EX-99.2 3 exhibit99-2.htm EXHIBIT 99.2 exhibit99-2.htm
Supplemental Slide
1
Third Quarter 2009 Earnings Call





Supplemental Slides
Exhibit 99.2
 
 
 
Supplemental Slide
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 our Form 10-K for
the fiscal year ended December 31, 2008, the Form 10-Q for quarters ended March 31, 2009, June 30,
2009, and September 30, 2009, 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. A schedule is attached that reconciles 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 November 3, 2009, 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
 
 
 
3
Table of Contents
 
 
 
4
Highlights (Q3 2009)
 ü Achieved 5.3% quarter-over-quarter discharge growth.
 – Same store discharge growth was 5.3%.
 ü Revenue growth of 3.8%.
 – Driven by higher discharge volume which more than offset lower outpatient revenue.
 ü High-quality, cost-effective, patient care.
 – Driven by effective management of hospital expenses and improved labor productivity.
 ü Amended and extended a portion of the term loan up to 2.5 years to September
 2015.
 ü Increased cash on the balance sheet by $68 million during the quarter.
 ü Leverage ratio reduced to 4.5x(1) from 5.3x at year end.
 – Beat previous goal of 4.5x by year-end 2010.
 ü Distributed the securities litigation shares and warrants.
(1) Based on trailing four quarter Adjusted Consolidated EBITDA of $376.6 million; reconciliation to GAAP provided on slides 33 through 36.
 
 
 
5
Revenues (Q3 2009 vs. Q3 2008)
• Inpatient revenue growth was driven by strong discharge volumes.
 – Volume growth was driven by the sustained sales and marketing effort.
 – Same store discharge growth was 5.3%.
 – Pricing essentially flat for the quarter. Q3 2009 marks the end of the Medicare pricing roll-
 back.
• Outpatient revenue declined as a result of 11 fewer outpatient satellites quarter over quarter.
 
 
 
6
• Continued improvement on labor productivity demonstrated by lower EPOB.
• Hospital-related expenses:
 – Despite increased volume, hospital expenses remained essentially flat producing strong
 operating leverage.
 – Increased provision for doubtful accounts to reflect aging of pending Medicare appeals.
 
 
 
7
Adjusted Consolidated EBITDA (1) (3Q 2009)
(Millions)
(1) Reconciliation to GAAP provided on slides 33 through 36.
• Improvements driven by:
 – Increased volumes
 – Improved labor productivity
 – Disciplined expense management
 
 
 
8
Adjusted Consolidated EBITDA (1) (9 months)
(Millions)
(1) Reconciliation to GAAP provided on slides 33 through 36.
• Improvements driven by:
 – Increased volumes
 – Improved labor productivity
 – Disciplined expense management
• Improvements offset by:
 – Increased provision for doubtful accounts to reflect aging of pending Medicare appeals.
• Strong volume growth YTD helped offset the Medicare price roll-back.
 – Medicare market basket update: $7-8 million benefit in Q108.
 
 
 
9
Adjusted Income per Diluted Share (3Q 2009)
(1) Includes a charge of $8.5 million and $17.1 million, respectively, for government, class action, and related settlements expense primarily
 reflecting the change in value of our common stock.     
(2) Reconciliation to GAAP provided on slides 33 through 36.
• Major drivers were:
 – Increased Adjusted Consolidated EBITDA
 – Lower floating-rate interest expense (results in higher cash payments on swap)
 – Lower interest expense as a result of lower debt balances
• Increase in income was offset by:
 – Increased provision for doubtful accounts to reflect aging of pending Medicare appeals.
 
 
 
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(1) Includes a charge of $41.3 million and a gain of $27.9 million, respectively, for government, class action, and related settlements expense
 primarily reflecting the change in value of our common stock.
(2) Reconciliation to GAAP provided on slides 33 through 36.
• Major drivers were:
 – Increased Adjusted Consolidated EBITDA
 – Lower floating-rate interest expense (results in higher cash payments on swap)
 – Lower interest expense as a result of lower debt balances.
 
 
 
11
Free Cash Flow
(1) Includes capital expenditures for the hospital refresh program.
(2) Benefited by approximately $19 million for the seasonal effect on working capital related to the interest payment accrual.
 
 
 
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• No near-term refinancing
 – Revolver = 2012
 – Term Loan = 2013 & 2014
 – Bonds = 2014 & 2016
• Previous goal of 4.5x by year-end
 2010, achieved in Q3 2009.
• Future deleveraging
 – Excess cash from operations
 – Derivative proceeds
 Ø E&Y arbitration
(1) October 2009, amendment to the credit agreement increases debt repayment flexibility of non-term loan balances.
(2) Based on four quarter trailing Adjusted Consolidated EBITDA of $376.6 million; see related debt schedule on slide 30, and reconciliation to
 GAAP on slides 33 through 36.
 Debt to EBITDA 6.3x 6.3x 5.3x 4.5x(2)
($ Billions)
Year-End 2012 Goal: 3.5x to 4.0x
Debt Reduction
 
 
 
13
Liquidity
(Millions)
 
 
 
14
2009 Guidance - Adjusted Consolidated EBITDA
(1)
(1) Reconciliation to GAAP provided on slides 33 through 36.
Key Drivers:
 ü Sustainable discharge growth
 ü High-quality, cost-effective patient care
 ü Market basket update in Q4 2009.
 
 
 
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2009 Guidance - Adjusted Earnings per Diluted Share
(1)
(1) Adjusted income from continuing operations per diluted share.
Key Drivers:
 ü Increased Adjusted Consolidated EBITDA
 ü Deleveraging
 ü Lower floating-rate interest expense (results in higher cash payment
 on the swap)
 ü Market basket update in Q4 2009.
 
 
 
16
Business Outlook
 
 
(1) For reconciliation to GAAP, see slides 33 - 36. These ranges are based on current assumptions of external drivers (e.g., healthcare reform,
 interest rates) and are subject to change.
(2) Based on adjusted income from continuing operations per diluted share.
 
 
 
17
Appendix
 
 
 
18
FIM Gain
LOS Efficiency
LOS Efficiency = Functional gain
divided by length of stay
Source: UDSmr Database - On Demand
Reports 2008 Year End Report
FIM Gain = Change in Functional
Independent Measurement (based on
an 18 point assessment) from
Admission to Discharge
** Benchmark = Expected, Risk Adjusted LOS Efficiency
Operational Excellence = “High-Quality” Care
 *Benchmark = Expected Risk Adjusted FIM Change Avg.
 
 
 
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Operational Excellence = “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.
 
 
 
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Disciplined Growth
(1) All surveys complete, awaiting final CMS approval.
(2) CON is being appealed; operational date may change.
Bed expansions:
 • Approximately 100 beds being added in 2009 and a similar amount
 in 2010.
 • Average investment per bed:
 – Internal renovation = $15 - 45K
 – New construction = $100 - 250K
New hospitals:
• Cash pay-back: 2 - 3 years
 
 
 
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De novo: 40-Bed Proforma Example
(1) Does not include estimated corporate overhead of ~4.75% of net operating revenues.
(2) Assumes state income taxes only for first five years, then federal and state income taxes.
 De novo’s attractive for future growth.
 We evaluate based on commitment (cash or leased).
 
 
 
 
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Revenue (9 months)
 
 
 
23
Expenses (9 months)
 
 
 
24
Revenues (Sequential)
 
 
 
25
Expenses (Sequential)
 
 
 
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Operational and Labor Metrics
(1) Numbers have been reclassified to reflect current continuing operations.
(2) Represents discharges from HealthSouth’s 91 consolidated hospitals, which includes Mesa, Arizona starting in Q3 2009.
(3) Excludes approx. 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 condensed 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.
 
 
 
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Payment Sources
(1) Managed Medicare revenues represent ~ 8% of total revenues and are included in “Managed care and other discount plans.”
 
 
 
28
Debt Maturities
(Millions)
$400.0
Current undrawn revolver
matures in 2012.
• Minimal amortization and no near-term financing risk.
• As of Sept. 30, 2009, we were in compliance with the covenants under our Credit Agreement.
$623.3
Term loan extendable to Sept. 2015
contingent on the floating rates notes
being refinanced prior to March 2014.
 
 
 
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Interest Rate Swaps
(Millions)
(1)  In October 2009, the credit agreement was amended. The maturity for $300 million of the term-loan was extended to 2014, and is
 extendable to September 2015, contingent on the floating rate note being refinanced prior to March 2014. The extended portion of the
 term loan will bear an interest rate of Libor plus 375.
(2) In June 2009, we entered into a received-fixed rate swap as a mirror offset to $100.0 million of the $1,056 million interest rate swap.
(3) Forward-starting interest rate swaps (designated as cash flow hedges).
 
 
 
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Debt Schedule
(Millions)
(1) October 2009, amendment to the credit agreement increases debt repayment flexibility of non-term loan balances.
(2) The Company had $117.3 million in cash and cash equivalents as of September 30, 2009.
 
 
 
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Non-Operating Cash/Tax Position
Cash Refunds as of Sept. 30, 2009
• Federal tax recoveries virtually complete.
 – Approx. $43 million received.
• State tax refunds in progress.
 – Approx. $17 million received.
 – Approx. $9 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).
• With over $2.5 billion in NOLs and tax
 deductions, we do not expect to pay significant
 federal income taxes for approximately the next
 10-12 years.
 – 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 the Internal
 Revenue Code section 382.
• If we experienced a “change of ownership” as
 defined by the 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 $1.0 billion.
 
• GAAP tax rate will net to small amount for
 foreseeable future as there will be a reduction
 in the valuation allowance when NOLs are
 utilized.
 
 
 
32
Outstanding Share Summary
(Millions)
Notes:
(1) Completed an equity offering for 8.8 million shares on June 27, 2008.
(2) 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.
(3) 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.
(4) The difference between the basic and diluted shares outstanding is primarily related to our convertible perpetual preferred stock.
 
 
 
33
Three & Nine Months Reconciliation of Net Income to Adjusted Income from
Continuing Operations and Adjusted Consolidated EBITDA (1) (3)
(1) (2) (3) (4) - Notes on page 36.
 
 
 
34
2008 Year-End Reconciliation of Net Income to Adjusted Income from
Continuing Operations and Adjusted Consolidated EBITDA (1) (3)
(1) (2) (3) (4) - Notes on page 36.
 
 
 
35
YTD Reconciliation of Adjusted Consolidated EBITDA (1) to Net Cash Provided
by Operating Activities
(1) - Notes on page 36.
 
 
 
36
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 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.