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HEALTHSOUTH Reports Second Quarter Earnings


8/14/2006 11:09:35 AM

BIRMINGHAM, Ala., Aug. 14 /PRNewswire-FirstCall/ -- HealthSouth Corporation today filed its quarterly financial statements on Form 10-Q for the period ended June 30, 2006 with the Securities and Exchange Commission (the "SEC"). The filing can be found on the SEC's website at www.sec.gov. The information below is summarized and should be read in conjunction with the Form 10-Q filed today.

"Overall, I'm encouraged by the progress we made in the second quarter," said HealthSouth President and CEO Jay Grinney. "We saw improved results from the prior year and our development pipeline indicates there are excellent growth opportunities in the post-acute, surgery and outpatient segments. Additionally, our Diagnostic Division is stabilizing and we believe there will be strong interest in these assets when we begin marketing them later this year."

Consolidated Results

The Company reported a pretax loss from continuing operations in the second quarter of $28.9 million, an improvement of $17.0 million over the second quarter 2005 pretax loss from continuing operations of $45.9 million.

Revenues for the second quarter were $787.5 million, a 3.8 percent decline from the same quarter a year ago. The revenue decline is a result of (i) the continued negative impact of the 75% Rule and negative pricing in the Inpatient Division; (ii) facility closures (which do not qualify as discontinued operations) primarily in the Outpatient, Surgery, and Diagnostic Divisions; and (iii) three surgery center facilities that became equity method investments rather than consolidated entities.

Segment Highlights

Operating Earnings are a key performance measure used by management to assess the results of each operating segment. Operating earnings include divisional overhead, but exclude corporate overhead. Operating earnings include the effect of minority interests in earnings of consolidated affiliates and equity in the net income of nonconsolidated affiliates.

Inpatient Division

Revenue in the Inpatient Division was lower by 1.7 percent or $7.8 million from declining volumes as a result of the continued implementation of the 75% Rule and negative Medicare pricing pressure. However, the strategic focus on growing compliant cases continues to yield excellent results. Compliant case growth was 4.8 percent in the second quarter.

Operating earnings margin declined to 21.2 percent in the second quarter from 23.9 percent in the same quarter a year ago. The operating earnings margin decline is the result of lower volumes, the negative effect of Medicare reimbursement changes and the higher costs of salaries and benefits (including inflationary increases needed to retain qualified personnel) and supplies related to treating more acute patients without a corresponding price increase. The second quarter included a $4.1 million loss on disposal of assets, which represented 0.9 percent of net operating revenues in the quarter.

In August 2006, the division signed a letter of intent to partner with TMC Healthcare in Tucson, Arizona to provide rehabilitation services and concluded its non-U.S. operations with the sale of its Australian facility, Cedar Court Rehabilitation Hospital.

Surgery Centers Division

The Surgery Centers Division revenue decline in the second quarter is an improvement over the first quarter 2006 performance where this division experienced a 6.7 percent decline. The decline in the quarter was 3.4 percent or $6.7 million with the majority of the decrease the result of three surgery centers that became equity method investments rather than consolidated entities after the second quarter of 2005 and the closure of seven facilities that did not qualify as discontinued operations.

Operating earnings margin declined to 10.5 percent in the second quarter from 11.1 percent in the same quarter a year ago. Operating earnings for the second quarter include a $1.6 million impairment charge, which is 0.8 percent of net operating revenues.

Outpatient Division

The Outpatient Division experienced a decline in revenues of $12.8 million in the second quarter as a result of continued competition, closures of underperforming facilities and the annual per-beneficiary limitation on Medicare outpatient therapy services (effective January 1, 2006).

Operating earnings margin increased to 8.8 percent from 5.8 percent in the same quarter a year ago, as the division continued to reduce expenses through headcount reductions and closure of underperforming facilities.

In July 2006, the division completed a transaction to acquire the assets of Hurrle Orthopaedic Physical Therapy, P.C. in Indianapolis, Indiana.

Diagnostic Division

The Diagnostic Division, which is not considered part of the Company's core business, experienced a decline in revenues of $5.6 million or 9.8 percent less than the second quarter a year ago due to competitive pressures and the closure of underperforming facilities that did not qualify as discontinued operations.

The division has a negative operating margin of (23.5) percent in the quarter compared to 1.8 percent in the second quarter of 2005. The second quarter includes an impairment charge of $2.0 million, 3.9 percent of net operating revenues, and a loss on disposal of assets of $2.0 million, 3.9 percent of net operating revenues. The balance of the decline is primarily related to added expenses from the installation of a new billing and collection system and reduced profitability as a result of a negative case mix change in scanning activity.

Corporate and Other

Corporate and other operating loss improved $22.1 million from the same quarter a year ago. The second quarter of 2005 included an impairment of $13.0 million, primarily related to the Digital Hospital. The second quarter of 2006 includes a $6.9 million gain from the recovery of amounts previously reserved related to Source Medical. The remaining improvement relates, primarily, to lower professional fees and lower insurance costs.

Cash Flow and Balance Sheet

Cash and cash equivalents were $53.9 million at June 30, 2006. Total debt was $3,334.0 million. Payments on government and litigation were $56.2 million and capital expenditures were $43.2 million in six months ended June 30, 2006.

HealthSouth Corporation and Subsidiaries Condensed Consolidated Statements of Operations (Unaudited) (In Thousands, Except Per Share Data) Three Months Ended June 30, 2006 2005 Net operating revenues $787,513 $818,277 Operating expenses: Salaries and benefits 354,870 360,371 Professional and medical director fees 19,978 23,073 Supplies 73,631 79,485 Other operating expenses 168,442 194,292 Provision for doubtful accounts 29,592 22,836 Depreciation and amortization 38,917 40,199 Loss (gain) on disposal of assets 2,954 (2,247) Impairments 3,860 12,978 Government, class action, and related settlements expense 17,186 - Professional fees - accounting, tax, and legal 27,996 28,981 Total operating expenses 737,426 759,968 Loss on early extinguishment of debt 4,565 33 Interest expense and amortization of debt discounts and fees, net 78,657 80,917 (Gain) loss on sale of investments (1,049) 4,592 Gain on interest rate swap (18,604) - Minority interests in earnings of consolidated affiliates, net of equity income of nonconsolidated affiliates 15,459 18,691 Loss from continuing operations before income tax expense (28,941) (45,924) Provision for income tax expense 9,086 9,540 Loss from continuing operations (38,027) (55,464) Loss from discontinued operations, net of income tax expense (4,409) (6,949) Net Loss $(42,436) $(62,413) Convertible perpetual preferred dividends (9,244) - Net loss available to common shareholders $(51,680) $(62,413) Weighted average common shares outstanding: Basic 398,165 397,047 Diluted 464,511 398,827 Basic and diluted loss per share: Net loss per share available to common shareholders $(0.13) $(0.16) HealthSouth Corporation Supplemental Non-GAAP Disclosures (In Thousands) Three Months Ended June 30, 2006 2005 Loss from continuing operations $(38,027) $(55,464) Income tax expense 9,086 9,540 Depreciation and amortization 38,917 40,199 Interest expense, net 78,657 80,917 Other debt related (income) expense (14,039) 33 Other adjustments under Debt Agreements (a): Professional Fees 27,996 28,981 Impairments 3,860 12,978 Government, class action, and related settlements expense 17,186 - All other (b) 12,309 16,780 Consolidated Adjusted EBITDA (1) $135,945 $133,964 (1) Consolidated Adjusted EBITDA is a non-GAAP financial measure. We believe Consolidated Adjusted EBITDA is an important measure that supplements discussion and analysis of our results of operation. We believe that it is useful to investors. Consolidated Adjusted EBITDA is not a measure of financial performance under accounting principles generally accepted in the United States and should not be considered as an alternative to net income as an operating performance measure or to cash flows from operating, investing, or financing activities as a measure of liquidity. Because Consolidated Adjusted EBITDA is not a measure determined in accordance with generally accepted accounting principles and is susceptible to varying calculations, Consolidated Adjusted EBITDA, as presented, may not be comparable to other similarly titled measures presented by other companies. (a) Our Senior Credit Facility and Senior Notes allow certain items to be added to arrive at Consolidated Adjusted EBITDA that are viewed as not being ongoing costs once the Company has completed its restructuring. (b) All other. Three Months Ended June 30, 2006 2005 (In Thousands) Non-cash losses on asset disposals $6,159 $3,503 Compensation expense under FASB No. 123(R) 3,757 - Restructuring charges under FASB Statement No. 146 2,077 5,584 Other 316 7,693 All Other $12,309 $16,780 HealthSouth Corporation Supplemental Segment Information (In Thousands) Three Months Ended June 30, 2006 Surgery Corporate Inpatient Centers Outpatient Diagnostic and Other Net operating revenues: 2Q 2006 $451,345 $191,261 $85,682 $51,268 $20,424 2Q 2005 $459,098 $197,985 $98,479 $56,831 $24,272 Operating earnings (loss): 2Q 2006 $95,517 $20,113 $7,535 $(12,059) $(76,478) 2Q 2005 $109,603 $21,920 $5,687 $1,024 $(98,616) Depreciation and amortization: 2Q 2006 $17,612 $7,093 $3,023 $5,954 $5,236 2Q 2005 $15,496 $8,217 $3,310 $4,806 $8,369 Number of facilities as of 6/30/2006 202(a) 153 606 76 5 (a) Includes 98 Outpatient Satellites HealthSouth Corporation and Subsidiaries Condensed Consolidated Balance Sheets (Unaudited) (In Thousands) Three Months Ended June 30, 2006 December 31, 2005 Assets Current Assets: Cash and cash equivalents and marketable securities $53,856 $199,456 Current portion of restricted cash 161,643 156,412 Accounts receivable, net of allowance for doubtful accounts 404,669 403,887 Other current assets 103,661 114,500 Total current assets 723,859 874,255 Property and equipment, net 1,153,879 1,197,944 Goodwill 913,820 911,403 Intangible assets, net 50,408 54,247 Investment in and advances to nonconsolidated affiliates 55,721 46,388 Other long-term assets 412,862 507,976 Total assets $3,310,549 $3,592,213 Liabilities and Shareholders' Deficit Current liabilities: Current portion of long-term debt $60,164 $33,866 Accounts payable 100,206 123,899 Accrued expenses and other current liabilities 394,318 476,616 Refunds due patients and other third-party payors 122,008 142,319 Current portion of government, class action, and related settlements 361,020 333,124 Total current liabilities 1,037,716 1,109,824 Long-term debt, net of current portion 3,273,843 3,368,071 Other long-term liabilities 338,467 381,297 4,650,026 4,859,192 Minority interest in equity of consolidated affiliates 292,909 273,742 Convertible perpetual preferred stock 387,403 - Shareholders' deficit: Total shareholders' deficit (2,019,789) (1,540,721) Total liabilities and shareholders' deficit $3,310,549 $3,592,213 HealthSouth Corporation and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited) (In Thousands) Six Months Ended June 30, 2006 2005 Net cash used in operating activities $(50,564) $(20,361) Net cash provided by (used in) investing activities 33,587 (24,725) Net cash used in financing activities (105,575) (131,973) Effect of exchange rate on cash and cash equivalents (123) (314) Decrease in cash and cash equivalents (122,675) (177,373) Cash and cash equivalents at beginning of period 175,617 449,097 Cash and cash equivalents of discontinued operations at beginning of period 1,977 6,314 Less: Cash and cash equivalents of discontinued operations at end of period (1,063) (5,152) Cash and cash equivalents at end of period $53,856 $272,886 Earnings Conference Call/Meeting

The Company will hold a meeting for investors in New York City on August 14, 2006 at 8 a.m. ET to review the second quarter earnings and provide an update of its current operations and strategic plan. The meeting will be held in the Penthouse Ballroom of the St. Regis Hotel at 2 East 55 Street, New York City. Individuals attending the meeting in person do not need to make a reservation.

Individuals will also be able to access the meeting via teleconference or a live Internet broadcast. To access the meeting by phone, please dial 800- 369-1733 and enter pass code 9314005. International callers should dial 517- 319-9288 and use the same pass code. A digital recording will be available, beginning approximately two hours after the completion of the meeting, from August 14, 2006 to August 28, 2006. To access the recording, please dial 866- 424-4003. International callers should dial 203-369-0853.

The Internet broadcast will be available at www.healthsouth.com by clicking on an available link. The Webcast will be archived for replay purposes for two weeks after the live broadcast on the same Web site.

About HealthSouth

HealthSouth is one of the nation's largest providers of outpatient surgery, diagnostic imaging and rehabilitative healthcare services, operating facilities nationwide. HealthSouth can be found on the Web at www.healthsouth.com.

Statements contained in this press release which are not historical facts 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. Such forward-looking statements are necessarily estimates based upon current information and involve a number of risks and uncertainties. HealthSouth's actual results may differ materially from the results 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 results to differ materially from those estimated by HealthSouth include, but are not limited to the consummation of the proposed settlement of pending litigation relating to HealthSouth's prior reporting and financial practices; significant changes in HealthSouth's management team; HealthSouth's ability to continue to operate in the ordinary course and manage its relationships with its creditors, including its lenders, bondholders, vendors and suppliers, employees and customers; HealthSouth's ability to successfully remediate its internal control weaknesses; changes, delays in 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; 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; general conditions in the economy and capital markets; and other factors which may be identified from time to time in the company's SEC filings and other public announcements, including HealthSouth's Form 10-K for the year ended December 31, 2005; Form 10-Q for the quarter ended March 31, 2006; and Form 10-Q for the quarter ended June 30, 2006.

Media Contact

Andy Brimmer, 205-410-2777

HealthSouth Corporation

CONTACT: Andy Brimmer for HealthSouth Corporation, +1-205-410-2777



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