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HealthSouth Reports Results for Second Quarter Ended June 30, 2007
Inpatient Volumes Increase
Operating Earnings Improve
Divestiture Program Complete
PRNewswire-FirstCall
BIRMINGHAM, Ala.

HealthSouth Corporation (the "Company") today reported its results of operations for the second quarter ended June 30, 2007.

"Our divestiture program is complete, and our deleveraging plan is on track," said Jay Grinney, President and Chief Executive Officer of HealthSouth. "We are now able to focus only on our inpatient rehabilitation business. We have received over $1 billion in net proceeds from the divestiture of our surgery centers, outpatient, and diagnostic divisions, which we used to reduce debt. I remain encouraged by our inpatient volumes and strong compliant case growth. Discharges were up 1.0% from the same quarter a year ago, and based on industry data published through the Uniform Data System for Medical Rehabilitation, our hospitals continue to increase their market share of compliant cases. This industry data, as reported under the presumptive method, showed a 4.1% compliant case growth by HealthSouth during the first quarter of 2007 compared to an average 2.7% decline for non-HealthSouth rehabilitation sites during the same period."

Consolidated net operating revenues were $442.8 million for the second quarter of 2007 compared to $443.5 million for the second quarter of 2006. Net operating revenues from our inpatient hospitals were $392.0 million, representing a 3.4% increase from the same quarter of 2006. This increase was primarily attributable to a 1.0% increase in discharges, pricing changes that became effective on October 1, 2006, an increase in our patient case mix index, and continued compliant case growth. Increased revenues associated with our inpatient hospitals were offset by decreased revenues from outpatient visits. Decreased outpatient volumes resulted from the closure of outpatient satellites, changes in patient program mix, shortages in therapy staffing, and continued competition from physicians offering physical therapy services within their own offices.

Operating earnings (see supplemental information attached to this press release for calculation) were $48.3 million for the second quarter of 2007 compared to operating earnings of $18.8 million for the second quarter of 2006. Operating expenses decreased by 7.3% quarter over quarter due primarily to a $31.5 million reduction in the liability associated with our securities litigation settlement based on the value of our common stock and the associated common stock warrants underlying the settlement and a $14.4 million reduction in professional fees associated with income tax consulting fees and legal fees for continued litigation defense and support matters arising from our prior reporting and restatement issues. Operating expenses also include a $14.7 million impairment charge in the second quarter of 2007 related primarily to our corporate campus. General and administrative expenses decreased due primarily to the divestiture of our outpatient division on May 1, 2007 (the divestiture of our surgery centers division occurred on June 29, 2007). General and administrative expenses were $35.0 million in the second quarter of 2007 compared to $44.7 million in the first quarter of 2007. This improvement over the immediate prior quarter, or "sequential" improvement, is expected to continue now that our divestiture program is complete.

Results for continuing operations in the second quarter of 2007 included a pre-tax loss from continuing operations of $9.2 million, or $0.12 per share, compared to a $26.5 million pre-tax loss from continuing operations, or $0.33 per share, in the second quarter of 2006.

Net income available to common shareholders was $461.8 million, or $5.87 per share, for the second quarter of 2007 compared to a net loss available to common shareholders of $51.6 million, or $0.65 per share, for the second quarter of 2006. Our net income in 2007 includes $464.9 million of post-tax gains associated with our divestures.

"Our divestitures are allowing us to reduce our debt and ongoing interest expense so we can build the right platform for growth in the post-acute sector," said John Workman, Executive Vice President and Chief Financial Officer. "Our reduction in debt to date will generate $80 million to $85 million per year in interest savings. Once we are no longer making payments under our Medicare Program Settlement, SEC Settlement, and other large, non-ordinary course charges, which should occur as of December 31, 2007, our cash flows from operations should provide ongoing deleveraging capabilities. "

Cash Flow and Balance Sheet

Cash and cash equivalents were $21.0 million as of June 30, 2007. Total debt was $2.4 billion. Our government, class action, and related settlements liability decreased by $69.3 million during the second quarter of 2007 and by $116.6 million since December 31, 2006. Capital expenditures were $9.2 million for the quarter and $15.2 million for the year-to-date period.

During the second quarter of 2007, we used the net proceeds from the divestiture of our surgery centers and outpatient divisions to pay down debt. As a result of these transactions, our total debt outstanding has decreased from $3.4 billion as of December 31, 2006 to $2.4 billion as of June 30, 2007. We also used the net proceeds received from the divestiture of our diagnostic division in July 2007 to further reduce debt. Also, in late 2007 or early 2008, we expect to further deleverage the Company through the receipt of income tax refunds from amended and restated income tax returns from prior years. However, no assurances can be given as to whether or when such income tax refunds will be received.

Other Information

As discussed in more detail in the Form 10-Q filed today with the United States Securities and Exchange Commission (the "SEC"), historically, we have reported five segments: inpatient, surgery centers, outpatient, diagnostic, and corporate and other. Based on our strategic focus in the inpatient rehabilitation industry and the reclassification of our surgery centers, outpatient, and diagnostic divisions to discontinued operations, we modified our segment reporting from five reportable segments to one reportable segment in the first quarter of 2007. Amounts historically reported as part of our corporate and other segment, which primarily represented the corporate overhead costs associated with our operating divisions, are no longer considered a reportable segment due to our strategic repositioning as a pure-play post-acute care provider and the change in the manner in which we now manage the Company. Rather, these corporate overhead costs are now presented on the line entitled General and administrative expenses in our condensed consolidated statements of operations and comprehensive income (loss). Therefore, the condensed consolidated results of operations of the Company presented herein represent the continuing operations of our inpatient division, including corporate overhead. Our condensed consolidated results of operations include overhead costs associated with managing and providing shared services to our surgery centers, outpatient, and diagnostic divisions, even though these divisions qualify as discontinued operations.

HealthSouth's Form 10-Q for the quarterly period ended June 30, 2007 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-Q filed today.

                 HealthSouth Corporation and Subsidiaries
           Condensed Consolidated Statements of Operations and
                       Comprehensive Income (Loss)
                               (Unaudited)
                   (In Millions, Except Per Share Data)

                                    Three Months Ended    Six Months Ended
                                          June 30,             June 30,
                                      2007       2006      2007       2006

  Net operating revenues            $442.8     $443.5    $890.9     $883.9
  Operating expenses:
  Salaries and benefits              217.2      205.9     434.7      412.2
  Other operating expenses            60.7       61.5     131.2      129.7
  General and administrative
   expenses                           35.0       36.1      79.7       71.1
  Supplies                            25.8       25.4      52.1       51.0
  Depreciation and amortization       20.0       22.5      38.1       42.7
  Impairment of long-lived assets     14.7          -      14.7          -
  Occupancy costs                     13.3       12.1      26.6       24.3
  Provision for doubtful accounts     10.8        7.9      21.3       15.2
  Loss on disposal of assets           1.7        3.3       1.7        4.2
  Government, class action, and
   related
  settlements expense                (23.4)      17.2     (35.6)      21.5
  Professional fees-accounting,
   tax, and legal                     13.3       27.7      35.1       76.3
  Total operating expenses           389.1      419.6     799.6      848.2
  Loss on early extinguishment of
   debt                               17.7        4.6      17.7      365.6
  Interest expense and amortization
   of debt discounts                  59.2       60.5     117.7      119.0
  and fees
  Other income                        (0.4)      (1.2)     (5.2)      (3.9)
  Gain on interest rate swap         (19.0)     (18.6)    (14.7)     (14.8)
  Equity in net income of
   nonconsolidated affiliates         (2.4)      (2.5)     (5.1)      (4.4)
  Minority interests in earnings of
   consolidated
  affiliates                           7.8        7.6      16.1       16.3
  Loss from continuing operations
   before income
  tax expense                         (9.2)     (26.5)    (35.2)    (442.1)
  Provision for income tax
   (benefit) expense                 (10.3)       5.2      (7.1)      18.9
  Income (loss) from continuing
   operations                          1.1      (31.7)    (28.1)    (461.0)
  Income (loss) from discontinued
   operations, net of
  income tax expense                 467.2      (10.7)    439.7      (16.6)
  Net income (loss)                  468.3      (42.4)    411.6     (477.6)
  Convertible perpetual preferred
   dividends                          (6.5)      (9.2)    (13.0)      (9.2)
  Net income (loss) available to
   common
  shareholders                      $461.8     $(51.6)   $398.6    $(486.8)
  Comprehensive income (loss):
  Net income (loss)                 $468.3     $(42.4)   $411.6    $(477.6)
  Other comprehensive income
   (loss), net of tax:
  Foreign currency translation
   adjustment                            -        0.3       0.1       (0.1)
  Unrealized gain (loss) on
   available-for-sale                  0.3       (0.3)     (3.2)      (0.2)
  securities
  Other comprehensive income (loss)    0.3          -      (3.1)      (0.3)
  Comprehensive income (loss)       $468.6     $(42.4)   $408.5    $(477.9)
  Weighted average common shares
   outstanding:
  Basic                               78.7       79.6      78.8       79.5
  Diluted                             92.1       92.9      92.1       87.9
  Basic and diluted earnings (loss) per
   common share:
  Loss from continuing operations
   available to
  common shareholders               $(0.07)    $(0.51)   $(0.52)    $(5.91)
  Income (loss) from discontinued
  operations, net of tax              5.94      (0.14)     5.58      (0.21)
  Net income (loss) per share
   available to
  common shareholders                $5.87     $(0.65)    $5.06     $(6.12)



                   HealthSouth Corporation and Subsidiaries
                    Condensed Consolidated Balance Sheets
                                 (Unaudited)
                                (In Millions)

                                                       June 30,     Dec. 31,
                                                         2007         2006
                                  Assets
  Current assets:
      Cash and cash equivalents                         $21.0        $27.2
      Current portion of restricted cash                 50.9         60.3
      Current portion of restricted marketable
       securities                                        16.8         37.5
      Accounts receivable, net of allowance for
       doubtful accounts of $38.8 in 2007;
       $36.6 in 2006                                    215.4        217.3
      Insurance recoveries receivable                   230.0        230.0
      Other current assets                               69.1         78.1
      Current assets held for sale                       79.7        229.9
          Total current assets                          682.9        880.3
  Property and equipment, net                           766.0        811.2
  Goodwill                                              406.0        406.1
  Intangible assets, net                                 28.4         30.4
  Investment in and advances to nonconsolidated
   affiliates                                            40.1         37.7
  Assets held for sale                                  172.9        833.7
  Income tax refund receivable                          208.9        218.8
  Other long-term assets                                 97.2        142.6
  Total assets                                       $2,402.4     $3,360.8

                  Liabilities and Shareholders' Deficit
  Current liabilities:
      Current portion of long-term debt                 $40.7        $33.6
      Accounts payable                                   58.7         67.5
      Accrued expenses and other current
       liabilities                                      307.5        360.1
      Refunds due patients and other
       third-party payors                                12.9         12.7
      Government, class action, and
       related settlements                              454.0        570.6
      Current liabilities held for sale                 271.8        217.0
          Total current liabilities                   1,145.6      1,261.5
  Long-term debt, net of current portion              2,360.0      3,343.1
  Liabilities held for sale                              13.4         40.6
  Other long-term liabilities                           175.0        241.7
                                                      3,694.0      4,886.9
  Commitments and contingencies
  Minority interest in equity of consolidated
   affiliates                                           109.8        271.1
  Convertible perpetual preferred stock                 387.4        387.4
  Shareholders' deficit:
  Total shareholders' deficit                        (1,788.8)    (2,184.6)
  Total liabilities and shareholders' deficit        $2,402.4     $3,360.8



                   HealthSouth Corporation and Subsidiaries
               Condensed Consolidated Statements of Cash Flows
                                 (Unaudited)
                                (In Millions)

                                                   Six Months Ended June 30,
                                                        2007         2006

  Net cash used in operating activities               $(111.0)      $(58.2)
  Net cash provided by investing activities           1,143.2         33.5
  Net cash used in financing activities              (1,047.9)       (94.4)
  Effect of exchange rate on cash and cash
   equivalents                                            0.1          0.1
  Decrease in cash and cash equivalents                 (15.6)      (119.0)
  Cash and cash equivalents at beginning of period       27.2        166.4
  Cash and cash equivalents of divisions and
   facilities held for sale at
  beginning of period                                    14.1         11.2
  Less: Cash and cash equivalents of divisions and
   facilities held for sale at                           (4.7)        (0.4)
  end of period
  Cash and cash equivalents at end of period            $21.0        $58.2



                 HealthSouth Corporation and Subsidiaries
                    Supplemental Non-GAAP Disclosures
                       Adjusted Consolidated EBITDA


                                    Three Months Ended    Six Months Ended
                                         June 30,             June 30,
                                     2007      2006       2007       2006
                                                (In Millions)
  Net income (loss)                 $468.3    $(42.4)    $411.6    $(477.6)
  (Income) loss from discontinued
   operations                       (467.2)     10.7     (439.7)      16.6
  Provision for income tax
   (benefit) expense                 (10.3)      5.2       (7.1)      18.9
  Depreciation and amortization       20.0      22.5       38.1       42.7
  Impairment charges                  14.7         -       14.7          -
  Interest expense and amortization
   of debt                            59.2      60.5      117.7      119.0
  discounts and fees
  Other debt related items            (1.3)    (14.0)       3.0      350.8
  Other adjustments under Credit
   Agreement (a):
  Professional fees                   13.3      27.7       35.1       76.3
  Government, class action, and
   related                           (23.4)     17.2      (35.6)      21.5
  settlements
  All other (b)                        4.3       8.2        8.3       15.7
  Adjusted Consolidated EBITDA (1)*  $77.6     $95.6     $146.1     $183.9

  (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 operations. 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 financial performance
      under accounting principles generally accepted in the United States
      and should not be considered as an alternative to net income (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.

      After consummation of the divestitures of our surgery centers,
      outpatient, and diagnostic divisions, and in accordance with our
      Credit Agreement, Adjusted Consolidated EBITDA is calculated to give
      effect to each divestiture, including adjustments for the allocation
      of corporate overhead to each divested division. When reporting
      Adjusted Consolidated EBITDA to our lenders for the three and six
      months ended June 30, 2007, we included corporate overhead costs of
      approximately $13.2 million and $28.8 million, respectively,
      associated with our surgery centers and outpatient divisions. These
      adjustments are not included in the above table.

  (a) 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.

  (b) All other.

                                  Three Months Ended      Six Months Ended
                                       June 30,               June 30,
                                   2007       2006        2007        2006
                                                (In Millions)
  Non-cash losses on asset
   disposals                       $1.7       $4.1        $1.7        $4.2
  Compensation expense under
   FASB
  Statement No. 123(R)              2.6        3.7         6.3         8.1
  Other                               -        0.4         0.3         3.4
  All Other                        $4.3       $8.2        $8.3       $15.7


  * Adjusted Consolidated EBITDA includes general and administrative
    expenses for all divisions. General and administrative expenses
    approximated 7.9% and 8.9% of consolidated net operating revenues for
    the three and six months ended June 30, 2007, respectively. However, if
    you include the revenues of the divisions reported in discontinued
    operations, these percentages decrease to 5.1% and 5.5%, respectively.


                 HealthSouth Corporation and Subsidiaries
                    Supplemental Non-GAAP Disclosures
                            Operating Earnings

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) gain 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 and six months ended June 30, 2007 and 2006 were as follows:

                                  Three Months Ended      Six Months Ended
                                       June 30,               June 30,
                                   2007       2006        2007        2006
                                              (In Millions)
  Net operating revenues         $442.8     $443.5      $890.9      $883.9
  Total operating expenses        389.1      419.6       799.6       848.2
  Equity in net income of
   nonconsolidated                 (2.4)      (2.5)       (5.1)       (4.4)
  affiliates
  Minority interests in
   earnings of                      7.8        7.6        16.1        16.3
  consolidated affiliates
  Operating earnings              $48.3      $18.8       $80.3       $23.8

Operating earnings is not a defined measure of financial performance under accounting principles generally accepted in the United States and should not be considered as an alternative to net income (loss) as an operating performance measure. Because operating earnings is not a measure determined in accordance with generally accepted accounting principles and is susceptible to varying calculations, operating earnings, as presented, may not be comparable to other similarly titled measures presented by other companies.

                 HealthSouth Corporation and Subsidiaries
                         Supplemental Information

                                         June 30,    Dec. 31,   June 30,
                                           2007        2006       2006
  # of inpatient
   rehabilitation hospitals                 93           92         94
  # of long-term acute care
   hospitals                                 8           10         10
  # of outpatient satellites                80           81         98



                                   Three Months Ended    Six Months Ended
                                         June 30,             June 30,
                                      2007      2006       2007       2006
                                                (In Millions)
  Net patient revenue-inpatient     $392.0    $379.0     $788.2     $763.7
  Net patient revenue-outpatient
   and other revenues                 50.8      64.5      102.7      120.2
  Net operating revenues            $442.8    $443.5     $890.9     $883.9

                                               (Actual Amounts)
  Discharges*                       25,870    25,613     51,849     51,615
  Outpatient visits                348,472   373,599    693,219    755,248
  Average length of stay         15.0 days 15.5 days  15.2 days  15.4 days
  Occupancy %                        63.8%     65.0%      65.0%      65.9%
  # of licensed beds                 6,685     6,594      6,685      6,594
  Full-time equivalents**           15,776    15,854     15,748     16,411

  *  Represents discharges from our 90 consolidated facilities.

  ** Excludes 803 and 858 full-time equivalents for the three months ended
     June 30, 2007 and 2006, respectively, and 832 and 838 full-time
     equivalents for the six months ended June 30, 2007 and 2006,
     respectively, who are considered part of corporate overhead with their
     salaries and benefits included in general and administrative expenses
     in our condensed consolidated statements of operations and
     comprehensive income (loss). Full-time equivalents included in the
     above table represent those who participate in or support the
     operations of our facilities.

  Our required compliance rates under the 75% Rule are as follows:

                                    Minimum Compliance Threshold
     Cost        # of
  Reporting   Consolidated
   Year End    Hospitals*        50%         60%         65%        75%

  June 30          9           July 1,     July 1,     July 1,    July 1,
                               2004 -      2005 -      2007 -     2008 -
                              June 30,    June 30,    June 30,   forward
                               2005        2007        2008

                             January 1,  January 1,  January 1, January 1,
  December 31     65           2005 -      2006 -      2008 -     2009 -
                             December    December    December    forward
                             31, 2005    31, 2007    31, 2008

  May 31          16          June 1,      June 1,      June 1,   June 1,
                              2005 -       2006 -       2008 -    2009 -
                              May 31,      May 31,      May 31,  forward
                               2006         2008         2009

  * As of June 30, 2007, we operated 93 inpatient rehabilitation hospitals,
    including three hospitals which we account for under the equity method
    of accounting.



                 HealthSouth Corporation and Subsidiaries
                         Supplemental Information

  During the three and six months ended June 30, 2007 and 2006, we derived
  consolidated net operating revenues from the following payor sources:

                                    Three Months Ended    Six Months Ended
                                          June 30,             June 30,
                                      2007      2006       2007       2006
  Medicare                           68.2%     68.3%      68.8%      69.2%
  Medicaid                            2.0%      2.2%       1.8%       2.2%
  Workers' compensation               2.5%      2.6%       2.3%       2.6%
  Managed care and other discount
   plans                             18.2%     18.7%      18.1%      17.8%
  Other third-party payors            6.3%      5.2%       6.0%       5.2%
  Patients                            0.4%      0.1%       0.4%       0.1%
  Other income                        2.4%      2.9%       2.6%       2.9%
      Total                         100.0%    100.0%     100.0%     100.0%


  Our operating results of discontinued operations were as follows:

                                    Three Months Ended    Six Months Ended
                                         June 30,             June 30,
                                      2007      2006       2007       2006
                                                 (In Millions)
  Net operating revenues            $243.2    $347.1     $553.0     $709.9
  Costs and expenses                 230.1     349.1      527.5      716.5
  Impairments                            -       6.1       35.9        6.7
      Income (loss) from
       discontinued operations        13.1      (8.1)     (10.4)     (13.3)
  Gain on disposal of assets of
   discontinued operations             1.5       1.2        1.5        4.7
  Gain on divestiture of divisions   403.2         -      403.2          -
  Income tax benefit (expense)        49.4      (3.8)      45.4       (8.0)
  Income (loss) from discontinued
   operations, net of tax           $467.2    $(10.7)    $439.7     $(16.6)


The company will host an investor conference call at 8:30 a.m. Eastern Time on Thursday, August 9, 2007, to discuss its results for the second quarter of 2007.

The conference call may be accessed by dialing 866-491-4244 and giving the pass code 9036079. International callers should dial 973-582-2815 and give 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 August 9 until August 23, 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 is the nation's largest provider of inpatient rehabilitation services. Operating in 27 states across the country and in Puerto Rico, HealthSouth serves more than 250,000 patients annually through its network of inpatient rehabilitation hospitals, long-term acute care hospitals, outpatient rehabilitation satellites, and home health agencies. HealthSouth strives to be the health care company of choice for its patients, employees, physicians and shareholders and 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 manage the post-closing financial risks and challenges related to its divestiture transactions; 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 and related Current Report on Form 8-K filed on March 30, 2007.

Media Contact:

Andy Brimmer, 205-410-2777

First Call Analyst:
FCMN Contact:

SOURCE: HealthSouth Corporation

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