HealthSouth reports consolidated net operating revenues of $572.1 million for Q4 2013

HealthSouth Corporation (NYSE: HLS), the nation's largest owner and operator of inpatient rehabilitation hospitals, today reported its results of operations for the fourth quarter and year ended December 31, 2013.

"The fourth quarter was a solid finish to another strong year for HealthSouth," said Jay Grinney, President and Chief Executive Officer of HealthSouth. "Most importantly, our business fundamentals remain compelling as we begin 2014. The quality of care provided by our dedicated employees remains a competitive advantage as we serve the needs of a growing number of patients requiring inpatient rehabilitative care and provide this care on a cost-effective basis. We also continue to invest in future growth through the development of new hospitals in new markets while adding bed capacity to hospitals in existing markets."

Fourth Quarter Results

• Consolidated net operating revenues were $572.1 million for the fourth quarter of 2013 compared to $552.9 million for the fourth quarter of 2012, or an increase of 3.5%. This increase was attributable to a 3.8% increase in patient discharges offset by a 0.1% decrease in net patient revenue per discharge. Discharge growth included a 1.3% increase in same-store discharges. Same-store discharges in the fourth quarter of 2013 were negatively impacted by the divestiture of 41 skilled nursing facility beds in the first quarter of 2013. Net patient revenue per discharge was negatively impacted in the fourth quarter of 2013 by approximately $9 million for sequestration and approximately $8 million for contractual allowances related to Recovery Audit Contractor ("RAC") audits. As disclosed previously, and in connection with CMS approved and announced RAC audits related to inpatient rehabilitation facilities, the Company received requests in 2013 to review certain patient files for discharges occurring from 2010 to 2013. To date, the Medicare payments that are subject to these audit requests represent less than 1% of the Company's Medicare patient discharges during those years, and not all of these patient file requests have resulted in payment denial determinations by the RACs. In the fourth quarter of 2013, the Company reduced its net operating revenues by approximately $8 million to establish reserves for post-payment claims that are part of RAC audits. Concurrently, the Company reversed approximately $4 million in bad debt reserves established during 2013 related to RAC audits. Excluding the negative impact of sequestration and reserves related to RAC audits, net patient revenue per discharge would have increased by 3.2%.

• Income from continuing operations attributable to HealthSouth per basic share for the fourth quarter of 2013 was $(0.31) compared to $0.41 for the same period of 2012. Earnings per share for the fourth quarter of 2013 benefited from solid operating results offset by the $71.6 million, or $(0.83) per share, repurchase premium associated with the exchange transactions involving the Company's convertible perpetual preferred stock. In November 2013, the Company exchanged $320 million in aggregate principal amount of newly issued 2.00% Convertible Senior Subordinated Notes due 2043 for 257,110 shares of the Company's outstanding 6.50% Series A Convertible Perpetual Preferred Stock. The excess of the consideration exchanged for the preferred stock over its carrying value was treated like a dividend and subtracted from income from continuing operations attributable to HealthSouth when calculating earnings per share. The Company's basic and diluted (loss) earnings per share were the same for the fourth quarters of 2013 and 2012.

• Cash flows provided by operating activities were $100.9 million for the fourth quarter of 2013 compared to $109.3 million for the fourth quarter of 2012. This decrease primarily resulted from an increase in working capital.

• Adjusted EBITDA (see attached supplemental information) for the fourth quarter of 2013 was $142.3 million compared to $128.6 million for the fourth quarter of 2012, or an increase of 10.7%. This improvement was primarily due to continued revenue growth, disciplined expense management, and a reduction in self-insurance reserves. As a result of enhancements in the way the Company manages its risks, the accumulation of additional historical data, and continued favorable trends in self-insured claims, the Company lowered the statistical confidence level used to determine its self-insurance reserves in the fourth quarter of 2013. This change in estimate increased Adjusted EBITDA by $6.7 million. Adjusted EBITDA in the fourth quarter of 2013 was negatively impacted by approximately $8 million due to sequestration and approximately $4 million, on a net basis, for reserves related to RAC audits.

• Adjusted free cash flow (see attached supplemental information) for the fourth quarter of 2013 was $66.3 million compared to $81.2 million for the fourth quarter of 2012. Adjusted free cash flow in the fourth quarter of 2013 benefited from higher Adjusted EBITDA offset by increased maintenance capital expenditures and an increase in working capital.

Full Year Results

• Consolidated net operating revenues were $2,273.2 million for 2013 compared to $2,161.9 million for 2012, or an increase of 5.1%. This increase was attributable to a 5.0% increase in patient discharges and a 0.9% increase in net patient revenue per discharge. Discharge growth included a 2.5% increase in same-store discharges. Same-store discharges were negatively impacted by the divestiture of 41 skilled nursing facility beds in the first quarter of 2013. Approximately 60 basis points of discharge growth from new stores resulted from the consolidation of St. Vincent Rehabilitation Hospital beginning in the third quarter of 2012. Net patient revenue per discharge was negatively impacted in 2013 by sequestration, the impact of reserves related to RAC audits, and the ramping up of three new hospitals. As discussed above, the Company reduced its net operating revenues by approximately $8 million to establish reserves for RAC audits in 2013.

• Income from continuing operations attributable to HealthSouth per basic share for 2013 was $2.59 compared to $1.62 for 2012. Earnings per share in 2013 was impacted by four items having a net, favorable after-tax impact of $0.84 per share:
  • Positively impacted by:
    • An approximate $115 million settlement with the Internal Revenue Service in the second quarter of 2013
    • The repurchase of approximately 9.1 million shares through a common stock tender offer in the first quarter of 2013
    • A reduction in certain nonrecurring expenses primarily related to government, class action, and related settlements (see attached supplemental information)
  • Negatively impacted by:
    • The $71.6 million repurchase premium on the preferred stock included in the November 2013 exchange transactions, as discussed above

The Company's basic and diluted earnings per share were the same in 2013 and 2012.

• Cash flows provided by operating activities were $470.3 million for 2013 compared to $411.5 million for 2012. This increase was due primarily to increased net operating revenues and continued disciplined expense management.

• Adjusted EBITDA (see attached supplemental information) for 2013 was $551.6 million compared to $505.9 million for 2012, or an increase of 9.0%. Growth in Adjusted EBITDA was due primarily to revenue growth and disciplined expense management. Adjusted EBITDA for 2013 benefited from $6.7 million of adjustments to self-insurance reserves resulting from the lowering of the statistical confidence level, as discussed above. Sequestration and reserves related to RAC audits negatively impacted Adjusted EBITDA by approximately $25 million and $8 million, respectively, during 2013.

• Adjusted free cash flow (see attached supplemental information) for 2013 was $330.9 million compared to $268.0 million for 2012, or an increase of 23.5%. This increase primarily resulted from higher Adjusted EBITDA offset by increased cash interest expense. Adjusted free cash flow in 2013 also benefited from the timing of maintenance capital expenditures related to approximately $12 million of equipment purchased at the end of 2013 and for which payment was not required until January 2014. As such, these items were not included in the Company's cash flows for 2013 but will increase its projected capital expenditures for 2014.

2014 Guidance

As discussed above, Adjusted EBITDA in 2013 benefited from continued favorable trends in self-insured claims, including a one-time $6.7 million benefit from the lowering of the Company's statistical confidence level used to determine its self-insurance reserves. The Company currently estimates sequestration will result in a net year-over-year reduction of 2014 Adjusted EBITDA of approximately $7 million. This reduction will anniversary for purposes of year-over-year Adjusted EBITDA comparisons beginning with payments received after April 1, 2014.

After taking these factors into consideration, the Company has established the following guidance ranges for 2014:

Initial 2014 Adjusted EBITDA Guidance: $555 million to $565 million

Initial 2014 Earnings per Share Guidance: $1.86 to $1.91 per diluted share

Earnings per share guidance for 2014 assumes an effective income tax rate of approximately 40% (using pre-tax income from continuing operations attributable to HealthSouth).