Form 8-K HEALTHSOUTH CORP For: Jul 29
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E-mailUNITED 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): July 29, 2015
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 July 29, 2015, HealthSouth Corporation (the “Company”) issued a press release reporting the financial results of the Company for the three and six months ended June 30, 2015. 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 Thursday, July 30, 2015 is attached to this report as Exhibit 99.2 and incorporated herein by reference. The information in this report 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 leverage ratio and Adjusted EBITDA. Adjusted EBITDA, as defined below, is used on both a consolidated basis and a segment basis. No corporate overhead is allocated to either of our reportable segments.
The leverage ratio referenced therein is defined as the ratio of consolidated total debt to Adjusted EBITDA for the trailing four quarters, subject to pro forma adjustments resulting from debt transactions and development activities. 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 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, 2014 (the “2014 Form 10‑K”) and Note 4, Long-term Debt, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of the Company’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2015 (the “June 2015 Form 10-Q”), when filed. 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, including the matters related to Ernst & Young LLP and Richard Scrushy
discussed in Note 18, Contingencies and Other Commitments, to the consolidated financial statements accompanying the 2014 Form 10-K, 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. 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 generally accepted accounting principles in the United States of America (“GAAP”), and the items excluded from Adjusted EBITDA are significant components in understanding and assessing financial performance. Therefore, Adjusted EBITDA should not be considered a substitute for net income or cash flows from operating, investing, or financing activities. 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 2014 Form 10-K and Note 1, Basis of Presentation, “Net Operating Revenues,” and “Accounts Receivable and Allowance for Doubtful Accounts,” to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of the June 2015 Form 10-Q, when filed.
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 June 2015 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 June 30, | Six Months Ended June 30, | Year Ended December 31, | |||||||||||||||||||||
2015 | 2014 | 2015 | 2014 | 2014 | 2013 | ||||||||||||||||||
(In Millions) | |||||||||||||||||||||||
Net cash provided by operating activities | $ | 102.9 | $ | 128.0 | $ | 204.9 | $ | 235.1 | $ | 444.9 | $ | 470.3 | |||||||||||
Provision for doubtful accounts | (10.9 | ) | (9.3 | ) | (22.5 | ) | (16.8 | ) | (31.6 | ) | (26.0 | ) | |||||||||||
Professional fees—accounting, tax, and legal | 0.1 | 2.0 | 2.3 | 3.6 | 9.3 | 9.5 | |||||||||||||||||
Interest expense and amortization of debt discounts and fees | 30.9 | 27.8 | 62.7 | 55.7 | 109.2 | 100.4 | |||||||||||||||||
Equity in net income of nonconsolidated affiliates | 2.3 | 2.6 | 3.9 | 6.9 | 10.7 | 11.2 | |||||||||||||||||
Net income attributable to noncontrolling interests in continuing operations | (17.3 | ) | (14.8 | ) | (33.8 | ) | (29.6 | ) | (59.7 | ) | (57.8 | ) | |||||||||||
Amortization of debt-related items | (3.0 | ) | (3.2 | ) | (6.3 | ) | (6.3 | ) | (12.7 | ) | (5.0 | ) | |||||||||||
Distributions from nonconsolidated affiliates | (1.8 | ) | (3.1 | ) | (3.7 | ) | (6.5 | ) | (12.6 | ) | (11.4 | ) | |||||||||||
Current portion of income tax expense | 3.4 | 3.0 | 6.9 | 6.6 | 13.3 | 6.3 | |||||||||||||||||
Change in assets and liabilities | 45.2 | 17.6 | 101.2 | 44.5 | 90.1 | 48.9 | |||||||||||||||||
Net premium (received) paid on bond transactions | 11.8 | — | 3.8 | — | 4.3 | 1.7 | |||||||||||||||||
Cash used in operating activities of discontinued operations | 0.2 | 1.0 | 0.3 | 1.2 | 1.2 | 1.9 | |||||||||||||||||
Reliant transaction costs | 3.3 | — | 3.3 | — | — | — | |||||||||||||||||
Encompass transaction costs | — | — | — | — | 9.3 | — | |||||||||||||||||
Other | 2.4 | 1.1 | 2.6 | 2.4 | 1.9 | 1.6 | |||||||||||||||||
Consolidated Adjusted EBITDA | $ | 169.5 | $ | 152.7 | $ | 325.6 | $ | 296.8 | $ | 577.6 | $ | 551.6 | |||||||||||
Reconciliation of Segment Adjusted EBITDA to Income from Continuing Operations Before Income Tax Expense
Three Months Ended June 30, | Six Months Ended June 30, | Year Ended December 31, 2014 | |||||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||||||
In Millions | |||||||||||||||||||
Total segment Adjusted EBITDA | $ | 189.5 | $ | 175.9 | $ | 370.8 | $ | 343.4 | $ | 669.2 | |||||||||
General and administrative expenses | (32.1 | ) | (30.2 | ) | (66.7 | ) | (60.9 | ) | (124.8 | ) | |||||||||
Depreciation and amortization | (32.7 | ) | (26.4 | ) | (64.6 | ) | (52.8 | ) | (107.7 | ) | |||||||||
(Loss) gain on disposal or impairment of assets | (0.8 | ) | (1.7 | ) | 0.7 | (3.0 | ) | (6.7 | ) | ||||||||||
Government, class action, and related settlements | — | 0.8 | (8.0 | ) | 0.8 | 1.7 | |||||||||||||
Professional fees - accounting, tax, and legal | (0.1 | ) | (2.0 | ) | (2.3 | ) | (3.6 | ) | (9.3 | ) | |||||||||
Loss on early extinguishment of debt | (18.8 | ) | — | (20.0 | ) | — | (13.2 | ) | |||||||||||
Interest expense and amortization of debt discounts and fees | (30.9 | ) | (27.8 | ) | (62.7 | ) | (55.7 | ) | (109.2 | ) | |||||||||
Gain on consolidation of former equity method hospital | — | 27.2 | — | 27.2 | 27.2 | ||||||||||||||
Net income attributable to noncontrolling interests | 17.3 | 14.8 | 33.8 | 29.6 | 59.7 | ||||||||||||||
Gain related to SCA equity interest | 2.6 | — | 2.6 | — | — | ||||||||||||||
Income from continuing operations before income tax expense | $ | 94.0 | $ | 130.6 | $ | 183.6 | $ | 225.0 | $ | 386.9 | |||||||||
Forward-Looking Statements
The information contained in this report, the press release, and supplemental slides includes certain estimates, projections, and other forward-looking information that involve known and unknown risks and relate to, among other things, future events, the Company’s business strategy, financial plans, dividend strategies, plans to repurchase its debt or equity securities, future financial performance, projected business results, projected capital expenditures, or leverage ratio. 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 information are based on assumptions the Company believes, as of the date hereof, are reasonable. Inevitably, there will be differences between such estimates and actual results, and those differences may be material.
There can be no assurance that any estimates, projections, or forward-looking information will be realized.
All such estimates, projections, and forward-looking information speak only as of the date hereof. The Company undertakes no duty to publicly update or revise that information.
You are cautioned not to place undue reliance on the estimates, projections, and other forward-looking information 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 2014 Form 10-K, the Company’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2015, 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 July 29, 2015. | |
99.2 | Supplemental slides provided in connection with the second quarter 2015 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/ JOHN P. WHITTINGTON | |
Name: | John P. Whittington | |
Title: | Executive Vice President, General Counsel and Corporate Secretary | |
Dated: July 29, 2015
Exhibit 99.1
Media Contact | July 29, 2015 |
Casey Lassiter, 205-410-2777 | For Immediate Release |
Investor Relations Contact | |
Mary Ann Arico, 205-969-6175 | |
HealthSouth Reports Results for Second Quarter 2015
Strong Volume Growth in Both Segments
Earnings Per Share Comparison Impacted by Prior Year Acquisition Gain and 2015 Bond Redemption
Substantial Development Activity
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 second quarter ended June 30, 2015.
“The second quarter was characterized by strong volume growth in both segments and an 11.0% increase in our Adjusted EBITDA,” said Jay Grinney, President and Chief Executive Officer of HealthSouth. “While reported results were negatively impacted by unusual items, we saw substantial development activity across both segments. In our inpatient rehabilitation segment, we completed the acquisition of Cardinal Hill Rehabilitation Hospital and created a new joint venture in Savannah, Georgia, while announcing four additional joint ventures to build new hospitals in Tennessee, Oklahoma, Ohio, and Arkansas. In our home health segment, we added new locations in four of our existing IRF markets. Both segments’ development pipelines remain strong, and we are excited about the Company's continued growth prospects.”
Second Quarter Consolidated Results
• | The Company's consolidated net operating revenues increased by $160.0 million, or 26.5%, in the second quarter of 2015 compared to the second quarter of 2014. Approximately $114 million of this increase resulted from the Company's acquisition of Encompass Home Health and Hospice (“Encompass”) on December 31, 2014. The remainder of the increase predominantly came from the Company's inpatient rehabilitation hospitals. Net operating revenues from the Company's hospitals were 8.6% higher for the second quarter of 2015 compared to the same quarter of 2014. |
• | Income from continuing operations attributable to HealthSouth per diluted share for the second quarter of 2015 was $0.47 per share compared to $0.81 per share for the second quarter of 2014. Earnings per share for the second quarter of 2014 benefited by $0.26 per share due to the Company's increase in ownership and consolidation of Fairlawn Rehabilitation Hospital (“Fairlawn”) in Worcester, Massachusetts effective June 1, 2014, including the associated tax benefits of the transaction. Earnings per share for the second quarter of 2015 included an $18.8 million, or $0.11 per share, loss on early extinguishment of debt associated with the Company's redemption of its 8.125% Senior Notes due 2020 (the “2020 Notes”), as discussed below. The Company's earnings per share in the second quarter of 2015 also reflected increased depreciation and amortization resulting from the Company's capital expenditures and development activities throughout 2014 and the first half of 2015, as well as higher interest expense due to the debt used to fund the acquisition of Encompass on December 31, 2014. |
• | Cash flows provided by operating activities were $204.9 million for the six months ended June 30, 2015 compared to $235.1 million for the six months ended June 30, 2014. This decrease primarily resulted from |
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increases in working capital and cash interest expense, as well as transaction costs incurred to date in connection with the Company's pending acquisition of Reliant Hospital Partners, LLC and affiliated entities (“Reliant”).
• | Adjusted EBITDA (see attached supplemental information) for the second quarter of 2015 was $169.5 million compared to $152.7 million for the second quarter of 2014, an increase of 11.0%. Adjusted EBITDA for the second quarter of 2015 included approximately $2.6 million of gains associated with the Company's equity interest in Surgical Care Affiliates (“SCA”), its former surgery centers division. |
• | Adjusted free cash flow (see attached supplemental information) for the second quarter of 2015 was $94.5 million compared to $97.9 million for the second quarter of 2014 as the Company's continued growth in Adjusted EBITDA was offset by increases in net working capital and cash interest expense. |
Second Quarter Results — Inpatient Rehabilitation Segment
• | Net operating revenues for the inpatient rehabilitation segment were $645.3 million for the second quarter of 2015 compared to $597.1 million for the second quarter of 2014, an increase of 8.1%. This increase was attributable to an 8.3% increase in patient discharges and a 0.3% increase in net patient revenue per discharge. Discharge growth included a 2.8% increase in same-store discharges and a 5.5% increase in new-store discharges. Approximately 110 basis points of discharge growth from new stores resulted from the consolidation of Fairlawn effective June 1, 2014, with the remainder resulting from three de novo hospitals that opened in the fourth quarter of 2014 (Altamonte Springs, Florida; Newnan, Georgia; and Middletown, Delaware), the Company's acquisitions of Quillen Rehabilitation Hospital in Johnson City, Tennessee (November 2014) and Cardinal Hill Rehabilitation Hospital in Lexington, Kentucky (May 2015), and the Company's joint venture with Memorial Health in Savannah, Georgia (April 2015). While the Company experienced pricing growth from Medicare and managed care payors, these price adjustments were offset by updated Supplemental Security Income (“SSI”) ratios published by the United States Centers for Medicare and Medicaid Services (“CMS”) for fiscal year 2013 and proportionally higher discharge growth in Medicaid and managed care payors, where the Company's reimbursement is lower. The SSI ratio adjustment resulted in an approximate $5 million reduction in revenues in the second quarter of 2015 while similar ratio adjustments resulted in an approximate $2 million increase in revenues in the second quarter of 2014. |
• | Adjusted EBITDA (see attached supplemental information) from the inpatient rehabilitation segment for the second quarter of 2015 was $170.5 million compared to $174.7 million for the second quarter of 2014. The decrease in Adjusted EBITDA in the second quarter of 2015 compared to the second quarter of 2014 primarily resulted from the SSI ratio adjustments and proportionally higher growth in discharges from payors with lower reimbursement, as discussed above, an approximate $4 million increase in group medical insurance reserves, increased bad debt expense, and incremental costs associated with investments in the Company's operating platform, including a contractual increase in costs associated with the ongoing implementation of its electronic clinical information system, the addition of staff at hospitals to ensure compliance with new CMS quality reporting requirements, the creation of a new medical services department, and costs associated with its participation in CMS’ Model 3 bundling pilot initiative. |
Second Quarter Results — Home Health and Hospice Segment
The Company's home health and hospice segment reported $119.1 million of net operating revenues and $19.0 million of Adjusted EBITDA for the second quarter of 2015. The results of operations for the home health and hospice segment in 2014 include only HealthSouth's legacy hospital-based home health agencies. The increase in net operating revenues and Adjusted EBITDA (see attached supplemental information) for the Company's home health and hospice segment in 2015 resulted from its acquisition of Encompass on December 31, 2014.
Debt and Preferred Stock Transactions
In March 2015, the Company issued $300 million of 5.125% Senior Notes due 2023 (the “2023 Notes”) at a price of 100.0% of the principal amount, which resulted in approximately $295 million in net proceeds from the public offering. On April 10, 2015, the Company used the net proceeds from the 2023 Notes offering along with cash on hand to execute the redemption of its 2020 Notes. Pursuant to the terms of the 2020 Notes, this redemption was made at a price of 104.063%, which resulted in a total cash outlay of approximately $302 million to retire the $290 million in principal. As a result of this redemption, the Company recorded an $18.8 million loss on early extinguishment of debt in the second quarter of 2015.
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On April 22, 2015, the Company delivered notice of the exercise of its rights to force conversion of all outstanding shares of its convertible perpetual preferred stock (par value of $0.10 per share and liquidation preference of $1,000 per share) pursuant to the underlying certificate of designations. The effective date of the conversion was April 23, 2015. On that date, each share of preferred stock automatically converted into 33.9905 shares of the Company's common stock (par value of $0.01 per share). The Company completed the forced conversion by issuing and delivering in the aggregate 3,271,415 shares of its common stock to the registered holders of the 96,245 shares of the preferred stock outstanding and paying cash in lieu of fractional shares due to those holders. The conversion increased the number of basic shares outstanding by 3,271,415 but did not change the diluted share count. On an annual basis, the conversion of the preferred stock to common stock is expected to result in a net positive cash impact of $3.2 million for the difference between preferred dividends and common dividends on these shares, based on the current common dividend level of $0.23 per share.
Development Activity
In June 2015, the Company entered into a definitive agreement to acquire the operations of Reliant for a cash purchase price of $730 million. Reliant operates a portfolio of 11 inpatient rehabilitation hospitals in Texas, Massachusetts, and Ohio for a total of 902 beds. This transaction, which is subject to customary closing conditions and regulatory approvals, including expiration or termination of all applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act, is expected to close in the fourth quarter of 2015. The Company expects to fund this transaction with cash on hand and senior debt.
All of the Reliant hospitals are leased, and seven of the leases are treated as capital leases for accounting purposes. The Company will assume the lease obligations of all the acquired hospitals. The amount of the capital lease obligation to be recognized on the Company's balance sheet upon closing is preliminarily estimated at approximately $210 million. In addition, operating entities for seven Reliant hospitals include minority limited partners. The interests held by limited partners represent less than 10% of the equity of the combined Reliant operating entities. The cash purchase price will be reduced for any remaining limited partner interests at closing.
In 2014, Reliant’s operations generated revenues of approximately $249 million and Adjusted EBITDA of approximately $82 million. The acquisition of the operations of Reliant is expected to be immediately accretive, excluding transaction costs, to HealthSouth's earnings per share following closing.
In addition to signing a definitive agreement with Reliant to expand its portfolio of inpatient rehabilitation hospitals, the Company:
• | began operating an inpatient rehabilitation hospital in Savannah, Georgia with its joint venture partner, Memorial Health; |
• | acquired Cardinal Hill Rehabilitation Hospital in Lexington, Kentucky; |
• | entered into four joint venture agreements for inpatient rehabilitation hospitals; |
• | continued development of three de novo hospitals; |
• | acquired five new home health locations; and |
• | opened one new home health location. |
Dividend Increase
On July 16, 2015, the Company's board of directors approved an increase in the Company's quarterly dividend of 9.5% and declared a quarterly cash dividend on its common stock of $0.23 per share. The dividend will be payable on October 15, 2015 to holders of record on October 1, 2015.
“We continue to generate significant levels of free cash flow which supports our development activity in both business segments, as well as our common dividend,” said Doug Coltharp, Executive Vice President and Chief Financial Officer of HealthSouth. “Our balance sheet remains strong, and we are well-positioned to fund the Reliant transaction.”
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2015 Guidance
The Company's year-to-date results for 2015 include strong revenue growth that has been offset by the impact of various adjustments including:
• | atypical litigation settlements; |
• | retroactive adjustments resulting from updates to SSI ratios; |
• | increased group medical insurance reserves; and |
• | increased bad debt expense resulting from additional pre-payment claims denials by Medicare Administrative Contractors and continued delays of approximately three years in the adjudication process at the administrative law judge hearing level. |
In spite of these headwinds, the Company reiterates its Adjusted EBITDA guidance of $670 million to $680 million for 2015. The Company currently expects its Adjusted EBITDA to be in the lower end of this range.
The Company is revising its previously provided earnings per diluted share guidance for 2015 from a range of $2.13 to $2.19 per share to a range of $2.11 to $2.17 per share to include approximately $3 million of transaction costs incurred to date related to its pending acquisition of Reliant. Earnings per share are presented using income from continuing operations attributable to HealthSouth.
The Company's guidance does not include any contribution from the pending acquisition of Reliant.
Earnings Conference Call and Webcast
The Company will host an investor conference call at 9:00 a.m. Eastern Time on Thursday, July 30, 2015 to discuss its results for the second quarter of 2015. 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 77686264. 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 33 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 June 30, 2015 (the “June 2015 Form 10-Q”), when filed, as well as the Company's Current Report on Form 8-K filed on July 29, 2015. In addition, the Company will post supplemental slides today on its website at http://investor.healthsouth.com for reference during its July 30, 2015 earnings call.
When filed, the June 2015 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.
HealthSouth Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
(In Millions) | |||||||||||||||
Net operating revenues | $ | 764.4 | $ | 604.4 | $ | 1,505.0 | $ | 1,195.6 | |||||||
Less: Provision for doubtful accounts | (10.9 | ) | (9.3 | ) | (22.5 | ) | (16.8 | ) | |||||||
Net operating revenues less provision for doubtful accounts | 753.5 | 595.1 | 1,482.5 | 1,178.8 | |||||||||||
Operating expenses: | |||||||||||||||
Salaries and benefits | 401.8 | 285.3 | 786.9 | 571.4 | |||||||||||
Other operating expenses | 104.2 | 86.3 | 207.4 | 170.8 | |||||||||||
Occupancy costs | 12.5 | 10.3 | 24.6 | 20.8 | |||||||||||
Supplies | 31.7 | 27.8 | 63.1 | 55.4 | |||||||||||
General and administrative expenses | 32.1 | 30.2 | 66.7 | 60.9 | |||||||||||
Depreciation and amortization | 32.7 | 26.4 | 64.6 | 52.8 | |||||||||||
Government, class action, and related settlements | — | (0.8 | ) | 8.0 | (0.8 | ) | |||||||||
Professional fees—accounting, tax, and legal | 0.1 | 2.0 | 2.3 | 3.6 | |||||||||||
Total operating expenses | 615.1 | 467.5 | 1,223.6 | 934.9 | |||||||||||
Loss on early extinguishment of debt | 18.8 | — | 20.0 | — | |||||||||||
Interest expense and amortization of debt discounts and fees | 30.9 | 27.8 | 62.7 | 55.7 | |||||||||||
Other income | (3.0 | ) | (28.2 | ) | (3.5 | ) | (29.9 | ) | |||||||
Equity in net income of nonconsolidated affiliates | (2.3 | ) | (2.6 | ) | (3.9 | ) | (6.9 | ) | |||||||
Income from continuing operations before income tax expense | 94.0 | 130.6 | 183.6 | 225.0 | |||||||||||
Provision for income tax expense | 32.2 | 36.5 | 62.5 | 69.3 | |||||||||||
Income from continuing operations | 61.8 | 94.1 | 121.1 | 155.7 | |||||||||||
(Loss) income from discontinued operations, net of tax | (1.6 | ) | 3.8 | (1.9 | ) | 3.7 | |||||||||
Net income | 60.2 | 97.9 | 119.2 | 159.4 | |||||||||||
Less: Net income attributable to noncontrolling interests | (17.3 | ) | (14.8 | ) | (33.8 | ) | (29.6 | ) | |||||||
Net income attributable to HealthSouth | 42.9 | 83.1 | 85.4 | 129.8 | |||||||||||
Less: Convertible perpetual preferred stock dividends | — | (1.5 | ) | (1.6 | ) | (3.1 | ) | ||||||||
Net income attributable to HealthSouth common shareholders | $ | 42.9 | $ | 81.6 | $ | 83.8 | $ | 126.7 | |||||||
(Continued) | 5 | |
HealthSouth Corporation and Subsidiaries
Condensed Consolidated Statements of Operations (Continued)
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
(In Millions, Except Per Share Data) | |||||||||||||||
Weighted average common shares outstanding: | |||||||||||||||
Basic | 89.8 | 86.7 | 88.4 | 87.0 | |||||||||||
Diluted | 101.5 | 100.6 | 101.3 | 100.8 | |||||||||||
Earnings per common share: | |||||||||||||||
Basic earnings per share attributable to HealthSouth common shareholders: | |||||||||||||||
Continuing operations | $ | 0.49 | $ | 0.89 | $ | 0.96 | $ | 1.40 | |||||||
Discontinued operations | (0.02 | ) | 0.04 | (0.02 | ) | 0.04 | |||||||||
Net income | $ | 0.47 | $ | 0.93 | $ | 0.94 | $ | 1.44 | |||||||
Diluted earnings per share attributable to HealthSouth common shareholders: | |||||||||||||||
Continuing operations | $ | 0.47 | $ | 0.81 | $ | 0.91 | $ | 1.29 | |||||||
Discontinued operations | (0.02 | ) | 0.04 | (0.02 | ) | 0.04 | |||||||||
Net income | $ | 0.45 | $ | 0.85 | $ | 0.89 | $ | 1.33 | |||||||
Cash dividends per common share | $ | 0.21 | $ | 0.18 | $ | 0.42 | $ | 0.36 | |||||||
Amounts attributable to HealthSouth common shareholders: | |||||||||||||||
Income from continuing operations | $ | 44.5 | $ | 79.3 | $ | 87.3 | $ | 126.1 | |||||||
(Loss) income from discontinued operations, net of tax | (1.6 | ) | 3.8 | (1.9 | ) | 3.7 | |||||||||
Net income attributable to HealthSouth | $ | 42.9 | $ | 83.1 | $ | 85.4 | $ | 129.8 | |||||||
6 | ||
HealthSouth Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
June 30, 2015 | December 31, 2014 | ||||||
(In Millions) | |||||||
Assets | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 45.5 | $ | 66.7 | |||
Accounts receivable, net of allowance for doubtful accounts of $26.1 in 2015; $22.2 in 2014 | 351.8 | 323.2 | |||||
Deferred income tax assets | 188.4 | 188.4 | |||||
Other current assets | 126.7 | 108.3 | |||||
Total current assets | 712.4 | 686.6 | |||||
Property and equipment, net | 1,062.8 | 1,019.7 | |||||
Goodwill | 1,097.5 | 1,084.0 | |||||
Intangible assets, net | 325.5 | 306.1 | |||||
Deferred income tax assets | 79.7 | 129.4 | |||||
Other long-term assets | 191.6 | 183.0 | |||||
Total assets | $ | 3,469.5 | $ | 3,408.8 | |||
Liabilities and Shareholders’ Equity | |||||||
Current liabilities: | |||||||
Current portion of long-term debt | $ | 21.4 | $ | 20.8 | |||
Accounts payable | 60.0 | 53.4 | |||||
Accrued expenses and other current liabilities | 283.2 | 290.1 | |||||
Total current liabilities | 364.6 | 364.3 | |||||
Long-term debt, net of current portion | 2,104.4 | 2,110.8 | |||||
Other long-term liabilities | 137.3 | 136.3 | |||||
2,606.3 | 2,611.4 | ||||||
Commitments and contingencies | |||||||
Convertible perpetual preferred stock | — | 93.2 | |||||
Redeemable noncontrolling interests | 98.5 | 84.7 | |||||
Shareholders’ equity: | |||||||
HealthSouth shareholders’ equity | 605.9 | 473.2 | |||||
Noncontrolling interests | 158.8 | 146.3 | |||||
Total shareholders’ equity | 764.7 | 619.5 | |||||
Total liabilities and shareholders’ equity | $ | 3,469.5 | $ | 3,408.8 | |||
7 | ||
HealthSouth Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended June 30, | |||||||
2015 | 2014 | ||||||
(In Millions) | |||||||
Cash flows from operating activities: | |||||||
Net income | $ | 119.2 | $ | 159.4 | |||
Loss (income) from discontinued operations | 1.9 | (3.7 | ) | ||||
Adjustments to reconcile net income to net cash provided by operating activities— | |||||||
Provision for doubtful accounts | 22.5 | 16.8 | |||||
Depreciation and amortization | 64.6 | 52.8 | |||||
Loss on early extinguishment of debt | 20.0 | — | |||||
Equity in net income of nonconsolidated affiliates | (3.9 | ) | (6.9 | ) | |||
Distributions from nonconsolidated affiliates | 3.7 | 6.5 | |||||
Stock-based compensation | 15.6 | 14.3 | |||||
Deferred tax expense | 55.6 | 62.7 | |||||
Gain on consolidation of Fairlawn Rehabilitation Hospital | — | (27.2 | ) | ||||
Other | 11.0 | 6.1 | |||||
Change in assets and liabilities— | |||||||
Accounts receivable | (62.1 | ) | (35.6 | ) | |||
Other assets | (6.5 | ) | 8.4 | ||||
Accounts payable | 1.7 | 2.7 | |||||
Accrued payroll | (23.6 | ) | (15.1 | ) | |||
Other liabilities | (10.7 | ) | (4.9 | ) | |||
Premium received on bond issuance | 8.0 | — | |||||
Premium paid on redemption of bonds | (11.8 | ) | — | ||||
Net cash used in operating activities of discontinued operations | (0.3 | ) | (1.2 | ) | |||
Total adjustments | 83.8 | 79.4 | |||||
Net cash provided by operating activities | 204.9 | 235.1 | |||||
(Continued) | 8 | |
HealthSouth Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Continued)
(Unaudited)
Six Months Ended June 30, | |||||||
2015 | 2014 | ||||||
(In Millions) | |||||||
Cash flows from investing activities: | |||||||
Purchases of property and equipment | (46.3 | ) | (89.5 | ) | |||
Capitalized software costs | (15.2 | ) | (11.0 | ) | |||
Acquisitions of businesses, net of cash acquired | (77.7 | ) | (15.9 | ) | |||
Net change in restricted cash | 13.1 | 6.5 | |||||
Other | (0.6 | ) | 2.9 | ||||
Net cash used in investing activities | (126.7 | ) | (107.0 | ) | |||
Cash flows from financing activities: | |||||||
Proceeds from bond issuance | 700.0 | — | |||||
Principal payments on debt, including pre-payments | (546.1 | ) | — | ||||
Borrowings on revolving credit facility | 270.0 | 65.0 | |||||
Payments on revolving credit facility | (442.0 | ) | (95.0 | ) | |||
Debt amendment and issuance costs | (13.9 | ) | — | ||||
Repurchases of common stock, including fees and expenses | — | (43.1 | ) | ||||
Dividends paid on common stock | (37.1 | ) | (31.6 | ) | |||
Dividends paid on convertible perpetual preferred stock | (3.1 | ) | (3.1 | ) | |||
Distributions paid to noncontrolling interests of consolidated affiliates | (26.2 | ) | (25.4 | ) | |||
Other | (1.0 | ) | 6.4 | ||||
Net cash used in financing activities | (99.4 | ) | (126.8 | ) | |||
(Decrease) increase in cash and cash equivalents | (21.2 | ) | 1.3 | ||||
Cash and cash equivalents at beginning of period | 66.7 | 64.5 | |||||
Cash and cash equivalents at end of period | $ | 45.5 | $ | 65.8 | |||
Supplemental schedule of noncash financing activity: | |||||||
Conversion of preferred stock to common stock | $ | 93.2 | $ | — | |||
9 | ||
HealthSouth Corporation and Subsidiaries
Supplemental Information
Inpatient Rehabilitation Metrics
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
(In Millions) | |||||||||||||||
Net operating revenues: | |||||||||||||||
Inpatient | $ | 618.7 | $ | 569.7 | $ | 1,225.3 | $ | 1,127.9 | |||||||
Outpatient and other | 26.6 | 27.4 | 50.3 | 53.7 | |||||||||||
Total inpatient rehabilitation segment revenues | $ | 645.3 | $ | 597.1 | $ | 1,275.6 | $ | 1,181.6 | |||||||
(Actual Amounts) | |||||||||||||||
Discharges | 36,408 | 33,620 | 71,524 | 66,509 | |||||||||||
Net patient revenue per discharge | $ | 16,994 | $ | 16,945 | $ | 17,131 | $ | 16,959 | |||||||
Outpatient visits | 144,914 | 149,664 | 276,267 | 292,357 | |||||||||||
Average length of stay (in days) | 13.0 | 13.1 | 13.1 | 13.3 | |||||||||||
Occupancy % | 70.4 | % | 70.5 | % | 70.2 | % | 70.9 | % | |||||||
# of licensed beds | 7,374 | 6,884 | 7,374 | 6,884 | |||||||||||
Full-time equivalents | 17,601 | 16,251 | 17,302 | 16,164 | |||||||||||
Employees per occupied bed | 3.41 | 3.37 | 3.36 | 3.33 | |||||||||||
10 | ||
HealthSouth Corporation and Subsidiaries
Supplemental Information
Home Health and Hospice Metrics
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
(In Millions) | |||||||||||||||
Net operating revenues: | |||||||||||||||
Home health | $ | 111.5 | $ | 7.3 | $ | 215.4 | $ | 14.0 | |||||||
Hospice | 7.6 | — | 14.0 | — | |||||||||||
Total home health and hospice segment revenues | $ | 119.1 | $ | 7.3 | $ | 229.4 | $ | 14.0 | |||||||
(Actual Amounts) | |||||||||||||||
Home health: | |||||||||||||||
Admissions | 16,862 | 1,913 | 33,361 | 3,813 | |||||||||||
Recertifications | 15,103 | 242 | 29,588 | 479 | |||||||||||
Episodes | 31,817 | 2,097 | 61,329 | 4,132 | |||||||||||
Average revenue per episode | $ | 3,082 | $ | 3,387 | $ | 3,092 | $ | 3,284 | |||||||
Episodic visits per episode | 19.4 | 18.4 | 19.5 | 18.5 | |||||||||||
Total visits | 675,095 | 39,876 | 1,306,094 | 79,353 | |||||||||||
Cost per visit | $ | 71 | $ | 106 | $ | 71 | $ | 107 | |||||||
Hospice: | |||||||||||||||
Admissions | 594 | N/A | 1,218 | N/A | |||||||||||
Patient days | 49,272 | N/A | 90,170 | N/A | |||||||||||
Revenue per day | $ | 154 | N/A | $ | 155 | N/A | |||||||||
11 | ||
HealthSouth Corporation and Subsidiaries
Supplemental Information
Adjusted EBITDA
Three Months Ended June 30, 2015 | |||||||||||||||
Inpatient Rehabilitation | Home Health and Hospice | Reclassifications | HealthSouth Consolidated | ||||||||||||
(In Millions) | |||||||||||||||
Net operating revenues | $ | 645.3 | $ | 119.1 | $ | — | $ | 764.4 | |||||||
Less: Provision for doubtful accounts | (10.2 | ) | (0.7 | ) | — | (10.9 | ) | ||||||||
Net operating revenues less provision for doubtful accounts | 635.1 | 118.4 | — | 753.5 | |||||||||||
Operating expenses: | |||||||||||||||
Inpatient rehabilitation: | |||||||||||||||
Salaries and benefits | 317.6 | — | 84.2 | 401.8 | |||||||||||
Other operating expenses (1) | 93.5 | — | 9.9 | 103.4 | |||||||||||
Supplies | 29.9 | — | 1.8 | 31.7 | |||||||||||
Occupancy costs | 10.7 | — | 1.8 | 12.5 | |||||||||||
Home health and hospice: | |||||||||||||||
Cost of services sold (excluding depreciation and amortization) | — | 56.7 | (56.7 | ) | — | ||||||||||
Support and overhead costs | — | 41.0 | (41.0 | ) | — | ||||||||||
451.7 | 97.7 | — | 549.4 | ||||||||||||
Other income | (0.4 | ) | — | — | (0.4 | ) | |||||||||
Equity in net income of nonconsolidated affiliates | (2.3 | ) | — | — | (2.3 | ) | |||||||||
Noncontrolling interests | 15.6 | 1.7 | — | 17.3 | |||||||||||
Adjusted EBITDA — segment level | $ | 170.5 | $ | 19.0 | $ | — | 189.5 | ||||||||
General and administrative expenses (2)(3) | 22.6 | ||||||||||||||
Gain related to SCA equity interest | (2.6 | ) | |||||||||||||
Adjusted EBITDA | $ | 169.5 | |||||||||||||
In arriving at Adjusted EBITDA, the following were excluded: | |||||||||||||||
(1) Net loss (gain) on disposal or impairment of assets | $ | 0.9 | $ | (0.1 | ) | $ | — | $ | 0.8 | ||||||
(2) Stock-based compensation expense | — | — | — | 6.2 | |||||||||||
(3) Reliant transaction costs | — | — | — | 3.3 | |||||||||||
12 | ||
HealthSouth Corporation and Subsidiaries
Supplemental Information
Adjusted EBITDA
Three Months Ended June 30, 2014 | |||||||||||||||
Inpatient Rehabilitation | Home Health and Hospice | Reclassifications | HealthSouth Consolidated | ||||||||||||
(In Millions) | |||||||||||||||
Net operating revenues | $ | 597.1 | $ | 7.3 | $ | — | $ | 604.4 | |||||||
Less: Provision for doubtful accounts | (9.2 | ) | (0.1 | ) | — | (9.3 | ) | ||||||||
Net operating revenues less provision for doubtful accounts | 587.9 | 7.2 | — | 595.1 | |||||||||||
Operating expenses: | |||||||||||||||
Inpatient rehabilitation: | |||||||||||||||
Salaries and benefits | 280.2 | — | 5.1 | 285.3 | |||||||||||
Other operating expenses (1) | 84.0 | — | 0.6 | 84.6 | |||||||||||
Supplies | 27.7 | — | 0.1 | 27.8 | |||||||||||
Occupancy costs | 10.2 | — | 0.1 | 10.3 | |||||||||||
Home health and hospice: | |||||||||||||||
Cost of services sold (excluding depreciation and amortization) | — | 4.2 | (4.2 | ) | — | ||||||||||
Support and overhead costs | — | 1.7 | (1.7 | ) | — | ||||||||||
402.1 | 5.9 | — | 408.0 | ||||||||||||
Other income (2) | (1.0 | ) | — | — | (1.0 | ) | |||||||||
Equity in net income of nonconsolidated affiliates | (2.6 | ) | — | — | (2.6 | ) | |||||||||
Noncontrolling interests | 14.7 | 0.1 | — | 14.8 | |||||||||||
Adjusted EBITDA — segment level | $ | 174.7 | $ | 1.2 | $ | — | 175.9 | ||||||||
General and administrative expenses (3) | 23.2 | ||||||||||||||
Adjusted EBITDA | $ | 152.7 | |||||||||||||
In arriving at Adjusted EBITDA, the following were excluded: | |||||||||||||||
(1) Net loss on disposal or impairment of assets | $ | 1.7 | $ | — | $ | — | $ | 1.7 | |||||||
(2) Gain on consolidation of Fairlawn Rehabilitation Hospital | 27.2 | — | — | 27.2 | |||||||||||
(3) Stock-based compensation expense | — | — | — | 7.0 | |||||||||||
13 | ||
HealthSouth Corporation and Subsidiaries
Supplemental Information
Adjusted EBITDA
Six Months Ended June 30, 2015 | |||||||||||||||
Inpatient Rehabilitation | Home Health and Hospice | Reclassifications | HealthSouth Consolidated | ||||||||||||
(In Millions) | |||||||||||||||
Net operating revenues | $ | 1,275.6 | $ | 229.4 | $ | — | $ | 1,505.0 | |||||||
Less: Provision for doubtful accounts | (21.2 | ) | (1.3 | ) | — | (22.5 | ) | ||||||||
Net operating revenues less provision for doubtful accounts | 1,254.4 | 228.1 | — | 1,482.5 | |||||||||||
Operating expenses: | |||||||||||||||
Inpatient rehabilitation: | |||||||||||||||
Salaries and benefits | 624.0 | — | 162.9 | 786.9 | |||||||||||
Other operating expenses (1) | 188.7 | — | 19.4 | 208.1 | |||||||||||
Supplies | 59.7 | — | 3.4 | 63.1 | |||||||||||
Occupancy costs | 21.1 | — | 3.5 | 24.6 | |||||||||||
Home health and hospice: | |||||||||||||||
Cost of services sold (excluding depreciation and amortization) | — | 110.1 | (110.1 | ) | — | ||||||||||
Support and overhead costs | — | 79.1 | (79.1 | ) | — | ||||||||||
893.5 | 189.2 | — | 1,082.7 | ||||||||||||
Other income | (0.9 | ) | — | — | (0.9 | ) | |||||||||
Equity in net income of nonconsolidated affiliates | (3.9 | ) | — | — | (3.9 | ) | |||||||||
Noncontrolling interests | 30.8 | 3.0 | — | 33.8 | |||||||||||
Adjusted EBITDA — segment level | $ | 334.9 | $ | 35.9 | $ | — | 370.8 | ||||||||
General and administrative expenses (2)(3) | 47.8 | ||||||||||||||
Gain related to SCA equity interest | (2.6 | ) | |||||||||||||
Adjusted EBITDA | $ | 325.6 | |||||||||||||
In arriving at Adjusted EBITDA, the following were excluded: | |||||||||||||||
(1) Net gain on disposal or impairment of assets | $ | (0.6 | ) | $ | (0.1 | ) | $ | — | $ | (0.7 | ) | ||||
(2) Stock-based compensation expense | — | — | — | 15.6 | |||||||||||
(3) Reliant transaction costs | — | — | — | 3.3 | |||||||||||
14 | ||
HealthSouth Corporation and Subsidiaries
Supplemental Information
Adjusted EBITDA
Six Months Ended June 30, 2014 | |||||||||||||||
Inpatient Rehabilitation | Home Health and Hospice | Reclassifications | HealthSouth Consolidated | ||||||||||||
(In Millions) | |||||||||||||||
Net operating revenues | $ | 1,181.6 | $ | 14.0 | $ | — | $ | 1,195.6 | |||||||
Less: Provision for doubtful accounts | (16.6 | ) | (0.2 | ) | — | (16.8 | ) | ||||||||
Net operating revenues less provision for doubtful accounts | 1,165.0 | 13.8 | — | 1,178.8 | |||||||||||
Operating expenses: | |||||||||||||||
Inpatient rehabilitation: | |||||||||||||||
Salaries and benefits | 561.1 | — | 10.3 | 571.4 | |||||||||||
Other operating expenses (1) | 166.7 | — | 1.1 | 167.8 | |||||||||||
Supplies | 55.2 | — | 0.2 | 55.4 | |||||||||||
Occupancy costs | 20.6 | — | 0.2 | 20.8 | |||||||||||
Home health and hospice: | |||||||||||||||
Cost of services sold (excluding depreciation and amortization) | — | 8.4 | (8.4 | ) | — | ||||||||||
Support and overhead costs | — | 3.4 | (3.4 | ) | — | ||||||||||
803.6 | 11.8 | — | 815.4 | ||||||||||||
Other income (2) | (2.7 | ) | — | — | (2.7 | ) | |||||||||
Equity in net income of nonconsolidated affiliates | (6.9 | ) | — | — | (6.9 | ) | |||||||||
Noncontrolling interests | 29.4 | 0.2 | — | 29.6 | |||||||||||
Adjusted EBITDA — segment level | $ | 341.6 | $ | 1.8 | $ | — | 343.4 | ||||||||
General and administrative expenses (3) | 46.6 | ||||||||||||||
Adjusted EBITDA | $ | 296.8 | |||||||||||||
In arriving at Adjusted EBITDA, the following were excluded: | |||||||||||||||
(1) Net loss on disposal or impairment of assets | $ | 3.0 | $ | — | $ | — | $ | 3.0 | |||||||
(2) Gain on consolidation of Fairlawn Rehabilitation Hospital | 27.2 | — | — | 27.2 | |||||||||||
(3) Stock-based compensation expense | — | — | — | 14.3 | |||||||||||
15 | ||
HealthSouth Corporation and Subsidiaries
Supplemental Information
Earnings Per Share
QTD | ||||||||
Q2 2015 | Q2 2014 | |||||||
(In Millions, Except Per Share Data) | ||||||||
Adjusted EBITDA | $ | 169.5 | $ | 152.7 | ||||
Interest expense and amortization of debt discounts and fees | (30.9 | ) | (27.8 | ) | ||||
Depreciation and amortization | (32.7 | ) | (26.4 | ) | ||||
Stock-based compensation expense | (6.2 | ) | (7.0 | ) | ||||
Noncash loss on disposal or impairment of assets | (0.8 | ) | (1.7 | ) | ||||
98.9 | 89.8 | |||||||
Certain nonrecurring expenses: | ||||||||
Government, class action, and related settlements | — | 0.8 | ||||||
Professional fees—accounting, tax, and legal | (0.1 | ) | (2.0 | ) | ||||
Loss on early extinguishment of debt | (18.8 | ) | — | |||||
Reliant transaction costs | (3.3 | ) | — | |||||
Gain on consolidation of Fairlawn Rehabilitation Hospital | — | 27.2 | ||||||
Pre-tax income | 76.7 | 115.8 | ||||||
Income tax expense (1) | (32.2 | ) | (36.5 | ) | (2) | |||
Income from continuing operations (3) | $ | 44.5 | $ | 79.3 | ||||
Basic shares | 89.8 | 86.7 | ||||||
Diluted shares | 101.5 | 100.6 | ||||||
Basic earnings per share (3) | $ | 0.49 | $ | 0.89 | ||||
Diluted earnings per share (3) | $ | 0.47 | $ | 0.81 | ||||
(1) | Current income tax expense for the three months ended June 30, 2015 and 2014 was $3.4 million and $3.0 million, respectively. |
(2) | The Company's effective income tax rate was reduced as a result of the nontaxable gain related to its acquisition of an additional 30% equity interest in Fairlawn Rehabilitation Hospital. |
(3) | Income from continuing operations attributable to HealthSouth. |
16 | ||
HealthSouth Corporation and Subsidiaries
Supplemental Information
Earnings Per Share
YTD | ||||||||
Q2 2015 | Q2 2014 | |||||||
(In Millions, Except Per Share Data) | ||||||||
Adjusted EBITDA | $ | 325.6 | $ | 296.8 | ||||
Interest expense and amortization of debt discounts and fees | (62.7 | ) | (55.7 | ) | ||||
Depreciation and amortization | (64.6 | ) | (52.8 | ) | ||||
Stock-based compensation expense | (15.6 | ) | (14.3 | ) | ||||
Noncash gain (loss) on disposal or impairment of assets | 0.7 | (3.0 | ) | |||||
183.4 | 171.0 | |||||||
Certain nonrecurring expenses: | ||||||||
Government, class action, and related settlements | (8.0 | ) | 0.8 | |||||
Professional fees—accounting, tax, and legal | (2.3 | ) | (3.6 | ) | ||||
Loss on early extinguishment of debt | (20.0 | ) | — | |||||
Reliant transaction costs | (3.3 | ) | — | |||||
Gain on consolidation of Fairlawn Rehabilitation Hospital | — | 27.2 | ||||||
Pre-tax income | 149.8 | 195.4 | ||||||
Income tax expense (1) | (62.5 | ) | (69.3 | ) | (2) | |||
Income from continuing operations (3) | $ | 87.3 | $ | 126.1 | ||||
Basic shares | 88.4 | 87.0 | ||||||
Diluted shares | 101.3 | 100.8 | ||||||
Basic earnings per share (3) | $ | 0.96 | $ | 1.40 | ||||
Diluted earnings per share (3) | $ | 0.91 | $ | 1.29 | ||||
(1) | Current income tax expense for the six months ended June 30, 2015 and 2014 was $6.9 million and $6.6 million, respectively. |
(2) | The Company's effective income tax rate was reduced as a result of the nontaxable gain related to its acquisition of an additional 30% equity interest in Fairlawn Rehabilitation Hospital. |
(3) | Income from continuing operations attributable to HealthSouth. |
17 | ||
HealthSouth Corporation and Subsidiaries
Supplemental Information
Reconciliation of Net Income to Adjusted EBITDA
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
(In Millions) | |||||||||||||||
Net income | $ | 60.2 | $ | 97.9 | $ | 119.2 | $ | 159.4 | |||||||
Loss (income) from discontinued operations, net of tax, attributable to HealthSouth | 1.6 | (3.8 | ) | 1.9 | (3.7 | ) | |||||||||
Provision for income tax expense | 32.2 | 36.5 | 62.5 | 69.3 | |||||||||||
Interest expense and amortization of debt discounts and fees | 30.9 | 27.8 | 62.7 | 55.7 | |||||||||||
Professional fees—accounting, tax, and legal | 0.1 | 2.0 | 2.3 | 3.6 | |||||||||||
Government, class action, and related settlements | — | (0.8 | ) | 8.0 | (0.8 | ) | |||||||||
Loss on early extinguishment of debt | 18.8 | — | 20.0 | — | |||||||||||
Net noncash loss (gain) on disposal or impairment of assets | 0.8 | 1.7 | (0.7 | ) | 3.0 | ||||||||||
Depreciation and amortization | 32.7 | 26.4 | 64.6 | 52.8 | |||||||||||
Stock-based compensation expense | 6.2 | 7.0 | 15.6 | 14.3 | |||||||||||
Net income attributable to noncontrolling interests | (17.3 | ) | (14.8 | ) | (33.8 | ) | (29.6 | ) | |||||||
Reliant transaction costs | 3.3 | — | 3.3 | — | |||||||||||
Gain on consolidation of Fairlawn Rehabilitation Hospital | — | (27.2 | ) | — | (27.2 | ) | |||||||||
Adjusted EBITDA | $ | 169.5 | $ | 152.7 | $ | 325.6 | $ | 296.8 | |||||||
18 | ||
HealthSouth Corporation and Subsidiaries
Supplemental Information
Reconciliation of Net Cash Provided by Operating Activities to Adjusted Free Cash Flow
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
(In Millions) | |||||||||||||||
Net cash provided by operating activities | $ | 102.9 | $ | 128.0 | $ | 204.9 | $ | 235.1 | |||||||
Impact of discontinued operations | 0.2 | 1.0 | 0.3 | 1.2 | |||||||||||
Net cash provided by operating activities of continuing operations | 103.1 | 129.0 | 205.2 | 236.3 | |||||||||||
Capital expenditures for maintenance | (18.2 | ) | (17.6 | ) | (36.5 | ) | (47.8 | ) | |||||||
Dividends paid on convertible perpetual preferred stock | (1.5 | ) | (1.5 | ) | (3.1 | ) | (3.1 | ) | |||||||
Distributions paid to noncontrolling interests of consolidated affiliates | (13.0 | ) | (13.4 | ) | (26.2 | ) | (25.4 | ) | |||||||
Nonrecurring items: | |||||||||||||||
Net premium paid (received) on redemption/issuance of bonds | 11.8 | — | 3.8 | — | |||||||||||
Encompass transaction costs and related assumed liabilities | — | — | 17.7 | — | |||||||||||
Reliant transaction costs | 1.6 | — | 1.6 | — | |||||||||||
Cash paid (received) for: | |||||||||||||||
Professional fees—accounting, tax, and legal | 2.7 | 2.0 | 3.4 | 3.6 | |||||||||||
Government, class action, and related settlements | 8.0 | (0.6 | ) | 8.0 | (0.6 | ) | |||||||||
Adjusted free cash flow | $ | 94.5 | $ | 97.9 | $ | 173.9 | $ | 163.0 | |||||||
For the three months ended June 30, 2015, net cash used in investing activities was $81.0 million and resulted primarily from acquisitions of businesses, capital expenditures, and the net change in restricted cash. Net cash used in financing activities during the three months ended June 30, 2015 was $184.7 million and resulted primarily from the redemption of the Company's 8.125% Senior Notes due 2020.
For the three months ended June 30, 2014, net cash used in investing activities was $39.2 million and resulted primarily from capital expenditures and acquisition activity. Net cash used in financing activities during the three months ended June 30, 2014 was $76.1 million and resulted primarily from net debt payments, repurchases of common stock, cash dividends on common stock, and distributions paid to noncontrolling interests of consolidated affiliates.
For the six months ended June 30, 2015, net cash used in investing activities was $126.7 million and resulted primarily from capital expenditures and acquisitions of businesses. Net cash used in financing activities during the six months ended June 30, 2015 was $99.4 million and resulted primarily from cash dividends on common stock, distributions paid to noncontrolling interests of consolidated affiliates, and net debt payments.
For the six months ended June 30, 2014, net cash used in investing activities was $107.0 million and resulted primarily from capital expenditures and acquisition activity. Net cash used in financing activities during the six months ended June 30, 2014 was $126.8 million and resulted primarily from repurchases of common stock, net debt payments, cash dividends on common stock, and distributions paid to noncontrolling interests of consolidated affiliates.
19 | ||
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 or Reliant; any adverse effects on HealthSouth's stock price resulting from the integration of Encompass or Reliant; 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 or other sensitive information as well as unforeseen issues, if any, related to integration of Encompass' systems; the ability to successfully integrate Encompass or Reliant, 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 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, 2014 and Form 10-Q for the quarters ended March 31, 2015, and June 30, 2015, when filed.
20 | ||
Second Quarter 2015 Earnings Call July 30, 2015 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 that HealthSouth believes, as of the date hereof, are reasonable. Inevitably, there will be differences between such estimates and actual events or results, and those differences may be material. There can be no assurance that any estimates, projections or forward-looking information will be realized. All such estimates, projections and forward-looking information speak only as of the date hereof. HealthSouth undertakes no duty to publicly update or revise the information contained herein. You are cautioned not to place undue reliance on the estimates, projections and other forward-looking information in this presentation as they are based on current expectations and general assumptions and are subject to various risks, uncertainties and other factors, including those set forth in the Form 10-K for the year ended December 31, 2014, the Form 10-Q for the quarters ended March 31, 2015 and June 30, 2015, 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 July 29, 2015, 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 Q2 2015 Summary................................................................................................................................................. 4-5 Development ......................................................................................................................................................... 6-7 Reliant Transaction Summary................................................................................................................................ 8 Highlights............................................................................................................................................................... . 9 Revenue - Inpatient Rehabilitation Segment......................................................................................................... 10 Adjusted EBITDA - Inpatient Rehabilitation Segment ........................................................................................... 11 Revenue - Home Health & Hospice Segment ....................................................................................................... 12 Adjusted EBITDA - Home Health & Hospice Segment ......................................................................................... 13 Earnings per Share................................................................................................................................................ 14 Adjusted Free Cash Flow ...................................................................................................................................... 15 2015 Guidance - Adjusted EBITDA ....................................................................................................................... 16 2015 Guidance - EPS............................................................................................................................................ 17 Appendix................................................................................................................................................................ 18 Adjusted Free Cash Flow History.......................................................................................................................... 19 Adjusted Free Cash Flow and Tax Assumptions.................................................................................................... 20 Priorities for Reinvesting Free Cash Flow ............................................................................................................. 21 Debt Schedule and Maturity Profile ...................................................................................................................... 22-23 Our New-Store/Same-Store IRF Growth .............................................................................................................. 24 Payment Sources (Percent of Revenues) ............................................................................................................. 25 Inpatient Rehabilitation Operational and Labor Metrics ........................................................................................ 26 Home Health & Hospice Operational Metrics ....................................................................................................... 27 Outstanding Share Summary, Warrant Information, and Conversion Price .......................................................... 28 History Recast by Segment................................................................................................................................... 29-32 Reconciliations to GAAP ....................................................................................................................................... 33-35 End Notes ............................................................................................................................................................. 36-38
4 Q2 2015 Summary (Q2 2015 vs. Q2 2014) Q2 YTD HealthSouth Consolidated 2015 2014 Delta % 2015 2014 Delta % ($millions) Net operating revenues $ 764.4 $ 604.4 $ 160.0 26.5% $1,505.0 $1,195.6 $ 309.4 25.9% Adjusted EBITDA* $ 169.5 $ 152.7 $ 16.8 11.0 % $ 325.6 $ 296.8 $ 28.8 9.7% Major takeaways for the quarter: u Strong volume growth in both segments u Adjusted EBITDA growth of 11.0% driven by Encompass acquisition; IRF segment down against a tough comparison impacted by retroactive SSI(1) adjustment (~$5 million) and group medical (~$4 million) headwinds u Substantial development activity across both segments Ÿ IRF Segment - Announced Reliant, closed an acquisition, formed a new JV and announced 4 JVs Ÿ Home Health - Acquired 5 locations and opened one new location Major takeaways for the YTD: u Strong volume growth in both segments u Adjusted EBITDA growth of 9.7% driven by Encompass acquisition; IRF segment impacted by retroactive SSI(1) adjustment (~$5 million), group medical (~$4 million), and litigation settlement headwinds(2) (~$4 million) in 2015 * Reconciliation to GAAP provided on pages 33-35 Refer to pages 36-38 for end notes.
5 Q2 2015 Summary (cont.) u Balance sheet enhancements: Ÿ Completed the call of the $290 million of 8.125% senior notes due 2020 Converted the residual 6.5% Series A Convertible Perpetual Preferred Stock(3b) into 3,271,415 common shares, which increased the basic share count but did not change the diluted share count. The conversion will have a net annual positive effect on cash of $3.2 million, based on the current common dividend level of $0.23 per share. Ÿ u Diluted earnings per share comparison significantly impacted by certain items (see table on page 14) Ÿ Q2 2014 earnings per share were positively impacted by a $27.2 million gain, or $0.26 per share, related to the increase in ownership and consolidation of Fairlawn(4). Ÿ Q2 2015 earnings per share were negatively impacted by approx. $19 million, or $0.11 pershare, for loss on extinguishment of debt related to the call of the 2020 senior notes. u Shareholder distributions: Ÿ Paid quarterly cash dividend of $0.21 per share on April 15, 2015 Ÿ Declared a $0.21 per share quarterly cash dividend paid on July 15, 2015 Ÿ Approved an increase in the quarterly dividend of 9.5% to $0.23 per share on July 16, 2015 Refer to pages 36-38 for end notes.
6 Q2 2015 Development u New inpatient rehabilitation development: Ÿ Announced Reliant acquisition on June 11, 2015; expected to close in Q4 2015 Ÿ Began operating a 50-bed inpatient rehabilitation hospital in Savannah, GA with our joint venture partner, Memorial Health, on April 1, 2015; the joint venture will build a new, 50-bed replacement hospital, which is expected to be complete in the first half of 2016. Ÿ Acquired Cardinal Hill Rehabilitation Hospital in Lexington, KY (158 licensed inpatient rehabilitation beds and 74 licensed skilled nursing beds) on May 1, 2015 Ÿ Continued the construction of a 40-bed inpatient rehabilitation hospital in Franklin, TN; expected to be operational in Q4 2015 Ÿ Signed joint venture agreements with: — West Tennessee Healthcare in Jackson, TN - assume management of an existing unit on January 1, 2016; expect to begin construction of new 48-bed inpatient rehabilitation hospital in 2016 — St. John Health System - operate existing 24-bed unit in Tulsa, OK (begin Q4 2015); construct new 40-bed inpatient rehabilitation hospital in Broken Arrow, OK; expect to be complete Q4 2016 — Mount Carmel Health System in Westerville, OH - construct new 60-bed inpatient rehabilitation hospital; expect to be complete Q1 2017 — CHI St. Vincent in Hot Springs, AR - operate existing 27-bed inpatient rehabilitation unit (begin Q4 2015); construct and re-locate to new 40-bed inpatient rehabilitation hospital; expect to be complete Q2 2016
7 Q2 2015 Development u New inpatient rehabilitation development (cont.): Ÿ Continued the construction of a 50-bed inpatient rehabilitation hospital in Modesto, CA; expect to be operational in Q2 2016 Ÿ Continued the permitting process for the 50-bed inpatient rehabilitation hospital in Murrieta, CA; expect to be operational in first half of 2018 u New home health and hospice: Ÿ Acquired (all located in HealthSouth IRF markets): — Harvey Home Health - one location in Houston, TX in April 2015 — Cardinal Hill - one location in Lexington, KY in May 2015 — Heritage Home Health - one location in Texarkana, AR in May 2015 — Alliance Home Health - two locations in the Fayetteville, AR area in June 2015 Ÿ Opened location in Ardmore, OK in May 2015
8 Transaction Summary • Acquisition adds 11 inpatient rehabilitation hospitals in Texas, Massachusetts, and Ohio with a total of 902 beds. • Reliant generated approx. $249 million of revenue in 2014. • All 11 hospitals are leased, and 7 of those leases are treated as capital leases for accounting purposes. HealthSouth will assume the lease obligations of all 11 acquired hospitals. • 8 IRFs in Texas • 2 IRFs in Massachusetts • 1 IRF in Ohio Ÿ $730 million purchase price —Expect to realize approx. $125 million to $150 million (NPV) tax benefit —The cash purchase price will be reduced based on any remaining limited partner equity interests at closing (limited partner interests currently aggregated to less than 10% of Reliant). —Capital lease obligation to be recognized on HealthSouth's balance sheet upon closing preliminarily estimated at approx. $210 million. Ÿ Accretive upon closing —Reliant generated Adjusted EBITDA of approx. $82 million in 2014. —The acquisition is expected to be immediately accretive (excluding transaction costs) to earnings per share. Ÿ Transaction expected to be funded with cash on hand and senior debt Ÿ Expected to close in Q4 2015 —Subject to Hart-Scott-Rodino approval and other regulatory approvals
9 Highlights u Surgical Care Affiliates (SCA) option Ÿ In connection with the 2007 sale of its surgery centers division (now known as Surgical Care Affiliates), the Company received an option to purchase up to a 5% equity interest in SCA. Ÿ In April 2015, the Company exercised the option resulting in the receipt of 326,242 shares of SCA common stock. .Ÿ In Q2 2015, the Company sold 132,308 shares of SCA common stock for $5.2 million in total proceeds. Ÿ The option exercise and subsequent share sales resulted in a $2.6 million gain in Q2 2015, which is included in Consolidated Adjusted EBITDA and not segment Adjusted EBITDA (see table on page 14).
10 Q2 2015 Inpatient Rehabilitation Segment Revenue Q2 Q2 Favorable/ ($millions) 2015 2014 (Unfavorable) Net operating revenues: Inpatient $ 618.7 $ 569.7 8.6% Outpatient and other 26.6 27.4 (2.9%) Total segment revenue $ 645.3 $ 597.1 8.1% (Actual Amounts) Discharges 36,408 33,620 8.3% New-store discharge growth 5.5% Same-store discharge growth 2.8% Net patient revenue / discharge $ 16,994 $ 16,945 0.3% Refer to pages 36-38 for end notes. u Revenue growth was driven primarily by strong discharge volume growth across all major payors. u New-store discharge growth was driven by the addition of four new hospitals in Q4 2014, the Fairlawn(4) consolidation (June 2014) and the addition of Savannah (April) and Cardinal Hill (May) in Q2 2015. u Revenue per discharge was negatively impacted by: Ÿ The effect of a negative retroactive SSI(1) adjustment of approx. $5 million in Q2 2015 against a positive SSI adjustment of approx. $2 million in Q2 2014 Ÿ Proportionally higher discharge growth from managed care (non-Medicare Advantage) and Medicaid, where the reimbursement per discharge is lower
11 Adjusted EBITDA* - Inpatient Rehabilitation Segment Q2 % of Revenue Q2 % of Revenue($millions) 2015 2014 Net operating revenues $645.3 $ 597.1 Less: Provision for doubtful accounts (10.2) 1.6% (9.2) 1.5% Net operating revenues less provision for doubtful accounts 635.1 587.9 Operating expenses: Salaries and benefits (317.6) 49.2% (280.2) 46.9% Other operating expenses(a) (93.5) 14.5% (84.0) 14.1% Supplies (29.9) 4.6% (27.7) 4.6% Occupancy costs (10.7) 1.7% (10.2) 1.7% (134.1) 20.8% (121.9) 20.4% Other income(b) 0.4 1.0 Equity in nonconsolidated affiliates 2.3 2.6 Noncontrolling interests (15.6) (14.7) Segment Adjusted EBITDA $170.5 $ 174.7 Percent change (2.4)% In arriving at Adjusted EBITDA, the following were excluded: (a) Loss on disposal or impairment of assets $ 0.9 $ 1.7 (b) Gain related to our consolidation of Fairlawn Rehabilitation Hospital(4) $ — $ 27.2 Segment Adjusted EBITDA* for the quarter of $170.5 million - Higher bad debt expense attributable to additional claims denials and continued adjudication delays - Approx. $4 million increase to group medical insurance reserves Q2 2015 includes: - Approx. $5 million for the negative impact of a retroactive SSI adjustment(1) (Q2 2014 included approx. $2 million favorable impact of retroactive SSI adjustment) * Reconciliation to GAAP provided on pages 33-35 Refer to pages 36-38 for end notes. - Approx. $1.6 million for planned investments in our operating platform
12 Q2 2015 Home Health and Hospice Segment Revenue Q2 Q2 ($millions) 2015 2014 Home health revenue $ 111.5 $ 7.3 Hospice revenue 7.6 — Total segment revenue $ 119.1 $ 7.3 (Actual Amounts) Admissions 16,862 1,913 Episodes 31,817 2,097 Revenue per episode $ 3,082 $ 3,387 u Q2 2015 includes Encompass Home Health and Hospice which was purchased on December 31, 2014 and HealthSouth's legacy home health agencies. u Q2 2014 includes only HealthSouth's legacy home health agencies. u Admissions, recertifications, and episodes were up significantly both in agencies owned by Encompass prior to 2014 and those acquired in 2014 (see page 27). Historical information for Encompass Home Health and Hospice and HealthSouth's legacy home health agencies can be found on page 27.
13 Q2 % of Revenue Q2 % of Revenue($millions) 2015 2014 Net operating revenues $ 119.1 $ 7.3 Less: Provision for doubtful accounts (0.7) 0.6% (0.1) 1.4% Net operating revenues less provision for doubtful accounts 118.4 7.2 Operating expenses(a): Cost of services (56.7) 47.6% (4.2) 57.5% Support and overhead costs (41.0) 34.4% (1.7) 23.3% (97.7) 82.0% (5.9) 80.8% Noncontrolling interests (1.7) (0.1) Segment Adjusted EBITDA $ 19.0 $ 1.2 In arriving at Adjusted EBITDA, the following was excluded: (a) Gain on disposal or impairment of assets (0.1) — Adjusted EBITDA* - Home Health and Hospice Segment Segment Adjusted EBITDA* for Q2 2015 of $19.0 million benefited from the acquisition of Encompass. Q2 2014 Adjusted EBITDA* represents HealthSouth's legacy home health agencies. New home health and hospice locations: Ÿ Acquired (all in HealthSouth IRF markets): — Harvey Home Health - one location in Houston, TX in April 2015 — Cardinal Hill - one location in Lexington, KY in May 2015 — Heritage Home Health - one location in Texarkana, AR in May 2015 — Alliance Home Health - two locations in the Fayetteville, AR area in June 2015 Ÿ Opened location in Ardmore, OK in May 2015 * Reconciliation to GAAP provided on pages 29-31 * Reconciliation to GAAP provided on pages 33-35
14 Earnings per Share Q2 6 Months (In Millions, Except Per Share Data) 2015 2014 2015 2014 Inpatient Rehabilitation Segment Adjusted EBITDA $ 170.5 $174.7 334.9 341.6 Home Health and Hospice Segment Adjusted EBITDA 19.0 1.2 35.9 1.8 General and administrative expenses (22.6) (23.2) (47.8) (46.6) Gain related to SCA equity interest 2.6 — 2.6 — Consolidated Adjusted EBITDA 169.5 152.7 325.6 296.8 Interest expense and amortization of debt discounts and fees (30.9) (27.8) (62.7) (55.7) Depreciation and amortization (32.7) (26.4) (64.6) (52.8) Stock-based compensation expense (6.2) (7.0) (15.6) (14.3) Other, including noncash (loss) gain on disposal or impairment of assets (0.8) (1.7) 0.7 (3.0) 98.9 89.8 183.4 171.0 Certain nonrecurring items: Government, class action, and related settlements — 0.8 (8.0) 0.8 Loss on early extinguishment of debt (18.8) — (20.0) — Gain on consolidation of Fairlawn Rehabilitation Hospital — 27.2 — 27.2 Professional fees - accounting, tax, and legal (0.1) (2.0) (2.3) (3.6) Reliant transaction costs (3.3) — (3.3) — Pre-tax income 76.7 115.8 149.8 195.4 Income tax expense(5) (32.2) (36.5) (62.5) (69.3) Income from continuing operations(6) $ 44.5 $ 79.3 $ 87.3 $ 126.1 Income allocated to participating securities(7) $ (0.3) $ (1.1) (0.6) (1.6) Convertible perpetual preferred dividends(7) — (1.5) (1.6) (3.1) Interest and amortization on 2.0% Convertible Senior Subordinated Notes (net of tax)(8) 2.3 2.3 4.6 4.5 Basic shares(3) 89.8 86.7 88.4 87.0 Diluted shares(3)(9) 101.5 100.6 101.3 100.8 Basic earnings per share (6)(7) $ 0.49 $ 0.89 $ 0.96 $ 1.40 Diluted earnings per share(6)(8) $ 0.47 $ 0.81 $ 0.91 $ 1.29 u Earnings per share for the quarter and 6 months of 2015 were negatively impacted by: Ÿ The net effect of certain nonrecurring items including the loss on debt extinguishment (Q2 2015), Reliant transaction costs (Q2 2015), and the General Medicine settlement (Q1 2015) Ÿ Higher interest expense and amortization of debt discounts and fees related to the debt for the Encompass acquisition Ÿ Higher depreciation and amortization related to recent capital investments u Earnings per share for the quarter and 6 months of 2014 were positively impacted by the net effect of certain nonrecurring items. Refer to pages 36-38 for end notes.
15 Adjusted Free Cash Flow 6 Mos. 2014 Adjusted EBITDA Cash Interest Expense Cash Tax Payments, Net of Refunds Working Capital and Other Maintenance Capital Expenditures Preferred Dividends Adjusted Free Cash Flow 6 Mos. 2015 $163.0 $28.8 ($7.0) $6.4 ($28.6) $11.3 $— $173.9 2015 Adjusted Free Cash Flow(10) Through 6 Months* * Reconciliation to GAAP provided on page 19 Refer to pages 36-38 for end notes. u YTD adjusted free cash flow(10) grew as a result of increased Adjusted EBITDA and lower maintenance capital expenditures, offset by higher working capital and cash interest expense. Ÿ Higher working capital mainly attributable to growth in accounts receivable due to additional claims denials and continued delays at the administrative law judge hearing level (approx. three years) Ÿ Lower maintenance capital spending compared to the first 6 months of 2014 which included approx. $12 million for equipment purchased in Q4 2013 and paid for in early 2014
16 2015 Guidance - Adjusted EBITDA* u Inpatient rehabilitation segment considerations for July 1, 2015 through December 31, 2015: Ÿ Discharge growth between 7% and 8% (includes Cardinal Hill in Lexington, KY and the Savannah, GA transactions closed in Q2 2015) Ÿ Revenue growth between 8.5% and 10.0% Ÿ Bad debt expense of approx.1.5% - 1.7% Ÿ Assumes a payor mix similar to Q2 2015 uHome health and hospice segment considerations for 2015: Ÿ Encompass contribution of approx. $72 million in Adjusted EBITDA after noncontrolling interest (does not include HealthSouth's legacy 25 home health agencies)(11) Ÿ In 2014, HealthSouth's legacy 25 home health agencies contributed $3.9 million to Adjusted EBITDA (see page 32). uOther considerations for 2015: Ÿ Approx. $8 million of new investments in our operating platform — Contractual increase for our clinical information system (CIS) — New medical services department — Additional hospital staff for quality reporting — Bundling pilot participation Adjusted EBITDA u $670 million to $680 million HealthSouth currently expects its 2015 Adjusted EBITDA guidance for 2015 to be in the lower end of this range. * Reconciliation to GAAP provided on pages 33-35 Refer to pages 36-38 for end notes. u Net Adjusted EBITDA contributions from Cardinal Hill and Savannah, GA are included in the 2015 guidance. u Net Adjusted EBITDA contributions for the Reliant acquisition, which is expected to close in Q4 2015, are not included in the guidance.
17 2015 Guidance - EPS EPS Guidance Actual Low High (In Millions, Except Per Share Data) 2014 2015 Adjusted EBITDA $ 577.6 $ 670 $ 680 Interest expense and amortization of debt discounts and fees (109.2) (123) Depreciation and amortization (107.7) (134) Stock-based compensation expense (23.9) (28) Other, including noncash loss on disposal and impairment of assets (6.7) (5) 330.1 380 390 Certain Nonrecurring Expenses: Government, class action, and related settlements 1.7 (8) Professional fees - accounting, tax, and legal (9.3) (4) Loss on early extinguishment of debt (13.2) (21) Gain related to consolidation of Fairlawn Rehabilitation Hospital(4) 27.2 — Encompass transaction costs (9.3) — Reliant transaction costs — (3) Pre-tax income 327.2 344 354 Income tax (110.7) (138) (142) Income from continuing operations(6) $ 216.5 $ 206 $ 212 Income allocated to participating securities(7) $ (2.3) $ (2) $ (2) Convertible perpetual preferred dividends(7) (6.3) (2) (2) After-tax convertible debt interest expense(8) 9.0 9 9 Basic shares(3) 86.8 89.5 89.5 Diluted shares(3)(9) 100.7 101.8 101.8 Earnings per share(6) $ 2.24 $ 2.11 $ 2.17 Refer to pages 36-38 for end notes. Considerations: u Higher depreciation and amortization related to recent capital investments u Higher interest expense and amortization of debt discounts and fees related to the increased debt for the Encompass acquisition u Reliant transaction costs represent costs incurred in Q2 2015 only and do not represent the total expected costs. u Assumes provision for income tax of approx. 40% (cash taxes expected to be $10 - $15 million for full-year 2015) u Basic share count includes 3.2 million shares for the conversion of the Company's convertible preferred security to the Company's common stock on April 23, 2015(3b). u Diluted share count includes 8.2 million shares for the 2.00% convertible notes(3a). If converted, the basic share count would increase by approx. 8.7 million shares and the diluted share count would increase by approx. 0.5 million shares (related to the make whole provision). Earnings per Share from Continuing Operations Attributable to HealthSouth u $ 2.11 to $ 2.17 HealthSouth currently expects its 2015 EPS guidance for 2015 to be in the lower end of this range.
Appendix
19 Adjusted Free Cash Flow(10) History Q2 6 Months Full-Year ($millions) 2015 2014 2015 2014 2014 Net cash provided by operating activities $ 102.9 $ 128.0 $ 204.9 $ 235.1 $ 444.9 Impact of discontinued operations 0.2 1.0 0.3 1.2 1.2 Net cash provided by operating activities of continuing operations 103.1 129.0 205.2 236.3 446.1 Capital expenditures for maintenance (18.2) (17.6) (36.5) (47.8) (92.0) Dividends paid on convertible perpetual preferred stock (1.5) (1.5) (3.1) (3.1) (6.3) Distributions paid to noncontrolling interests of consolidated affiliates (13.0) (13.4) (26.2) (25.4) (54.1) Nonrecurring items: Cash paid for professional fees - accounting, tax, and legal 2.7 2.0 3.4 3.6 8.6 Encompass transaction costs and related assumed liabilities — — 17.7 — 2.0 Reliant transaction costs 1.6 — 1.6 — — Net premium on bond issuance/repayment 11.8 — 3.8 — 4.3 Cash received for government, class action, and related settlements 8.0 (0.6) 8.0 (0.6) 2.7 Adjusted free cash flow $ 94.5 $ 97.9 $ 173.9 $ 163.0 $ 311.3 Cash dividends on common stock $ 18.5 $ 15.8 $ 37.1 $ 31.6 $ 65.8 Refer to pages 36-38 for end notes. u Adjusted free cash flow(10) for Q2 2015 was impacted by higher working capital and cash interest expense. Ÿ Higher working capital mainly attributable to growth in accounts receivable due to additional claims denials and continued delays at the administrative law judge hearing level (approx. three years) u Adjusted free cash flow(10) for 6 months 2014 was impacted by higher maintenance capital spending, which included approx. $12 million for equipment purchased in Q4 2013 and paid for in early 2014.
20 Adjusted Free Cash Flow(10) and Tax Assumptions Certain Cash Flow Items(10) (millions) 6 Months 2015 Actual 2015 Assumptions 2014 Actual • Cash interest expense(12) $56.4 $106 to $111 $96.5 • Cash payments for taxes, net of refunds $5.0 $10 to $15 $16.4 • Working Capital and Other $50.8 $55 to $65 $55.0 • Maintenance CAPEX(13) $36.5 $90 to $100 $92.0 • Dividends paid on preferred stock $3.1 $3 $6.3 • Dividends on common stock(14) $37.1 $77 $65.8 Refer to pages 36-38 for end notes. GAAP Tax Considerations: • As of 6/30/15, the Company’s federal NOL had a gross balance of approx. $485 million. • The Company has a remaining valuation allowance of approx. $23 million related to state NOLS. • The Encompass acquisition includes approx. $40 million (NPV) tax benefit (in addition to the Company's NOLs).
21 Priorities for Reinvesting Free Cash Flow* Opportunities (in millions) 6 Months 2015 2015 2014 Actuals Assumptions Actuals IRF bed expansions $10.1 $30 to $40 $23.6 New IRF's - De novos 15.0 40 to 60 53.7 - Acquisitions 56.5 TBD 20.2 New home health and hospice acquisitions 21.1 30 to 40 674.6 $102.7 $100 to $140, excluding IRF acquisitions $772.1 6 Months 2015 2015 2014 Actuals Assumptions Actuals Debt (borrowings) redemptions, net(15)(16)(17) $5.8 TBD $(614.1) Purchase leased properties — TBD 20.0 Cash dividends on common stock(14) 37.1 75 65.8 Common stock repurchase (~$207 million authorization remaining as of June 30, 2015)(18) — TBD 43.1 $42.9 TBD $(485.2) Complements Growth Investments Shareholder Distributions Growth in Core Business Debt Reduction Remain s Highest Priorit y * Reconciliation to GAAP provided on pages 33-35 Refer to pages 36-38 for end notes.
22 Debt Schedule Change in June 30, Dec. 31, Debt vs. ($millions) 2015(16)(17) 2014 YE 2014 Advances under $600 million revolving credit facility, September 2019 - LIBOR +200bps(15)(16) $ 153.0 $ 325.0 $ (172.0) Term loan facility, September 2019 - LIBOR +200bps(15)(16) 195.0 450.0 (255.0) Bonds Payable: 8.125% Senior Notes due 2020(17) — 287.0 (287.0) 7.75% Senior Notes due 2022 227.1 227.1 — 5.125% Senior Notes due 2023(17) 300.0 — 300.0 5.75% Senior Notes due 2024(16) 863.7 456.2 407.5 2.0% Convertible Senior Subordinated Notes due 2043(3a) 262.4 258.0 4.4 Other notes payable 40.4 41.6 (1.2) Capital lease obligations 84.2 86.7 (2.5) Long-term debt $ 2,125.8 $ 2,131.6 $ (5.8) Debt to Adjusted EBITDA*(19) 3.5x 3.7x * Reconciliation to GAAP provided on pages 33-35 Refer to pages 36-38 for end notes.
23 2015 2018 2019 2019 2020 2021 2022 2023 2024 2043 $300 Senior Notes 5.125% $850 Senior Notes 5.75% $320 Conv. Sr. Sub. Notes(3a) 2.0% $226 Senior Notes 7.75% $153 Drawn + $33 LC Holders have a put option in 2020 As of June 30, 2015 (20) Debt Maturity Profile - Face Value Callable beginning September 2015 ($ in millions) $414 Undrawn $195 Term Loan Refer to pages 36-38 for end notes. Callable beginning November 2017 $2.5 million quarterly term loan payments began March 2015. HealthSouth is positioned with a cost-efficient, flexible capital structure. Callable beginning March 2018
24 10.0 8.0 6.0 4.0 2.0 0.0 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Our New-Store/Same-Store IRF Growth Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Fairlawn (4) 0.6% 1.9% 1.9% 2.0% 1.1% St. Vincent's(21) 1.3% 1.2% 1.2% 1.3% New Store 2.8% 2.6% 1.1% 0.4% 1.0% 1.1% 1.2% 1.2% 0.7% 1.7% 2.5% 2.5% 2.0% 1.0% —% 0.6% 1.8% 4.4% Same Store 5.0% 3.5% 4.0% 1.7% 5.0% 1.9% 1.7% 3.0% 2.2% 3.3% 3.2% 1.3% 0.4% 1.4% 1.9% 2.2% 2.9% 2.8% Total by Qtr. 7.8% 6.1% 5.1% 2.1% 6.0% 3.0% 4.2% 5.4% 4.1% 6.3% 5.7% 3.8% 2.4% 3.0% 3.8% 4.7% 6.7% 8.3% Total by Year 5.2% 4.6% 5.0% 3.5% Altamonte Springs, FL (50 beds) Johnson City, TN (26 beds) Newnan, GA (50 beds) Middletown, DE (34 beds) Cypress, TX (40 beds) Cincinnati, OH (40 beds) Ocala, FL (40 beds) Augusta, GA (58 beds) Littleton, CO (40 beds) Stuart, FL (34 beds) Refer to page 36-38 for end notes. Lexington, KY (158 beds) Savannah, GA (50 beds)
25 Payment Sources (Percent of Revenues) Inpatient Rehabilitation Segment Home Health and Hospice Segment Consolidated Q2 Q2 Q2 6 Months Full-Year 2015 2014 2015 2014 2015 2014 2015 2014 2014 Medicare 72.7% 73.9% 83.9% 96.8% 74.5% 74.1% 74.7% 74.7% 74.1% Medicaid 2.6% 1.8% 5.8% —% 3.1% 1.8% 2.9% 1.5% 1.8% Workers' compensation 1.1% 1.2% —% —% 0.9% 1.2% 0.9% 1.2% 1.2% Managed care and other discount plans, including Medicare Advantage(22) 19.2% 18.9% 10.1% 2.2% 17.8% 18.7% 18.0% 18.4% 18.6% Other third-party payors 2.1% 1.7% 0.1% 1.0% 1.8% 1.7% 1.6% 1.6% 1.8% Patients 0.7% 0.9% 0.1% —% 0.6% 0.9% 0.6% 1.0% 1.0% Other income 1.6% 1.6% —% —% 1.3% 1.6% 1.3% 1.6% 1.5% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Refer to pages 36-38 for end notes.
26 Inpatient Rehabilitation Operational and Labor Metrics Q2 Q1 Q4 Q3 Q2 Q1 Full-Year 2015 2015 2014 2014 2014 2014 2014 (In Millions) Net patient revenue-inpatient $ 618.7 $ 606.6 $ 580.9 $ 563.7 $ 569.7 $ 558.2 $ 2,272.5 Net patient revenue-outpatient and other revenues 26.6 23.7 24.9 26.2 27.4 26.3 104.8 Net operating revenues $ 645.3 $ 630.3 $ 605.8 $ 589.9 $ 597.1 $ 584.5 $ 2,377.3 Discharges(23) 36,408 35,116 34,465 33,541 33,620 32,889 134,515 Outpatient visits 144,914 131,353 142,688 144,510 149,664 142,693 579,555 Average length of stay 13.0 13.3 12.9 13.2 13.1 13.4 13.2 Occupancy % 70.4% 72.8% 68.4% 69.6% 70.5% 71.9% 68.4% # of licensed beds 7,374 7,100 7,095 6,890 6,884 6,825 7,095 Occupied beds 5,191 5,169 4,853 4,795 4,853 4,907 4,853 Full-time equivalents (FTEs)(24) 17,601 17,002 16,792 16,499 16,251 16,078 16,405 Contract labor 118 116 86 78 99 82 86 Total FTE and contract labor 17,719 17,118 16,878 16,577 16,350 16,160 16,491 EPOB(25) 3.41 3.31 3.48 3.46 3.37 3.29 3.40 Refer to pages 36-38 for end notes.
27 Home Health and Hospice Operational Metrics Home Health & Hospice Segment Encompass Home Health and Hospice HealthSouth's 25 Legacy Home Health Agencies Q2 Q1 Q4 Q3 Q2 Q1 Full-Year Q4 Q3 Q2 Q1 Full-Year 2015 2015 2014 2014 2014 2014 2014 2014 2014 2014 2014 2014 (In Millions) Net home health revenue $ 111.5 $ 103.9 $ 95.2 $ 89.5 $ 85.1 $ 77.6 $ 347.4 $ 7.6 $ 7.0 $ 7.3 $ 6.7 $ 28.6 Net hospice and other revenue 7.6 6.4 6.1 5.6 5.2 4.6 21.5 — — — — — Net operating revenues $ 119.1 $ 110.3 $ 101.3 $ 95.1 $ 90.3 $ 82.2 $ 368.9 $ 7.6 $ 7.0 $ 7.3 $ 6.7 $ 28.6 Home Health: (Actual Amounts) Admissions(26) 16,862 16,499 13,125 12,505 11,870 11,532 49,032 1,893 1,839 1,913 1,900 7,545 Recertifications 15,103 14,485 14,256 13,479 12,461 11,365 51,561 304 247 242 237 1,030 Episodes 31,817 29,512 27,449 25,673 23,966 21,826 98,914 2,092 2,012 2,097 2,035 8,236 Average revenue per episode $ 3,082 $ 3,102 $ 3,034 $ 3,020 $ 3,080 $ 3,066 $ 3,049 $ 3,512 $ 3,373 $ 3,387 $ 3,178 $ 3,364 Episodic visits per episode 19.4 19.6 19.3 19.6 20.1 20.4 19.8 19.2 18.8 18.4 18.7 18.8 Total visits 675,095 630,999 578,158 547,862 523,751 481,956 2,131,727 41,379 38,940 39,876 39,477 159,672 Cost per visit $ 71 $ 71 $ 69 $ 67 $ 64 $ 65 $ 67 $ 110 $ 105 $ 106 $ 108 $ 108 Hospice: Admissions(27) 594 624 502 416 403 374 1,695 N/A N/A N/A N/A N/A Patient days 49,272 40,898 37,353 36,973 34,336 32,773 141,435 N/A N/A N/A N/A N/A Revenue per day $ 154 $ 156 $ 162 $ 153 $ 151 $ 142 $ 152 N/A N/A N/A N/A N/A Refer to pages 36-38 for end notes.
28 Outstanding Share Summary, Warrant Information, and Conversion Price Weighted Average for the Period Q2 6 Months Full-Year (Millions) 2015 2014 2015 2014 2014 2013 2012 Basic shares outstanding(9)(28)(29) 89.8 86.7 88.4 87.0 86.8 88.1 94.6 Diluted shares outstanding(3)(9)(28)(29) 101.5 100.6 101.3 100.8 100.7 102.1 108.1 End of Period Q2 6 Months Full-Year (Millions) 2015 2014 2015 2014 2014 2013 2012 Basic shares outstanding(9)(28)(29) 90.6 86.5 90.6 86.5 86.6 86.8 94.6 Convertible perpetual preferred stock(3) — 0.096 — 0.096 0.096 0.096 0.353 If converted, equivalent common shares — 3.2 — 3.2 3.2 3.2 11.6 Convertible senior subordinated notes(3) $320.0 $320.0 $320.0 $320.0 $320.0 $320.0 — If converted, equivalent common shares 8.2 8.2 8.2 8.2 8.2 8.1 — Approx. Approx. Date Conversion Rates Conversion Price Convertible perpetual preferred stock (Forced conversion on April 23, 2015)(3) 4/1/2015 33.9905 $29.42 Convertible senior subordinated notes(3) 7/1/2015 26.1084 $38.30 Refer to pages 36-38 for end notes.
29 History Recast by Segment Three Months Ended March 31, 2015 Three Months Ended March 31, 2014 Inpatient Rehabili- tation Home Health and Hospice Reclass- ifications HealthSouth Consolidated Inpatient Rehabili- tation Home Health and Hospice Reclass- ifications HealthSouth Consolidated Net operating revenues $ 630.3 $ 110.3 $ — $ 740.6 $ 584.5 6.7 — $ 591.2 Less: Provision for doubtful accounts (11.0) (0.6) — (11.6) (7.4) (0.1) — (7.5) 619.3 109.7 — 729.0 577.1 6.6 — 583.7 Operating Expenses: Inpatient Rehabilitation: Salaries and benefits (306.4) — (78.7) (385.1) (280.9) — (5.2) (286.1) Other operating expenses(a) (95.2) — (9.5) (104.7) (82.7) — (0.5) (83.2) Supplies (29.8) — (1.6) (31.4) (27.5) — (0.1) (27.6) Occupancy (10.4) — (1.7) (12.1) (10.4) — (0.1) (10.5) Home Health and Hospice: Cost of services sold (excluding depreciation and amortization) — (53.4) 53.4 — — (4.2) 4.2 — Support and overhead costs — (38.1) 38.1 — — (1.7) 1.7 — (441.8) (91.5) — (533.3) (401.5) (5.9) — (407.4) Other income 0.5 — — 0.5 1.7 — — 1.7 Equity in net income of nonconsolidated affiliates 1.6 — — 1.6 4.3 — — 4.3 Noncontrolling interest (15.2) (1.3) — (16.5) (14.7) (0.1) — (14.8) Segment Adjusted EBITDA $ 164.4 $ 16.9 $ — $ 181.3 $ 166.9 $ 0.6 $ — 167.5 General and administrative expenses(b) (25.2) (23.4) Adjusted EBITDA $ 156.1 $ 144.1 Reconciliation to GAAP provided on pages 33-35 In arriving at Adjusted EBITDA, the following were excluded: (a) (Gain) loss on disposal or impairment of assets $ (1.5) $ — $ — $ (1.5) $ 1.3 $ — $ — $ 1.3 (b) Stock-based compensation expense — — — 9.4 — — — 7.3
30 History Recast by Segment Three Months Ended June 30, 2015 Three Months Ended June 30, 2014 Inpatient Rehabili- tation Home Health and Hospice Reclass- ifications HealthSouth Consolidated Inpatient Rehabili- tation Home Health and Hospice Reclass- ifications HealthSouth Consolidated Net operating revenues $ 645.3 $ 119.1 $ — $ 764.4 $ 597.1 $ 7.3 $ — $ 604.4 Less: Provision for doubtful accounts (10.2) (0.7) — (10.9) (9.2) (0.1) — (9.3) 635.1 118.4 — 753.5 587.9 7.2 — 595.1 Operating Expenses: Inpatient Rehabilitation: Salaries and benefits (317.6) — (84.2) (401.8) (280.2) — (5.1) (285.3) Other operating expenses(a) (93.5) — (9.9) (103.4) (84.0) — (0.6) (84.6) Supplies (29.9) — (1.8) (31.7) (27.7) — (0.1) (27.8) Occupancy (10.7) — (1.8) (12.5) (10.2) — (0.1) (10.3) Home Health and Hospice: Cost of services sold (excluding depreciation and amortization) — (56.7) 56.7 — — (4.2) 4.2 — Support and overhead costs — (41.0) 41.0 — — (1.7) 1.7 — (451.7) (97.7) — (549.4) (402.1) (5.9) — (408.0) Other income(b) 0.4 — — 0.4 1.0 — — 1.0 Equity in net income of nonconsolidated affiliates 2.3 — — 2.3 2.6 — — 2.6 Noncontrolling interest (15.6) (1.7) — (17.3) (14.7) (0.1) — (14.8) Segment Adjusted EBITDA $ 170.5 $ 19.0 $ — $ 189.5 $ 174.7 $ 1.2 $ — 175.9 General and administrative expenses(c)(d) (22.6) (23.2) Gain related to SCA equity interest 2.6 — Adjusted EBITDA $ 169.5 $ 152.7 Reconciliation to GAAP provided on pages 33-35 In arriving at Adjusted EBITDA, the following were excluded: (a) Loss (gain) on disposal or impairment of assets $ 0.9 $ (0.1) $ — $ 0.8 $ 1.7 $ — $ — $ 1.7 (b) Gain related to our consolidation of Fairlawn Rehabilitation Hospital — — — — 27.2 — — 27.2 (c) Reliant transaction costs — — — 3.3 — — — — (d) Stock-based compensation expense — — — 6.2 — — — 7.0
31 History Recast by Segment Six Months Ended June 30, 2015 Six Months Ended June 30, 2014 Inpatient Rehabili- tation Home Health and Hospice Reclass- ifications HealthSouth Consolidated Inpatient Rehabili- tation Home Health and Hospice Reclass- ifications HealthSouth Consolidated Net operating revenues $ 1,275.6 $ 229.4 $ — $ 1,505.0 $ 1,181.6 14.0 — $ 1,195.6 Less: Provision for doubtful accounts (21.2) (1.3) — (22.5) (16.6) (0.2) — (16.8) 1,254.4 228.1 — 1,482.5 1,165.0 13.8 — 1,178.8 Operating Expenses: Inpatient Rehabilitation: Salaries and benefits (624.0) — (162.9) (786.9) (561.1) — (10.3) (571.4) Other operating expenses(a) (188.7) — (19.4) (208.1) (166.7) — (1.1) (167.8) Supplies (59.7) — (3.4) (63.1) (55.2) — (0.2) (55.4) Occupancy (21.1) — (3.5) (24.6) (20.6) — (0.2) (20.8) Home Health and Hospice: Cost of services sold (excluding depreciation and amortization) — (110.1) 110.1 — — (8.4) 8.4 — Support and overhead costs — (79.1) 79.1 — — (3.4) 3.4 — (893.5) (189.2) — (1,082.7) (803.6) (11.8) — (815.4) Other income(b) 0.9 — — 0.9 2.7 — — 2.7 Equity in net income of nonconsolidated affiliates 3.9 — — 3.9 6.9 — — 6.9 Noncontrolling interest (30.8) (3.0) — (33.8) (29.4) (0.2) — (29.6) Segment Adjusted EBITDA $ 334.9 $ 35.9 $ — $ 370.8 $ 341.6 $ 1.8 $ — 343.4 General and administrative expenses(c)(d) (47.8) (46.6) Gain related to SCA equity interest 2.6 — Adjusted EBITDA $ 325.6 $ 296.8 Reconciliation to GAAP provided on pages 33-35 In arriving at Adjusted EBITDA, the following were excluded: (a) (Gain) loss on disposal or impairment of assets $ (0.6) $ (0.1) $ — $ (0.7) $ 3.0 $ — $ — $ 3.0 (b) Gain related to our consolidation of Fairlawn Rehabilitation Hospital — — — — 27.2 — — 27.2 (c) Reliant transaction costs — — — 3.3 — — — — (d) Stock based compensation expense — — — 15.6 — — — 14.3
32 History Recast by Segment Twelve Months Ended December 31, 2014 Inpatient Rehabilitation Home Health and Hospice Reclass- ifications HealthSouth Consolidated Net operating revenues $ 2,377.3 $ 28.6 $ — $ 2,405.9 Less: Provision for doubtful accounts (31.2) (0.4) — (31.6) 2,346.1 28.2 — 2,374.3 Operating Expenses: Inpatient Rehabilitation: Salaries and benefits (1,141.0) — (20.7) (1,161.7) Other operating expenses(a) (342.5) — (2.4) (344.9) Supplies (111.5 ) — (0.4) (111.9 ) Occupancy (41.2) — (0.4) (41.6) Home Health and Hospice: Cost of services sold (excluding depreciation and amortization) — (17.0) 17.0 — Support and overhead costs — (6.9) 6.9 — (1,636.2) (23.9) — (1,660.1) Other income(b) 4.0 — — 4.0 Equity in net income of nonconsolidated affiliates 10.7 — — 10.7 Noncontrolling interest (59.3) (0.4) — (59.7) Adjusted EBITDA - Segment level $ 665.3 $ 3.9 $ — 669.2 General and administrative expenses(c)(d) (91.6) Adjusted EBITDA $ 577.6 Reconciliation to GAAP provided on pages 33-35 In arriving at Adjusted EBITDA, the following were excluded: (a) Loss on disposal or impairment of assets $ 6.7 $ — $ — $ 6.7 (b) Gain on consolidation of Fairlawn Rehabilitation Hospital 27.2 — — 27.2 (c) Stock-based compensation expense — — — 23.9 (d) Encompass transaction costs — — — 9.3
33 Reconciliation of Net Income to Adjusted EBITDA(30) 2015 Q1 Q2 6 Months (in millions, except per share data) Total Per Share Total Per Share Total Per Share Net Income $ 59.0 $ 60.2 $ 119.2 Loss from disc ops, net of tax, attributable to HealthSouth 0.3 1.6 1.9 Net income attributable to noncontrolling interests (16.5) (17.3) (33.8) Income from continuing operations attributable to HealthSouth(31) 42.8 $ 0.44 44.5 $ 0.47 87.3 $ 0.91 Gov't, class action, and related settlements 8.0 — 8.0 Pro fees - acct, tax, and legal 2.2 0.1 2.3 Provision for income tax expense 30.3 32.2 62.5 Interest expense and amortization of debt discounts and fees 31.8 30.9 62.7 Depreciation and amortization 31.9 32.7 64.6 Loss on early extinguishment of debt 1.2 18.8 20.0 Other, including net noncash (gain) loss on disposal or impairment of assets (1.5) 0.8 (0.7) Stock-based compensation expense 9.4 6.2 15.6 Reliant transaction costs — 3.3 3.3 Adjusted EBITDA(30) $ 156.1 $ 169.5 $ 325.6 Weighted average common shares outstanding: Basic 87.1 89.8 88.4 Diluted 101.1 101.5 101.3 Refer to pages 36-38 for end notes.
34 Reconciliation of Net Income to Adjusted EBITDA(30) 2014 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 $ 61.5 $ 97.9 $ 64.8 $ 57.5 $ 281.7 Loss (income) from disc ops, net of tax, attributable to HealthSouth 0.1 (3.8) 0.9 (2.7) (5.5) Net income attributable to noncontrolling interests (14.8) (14.8) (14.7) (15.4) (59.7) Income from continuing operations attributable to HealthSouth(31) 46.8 $ 0.48 79.3 $ 0.81 51.0 $ 0.53 39.4 $ 0.41 216.5 $ 2.24 Gov't, class action, and related settlements — (0.8) — (0.9) (1.7) Pro fees - acct, tax, and legal 1.6 2.0 4.0 1.7 9.3 Provision for income tax expense 32.8 36.5 22.1 19.3 110.7 Interest expense and amortization of debt discounts and fees 27.9 27.8 27.8 25.7 109.2 Depreciation and amortization 26.4 26.4 27.4 27.5 107.7 Loss on early extinguishment of debt — — — 13.2 13.2 Gain on consolidation of Fairlawn Rehabilitation Hospital — (27.2) — — (27.2) Other, including net noncash loss on disposal or impairment of assets 1.3 1.7 2.7 1.0 6.7 Stock-based compensation expense 7.3 7.0 5.0 4.6 23.9 Encompass transaction costs — — — 9.3 9.3 Adjusted EBITDA(30) $ 144.1 $ 152.7 $ 140.0 $ 140.8 $ 577.6 Weighted average common shares outstanding: Basic 87.3 86.7 86.5 86.6 86.8 Diluted 100.9 100.6 100.5 100.8 100.7 Refer to pages 36-38 for end notes.
35 Net Cash Provided by Operating Activities Reconciled to Adjusted EBITDA Q2 6 Months Full-Year (Millions) 2015 2014 2015 2014 2014 2013 Net cash provided by operating activities $ 102.9 $ 128.0 $ 204.9 $ 235.1 $ 444.9 $ 470.3 Provision for doubtful accounts (10.9) (9.3) (22.5) (16.8) (31.6) (26.0) Professional fees—accounting, tax, and legal 0.1 2.0 2.3 3.6 9.3 9.5 Interest expense and amortization of debt discounts and fees 30.9 27.8 62.7 55.7 109.2 100.4 Equity in net income of nonconsolidated affiliates 2.3 2.6 3.9 6.9 10.7 11.2 Net income attributable to noncontrolling interests in continuing operations (17.3) (14.8) (33.8) (29.6) (59.7) (57.8) Amortization of debt-related items (3.0) (3.2) (6.3) (6.3) (12.7) (5.0) Distributions from nonconsolidated affiliates (1.8) (3.1) (3.7) (6.5) (12.6) (11.4) Current portion of income tax expense 3.4 3.0 6.9 6.6 13.3 6.3 Change in assets and liabilities 45.2 17.6 101.2 44.5 90.1 48.9 Net premium paid on bond issuance/redemption 11.8 — 3.8 — 4.3 1.7 Cash used in operating activities of discontinued operations 0.2 1.0 0.3 1.2 1.2 1.9 Reliant transaction costs 3.3 — 3.3 — — — Encompass transaction costs — — — — 9.3 — Other 2.4 1.1 2.6 2.4 1.9 1.6 Adjusted EBITDA 169.5 152.7 325.6 296.8 577.6 551.6
36 End Notes (1) CMS periodically retroactively updates Supplemental Security Income ("SSI") ratios that are used to determine the adjustments to Medicare payment rates for low-income patients. In June 2015, CMS updated ratios for fiscal year 2013, and we retroactively recorded adjustments to full-year 2013, full- year 2014, and YTD 2015. As a result, our net operating revenues were negatively impacted by approx. $5 million. (2) This is 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 is reported in "Other Operating Expenses" in Q1 2015. (3) The difference between the basic and diluted shares outstanding is primarily related to the convertible senior subordinated notes (convertible into 8.2 million common shares) and our convertible perpetual preferred stock (converted into 3.3 million common shares on April 23, 2015). a. On November 18, 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 the Company’s 6.5% Series A Convertible Perpetual Preferred Stock. The Company recorded approx. $249 million as debt and approx. $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 at a conversion rate of approx. 26.1084 shares per $1,000 in principal amount, which is equal to a conversion price of approximately $38.30 per share, 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% ($45.96) of the conversion price 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. As a result of the transaction, the dividend on the convertible perpetual preferred stock was reduced from approx. $5.7 million per quarter to approx. $1.6 million per quarter. b. There were 96,245 shares of preferred stock outstanding after the exchange transaction. On April 22, 2015, we delivered notice of the exercise of our rights to force conversion of all outstanding shares of the perpetual preferred stock (par value of $0.10 per share and liquidation preference of $1,000 per share) pursuant to the underlying certificate of designations. The effective date of the conversion was April 23, 2015. On that date, each share of preferred stock automatically converted into 33.9905 shares of our common stock (par value of $0.01 per share). We completed the forced conversion by issuing and delivering in the aggregate 3,271,415 shares of our common stock to the registered holders of the 96,245 shares of the preferred stock outstanding and paying cash in lieu of fractional shares due to those holders. (4) 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. (5) Current income tax expense was $3.4 million and $3.0 million for Q2 2015 and Q2 2014, respectively, and $6.9 million and $6.6 million for 6 months 2015 and 6 months 2014, respectively. (6) Earnings per share are determined using income from continuing operations attributable to HealthSouth. (7) The income allocated to participating securities and the convertible perpetual preferred dividends need to be subtracted from income from continuing operations to calculate basic earnings per share. (8) 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.
37 (9) The agreement to settle our class action securities litigation received final court approval in January 2007. These shares of common stock and warrants were issued on September 30, 2009. The 5.0 million of common shares are included in the outstanding shares. The warrants to purchase approx. 8.2 million shares of common stock at a strike price of $41.40 (expire January 17, 2017) were not included in the diluted share count before 2015 since the strike price has historically been above the market price. In Q2 2015 and 6 months of 2015, we included 622,224 and 470,136 shares respectively, in the diluted share count using the treasury stock method. The increase in the diluted share count shown in the 2015 EPS guidance table is primarily related to the potential increase in shares associated with these warrants. (10) 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. (11) Beginning in Q1 2015, HealthSouth's legacy 25 home health agencies are included in the home health and hospice segment. The 2014 results for these agencies have been recast and reported in the 2014 results for the home health and hospice segment. The $72 million Adjusted EBITDA guidance does not include the Adjusted EBITDA contribution for HealthSouth's legacy home health agencies. (12) Cash interest expense is net of amortization of debt discounts and fees. (13) Capital expenditures for maintenance in 2014 were negatively impacted by approx. $12 million for equipment purchases that were invoiced in Q4 2013 and paid in early 2014. (14) On July 17, 2014, the board of directors approved a $0.03 per share, or 16.7%, increase to the quarterly cash dividend on our common stock, bringing the quarterly cash dividend to $0.21 per common share. On July 16, 2015, the board of directors approved a $0.02 per share, or 9.5%, increase to the quarterly cash dividend on our common stock, bringing the quarterly cash dividend to $0.23 per common share. (15) The Encompass acquisition was funded using a combination of draws under the revolving credit facility and expanded term loan facility. (16) In January 2015, the Company issued an additional $400 million of its 5.75% senior notes due 2024 and used $250 million of the net proceeds to repay borrowings under its term loan facilities, with the remainder used to repay borrowings under its revolving credit facility. (17) In March 2015, the Company issued $300 million of 5.125% senior notes due 2023 and called all of its 8.125% senior notes due 2020 (approx. $290 million), which were funded in April 2015. (18) On February 14, 2014, the board of directors approved an increase in our existing common stock repurchase authorization from $200 million to $250 million. (19) The leverage ratio is based on trailing 4 quarter Adjusted EBITDA of $606.4 million and 2014 Adjusted EBITDA of $577.6 million. Pro forma 2015 leverage with trailing 4 quarters Encompass Adjusted EBITDA included would be approx. 3.3x. (20) Debt amounts do not include approx. $84 million of capital leases and approx. $40 million of other notes payable. (21) 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. (22) Medicare Advantage revenues represent approx. 8% of total revenues for all periods presented. End Notes, con't.
38 End Notes, con't. (23) Represents discharges from HealthSouth’s 108 consolidated hospitals in Q2 2015; 106 consolidated hospitals in Q1 2015 and Q4 2014; 102 consolidated hospitals in Q3 2014 and Q2 2014; and 101 consolidated hospitals in Q1 2014 (24) Excludes approximately 400 full-time equivalents who are considered part of corporate overhead with their salaries and benefits included in general and administrative expenses in the Company’s consolidated statements of operations. Full-time equivalents included in the table represent HealthSouth employees who participate in or support the operations of the Company’s hospitals. (25) 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. (26) Represents home health admissions from 160 locations in Q2 2015 and 164 locations in Q1 2015. Encompass represented 135 locations in Q4 2014. (27) Represents hospice admissions from 21 locations in Q2 2015 and 20 locations in Q1 2015 and Q4 2014. (28) The Company purchased 9,119,450 common shares in Q1 2013 through a tender offer at a price of $25.50 per share. (29) 10 million warrants (pre-October 2006 reverse split) were issued in connection with a January 2004 loan repaid to Credit Suisse First Boston. The warrants expired on January 16, 2014. The holders of these warrants chose both cash and cashless exercises into shares of our common stock. Prior to warrant expiration, 755,323 shares of our common stock were issued upon exercise between September 30, 2013 and January 16, 2014. (30) 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. (31) Per share amounts for each period presented are based on diluted weighted average shares outstanding unless the amounts are antidilutive, in which case the per share amount is calculated using the basic share count after subtracting the quarterly dividend on the convertible perpetual preferred stock, income allocated to participating securities, and the repurchase premium on shares of preferred stock. The difference in shares between the basic and diluted shares outstanding is primarily related to the convertible senior subordinated notes and our convertible perpetual preferred stock.
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