Unlocking Value
Merrill Lynch Health Services Conference
November 28, 2006
New York, NY
Forward-Looking Statements
The information contained in this presentation includes certain estimates, projections
and other forward-looking information that reflect our current views with respect to
future events and financial performance. These estimates, projections and other
forward-looking information are based on assumptions that HealthSouth believes, as
of the date hereof, are reasonable. Inevitably, there will be differences between such
estimates and actual results, and those differences may be material.
There can be no assurance that any estimates, projections or forward-looking
information will be realized.
All such estimates, projections and forward-looking information speak only as of the
date hereof. HealthSouth undertakes no duty to publicly update or revise the
information contained herein.
You are cautioned not to place undue reliance on the estimates, projections and other
forward-looking information in this presentation as they are based on current
expectations and general assumptions and are subject to various risks, uncertainties
and other factors, including those set forth in our Form 10-Q for the periods ended
March 30, 2006, June 30, 2006 & Sept. 30, 2006, the Form 10-K for the fiscal year
ended December 31, 2005 and current report on Form 8-K dated May 26, 2006 and in
other documents that we previously filed with the SEC, many of which are beyond our
control, that may cause actual results to differ materially from the views, beliefs and
estimates expressed herein.
Diversified Healthcare Services Provider
The Company is a leader in each of its four major
operating divisions
Approximately 1,003 facilities in 45 states
YTD Performance (09/30/06)
Net Operating Revenues: $2.3 billion
Operating Earnings of $119.7 million
Adjusted Consolidated EBITDA: $411.8 million
Adjusted Consolidated EBITDA margin: 18.0%
Diagnostic
(6.9%)
Outpatient
6.3%
Surgery
19.7%
Inpatient
81.0%
% of Operating Earnings (b) (c)
(a) Based on facility counts as of Sept. 30, 2006.
(b) Percentages do not include Intersegment Revenues; operating earnings include
operating divisions only
(c) Nine months ended Sept. 30, 2006.
Diagnostic
6.7%
Outpatient
11.0%
Surgery
24.3%
Inpatient
57.1%
Other
0.8%
Diversified Business Portfolio (b) (c) : % of Net Operating Revenues
National Provider of Healthcare Services
Inpatient Division
Overview
102 Hospital Locations
75% Rule
Nation's largest provider of inpatient rehabilitation
services
193 locations (92 IRFs, 91 outpatient satellites)
Also have 10 LTCH facilities
YTD Performance (09/30/06)
Net Operating Revenues: $1,303.3 million
Operating Earnings: $277.7 million; Margin: 21.3%
Compliant Case Growth approximately 5.4%
Government regulation limiting types of patients IRFs
can admit (“Compliant Cases”)
13 categories
Phase-in = 50%; 60%; 65%; 75%
Threshold frozen at 60% for an additional year
(07/01/07)
HealthSouth outperforms the market with compliant
case growth
Research underway; Symposium Q1 2007
Rule creating roll-up/consolidation opportunities
Payor Mix(1) for the nine months ended 9/30/2006
State Concentrations
(2)
Cummulative %
(2)
IRF
LTCH
TX
15
1
16%
PA
9
2
26%
FL
9
1
36%
AL
6
42%
TN
6
48%
LA
2
3
53%
AZ
5
58%
SC
5
63%
(1) Net Patient Revenue
(2) Number of IRF's & LTCH's Only
Managed Care
18.7%
Medicare
71.2%
Patients
0.2%
Other 3
rd
Party
5.1%
Medicaid
2.1%
Workers Comp
2.7%
Strategic Repositioning
August 14, 2006: HealthSouth announced it would seek strategic
alternatives for its Surgery and Outpatient business segments
Diagnostic business segment previously designated as “non-
core”
The “new” HealthSouth = Focus on Inpatient Rehabilitation
Facilities (“IRF”)
Future growth opportunities in other post-acute segments
Long-Term Acute Care
Home Health
Hospice
Integrated, post-acute payment system (Medicare)
Repositioning Rationale
Significant CAPEX Required to Fund Growth
($ in millions)
Incremental Cumulative Growth
CAPEX vs. Base CAPEX ~ $760MM
How to Fund?
Borrow (can’t take on
more debt)
Float Equity (can’t dilute
shareholders)
Divest Segments
“Base Case”
“Growth Case”
$0>
$50
$100
$150
$200
$250
$300
$350
$400
2006E
2007E
2008E
2009E
2010E
2011E
Repositioning Rationale (cont’d)
Orthopedic surgeons used to:
Admit knees/hips to our rehab
hospitals (~20+% of total
discharges)
Referred 50+% of our
outpatient P.T. patients
Referred a disproportionate
amount to our MRIs/ CTs
Did surgeries in our ASCs
Today Orthopedic Surgeons:
Cannot admit most of their
knee/hip patients because of
the 75% Rule
Directly compete with our
Outpatient and Diagnostic
centers by offering these
services in their offices
Remain as partners in ASCs;
the only remaining “synergy”
In some instances, the strategic interests between Inpatient
and Surgery are at cross-purposes with one another
No strategic or financial synergies among divisions
– Historic connection = Orthopedic care
– No longer consistent with current realities
IRF 7% $9 Billion
IRF Segment
Post Acute Market (2004)
Notes:
1. Source: Medicare Provider Analysis and Review File (2004); Claritas
2. Source: Annual Reports; Verispan data; management analysis
3. Typically a 15 – 30 bed wing / unit of an acute-care hospital
Projected Medicare Compliant Case Growth(1)
+ 22%
=
U.S. IRF Market (
2004
)
(2)
1337 IRFs
Free-standing = 334 (25%)
In-hospital Unit
(3)
= 1003 (75%)
HLS
All Others
For-Profit
Hospitals
Not-for-Profit
Hospitals
Number of IRFs
92
242
266
737
(1) Current overhead calculation of 4.25% of net operating revenue may not be comparable to stand alone entity
(2) 2005 numbers adjusted for discontinued ops facilities in 2006
Inpatient Division
($ in millions)
Inpatient Division – Strong Cash Flow
Characteristics
YTD 09/30/06
2005
(2)
YTD 09/30/06
Annualized
Net Operating Revenues
$1,776.3
$1,303.3
$1,737.7
Operating Earnings
388.3
277.7
370.3
Corporate OH (as a % of revenue)
(1)
(75.5)
(55.4)
(73.9)
Depreciation
65.4
47.5
63.3
Available Cash Before CAPEX & Debt Service
$378.2
$269.8
$359.7
CAPEX (maintenance only)
(38.8)
(30.0)
(40.0)
Cash Available for Growth CAPEX
$339.4
$239.8
$319.7
and Debt Service
Growth Opportunities
Post divestiture, HealthSouth’s growth will occur through organic and
development initiatives
Organic*
2-3% Pricing
1-2% SS Volume
Development:
Current pipeline
~ 40+ projects
*After full implementation of 75% Rule
IRF
LTCH
IRF
1.
Consolidation
(Existing markets)
2.
Acquisition (New markets)
3.
De-novo (Existing or New markets)
LTCH (to supplement IRF presence)
J.V.
Acquire
Mid-to high-single digit
EBITDA growth
Development Strategies
Growth Potential – Illustrative Examples
Incremental EBITDA with No Investment
Capacity Rationalization
“Win - Win” Situation for Both Parties
Higher Margin from Platform Efficiency
Ramp-up Period though Strong IRR
(1) % includes estimated corporate overhead of 4.25%
(2) Assumes HLS owns 80% of JV
($ in thousands)
Consolidation - Joint Venture
DeNovo - Proforma (40 Bed)
Revenue
EBITDA
%
(1)
Revenue
EBITDA
%
(1)
Stand Alone
$10,000
$2,000
16%
Year 1
$8,500
$1,275
11%
Joint Venture
(2)
$14,000
$3,200
19%
Year 2
$10,500
$2,500
20%
- Minority Interest
($640)
Run Rate
$11,500
$2,900
21%
After Consolidation
$14,000
$2,560
14%
Incremental
EBITDA
$560
Investment
$14,000
Investment
$0
5-year Annualized ROI
~ 18%
2006 Development Achievements
Growth is occurring ahead of plan:
Opened new 40-bed IRF in Petersburg, VA
Created joint venture/market consolidation in Tucson, AZ
Merged competitor’s 20-bed IRF with existing HLS 80-bed
IRF
Broke ground on new 40-bed IRF in Fredericksburg, VA
Approved new 50-bed IRF in Phoenix, AZ
Announced acquisition/market consolidation in Wichita Falls, TX
Acquired competitor’s 48-bed IRF; will consolidate patients
to HLS 63-bed IRF
Future Growth Opportunities: Other Post-Acute Sectors
The Post-Acute Market is Sizeable and Remains Highly Fragmented
No Post Acute Care
67%
Post-Acute Usage After Hospital Discharge
Post-Acute Market (2004)
2004 Market Size: $126 B
Source: 2005 CMS, MedPAC and Wall Street research
Post Acute Care
33%
IRF 7%
Skilled Nursing
38%
Home Health
37%
IPF6%
Outpatient 5%
Hospice 4%
Post-Acute Growth Opportunities
Segment
Projected Growth
Inpatient Rehab Facilities (IRFs)
4-6%
Home Health
5-9%
Hospice
12-15%
Long Term Acute Care (LTCH)
10-15%
Skilled Nursing
4-6%
Top 3-5 players in each sector hold the
following market share:
<25% in IRFs
<10% in Home Health
<20% in Hospice
<20% in Skilled Nursing
~50% in LTCH
Summary
HealthSouth: a new Board, a new management team, a new balance
sheet and a new direction.
Re-listed on NYSE (symbol: HLS) on October 26, 2006.
By divesting its non-core assets, the Company will be well-positioned to
become a “pure-play” post-acute provider and a consolidator in the
fragmented $126 B post-acute space.
These divestures – along with any proceeds we may receive from tax
refunds and certain derivative litigation – will significantly strengthen the
company’s Balance Sheet through deleveraging.
LTCHs (supplemental to IRFs only)
Near Term
Longer-term
IRFs
Home Health
Hospice
Appendix
Non-GAAP Financial Reconciliations
(In Thousands)
Reconciliation of Net Loss to Adjusted Consolidated EBITDA
2006
2005
2006
2005
Net loss
(76,144)
$
(11,541)
$
(553,718)
$
(332,158)
$
Loss from discontinued operations
3,291
11,735
20,191
30,830
Provision for income tax expense
4,582
10,339
31,457
29,209
Loss on interest rate swap
28,711
-
13,922
-
Loss (gain) on sale of marketable securities
107
-
121
(10)
Interest income
(1,253)
(3,739)
(9,610)
(10,618)
Interest expense and amortization of debt
discounts and fees
82,493
82,904
250,647
253,530
(Gain) loss on early extinguishment of debt
(6)
-
365,636
33
Professional fees—accounting, tax, and legal
23,774
33,072
100,402
113,429
Government, class action, and related
settlements expense
28,420
-
45,733
215,000
Impairment charges
200
1,460
4,022
26,375
Net non-cash loss on disposal of assets
3,448
2,385
8,830
16,672
Depreciation and amortization
38,473
40,249
113,726
128,694
Compensation expense under FASB Statement
No. 123(R)
3,595
-
11,630
-
Sarbanes-Oxley related costs
861
7,738
4,237
22,965
Restructuring activities under FASB Statement
No. 146
1,348
249
4,579
7,456
Adjusted Consolidated EBITDA
141,900
$
174,851
$
411,805
$
501,407
$
Three Months Ended
September 30,
Nine Months Ended
September 30,
Appendix (cont’d)
Non-GAAP Financial Reconciliations
The change in operating cash and assets and liabilities during the nine months ended September 30,
2006 primarily resulted from declining volumes in each of our operating segments, increased receivable
balances (due to current collection trends, the $35.0 million receivable recorded as a recovery from Mr.
Scrushy, and a delay in Medicare payments), and non-cash reductions in various accrued expenses,
including a reduction in estimates associated with legal fees owed to Mr. Scrushy.
Reconciliation of Adjusted Consolidated EBITDA to Net Cash (Used In) Provided By Operating Activities
2006
2005
Adjusted Consolidated EBITDA
411,805
$
501,407
$
Professional fees—accounting, tax, and legal
(100,402)
(113,429)
Sarbanes-Oxley related costs
(4,237)
(22,965)
Interest expense and amortization of debt discounts and fees
(250,647)
(253,530)
Interest income
9,610
10,618
Provision for doubtful accounts
86,364
68,583
Net gain on disposal of assets
(7,977)
(2,656)
Amortization of debt issue costs, debt discounts, and fees
16,312
30,371
Amortization of restricted stock
2,654
1,358
Accretion of debt securities
(53)
(117)
Loss on sale of investments, excluding marketable securities
1,103
3,420
Equity in net income of nonconsolidated affiliates
(16,841)
(21,115)
Distributions from nonconsolidated affiliates
10,455
15,615
Minority interest in earnings of consolidated affiliates
78,367
78,895
Stock-based compensation
8,976
-
Compensation expense under FASB Statement No. 123(R)
(11,630)
-
Current portion of income tax provision
(10,670)
(16,244)
Restructuring charges under FASB Statement No. 146
(4,579)
(7,456)
Recovery of amounts due from Richard M. Scrushy
(35,000)
-
Net cash settlement on interest rate swap
1,448
-
Other operating cash used in discontinued operations
(25,271)
(42,879)
Change in government, class action, and related settlements liability
(87,171)
(133,548)
Change in assets and liabilities, net of acquisitions*
(148,251)
(7,766)
Net Cash (Used In) Provided By Operating Activities*
(75,635)
$
88,562
$
Nine Months Ended
September 30,
(In Thousands)
