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Form 8-K HEALTHSOUTH CORP For: Apr 26

April 26, 2016 4:40 PM EDT



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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): April 26, 2016

HealthSouth Corporation
(Exact name of Registrant as specified in its Charter)
Delaware
(State or Other Jurisdiction of Incorporation)
001-10315
63-0860407
(Commission File Number)
(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 2.02. Results of Operations and Financial Condition.
The information contained herein is being furnished pursuant to Item 2.02 of Form 8‑K, “Results of Operations and Financial Condition,” and Item 7.01 of Form 8-K, “Regulation FD Disclosure.” This information shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or incorporated by reference in any filing under the Securities Act of 1933, as amended, (the “Securities Act”) or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing.
On April 26, 2016, HealthSouth Corporation (the “Company”) issued a press release reporting the financial results of the Company for the three months ended March 31, 2016. A copy of the press release is attached to this report as Exhibit 99.1 and incorporated herein by reference.
ITEM 7.01. Regulation FD Disclosure.
See Item 2.02, “Results of Operations and Financial Condition,” above.
In addition, a copy of the supplemental slides which will be discussed during the Company’s earnings call at 9:00 a.m. Eastern Time on Wednesday, April 27, 2016 is attached to this report as Exhibit 99.2 and incorporated herein by reference. This information shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or incorporated by reference in any filing under the Securities Act 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 press release and supplemental slides include non-GAAP financial measures, including the Company’s adjusted earnings per share, leverage ratio, Adjusted EBITDA, and adjusted free cash flow.
The Company is providing adjusted earnings per share from continuing operations attributable to HealthSouth (“adjusted earnings per share”). The Company believes the presentation of adjusted earnings per share provides useful additional information to investors because it provides better comparability of ongoing performance to prior periods given that it excludes the impact of government, class action, and related settlements, professional fees—accounting, tax, and legal, mark-to-market adjustments for stock appreciation rights, gains or losses related to hedging instruments, loss on early extinguishment of debt, adjustments to its income tax provision (such as valuation allowance adjustments and settlements of income tax claims), items related to corporate and facility restructurings, and certain other items. It is reasonable to expect that one or more of these excluded items will occur in future periods, but the amounts recognized can vary significantly from period to period and may not directly relate to the Company’s ongoing operations. Accordingly, they can complicate comparisons of the Company’s results of operations across periods and comparisons of the Company’s results to those of other healthcare companies. Adjusted earnings per share should not be considered as a measure of financial performance under generally accepted accounting principles in the United States (“GAAP”) as the items excluded from it are significant components in understanding and assessing financial performance. Because adjusted earnings per share is not a measurement determined in accordance with GAAP and is thus susceptible to varying calculations, it may not be comparable as presented to other similarly titled measures of other companies. The Company reconciles adjusted earnings per share to earnings per share in the press release attached as Exhibit 99.1 and the supplemental slides attached as Exhibit 99.2.
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 which allows the Company to deduct up to $75 million of cash on hand from consolidated total debt. The Company reconciles Adjusted EBITDA to net income in the press release attached as Exhibit 99.1 and the supplemental slides attached as Exhibit 99.2 and to net cash provided by operating activities in the supplemental slides attached as Exhibit 99.2 and below. Adjusted EBITDA for the Company’s reportable segments is reconciled to net income from continuing operations before income tax expense in the supplemental slides attached as Exhibit 99.2 and below.
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 Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Liquidity and Capital Resources,” and 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, 2015 (the “2015 Form 10‑K”). These covenants are material terms of the credit agreement. Noncompliance 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 be on terms less 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, paying common stock dividends, 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, therein referred to as “Adjusted Consolidated EBITDA,” allows the Company to add back to consolidated net income interest expense, income taxes, and depreciation and amortization and then add back to consolidated net income (1) all unusual or nonrecurring items reducing consolidated net income (of which only up to $10 million in a year may be cash expenditures), (2) any losses from discontinued operations and closed locations, (3) costs and expenses, including legal fees and expert witness fees, incurred with respect to litigation associated with stockholder derivative litigation, and (4) share-based compensation expense. The Company also subtracts from consolidated net income all unusual or nonrecurring items to the extent they increase consolidated net income.
Under the credit agreement, the Adjusted EBITDA calculation does not include net income attributable to noncontrolling interests and includes (1) gain or loss on disposal of assets, (2) professional fees unrelated to the stockholder derivative litigation, and (3) unusual or nonrecurring cash expenditures in excess of $10 million, and (4) pro forma adjustments resulting from debt transactions and development activities. These items may not be indicative of the Company’s ongoing performance, so the Adjusted EBITDA calculation presented here includes adjustments for them.
Adjusted EBITDA is not a measure of financial performance under 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. 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 Note 1, Summary of Significant Accounting Policies, to the consolidated financial statements accompanying the 2015 Form 10-K.
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, pursue development activities, and return capital to its common stockholders. The calculation of adjusted free cash flow and a reconciliation of net cash provided by operating activities to adjusted free cash flow are included in the press release attached as Exhibit 99.1 and the supplemental slides attached as Exhibit 99.2. 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. The Company’s 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 condensed consolidated statements of cash flows included in the March 2016 Form 10-Q, when filed, and in the press release attached as Exhibit 99.1 for the GAAP measures of cash flows from operating, investing, and financing activities.





Reconciliation of Net Cash Provided by Operating Activities to Consolidated Adjusted EBITDA
 
Three Months Ended March 31,
 
Year Ended December 31,
 
 
 
2016
 
2015
 
2015
 
(In Millions)
Net cash provided by operating activities
$
159.7

 
$
102.0

 
$
484.8

Provision for doubtful accounts
(16.5
)
 
(11.6
)
 
(47.2
)
Professional fees—accounting, tax, and legal
0.2

 
2.2

 
3.0

Interest expense and amortization of debt discounts and fees
44.6

 
31.8

 
142.9

Equity in net income of nonconsolidated affiliates
2.4

 
1.6

 
8.7

Net income attributable to noncontrolling interests in continuing operations
(18.7
)
 
(16.5
)
 
(69.7
)
Amortization of debt-related items
(3.4
)
 
(3.3
)
 
(14.3
)
Distributions from nonconsolidated affiliates
(1.7
)
 
(1.9
)
 
(7.7
)
Current portion of income tax expense
5.0

 
3.5

 
14.8

Change in assets and liabilities
18.3

 
56.0

 
147.1

Net premium paid on bond transactions
1.9

 
(8.0
)
 
3.9

Net cash used in operating activities of discontinued operations
0.2

 
0.1

 
0.7

Reliant/CareSouth transaction costs

 

 
12.3

Other
0.1

 
0.2

 
3.2

Consolidated Adjusted EBITDA
$
192.1

 
$
156.1

 
$
682.5

Reconciliation of Segment Adjusted EBITDA to Income from Continuing Operations Before Income Tax Expense
 
Three Months Ended March 31,
 
Year Ended December 31, 2015
 
2016
 
2015
 
 
In Millions
Total segment Adjusted EBITDA
$
219.5

 
$
181.3

 
$
774.1

General and administrative expenses
(31.9
)
 
(34.6
)
 
(133.3
)
Depreciation and amortization
(42.4
)
 
(31.9
)
 
(139.7
)
(Loss) gain on disposal or impairment of assets
(0.2
)
 
1.5

 
(2.6
)
Government, class action, and related settlements

 
(8.0
)
 
(7.5
)
Professional fees - accounting, tax, and legal
(0.2
)
 
(2.2
)
 
(3.0
)
Loss on early extinguishment of debt
(2.4
)
 
(1.2
)
 
(22.4
)
Interest expense and amortization of debt discounts and fees
(44.6
)
 
(31.8
)
 
(142.9
)
Net income attributable to noncontrolling interests
18.7

 
16.5

 
69.7

Gain related to SCA equity interest

 

 
3.2

Income from continuing operations before income tax expense
$
116.5

 
$
89.6

 
$
395.6






Forward-Looking Statements
The information contained in the press release and supplemental slides includes certain estimates, projections, and other forward-looking statements that involve known and unknown risks and relate to, among other things, future events, the Company’s business strategy, financial plans, dividend strategies or payments, effective income tax rates, plans to repurchase its debt or equity securities, future financial performance, projected business results or model, ability to return value to its shareholders, projected capital expenditures, leverage ratio, acquisition opportunities, and the impact of future legislation or regulation. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “targets,” “potential,” or “continue” or the negative of these terms or other comparable terminology. These estimates, projections, and other forward-looking statements 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 statements will be realized.
All such estimates, projections, and forward-looking statements speak only as of the date hereof. The Company undertakes no duty to publicly update or revise that information.
You are cautioned not to place undue reliance on the estimates, projections, and other forward-looking statements in this report, the press 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 attached press release and in the 2015 Form 10-K, the Company’s quarterly report on Form 10-Q for the quarterly period ended March 31, 2016, when filed, 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.
Exhibit Number
 
Description
99.1
 
Press release of HealthSouth Corporation, dated April 26, 2016.
99.2
 
Supplemental slides provided in connection with the first quarter 2016 earnings call of HealthSouth Corporation.






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/   DOUGLAS E. COLTHARP
 
Name:
Douglas E. Coltharp
 
Title:
Executive Vice President and Chief Financial Officer
Dated: April 26, 2016



Exhibit 99.1

Media Contact
April 26, 2016
Casey Lassiter, 205-410-2777
For Immediate Release
 
 
 
Investor Relations Contact
 
Crissy Carlisle, 205-970-5860
 
 
HealthSouth Reports Strong Revenue, Volume, and Adjusted EBITDA Growth
in Both Segments for First Quarter 2016 and Raises Full-Year 2016 Guidance
BIRMINGHAM, Ala. - HealthSouth Corporation (NYSE: HLS), one of the nation's largest providers of post-acute healthcare services, offering both facility-based and home-based post-acute services, today reported its results of operations for the first quarter ended March 31, 2016.
“The first quarter was an excellent start to the year as both segments generated strong volume, revenue, and Adjusted EBITDA growth,” said Jay Grinney, President and Chief Executive Officer of HealthSouth. “Additionally, we produced $129.5 million of adjusted free cash flow which we were able to invest in a variety of value-creating ways: expanding our portfolio of hospitals and home health agencies; reducing our long-term debt by $55.3 million; repurchasing 314,532 shares of our common stock; and paying a $0.23 per share cash dividend. As a result of these very strong results, we are increasing our guidance for full-year net operating revenues, Adjusted EBITDA, and adjusted earnings per share.”
Consolidated Results
 
 
 
 
 
Growth
 
Q1 2016
 
Q1 2015
 
Dollars
 
Percent
 
(In Millions, Except per Share Data)
Net operating revenues
$
909.8

 
$
740.6

 
$
169.2

 
22.8
%
Income from continuing operations attributable to HealthSouth per diluted share
0.61

 
0.44

 
0.17

 
38.6
%
Adjusted earnings per share
0.61

 
0.51

 
0.10

 
19.6
%
Cash flows provided by operating activities
159.7

 
102.0

 
57.7

 
56.6
%
Adjusted EBITDA
192.1

 
156.1

 
36.0

 
23.1
%
Adjusted free cash flow
129.5

 
79.4

 
50.1

 
63.1
%
Revenue growth primarily resulted from strong volumes in both of the Company's operating segments and included the effect of the Company's acquisitions of Reliant Hospital Partners, LLC and affiliated entities (“Reliant”) on October 1, 2015 and CareSouth Health System, Inc. (“CareSouth”) on November 2, 2015.
The increase in adjusted earnings per share primarily resulted from increased Adjusted EBITDA. Adjusted earnings per share also included the impact of higher interest expense related to the financing of the Reliant and CareSouth acquisitions, higher depreciation and amortization related to acquisitions and capital investments, and a lower share count resulting from share repurchases in the fourth quarter of 2015 and first quarter of 2016.
Adjusted free cash flow increased primarily as a result of the Company's growth in Adjusted EBITDA. Adjusted free cash flow in the first quarter of 2016 included increased cash interest expense related to the acquisitions of Reliant and CareSouth and lower working capital primarily attributable to payroll-related liabilities.

 
 
1


See attached supplemental information for calculations of non-GAAP measures and reconciliations to their most comparable GAAP measure.
Inpatient Rehabilitation Segment Results
 
 
 
 
 
Growth
 
Q1 2016
 
Q1 2015
 
Dollars
 
Percent
Net operating revenues:
(In Millions)
Inpatient
$
719.4

 
$
606.6

 
$
112.8

 
18.6
%
Outpatient and other
29.8

 
23.7

 
6.1

 
25.7
%
Total segment revenue
$
749.2

 
$
630.3

 
$
118.9

 
18.9
%
 
 
 
 
 
 
 
 
 
(Actual Amounts)
Discharges
41,098

 
35,116

 
5,982

 
17.0
%
New-store discharge growth
 
 
 
 
 
 
14.2
%
Same-store discharge growth
 
 
 
 
 
 
2.8
%
Net patient revenue per discharge
$
17,505

 
$
17,274

 
$
231

 
1.3
%
 
 
 
 
 
 
 
 
 
(In Millions)
Adjusted EBITDA
$
196.9

 
$
164.4

 
$
32.5

 
19.8
%
Revenue - Revenue growth resulted primarily from strong same-store and new-store volume growth. Discharge growth from new stores resulted from the Company's acquisitions of Reliant (October 2015) and Cardinal Hill Rehabilitation Hospital (May 2015), the Company's joint ventures with Memorial Health in Savannah, Georgia (April 2015) and CHI St. Vincent in Hot Springs, Arkansas (February 2016), and the de novo opened in Franklin, Tennessee (December 2015).
Net patient revenue per discharge was impacted by the ramping up of new hospitals (Franklin, TN and Hot Springs, AR) which are required to treat a minimum of 30 patients for zero revenue as part of the Medicare certification process. In the first quarter of 2016, the Company also recorded a $1.8 million revenue reserve related to post-payment claims reviews.
Outpatient revenues increased by $6.1 million in the first quarter of 2016 compared to the first quarter of 2015 due to the acquisitions of Reliant and Cardinal Hill.
Adjusted EBITDA - Inpatient rehabilitation segment Adjusted EBITDA increased by 19.8% driven primarily by revenue growth. Adjusted EBITDA for the segment was impacted by an increase in salaries and benefits as a percent of revenue. This increase primarily resulted from merit and benefit cost increases, as well as the ramping up of new stores. Hospital operating expenses (other operating expenses, supplies, and occupancy costs) improved as a percent of net operating revenues in the first quarter of 2016 compared to the first quarter of 2015 primarily due to increased revenue, continued supply chain initiatives, and the impact of an approximate $4 million litigation charge recorded in the first quarter of 2015. This improvement in hospital operating expenses occurred in spite of an increase in occupancy costs as a percent of net operating revenues due to the acquisition of Reliant. Bad debt expense as a percent of net operating revenues increased from 1.7% in the first quarter of 2015 to 2.1% in the first quarter of 2016 due to administrative payment delays at the Company's largest Medicare Administrative Contractor and continued payment delays resulting from the implementation of ICD-10 by certain payors. Pre-payment claims denials increased year over year but were consistent with the level experienced in the second half of 2015.

 
 
2



Home Health and Hospice Segment Results
 
 
 
 
 
Growth
 
Q1 2016
 
Q1 2015
 
Dollars
 
Percent
Net operating revenues:
(In Millions)
Home health
$
150.9

 
$
103.9

 
$
47.0

 
45.2
 %
Hospice and other
9.7

 
6.4

 
3.3

 
51.6
 %
Total segment revenue
$
160.6

 
$
110.3

 
$
50.3

 
45.6
 %
 
 
 
 
 
 
 
 
 
(Actual Amounts)
Admissions
25,763

 
16,499

 
9,264

 
56.1
 %
New-store admissions growth
 
 
 
 
 
 
43.5
 %
Same-store admissions growth
 
 
 
 
 
 
12.6
 %
Episodes
43,844

 
29,512

 
14,332

 
48.6
 %
New-store episode growth
 
 
 
 
 
 
36.3
 %
Same-store episode growth
 
 
 
 
 
 
12.3
 %
Revenue per episode
$
3,035

 
$
3,102

 
$
(67
)
 
(2.2
)%
 
 
 
 
 
 
 
 
 
(In Millions)
Adjusted EBITDA
$
22.6

 
$
16.9

 
$
5.7

 
33.7
 %
Revenue - Revenue growth resulted from strong same-store and new-store volume growth. Growth from new stores resulted from the acquisition of CareSouth and Encompass' other acquisitions throughout 2015.
Revenue per episode was impacted by the Medicare home health reimbursement rate cuts that became effective January 1, 2016 and lower revenue per episode at CareSouth due to patient mix.
Adjusted EBITDA - Growth in Adjusted EBITDA resulted primarily from revenue growth. Adjusted EBITDA for the segment was impacted by lower average revenue per episode, merit and benefit costs increases year over year, and expenses related to the integration of CareSouth.
Capital Structure Transactions
Repurchases of Common Stock
During the first quarter of 2016, the Company repurchased 314,532 shares of its common stock for approximately $11 million in the open market. As of March 31, 2016, the Company had a remaining repurchase authorization of approximately $149 million.
Redemption of Senior Notes
In March 2016, the Company redeemed $50 million of the outstanding principal amount of its 7.75% Senior Notes due 2022 (the “2022 Notes”). Pursuant to the terms of the 2022 Notes, this optional redemption was made at a price of 103.875%, which resulted in a total cash outlay of approximately $52 million. This redemption was funded using cash on hand and capacity under the Company's revolving credit facility. As a result of this redemption, the Company recorded a $2.4 million loss on early extinguishment of debt in the first quarter of 2016.
In April 2016, the Company gave notice of its intent to redeem an additional $50 million of the outstanding principal amount of the 2022 Notes. This optional redemption also will be made at a price of 103.875%. The Company plans to use cash on hand and capacity under its revolving credit facility to fund the redemption, which will close in May 2016. As a result of this redemption, the Company expects to record an approximate $2 million loss on early extinguishment of debt in the second quarter of 2016.
“The continued strength and consistency of our free cash flow facilitated an approximate $55 million reduction in our funded debt in the first quarter of 2016,” said Doug Coltharp, Executive Vice President and Chief Financial Officer of HealthSouth. “Together with the growth in Adjusted EBITDA, this resulted in a 0.3x decrease in our leverage ratio from year-end 2015.”

 
 
3



2016 Guidance
Based on its results for the first quarter of 2016 and its current expectations for the remainder of 2016, the Company is increasing its full-year guidance ranges.
 
Full-Year 2016 Guidance Ranges
 
Initial Guidance
 
Revised Guidance
 
(In Millions, Except Per Share Data)
Net operating revenues
$3,550 to $3,650
 
$3,580 to $3,680
Adjusted EBITDA
$765 to $785
 
$770 to $790
Adjusted earnings per share from continuing operations attributable to HealthSouth
$2.32 to $2.44
 
$2.37 to $2.49
For additional considerations regarding the Company's 2016 guidance ranges, see the supplemental slides posted on the Company's website at http://investor.healthsouth.com.
Earnings Conference Call and Webcast
The Company will host an investor conference call at 9:00 a.m. Eastern Time on Wednesday, April 27, 2016 to discuss its results for the first quarter of 2016. For reference during the call, the Company will post certain supplemental slides at
http://investor.healthsouth.com.
The conference call may be accessed by dialing 877 587-6761 and giving the pass code 74092677. International callers should dial 706 679-1635 and give the same pass code. Please call approximately ten minutes before the start of the call to ensure you are connected. The conference call will also be webcast live and will be available at http://investor.healthsouth.com by clicking on an available link.
An on-line replay of the conference call will be available after the live broadcast at http://investor.healthsouth.com.
About HealthSouth
HealthSouth is one of the nation's largest providers of post-acute healthcare services, offering both facility-based and home-based post-acute services in 34 states and Puerto Rico through its network of inpatient rehabilitation hospitals, home health agencies, and hospice agencies. HealthSouth can be found on the Web at www.healthsouth.com.
Other Information
The information in this press release is summarized and should be read in conjunction with the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2016 (the “March 2016 Form 10-Q”), when filed, as well as the Company's Current Report on Form 8-K filed on April 26, 2016 (the “Q1 Earnings Form 8-K”), to which this press release is attached as Exhibit 99.1. This press release includes certain non-GAAP financial measures as defined in Regulation G under the Securities Act of 1934. The Q1 Earnings Form 8-K provides further explanation and disclosure regarding the Company's use of non-GAAP financial measures and should be read in conjunction with this press release. In addition, the Company will post supplemental slides today on its website at http://investor.healthsouth.com for reference during its April 27, 2016 earnings call.
The Q1 Earnings Form 8-K and, when filed, the March 2016 Form 10-Q can be found on the Company's website at
http://investor.healthsouth.com and the SEC's website at www.sec.gov.

 
 
4

HealthSouth Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)

 
Three Months Ended March 31,
 
2016
 
2015
 
(In Millions)
Net operating revenues
$
909.8

 
$
740.6

Less: Provision for doubtful accounts
(16.5
)
 
(11.6
)
Net operating revenues less provision for doubtful accounts
893.3

 
729.0

Operating expenses:
 

 
 

Salaries and benefits
486.1

 
385.1

Other operating expenses
119.2

 
103.2

Occupancy costs
18.0

 
12.1

Supplies
35.0

 
31.4

General and administrative expenses
31.9

 
34.6

Depreciation and amortization
42.4

 
31.9

Government, class action, and related settlements

 
8.0

Professional fees—accounting, tax, and legal
0.2

 
2.2

Total operating expenses
732.8

 
608.5

Loss on early extinguishment of debt
2.4

 
1.2

Interest expense and amortization of debt discounts and fees
44.6

 
31.8

Other income
(0.6
)
 
(0.5
)
Equity in net income of nonconsolidated affiliates
(2.4
)
 
(1.6
)
Income from continuing operations before income tax expense
116.5

 
89.6

Provision for income tax expense
39.7

 
30.3

Income from continuing operations
76.8

 
59.3

Loss from discontinued operations, net of tax
(0.1
)
 
(0.3
)
Net income
76.7

 
59.0

Less: Net income attributable to noncontrolling interests
(18.7
)
 
(16.5
)
Net income attributable to HealthSouth
58.0

 
42.5

Less: Convertible perpetual preferred stock dividends

 
(1.6
)
Net income attributable to HealthSouth common shareholders
$
58.0

 
$
40.9



 
(Continued)
5

HealthSouth Corporation and Subsidiaries
Condensed Consolidated Statements of Operations (Continued)
(Unaudited)

 
Three Months Ended March 31,
 
2016
 
2015
 
(In Millions, Except Per Share Data)
Weighted average common shares outstanding:
 

 
 

Basic
89.5

 
87.1

Diluted
99.4

 
101.1

 
 
 
 
Earnings per common share:
 
 
 
Basic earnings per share attributable to HealthSouth common shareholders:
 
 
 

Continuing operations
$
0.65

 
$
0.47

Discontinued operations

 

Net income
$
0.65

 
$
0.47

Diluted earnings per share attributable to HealthSouth common shareholders:
 
 
 
Continuing operations
$
0.61

 
$
0.44

Discontinued operations

 

Net income
$
0.61

 
$
0.44

 
 
 
 
Cash dividends per common share
$
0.23

 
$
0.21

 
 
 
 
Amounts attributable to HealthSouth common shareholders:
 
 
 

Income from continuing operations
$
58.1

 
$
42.8

Loss from discontinued operations, net of tax
(0.1
)
 
(0.3
)
Net income attributable to HealthSouth
$
58.0

 
$
42.5



 
 
6

HealthSouth Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)

 
March 31,
2016
 
December 31,
2015
 
(In Millions)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
73.2

 
$
61.6

Accounts receivable, net of allowance for doubtful accounts of $44.7 in 2016; $39.3 in 2015
431.9

 
410.5

Other current assets
127.0

 
126.6

Total current assets
632.1

 
598.7

Property and equipment, net
1,317.7

 
1,310.1

Goodwill
1,891.9

 
1,890.1

Intangible assets, net
415.8

 
419.4

Deferred income tax assets
145.0

 
190.8

Other long-term assets
205.8

 
197.0

Total assets
$
4,608.3

 
$
4,606.1

Liabilities and Shareholders’ Equity
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
36.6

 
$
36.8

Accounts payable
62.7

 
61.6

Accrued expenses and other current liabilities
364.5

 
328.0

Total current liabilities
463.8

 
426.4

Long-term debt, net of current portion
3,079.6

 
3,134.7

Other long-term liabilities
144.8

 
144.6

 
3,688.2

 
3,705.7

Commitments and contingencies
 
 
 
Redeemable noncontrolling interests
96.2

 
121.1

Shareholders’ equity:
 

 
 

HealthSouth shareholders’ equity
649.5

 
611.4

Noncontrolling interests
174.4

 
167.9

Total shareholders’ equity
823.9

 
779.3

Total liabilities and shareholders’ equity
$
4,608.3

 
$
4,606.1


 
 
7

HealthSouth Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)

 
Three Months Ended March 31,
 
2016

2015
 
(In Millions)
Cash flows from operating activities:
 
 
 
Net income
$
76.7

 
$
59.0

Loss from discontinued operations, net of tax
0.1

 
0.3

Adjustments to reconcile net income to net cash provided by operating activities—
 

 
 

Provision for doubtful accounts
16.5

 
11.6

Depreciation and amortization
42.4

 
31.9

Equity in net income of nonconsolidated affiliates
(2.4
)
 
(1.6
)
Distributions from nonconsolidated affiliates
1.7

 
1.9

Stock-based compensation
4.5

 
9.4

Deferred tax expense
34.7

 
26.8

Other
5.9

 
10.8

Change in assets and liabilities—
 
 
 

Accounts receivable
(45.7
)
 
(37.3
)
Other assets
1.8

 
(2.9
)
Accounts payable
0.6

 
2.1

Accrued payroll
20.9

 
(23.3
)
Other liabilities
4.1

 
5.4

Premium received on bond issuance

 
8.0

Premium paid on redemption of bonds
(1.9
)
 

Net cash used in operating activities of discontinued operations
(0.2
)
 
(0.1
)
Total adjustments
82.9

 
42.7

Net cash provided by operating activities
159.7

 
102.0

 
 
 
 

 
(Continued)
8

HealthSouth Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Continued)
(Unaudited)

 
Three Months Ended March 31,
 
2016
 
2015
 
(In Millions)
Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(31.4
)
 
(17.7
)
Capitalized software costs
(7.7
)
 
(8.9
)
Acquisitions of businesses, net of cash acquired

 
(7.3
)
Net change in restricted cash
(3.2
)
 
(15.0
)
Other
2.8

 
3.2

Net cash used in investing activities
(39.5
)
 
(45.7
)
Cash flows from financing activities:
 
 
 
Proceeds from bond issuance

 
700.0

Principal payments on debt, including pre-payments
(56.3
)
 
(252.9
)
Borrowings on revolving credit facility
60.0

 
35.0

Payments on revolving credit facility
(60.0
)
 
(350.0
)
Debt amendment and issuance costs

 
(13.7
)
Repurchases of common stock, including fees and expenses
(12.9
)
 

Dividends paid on common stock
(21.3
)
 
(18.6
)
Dividends paid on convertible perpetual preferred stock

 
(1.6
)
Distributions paid to noncontrolling interests of consolidated affiliates
(15.6
)
 
(13.2
)
Other
(2.5
)
 
0.3

Net cash (used in) provided by financing activities
(108.6
)
 
85.3

Increase in cash and cash equivalents
11.6

 
141.6

Cash and cash equivalents at beginning of period
61.6

 
66.7

Cash and cash equivalents at end of period
$
73.2

 
$
208.3




 
 
9

HealthSouth Corporation and Subsidiaries
Supplemental Information
Earnings Per Share

 
QTD
 
 
Q1 2016
 
Q1 2015
 
 
(In Millions, Except Per Share Data)
 
Adjusted EBITDA
$
192.1

 
$
156.1

 
Interest expense and amortization of debt discounts and fees
(44.6
)
 
(31.8
)
 
Depreciation and amortization
(42.4
)
 
(31.9
)
 
Stock-based compensation expense
(4.5
)
 
(9.4
)
 
Noncash (loss) gain on disposal or impairment of assets
(0.2
)
 
1.5

 
 
100.4

 
84.5

 
Certain nonrecurring expenses:
 
 
 
 
Government, class action, and related settlements

 
(8.0
)
 
Professional fees—accounting, tax, and legal
(0.2
)
 
(2.2
)
 
Loss on early extinguishment of debt
(2.4
)
 
(1.2
)
 
Pre-tax income
97.8

 
73.1

 
Income tax expense (1)
(39.7
)
 
(30.3
)
 
Income from continuing operations (2)
$
58.1

 
$
42.8

 
 
 
 
 
 
Basic shares
89.5

 
87.1

 
Diluted shares
99.4

 
101.1

 
 
 
 
 
 
Basic earnings per share (2)
$
0.65

 
$
0.47

 
Diluted earnings per share (2)
$
0.61

 
$
0.44

 
(1) 
Current income tax expense for the three months ended March 31, 2016 and 2015 was $5.0 million and $3.5 million, respectively.
(2) 
Income from continuing operations attributable to HealthSouth.


 
 
10

HealthSouth Corporation and Subsidiaries
Supplemental Information
Adjusted Earnings Per Share


 
Q1
 
2016
 
2015
 
 
 
 
Earnings per share, as reported
$
0.61

 
$
0.44

Adjustments, net of tax:
 
 
 
Government, class action, and related settlements

 
0.05

Professional fees — accounting, tax, and legal

 
0.01

Mark-to-market adjustments for stock appreciation rights
(0.01
)
 

Loss on early extinguishment of debt
0.01

 
0.01

Adjusted earnings per share*
$
0.61

 
$
0.51

* Adjusted EPS may not sum due to rounding.


 
 
11

HealthSouth Corporation and Subsidiaries
Supplemental Information
Adjusted Earnings Per Share


 
For the Three Months Ended March 31, 2016
 
 
 
Adjustments
 
 
 
As Reported
 
Professional Fees - Accounting, Tax, and Legal
 
Mark-to-Market Adjustment for Stock Appreciation Rights
 
Loss on Early Extinguishment of Debt
 
As Adjusted
 
(In Millions, Except Per Share Amounts)
Adjusted EBITDA*
$
192.1

 
$

 
$

 
$

 
$
192.1

Depreciation and amortization
(42.4
)
 

 

 

 
(42.4
)
Professional fees - accounting, tax, and legal
(0.2
)
 
0.2

 

 

 

Loss on early extinguishment of debt
(2.4
)
 

 

 
2.4

 

Interest expense and amortization of debt discounts and fees
(44.6
)
 

 

 

 
(44.6
)
Stock-based compensation
(4.5
)
 

 
(2.4
)
 

 
(6.9
)
Loss on disposal or impairment of assets
(0.2
)
 

 

 

 
(0.2
)
Income from continuing operations before income tax expense
97.8

 
0.2

 
(2.4
)
 
2.4

 
98.0

Provision for income tax expense
(39.7
)
 
(0.1
)
 
1.0

 
(1.0
)
 
(39.8
)
Income from continuing operations attributable to HealthSouth
$
58.1

 
$
0.1

 
$
(1.4
)
 
$
1.4

 
$
58.2

Add: Interest on convertible debt, net of tax
2.4

 
 
 
 
 
 
 
2.4

Numerator for diluted earnings per share
$
60.5

 
 
 
 
 
 
 
$
60.6

 
 
 
 
 
 
 
 
 
 
Diluted earnings per share from continuing operations**
$
0.61

 
$

 
$
(0.01
)
 
$
0.01

 
$
0.61

Diluted shares used in calculation
99.4

 
 
 
 
 
 
 
 
* Reconciliation to GAAP provided on page 14
** Adjusted EPS may not sum across due to rounding.

 
 
12

HealthSouth Corporation and Subsidiaries
Supplemental Information
Adjusted Earnings Per Share


 
For the Three Months Ended March 31, 2015
 
 
 
Adjustments
 
 
 
As Reported
 
Government, Class Action, and Related Settlements
 
Professional Fees - Accounting, Tax, and Legal
 
Loss on Early Extinguishment of Debt
 
As Adjusted
 
(In Millions, Except Per Share Amounts)
Adjusted EBITDA*
$
156.1

 
$

 
$

 
$

 
$
156.1

Depreciation and amortization
(31.9
)
 

 

 

 
(31.9
)
Government, class action, and related settlements
(8.0
)
 
8.0

 

 

 

Professional fees - accounting, tax, and legal
(2.2
)
 

 
2.2

 

 

Loss on early extinguishment of debt
(1.2
)
 

 

 
1.2

 

Interest expense and amortization of debt discounts and fees
(31.8
)
 

 

 

 
(31.8
)
Stock-based compensation
(9.4
)
 

 

 

 
(9.4
)
Gain on disposal or impairment of assets
1.5

 

 

 

 
1.5

Income from continuing operations before income tax expense
73.1

 
8.0

 
2.2

 
1.2

 
84.5

Provision for income tax expense
(30.3
)
 
(3.2
)
 
(0.9
)
 
(0.5
)
 
(34.9
)
Income from continuing operations attributable to HealthSouth
$
42.8

 
$
4.8

 
$
1.3

 
$
0.7

 
$
49.6

Add: Interest on convertible debt, net of tax
2.3

 
 
 
 
 
 
 
2.3

Numerator for diluted earnings per share
$
45.1

 
 
 
 
 
 
 
$
51.9

 
 
 
 
 
 
 
 
 
 
Diluted earnings per share from continuing operations**
$
0.44

 
$
0.05

 
$
0.01

 
$
0.01

 
$
0.51

Diluted shares used in calculation
101.1

 
 
 
 
 
 
 
 

* Reconciliation to GAAP provided on page 14
** Adjusted EPS may not sum across due to rounding.

 
 
13

HealthSouth Corporation and Subsidiaries
Supplemental Information
Reconciliation of Net Income to Adjusted EBITDA


 
Three Months Ended March 31,
 
2016
 
2015
 
(In Millions)
Net income
$
76.7

 
$
59.0

Loss from discontinued operations, net of tax, attributable to HealthSouth
0.1

 
0.3

Provision for income tax expense
39.7

 
30.3

Interest expense and amortization of debt discounts and fees
44.6

 
31.8

Professional fees—accounting, tax, and legal
0.2

 
2.2

Government, class action, and related settlements

 
8.0

Loss on early extinguishment of debt
2.4

 
1.2

Net noncash loss (gain) on disposal or impairment of assets
0.2

 
(1.5
)
Depreciation and amortization
42.4

 
31.9

Stock-based compensation expense
4.5

 
9.4

Net income attributable to noncontrolling interests
(18.7
)
 
(16.5
)
Adjusted EBITDA
$
192.1

 
$
156.1


 
 
14

HealthSouth Corporation and Subsidiaries
Supplemental Information
Reconciliation of Net Cash Provided by Operating Activities to Adjusted Free Cash Flow

 
Three Months Ended March 31,
 
 
2016
 
2015
 
(In Millions)
Net cash provided by operating activities
$
159.7

 
$
102.0

Impact of discontinued operations
0.2

 
0.1

Net cash provided by operating activities of continuing operations
159.9

 
102.1

Capital expenditures for maintenance
(17.7
)
 
(18.3
)
Dividends paid on convertible perpetual preferred stock

 
(1.6
)
Distributions paid to noncontrolling interests of consolidated affiliates
(15.6
)
 
(13.2
)
Nonrecurring items:
 
 
 
Net premium on bond issuance/repayment
1.9

 
(8.0
)
Encompass transaction costs and related assumed liabilities
0.5

 
17.7

Reliant/CareSouth transaction costs
0.3

 

Cash paid for:
 
 
 
Professional fees—accounting, tax, and legal
0.2

 
0.7

Adjusted free cash flow
$
129.5

 
$
79.4

For the three months ended March 31, 2016, net cash used in investing activities was $39.5 million and resulted primarily from capital expenditures. Net cash used in financing activities during the three months ended March 31, 2016 was $108.6 million and resulted primarily from the redemption of $50 million of 7.75% Senior Notes due 2022 in March 2016, cash dividends paid on common stock, and distributions paid to noncontrolling interests of consolidated affiliates.
For the three months ended March 31, 2015, net cash used in investing activities was $45.7 million and resulted primarily from capital expenditures, an acquisition, and the net change in restricted cash. Net cash provided by financing activities during the three months ended March 31, 2015 was $85.3 million and resulted primarily from the Company's public offering of 5.125% Senior Notes due 2023.


 
 
15

HealthSouth Corporation and Subsidiaries
Forward-Looking Statements

Statements contained in this press release which are not historical facts, such as those relating to financial guidance and anticipated acquisitions, are forward-looking statements. In addition, HealthSouth, through its senior management, may from time to time make forward-looking public statements concerning the matters described herein. All such estimates, projections, and forward-looking information speak only as of the date hereof, and HealthSouth undertakes no duty to publicly update or revise such forward-looking information, whether as a result of new information, future events, or otherwise. Such forward-looking statements are necessarily estimates based upon current information, involve a number of risks and uncertainties, and relate to, among other things, future events, HealthSouth's plan to repurchase its debt or equity securities, dividend strategies, effective income tax rates, HealthSouth's business strategy, its financial plans, its future financial performance, its projected business results or model, its ability to return value to shareholders, its projected capital expenditures, its leverage ratio, its acquisition opportunities, and the impact of future legislation or regulation. Actual events or results may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors. While it is impossible to identify all such factors, factors which could cause actual events or results to differ materially from those estimated by HealthSouth include, but are not limited to, the price of HealthSouth's common or preferred stock as it affects the Company's willingness and ability to repurchase shares and the financial and accounting effects of any repurchases; any adverse outcome of various lawsuits, claims, and legal or regulatory proceedings involving HealthSouth, including its pending DOJ and HHS-OIG investigations and any matters related to yet undiscovered issues, if any, at Encompass, Reliant, or CareSouth; any adverse effects on HealthSouth's stock price resulting from the integration of Encompass, Reliant, or CareSouth; potential disruptions, breaches, or other incidents affecting the proper operation, availability, or security of HealthSouth's information systems, including unauthorized access to or theft of patient, business associate, or other sensitive information as well as unforeseen issues, if any, related to integration of Encompass' systems; the ability to successfully integrate Encompass, Reliant, or CareSouth, including realization of anticipated tax benefits, revenues, and cost savings, minimizing the negative impact on margins arising from the changes in staffing and other operating practices, and avoidance of unforeseen exposure to liabilities; significant changes in HealthSouth's management team; HealthSouth's ability to successfully complete and integrate de novo developments, acquisitions, investments, and joint ventures consistent with its growth strategy; changes, delays in (including in connection with resolution of Medicare payment reviews or appeals), or suspension of reimbursement for HealthSouth's services by governmental or private payors; changes in the regulation of the healthcare industry at either or both of the federal and state levels, including as part of national healthcare reform and deficit reduction; competitive pressures in the healthcare industry and HealthSouth's response thereto; HealthSouth's ability to obtain and retain favorable arrangements with third-party payors; HealthSouth's ability to control costs, particularly labor and employee benefit costs, including group medical expenses; adverse effects resulting from coverage determinations made by Medicare Administrative Contractors regarding its Medicare reimbursement claims and lengthening delays in HealthSouth's ability to recover improperly denied claims through the administrative appeals process on a timely basis; HealthSouth's ability to adapt to changes in the healthcare delivery system, including involvement in coordinated care initiatives or programs that may arise with its referral sources; HealthSouth's ability to attract and retain nurses, therapists, and other healthcare professionals in a highly competitive environment with often severe staffing shortages and the impact on HealthSouth's labor expenses from potential union activity and staffing shortages; general conditions in the economy and capital markets, including any crisis resulting from uncertainty in the sovereign debt market; the increase in the costs of defending and insuring against alleged professional liability claims and HealthSouth's ability to predict the estimated costs related to such claims; and other factors which may be identified from time to time in HealthSouth's SEC filings and other public announcements, including HealthSouth's Form 10‑K for the year ended December 31, 2015 and Form 10-Q for the quarter ended March 31, 2016, when filed.

 
 
16
First Quarter 2016 Earnings Call April 27, 2016 SUPPLEMENTAL SLIDES


 
2 The information contained in this presentation includes certain estimates, projections and other forward-looking information that reflect our current outlook, views and plans with respect to future events, including legislative and regulatory developments, strategy, capital expenditures, development activities, dividend strategies, repurchases of securities, effective tax rates, financial performance, and business model. These estimates, projections and other forward-looking information are based on assumptions 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 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, 2015, the form 10-Q for the quarter ended March 31, 2016, when filed, 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 April 26, 2016, 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 Q1 2016 Summary................................................................................................................................................. 4-5 Inpatient Rehabilitation Segment ........................................................................................................................... 6-7 Home Health & Hospice Segment ......................................................................................................................... 8-9 Earnings per Share ................................................................................................................................................ 10-11 Adjusted Free Cash Flow....................................................................................................................................... 12 Guidance................................................................................................................................................................ 13-14 Appendix ................................................................................................................................................................ 15 Map of Locations.................................................................................................................................................... 16 Expansion Activity .................................................................................................................................................. 17 Business Outlook: Revenue Assumptions ............................................................................................................ 18 Adjusted Free Cash Flow and Tax Assumptions.................................................................................................... 19 Free Cash Flow Priorities....................................................................................................................................... 20 Debt Schedule and Maturity Profile ....................................................................................................................... 21-22 New-Store/Same-Store IRF Growth ...................................................................................................................... 23 Payment Sources (Percent of Revenues).............................................................................................................. 24 Inpatient Rehabilitation Operational and Labor Metrics ......................................................................................... 25 Home Health & Hospice Operational Metrics ........................................................................................................ 26 Share Information .................................................................................................................................................. 27 Segment Operating Results................................................................................................................................... 28-29 Reconciliations to GAAP........................................................................................................................................ 30-36 End Notes .............................................................................................................................................................. 37-38


 
4 Q1 2016 Summary (Q1 2016 vs. Q1 2015) Growth (In Millions) Q1 2016 Q1 2015 Dollars Percent HealthSouth Consolidated Net operating revenues $ 909.8 $ 740.6 $ 169.2 22.8% Adjusted EBITDA* $ 192.1 $ 156.1 $ 36.0 23.1% Inpatient Rehabilitation Segment Net operating revenues $ 749.2 $ 630.3 $ 118.9 18.9% Adjusted EBITDA* $ 196.9 $ 164.4 $ 32.5 19.8% Home Health and Hospice Segment Net operating revenues $ 160.6 $ 110.3 $ 50.3 45.6% Adjusted EBITDA* $ 22.6 $ 16.9 $ 5.7 33.7% Major takeaways: u Strong revenue, volume, and Adjusted EBITDA growth in both segments Ÿ 17% discharge growth for IRFs (same-store = 2.8%) Ÿ 56.1% admissions growth for home health (same-store = 12.6%) u Adjusted EPS grew 19.6% to $0.61 per diluted share ($0.51 per diluted share in Q1 2015). u Adjusted free cash flow grew 63.1% to $129.5 million ($79.4 million in Q1 2015). *Reconciliation to GAAP provided on pages 30-33


 
5 Q1 2016 Summary (cont.) u Balance sheet Ÿ Reduced debt by $55.3 million - See page 21. ü Redeemed $50 million of 7.75% Senior Notes due 2022 in March 2016 ü Issued notice for redemption of an additional $50 million of the 2022 Notes to be completed in May 2016 Ÿ Reduced leverage ratio by 0.3x to 4.3x - See page 21. u Adjusted diluted earnings per share*(1) were $0.61 in Q1 2016 ($0.51 in Q1 2015) - See page 11. u Expansion Activity (see page 17) Ÿ Began operating a 27-bed joint venture IRF unit in Hot Springs, AR in February 2016 Ÿ Expanded existing hospitals by 50 beds Ÿ Opened new home health location in Lee’s Summit, MO (Kansas City metro area) u Shareholder distributions Ÿ Paid quarterly cash dividend of $0.23 per share on January 15, 2016 Ÿ Declared a $0.23 per share quarterly cash dividend paid on April 15, 2016 Ÿ Repurchased 314,532 shares of common stock for ~$11 million in open market transactions * Reconciliation to GAAP provided on pages 35-36 Refer to pages 37-38 for end notes.


 
6 Inpatient Rehabilitation Segment - Revenue Q1 Q1 Favorable/ ($millions) 2016 2015 (Unfavorable) Net operating revenues: Inpatient $ 719.4 $ 606.6 18.6% Outpatient and other 29.8 23.7 25.7% Total segment revenue $ 749.2 $ 630.3 18.9% (Actual Amounts) Discharges 41,098 35,116 17.0% New-store discharge growth 14.2% Same-store discharge growth 2.8% Net patient revenue / discharge $ 17,505 $ 17,274 1.3% u Revenue growth was driven by strong same-store and new-store volume growth. u New-store discharge growth resulted from the acquisitions of Reliant (October 2015) and Cardinal Hill (May 2015), joint ventures in Savannah, GA (April 2015) and Hot Springs, AR (February 2016), and the opening of Franklin, TN (December 2015). u Revenue per discharge was impacted by the ramp up at new hospitals in Franklin, TN and Hot Springs, AR (required to treat a minimum of 30 patients for zero revenue as part of the Medicare certification process) and a $1.8 million revenue reserve for post-payment claims reviews. u Outpatient and other revenue increase was due to the acquisitions of Reliant and Cardinal Hill.


 
7 Inpatient Rehabilitation Segment - Adjusted EBITDA* Q1 % of Revenue Q1 % of Revenue($millions) 2016 2015 Net operating revenues $ 749.2 $ 630.3 Less: Provision for doubtful accounts (15.6) 2.1% (11.0) 1.7% Net operating revenues less provision for doubtful accounts 733.6 619.3 Operating expenses: Salaries and benefits (369.9) 49.4% (306.4) 48.6% Other operating expenses(a) (104.8) 14.0% (95.2) 15.1% Supplies (32.4) 4.3% (29.8) 4.7% Occupancy costs (15.6) 2.1% (10.4) 1.7% (152.8) 20.4% (135.4) 21.5% Other income 0.6 0.5 Equity in nonconsolidated affiliates 2.2 1.6 Noncontrolling interests (16.8) (15.2) Segment Adjusted EBITDA $ 196.9 $ 164.4 Percent change 19.8% In arriving at Adjusted EBITDA, the following were excluded: (a) Loss (gain) on disposal or impairment of assets $ 0.5 $ (1.5) Segment Adjusted EBITDA for the quarter of $196.9 million - Supplies expense as a percent of revenue decreased primarily due to continued supply chain initiatives. - Salaries and benefits as a percent of revenue increased primarily due to merit and benefit cost increases year over year and the ramping up of new stores. - Other operating expenses in Q1 2015 included an approximate $4 million litigation settlement(2). - Occupancy costs as a percent of revenue increased due to the acquisition of Reliant. Bad debt expense increased as a percent of revenue due to administrative payment delays at the Company's largest Medicare Administrative Contractor and continued delays resulting from the implementation of ICD-10 by certain payors; pre-payment claims denials increased year over year but were consistent with the level experienced in the second half of 2015. * Reconciliation to GAAP provided on page 33 Refer to pages 37-38 for end notes.


 
8 Home Health and Hospice Segment - Revenue Q1 Q1 Favorable/ ($millions) 2016 2015 (Unfavorable) Net operating revenues: Home health revenue $ 150.9 $ 103.9 45.2 % Hospice revenue 9.7 6.4 51.6 % Total segment revenue $ 160.6 $ 110.3 45.6 % (Actual Amounts) Admissions 25,763 16,499 56.1 % New-store admissions growth 43.5 % Same-store admissions growth 12.6 % Episodes 43,844 29,512 48.6 % New-store episode growth 36.3 % Same-store episode growth 12.3 % Revenue per episode $ 3,035 $ 3,102 (2.2)% u Revenue growth was driven by strong same-store and new-store volume growth. u New-store admission and episode growth resulted from the acquisition of CareSouth and Encompass’ other acquisitions throughout 2015. u Revenue per episode was impacted by: Ÿ Medicare reimbursement rate cuts that became effective January 1, 2016 and Ÿ lower revenue per episode at CareSouth due to patient mix.


 
9 Q1 % of Revenue Q1 % of Revenue($millions) 2016 2015 Net operating revenues $ 160.6 $ 110.3 Less: Provision for doubtful accounts (0.9) 0.6% (0.6) 0.5% Net operating revenues less provision for doubtful accounts 159.7 109.7 Operating expenses: Cost of services (78.4) 48.8% (53.4) 48.4% Support and overhead costs(a) (57.0) 35.5% (38.1) 34.5% (135.4) 84.3% (91.5) 83.0% Equity in net income of nonconsolidated affiliates 0.2 — Noncontrolling interests (1.9) (1.3) Segment Adjusted EBITDA $ 22.6 $ 16.9 Percent change 33.7% In arriving at Adjusted EBITDA, the following was excluded: (a) Gain on disposal or impairment of assets (0.3) — Home Health and Hospice Segment - Adjusted EBITDA* Segment Adjusted EBITDA for the quarter of $22.6 million. - Cost of services increased as a percent of net operating revenues primarily due to lower average revenue per episode and merit and benefit cost increases. * Reconciliation to GAAP provided on pages 29-31 * Reconciliation to GAAP provided on page 33 - Support and overhead costs increased as a percent of net operating revenues primarily due to lower average revenue per episode and expenses related to the integration of CareSouth.


 
10 Earnings per Share - As Reported Q1 (In Millions, Except Per Share Data) 2016 2015 Inpatient rehabilitation segment Adjusted EBITDA $ 196.9 $ 164.4 Home health and hospice segment Adjusted EBITDA 22.6 16.9 General and administrative expenses (27.4) (25.2) Consolidated Adjusted EBITDA 192.1 156.1 Interest expense and amortization of debt discounts and fees (44.6) (31.8) Depreciation and amortization (42.4) (31.9) Stock-based compensation expense (4.5) (9.4) Other, including noncash (loss) gain on disposal or impairment of assets (0.2) 1.5 100.4 84.5 Certain unusual and nonrecurring items: Government, class action, and related settlements — (8.0) Loss on early extinguishment of debt (2.4) (1.2) Professional fees - accounting, tax, and legal (0.2) (2.2) Pre-tax income 97.8 73.1 Income tax expense(3) (39.7) (30.3) Income from continuing operations* $ 58.1 $ 42.8 Interest and amortization on 2.0% Convertible Senior Subordinated Notes (net of tax)(4) 2.4 2.3 Diluted shares (see page 27) 99.4 101.1 Diluted earnings per share*(4) $ 0.61 $ 0.44 u Earnings per share for the first quarter of 2016 were impacted by: Ÿ Higher interest expense related to the financing of the Reliant and CareSouth acquisitions Ÿ Higher depreciation and amortization resulting from acquisitions and capital investments Ÿ Lower stock-based compensation expense due to the mark-to-market adjustment for stock appreciation rights(5) and decreased stock awards resulting from 2015’s performance under the long-term incentive plan Ÿ Loss on early extinguishment of debt associated with the $50 million redemption of the 7.75% Senior Notes due 2022 in Q1 2016 Ÿ Lower share count resulting from stock repurchases in Q4 2015 and Q1 2016 u Earnings per share for the first quarter of 2015 included ~$11 million, or $0.07 per share, for certain nonrecurring items, including the General Medicine settlement. * Earnings per share are determined using income from continuing operations attributable to HealthSouth. Refer to pages 37-38 for end notes.


 
11 Q1 2016 2015 Earnings per share, as reported $ 0.61 $ 0.44 Adjustments, net of tax: Government, class action, and related settlements — 0.05 Professional fees — accounting, tax, and legal — 0.01 Mark-to-market adjustment for stock appreciation rights(5) (0.01) — Loss on early extinguishment of debt 0.01 0.01 Adjusted earnings per share* $ 0.61 $ 0.51 Adjusted Earnings per Share(1) * Adjusted EPS may not sum due to rounding. See complete calculations of adjusted earnings per share on pages 35-36. Refer to pages 37-38 for end notes. Adjusted earnings per share removes the impact of certain unusual and nonrecurring items from the earnings per share calculation.


 
12 Adjusted Free Cash Flow 3 Mos. 2015 Adjusted EBITDA Cash Interest Expense Cash Tax Payments, Net of Refunds Working Capital and Other Maintenance Capital Expenditures Preferred Dividends Adjusted Free Cash Flow 3 Mos. 2016 $79.4 $36.0 ($12.6) $2.4 $22.1 $0.6 $1.6 $129.5 Adjusted Free Cash Flow*(6) * Reconciliation to GAAP provided on page 34 Refer to pages 37-38 for end notes. u Adjusted free cash flow grew 63.1% primarily as a result of increased Adjusted EBITDA. u Cash interest expense increased due to the financing of the Reliant and CareSouth acquisitions. u The decrease in working capital was mainly attributable to the timing of payroll-related liabilities as well as a year-over-year decrease in payroll tax withholdings related to the vesting of employee restricted stock awards. u Quarterly free cash flow for the remainder of 2016 will be impacted by the timing of income tax payments and maintenance capital expenditures, as well as working capital changes.


 
13 Adjusted EBITDA Adjusted Earnings per Share from Continuing Operations Attributable to HealthSouth Revised Guidance Net Operating Revenues Initial 2016 Full-Year Guidance Revised 2016 Full-Year Guidance Net Operating Revenues $3,580 million to $3,680 million Adjusted EBITDA $770 million to $790 million Adjusted Earnings per Share from Continuing Operations Attributable to HealthSouth $2.37 to $2.49 Projected Growth Over 2015 $3,550 million to $3,650 million $765 million to $785 million $2.32 to $2.44 13% to 16% 13% to 16% 5% to 11% +$30 million +$5 million +$0.05 per share


 
14 Inpatient Rehabilitation u Full-year contribution from Reliant and other 2015 acquisitions and openings Ÿ Transitioning to HLS business model u Continued evolution of payor mix Ÿ Managed care and Medicaid increases expected to moderate in 2016 as compared to 2015 u Estimated 1.6% increase in Medicare pricing (effective October 1, 2015) u Moderating increase in group medical expense compared to increase experienced in 2015 u Bad debt expense of 1.8% to 2.0% of net operating revenues in 2016 Guidance Considerations Home Health and Hospice u Full-year contribution from CareSouth and other 2015 acquisitions and openings Ÿ Transitioning to Encompass business model u Estimated 1.7% decrease in Medicare pricing (effective January 1, 2016) u Enhanced clinical collaboration with HealthSouth IRFs Consolidated u Completion of additional $50 million redemption of 2022 Notes in May 2016 u Diluted share count of 100.5 million shares u Tax rate of approximately 41%


 
Appendix


 
16 HealthSouth: A Leading Provider of Post-Acute Care 58% of HealthSouth's IRFs are located within a 30-mile radius of an Encompass location. Inpatient Rehabilitation Portfolio - As of March 31, 2016 122 Inpatient Rehabilitation Hospitals • 34 operate as joint ventures with acute care hospitals 29 Number of States (plus Puerto Rico) ~ 27,400 Employees Key Statistics - Trailing 4 Quarters ~ $2.8 Billion Revenue 155,143 Inpatient Discharges 608,803 Outpatient Visits Encompass Home Health and Hospice Portfolio – As of March 31, 2016 179 Home Health Locations 7 Pediatric Home Health Locations 27 Hospice Locations 24 Number of States ~ 7,500 Employees Key Statistics - Trailing 4 Quarters ~ $560 million Revenue 151,900 Home Health Episodes 2,552 Hospice Admissions IRF Marketshare 10% of IRFs 21% of Licensed Beds 28% of Patients Served Home Health and Hospice Marketshare 4th largest provider of Medicare-certified skilled home health services


 
17 Expansion Activity Inpatient Rehabilitation Facilities # of New Beds 2016 2017 2018 De Novo: Modesto, CA 50 — — Pearland, TX — 40 — Murrieta, CA — — 50 Joint Ventures: Hot Springs, AR 40 — — Broken Arrow, OK — 40 — Bryan, TX 49 — — Westerville, OH — 60 — Jackson, TN — 48 — Bed Expansions, net* 110 100 100 249 288 150 Home Health and Hospice # of locations December 31, 2015 213 Acquisitions — De Novo 1 Merged / Closed Locations (1) March 31, 2016 213 * Net bed expansions in each year may change due to the timing of certain regulatory approvals and/or construction delays. u Opened one home health location in Lee’s Summit, MO (Kansas City metro area) u Closed one legacy HealthSouth home health agency in Sea Pines, FL u Began operating 27-bed IRF unit in Hot Springs, AR in February 2016 Ÿ joint venture with CHI St. Vincent Hot Springs Ÿ will relocate unit to new 40-bed hospital when construction is completed (expected Q3 2016) u Expanded existing hospitals by 50 beds Ÿ 40 beds in Cincinnati, OH Ÿ 10 beds in Johnson City, TN (Quillen)


 
18 • 10% to15% annual episode growth • Includes $35-$40 million per annum in agency acquisitions Volume Inpatient Rehabilitation Home Health & Hospice Medicare Pricing Approx. 74% of Revenue Approx. 84% of Revenue FY 2016 Q415-Q316 FY 2017 Q416-Q317 Proposed Rule FY 2018* Q417-Q318 CY 2016 Q116-Q416 CY 2017 Q117-Q417 Mngt. Estimate CY 2018* Q118-Q418 Market basket update 2.4% 2.7% 1.0% 2.3% 2.6% 1.0% Healthcare reform reduction (20) bps (75) bps - - - - Healthcare reform rebasing adjustment - - - (2.4%) (2.4%) - Healthcare reform coding intensity reduction - - - (0.9%) (0.9%) (0.9%) Expiration of rural add-on - - - - - Approx. (0.7%) Healthcare reform productivity adjustment (50) bps (50) bps - (40) bps Approx. (50) bps - Net impact - all providers 1.7% 1.45% 1.0% (1.4%) (1.2%) (0.6%) Estimated impact to HealthSouth 1.6% 1.7% (1.7%) Managed Care Pricing, Including Medicare Advantage Approx. 19% of Revenue Approx. 11% of Revenue 2016 2017 2018 2016 2017 2018 Expected increases 2-4% 2-4% 2-4% 0-2% 0-2% 0-2% Business Outlook: Revenue Assumptions 2% Sequestration • 3+% annual discharge growth • 10+% annual episode growth• Includes $30-$40 million per annum in agency acquisitions * The Medicare Access and CHIP Reauthorization Act of 2015 mandated a market basket update of +1.0% in 2018 for post-acute providers including rehabilitation hospitals as well as home health and hospice agencies.


 
19 Adjusted Free Cash Flow*(6) and Tax Assumptions Certain Cash Flow Items (millions) Q1 2016 Actual 2016 Assumptions 2015 Actual • Cash interest expense (net of amortization of debt discounts and fees) $41.1 $165 to $175 $128.6 • Cash payments for taxes, net of refunds $0.7 $20 to $40 $9.4 • Working Capital and Other $3.0 $60 to $80 $69.2 • Maintenance CAPEX $17.7 $95 to $110 $83.1 • Dividends paid on preferred stock(7) $— $— $3.1 • Adjusted Free Cash Flow $129.5 $360 to $445 $389.0 GAAP Tax Considerations: • Gross federal NOL of ~$183 million as of March 31, 2016 • Remaining valuation allowance of ~$28 million related to state NOLS * Reconciliation to GAAP provided on page 34 Refer to pages 37-38 for end notes. Quarterly free cash flow for the remainder of 2016 will be impacted by the timing of income tax payments and maintenance capital expenditures, as well as changes in working capital.


 
20 Free Cash Flow Priorities (In Millions) Q1 2016 2016 2015 Actuals Assumptions Actuals IRF bed expansions $4.1 $20 to $30 $20.8 New IRF’s - De novos 17.3 70 to 90 47.8 - Acquisitions — 0 to 20 786.2 New home health and hospice acquisitions — 30 to 40 200.2 $21.4 $120 to $180 $1,055.0 Q1 2016 2016 2015 Actuals Assumptions Actuals Debt redemptions (borrowings), net $55.3 $TBD $(1,060.3) Leased property purchases — TBD — Cash dividends on common stock(8) 21.3 85 77.2 Common stock repurchases 12.9 TBD 45.3 $89.5 $TBD $(937.8) Shareholder Distributions Growth in Core Business Debt Reduction Highest Priorit y 2022 senior notes are fully callable: • Redeemed $50 million in March 2016 • ~$126 million remaining as of March 31, 2016 • will complete additional $50 million redemption in May 2016 Current quarterly cash dividend of $0.23 per common share ~$149 million authorization remaining as of March 31, 2016 Note: 2015 amount for debt borrowings included ~$208 million related to the Reliant hospitals' capital lease obligations. See the debt schedule on page 21. Refer to pages 37-38 for end notes.


 
21 Debt Schedule Change in Mar. 31, Dec. 31, Debt vs. ($millions) 2016 2015 YE 2015 Advances under $600 million revolving credit facility, July 2020 - LIBOR +200bps $ 130.0 $ 130.0 $ — Term loan facility, July 2020 - LIBOR +200bps 437.8 443.3 (5.5) Bonds Payable: 7.75% Senior Notes due 2022 124.8 174.3 (49.5) 5.125% Senior Notes due 2023 294.8 294.6 0.2 5.75% Senior Notes due 2024 1,192.7 1,192.6 0.1 5.75% Senior Notes due 2025 343.5 343.4 0.1 2.0% Convertible Senior Subordinated Notes due 2043 268.3 265.9 2.4 Other notes payable 38.4 39.2 (0.8) Capital lease obligations 285.9 288.2 (2.3) Long-term debt $ 3,116.2 $ 3,171.5 $ (55.3) Debt to Adjusted EBITDA* 4.3x 4.6x * Reconciliation to GAAP provided on pages 30-32 Note: The 7.75% Senior Notes due 2022 are fully callable. The Company redeemed $50 million of the 2022 Notes in March 2016 and will complete the redemption of an additional $50 million in May 2016.


 
22 2015 2019 2020 2020 2021 2022 2023 2024 2025 2043 $350 Senior Notes 5.75% $1,200 Senior Notes 5.75% $320 Conv. Sr. Sub. Notes 2.0% $300 Senior Notes 5.125% $130 Drawn + $35 reserved for LC’s Holders have a put option in 2020 As of March 31, 2016* Debt Maturity Profile - Face Value ($ in millions) $435 Available $126 Senior Notes 7.75% Callable beginning November 2017 HealthSouth is positioned with a cost-efficient, flexible capital structure. Callable beginning March 2018 Revolver Revolver Capacity $440 Term Loans Became callable in September 2015 Callable beginning September 2020 * This chart does not include ~$286 million of capital lease obligations or ~$38 million of other notes payable. See the debt schedule on page 21. The Company will complete the redemption of $50 million of its 7.75% Senior Notes due 2022 in May 2016. • Expect to fund using cash on hand and capacity under revolving credit facility • Q2 2016 loss on early extinguishment of debt of ~$2 million • Estimated cash interest savings of ~ $2 million in 2016


 
23 25.0 20.0 15.0 10.0 5.0 0.0 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 New-Store/Same-Store IRF Growth Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Fairlawn(9) 0.6% 1.9% 1.9% 2.0% 1.1% St. Vincent’s(10) 1.2% 1.3% New Store 0.7% 1.7% 2.5% 2.5% 2.0% 1.0% —% 0.6% 1.8% 4.4% 5.7% 15.6% 14.2% Same Store 2.2% 3.3% 3.2% 1.3% 0.4% 1.4% 1.9% 2.2% 2.9% 2.8% 3.9% 3.0% 2.8% Total by Qtr. 4.1% 6.3% 5.7% 3.8% 2.4% 3.0% 3.8% 4.7% 6.7% 8.3% 9.6% 18.6% 17.0% Total by Year 5.0% 3.5% 10.9% Same-Store Year(11) 2.5% 1.3% 3.2% Same-Store Year UDS(12) (0.7)% (0.2)% 1.3% Altamonte Springs, FL (50 beds) Johnson City, TN (26 beds) Newnan, GA (50 beds) Middletown, DE (34 beds) Augusta, GA (58 beds) Littleton, CO (40 beds) Stuart, FL (34 beds) Refer to page 37-38 for end notes. Reliant (857 beds) Franklin, TN (40 beds) Lexington, KY (158 beds) Savannah, GA (50 beds) Hot Springs, AR (27 beds)


 
24 Payment Sources (Percent of Revenues) Inpatient Rehabilitation Segment Home Health and Hospice Segment Consolidated Q1 Q1 Q1 Full Year 2016 2015 2016 2015 2016 2015 2015 Medicare 73.8% 73.5% 83.5% 83.8% 75.4% 74.9% 74.9% Medicare Advantage 7.6% 8.3% 8.7% 7.3% 7.8% 8.2% 7.9% Managed care 11.0% 11.2% 2.7% 3.1% 9.5% 10.0% 9.8% Medicaid 3.0% 2.0% 4.9% 5.6% 3.4% 2.6% 3.0% Other third-party payors 1.6% 1.7% —% 0.1% 1.4% 1.5% 1.7% Workers’ compensation 1.1% 1.1% —% —% 0.9% 0.9% 0.9% Patients 0.6% 0.8% 0.1% 0.1% 0.5% 0.7% 0.6% Other income 1.3% 1.4% 0.1% —% 1.1% 1.2% 1.2% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%


 
25 Inpatient Rehabilitation Operational and Labor Metrics Q1 Q4 Q3 Q2 Q1 Full Year 2016 2015 2015 2015 2015 2015 (In Millions) Net patient revenue-inpatient $ 719.4 $ 696.8 $ 625.1 $ 618.7 $ 606.6 $ 2,547.2 Net patient revenue-outpatient and other revenues 29.8 29.1 26.5 26.6 23.7 105.9 Net operating revenues $ 749.2 $ 725.9 $ 651.6 $ 645.3 $ 630.3 $ 2,653.1 Discharges(13) 41,098 40,891 36,746 36,408 35,116 149,161 Net patient revenue per discharge $ 17,505 $ 17,040 $ 17,011 $ 16,994 $ 17,274 $ 17,077 Outpatient visits 162,649 163,119 138,121 144,914 131,353 577,507 Average length of stay 12.9 12.6 12.9 13.0 13.3 12.9 Occupancy % 68.9% 66.4% 69.6% 70.4% 72.8% 62.8% # of licensed beds 8,481 8,404 7,422 7,374 7,100 8,404 Occupied beds 5,843 5,580 5,166 5,191 5,169 5,278 Full-time equivalents (FTEs)(14) 19,352 19,136 17,782 17,601 17,002 17,880 Contract labor 194 152 141 118 116 132 Total FTE and contract labor 19,546 19,288 17,923 17,719 17,118 18,012 EPOB(15) 3.35 3.46 3.47 3.41 3.31 3.41 Refer to pages 37-38 for end notes.


 
26 Home Health and Hospice Operational Metrics Q1 Q4 Q3 Q2 Q1 Full Year 2016 2015 2015 2015 2015 2015 (In Millions) Net home health revenue $ 150.9 $ 144.4 $ 118.3 $ 111.5 $ 103.9 $ 478.1 Net hospice and other revenue 9.7 9.0 8.7 7.6 6.4 31.7 Net operating revenues $ 160.6 $ 153.4 $ 127.0 $ 119.1 $ 110.3 $ 509.8 Home Health: (Actual Amounts) Admissions(16) 25,763 22,892 18,076 16,862 16,499 74,329 Recertifications 19,453 18,909 16,542 15,103 14,485 65,039 Episodes 43,844 42,697 33,542 31,817 29,512 137,568 Average revenue per episode $ 3,035 $ 3,005 $ 3,123 $ 3,082 $ 3,102 $ 3,072 Episodic visits per episode 19.1 18.2 19.6 19.4 19.6 19.1 Total visits 949,387 862,224 721,055 675,095 630,999 2,889,373 Cost per visit $ 72 $ 73 $ 72 $ 71 $ 71 $ 72 Hospice: Admissions(17) 724 614 620 594 624 2,452 Patient days 63,431 59,100 55,627 49,272 40,898 204,898 Revenue per day $ 153 $ 155 $ 156 $ 154 $ 156 $ 155 Refer to pages 37-38 for end notes.


 
27 Share Information Weighted Average for the Period Q1 Full Year (Millions) 2016 2015 2015 2014 2013 Basic shares outstanding(7) 89.5 87.1 89.4 86.8 88.1 Convertible perpetual preferred stock(7)(18) — 3.2 1.0 3.2 10.5 Convertible senior subordinated notes(18) 8.4 8.2 8.3 8.2 1.0 Restricted stock awards, dilutive stock options, restricted stock units, and common stock warrants(19) 1.5 2.6 2.3 2.5 2.5 Diluted shares outstanding 99.4 101.1 101.0 100.7 102.1 End of Period Q1 Full Year (Millions) 2016 2015 2015 2014 2013 Basic shares outstanding(7) 89.4 87.2 89.3 86.6 86.8 Approx. Approx. Date Conversion Rate Conversion Price Convertible senior subordinated notes(18) 04/01/16 26.6011 $37.59 Refer to pages 37-38 for end notes.


 
28 Segment Operating Results Q1 2016 Q1 2015 IRF Home Health and Hospice Reclasses HealthSouthConsolidated IRF Home Health and Hospice Reclasses HealthSouthConsolidated Net operating revenues $ 749.2 $ 160.6 $ — $ 909.8 $ 630.3 $ 110.3 $ — $ 740.6 Less: Provision for doubtful accounts (15.6) (0.9) — (16.5) (11.0) (0.6) — (11.6) 733.6 159.7 — 893.3 619.3 109.7 — 729.0 Operating Expenses: Inpatient Rehabilitation: Salaries and benefits (369.9) — (116.2) (486.1) (306.4) — (78.7) (385.1) Other operating expenses(a) (104.8) — (14.2) (119.0) (95.2) — (9.5) (104.7) Supplies (32.4) — (2.6) (35.0) (29.8) — (1.6) (31.4) Occupancy (15.6) — (2.4) (18.0) (10.4) — (1.7) (12.1) Home Health and Hospice: Cost of services sold (excluding depreciation and amortization) — (78.4) 78.4 — — (53.4) 53.4 — Support and overhead costs — (57.0) 57.0 — — (38.1) 38.1 — (522.7) (135.4) — (658.1) (441.8) (91.5) — (533.3) Other income 0.6 — — 0.6 0.5 — — 0.5 Equity in net income of nonconsolidated affiliates 2.2 0.2 — 2.4 1.6 — — 1.6 Noncontrolling interest (16.8) (1.9) — (18.7) (15.2) (1.3) — (16.5) Segment Adjusted EBITDA $ 196.9 $ 22.6 $ — 219.5 $ 164.4 $ 16.9 $ — 181.3 General and administrative expenses(b) (27.4) (25.2) Adjusted EBITDA $ 192.1 $ 156.1 Reconciliation to GAAP provided on pages 30-33 In arriving at Adjusted EBITDA, the following were excluded: (a) Loss (gain) on disposal or impairment of assets $ 0.5 $ (0.3) $ — $ 0.2 $ (1.5) $ — $ — $ (1.5) (b) Stock-based compensation — — — 4.5 — — — 9.4


 
29 Segment Operating Results Year Ended December 31, 2015 IRF Home Health and Hospice Reclasses HealthSouth Consolidated Net operating revenues $ 2,653.1 $ 509.8 $ — $ 3,162.9 Less: Provision for doubtful accounts (44.7) (2.5) — (47.2) 2,608.4 507.3 — 3,115.7 Operating Expenses: Inpatient Rehabilitation: Salaries and benefits (1,310.6) — (360.2) (1,670.8) Other operating expenses(a) (387.7) — (41.8) (429.5) Supplies (120.9) — (7.8) (128.7) Occupancy (46.2) — (7.7) (53.9) Home Health and Hospice: Cost of services sold (excluding depreciation and amortization) — (244.8) 244.8 — Support and overhead costs — (172.7) 172.7 — (1,865.4) (417.5) — (2,282.9) Other income 2.3 — — 2.3 Equity in net income of nonconsolidated affiliates 8.6 0.1 — 8.7 Noncontrolling interest (62.9) (6.8) — (69.7) Segment Adjusted EBITDA $ 691.0 $ 83.1 $ — 774.1 General and administrative expenses(b)(c) (94.8) Gain related to SCA equity interest 3.2 Adjusted EBITDA $ 682.5 Reconciliation to GAAP provided on pages 30-33 In arriving at Adjusted EBITDA, the following were excluded: (a) Loss (gain) on disposal or impairment of assets $ 2.8 $ (0.2) $ — $ 2.6 (b) Stock-based compensation expense — — — 26.2 (c) Transaction costs — — — 12.3


 
30 Reconciliation of Net Income to Adjusted EBITDA(20) 2016 Q1 (in millions, except per share data) Total Per Share Net Income $ 76.7 Loss from disc ops, net of tax, attributable to HealthSouth 0.1 Net income attributable to noncontrolling interests (18.7) Income from continuing operations attributable to HealthSouth* 58.1 $ 0.61 Gov’t, class action, and related settlements — Pro fees - acct, tax, and legal 0.2 Provision for income tax expense 39.7 Interest expense and amortization of debt discounts and fees 44.6 Depreciation and amortization 42.4 Loss on early extinguishment of debt 2.4 Other, including net noncash loss on disposal or impairment of assets 0.2 Stock-based compensation expense 4.5 Adjusted EBITDA $ 192.1 Weighted average common shares outstanding: Basic 89.5 Diluted 99.4 * Per share amounts for each period presented are based on diluted weighted-average shares outstanding. Refer to pages 37-38 for end notes.


 
31 Reconciliation of Net Income to Adjusted EBITDA(20) 2015 Q1 Q2 Q3 Q4 Full Year (in millions, except per share data) Total Per Share Total Per Share Total Per Share Total Per Share Total Per Share Net Income $ 59.0 $ 60.2 $ 67.8 $ 65.8 $ 252.8 Loss (income) from disc ops, net of tax, attributable to HealthSouth 0.3 1.6 (0.3) (0.7) 0.9 Net income attributable to noncontrolling interests (16.5) (17.3) (17.1) (18.8) (69.7) Income from continuing operations attributable to HealthSouth* 42.8 $ 0.44 44.5 $ 0.47 50.4 $ 0.52 46.3 $ 0.48 184.0 $ 1.92 Gov’t, class action, and related settlements 8.0 — — (0.5) 7.5 Pro fees - acct, tax, and legal 2.2 0.1 0.4 0.3 3.0 Provision for income tax expense 30.3 32.2 35.9 43.5 141.9 Interest expense and amortization of debt discounts and fees 31.8 30.9 35.6 44.6 142.9 Depreciation and amortization 31.9 32.7 33.7 41.4 139.7 Loss on early extinguishment of debt 1.2 18.8 — 2.4 22.4 Other, including net noncash (gain) loss on disposal or impairment of assets (1.5) 0.8 0.9 2.4 2.6 Stock-based compensation expense 9.4 6.2 6.2 4.4 26.2 Encompass transaction costs — 3.3 2.3 6.7 12.3 Adjusted EBITDA $ 156.1 $ 169.5 $ 165.4 $ 191.5 $ 682.5 Weighted average common shares outstanding: Basic 87.1 89.8 90.6 90.1 89.4 Diluted 101.1 101.5 101.5 100.6 101.0 * Per share amounts for each period presented are based on diluted weighted-average shares outstanding. Refer to pages 37-38 for end notes.


 
32 Net Cash Provided by Operating Activities Reconciled to Adjusted EBITDA Q1 Full Year (Millions) 2016 2015 2015 Net cash provided by operating activities $ 159.7 $ 102.0 $ 484.8 Provision for doubtful accounts (16.5) (11.6) (47.2) Professional fees—accounting, tax, and legal 0.2 2.2 3.0 Interest expense and amortization of debt discounts and fees 44.6 31.8 142.9 Equity in net income of nonconsolidated affiliates 2.4 1.6 8.7 Net income attributable to noncontrolling interests in continuing operations (18.7) (16.5) (69.7) Amortization of debt-related items (3.4) (3.3) (14.3) Distributions from nonconsolidated affiliates (1.7) (1.9) (7.7) Current portion of income tax expense 5.0 3.5 14.8 Change in assets and liabilities 18.3 56.0 147.1 Net premium paid on bond issuance/redemption 1.9 (8.0) 3.9 Cash used in operating activities of discontinued operations 0.2 0.1 0.7 Reliant/CareSouth transaction costs — — 12.3 Encompass transaction costs — — — Other 0.1 0.2 3.2 Adjusted EBITDA $ 192.1 $ 156.1 $ 682.5


 
33 Reconciliation of Segment Adjusted EBITDA to Income from Continuing Operations Before Income Tax Expense Three Months Ended Year Ended March 31, December 31, 2016 2015 2015 (In Millions) Total segment Adjusted EBITDA $ 219.5 $ 181.3 $ 774.1 General and administrative expenses (31.9) (34.6) (133.3) Depreciation and amortization (42.4) (31.9) (139.7) (Loss) gain on disposal or impairment of assets (0.2) 1.5 (2.6) Government, class action, and related settlements — (8.0) (7.5) Professional fees - accounting, tax, and legal (0.2) (2.2) (3.0) Loss on early extinguishment of debt (2.4) (1.2) (22.4) Interest expense and amortization of debt discounts and fees (44.6) (31.8) (142.9) Gain on consolidation of former equity method hospital — — — Net income attributable to noncontrolling interests 18.7 16.5 69.7 Gain related to SCA equity interest — — 3.2 Income from continuing operations before income tax expense $ 116.5 $ 89.6 $ 395.6


 
34 Reconciliation of Net Cash Provided by Operating Activities to Adjusted Free Cash Flow(6) Q1 Full Year ($millions) 2016 2015 2015 Net cash provided by operating activities $ 159.7 $ 102.0 $ 484.8 Impact of discontinued operations 0.2 0.1 0.7 Net cash provided by operating activities of continuing operations 159.9 102.1 485.5 Capital expenditures for maintenance (17.7) (18.3) (83.1) Dividends paid on convertible perpetual preferred stock(7) — (1.6) (3.1) Distributions paid to noncontrolling interests of consolidated affiliates (15.6) (13.2) (54.4) Unusual and nonrecurring items: Cash paid for professional fees - accounting, tax, and legal 0.2 0.7 4.1 Encompass transaction costs and related assumed liabilities 0.5 17.7 17.9 Reliant and CareSouth transaction costs 0.3 — 10.4 Net premium on bond issuance/repayment 1.9 (8.0) 4.0 Cash paid for government, class action, and related settlements — — 7.7 Adjusted free cash flow $ 129.5 $ 79.4 $ 389.0 Cash dividends on common stock $ 21.3 $ 18.6 $ 77.2 Refer to pages 37-38 for end notes.


 
35 For the Three Months Ended March 31, 2016 Adjustments As Reported Professional Fees - Accounting, Tax, and Legal Mark-to- Market Adjustment for Stock Appreciation Rights Loss on Early Extinguishment of Debt As Adjusted (In Millions, Except Per Share Amounts) Adjusted EBITDA* $ 192.1 $ — $ — $ — $ 192.1 Depreciation and amortization (42.4) — — — (42.4) Professional fees - accounting, tax, and legal (0.2) 0.2 — — — Loss on early extinguishment of debt (2.4) — — 2.4 — Interest expense and amortization of debt discounts and fees (44.6) — — — (44.6) Stock-based compensation (4.5) — (2.4) — (6.9) Loss on disposal or impairment of assets (0.2) — — — (0.2) Income from continuing operations before income tax expense 97.8 0.2 (2.4) 2.4 98.0 Provision for income tax expense (39.7) (0.1) 1.0 (1.0) (39.8) Income from continuing operations attributable to HealthSouth $ 58.1 $ 0.1 $ (1.4) $ 1.4 $ 58.2 Add: Interest on convertible debt, net of tax 2.4 2.4 Numerator for diluted earnings per share $ 60.5 $ 60.6 Diluted earnings per share from continuing operations** $ 0.61 $ — $ (0.01) $ 0.01 $ 0.61 Diluted shares used in calculation 99.4 Adjusted EPS(1) - Q1 2016 * Reconciliation to GAAP provided on page 30; Refer to pages 37-38 for end notes. ** Adjusted EPS may not sum across due to rounding.


 
36 For the Three Months Ended March 31, 2015 Adjustments As Reported Government, Class Action, and Related Settlements Professional Fees - Accounting, Tax, and Legal Loss on Early Extinguishment of Debt As Adjusted (In Millions, Except Per Share Amounts) Adjusted EBITDA* $ 156.1 $ — $ — $ — $ 156.1 Depreciation and amortization (31.9) — — — (31.9) Government, class action, and related settlements (8.0) 8.0 — — — Professional fees - accounting, tax, and legal (2.2) — 2.2 — — Loss on early extinguishment of debt (1.2) — — 1.2 — Interest expense and amortization of debt discounts and fees (31.8) — — — (31.8) Stock-based compensation (9.4) — — — (9.4) Gain on disposal or impairment of assets 1.5 — — — 1.5 Income from continuing operations before income tax expense 73.1 8.0 2.2 1.2 84.5 Provision for income tax expense (30.3) (3.2) (0.9) (0.5) (34.9) Income from continuing operations attributable to HealthSouth $ 42.8 $ 4.8 $ 1.3 $ 0.7 $ 49.6 Add: Interest on convertible debt, net of tax 2.3 2.3 Numerator for diluted earnings per share $ 45.1 $ 51.9 Diluted earnings per share from continuing operations** $ 0.44 $ 0.05 $ 0.01 $ 0.01 $ 0.51 Diluted shares used in calculation 101.1 Adjusted EPS(1) - Q1 2015 * Reconciliation to GAAP provided on page 31; Refer to pages 37-38 for end notes. ** Adjusted EPS may not sum across due to rounding.


 
37 End Notes (1) HealthSouth is providing adjusted earnings per share from continuing operations attributable to HealthSouth (“adjusted earnings per share”), which is a non-GAAP measure. The Company believes the presentation of adjusted earnings per share provides useful additional information to investors because it provides better comparability of ongoing performance to prior periods given that it excludes the impact of government, class action, and related settlements, professional fees - accounting, tax, and legal, mark-to-market adjustments for stock appreciation rights, gains or losses related to hedging instruments, loss on early extinguishment of debt, adjustments to its income tax provision (such as valuation allowance adjustments and settlements of income tax claims), items related to corporate and facility restructurings, and certain other items. It is reasonable to expect that one or more of these excluded items will occur in future periods, but the amounts recognized can vary significantly from period to period and may not directly relate to the Company's ongoing operations. Accordingly, they can complicate comparisons of the Company's results of operations across periods and comparisons of the Company's results to those of other healthcare companies. Adjusted earnings per share should not be considered as a measure of financial performance under generally accepted accounting principles in the United States as the items excluded from it are significant components in understanding and assessing financial performance. Because adjusted earnings per share is not a measurement determined in accordance with GAAP and is thus susceptible to varying calculations, it may not be comparable as presented to other similarly titled measures of other companies. (2) In the first quarter of 2015, the Company recorded a settlement related to sexual harassment and other claims brought by eight former employees against another former employee. The settlement was not covered by insurance and was included in “Other Operating Expenses.” (3) Current income tax expense was $5.0 million and $3.5 million for Q1 2016 and Q1 2015, respectively. (4) The interest and amortization related to the convertible senior subordinated notes must be added to income from continuing operations when calculating diluted earnings per share because the debt is assumed to have been converted and the applicable shares are included in the diluted share count. (5) In connection with the Encompass acquisition, the Company granted stock appreciation rights based on the common stock of HealthSouth Home Health Holdings, Inc. to certain members of Encompass management. The fair value of Holdings’ common stock is determined using the product of the trailing 12-month specified performance measure for Holdings and a specified median market price multiple based on a basket of public home health companies. The fair value of these stock appreciation rights will vary from period to period based on Encompass’ performance and the change in the multiple of the basket of public home health companies. (6) Definition of adjusted free cash flow is net cash provided by operating activities of continuing operations minus capital expenditures for maintenance, dividends paid on preferred stock, distributions to noncontrolling interests, and nonrecurring items. Common stock dividends are not included in the calculation of adjusted free cash flow. (7) In March 2006, the Company completed the sale of 400,000 shares of its 6.5% Series A Convertible Perpetual Preferred Stock. In Q4 2013, the Company exchanged $320 million of newly issued 2.0% Convertible Senior Subordinated Notes due 2043 for 257,110 shares of its outstanding preferred stock. In April 2015, the Company exercised its rights to force conversion of all outstanding shares of preferred stock. On the conversion date, each outstanding share of preferred stock was converted into 33.9905 shares of common stock, resulting in the issuance of 3,271,415 shares of common stock. (8) On July 16, 2015, the board of directors approved a $0.02 per share, or 9.5%, increase to the quarterly cash dividend on the Company’s common stock, bringing the quarterly cash dividend to $0.23 per common share. (9) HealthSouth acquired an additional 30% equity interest in Fairlawn Rehabilitation Hospital in Worcester, MA from its joint venture partner. This transaction increased HealthSouth’s ownership interest from 50% to 80% and resulted in a change in accounting for this hospital from the equity method to a consolidated entity effective June 1, 2014. (10) In Q3 2012, HealthSouth amended the joint venture agreement related to St. Vincent Rehabilitation Hospital in Sherwood, AR which resulted in a change in accounting for this hospital from the equity method to a consolidated entity. (11) Includes consolidated HealthSouth inpatient rehabilitation hospitals classified as same store during each time period.


 
38 End Notes, con’t. (12) Data provided by Uniform Data System for Medical Rehabilitation, a division of UB Foundation Activities, Inc., a data gathering and analysis organization for the rehabilitation industry; represents ~70% of industry, including HealthSouth sites (13) Represents discharges from HealthSouth’s 121 consolidated hospitals in Q1 2016; 120 consolidated hospitals in Q4 2015; 108 consolidated hospitals in Q3 2015 and Q2 2015; and 106 consolidated hospitals in Q1 2015 (14) Excludes approximately 430 full-time equivalents in Q1 2016 and approximately 400 full-time equivalents in the 2015 periods presented 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 table represent HealthSouth employees who participate in or support the operations of the Company’s hospitals. (15) 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. (16) Represents home health admissions from Encompass’ 184 consolidated locations in Q1 2016 and Q4 2015; 141 locations in Q3 2015, 139 locations in Q2 2015, and 143 locations in Q1 2015. (17) Represents hospice admissions from Encompass’ 27 locations in Q1 2016 and Q4 2015; 23 locations in Q3 2015; and 21 locations in Q2 2015 and Q1 2015. (18) In November 2013, the Company closed separate, privately negotiated exchanges in which it issued $320 million of 2.0% Convertible Senior Subordinated Notes due 2043 in exchange for 257,110 shares of its 6.5% Series A Convertible Perpetual Preferred Stock. The Company recorded ~$249 million as debt and ~$71 million as equity. The convertible notes are convertible, at the option of the holders, at any time on or prior to the close of business on the business day immediately preceding December 1, 2043 into shares of the Company’s common stock and is subject to customary antidilution adjustments. The Company has the right to redeem the convertible notes before December 1, 2018 if the volume weighted-average price of the Company’s common stock is at least 120% of the conversion price ($45.70) of the convertible notes for a specified period. On or after December 1, 2018, the Company may, at its option, redeem all or any part of the convertible notes. In either case, the redemption price will be equal to 100% of the principal amount of the convertible notes to be redeemed, plus accrued and unpaid interest. (19) The agreement to settle the Company’s class action securities litigation received final court approval in January 2007. The 5.0 million shares of common stock and warrants to purchase ~8.2 million shares of common stock at a strike price of $41.40 (expire January 17, 2017) related to this settlement were issued on September 30, 2009. The 5.0 million common shares are included in the basic outstanding shares. The warrants were not included in the diluted share count prior to 2015 because the strike price has historically been above the market price. In Q1 2016 and Q1 2015, zero shares related to the warrants are included in the diluted share count due to antidilution based on the stock price. In full-year 2015, 80,814 shares related to the warrants are included in the diluted share count using the treasury stock method. (20) Adjusted EBITDA is a non-GAAP financial measure. 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 EBITDA as a financial measure and the leverage ratio as a liquidity measure 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 Adjusted EBITDA, the reader should be aware that in the future HealthSouth may incur expenses similar to the adjustments set forth.


 


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