
 
  Q2  6 Months
 +$0.05 +$0.13
 +12.8% +16.5%
Improvements driven by:
 • Higher Adjusted Consolidated
 EBITDA
 • Lower interest expense
 Offset by:
•5 million shares issued on
September 30, 2009, related to
the 2006 securities litigation
settlement
•Higher provision for income tax
 
 
 
Exhibit 99-2
Page 10
(1) Notes on page 29.
Net Cash Provided by Operating Activities
 
 
 
Exhibit 99-2
Page 11
 
Adjusted Free Cash Flow
 
 
 
Exhibit 99-2
Page 12
Debt to
EBITDA  6.3x   6.3x   5.3x   4.3x   4.1x (1)
($ Billions)
Year-End 2010 Goal: 3.75x to 4.00x
Liquidity
Debt Outstanding, Liquidity and Swaps
(1) Based on trailing, four-quarter Adjusted Consolidated EBITDA of $400.7 million; reconciliation to GAAP provided on slides 28 and 29.
(2) Cash settlements flow through investing activities for swaps that do not qualify for hedge accounting. Notional amount of $884 million receives
 3-month LIBOR and pays 5.22% fixed until expiration in March of 2011.
(3) Forward-starting interest rate swaps (designated as cash flow hedges). Cash settlements will flow through operating activities as part of interest
 expense. Notional amounts of $100 million and $100 million receive LIBOR and pay 2.6% and 2.9% fixed, respectively.
 
 
 
Exhibit 99-2
Page 13
2010 Guidance - Revised
(1) Reconciliation to GAAP provided on slides 28 and 29.
(2) Adjusted income from continuing operations per diluted share.
 Considerations:
 ü IT “pilot” investment
 ü Integration of acquisitions
 ü Start-up costs at two new hospitals
 ü TeamWorks investment
 ü 2nd half 2010 bad debt = 1.5% to 1.8%
 Considerations:
 ü $3 million of additional stock-based
 compensation expense
 ü 5 million more diluted shares
 (2006 Securities Litigation Settlement)
 
 
 
Exhibit 99-2
Page 14
Business Outlook
 Business Model:
 • 5 - 8 % annual Adjusted Consolidated EBITDA growth (1)
 • 15 - 20% annual Adjusted EPS growth (1) (2)
 Strategy
(1) Reconciliation to GAAP provided on slides 28 and 29.
(2) Adjusted income from continuing operations per diluted share.
(3) Exclusive of any E&Y recovery.
 
 
 
Exhibit 99-2
Page 15
Appendix
 
 
 
Exhibit 99-2
Page 16
Future Regulatory Risk
 
IRF
SNF
LTCH
HH
 
 
 
 
 
 
 1. Re-basing payment system
 
No
Yes; RUGS IV and MDS
3.0 being implemented FY
2011/2012
No
Yes; would be required as part  of
PPACA starting in 2014
 2. Major outlier payment adjustments
 
No
No
 Yes; will occur when
MMSEA relief expires (short
stay outliers)
Yes; 10% cap per agency;
2.5% taken out of outlier pool
(per PPACA)
 3. Upcoding adjustments
 
No
Yes; occurring in
FY 2010
 Yes; occurring in FY 2010
and proposed (-2.5%)
for FY 2011
 Yes; occurring in CYs
2010 (-2.75%), and proposed
(-3.79%) for 2011 and 2012
 4. Patient criteria
 
 No; 60% Rule
already in place
No
Study dictated as
part of MMSEA
PPACA requires a patient -
physician “face-to-face”
encounter; new therapy
coverage proposed
 5. Healthcare Reform
 
 
 
 
 
– Market basket update reductions
 
– Known
– Known
– Known
– Known
– Productivity adjustments
 
– Begins 2012
– Begins 2012
– Begins 2012
– Begins 2015
– Bundling
 
– Pilot to be
 established by 2013
– Pilot to be
 established by 2013
– Pilot to be
 established by 2013
– Pilot to be
 established by 2013
– Independent Payment Advisory Board
 
– FY 2019
– FY 2015
– FY 2019
– CY 2015
– New quality reporting requirements
 
– Begins 2014
– N/A
– Begins 2014
– N/A
– Value based purchasing
 
– Pilot begins 2016
– Post 2012
– Pilot begins 2016
– Post 2012
 6. Other
 
N/A
Forecast error
being implemented
in FY 2011
25% Rule regulatory relief
expires in 2012/2013;
prohibition on new
LTCHs through 2012
Limits on transfer
of ownership
Regulatory Uncertainty
Sources: Healthcare Reform Bill (PPACA, HERA),CMS Regulatory published rules and MMSEA
 
 
 
Exhibit 99-2
Page 17
Cost-Effective Care
CMS Fiscal Year 2010 IRF Rate Setting File Analysis (1)
 
Freestanding
(2)
Units (2)
Total
 
HealthSouth
 
Hospitals (2)
Number of IRFs
228
953
1,181
 
94
Average # of Discharges per IRF
649
237
316
 
822
Outlier Payments as % of Total
Payments
1.32%
4.08%
3.00%
 
0.43%
Average Estimated Total Payment
per Discharge for FY 2010
$16,452
$16,741
$16,626
 
$15,996
Average Estimated Cost per
Discharge for FY 2010
$14,021
$17,207
$15,945
 
$12,633
Notes:
(1)  All data provided was filtered and compiled from the Centers for Medicare and Medicaid Services (CMS) Fiscal Year 2010 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 1,181 inpatient rehabilitation facilities used to estimate the policy updates for the FY 2010 Final IRF-
 PPS Rule. Most of the data represents historical information from the CMS fiscal year 2008 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.
 
 
 
Exhibit 99-2
Page 18
Readmission Rates
Note: Use of home health care and hospice is based on care that starts within three days of discharge. Other PAC care starts within one day
 of 0discharge. Home health use includes episodes that overlap an inpatient stay.
Source: Medicare Payment Advisory Commission, “A Data Book: Healthcare spending and the Medicare program,” Chart 9-3 (June 2008)
 
 
 
Exhibit 99-2
Page 19
Organic Growth
•Capacity Expansions:
 Ø ~ 100+ beds in 2010
 • De novos:
 Acquisitions/Joint Ventures
Portfolio Growth
6 - 7 years (2)
2 - 4 years (1)
(1) Assumes average investment per bed: $100K to $250K.
(2) Assumes average investment per bed: ~ $450K.
6 - 7 years
Target Cash pay-back
 
 
 
Exhibit 99-2
Page 20
(1) Data provided by UDSMR, a data gathering and analysis organization for the rehabilitation industry; represents ~ 65-70% of industry, including 89 HealthSouth sites.
(2) Includes 89 consolidated HealthSouth inpatient rehab hospitals and six long-term acute-care hospitals.
Discharge Growth - Trend
ü HealthSouth’s volume
 growth has outpaced
 competitors’
ü TeamWorks =
 standardized sales &
 marketing
ü Capacity expansions will
 help facilitate organic
 growth:
 • ~ 100+ beds will be added
 in 2010
(1)
(2)
 
 
 
Exhibit 99-2
Page 21
 
 
 
Exhibit 99-2
Page 22
 
 
 
Exhibit 99-2
Page 23
Payment Sources
(1) Managed Medicare revenues represent ~ 8%, 9%, 8%, 8% and 8% of total revenues for Q2 2010, Q2 2009, 6 months 2010, 6 months 2009 and
 2009, respectively, and are included in “Managed care and other discount plans.”
 
 
 
Exhibit 99-2
Page 24
Operational and Labor Metrics (1)
(2) Represents discharges from HealthSouth’s 92 consolidated hospitals and 6 LTCHs in Q2 2010 and 90 consolidated hospitals and 6 LTCHs prior
 to Q2 2010.
(3) Excludes approximately 400 full-time equivalents, who are considered part of corporate overhead with their salaries and benefits included in
 general and administrative expenses in the Company’s consolidated statements of operations. Full-time equivalents included in the above table
 represent HealthSouth employees who participate in or support the operations of the Company’s hospitals.
(4) Employees per occupied bed, or “EPOB,” is calculated by dividing the number of full-time equivalents, including an estimate of full-time
 equivalents from the utilization of contract labor, by the number of occupied beds during each period. The number of occupied beds is determined
 by multiplying the number of licensed beds by the Company’s occupancy percentage.
 
 
 
Exhibit 99-2
Page 25
= Term Loan maturities
= 10.75% Fixed
= 8.125% Fixed
= Capital leases & term
 loan amortization
3 month
LIBOR
plus
225 bps
3 month
LIBOR
plus
375 bps
Call Schedule
Date   Price
June 15, 2011   105.375
June 15, 2012   103.583
June 15, 2013  101.792
June 15, 2014   100.000
and thereafter
$400.0
 
 
 
Exhibit 99-2
Page 26
Non-Operating Cash/Tax Position
Cash Refunds as of June 30, 2010
• Federal tax recoveries virtually complete.
• State tax refunds in progress.
 – Approx. $3.1 million received in Q2
 2010.
 – Approx. $5.7 million net receivable on
  the balance sheet.
Future Cash Tax Payments
• Expect to pay about $5-7 million per year of income
 tax.
 – State income tax.
 – Alternative Minimum Tax (AMT).
• The Company does not expect to pay significant
 federal income taxes for the next 10-12 years due to
 approximately $905 million in deferred tax assets as
 of 12/31/09 outlined in the 2009 Form 10-K. The
 majority of the deferred tax assets is related to
 NOLs.
 – At this time, we do not believe the use
  of NOLs will be limited before they
  expire, however, no assurances can
  be provided.
• HealthSouth is not currently subject to an annual
 use limitation (AUL) under Internal Revenue Code
 section 382.
• If we experienced a “change of ownership” as
 defined by Internal Revenue Code section 382, we
 would be subject to an AUL, which is equal to the
 value of the company at the time of the “change of
 ownership” multiplied by the long-term tax exempt
 rate.
GAAP Considerations
• HealthSouth’s balance sheet currently
 reflects a valuation allowance for the
 potential value of NOLs and future
 deductions. The valuation allowance is
 approximately $888 million.
 
• GAAP tax rate will net to small amount as
 there will be a reduction in the valuation
 allowance when NOLs are utilized.
 
 
 
Exhibit 99-2
Page 27
Outstanding Share Summary
(Millions)
Notes:
(1)  Does not include 2.0 million warrants issued in connection with a January 2004 loan repaid to Credit Suisse First Boston. In connection with this
 transaction, we issued warrants to the lender to purchase two million shares of our common stock. Each warrant has a term of ten years from the
 date of issuance and an exercise price of $32.50 per share. The warrants were not assumed exercised for dilutive shares outstanding because
 they were antidilutive in the periods presented.
(2) The agreement to settle our class action securities litigation received final court approval in January 2007. These shares of common stock and
 warrants were issued on September 30, 2009. The 5.0 million of common shares are now included in the outstanding shares. The warrants at a
 strike price of $41.40 were not assumed exercised for the dilutive shares outstanding because they are anti-dilutive in the periods presented.
(3) The difference between the basic and diluted shares outstanding is primarily related to our convertible perpetual preferred stock.
 
 
 
Exhibit 99-2
Page 28
 
 
 
Exhibit 99-2
Page 29
Reconciliation Notes
1. Adjusted income from continuing operations and Adjusted Consolidated EBITDA are
 non-GAAP financial measures. The Company’s leverage ratio (total consolidated debt to
 Adjusted Consolidated 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
 Consolidated 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
 Consolidated EBITDA are two components of our guidance.
4. The Company’s credit agreement allows certain other items to be added to arrive at
 Adjusted Consolidated EBITDA, and there may be certain other deductions required.