Investor
Presentation
May 2008
1
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 quarter ended March 31, 2008, Form 10-K
for the fiscal year ended December 31, 2007 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.
Forward-Looking Statements
2
Investment Considerations
Turnaround Complete: 2008 represents the first year current management can
focus 100% on operations
Volume Growth: #1 priority going forward; TeamWorks initiative will help us meet
or exceed our targets
Expense Control: focused on managing expenses in a disciplined manner, while
realizing that our most important "assets" are our dedicated employees
Continued Deleveraging: goal is to reduce leverage to ~4.5X by the end of 2010
Strong Cash Flows: shareholder value enhanced through strategic use of excess
cash flow
Experienced Management Team: proven track record of success
Focus: Debt Reduction & Growing EPS
3
HealthSouth
$1.8 billion
net operating revenues
100 hospitals
26 states
+
60 outpatient satellites & 25 hospital-
based home health agencies
~22,000 employees
Largest Provider of Inpatient Rehabilitative Healthcare Services in the U.S. (1)
(1) Source: Report to Congress: Medicare Payment Policy: March 2008, MedPAC analysis of Providers of service files from CMS
~8% of IRHs
~17% of inpatient beds
4
HealthSouth's Value Proposition
Attractive industry
Aging demographics
Industry leader
Demonstrated ability to grow market
share
Strong operating platform
Industry-leading margins
Commitment to quality
Negligible bad debts
Modest CAPEX requirements
Strong operating cash flows
Deleveraging a priority
~ $2.5 billion NOL's
No federal income taxes for foreseeable
future
Excellent growth opportunities:
2. Development
De-novo
Acquisitions
Consolidations
Joint Ventures
1. Organic
TeamWorks
5
New, independent board
New management
Resolved bond holder
dispute
Settled with DOJ/CMS and
SEC
Reconstructed financial
statements
Sold non-core assets;
reduced debt
“Old” HealthSouth
“New” HealthSouth
Complex company with four
operating divisions and no
synergies -- some actual dis-
synergies
Heavily levered with $3.5 billion of
debt
Over $1 billion total cash outflows
related to government settlements
and professional fees (accounting,
tax and legal)
Non-existent internal controls;
significant material weaknesses at
YE 2004
Corporate governance issues
Post-acute provider with emphasis
on inpatient rehabilitation
Debt reduced to $2.0 billion as of
Q407
Paid last DOJ/CMS & SEC
settlement payments in Q407;
Company can now use excess
cash flow to invest in business
Created comprehensive internal
controls from ground up; 0 material
weaknesses at YE 2007
Leading corporate governance
standards in place
- Outperformed 98.5% of
Russell 3000 (1)
A New Company...
(1) Source: ISS Governance Services: US Proxy Advisory Services report on HealthSouth Corporation dated April 23, 2008
6
... With a Focused Strategy
With our turnaround complete our focus is now on executing
our strategic plan and growing EPS
Our Goal: To be the preeminent specialty provider of inpatient
rehabilitative care in the U.S. through:
clinical, service and operational excellence;
growing market share in existing markets;
building new hospitals in new markets; and
acquiring, or joint-venturing with, competitors
Longer term, we will evaluate expanding into other,
complementary post-acute services on an opportunistic basis
7
Projected percentage of US population
65 years or older through 2050 (1)
(1) Source: US Census Bureau, 2004
(2) Source: Medicare Provider Analysis and Review File (2004); Claritas
Projected Medicare Compliant Case Growth (2)
+ 22%
Attractive Industry
Aging Demographics = Increased Demand
Demand for post-acute services will increase
as the U.S. population ages
“Compliant Cases” are expected to grow
~2% per year for the foreseeable future, creating
an attractive market.
8
(1) Source: Report to Congress: Medicare Payment Policy; March 2008, MedPAC analysis of Providers of service files from CMS
(2) Typically a 15-30 bed unit/department of an acute care hospital
Inpatient rehabilitation is HLS’ core business -vs- one of many,
secondary services provided by acute-care hospitals
HLS not challenged by Bad Debt or CAPEX issues facing
acute-care hospitals
HLS can attract patients from multiple referral sources
Consolidation opportunities will be pursued
Attractive Industry
Fragmented Provider Base = Opportunities
1
2
Total Number of IRFs
1,224
Free-Standing Hospitals
217 (18%)
In-Hospital Units
1,007 (82%)
For-Profit
179
NFP & Gov’t
828
All Others
123
HLS
94
(1)
(2)
9
FIM Gains
LOS Efficiency
Source: UDSmr Database –On Demand
Reports - YTD 2007
*Benchmark = Risk Adjusted Expectancy
Leadership Franchise
Value Proposition = Quality of Care
10
IRHs provide a Higher Level of Service…
Leadership Franchise
Differentiation = Better Outcomes at Comparable Costs
8 consecutive hours per day (min.)
24 hours per day
RN oversight and availability
None
Rehabilitation specialty expertise
Nursing training, expertise
2.5 – 4.0
5.0 to 7.5
Nursing hours per patient per day
Not required
Required
MD or DO designated as
Rehabilitation Director
Not required
Required; 3 hour (min.) therapy per day
Multi-disciplinary team approach;
coordinated Program of Care
Once every 30 days (min.)
4+ times per week
Attending physician visits
Nursing Home
Inpatient Rehabilitation Hospital
Service
at Comparable Cost …
~$400
~$900
Average Cost/Day
~$12,000
~30
Nursing Home
~$13,500
~15
Inpatient Rehabilitation Hospital
Average Cost / Admission
Average LOS
11
Financial Overview,
Debt Reduction &
Growth Strategies
12
First Quarter Highlights
Q1 2008 net operating revenues
from inpatient rehabilitation
hospitals increased by 7.7%
compared to Q1 2007
Total discharges increased by
2.7% compared to Q1 2007 and
5.3% sequential improvement
from Q4 2007
Total operating expenses
decreased by 7.1% in Q1 2008
compared to Q1 2007
Adjusted(1) diluted EPS from
continuing operations =
$0.19/share
2008 Q1 Financial Recap
13
(1) Excludes preferred dividends, accelerated depreciation from our corporate campus, professional fees related to derivative litigation and tax recoveries, amounts
classified as government, class action, and related settlements and the loss associated with our interest rate swap
Year-Over-Year
($ In Millions)
Three Months Ended Mar. 31,
2008
2007
Net operating revenues
469.0
$
443.1
$
Adjusted Consolidated EBITDA
89.0
$
68.9
$
Operating Earnings
87.6
$
32.6
$
Discharges
26,517
25,822
Sequential
Three Months Ended
3/31/2008
12/31/2007
Net operating revenues
469.0
$
439.0
$
Adjusted Consolidated EBITDA
89.0
$
87.1
$
Operating Earnings
87.6
$
21.9
$
Discharges
26,517
25,183
14
Strong Cash Flow
All Settlement Payments
completed by 12/31/07
Tax losses available for future
years ~ $2.5 billion
No federal income taxes for
foreseeable future
Excess cash flow will be used for:
Reducing debt
Upgrading existing hospitals
Building new hospitals
Acquiring competitors
Note: Consolidations/JVs typically
do not require any CAPEX
Note: Before Professional Fees (2008 est. $25M) and Preferred Dividends ($26M)
Does not include non-cash amortization and discounts reported on a GAAP basis
Pro-Forma Based on
(In Millions)
Q1 2008
Adjusted Consolidated EBITDA
89.0
$
320.0
$
335.0
$
Less: Est. capital expenditures (maintenance)
(8.7)
(40.0)
(40.0)
Est. cash interest cost and swap payments
(45.8)
(190.0)
(195.0)
Excess
34.5
$
90.0
$
100.0
$
Excess per fully diluted share
0.37
$
0.98
$
1.09
$
2008 Guidance Range
Debt Reduction
Significant debt reduction since
2004
No near-term refinancing
requirements
Priority: reduce high cost debt
Purchased $5M of 10.75%
Senior Notes in Jan/Feb 2008
Will repay $30M of 10.75%
Senior Sub Note in Q4 2008
Future debt reduction from:
Sale of Corporate Campus
Additional income tax recoveries
Excess cash from operations
Derivative proceeds
Goal: 4.5x leverage by YE 2010
15
Growth: Acquisitions and Consolidations
Acquisitions
Opportunistic "tuck-in" IRHs
Active in marketplace as we believe we're the natural consolidator in
IRH space
We will continue to be very disciplined in our approach -- carefully
evaluating these opportunities against our deleveraging priority
Consolidations
Capacity rationalization
Incremental EBITDA with no cash investment
Joint Venture consolidations can be complex
16
Growth: De-novo
17
New and existing markets
Real estate lease option available
at $3 - $5 million cash up-front
cost
Goal: Launch 5 /yr
Pre-construction ~ 6 months
Construction ~ 12 months
Ramp-up to cash positive ~ 6
months
(In Thousands)
(1) Does NOT include estimated corporate overhead of ~4.75% of net operating revenues or rent on a leased facility
(2) Does not assume any income tax implications
De-novo - Pro forma (40 Bed)
Revenue
EBITDA
(1)
%
(1)
Year 1
$8,500
$1,275
15%
Year 2
$10,500
$2,500
24%
Run Rate
$11,500
$2,900
25%
Investment
$15,000-17,000
5-year Annualized ROI
(2)
14% -18%
Investment Considerations
Turnaround Complete: 2008 represents the first year current management can
focus 100% on operations
Volume Growth: #1 priority going forward; TeamWorks initiative will help us meet
or exceed our targets
Expense Control: focused on managing expenses in a disciplined manner, while
realizing that our most important "assets" are our dedicated employees
Continued Deleveraging: goal is to reduce leverage to ~4.5X by the end of 2010
Strong Cash Flows: shareholder value enhanced through strategic use of excess
cash flow
Experienced Management Team: proven track record of success
Focus: Debt Reduction & Growing EPS
18
Appendix
19
2008 Guidance
Note: The above guidance does not incorporate any assumptions related to: (1) mark-to-market adjustments to the liability associated with our securities litigation settlement that
are required until issuance of the common stock and warrants; and (2) any gain or loss associated with our interest rate swap over the remaining term of this agreement.
Inpatient discharges are expected to grow 2% to 4% year over year
Consolidated net operating revenues to be in the range of $1.80 billion to
$1.85 billion
Adjusted consolidated EBITDA is expected to be in the range of $320 million
to $335 million
Diluted loss per share available to common shareholders will be in the range
of ($0.08) to $0.00 per share
Our adjusted diluted earnings per share will be in the range of $0.30 per share to
$0.38 per share
Excludes accelerated depreciation from our corporate campus (~$10M) and professional fees
related to derivative litigation and tax recoveries (~$25M)
20
Review of Key Assumptions to EPS Growth
Key Assumptions:
SS Discharges: 2+%/yr
(2% - 4% guidance for 2008)
Pricing: 2-3%/yr
SW&B: 3-4%/yr
G&A: 4.75% of net op. revenues
Other op. expense: = inflation
Interest expense: $180-190M
(at current debt levels)
Federal income taxes: $0
(for foreseeable future)
Derivative proceeds: TBD
“Restructuring”: ~$25M in ‘08
Comments:
Primary operational focus (TeamWorks)
Beginning in Q409 (P.L. 110-173 “rolls-back”
pricing from Q208 thru Q309)
Higher in 2008 due to investment (“catch-up”) to
make benefits competitive
Target: End-of-Year 2008
Operational focus (TeamWorks)
Cash payments are lower ($170-180M)
(at current debt levels)
NOL’s (~$2.5B)
Will be used to re-pay debt
Fees related to pursuit of derivative proceeds
(a)
(a) Targeted rate of 4.75% (not including FASB Statement No.123(R) costs); (b) Excludes swap payments
(b)
21
Supplemental Non-GAAP Disclosures
Adjusted Consolidated EBITDA
22
2008
2007
Net income (loss)
19.8
$
(56.6)
$
(Income) loss from discontinued operations
(15.9)
27.8
Provision for income tax expense
0.1
3.3
Loss on interest rate swap
36.6
4.3
Interest expense and amortization of debt discounts and fees
47.4
58.5
Loss on early extinguishment of debt
0.3
-
Government, class action, and related settlements
(36.4)
(12.2)
Net noncash loss on disposal of assets
0.1
0.1
Depreciation and amortization
30.1
18.0
Professional fees—accounting, tax, and legal
3.6
21.8
Compensation expense under FASB Statement No. 123(R)
3.3
3.6
Sarbanes-Oxley related costs
-
0.3
Adjusted Consolidated EBITDA
(1)
89.0
$
68.9
$
Three Months Ended March 31,
(In Millions)
(1)
Adjusted Consolidated EBITDA is a non
-
GAAP financial measure. We believe it is useful to investors
as it is used in
our
covenant calculations under our Credit Agreement.
Adjusted Consolidated EBITDA is not a measure of financ
ial performance under accounting principles generally accepted
in the United States
(“GAAP”)
and should not be considered as an alternative to net income (loss) or to cash flows from
operating, investing, and financing activities. Because Adjusted Consolid
ated EBITDA is not a measure determined in
accordance with
GAAP
and is susceptible to varying calculations, Adjusted Consolidated EBITDA, as presented, may not
be comparable to other similarly titled measures presented by other companies.
Our Credit Agreement allows certain items to be added to arrive at Adjusted Consolidated EBITDA that are viewed as not
being ongoing costs once the Company has completed its restructuring.
Supplemental Non-GAAP Disclosures (cont'd)
Adjusted Consolidated EBITDA
23
for future periods.
amount has not been included in the above calculation as it would not be indicative of our Adjusted Consolidated EBITDA
overy. This
EBITDA under our Credit Agreement. This includes interest income associated with our federal income tax rec
addition, we are allowed to add other income, including interest income, to the calculation of Adjusted Consolidated
included in the above table. In
divested as of the beginning of each period presented. Accordingly, these adjustments are not
necessarily indicative of the Adjusted Consolidated EBITDA that would have resulted had the applicable divisions been
these allocation are estimates and are not
for the allocation of corporate overhead to each divested division. However,
our Credit Agreement, Adjusted Consolidated EBITDA is calculated to give effect to each divestiture, including adjustments
atient, and diagnostic divisions, and in accordance with
After consummation of the divestitures of our surgery centers, outp
We define operating earnings as income before (1) loss on early extinguishment of debt
,
(2) interest expense and
amortization of debt discounts and fees
,
(3) other income
,
(4)
loss on interest rate
swap, and (5) income tax expense.
We use operating earnings as an analytical indicator to assess our performance. Our operating earnings for the three
months ended March
31, 200
8
and 200
7
were as follows:
2008
2007
Net operating revenues
469.0
$
443.1
$
Total operating expenses
376.2
404.9
Equity in net income of nonconsolidated affiliates
(2.4)
(2.7)
Minority interests in earnings of consolidated affiliates
7.6
8.3
Operating earnings
87.6
$
32.6
$
Three Months Ended March 31,
(In Millions)
Operating earnings is no
t a defined measure of financial performance under
GAAP
and should not be considered as
an alternative to net
income (
loss
)
. Because operating earnings is not a measure determined in accordance with
GAAP
and is susceptible to varying calculations, operatin
g earnings, as presented, may not be comparable to other
similarly titled measure
s presented by other companies.