Business Update
April 27, 2005
This presentation contains certain estimates and other forward-looking information
which are based on assumptions that HealthSouth believes, as of the date hereof, are
reasonable. Inevitably, there will be differences between such estimates and actual
results, and those differences may be material to HealthSouth.
As the company currently is undertaking a reconstruction of its accounting records and
a restatement of its results, the numbers presented herein as actual could change as a
result of the reconstruction and restatement process.
There can be no assurance that any estimates or forward-looking information will be
realized.
HealthSouth undertakes no duty to publicly update or revise the information contained
herein.
Cautionary Statements Regarding Presentation
You are cautioned not to place undue reliance on the estimates and results in this
presentation.
This presentation was prepared on a basis consistent with methodologies used in prior
presentations:
In prior presentations, no adjustments were made for retrospective or
prospective changes for consolidation or equity method of accounting.
We have attempted to show the proforma impact of these changes in arriving at
the 2005 budget.
Certain items included in the presentation as Restructuring Charges may be
recurring.
There are no asset impairment charges (e.g. write-down of Goodwill) reflected in
the results.
Cautionary Statements Regarding Presentation
The Securities and Exchange Commission (“SEC”) and the United States Department
of Justice (“DOJ”) are investigating HealthSouth’s financial reporting and related
activities and significant litigation exists regarding these matters.
HealthSouth, as well as certain of its past and present officers and directors, is also
subject to a number of class action, derivative and individual lawsuits relating to, among
other things, allegations of violation of federal securities laws.
Ernst & Young LLP was dismissed as the company’s independent accountants and
withdrew their audit reports on all of the company’s previously filed financial statements,
which should not be relied upon.
No financial statements currently are available for any prior period.
Our financial statements will be restated; the estimated impact on shareholders’ equity
will be to reduce it by $3.8-$4.6 billion.
Considerations Involving Our Current Situation
Certain matters discussed herein constitute forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934.
Such information is based on numerous assumptions and involve a number of risks and
uncertainties, many of which are beyond HealthSouth’s control, including:
Completion of the investigations by the SEC and the DOJ.
Resolution of outstanding litigation, including certain class action litigation alleging violations
under federal securities laws and certain qui tam actions.
Our ability to successfully refinance our existing public indebtedness as it becomes due.
Changes, delays in or suspension of reimbursement by payors.
Regulatory changes, including the implementation of the recently-adopted 75% Rule.
Competitive pressures.
General conditions in the economy and capital markets.
Completion of the reconstruction and restatement of our financial performance.
You are cautioned not to place undue reliance on the forward-looking statements
contained in this presentation.
Forward-Looking Statements
The financial data contained herein includes non-GAAP financial measures, including
“EBITDA”, to assist in assessing projected and actual operating performance and to
facilitate quantification of planned business activities.
As used by HealthSouth, “EBITDA” is consistent with the definition of Adjusted
Consolidated EBITDA in our Senior Subordinated Credit Agreement dated as of
January 16, 2004. In summary, this definition allows for the company to add back
charges to EBITDA classified as “Restructuring Charges” by the company until June
2005. These charges are generally not consistent with the definition of restructuring
charges as defined by GAAP.
Costs which HealthSouth classifies as “Restructuring Charges” are: professional fees
associated with litigation, financial restructuring, government investigations, forensic
accounting, creditor advisors, accounting reconstruction, audit and tax work associated
with the restatement, and Sarbanes-Oxley implementation and non-ordinary course
charges incurred after March 19, 2003 and related to the company’s overall corporate
restructuring.
Under the Senior Subordinated Credit Agreement professional fees associated with the
class-action and shareholder derivative litigation can be added back to EBITDA after
June 30, 2005.
Notes Regarding Presentation of Non-GAAP
Financial Measures
Financial information has been presented after consideration of accounting for
consolidation of joint ventures and partnership interests. Actual results may vary after
our reconstruction and restatement efforts are completed.
EBITDA may be useful to stakeholders because it is commonly used as an analytical
indicator within the healthcare industry to calculate facility performance, allocate
resources and measure leverage capacity and debt service ability.
EBITDA should not be considered as a measure of financial performance under
GAAP.
Because HealthSouth is currently unable to prepare a balance sheet for any
completed period or a projected balance sheet, reconciliation for non-GAAP financial
measures to a financial measure calculated in accordance with GAAP is not currently
possible. In addition, once our reconstruction and restatement process is completed, it
could cause changes in the results indicated.
Notes Regarding Presentation of Non-GAAP
Financial Measures
Agenda
I.
2004 Results
Jay Grinney, Mike Snow
II.
2005 Budget
John Workman
III.
75% Rule
Mike Snow, Jay Grinney
IV.
Liquidity and Bank Facility Update
John Workman
V.
Restructuring Costs
John Workman
VI.
2000 - 2003 10-K Status
John Workman
VII.
Litigation Update
Greg Doody
VIII.
Summary Comments
Jay Grinney
IX.
Questions & Answers
%
2004 Actual
2004 Budget
Variance
Net Revenue
$3,826.2
$3,952.8
-3.2%
Salaries, Wages and Benefits
1,742.2
1,778.6
-2.0%
Cost of Sales
380.0
380.9
-0.3%
Other
951.5
1,034.6
-8.0%
EBITDA before Minority Interest
752.5
758.6
-0.8%
Minority Interest
108.9
108.6
0.2%
EBITDA* after Minority Interest
$643.6
$650.0
-1.0%
Presentation on December 2, 2004 indicated trended EBITDA* of $630.4
(Dollars in Millions)
EBITDA is presented after Corporate Division Overhead and Minority Interest, but it is before Restructuring Charges and does not
include the change in composition of the entities that are consolidated
I. 2004 Results – Total Company
New Division President
Operational improvement / productivity
Develop mitigation strategies: 75% Rule
Target marketing for stroke / neuro cases
I. 2004 Results – Inpatient & Surgery
$512
EBITDA* (in millions)
$2,054
Net Revenue (in millions)
123,701
Discharges
Financial Overview
Key Accomplishments/Initiatives
$154
EBITDA* (in millions)
$910
Net Revenue (in millions)
781,743
Cases
Financial Overview
Inpatient Division –2004
Surgery Division –2004
Key Accomplishments/Initiatives
Recruited new Division President
Enhance re-syndication process
Portfolio assessment
Operations improvement
EBITDA is presented after Corporate Division Overhead and Minority Interest, but it is before Restructuring Charges and does not
include the change in composition of the entities that are consolidated
I. 2004 Results – Outpatient & Diagnostic
$60
EBITDA* (in millions)
$485
Net Revenue (in millions)
5,166,694
Visits
Financial Overview
Key Accomplishments/Initiatives
$28
EBITDA* (in millions)
$221
Net Revenue (in millions)
789,668
Scans
Financial Overview
Outpatient Division –2004
Diagnostic Division –2004
Key Accomplishments/Initiatives
Portfolio dispositions
Operational improvement / productivity
Focus sales / marketing to workers comp /
employer relationships
Cash collection / claims software
implementation
Portfolio dispositions
Technology assessment / investment
EBITDA is presented after Corporate Division Overhead and Minority Interest, but it is before Restructuring Charges and does not
include the change in composition of the entities that are consolidated
Agenda
I.
2004 Results
Jay Grinney, Mike Snow
II.
2005 Budget
John Workman
III.
75% Rule
Mike Snow, Jay Grinney
IV.
Liquidity and Bank Facility Update
John Workman
V.
Restructuring Costs
John Workman
VI.
2000 - 2003 10-K Status
John Workman
VII.
Litigation Update
Greg Doody
VIII.
Summary Comments
Jay Grinney
IX.
Questions & Answers
II. 2005 Budget
The 2005 budget includes non-comparables to the 2004 results:
As a result of the restatement (and as previously disclosed), the composition
of the entities that are consolidated has changed
For 2005, this change has a negative EBITDA impact of $11.7
million
Certain costs previously classified as “restructuring” are now being reflected
as charges against EBITDA
These total approximately $15 million
II. 2005 Budget (cont’d)
The bridge from the 2004 Results to the 2005 Budget is as follows:
(Dollars in Millions)
2004 EBITDA
$643.6
Consolidation Impact
(11.7)
"Restructuring" to Operations
(15.0)
2004 EBITDA on Proforma Basis
$616.9
75% Rule Impact, incremental
(17.0)
Operational Improvements, net
36.6
2005 Budget Before Restructuring Costs
$630.5
2005
2004
Budget
Proforma **
Net Revenue
$3,711.3
$3,741.9
Salaries, Wages and Benefits
1,704.0
1,722.9
Cost of Sales
348.8
363.3
Other
931.2
945.1
EBITDA before Minority Interest
$727.3
$710.6
Minority Interest
96.8
93.7
EBITDA* after Minority Interest
$630.5
$616.9
Capital Expenditures
$152.7
$128.2
(Dollars in Millions)
* EBITDA is presented after Corporate Division overhead and Minority Interest, but it is before Restructuring Charges
** The Proforma amount for 2004 has been reduced for (i) consolidation changes and (ii) restructuring amounts charged to operations
II. 2005 Budget (cont’d)
EBITDA*
2005
2004
Breakdown by Division:
Budget
Proforma **
Inpatient
$515.3
$503.8
Surgery
146.0
139.7
Outpatient
60.1
59.8
Diagnostic
36.3
27.8
Corporate & Other
(127.2)
(114.2)
Total EBITDA
$630.5
$616.9
* EBITDA by Division is presented after Corporate Division overhead and Minority Interest, but it is before Restructuring Charges
** The Proforma amount for 2004 has been reduced for (i) consolidation changes and (ii) restructuring amounts charged to operations
(Dollars in Millions)
II. 2005 Budget (cont’d)
Agenda
I.
2004 Results
Jay Grinney, Mike Snow
II.
2005 Budget
John Workman
III.
75% Rule
Mike Snow, Jay Grinney
IV.
Liquidity and Bank Facility Update
John Workman
V.
Restructuring Costs
John Workman
VI.
2000 - 2003 10-K Status
John Workman
VII.
Litigation Update
Greg Doody
VIII.
Summary Comments
Jay Grinney
IX.
Questions & Answers
II. 75% Rule
Assumption Changes
Exclude polyneuropathy and some comorbid conditions in the list of
“qualified” diagnoses pursuant to Transmittal 347
Enforcement rules for migration to 60% threshold changed pursuant
to Transmittal 478
Actual patient mix change, Q4 2004
SNF and Home Health experiencing state licensure delays
Conclusion:
Expected impact of the 75% Rule for FY 2005 is materially unchanged
Discharges
Net Revenue
EBITDA
December Update
(8,200)
($53 million)
~ ($22 million)
II. 75% Rule (cont’d)
Uniform Data System
Quarterly Discharge Comparison 2002 - 2004
(Medicare Only)
70,544
72,441
71,563
74,184
73,414
74,718
73,329
74,775
71,341
71,025
75,064
75,060
68,000
69,000
70,000
71,000
72,000
73,000
74,000
75,000
76,000
1st Qtr 02
2nd Qtr 02
3rd Qtr 02
4th Qtr 02
1st Qtr 03
2nd Qtr 03
3rd Qtr 03
4th Qtr 03
1st Qtr 04
2nd Qtr 04
3rd Qtr 04
4th Qtr 04
Data derived from facilities reporting discharges in each quarter; ~ 65% of Medicare IRF discharges
This summary information was provided by UDSmr, for the benefit of the rehabilitation field, and is used with prior written permission of UDSmr
IRF
Discharges
-5.4%
III. 75% Rule (cont’d)
Projected Medicare Savings FY2005
Government substantially underestimated impact of the Rule
Industry has presented this data to CMS, GAO, and Congress
not provided
~ 39,0003
AMRPA estimates of annual impact
$ 142 million
~ 24,8002
Q42004 industry results annualized (UDSmr data)
$ 10 million
~ 1,7501
Original CMS estimate ($ only)
Net Medicare
Savings
IRF Cases
Reduced
1.
CMS estimate, $10 million, divided by $5,710, the “net savings” per case reduction due
to movement to SNF, Home Health, etc. (Rate per Fed. Reg. Vol. 69, No. 89 pg 25772)
2.
% reduction of Q4 2004 vs. Q4 2003 discharges multiplied by Medicare annual
discharges, ~ 460,000
3.
AMRPA press release, April 23, 2005
II. 75% Rule (cont’d)
Directives
Whether the current list of patient
conditions in the Rule represents a
clinically appropriate standard for
IRF services
Whether additional conditions
should be added to the list
Findings
Agreement that patient condition
alone is insufficient to identify
patients for IRF services. Other
factors, e.g. functional status,
should be considered
Medical experts differed on whether
other conditions should be added to
the list at this time
GAO Report
Conclusions:
Greater clarity is needed in the Rule about types of patients most
appropriate for IRF services
Further research should be undertaken to identify subgroups of patients
within a condition that require IRF services
The Rule should be refined based upon this research
II. 75% Rule (cont’d)
Continue to work with industry representatives (Federation of American
Hospitals, AMRPA, American Hospital Association, AAPMR) to
communicate that:
We agree with the goal for patients to be cared for in the most
appropriate clinical setting
The early impact of the Rule is much more significant than anticipated
by government estimates
As concluded by the GAO report, more research is required to provide
clarity to the Rule
HealthSouth Position
Recommendation:
Freeze compliance threshold at 50% pending further refinements
to the Rule based on research recommended by GAO
Agenda
I.
2004 Results
Jay Grinney, Mike Snow
II.
2005 Budget
John Workman
III.
75% Rule
Mike Snow, Jay Grinney
IV.
Liquidity and Bank Facility Update
John Workman
V.
Restructuring Costs
John Workman
VI.
2000 - 2003 10-K Status
John Workman
VII.
Litigation Update
Greg Doody
VIII.
Summary Comments
Jay Grinney
IX.
Questions & Answers
IV. Liquidity and Bank Facility Update
Interest payments were $105.3 and $29.0 for 4Q04 and 1Q05,
respectively
CMS settlement payments in 1Q05 were $99.5
Liquidity
(Dollars in Millions)
$587.9
$639.7
Consolidated Cash
$232.3
$233.7
Restricted Cash*
$355.6
$406.0
Available Cash
Dec 31, 2004
Sept 30, 2004
Restricted cash includes non-consolidated partnership accounts, deposits related to captive insurance
account and other risk management deposits
IV. Liquidity and Bank Facility Update (cont’d)
Bank Facility Update
(Dollars in Millions)
All events of default under prior Credit Agreement have been waived
Other
$250 revolver provides additional liquidity
Revolver
Minimum Interest Coverage Ratio
Maximum Total Debt to EBITDA Ratio
Maximum Capital Expenditures
Key Covenants
Facility closed and funded March 21, 2005
Closing
$315 term loan B & $85 synthetic L/C @ LIBOR +250 bp
$250 revolver & $65 L/C @ LIBOR +275 bp
Note: Borrowing rates can go down based on achieving certain agency
ratings (term) and Leverage Ratio metrics (revolving)
Facility
Agenda
I.
2004 Results
Jay Grinney, Mike Snow
II.
2005 Budget
John Workman
III.
75% Rule
Mike Snow, Jay Grinney
IV.
Liquidity and Bank Facility Update
John Workman
V.
Restructuring Costs
John Workman
VI.
2000 - 2003 10-K Status
John Workman
VII.
Litigation Update
Greg Doody
VIII.
Summary Comments
Jay Grinney
IX.
Questions & Answers
V. Restructuring Costs
2005 Budget
2004 Results
Reconstruction / Restatement
2000 - 2003
$16.0
$95.2
2004
15.0
-
Audit
2000 - 2003
19.0
31.4
2004
11.4
-
Sarbanes-Oxley Related
18.0
22.0
Crisis Management
-
27.0
All Other
-
19.2
Total
$79.4
$194.8
Note: These costs include (i) professional fees associated with litigation, financial restructuring, government investigations, forensic accounting,
accounting reconstruction, audit and tax work associated with the restatement, and Sarbanes-Oxley implementation and (ii) non-ordinary course
charges incurred after March 19, 2003 and related to the company’s overall corporate restructuring
(Dollars in Millions)
V. Other Potential Restructuring Costs
The company continues to evaluate facilities and the organizational
structure of each Division
Some locations lose money on an EBITDA basis
Decisions to close locations or reduce the organization will be based on
gaining a positive return for such decisions
The costs of such decisions, if any, have not been reflected in the 2005
budget
Agenda
I.
2004 Results
Jay Grinney, Mike Snow
II.
2005 Budget
John Workman
III.
75% Rule
Mike Snow, Jay Grinney
IV.
Liquidity and Bank Facility Update
John Workman
V.
Restructuring Costs
John Workman
VI.
2000 - 2003 10-K Status
John Workman
VII.
Litigation Update
Greg Doody
VIII.
Summary Comments
Jay Grinney
IX.
Questions & Answers
VI. 2000 - 2003 10-K Status
A draft of the 2000-2003 comprehensive 10-K exists and is being finalized
HealthSouth fraud was extremely complicated
1.4 million accounts had to be analyzed and 92% of the accounts required
adjustment
There were more than 750 acquisitions that had to be analyzed and redone
(19 large acquisitions)
The fact that HealthSouth has many partnerships added to the complexity of the
restatement process
As many of the former financial employees were indicted or left the company and
since the prior auditor work papers could not be reviewed, knowledge of
historical accounting further complicated the restatement
Location of documentation for long lived assets that were acquired more than 10
years ago has been a challenge
This effort has required more than one million hours of external time to be
completed
Agenda
I.
2004 Results
Jay Grinney, Mike Snow
II.
2005 Budget
John Workman
III.
75% Rule
Mike Snow, Jay Grinney
IV.
Liquidity and Bank Facility Update
John Workman
V.
Restructuring Costs
John Workman
VI.
2000 - 2003 10-K Status
John Workman
VII.
Litigation Update
Greg Doody
VIII.
Summary Comments
Jay Grinney
IX.
Questions & Answers
CMS/DOJ (Civil)
The company has reached a global settlement with CMS/DOJ Civil
Division
Terms of payment are $325 million total; $75 million upfront with the
remainder over the next three years payable quarterly with interest
CMS/DOJ (Criminal)
Cooperation recognized by United States Attorney
Continue to fully cooperate
SEC
Negotiations continue
Class Action and other litigation
Dialogue continues
VII. Litigation Update
Agenda
I.
2004 Results
Jay Grinney, Mike Snow
II.
2005 Budget
John Workman
III.
75% Rule
Mike Snow, Jay Grinney
IV.
Liquidity and Bank Facility Update
John Workman
V.
Restructuring Costs
John Workman
VI.
2000 - 2003 10-K Status
John Workman
VII.
Litigation Update
Greg Doody
VIII.
Summary Comments
Jay Grinney
IX.
Questions & Answers
Operational Agenda
Revenue
75% Rule mitigation
Organic growth
Standardized market assessment
Monitoring mechanisms
Centralized managed care support,
decentralized decision-making
Consolidated revenue cycle
operations
Leverage sales/marketing
Infrastructure
SEC filing milestones
Internal controls (SOX 404)
Financial infrastructure
Financial/operating reporting
Formal CAPEX process
Formal budget process
Revised levels of authority
Compliance program
IT strategic plan
Quality
Establish a robust quality agenda
Standardized quality metrics
Clinical information system
Leverage AutoAmbulator
Engage physicians; recruit
Chief Medical Officer
Research
Cost
Standardized labor management
metrics and performance
expectations
Benchmarking
Productivity improvement
Contract Labor focus
Streamline supply chain
Reduce fixed costs
People
HR strategic plan
Organization structure
effectiveness
Performance management
process
Communications
Multi-year Operational Program
34
Questions and Answers