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HealthSouth Corporation
Net operating revenues for the fourth quarter were $730.2 million, a 0.4% decrease from the same quarter of 2005. Net operating revenues increased in our inpatient and surgery centers divisions due to regulatory pricing changes that positively impacted the fourth quarter of 2006 in our inpatient division and positive trends due to resyndication activities in our surgery centers division. These increased revenues were offset by revenue decreases as a result of continued competition from physician-owned sites and the closure of underperforming facilities that did not qualify as discontinued operations in our outpatient and diagnostic divisions.
Results for continuing operations in the fourth quarter of 2006 included a pre-tax loss from continuing operations of $61.1 million, or $0.77 per share, compared to a $76.2 million pre-tax loss from continuing operations, or $0.96 per share, in the fourth quarter of 2005.
"I view the fact that net revenues were up in our inpatient division both sequentially and on a quarter-over-quarter basis while net revenues in our surgery centers division showed quarter-over-quarter improvement for the first time since our new management team took over in 2004 as a positive development," said HealthSouth President and Chief Executive Officer, Jay Grinney. "Solid pricing in our inpatient rehabilitation hospitals, as we continued to treat more acutely-ill patients, coupled with compliant case growth of 4.7% generated a 3.2% increase in fourth quarter operating earnings for our inpatient division compared to the fourth quarter of 2005. The turnaround of our surgery centers division continued in the fourth quarter as we saw both sequential and quarter-over-quarter improvement in operating earnings for this segment. While total cases were down 1.3%, cases in those facilities that were open for at least twelve months were up 0.9%. While our fourth quarter Adjusted Consolidated EBITDA (see Supplemental Non-GAAP Disclosures section of this earnings release for additional information) of $125.7 million was essentially unchanged from the fourth quarter of 2005 due to the performance of our outpatient and diagnostic divisions, I am encouraged by the solid results from our two largest business segments."
"Over the last two years, we have spent a significant amount of time and financial resources to design, implement, and test internal controls, and I am pleased to report that we made significant progress toward improving our internal control over financial reporting and remediating the material weaknesses in our internal controls that we identified in previous years," said John Workman, HealthSouth Executive Vice President and Chief Financial Officer. "At December 31, 2006, we reported only one remaining material weakness relating to our accounting for income taxes, and we will diligently pursue the remediation of this material weakness during 2007. We continue to attempt to manage corporate expenses while we implement our repositioning and deleveraging plan. However, this will be challenging in 2007 until we are able to rationalize our corporate overhead in relation to the size of our operations post-repositioning. We expect our corporate expenses to include unusually high costs in 2007, as a percent of consolidated net operating revenues, as we provide transition services to the divested divisions (whose results exclude corporate overhead), continue to build our development team to execute our consolidation strategy and identify new market opportunities in the inpatient rehabilitation area, and implement an upgrade to our PeopleSoft accounting system. We will also continue to incur significant professional fees associated with transaction support for our divestitures and for tax services as we attempt to maximize the amount we receive related to the filing of amended income tax returns for 1996 through 2003."
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 net income of nonconsolidated affiliates.
Inpatient Division
Net operating revenues in the inpatient division increased by 1.9%, or $8.1 million, in the fourth quarter of 2006 compared to the fourth quarter of 2005 due to new pricing that went into effect October 1, 2006 and continued compliant case growth. The strategic focus on growing compliant cases continues to yield strong results. Compliant case growth was 4.7% in the fourth quarter of 2006.
Operating earnings increased by 3.2%, or $2.5 million, quarter over quarter due to the pricing changes discussed above.
Surgery Centers Division
In Q4 2006, we began to see the results of our resyndication efforts on net operating revenues of our surgery centers division, with net operating revenues of the division increasing 3.1%, or $5.4 million, in the fourth quarter of 2006 compared to the fourth quarter of 2005.
Operating earnings increased by $12.8 million quarter over quarter as a result of improved revenues and labor and supply cost management initiatives, including the standardization of non-physician preference items.
Outpatient Division
The outpatient division experienced a decline in net operating revenues of $10.2 million in the fourth quarter of 2006 compared to the fourth quarter of 2005 as a result of continued competition, closures of underperforming facilities that did not qualify as discontinued operations, and the annual per-beneficiary limitations on Medicare outpatient therapy services (effective January 1, 2006). The division has reduced its exposure to physician-owned physical therapy sites through its initiatives to diversify its referral sources and expects its exposure to this competitive threat to lessen in 2007.
Operating earnings decreased due to the continued volume declines.
On January 29, 2007, we announced that we have entered into a definitive agreement with Select Medical Corporation, a privately owned operator of specialty hospital and outpatient rehabilitation facilities, to sell our outpatient division for approximately $245 million in cash, subject to certain adjustments. The closing of this transaction is anticipated to occur on or before April 30, 2007, and is subject to customary closing conditions, including regulatory approval.
Diagnostic Division
The diagnostic division experienced a decline in net operating revenues of $5.9 million, or 12.8%, during the fourth quarter of 2006 as compared to the fourth quarter of 2005 due to competitive pressures and the closure of underperforming facilities that did not qualify as discontinued operations.
The division continued to experience an operating loss in the fourth quarter of 2006 due primarily 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
The operating loss of our corporate and other segment decreased $6.7 million from the fourth quarter a year ago due primarily to a revaluation of the common stock and common stock warrants associated with our securities litigation settlement and a recovery of amounts due from Richard M. Scrushy, our former chairman and chief executive officer. These benefits recorded in the fourth quarter of 2006 were offset by additional stock-based compensation charges due to our adoption of Financial Accounting Standards Board Statement No. 123( R ), Share-Based Payment, on January 1, 2006 and expenses associated with amounts owed to the derivative plaintiffs' attorneys.
Cash Flow and Balance Sheet
Cash and cash equivalents were $40.6 million as of December 31, 2006. Total debt was $3.4 billion. Our government, class action, and related settlements liability decreased by $118.4 million during 2006, and capital expenditures were $99.2 million for 2006.
In 2007, we will make the final payments under our Medicare Program Settlement and SEC Settlement.
As of December 31, 2006, approximately $170 million was drawn under our $400 million revolving credit facility due to seasonal borrowing needs, the timing of bond and interest payments, and government settlement payments. As of February 28, 2007, approximately $130 million was drawn under our revolving credit facility. We will use the anticipated proceeds from the divestiture of our surgery centers, outpatient, and diagnostic divisions to deleverage the Company. However, no assurances can be given as to whether or when such proceeds will be received.
HealthSouth's Form 10-K for the year ended December 31, 2006 can be found on the SEC's website at www.sec.gov. The information in this press release is summarized and should be read in conjunction with the Form 10-K filed today.
Media Contact:
Andy Brimmer, +1-205-410-2777
HealthSouth Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
(In Millions, Except Per Share Data)
Three Months Ended
December 31,
2006 2005
Net operating revenues $730.2 $733.4
Operating expenses:
Salaries and benefits 354.4 343.5
Professional and medical director fees 15.1 17.9
Supplies 72.5 72.7
Other operating expenses 104.5 115.8
Provision for doubtful accounts 34.2 26.2
Depreciation and amortization 35.5 35.4
Occupancy costs 37.0 32.3
Recovery of amounts due from Richard M. Scrushy (12.8) -
(Gain) loss on disposal of assets (3.2) 2.4
Impairment of long-lived assets 12.8 17.4
Government, class action, and related
settlements expense (6.9) -
Professional fees-accounting, tax, and legal 63.3 56.4
Total operating expenses 706.4 720.0
Interest expense and amortization of debt
discounts and fees 84.5 83.9
Interest income (6.0) (6.5)
Loss (gain) on sale of investments 0.6 (3.3)
Gain on interest rate swap (3.6) -
Equity in net income of nonconsolidated
affiliates (4.5) (2.8)
Minority interests in earnings of consolidated
affiliates 13.9 18.3
Loss from continuing operations before
income tax expense (61.1) (76.2)
Provision for income tax expense 9.4 7.8
Loss from continuing operations (70.5) (84.0)
Loss from discontinued operations, net of income
tax expense (0.9) (29.9)
Net loss (71.4) (113.9)
Convertible perpetual preferred dividends (6.5) -
Net loss available to common shareholders $(77.9) $(113.9)
Comprehensive loss:
Net loss $(71.4) $(113.9)
Other comprehensive income, net of tax:
Foreign currency translation adjustment (0.2) (0.9)
Unrealized gain on available-for-sale securities 1.1 -
Other comprehensive income 0.9 (0.9)
Comprehensive loss $(70.5) $(114.8)
Weighted average common shares outstanding:
Basic 79.2 79.4
Diluted 92.6 79.5
Basic and diluted loss per common share:
Loss from continuing operations available to
common shareholders $(0.97) $(1.06)
Loss from discontinued operations, net of tax (0.01) (0.38)
Net loss per share available to common
shareholders $(0.98) $(1.44)
HealthSouth Corporation and Subsidiaries
Supplemental Non-GAAP Disclosures
(In Millions)
Three Months Ended
December 31,
2006 2005
Net loss $(71.4) $(113.9)
Loss from discontinued operations, net of tax 0.9 29.9
Income tax expense 9.4 7.8
Depreciation and amortization 35.5 35.4
Interest expense, net 78.5 77.4
Other debt related items (3.6) -
Other adjustments under Debt Agreements (a):
Professional fees 63.3 56.4
Impairment charges 12.8 17.4
Government, class action, and related settlements
expense (6.9) -
All other (b) 7.2 15.1
Adjusted Consolidated EBITDA (1) $125.7 $125.5
(1) Adjusted Consolidated EBITDA is a non-GAAP financial measure. We
believe Adjusted Consolidated EBITDA is an important measure that
supplements discussion and analysis of our results of operation. We
believe that it is useful to investors as it is used in our covenant
calculations under our 2006 Credit Agreement.
Adjusted Consolidated 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
loss as an operating performance measure or to cash flows from
operating, investing, or financing activities as a measure of
liquidity. Because Adjusted Consolidated EBITDA is not a measure
determined in accordance with generally accepted accounting
principles and is susceptible to varying calculations, Adjusted
Consolidated 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 Adjusted Consolidated EBITDA that are viewed as
not being ongoing costs once the Company has completed its
restructuring.
(b) All other.
Three Months Ended
December 31,
2006 2005
(In Millions)
Non-cash losses on asset disposals $2.2 $5.2
Compensation expense under FASB No. 123( R ) 3.9 -
Restructuring charges under FASB Statement No.
146 0.5 0.7
Other 0.6 9.2
All Other $7.2 $15.1
HealthSouth Corporation
Supplemental Segment Information
(In Millions, Except Number of Facilities)
Three Months Ended December 31, 2006 and 2005
Corporate
Surgery and
Inpatient Centers Outpatient Diagnostic Other
Net operating
revenues:
4Q 2006 $424.6 $182.4 $76.5 $40.1 $5.1
4Q 2005 $416.5 $177.0 $86.7 $46.0 $13.1
Operating earnings
(loss):
4Q 2006 $80.7 $25.8 $5.3 $(7.3) $(90.1)
4Q 2005 $78.2 $13.0 $8.7 $(5.2) $(96.8)
Depreciation and
amortization:
4Q 2006 $17.4 $6.3 $4.6 $0.8 $6.4
4Q 2005 $14.7 $7.8 $3.3 $6.4 $3.2
Number of facilities
as of December 31,
2006 183 (a) 147 (b) 582 61 5
Number of facilities
as of December 31,
2005 204 (c) 161 (b) 620 85 5
(a) includes 81 outpatient satellites
(b) includes 3 surgical hospitals
(c) includes 101 outpatient satellites
HealthSouth Corporation and Subsidiaries
Supplemental Segment Information
Three Months Ended
December 31,
2006 2005
(In Thousands, Except Average
Volumes Length of Stay)
Inpatient
Discharges 25.2 26.4
Outpatient visits 333.9 362.6
Average length of stay 15.3 days 14.9 days
Surgery Centers
Cases 139.8 141.6
Outpatient
Visits 731.0 851.3
Diagnostic
Scans 152.3 155.8
HealthSouth Corporation and Subsidiaries
Supplemental Segment Information
(In Millions)
Year Ended December 31, 2006 and 2005
Corporate
Surgery and
Inpatient Centers Outpatient Diagnostic Other
Depreciation and
amortization:
2006 $64.7 $29.4 $13.7 $17.6 $22.8
2005 $65.0 $35.6 $13.2 $23.4 $25.4
HealthSouth Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(In Millions)
December 31,
2006 2005
Assets
Current Assets:
Cash and cash equivalents $40.6 $174.5
Current portion of restricted cash 99.6 151.4
Marketable securities - 23.8
Current portion of restricted marketable
securities 37.5 -
Accounts receivable, net of allowance for
doubtful accounts of $144.3 in 2006;
$122.2 in 2005 367.4 392.0
Insurance recoveries receivable 230.0 -
Other current assets 105.2 132.6
Total current assets 880.3 874.3
Property and equipment, net 1,096.0 1,179.3
Goodwill 896.9 911.4
Intangible assets, net 54.1 51.5
Investment in and advances to nonconsolidated
affiliates 59.3 46.4
Other long-term assets 373.0 529.3
Total assets $3,359.6 $3,592.2
Liabilities and Shareholders' Deficit
Current liabilities:
Current portion of long-term debt $37.0 $33.8
Accounts payable 105.1 121.2
Accrued expenses and other current liabilities 448.5 478.3
Refunds due patients and other third-party
payors 100.4 143.4
Current portion of government, class action,
and related settlements 570.6 333.1
Total current liabilities 1,261.6 1,109.8
Long-term debt, net of current portion 3,365.3 3,368.1
Government, class action, and related
settlements, net of current portion - 135.2
Other long-term liabilities 258.8 246.1
4,885.7 4,859.2
Commitments and contingencies
Minority interest in equity of consolidated
affiliates 271.1 273.7
Convertible perpetual preferred stock 387.4 -
Shareholders' Deficit:
Total shareholders' deficit (2,184.6) (1,540.7)
Total liabilities and shareholders' deficit $3,359.6 $3,592.2
HealthSouth Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In Millions)
Year Ended December 31,
2006 2005
Net cash used in operating activities $(120.4) $(2.9)
Net cash provided by (used in) investing activities 59.3 (101.8)
Net cash used in financing activities (75.3) (172.0)
Effect of exchange rate on cash and cash
equivalents 0.1 (1.2)
Decrease in cash and cash equivalents (136.3) (277.9)
Cash and cash equivalents at beginning of period 174.5 450.1
Cash and cash equivalents of discontinued
operations at beginning of period 3.0 5.3
Less: Cash and cash equivalents of discontinued
operations at end of period (0.6) (3.0)
Cash and cash equivalents at end of period $40.6 $174.5
Earnings Conference Call
The Company will host an investor conference call at 8:30 a.m. Eastern Time on March 1, 2007 to discuss its 2006 results.
The conference call may be accessed by dialing 866-491-4244 and entering pass code 8437134. International callers should dial 973-582-2815 and enter the same pass code. Please call approximately 10 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 www.healthsouth.com by clicking on an available link.
A replay of the conference call will be available, beginning approximately two hours after the completion of the conference call, from March 1 until March 15, 2007. To access the replay, please dial 877-519-4471. International callers should dial 973-341-3080. The webcast will also be archived for replay purposes for two weeks after the live broadcast on www.healthsouth.com.
About HealthSouth
HealthSouth strives to be the health care company of choice for its patients, employees, physicians and shareholders. Operating across the country, HealthSouth is one of the nation's largest providers of inpatient rehabilitative services, outpatient rehabilitation centers, surgery centers, and diagnostic imaging centers. 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, any adverse outcome of various lawsuits, claims, and legal or regulatory proceedings that may be brought against us or any adverse outcome relating to the settlement of the federal securities class action previously disclosed by us; significant changes in HealthSouth's management team; HealthSouth's ability to successfully consummate transactions related to its previously announced strategic repositioning; 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 weakness; 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, 2006.
SOURCE: HealthSouth Corporation
CONTACT: Andy Brimmer of HealthSouth Corporation, +1-205-410-2777
Web site: http://www.healthsouth.com/