UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2009
OR
o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 001-10315
HealthSouth Corporation
(Exact name of Registrant as specified in its Charter)
|
|
Delaware |
63-0860407 |
(State or Other Jurisdiction of
Incorporation or Organization) |
(I.R.S. Employer
Identification No.) |
|
|
3660 Grandview Parkway, Suite 200
Birmingham, Alabama |
35243 |
(Address of Principal Executive Offices) |
(Zip Code) |
(205) 967-7116
(Registrant’s telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes o No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x Accelerated filer ¨ Non-Accelerated filer ¨ Smaller
reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes o No x
The registrant had 93,305,496 shares of common stock outstanding, net of treasury shares, as of October 30, 2009.
TABLE OF CONTENTS
|
|
Page |
PART I |
Financial Information |
|
|
|
|
Item 1. |
Financial Statements (Unaudited) |
1 |
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
38 |
Item 3. |
Quantitative and Qualitative Disclosures about Market Risk |
60 |
Item 4. |
Controls and Procedures |
61 |
|
|
|
PART II |
Other Information |
|
|
|
|
Item 1. |
Legal Proceedings |
62 |
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
62 |
Item 5. |
Other Matters |
62 |
Item 6. |
Exhibits |
64 |
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report contains historical information, as well as forward-looking statements that involve known and unknown risks and relate to future events, our business strategy, our future financial performance, or our projected business results. In some cases, you can identify forward-looking statements by terminology such as “may,”
“will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “targets,” “potential,” or “continue” or the negative of these terms or other comparable terminology. Such forward-looking statements are necessarily estimates or forecasts based upon current information and involve a number of risks and uncertainties, many of which are beyond our control. Actual
events or results may differ materially from the results anticipated in these forward-looking statements as a result of a variety of factors. Any forward-looking statement is based on information current as of the date of this report and speaks only as of the date on which such statement is made. While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by us include, but are not limited to, the following:
• |
each of the factors discussed in Item 1A, Risk Factors, of our Annual Report on Form 10-K for the year ended December 31, 2008, as well as uncertainties and factors discussed elsewhere in this Form 10-Q, in our other filings from time to time with the United States Securities and Exchange Commission,
or in materials incorporated therein by reference; |
• |
changes or delays in, or suspension of, reimbursement for our services by governmental or private payors, including our ability to obtain and retain favorable arrangements with third-party payors; |
• |
our ability to attract and retain nurses, therapists, and other healthcare professionals in a highly competitive environment with often severe staffing shortages and the impact on our labor expenses from potential union activity and staffing shortages; |
• |
changes in the regulations of the healthcare industry at either or both of the federal and state levels; |
• |
competitive pressures in the healthcare industry and our response to those pressures; |
• |
our ability to successfully access the credit markets on favorable terms; and |
• |
general conditions in the economy and capital markets. |
The cautionary statements referred to in this section also should be considered in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf. We undertake no duty to update these forward-looking statements, even though our situation may change in the future. Furthermore,
we cannot guarantee future results, events, levels of activity, performance, or achievements.
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
HealthSouth Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
|
|
September 30,
2009 |
|
|
December 31,
2008 |
|
|
|
|
|
|
(As Adjusted) |
|
|
|
(In Millions, Except Share Data) |
|
Assets |
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
117.3 |
|
|
$ |
32.2 |
|
Restricted cash |
|
|
88.1 |
|
|
|
154.0 |
|
Current portion of restricted marketable securities |
|
|
7.7 |
|
|
|
20.3 |
|
Accounts receivable, net of allowance for doubtful accounts of $33.6 in 2009; $31.1 in 2008 |
|
|
216.2 |
|
|
|
235.8 |
|
Insurance recoveries receivable |
|
|
- |
|
|
|
182.8 |
|
Other current assets |
|
|
55.0 |
|
|
|
57.6 |
|
Total current assets |
|
|
484.3 |
|
|
|
682.7 |
|
Property and equipment, net |
|
|
671.5 |
|
|
|
673.9 |
|
Goodwill |
|
|
414.7 |
|
|
|
414.7 |
|
Intangible assets, net |
|
|
37.7 |
|
|
|
42.8 |
|
Investments in and advances to nonconsolidated affiliates |
|
|
27.6 |
|
|
|
36.7 |
|
Income tax refund receivable |
|
|
8.6 |
|
|
|
55.9 |
|
Other long-term assets |
|
|
110.0 |
|
|
|
91.5 |
|
Total assets |
|
$ |
1,754.4 |
|
|
$ |
1,998.2 |
|
Liabilities and Shareholders’ Deficit |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Current portion of long-term debt |
|
$ |
21.9 |
|
|
$ |
23.6 |
|
Accounts payable |
|
|
50.6 |
|
|
|
45.6 |
|
Accrued expenses and other current liabilities |
|
|
369.8 |
|
|
|
408.5 |
|
Government, class action, and related settlements |
|
|
6.1 |
|
|
|
268.5 |
|
Total current liabilities |
|
|
448.4 |
|
|
|
746.2 |
|
Long-term debt, net of current portion |
|
|
1,674.8 |
|
|
|
1,789.6 |
|
Other long-term liabilities |
|
|
165.7 |
|
|
|
162.2 |
|
|
|
|
2,288.9 |
|
|
|
2,698.0 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
Convertible perpetual preferred stock, $.10 par value; 1,500,000 shares authorized; |
|
|
|
|
|
|
|
|
400,000 shares issued; liquidation preference of $1,000 per share |
|
|
387.4 |
|
|
|
387.4 |
|
Shareholders’ deficit: |
|
|
|
|
|
|
|
|
HealthSouth shareholders' deficit: |
|
|
|
|
|
|
|
|
Common stock, $.01 par value; 200,000,000 shares authorized; |
|
|
|
|
|
|
|
|
issued: 97,238,725 in 2009; 96,890,924 in 2008 |
|
|
1.0 |
|
|
|
1.0 |
|
Capital in excess of par value |
|
|
2,888.4 |
|
|
|
2,956.5 |
|
Accumulated deficit |
|
|
(3,756.0 |
) |
|
|
(3,812.2 |
) |
Accumulated other comprehensive income (loss) |
|
|
0.9 |
|
|
|
(3.2 |
) |
Treasury stock, at cost (3,926,639 shares in 2009 and 8,872,121 shares |
|
|
|
|
|
|
|
|
in 2008) |
|
|
(137.0 |
) |
|
|
(311.5 |
) |
Total HealthSouth shareholders’ deficit |
|
|
(1,002.7 |
) |
|
|
(1,169.4 |
) |
Noncontrolling interests |
|
|
80.8 |
|
|
|
82.2 |
|
Total shareholders' deficit |
|
|
(921.9 |
) |
|
|
(1,087.2 |
) |
Total liabilities and shareholders’ deficit |
|
$ |
1,754.4 |
|
|
$ |
1,998.2 |
|
The accompanying notes to condensed consolidated financial
statements are an integral part of these condensed balance sheets.
HealthSouth Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
(As Adjusted) |
|
|
|
|
|
(As Adjusted) |
|
|
|
(In Millions, Except Per Share Data) |
|
Net operating revenues |
|
$ |
472.7 |
|
|
$ |
455.5 |
|
|
$ |
1,431.5 |
|
|
$ |
1,376.3 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
235.4 |
|
|
|
236.3 |
|
|
|
709.2 |
|
|
|
700.8 |
|
Other operating expenses |
|
|
66.8 |
|
|
|
68.6 |
|
|
|
201.6 |
|
|
|
201.0 |
|
General and administrative expenses |
|
|
26.0 |
|
|
|
25.5 |
|
|
|
76.4 |
|
|
|
78.8 |
|
Supplies |
|
|
27.7 |
|
|
|
26.2 |
|
|
|
83.9 |
|
|
|
81.1 |
|
Depreciation and amortization |
|
|
18.1 |
|
|
|
17.9 |
|
|
|
53.4 |
|
|
|
65.3 |
|
Impairment of long-lived assets |
|
|
4.0 |
|
|
|
- |
|
|
|
4.0 |
|
|
|
0.6 |
|
Occupancy costs |
|
|
11.8 |
|
|
|
12.6 |
|
|
|
35.9 |
|
|
|
36.8 |
|
Provision for doubtful accounts |
|
|
7.9 |
|
|
|
6.6 |
|
|
|
25.5 |
|
|
|
20.5 |
|
Loss on disposal of assets |
|
|
0.7 |
|
|
|
0.2 |
|
|
|
3.0 |
|
|
|
0.6 |
|
Government, class action, and related settlements expense |
|
|
8.5 |
|
|
|
17.1 |
|
|
|
41.3 |
|
|
|
(27.9 |
) |
Professional fees—accounting, tax, and legal |
|
|
3.5 |
|
|
|
4.0 |
|
|
|
5.0 |
|
|
|
12.9 |
|
Total operating expenses |
|
|
410.4 |
|
|
|
415.0 |
|
|
|
1,239.2 |
|
|
|
1,170.5 |
|
Loss (gain) on early extinguishment of debt |
|
|
- |
|
|
|
2.1 |
|
|
|
(3.1 |
) |
|
|
5.8 |
|
Interest expense and amortization of debt discounts and fees |
|
|
29.5 |
|
|
|
40.3 |
|
|
|
95.0 |
|
|
|
131.1 |
|
Other income |
|
|
(0.6 |
) |
|
|
(0.4 |
) |
|
|
(1.4 |
) |
|
|
(2.1 |
) |
Loss on interest rate swaps |
|
|
7.9 |
|
|
|
8.0 |
|
|
|
16.7 |
|
|
|
16.1 |
|
Equity in net income of nonconsolidated affiliates |
|
|
(3.0 |
) |
|
|
(2.7 |
) |
|
|
(2.8 |
) |
|
|
(7.8 |
) |
Income (loss) from continuing operations before income tax benefit |
|
|
28.5 |
|
|
|
(6.8 |
) |
|
|
87.9 |
|
|
|
62.7 |
|
Provision for income tax benefit |
|
|
(1.7 |
) |
|
|
(22.5 |
) |
|
|
(0.8 |
) |
|
|
(21.7 |
) |
Income from continuing operations |
|
|
30.2 |
|
|
|
15.7 |
|
|
|
88.7 |
|
|
|
84.4 |
|
(Loss) income from discontinued operations, net of tax |
|
|
(5.4 |
) |
|
|
(2.9 |
) |
|
|
(6.8 |
) |
|
|
7.2 |
|
Net income |
|
|
24.8 |
|
|
|
12.8 |
|
|
|
81.9 |
|
|
|
91.6 |
|
Less: Net income attributable to noncontrolling interests |
|
|
(8.0 |
) |
|
|
(6.2 |
) |
|
|
(25.7 |
) |
|
|
(21.1 |
) |
Net income attributable to HealthSouth |
|
|
16.8 |
|
|
|
6.6 |
|
|
|
56.2 |
|
|
|
70.5 |
|
Less: Convertible perpetual preferred stock dividends |
|
|
(6.5 |
) |
|
|
(6.5 |
) |
|
|
(19.5 |
) |
|
|
(19.5 |
) |
Net income attributable to HealthSouth |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common shareholders |
|
$ |
10.3 |
|
|
$ |
0.1 |
|
|
$ |
36.7 |
|
|
$ |
51.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
87.6 |
|
|
|
87.4 |
|
|
|
87.6 |
|
|
|
81.6 |
|
Diluted |
|
|
102.2 |
|
|
|
101.0 |
|
|
|
101.6 |
|
|
|
95.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
attributable to HealthSouth common shareholders |
|
$ |
0.18 |
|
|
$ |
0.04 |
|
|
$ |
0.50 |
|
|
$ |
0.53 |
|
(Loss) income from discontinued operations, net of tax, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
attributable to HealthSouth common shareholders |
|
|
(0.06 |
) |
|
|
(0.04 |
) |
|
|
(0.08 |
) |
|
|
0.10 |
|
Net income per share attributable to HealthSouth common |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shareholders |
|
$ |
0.12 |
|
|
$ |
0.00 |
|
|
$ |
0.42 |
|
|
$ |
0.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts attributable to HealthSouth: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
22.2 |
|
|
$ |
9.8 |
|
|
$ |
63.5 |
|
|
$ |
62.7 |
|
(Loss) income from discontinued operations, net of tax |
|
|
(5.4 |
) |
|
|
(3.2 |
) |
|
|
(7.3 |
) |
|
|
7.8 |
|
Net income attributable to HealthSouth |
|
$ |
16.8 |
|
|
$ |
6.6 |
|
|
$ |
56.2 |
|
|
$ |
70.5 |
|
The accompanying notes to condensed consolidated financial
statements are an integral part of these condensed statements.
HealthSouth Corporation and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
(As Adjusted) |
|
|
|
|
|
(As Adjusted) |
|
|
|
(In Millions) |
|
COMPREHENSIVE INCOME |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
24.8 |
|
|
$ |
12.8 |
|
|
$ |
81.9 |
|
|
$ |
91.6 |
|
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in foreign currency translation adjustments |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.8 |
|
Net change in unrealized gain (loss) on available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized net holding gain (loss) arising during the period |
|
|
2.0 |
|
|
|
(0.6 |
) |
|
|
2.1 |
|
|
|
(0.1 |
) |
Reclassification adjustment for gains (losses) included |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in net income |
|
|
- |
|
|
|
- |
|
|
|
1.6 |
|
|
|
(1.3 |
) |
Net change in unrealized (loss) gain on forward-starting interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
rate swaps: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized net holding (loss) gain arising during the period |
|
|
(1.6 |
) |
|
|
- |
|
|
|
0.2 |
|
|
|
- |
|
Reclassification adjustment for gains included in net income |
|
|
- |
|
|
|
- |
|
|
|
0.2 |
|
|
|
- |
|
Other comprehensive income (loss), net of tax |
|
|
0.4 |
|
|
|
(0.6 |
) |
|
|
4.1 |
|
|
|
(0.6 |
) |
Comprehensive income |
|
|
25.2 |
|
|
|
12.2 |
|
|
|
86.0 |
|
|
|
91.0 |
|
Comprehensive income attributable to noncontrolling interests |
|
|
(8.0 |
) |
|
|
(6.2 |
) |
|
|
(25.7 |
) |
|
|
(21.1 |
) |
Comprehensive income attributable to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HealthSouth |
|
$ |
17.2 |
|
|
$ |
6.0 |
|
|
$ |
60.3 |
|
|
$ |
69.9 |
|
The accompanying notes to condensed consolidated financial
statements are an integral part of these condensed statements.
HealthSouth Corporation and Subsidiaries
Condensed Consolidated Statements of Shareholders' Deficit
(Unaudited)
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2009 |
|
|
|
(In Millions) |
|
|
|
HealthSouth Common Shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
Number of Common Shares Outstanding |
|
|
Common Stock |
|
|
Capital in Excess of Par Value |
|
|
Accumulated Deficit |
|
|
Accumulated Other Comprehensive (Loss) Income |
|
|
Treasury Stock |
|
|
Noncontrolling Interests |
|
|
Total |
|
|
Comprehensive Income |
|
Balance at beginning of period |
|
|
88.0 |
|
|
$ |
1.0 |
|
|
$ |
2,956.5 |
|
|
$ |
(3,812.2 |
) |
|
$ |
(3.2 |
) |
|
$ |
(311.5 |
) |
|
$ |
82.2 |
|
|
$ |
(1,087.2 |
) |
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
56.2 |
|
|
|
- |
|
|
|
- |
|
|
|
25.7 |
|
|
|
81.9 |
|
|
$ |
81.9 |
|
Other comprehensive
income, net of tax |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4.1 |
|
|
|
- |
|
|
|
- |
|
|
|
4.1 |
|
|
|
4.1 |
|
Comprehensive
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
86.0 |
|
Common stock issued
under Securities Litigation
Settlement |
|
|
5.0 |
|
|
|
- |
|
|
|
(58.7 |
) |
|
|
- |
|
|
|
- |
|
|
|
175.3 |
|
|
|
- |
|
|
|
116.6 |
|
|
|
|
|
Dividends declared on
convertible perpetual
preferred stock |
|
|
- |
|
|
|
- |
|
|
|
(19.5 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(19.5 |
) |
|
|
|
|
Stock-based
compensation |
|
|
- |
|
|
|
- |
|
|
|
9.9 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
9.9 |
|
|
|
|
|
Distributions declared |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(26.0 |
) |
|
|
(26.0 |
) |
|
|
|
|
Other |
|
|
0.3 |
|
|
|
- |
|
|
|
0.2 |
|
|
|
- |
|
|
|
- |
|
|
|
(0.8 |
) |
|
|
(1.1 |
) |
|
|
(1.7 |
) |
|
|
|
|
Balance at end of period |
|
|
93.3 |
|
|
$ |
1.0 |
|
|
$ |
2,888.4 |
|
|
$ |
(3,756.0 |
) |
|
$ |
0.9 |
|
|
$ |
(137.0 |
) |
|
$ |
80.8 |
|
|
$ |
(921.9 |
) |
|
|
|
|
HealthSouth Corporation and Subsidiaries
Condensed Consolidated Statements of Shareholders' Deficit (Continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2008 |
|
|
|
(In Millions) |
|
|
|
HealthSouth Common Shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
Number of Common Shares Outstanding |
|
|
Common Stock |
|
|
Capital in Excess of Par Value |
|
|
Accumulated Deficit |
|
|
Accumulated Other Comprehensive Loss |
|
|
Treasury Stock |
|
|
Noncontrolling Interests |
|
|
Total |
|
|
Comprehensive Income |
|
Balance at beginning of period |
|
|
78.7 |
|
|
$ |
0.9 |
|
|
$ |
2,820.4 |
|
|
$ |
(4,064.6 |
) |
|
$ |
(0.8 |
) |
|
$ |
(310.4 |
) |
|
$ |
97.2 |
|
|
$ |
(1,457.3 |
) |
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
70.5 |
|
|
|
- |
|
|
|
- |
|
|
|
21.1 |
|
|
|
91.6 |
|
|
$ |
91.6 |
|
Other comprehensive
loss, net of tax |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(0.6 |
) |
|
|
- |
|
|
|
- |
|
|
|
(0.6 |
) |
|
|
(0.6 |
) |
Comprehensive
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
91.0 |
|
Dividends declared on
convertible perpetual
preferred stock |
|
|
- |
|
|
|
- |
|
|
|
(19.5 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(19.5 |
) |
|
|
|
|
Issuance of common
stock |
|
|
8.8 |
|
|
|
0.1 |
|
|
|
150.1 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
150.2 |
|
|
|
|
|
Stock-based
compensation |
|
|
- |
|
|
|
- |
|
|
|
8.5 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
8.5 |
|
|
|
|
|
Distributions declared |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(25.0 |
) |
|
|
(25.0 |
) |
|
|
|
|
Settlements with partners |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4.2 |
|
|
|
4.2 |
|
|
|
|
|
Government, class action,
and related settlements |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(5.3 |
) |
|
|
(5.3 |
) |
|
|
|
|
Transfer of surgery
centers to ASC |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(6.8 |
) |
|
|
(6.8 |
) |
|
|
|
|
Other |
|
|
0.5 |
|
|
|
- |
|
|
|
0.2 |
|
|
|
- |
|
|
|
- |
|
|
|
(1.0 |
) |
|
|
(0.7 |
) |
|
|
(1.5 |
) |
|
|
|
|
Balance at end of period |
|
|
88.0 |
|
|
$ |
1.0 |
|
|
$ |
2,959.7 |
|
|
$ |
(3,994.1 |
) |
|
$ |
(1.4 |
) |
|
$ |
(311.4 |
) |
|
$ |
84.7 |
|
|
$ |
(1,261.5 |
) |
|
|
|
|
The accompanying notes to condensed consolidated financial
statements are an integral part of these condensed statements.
HealthSouth Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
(As Adjusted) |
|
|
|
(In Millions) |
|
Cash flows from operating activities: |
|
|
|
|
|
|
Net income |
|
$ |
81.9 |
|
|
$ |
91.6 |
|
Loss (income) from discontinued operations |
|
|
6.8 |
|
|
|
(7.2 |
) |
Adjustments to reconcile net income to net cash provided by operating |
|
|
|
|
|
|
|
|
activities— |
|
|
|
|
|
|
|
|
Provision for doubtful accounts |
|
|
25.5 |
|
|
|
20.5 |
|
Provision for government, class action, and related settlements |
|
|
41.3 |
|
|
|
(27.9 |
) |
UBS Settlement proceeds, gross |
|
|
100.0 |
|
|
|
- |
|
Depreciation and amortization |
|
|
53.4 |
|
|
|
65.3 |
|
Amortization of debt issue costs, debt discounts, and fees |
|
|
4.8 |
|
|
|
4.9 |
|
Impairment of long-lived assets |
|
|
4.0 |
|
|
|
0.6 |
|
Loss on disposal of assets |
|
|
3.0 |
|
|
|
0.6 |
|
(Gain) loss on early extinguishment of debt |
|
|
(3.1 |
) |
|
|
5.8 |
|
Loss on interest rate swaps |
|
|
16.7 |
|
|
|
16.1 |
|
Equity in net income of nonconsolidated affiliates |
|
|
(2.8 |
) |
|
|
(7.8 |
) |
Distributions from nonconsolidated affiliates |
|
|
6.5 |
|
|
|
7.6 |
|
Stock-based compensation |
|
|
9.9 |
|
|
|
8.5 |
|
Deferred tax provision |
|
|
2.4 |
|
|
|
2.0 |
|
Other |
|
|
0.6 |
|
|
|
0.2 |
|
(Increase) decrease in assets— |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(5.9 |
) |
|
|
(27.4 |
) |
Other assets |
|
|
1.3 |
|
|
|
6.4 |
|
Income tax refund receivable |
|
|
47.3 |
|
|
|
(10.4 |
) |
Increase (decrease) in liabilities— |
|
|
|
|
|
|
|
|
Accounts payable |
|
|
5.0 |
|
|
|
(9.3 |
) |
Accrued fees and expenses for derivative plaintiffs' attorneys in |
|
|
(26.2 |
) |
|
|
- |
|
UBS Settlement |
|
|
|
|
|
|
|
|
Other liabilities |
|
|
10.3 |
|
|
|
18.2 |
|
Government, class action, and related settlements |
|
|
(11.0 |
) |
|
|
(7.4 |
) |
Net cash used in operating activities of discontinued operations |
|
|
(9.6 |
) |
|
|
(1.6 |
) |
Total adjustments |
|
|
273.4 |
|
|
|
64.9 |
|
Net cash provided by operating activities |
|
|
362.1 |
|
|
|
149.3 |
|
HealthSouth Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Continued)
(Unaudited)
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
(As Adjusted) |
|
|
|
(In Millions) |
|
Cash flows from investing activities: |
|
|
|
|
|
|
Capital expenditures |
|
|
(54.7 |
) |
|
|
(39.4 |
) |
Acquisition of business, net of cash acquired |
|
|
- |
|
|
|
(14.6 |
) |
Acquisition of intangible assets |
|
|
(0.4 |
) |
|
|
(18.2 |
) |
Proceeds from disposal of assets |
|
|
0.9 |
|
|
|
53.8 |
|
Net change in restricted cash |
|
|
(32.0 |
) |
|
|
20.5 |
|
Net settlements on interest rate swaps |
|
|
(30.3 |
) |
|
|
(13.9 |
) |
Net investment in interest rate swap |
|
|
(6.4 |
) |
|
|
- |
|
Other |
|
|
(1.7 |
) |
|
|
(0.3 |
) |
Net cash provided by investing activities of discontinued operations |
|
|
0.2 |
|
|
|
0.2 |
|
Net cash used in investing activities |
|
|
(124.4 |
) |
|
|
(11.9 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Checks in excess of bank balance |
|
|
- |
|
|
|
(11.4 |
) |
Change in restricted cash for amounts in escrow related to debt |
|
|
- |
|
|
|
(30.3 |
) |
Principal payments on debt, including pre-payments |
|
|
(62.9 |
) |
|
|
(121.5 |
) |
Borrowings on revolving credit facility |
|
|
10.0 |
|
|
|
88.0 |
|
Payments on revolving credit facility |
|
|
(50.0 |
) |
|
|
(150.0 |
) |
Principal payments under capital lease obligations |
|
|
(9.9 |
) |
|
|
(9.3 |
) |
Issuance of common stock |
|
|
- |
|
|
|
150.2 |
|
Dividends paid on convertible perpetual preferred stock |
|
|
(19.5 |
) |
|
|
(19.5 |
) |
Distributions paid to noncontrolling interests of consolidated affiliates |
|
|
(22.8 |
) |
|
|
(26.3 |
) |
Other |
|
|
1.1 |
|
|
|
(0.3 |
) |
Net cash provided by (used in) financing activities of discontinued |
|
|
|
|
|
|
|
|
operations |
|
|
1.4 |
|
|
|
(3.0 |
) |
Net cash used in financing activities |
|
|
(152.6 |
) |
|
|
(133.4 |
) |
Effect of exchange rate changes on cash and cash equivalents |
|
|
- |
|
|
|
0.8 |
|
Increase in cash and cash equivalents |
|
|
85.1 |
|
|
|
4.8 |
|
Cash and cash equivalents at beginning of period |
|
|
32.2 |
|
|
|
19.8 |
|
Cash and cash equivalents of divisions and facilities held for sale |
|
|
|
|
|
|
|
|
at beginning of period |
|
|
- |
|
|
|
0.4 |
|
Less: Cash and cash equivalents of divisions and facilities held for |
|
|
|
|
|
|
|
|
sale at end of period |
|
|
- |
|
|
|
(0.1 |
) |
Cash and cash equivalents at end of period |
|
$ |
117.3 |
|
|
$ |
24.9 |
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of noncash financing activities: |
|
|
|
|
|
|
|
|
Securities Litigation Settlement |
|
$ |
299.3 |
|
|
$ |
- |
|
The accompanying notes to condensed consolidated financial
statements are an integral part of these condensed statements
HealthSouth Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
1. Basis of Presentation:
HealthSouth Corporation, incorporated in Delaware in 1984, including its subsidiaries, is the largest provider of inpatient rehabilitative healthcare services in the United States. We operate inpatient rehabilitation hospitals and long-term acute care hospitals and provide treatment on both an inpatient and outpatient basis. References herein
to “HealthSouth,” the “Company,” “we,” “our,” or “us” refer to HealthSouth Corporation and its subsidiaries unless otherwise stated or indicated by context.
The accompanying unaudited condensed consolidated financial statements of HealthSouth Corporation and Subsidiaries should be read in conjunction with the consolidated financial statements and accompanying notes filed with the United States Securities and Exchange Commission (the “SEC”) in HealthSouth’s Annual Report on Form 10-K
filed on February 24, 2009 (the “2008 Form 10-K”). The unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the SEC applicable to interim financial information. Certain information and note disclosures included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) have been omitted in these interim statements, as allowed by such SEC rules
and regulations. The condensed consolidated balance sheet as of December 31, 2008 has been derived from audited financial statements, as adjusted for our recharacterization of minority interests to noncontrolling interest and classification of noncontrolling interest as a component of equity, but it does not include all disclosures required by GAAP. However, we believe the disclosures are adequate to make the information presented not misleading.
The unaudited results of operations for the interim periods shown in these financial statements are not necessarily indicative of operating results for the entire year. In our opinion, the accompanying condensed consolidated financial statements recognize all adjustments of a normal recurring nature considered necessary to fairly state the
financial position, results of operations, and cash flows for each interim period presented.
Subsequent events have been evaluated through November 4, 2009, which represents the issuance date of these unaudited condensed consolidated financial statements.
Reclassifications—
Certain financial results have been reclassified to conform to the current year presentation. Such reclassifications primarily relate to rental properties where we terminated the leases associated with certain properties during the first quarter of 2009. We reclassified our condensed consolidated balance sheet as of December 31, 2008,
our condensed consolidated statements of operations for the three and nine months ended September 30, 2008, and our condensed consolidated statement of cash flows for the nine months ended September 30, 2008 to include these properties and their results of operations in discontinued operations.
As of January 1, 2009, we reclassified our noncontrolling interests (formerly known as “minority interests”) as a component of equity and now report net income and comprehensive income attributable to our noncontrolling interests separately from net income and comprehensive income attributable to HealthSouth.
Out-of-Period Adjustments—
During the preparation of our condensed consolidated financial statements for the quarterly period ended June 30, 2009, we identified an error in our consolidated financial statements as of and for the year ended December 31, 2008 and prior periods and our condensed consolidated financial statements as of and for the quarterly period
ended March 31, 2009. We corrected this error in our financial statements by adjusting Equity in net income of nonconsolidated affiliates, which resulted in an understatement of both our Income (loss) from continuing operations before income tax benefit and our Net income of approximately $4.5 million for the nine months ended September 30,
2009. This error related primarily to an approximate $9.6 million overstatement of our investment in a joint venture hospital we account for using the equity method of accounting due to the understatement of prior period income tax provisions of this joint venture hospital and the adjustment of certain liabilities due to this joint venture hospital. We also adjusted Accrued expenses and other current liabilities by approximately $4.7 million due to changes
in amounts due to us for expenses paid on behalf of this joint venture hospital. We do not believe these adjustments are material to the condensed consolidated financial statements as of September 30, 2009 and for the nine months then ended or to any prior years’ consolidated financial statements. As a result, we have not restated any prior period amounts.
Stock-Based Compensation—
In February 2009, we granted 1.7 million shares of restricted common stock to members of our management team and our board of directors. Approximately 0.5 million shares of the restricted stock granted contain only a service condition, while the remaining 1.2 million shares contain a service and either a performance or market condition. Additionally,
we granted 0.3 million stock options to members of our management team. The fair value of these awards and options were determined using the policies described in the 2008 Form 10-K.
Recent Accounting Pronouncements—
In April 2009, the Financial Accounting Standards Board ("FASB") updated the other-than-temporary impairment guidance in GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This guidance
was effective for interim and annual reporting periods ended after June 15, 2009, with early adoption permitted. HealthSouth elected to adopt this amended guidance in the first quarter of 2009. While its adoption did not have a material impact on our financial position, results of operations, or cash flows, it does require interim disclosures related to our available-for-sale equity securities. See Note 3, Cash and Marketable Securities.
In April 2009, the FASB also issued updated guidance on disclosures about fair value of financial instruments. This guidance requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements and was effective for interim reporting
periods ended after June 15, 2009, with early adoption permitted. HealthSouth elected to adopt this amended guidance in the first quarter of 2009. Its adoption resulted in additional interim disclosures only. See Note 7, Fair Value Measurements.
In May 2009, the FASB issued authoritative guidance on subsequent events to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This guidance was effective for interim or annual financial periods ended after
June 15, 2009. Our adoption of this guidance resulted only in additional disclosure regarding the date through which subsequent events have been evaluated in each set of interim or annual financial statements and had no impact on our financial position, results of operations, or cash flows.
In June 2009, the FASB established the FASB Accounting Standards Codification (the "Codification") as the single authoritative source for GAAP. The Codification was effective for financial statements that cover interim and annual periods ended after September 15, 2009. While not intended to change GAAP, the Codification significantly changed
the way in which the accounting literature is organized. Because the Codification completely replaced existing standards, it affected the way GAAP is referenced by companies in their financial statements and accounting policies. Our adoption and our use of the Codification beginning in the third quarter of 2009 did not have an impact on our financial position, results of operations, or cash flows.
Since the filing of our 2008 Form 10-K, we do not believe any other recently issued, but not yet effective, accounting standards will have a material effect on our consolidated financial position, results of operations, or cash flows.
2. Liquidity:
We continue to make progress in improving our leverage and liquidity.
During the nine months ended September 30, 2009, we reduced our total debt by approximately $117 million and increased our Cash and cash equivalents by approximately $85 million. In February 2009, we used our federal income tax refund for tax years 1995 through 1999 (see Note 17, Income
Taxes, to the consolidated financial statements accompanying our 2008 Form 10-K) along with available cash to reduce our Term Loan Facility (as defined in Note 8, Long-term Debt, to the consolidated financial statements accompanying our 2008 Form 10-K) by $24.5 million and amounts outstanding under our revolving credit facility to zero. In addition, we have used a portion of the net proceeds from our settlement with UBS (see Note 11, Settlements)
to redeem $36.4 million of our Floating Rate Senior Notes due 2014 (as defined in Note 8, Long-term Debt, to the consolidated financial statements accompanying our 2008 Form 10-K). See also Note 5, Long-term Debt.
As of September 30, 2009, we had $117.3 million in Cash and cash equivalents. This amount excludes $88.1 million in Restricted cash and $23.3 million of restricted marketable securities. Our restricted assets pertain
to various obligations we have under partnership agreements and other arrangements, primarily related to our captive insurance company. As of December 31, 2008, our Restricted cash included $97.9 million related to our settlement with UBS (see Note 11, Settlements).
We have scheduled principal payments of $6.2 million and $24.9 million in the remainder of 2009 and 2010, respectively, related to long-term debt obligations (see Note 5, Long-term Debt). We do not face substantial near-term refinancing risk, as our revolving credit facility does not
expire until 2012, a portion of our Term Loan Facility does not mature until 2013, with the remainder maturing in 2015, depending on certain conditions (see Note 5, Long-term Debt, for a discussion of an amendment and extension related to our Credit Agreement), and the majority of our bonds are not due until 2014 and 2016.
Our Credit Agreement (as defined in Note 8, Long-term Debt, to the consolidated financial statements accompanying our 2008 Form 10-K) governs the vast majority of our senior secured borrowings and contains financial covenants that include a leverage ratio and an interest coverage ratio.
As of September 30, 2009, we were in compliance with the covenants under our Credit Agreement. If we anticipated a potential covenant violation, we would seek relief from our lenders, which would have some cost to us, and such relief might not be on terms as favorable to those in our existing Credit Agreement. Under such circumstances, there is also the potential our lenders would not grant relief to us which, among other things, would depend on the state of the credit markets at that time. However, we believe
we have reduced this risk by significantly lowering our senior secured leverage ratio since the inception of our Credit Agreement.
Our Credit Agreement also contains excess cash flow provisions. To the extent we have available cash at the end of 2009 that has not been used to make qualified capital expenditures or debt reductions, and depending upon our leverage ratio under our Credit Agreement, we may be required to use a portion of our excess cash to reduce amounts
outstanding on our Term Loan Facility.
Our primary sources of liquidity are cash on hand, cash flows from operations, and borrowings under our revolving credit facility. We monitor the financial strength of our depositories, creditors, insurance carriers, and other counterparties using publicly available information, as well as qualitative inputs. Based on our current borrowing
capacity and compliance with the financial covenants under our Credit Agreement, we do not believe there is significant risk in our ability to make draws under our revolving credit facility, if needed. However, no such assurances can be provided. We continue to analyze our capital structure, and we will use our available cash in a manner that provides the most beneficial impact to our capital structure, including deleveraging.
See Note 1, Summary of Significant Accounting Policies, to the consolidated financial statements accompanying our 2008 Form 10-K for a discussion of risks and uncertainties facing us. Changes in our business or other factors may occur that might have a material adverse impact on our
financial position, results of operations, and cash flows.
3. |
Cash and Marketable Securities: |
As of September 30, 2009 and December 31, 2008, our investments consist of cash and cash equivalents and marketable securities. Our investments in marketable securities are classified as available-for-sale.
The components of our investments as of September 30, 2009 are as follows (in millions):
|
|
Cash & Cash Equivalents |
|
|
Restricted Cash |
|
|
Nonrestricted Marketable Securities |
|
|
Restricted Marketable Securities |
|
|
Total |
|
Cash |
|
$ |
117.3 |
|
|
$ |
88.1 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
205.4 |
|
Equity securities |
|
|
- |
|
|
|
- |
|
|
|
0.5 |
|
|
|
23.3 |
|
|
|
23.8 |
|
Total |
|
$ |
117.3 |
|
|
$ |
88.1 |
|
|
$ |
0.5 |
|
|
$ |
23.3 |
|
|
$ |
229.2 |
|
The components of our investments as of December 31, 2008 are as follows (in millions):
|
|
Cash & Cash Equivalents |
|
|
Restricted Cash |
|
|
Nonrestricted Marketable Securities |
|
|
Restricted Marketable Securities |
|
|
Total |
|
Cash |
|
$ |
32.2 |
|
|
$ |
154.0 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
186.2 |
|
Equity securities |
|
|
- |
|
|
|
- |
|
|
|
0.2 |
|
|
|
20.3 |
|
|
|
20.5 |
|
Total |
|
$ |
32.2 |
|
|
$ |
154.0 |
|
|
$ |
0.2 |
|
|
$ |
20.3 |
|
|
$ |
206.7 |
|
Approximately $15.6 million of restricted marketable securities are included in Other long-term assets in our condensed consolidated balance sheet as of September 30, 2009. Restricted cash as of December 31, 2008 includes cash
associated with the UBS Settlement discussed in Note 11, Settlements. Nonrestricted marketable securities are included in Other current assets in our condensed consolidated balance sheets.
A summary of our restricted marketable securities as of September 30, 2009 is as follows (in millions):
|
|
Cost |
|
|
Gross Unrealized Gains |
|
|
Gross Unrealized Losses |
|
|
Fair Value |
|
Equity securities |
|
$ |
21.4 |
|
|
$ |
2.0 |
|
|
$ |
(0.1 |
) |
|
$ |
23.3 |
|
A summary of our restricted marketable securities as of December 31, 2008 is as follows (in millions):
|
|
Cost |
|
|
Gross Unrealized Gains |
|
|
Gross Unrealized Losses |
|
|
Fair Value |
|
Equity securities |
|
$ |
21.9 |
|
|
$ |
0.4 |
|
|
$ |
(2.0 |
) |
|
$ |
20.3 |
|
Cost in the above tables includes adjustments made to the cost basis of our equity securities for other-than-temporary impairments. During the nine months ended September 30, 2009, we recorded $0.8 million of impairments related to our restricted marketable securities. These impairment charges are included in Other
income in our condensed consolidated statement of operations for the nine months ended September 30, 2009. No impairments were recorded during the three months ended September 30, 2009 or the three or nine months ended September 30, 2008.
Investing information related to our marketable securities is as follows (in millions):
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Nonrestricted: |
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains - nonrestricted |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
0.6 |
|
Restricted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of restricted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
available-for-sale securities |
|
$ |
0.3 |
|
|
$ |
1.1 |
|
|
$ |
1.9 |
|
|
$ |
2.4 |
|
Gross realized gains - restricted |
|
$ |
0.1 |
|
|
$ |
0.1 |
|
|
$ |
0.3 |
|
|
$ |
0.2 |
|
Gross realized losses - restricted |
|
$ |
- |
|
|
$ |
(0.5 |
) |
|
$ |
(0.2 |
) |
|
$ |
(0.7 |
) |
The following table shows the fair value and gross unrealized losses of our marketable securities with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by the length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2009 and December 31, 2008 (in
millions):
|
|
As of September 30, 2009 |
|
|
As of December 31, 2008 |
|
Less than 12 months: |
|
|
|
|
|
|
Fair value |
|
$ |
0.4 |
|
|
$ |
15.5 |
|
Gross unrealized losses |
|
$ |
- |
|
|
$ |
(1.9 |
) |
12 months or greater: |
|
|
|
|
|
|
|
|
Fair value |
|
$ |
0.6 |
|
|
$ |
0.1 |
|
Gross unrealized losses |
|
$ |
(0.1 |
) |
|
$ |
(0.1 |
) |
Total: |
|
|
|
|
|
|
|
|
Fair value |
|
$ |
1.0 |
|
|
$ |
15.6 |
|
Gross unrealized losses |
|
$ |
(0.1 |
) |
|
$ |
(2.0 |
) |
Our portfolio of marketable securities is comprised of numerous individual equity securities and mutual funds across a variety of industries. For our marketable securities with unrealized losses that are not deemed to be other-than-temporarily impaired, we examined the severity and duration of the impairments in relation to the cost of the
individual investments. We also considered the industry in which each investment is held and the near-term prospects for a recovery in each specific industry. Based on our evaluation and our ability and intent to hold these investments for a reasonable period of time sufficient for a potential recovery of fair value, we do not believe these investments are other-than-temporarily impaired at September 30, 2009.
4. |
Investments in and Advances to Nonconsolidated Affiliates: |
Investments in and advances to nonconsolidated affiliates as of September 30, 2009 represents our investment in 16 partially owned subsidiaries, of which 11 are general or limited partnerships, limited liability companies, or joint ventures in which HealthSouth or one of our subsidiaries
is a general or limited partner, managing member, member, or venturer, as applicable. We do not control these affiliates, but have the ability to exercise significant influence over the operating and financial policies of certain of these affiliates. Our ownership percentages in these affiliates range from 4% to 51%. We account for these investments using the cost and equity methods of accounting.
The following summarizes the combined results of operations of our equity method affiliates (on a 100% basis, in millions):
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Net operating revenues |
|
$ |
19.3 |
|
|
$ |
17.9 |
|
|
$ |
54.8 |
|
|
$ |
55.2 |
|
Operating expenses |
|
|
(11.3 |
) |
|
|
(11.2 |
) |
|
|
(34.5 |
) |
|
|
(26.1 |
) |
Income from continuing operations |
|
|
6.5 |
|
|
|
5.7 |
|
|
|
16.8 |
|
|
|
26.2 |
|
Net income |
|
|
6.5 |
|
|
|
5.7 |
|
|
|
16.8 |
|
|
|
26.2 |
|
See also Note 1, Basis of Presentation, “Out-of-Period Adjustments.”
5. Long-term Debt
Our long-term debt outstanding consists of the following (in millions):
|
|
September 30, 2009 |
|
|
December 31, 2008 |
|
Advances under $400 million revolving credit facility |
|
$ |
- |
|
|
$ |
40.0 |
|
Term Loan Facility |
|
|
753.2 |
|
|
|
783.6 |
|
Bonds Payable— |
|
|
|
|
|
|
|
|
8.375% Senior Notes due 2011 |
|
|
0.3 |
|
|
|
0.3 |
|
7.625% Senior Notes due 2012 |
|
|
1.5 |
|
|
|
1.5 |
|
Floating Rate Senior Notes due 2014 |
|
|
329.6 |
|
|
|
366.0 |
|
10.75% Senior Notes due 2016 |
|
|
494.7 |
|
|
|
494.3 |
|
Other notes payable at interest rates from 8.1% to 12.9% |
|
|
12.5 |
|
|
|
12.8 |
|
Capital lease obligations |
|
|
104.9 |
|
|
|
114.7 |
|
|
|
|
1,696.7 |
|
|
|
1,813.2 |
|
Less: Current portion |
|
|
(21.9 |
) |
|
|
(23.6 |
) |
Long-term debt, net of current portion |
|
$ |
1,674.8 |
|
|
$ |
1,789.6 |
|
For a description of our indebtedness, see Note 8, Long-term Debt, to the consolidated financial statements accompanying our 2008 Form 10-K. See Note 2, Liquidity, for a discussion of debt reductions during 2009.
In October 2009, we entered into an agreement with the lenders in our Credit Agreement to extend the maturity of a portion of our Term Loan Facility and to amend certain provisions of the Credit Agreement. The extension provides for a $300.0 million tranche of the Term Loan Facility to have
its maturity extended from March 2013 to September 2015 in exchange for a higher interest rate spread on that portion of the loan. In the event we have not fully redeemed or refinanced the Floating Rate Senior Notes due 2014 by March 15, 2014, the extended portion of the Term Loan Facility will mature on that date. The extended portion of the loan now accrues interest at a rate of LIBOR plus 3.75% while the remainder of the Term Loan Facility continues to accrue interest at LIBOR plus 2.25%. Both portions of
the Term Loan Facility continue to amortize at the same 0.25% of the principal outstanding per quarter rate. The other amendments to the Credit Agreement primarily allow us to issue senior secured and unsecured notes in the bond market and increase amounts we can spend for acquisitions and selected debt repurchases.
The following chart shows scheduled principal payments due on long-term debt for the next five years and thereafter after the extension of $300.0 million of the Term Loan Facility in October 2009, as discussed above (in millions):
|
|
Face Amount |
|
|
Net Amount |
|
October 1 through December 31, 2009 |
|
$ |
6.2 |
|
|
$ |
6.2 |
|
2010 |
|
|
24.9 |
|
|
|
24.9 |
|
2011 |
|
|
24.2 |
|
|
|
24.2 |
|
2012 |
|
|
23.6 |
|
|
|
23.6 |
|
2013 |
|
|
440.5 |
|
|
|
440.5 |
|
2014 |
|
|
623.3 |
|
|
|
623.3 |
|
Thereafter |
|
|
559.9 |
|
|
|
554.0 |
|
Total |
|
$ |
1,702.6 |
|
|
$ |
1,696.7 |
|
The following table provides information regarding our Interest expense and amortization of debt discounts and fees presented in our condensed consolidated statements of operations (in millions):
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Interest expense |
|
$ |
27.9 |
|
|
$ |
38.7 |
|
|
$ |
90.2 |
|
|
$ |
126.2 |
|
Amortization of debt discounts and fees |
|
|
1.6 |
|
|
|
1.6 |
|
|
|
4.8 |
|
|
|
4.9 |
|
Interest expense and amortization of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
debt discounts and fees |
|
$ |
29.5 |
|
|
$ |
40.3 |
|
|
$ |
95.0 |
|
|
$ |
131.1 |
|
Interest Rate Swaps—
Interest Rate Swaps Not Designated as Hedging Instruments
In March 2006, we entered into an interest rate swap to effectively convert the floating rate of a portion of our Credit Agreement to a fixed rate in order to limit the variability of interest-related payments caused by changes in LIBOR. Under this interest rate swap agreement, we pay a fixed rate of 5.2% on an amortizing notional principal
of $1.1 billion, while the counterparties to this agreement pay a floating rate based on 3-month LIBOR. The termination date of this swap is March 10, 2011. The fair market value of this swap as of September 30, 2009 and December 31, 2008 was ($64.7) million and ($78.2) million, respectively, and is included in Accrued expenses and other current liabilities in our condensed consolidated balance
sheets. See Note 8, Long-term Debt, to the consolidated financial statements accompanying our 2008 Form 10-K for additional information related to this interest rate swap.
In June 2009, we entered into a receive-fixed swap as a mirror offset to $100.0 million of the $1.1 billion interest rate swap discussed above in order to reduce our effective fixed rate to total debt ratio. Under this interest rate swap agreement, we pay a variable rate based on 3-month LIBOR, while the counterparty to this agreement pays
a fixed rate of 5.2% on a notional principal of $100.0 million. Net settlements commenced in September 2009 and are made quarterly on the same settlement schedule as the $1.1 billion interest rate swap discussed above. The termination date of this swap is March 10, 2011. Our initial net investment in this swap was $6.4 million. The fair market value of this swap as of September 30, 2009 was $6.5 million. Of this amount, $4.7 million is included in Other current
assets with the remainder included in Other long-term assets in our condensed consolidated balance sheet.
These interest rate swaps are not designated as hedges. Therefore, changes in the fair value of these interest rate swaps during the three and nine months ended September 30, 2009 and 2008 have been included in current-period earnings as Loss on interest rate swaps.
During the three and nine months ended September 30, 2009, we made net cash settlement payments of $11.2 million and $30.3 million, respectively, to our counterparties. During the three and nine months ended September 30, 2008, we made net cash settlement payments of $7.3 million and $13.9 million, respectively, to our counterparties. Net
settlement payments or receipts on these swaps are included in the line item Loss on interest rate swaps in our condensed consolidated statements of operations.
Forward-Starting Interest Rate Swaps Designated as Cash Flow Hedges
In December 2008, we entered into a $100 million forward-starting interest rate swap as a cash flow hedge of future interest payments on our Term Loan Facility. Under this swap agreement, we will pay a fixed rate of 2.6% while the counterparty will pay a floating rate based on 3-month LIBOR. Net settlements will commence on June 10,
2011. The termination date of this swap is December 12, 2012. The fair market value of this swap as of September 30, 2009 and December 31, 2008 was $0.4 million and ($0.2) million, respectively, and is included in Other long-term assets and Accrued expenses and other current liabilities, respectively, in our condensed consolidated balance sheets.
In March 2009, we entered into an additional $100 million forward-starting interest rate swap as a cash flow hedge of future interest payments on our Term Loan Facility. Under this swap agreement, we will pay a fixed rate of 2.9% while the counterparty will pay a floating rate based on 3-month LIBOR. Net settlements will commence on June
10, 2011. The termination date of this swap is September 12, 2012. The fair market value of this swap as of September 30, 2009 was ($0.2) million and is included in Accrued expenses and other current liabilities in our condensed consolidated balance sheet.
Both forward-starting swaps are designated as cash flow hedges and are accounted for under the policies described in Note 1, Summary of Significant Accounting Policies, to the consolidated financial statements accompanying our 2008 Form 10-K. The effective portion of changes in the
fair value of these cash flow hedges is deferred as a component of other comprehensive income and is reclassified into earnings as part of interest expense in the same period in which the forecasted transaction impacts earnings.
See also Note 7, Fair Value Measurements.
6. Guarantees:
Primarily in conjunction with the sale of certain facilities, including the sale of our surgery centers, outpatient, and diagnostic divisions during 2007, HealthSouth assigned, or remained as a guarantor on, the leases of certain properties and equipment to certain purchasers and, as a condition of the lease, agreed to act as a guarantor
of the purchaser’s performance on the lease. HealthSouth also remained as a guarantor to certain purchase contracts that were assigned to the buyer of our diagnostic division in connection with the sale. Should the purchaser fail to pay the obligations due on these leases or contracts, the lessor or vendor would have contractual recourse against us.
As of September 30, 2009, we were secondarily liable for 84 such guarantees. The remaining terms of these guarantees ranged from one month to 117 months. If we were required to perform under all such guarantees, the maximum amount we would be required to pay approximated $51.9 million.
We have not recorded a liability for these guarantees, as we do not believe it is probable we will have to perform under these agreements. If we are required to perform under these guarantees, we could potentially have recourse against the purchaser for recovery of any amounts paid. In addition, the purchasers of our surgery centers, outpatient,
and diagnostic divisions have agreed to seek releases from the lessors and vendors in favor of HealthSouth with respect to the guarantee obligations associated with these divestitures. To the extent the purchasers of these divisions are unable to obtain releases for HealthSouth, the purchasers have agreed to indemnify HealthSouth for damages incurred under the guarantee obligations, if any.
These guarantees are not secured by any assets under the agreements. As of September 30, 2009, we have not been required to make any material payments under these agreements.
7. Fair Value Measurements:
Our financial assets and liabilities that are measured at fair value on a recurring basis are as follows (in millions):
|
|
|
|
|
Fair Value Measurements at Reporting Date Using |
|
September 30, 2009 |
|
Fair Value |
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1) |
|
|
Significant Other Observable Inputs
(Level 2) |
|
|
Significant Unobservable Inputs
(Level 3) |
|
|
Valuation Technique (1) |
|
Current portion of restricted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
marketable securities |
|
$ |
7.7 |
|
|
$ |
7.7 |
|
|
$ |
- |
|
|
$ |
- |
|
|
|
M |
|
Other current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities |
|
|
0.5 |
|
|
|
0.5 |
|
|
|
- |
|
|
|
- |
|
|
|
M |
|
June 2009 trading swap |
|
|
4.7 |
|
|
|
- |
|
|
|
4.7 |
|
|
|
- |
|
|
|
I |
|
Other long-term assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted marketable securities |
|
|
15.6 |
|
|
|
15.6 |
|
|
|
- |
|
|
|
- |
|
|
|
M |
|
December 2008 forward-starting swap |
|
|
0.4 |
|
|
|
- |
|
|
|
0.4 |
|
|
|
- |
|
|
|
I |
|
June 2009 trading swap |
|
|
1.8 |
|
|
|
- |
|
|
|
1.8 |
|
|
|
- |
|
|
|
I |
|
Accrued expenses and other current |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 2006 trading swap |
|
|
(64.7 |
) |
|
|
- |
|
|
|
(64.7 |
) |
|
|
- |
|
|
|
I |
|
March 2009 forward-starting swap |
|
|
(0.2 |
) |
|
|
- |
|
|
|
(0.2 |
) |
|
|
- |
|
|
|
I |
|
(1) |
The three valuation techniques are: market approach (M), cost approach (C), and income approach (I). |
In addition to assets and liabilities recorded at fair value on a recurring basis, we are also required to record assets and liabilities at fair value on a nonrecurring basis. Generally, assets are recorded at fair value on a nonrecurring basis as a result of impairment charges or similar adjustments made to the carrying value of the applicable
assets. Assets measured at fair value on a nonrecurring basis are as follows (in millions):
|
|
|
|
|
Fair Value Measurements at Reporting |
|
|
|
|
|
|
|
|
|
|
|
|
Date Using |
|
|
Total Losses |
|
|
|
Net Carrying Value as of September 30, 2009 |
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1) |
|
|
Significant Other Observable Inputs
(Level 2) |
|
|
Significant Unobservable Inputs
(Level 3) |
|
|
Three Months Ended September 30, 2009 |
|
|
Nine Months Ended September 30, 2009 |
|
Property and equipment |
|
$ |
671.5 |
|
|
$ |
- |
|
|
$ |
671.5 |
|
|
$ |
- |
|
|
$ |
4.0 |
|
|
$ |
4.0 |
|
Investments in and advances |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to nonconsolidated affiliates |
|
|
1.7 |
|
|
|
|
|
|
|
|
|
|
|
1.7 |
|
|
|
0.4 |
|
|
|
0.4 |
|
Other long-term assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets held for sale |
|
|
28.0 |
|
|
|
- |
|
|
|
28.0 |
|
|
|
- |
|
|
|
0.4 |
|
|
|
0.9 |
|
The above losses represent our write-down of certain assets to their estimated fair value based on offers we received from third parties to acquire the assets or other market conditions. The $4.0 million charge related to Property and equipment is
included in Impairment of long-lived assets in our condensed consolidated statements of operations for the three and nine months ended September 30, 2009. The loss related to Investments in and advances to nonconsolidated affiliates is included in Other Income in our condensed consolidated statements of operations for the three and nine months
ended September 30, 2009. The losses related to assets held for sale are included in Loss on disposal of assets in our condensed consolidated statements of operations for the three and nine months ended September 30, 2009. In addition, during the nine months ended September 30, 2008, we recorded an impairment charge of $0.6 million. This charge represented our write-down of certain long-lived assets associated with one of our hospitals to their estimated
fair value based on an offer we received from a third party to acquire the assets. During the three and nine months ended September 30, 2008, we also recorded $8.4 million and $9.0 million, respectively, of impairment charges as part of our results of discontinued operations. See Note 16, Assets Held for Sale and Results of Discontinued Operations, to the consolidated financial statements included in our 2008 Form 10-K.
The loss associated with Investments in and advances to nonconsolidated affiliates resulted from an other-than-temporary impairment of an investment accounted for using the cost method of accounting. The investment was valued using its
published net asset value discounted due to recent market fluctuations, the illiquid nature of the investment, and proposed changes to the investment’s structure. More specifically, and because we elected a liquidation option with regard to this investment, we discounted the net asset value of our holdings to account for anticipated sales of assets within this investment at prices lower than the currently stated net asset value.
The carrying value equals fair value for our financial instruments that are not included in the table below and are classified as current in our condensed consolidated balance sheets. The carrying amounts and estimated fair values for all of our other financial instruments are presented in the following table (in millions):
|
|
As of September 30, 2009 |
|
|
As of December 31, 2008 |
|
|
|
Carrying Amount |
|
|
Estimated Fair Value |
|
|
Carrying Amount |
|
|
Estimated Fair Value |
|
Interest rate swap agreements: |
|
|
|
|
|
|
|
|
|
|
|
|
March 2006 trading swap |
|
$ |
(64.7 |
) |
|
$ |
(64.7 |
) |
|
$ |
(78.2 |
) |
|
$ |
(78.2 |
) |
December 2008 forward-starting swap |
|
|
0.4 |
|
|
|
0.4 |
|
|
|
(0.2 |
) |
|
|
(0.2 |
) |
March 2009 forward-starting swap |
|
|
(0.2 |
) |
|
|
(0.2 |
) |
|
|
- |
|
|
|
- |
|
June 2009 trading swap |
|
|
6.5 |
|
|
|
6.5 |
|
|
|
- |
|
|
|
- |
|
Long-term debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances under $400 million revolving |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
credit facility |
|
|
- |
|
|
|
- |
|
|
|
40.0 |
|
|
|
28.4 |
|
Term Loan Facility |
|
|
753.2 |
|
|
|
722.1 |
|
|
|
783.6 |
|
|
|
597.5 |
|
8.375% Senior Notes due 2011 |
|
|
0.3 |
|
|
|
0.3 |
|
|
|
0.3 |
|
|
|
0.3 |
|
7.625% Senior Notes due 2012 |
|
|
1.5 |
|
|
|
1.5 |
|
|
|
1.5 |
|
|
|
1.5 |
|
Floating Rate Senior Notes due 2014 |
|
|
329.6 |
|
|
|
321.4 |
|
|
|
366.0 |
|
|
|
292.1 |
|
10.75% Senior Notes due 2016 |
|
|
494.7 |
|
|
|
542.5 |
|
|
|
494.3 |
|
|
|
459.0 |
|
Other notes payable |
|
|
12.5 |
|
|
|
12.5 |
|
|
|
12.8 |
|
|
|
12.8 |
|
Financial commitments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Letters of credit |
|
|
- |
|
|
|
94.1 |
|
|
|
- |
|
|
|
152.7 |
|
8. Assets Held for Sale and Results of Discontinued Operations:
During the first quarter of 2009, we terminated the leases associated with certain rental properties. As a result, we reclassified our condensed consolidated balance sheet as of December 31, 2008, our condensed consolidated statements of operations for the three and nine months ended September 30, 2008, and our condensed consolidated statement
of cash flows for the nine months ended September 30, 2008 to include these properties and their results of operations in discontinued operations.
The operating results of discontinued operations are as follows (in millions):
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Net operating revenues |
|
$ |
2.3 |
|
|
$ |
8.7 |
|
|
$ |
8.0 |
|
|
$ |
27.1 |
|
Costs and expenses |
|
|
8.4 |
|
|
|
3.1 |
|
|
|
15.2 |
|
|
|
30.2 |
|
Impairments |
|
|
- |
|
|
|
8.4 |
|
|
|
- |
|
|
|
9.0 |
|
Loss from discontinued operations |
|
|
(6.1 |
) |
|
|
(2.8 |
) |
|
|
(7.2 |
) |
|
|
(12.1 |
) |
Gain (loss) on disposal of assets of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
discontinued operations |
|
|
0.7 |
|
|
|
(0.1 |
) |
|
|
0.4 |
|
|
|
(0.1 |
) |
Gain on divestitures of divisions |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
18.7 |
|
Income tax benefit |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.7 |
|
(Loss) income from discontinued |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations, net of tax |
|
$ |
(5.4 |
) |
|
$ |
(2.9 |
) |
|
$ |
(6.8 |
) |
|
$ |
7.2 |
|
Assets and liabilities held for sale consist of the following (in millions):
|
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Assets: |
|
|
|
|
|
|
Current assets |
|
$ |
2.0 |
|
|
$ |
2.8 |
|
Long-term assets |
|
|
28.0 |
|
|
|
24.9 |
|
Total assets |
|
$ |
30.0 |
|
|
$ |
27.7 |
|
Liabilities: |
|
|
|
|
|
|
|
|
Current liabilities |
|
$ |
32.7 |
|
|
$ |
36.9 |
|
Long-term liabilities |
|
|
5.5 |
|
|
|
4.7 |
|
Total long-term liabilities |
|
$ |
38.2 |
|
|
$ |
41.6 |
|
Assets and liabilities held for sale in the above table primarily relate to the one surgery facility that is awaiting transfer to ASC, as defined and discussed below, as of September 30, 2009.
Current assets and long-term assets in the above table are included in Other current assets and Other long-term assets, respectively, in our condensed consolidated balance sheets. Current liabilities and long-term liabilities
in the above table are included in Accrued expenses and other current liabilities and Other long-term liabilities, respectively, in our condensed consolidated balance sheets.
Surgery Centers Division—
As discussed in Note 16, Assets Held for Sale and Results of Discontinued Operations, to the consolidated financial statements accompanying our 2008 Form 10-K, the transaction to sell our surgery centers division to ASC Acquisition LLC (“ASC”) closed on June 29, 2007, other
than with respect to certain facilities for which approvals for the transfer to ASC had not yet been received as of such date. In connection with the closing, HealthSouth and ASC agreed, among other things, that HealthSouth would retain its ownership interest in certain surgery centers until regulatory approvals for the transfer of such surgery centers to ASC were received. In that regard, ASC would manage the operations of such surgery centers until such approvals had been received, and HealthSouth and ASC entered
into arrangements designed to place them in approximately the same economic position, whether positive or negative, they would have occupied had all regulatory approvals been received prior to closing. Upon receipt of such approvals, HealthSouth’s ownership interest in such facilities would be transferred to ASC. No portion of the purchase price was withheld at closing pending the transfer of these facilities. In the event regulatory approval for the transfer of any such facility is not received prior to
December 31, 2009, HealthSouth would be required to return to ASC a portion of the purchase price allocated to such facility.
As of September 30, 2009, one facility in Illinois remained pending due to a relocation project that was completed during the second quarter of 2009. While the transfer of this facility pended, we maintained our management agreement with ASC. In October 2009, we received approval for the transfer of this facility to ASC, and the transfer
to ASC became effective as of November 1, 2009.
The assets and liabilities for the surgery centers division as of September 30, 2009 and December 31, 2008 include the assets and liabilities associated with the facility that had not been transferred as of those dates, as these assets were not transferred to ASC until November 2009, once approval for such transfer had been obtained.
As of both balance sheet dates, we had deferred $26.5 million of cash proceeds received at closing associated with this facility. The results of operations of this facility will be reported in discontinued operations through its November 2009 transfer date.
During the first quarter of 2008, we recorded a $19.3 million post-tax gain on disposal associated with five Illinois facilities that were transferred during the quarter. We expect to record an additional post-tax gain of approximately $14 million for the facility that was transferred to ASC during the fourth quarter of 2009.
Our Provision for income tax benefit of $1.7 million for the three months ended September 30, 2009 includes the following: (1) current income tax benefit of $3.9 million primarily attributable to state income tax refunds received, or expected to be received, offset by (2) current
income tax expense of $1.7 million attributable to state income tax expense of subsidiaries which have separate state filing requirements and federal income taxes for subsidiaries not included in our federal consolidated income tax return and (3) deferred income tax expense of $0.5 million attributable to increases in basis differences of certain indefinite-lived assets.
Our Provision for income tax benefit of $0.8 million for the nine months ended September 30, 2009 includes the following: (1) current income tax benefit of $9.1 million primarily attributable to state income tax refunds received, or expected to be received, offset by (2) current
income tax expense of $5.9 million attributable to state income tax expense of subsidiaries which have separate state filing requirements and federal income taxes for subsidiaries not included in our federal consolidated income tax return and (3) deferred income tax expense of $2.4 million attributable to increases in basis differences of certain indefinite-lived assets and a decrease in our deferred tax asset related to the Alternative Minimum Tax Refundable Tax Credit.
We have significant federal and state net operating loss carryforwards (“NOLs”) that expire in various amounts at varying times through 2028. We assess the realization of our deferred tax assets quarterly to determine whether an adjustment to our valuation allowance is required. After consideration of all evidence, both positive
and negative, management concluded it is more likely than not we will not realize a portion of our deferred tax assets. Therefore, a valuation allowance has been established on substantially all of our net deferred tax assets. No valuation allowance has been provided on deferred assets and liabilities attributable to subsidiaries not included within the federal consolidated group.
Our utilization of NOLs is subject to the Internal Revenue Code Section 382 (“Section 382”) limitation and may be limited in the event of certain cumulative changes in ownership interests of significant shareholders over a three-year period in excess of 50%. Section 382 imposes an annual limitation on the use of these losses to
an amount equal to the value of a company at the time of an ownership change multiplied by the long-term tax exempt rate. At this time, we do not believe these limitations will limit our ability to use any NOLs before they expire. However, no such assurances can be provided.
Our Provision for income tax benefit of $22.5 million for the three months ended September 30, 2008, includes the following: (1) current income tax benefit of approximately $25.1 million primarily attributable to state income tax refunds received, or expected to be received,
and changes in the amount of unrecognized tax benefits offset by (2) current income tax expense of approximately $2.0 million attributable to state income tax expense of subsidiaries which have separate state filing requirements and federal income taxes for subsidiaries not included in our federal consolidated income tax return and (3) deferred income tax expense of approximately $0.6 million attributable to increases in the basis difference of certain indefinite-lived assets.
Our Provision for income tax benefit of $21.7 million for the nine months ended September 30, 2008, includes the following: (1) current income tax benefit of approximately $44.2 million primarily attributable to state income tax refunds received, or expected to be received,
and changes in the amount of unrecognized tax benefits offset by (2) current income tax expense of approximately $20.5 million attributable to a revision in previously estimated federal income tax refunds and related interest as a result of our settlement with the Internal Revenue Service (the “IRS”) for the tax years 2000 through 2003, state income tax expense of subsidiaries which have separate state filing requirements, and federal income taxes for subsidiaries not included in our federal consolidated
income tax return and (3) deferred income tax expense of approximately $2.0 million attributable to increases in the basis difference of certain indefinite-lived assets.
As of December 31, 2008, total remaining gross unrecognized tax benefits were $61.1 million, all of which would affect our effective tax rate if recognized. Total accrued interest expense related to unrecognized tax benefits was $2.9 million as of December 31, 2008. During the nine months ended September 30, 2009, the amount of
unrecognized benefits changed due primarily to the issuance of a Revenue Agent’s Report by the IRS in April 2009 related to the 2004 tax year which reopened statutes of limitation in certain states where amended returns are required to be filed. Total remaining gross unrecognized tax benefits were $59.4 million as of September 30, 2009, all of which would affect our effective tax rate if recognized. Total accrued interest expense related to unrecognized tax benefits as of September 30, 2009 was $3.0 million.
Our continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. For the three and nine months ended September 30, 2009 and 2008, we recorded $0.4 million and $1.9 million, respectively, of net interest income as part of our income tax provision. For the three and nine months ended September
30, 2008, we recorded $0.7 million and $(2.1) million, respectively, of net interest income (expense) as part of our income tax provision. Total accrued interest income was $1.3 million and $17.5 million as of September 30, 2009 and December 31, 2008, respectively.
HealthSouth and its subsidiaries’ federal and state income tax returns are periodically examined by various regulatory taxing authorities. In connection with such examinations, we have settled federal income tax examinations with the IRS for all tax years through 2004. In April 2009, the IRS initiated an audit of the 2005 to 2007 tax
years.
For the tax years that remain open under the applicable statutes of limitations, amounts related to these unrecognized tax benefits have been considered by management in its estimate of our potential net recovery of prior years’ income taxes. However, at this time, we cannot estimate a range of the reasonably possible change that may
occur.
We continue to actively pursue the maximization of our remaining state income tax refund claims. The process of resolving these tax matters with the applicable taxing authorities will continue in 2009. Although management believes its estimates and judgments related to these claims are reasonable, depending on the ultimate resolution of these
tax matters, actual amounts recovered could differ from management’s estimates, and such differences could be material.
10. Earnings per Common Share:
The calculation of earnings per common share is based on the weighted-average number of our common shares outstanding during the applicable period. The calculation for diluted earnings per common share recognizes the effect of all dilutive potential common shares that were outstanding during the respective periods, unless their impact would
be antidilutive. The following table sets forth the computation of basic and diluted earnings per common share (in millions, except per share amounts):
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
30.2 |
|
|
$ |
15.7 |
|
|
$ |
88.7 |
|
|
$ |
84.4 |
|
Less: Net income attributable to noncontrolling |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interests included in continuing operations |
|
|
(8.0 |
) |
|
|
(5.9 |
) |
|
|
(25.2 |
) |
|
|
(21.7 |
) |
Less: Convertible perpetual preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
dividends |
|
|
(6.5 |
) |
|
|
(6.5 |
) |
|
|
(19.5 |
) |
|
|
(19.5 |
) |
Income from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
attributable to HealthSouth common |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shareholders |
|
|
15.7 |
|
|
|
3.3 |
|
|
|
44.0 |
|
|
|
43.2 |
|
(Loss) income from discontinued operations, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of tax, attributable to HealthSouth common |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shareholders |
|
|
(5.4 |
) |
|
|
(3.2 |
) |
|
|
(7.3 |
) |
|
|
7.8 |
|
Net income attributable to HealthSouth |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common shareholders |
|
$ |
10.3 |
|
|
$ |
0.1 |
|
|
$ |
36.7 |
|
|
$ |
51.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding |
|
|
87.6 |
|
|
|
87.4 |
|
|
|
87.6 |
|
|
|
81.6 |
|
Diluted weighted average common shares outstanding |
|
|
102.2 |
|
|
|
101.0 |
|
|
|
101.6 |
|
|
|
95.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
attributable to HealthSouth common shareholders |
|
$ |
0.18 |
|
|
$ |
0.04 |
|
|
$ |
0.50 |
|
|
$ |
0.53 |
|
(Loss) income from discontinued operations, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of tax, attributable to HealthSouth common |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shareholders |
|
|
(0.06 |
) |
|
|
(0.04 |
) |
|
|
(0.08 |
) |
|
|
0.10 |
|
Net income attributable to HealthSouth |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common shareholders |
|
$ |
0.12 |
|
|
$ |
0.00 |
|
|
$ |
0.42 |
|
|
$ |
0.63 |
|
Diluted earnings per share report the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. These potential shares include dilutive stock options, restricted stock awards, restricted stock units, and convertible perpetual preferred stock. For the three months
ended September 30, 2009 and 2008, the number of potential shares approximated 14.6 million and 13.6 million, respectively. For the nine months ended September 30, 2009 and 2008, the number of potential shares approximated 14.0 million and 13.5 million, respectively. For the three and nine months ended September 30, 2009 and 2008, approximately 13.1 million of the potential shares related to our Convertible perpetual preferred stock. For
the three and nine months ended September 30, 2009 and 2008, adding back the dividends for the Convertible perpetual preferred stock to our Income from continuing operations attributable to HealthSouth common shareholders causes a per share increase when calculating diluted earnings per common share resulting in an antidilutive per share amount. Therefore, basic and diluted earnings per common share
are the same for the three and nine months ended September 30, 2009 and 2008.
Options to purchase 2.4 million shares of common stock were outstanding during each period presented but were not included in the computation of diluted weighted-average shares because to do so would have been antidilutive.
On September 30, 2009, we issued 5.0 million shares of common stock and 8.2 million common stock warrants associated with our class action securities litigation. For additional information, see Note 11, Settlements, "Securities Litigation Settlement."
See Note 18, Earnings (Loss) per Common Share, to the consolidated financial statements accompanying our 2008 Form 10-K for additional information related to common stock, common stock warrants, and convertible perpetual preferred stock.
11. Settlements
Securities Litigation Settlement—
On June 24, 2003, the United States District Court for the Northern District of Alabama consolidated a number of separate securities lawsuits filed against us under the caption In re HealthSouth Corp. Securities Litigation, Master Consolidation File No. CV-03-BE-1500-S (the “Consolidated
Securities Action”), which the court divided into two subclasses:
• |
Complaints based on purchases of our common stock were grouped under the caption In re HealthSouth Corp. Stockholder Litigation, Consolidated Case No. CV-03-BE-1501-S, which was further divided into complaints based on purchases of our common stock in the open market (grouped under the caption In
re HealthSouth Corp. Stockholder Litigation, Consolidated Case No. CV-03-BE-1501-S) and claims based on the receipt of our common stock in mergers (grouped under the caption HealthSouth Merger Cases, Consolidated Case No. CV-98-2777-S); and |
• |
Complaints based on purchases of our debt securities were grouped under the caption In re HealthSouth Corp. Bondholder Litigation, Consolidated Case No. CV-03-BE-1502-S. |
The Consolidated Securities Action and the related settlement of that litigation are more fully described in Note 20, Settlements, “Securities Litigation Settlement,” and Note 21, Contingencies and Other Commitments, “Securities
Litigation,” to the consolidated financial statements accompanying our 2008 Form 10-K.
Despite approval of the Consolidated Securities Action settlement, there are class members who have elected to opt out of the settlement and pursue claims individually. In addition, AIG Global Investment Corporation (“AIG”), which failed to opt out of the class settlement
on a timely basis, has requested that the court allow it to opt out despite missing the district court’s deadline. In an order dated January 11, 2007, the court denied AIG’s request for an expansion of time to opt out. On April 17, 2007, AIG filed a notice of appeal with the Eleventh Circuit Court of Appeals. The appeal was consolidated with the appeal by Mr. Scrushy of one provision in the bar order in the Consolidated Securities Action settlement. On June 17, 2009, the Eleventh Circuit Court
of Appeals rejected the two appeals and affirmed the district court’s approval of the settlement.
Under the settlement, the claims brought in the Consolidated Securities Action against us and certain of our former directors and officers were settled in exchange for aggregate consideration of $445.0 million, consisting of HealthSouth common stock and warrants valued at $215.0 million and cash payments by our insurance carriers of $230.0
million. The opportunity for Mr. Scrushy and AIG to seek review of the June 17, 2009 decision by the Eleventh Circuit Court of Appeals lapsed on September 15, 2009. Accordingly, on September 30, 2009, we issued an aggregate of 5,023,732 shares of common stock and 8,151,265 warrants to purchase our common stock in full satisfaction of our obligation to do so under the Consolidated Securities Action settlement. Pursuant to the Consolidated Securities Action settlement, the process for final distribution of the
cash and securities to qualified claimants will be handled by counsel for the plaintiffs and the administrator of the settlement funds.
In connection with the Consolidated Securities Action settlement, we recorded a charge of $215.0 million as Government, class action, and related settlements expense in our 2005 consolidated statement of operations. During each quarter subsequent to the initial recording of this liability,
we reduced or increased our liability for this settlement based on the value of our common stock and the associated common stock warrants underlying the settlement. During the three and nine months ended September 30, 2009, we increased our liability for this settlement by $8.2 million and $41.9 million, respectively, based on the value of our common stock and the associated common stock warrants at each period end. During the three and nine months ended September 30, 2008, we increased (reduced) our liability
for this settlement by $14.7 million and ($28.6) million, respectively, based on the value of our common stock and the associated common stock warrants at each period end. When the underlying common stock and warrants were issued on September 30, 2009, the corresponding liability included in Government, class action, and related settlements was $116.5 million. The corresponding liability included in Government,
class action, and related settlements in our condensed consolidated balance sheet as of December 31, 2008 was $74.6 million.
In addition, in order to state the total liability related to the Consolidated Securities Action settlement at the aggregate value of the consideration to be exchanged for the securities to be issued by us and the cash to be paid by the insurers, we recorded a $230.0 million liability in Government,
class action, and related settlements. We also recorded a related receivable from our insurers in the amount of $230.0 million as Insurance recoveries receivable. During 2008, the United States District Court for the Northern District of Alabama issued three court orders awarding attorneys’ fees and expenses to the stockholder plaintiffs’ lead counsel, bondholder plaintiffs’ counsel, and merger subclass counsel. A portion of the
fees and expenses awarded under these court orders was disbursed from the cash portion of the settlement, which was funded by the insurance carriers and was held in escrow by the lead attorneys for the federal plaintiffs. We reduced our liability and corresponding receivable by $48.2 million, including $1.0 million in the first quarter of 2009, for disbursements made per these court orders. During the third quarter of 2009, we removed this liability and corresponding receivable from our condensed consolidated
balance sheet when our total liability related to the Securities Litigation Settlement was extinguished in conjunction with the issuance of the common stock and warrants described above.
UBS Litigation Settlement—
In August 2003, claims on behalf of HealthSouth were brought in the Tucker derivative litigation (described below in Note 12, Contingencies, “Derivative Litigation,”) against various UBS entities, alleging that from
at least 1998 through 2002, when those entities served as our investment bankers, they breached their duties of care, suppressed information, and aided and abetted in the ongoing fraud. The claims and counterclaims between HealthSouth and various UBS entities and the related settlement (the “UBS Settlement”) are more fully described in Note 20, Settlements, “UBS Litigation Settlement,” and Note 21, Contingencies
and Other Commitments, “Derivative Litigation,” to the consolidated financial statements accompanying our 2008 Form 10-K.
On January 13, 2009, the Circuit Court of Jefferson County, Alabama entered an order approving the UBS Settlement under which we received $100.0 million in cash and a release of all claims by the UBS entities. That order also awarded to the derivative plaintiffs’ attorneys fees and expenses of $26.2 million to be paid from the $100.0
million in cash we received. Pursuant to the Consolidated Securities Action settlement, we are obligated to pay 25% of the net settlement proceeds, after deducting all of our costs and expenses in connection with the Tucker derivative litigation including fees and expenses of the derivative counsel and our counsel, to the plaintiffs in the Consolidated Securities Action. The UBS Settlement does not release our claims against any other defendants in the Tucker derivative
litigation, or against our former independent auditor, Ernst & Young, which remain pending in arbitration.
Capstone Litigation Settlement—
In August 2002, claims on behalf of HealthSouth were brought in the Tucker derivative litigation (described below in Note 12, Contingencies, “Derivative Litigation,”) against Capstone Capital Corporation, now known
as HR Acquisition I Corp. (“Capstone”), alleging misrepresentations, conspiracy, and aiding and abetting the breach of fiduciary duties by certain of our former executives. In particular, the claims pursued against Capstone relate to the sale and leaseback of 14 properties that we initially owned. On May 8, 2009, the Circuit Court of Jefferson County, Alabama entered an order approving a settlement agreement among us, the derivative plaintiffs and Capstone (the “Capstone Settlement”).
The settlement is final as the deadline for an appeal has passed.
Under the settlement, all claims against Capstone in the Tucker litigation were released, and Capstone agreed to the following:
· |
our existing leases on four properties have been restructured on terms more favorable and beneficial to us; |
· |
our financial obligations on certain other properties have been terminated and liquidated at an amount equal to 70% of the net present value of the future outstanding lease payment, with credit given toward that obligation for existing subtenant rental income assigned to a Capstone affiliate; |
· |
our obligation on the building lease for another property, and all obligations on an associated ground lease, terminated in June 2009 upon payment by us of $0.5 million and the transfer of unimproved land, valued at $1.5 million, near that property to a Capstone affiliate; and |
· |
we have been released as guarantor or primary obligor on leases for three other properties previously assigned to third-party purchasers. |
Under the settlement, we also paid $1.2 million in fees and expenses to the derivative plaintiffs’ attorneys, and Capstone reimbursed us for half of those fees and expenses.
Amounts recorded during the nine months ended September 30, 2009 related to the Capstone Settlement did not have a material effect on our financial position, results of operations, or cash flows. The Capstone Settlement does not release our claims against any other defendants in the Tucker derivative
litigation, or against our former independent auditor, Ernst & Young, which remain pending in arbitration.
12. Contingencies:
We operate in a highly regulated and litigious industry. As a result, various lawsuits, claims, and legal and regulatory proceedings have been and can be expected to be instituted or asserted against us. The resolution of any such lawsuits, claims, or legal and regulatory proceedings could materially and adversely affect our financial position,
results of operations, and cash flows in a given period.
Derivative Litigation—
All lawsuits purporting to be derivative complaints filed in the Circuit Court of Jefferson County, Alabama since 2002 have been consolidated and stayed in favor of the first-filed action captioned Tucker v. Scrushy, CV-02-5212, filed August 28, 2002. Derivative lawsuits in other
jurisdictions have been stayed. The Tucker complaint named as defendants a number of our former officers and directors. Tucker also asserted claims on our behalf against Ernst & Young and UBS entities, as well as against MedCenterDirect.com, Capstone, and G.G. Enterprises. When originally filed, the primary allegations in the Tucker case
involved self-dealing by Mr. Scrushy and other insiders through transactions with various entities allegedly controlled by Mr. Scrushy. The complaint was amended four times to add additional defendants and include claims of accounting fraud, improper Medicare billing practices, and additional self-dealing transactions. On June 18, 2009, the court found Mr. Scrushy liable for, and awarded us, $2.9 billion in damages as a result of breaches of fiduciary duty and fraud he perpetrated from 1996 to 2003. On July 24,
2009, Mr. Scrushy filed a notice of appeal of the trial court’s decision. No assurances can be given as to whether or when any amounts will be received from Mr. Scrushy, nor can we provide any assurances as to the collectability of any amounts owed from Mr. Scrushy. Therefore, no amounts related to this award are included in our condensed consolidated financial statements. The Tucker derivative litigation and the related settlements to date are more
fully described in Note 11, Settlements, to these condensed consolidated financial statements and Note 20, Settlements, and Note 21, Contingencies and Other Commitments, to the consolidated financial statements accompanying our 2008 Form 10-K.
On January 13, 2009, the Circuit Court of Jefferson County, Alabama approved the agreement among us, the derivative plaintiffs, and UBS Securities to settle the claims against and by UBS Securities in the Tucker litigation. See Note 11, Settlements,
“UBS Litigation Settlement,” to these condensed consolidated financial statements and Note 20, Settlements, “UBS Litigation Settlement,” and Note 21, Contingencies and Other Commitments, “Derivative Litigation,” to the consolidated financial statements accompanying our 2008 Form 10-K for further discussion of the UBS Settlement. On May 8, 2009, the Circuit Court
of Jefferson County, Alabama approved the agreement among us, the derivative plaintiffs, and Capstone to settle the claims against Capstone in the Tucker litigation. See Note 11, Settlements, “Capstone Litigation Settlement,” for further discussion.
The settlements with UBS Securities and Capstone do not release our claims against any other defendants in the Tucker litigation, or against our former independent auditor, Ernst & Young, which remain pending in arbitration. The Tucker derivative
claims against Ernst & Young and other defendants listed above remain pending and have moved through fact discovery on an expedited schedule that was coordinated with the federal securities claims by our former stockholders and bondholders against Mr. Scrushy, Ernst & Young, and UBS. We are no longer a party in the federal securities claims action (described in Note 11, Settlements, “Securities Litigation Settlement”) by our
former stockholders and bondholders against Mr. Scrushy, Ernst & Young, and UBS and are not a party to or beneficiary of any settlements between the plaintiffs and the remaining defendants.
Litigation By and Against Richard M. Scrushy—
On December 9, 2005, Mr. Scrushy filed a complaint in the Circuit Court of Jefferson County, Alabama, captioned Scrushy v. HealthSouth, CV-05-7364. The complaint alleged that, as a result of Mr. Scrushy’s removal from the position of chief executive officer in March
2003, we owed him “in excess of $70 million” pursuant to an employment agreement dated as of September 17, 2002. On December 28, 2005, we counterclaimed against Mr. Scrushy, asserting claims for breaches of fiduciary duty and fraud arising out of Mr. Scrushy’s tenure with us, and seeking compensatory damages, punitive damages, and disgorgement of wrongfully obtained benefits. We also asserted that any employment agreements with Mr. Scrushy should be void and unenforceable. On July 7, 2009,
we filed a motion for summary judgment on all claims by Mr. Scrushy based upon the Tucker court’s June 18, 2009 ruling that Mr. Scrushy’s employment agreements are void and rescinded. We understand that the court does not intend to rule on this motion at the present time.
On June 18, 2009, the Circuit Court of Jefferson County, Alabama ruled on our derivative claims against Mr. Scrushy presented during a non-jury trial held May 11 to May 26, 2009. The court held Mr. Scrushy responsible for fraud and breach of fiduciary duties and awarded us $2.9 billion in damages. On July 24, 2009, Mr. Scrushy filed a notice
of appeal of the trial court’s decision and briefing in the Supreme Court of Alabama is expected to follow. At this time, we cannot predict when and to what extent this judgment can be collected. We will pursue collection aggressively and to the fullest extent permitted by law. We, in coordination with derivative plaintiffs’ counsel, are attempting to locate, in order to collect the judgment, Mr. Scrushy’s current assets and other assets we believe were improperly disposed. Part of this effort
is a fraudulent transfer complaint filed on July 2, 2009 against Mr. Scrushy and a number of related entities by derivative plaintiffs for the benefit of HealthSouth in the Circuit Court of Jefferson County, Alabama, captioned Tucker v. Scrushy et al., CV-09-902145. In that same case, on August 26, 2009, Mr. Scrushy's wife, Leslie Scrushy, filed a counterclaim against the plaintiffs and HealthSouth seeking a declaration that certain personal property belongs
to her or her children and not to Mr. Scrushy. HealthSouth filed an answer in this case on September 24, 2009, denying Mrs. Scrushy's entitlement to the relief she seeks. While these proceedings continue, some of Mr. Scrushy’s assets have been seized and sold at auction pursuant to the state law procedure for collection of a judgment. Other assets will likewise be sold from time to time. We do not anticipate that any of his assets, or the proceeds from their sale, will be distributed to us or any other
party until the final disposition of Mr. Scrushy’s appeal of the verdict. We are obligated to pay 35% of any recovery from Mr. Scrushy along with reasonable out-of-pocket expenses to the attorneys for the derivative shareholder plaintiffs. Under the Consolidated Securities Action settlement, we must also pay the federal plaintiffs 25% of any net recovery from Mr. Scrushy. After payment of these obligations and other amounts related to professional fees and expenses, we expect our recovery to be between
40% and 45% of any amounts collected.
In March 2009, Mr. Scrushy filed an arbitration demand claiming that we are obligated under a separate indemnification agreement to indemnify him for certain costs associated with litigation and to advance to him his attorneys’ fees and costs. On May 14, 2009, the arbitrator ruled that we should deposit certain funds for attorneys’
fees in escrow until after a ruling in the Tucker litigation. As a result of the Tucker court’s June 18, 2009 ruling that Mr. Scrushy committed fraud and breached his fiduciary duties, the arbitrator allowed us to withdraw all funds from the escrow. Any future obligation to pay such fees would be tied to the success of his appeal of the June 18, 2009 ruling. As of December 31, 2008, we included
an estimate of those legal fees in Accrued expenses and other current liabilities in our condensed consolidated balance sheet. As a result of the court ruling that Mr. Scrushy committed fraud and breached his fiduciary duties, we have no obligation to indemnify him for any litigation costs. Therefore, we removed this accrual from our balance sheet and recorded an approximate $6.5 million gain in Professional
fees – accounting, tax, and legal during the nine months ended September 30, 2009.
Litigation By and Against Former Independent Auditor—
In March 2003, claims on behalf of HealthSouth were brought in the Tucker derivative litigation against Ernst & Young, alleging that from 1996 through 2002, when Ernst & Young served as our independent auditor, Ernst & Young acted recklessly and with gross negligence in
performing its duties, and specifically that Ernst & Young failed to perform reviews and audits of our financial statements with due professional care as required by law and by its contractual agreements with us. The claims further allege Ernst & Young either knew of or, in the exercise of due care, should have discovered and investigated the fraudulent and improper accounting practices being directed by certain officers and employees, and should have reported them to our board of directors and the Audit
Committee. The claims seek compensatory and punitive damages, disgorgement of fees received from us by Ernst & Young, and attorneys’ fees and costs. On March 18, 2005, Ernst & Young filed a lawsuit captioned Ernst & Young LLP v. HealthSouth Corp., CV-05-1618, in the Circuit Court of Jefferson County, Alabama. The complaint asserts that the filing of the claims against us was for the purpose of suspending any statute of limitations
applicable to those claims. The complaint alleges we provided Ernst & Young with fraudulent management representation letters, financial statements, invoices, bank reconciliations, and journal entries in an effort to conceal accounting fraud. Ernst & Young claims that as a result of our actions, Ernst & Young’s reputation has been injured and it has and will incur damages, expense, and legal fees. On April 1, 2005, we answered Ernst & Young’s claims and asserted
counterclaims related or identical to those asserted in the Tucker action. Upon Ernst & Young’s motion, the Alabama state court referred Ernst & Young’s claims and our counterclaims to arbitration pursuant to a clause in the engagement agreements between HealthSouth and Ernst & Young. On July 12, 2006, we and the derivative plaintiffs filed an arbitration demand on behalf of HealthSouth against Ernst & Young.
On August 7, 2006, Ernst & Young filed an answering statement and counterclaim in the arbitration reasserting the claims made in state court. In August 2006, we and the derivative plaintiffs agreed to jointly prosecute the claims against Ernst & Young in arbitration.
We are vigorously pursuing our claims against Ernst & Young and defending the claims against us. The three-person arbitration panel that will adjudicate the claims and counterclaims in arbitration has been selected under rules of the American Arbitration Association (the “AAA”). The arbitration process has begun. However,
pursuant to an order of the AAA panel, all aspects of the arbitration are confidential. Accordingly, we will not discuss the arbitration until there is a resolution. Based on the stage of litigation, and review of the current facts and circumstances, it is not possible to estimate the amount of loss, if any, or range of possible loss that might result from an adverse judgment or a settlement of this case.
Certain Regulatory Actions—
The False Claims Act, 18 U.S.C. § 287, allows private citizens, called “relators,” to institute civil proceedings alleging violations of the False Claims Act. These qui tam cases are generally sealed by the court at the time of filing. The only parties privy to the
information contained in the complaint are the relator, the federal government, and the presiding court. It is possible that qui tam lawsuits have been filed against us and that we are unaware of such filings or have been ordered by the presiding court not to discuss or disclose the filing of such lawsuits. We may be subject to liability under one or more undisclosed qui tam cases brought pursuant
to the False Claims Act.
General Medicine Action—
On August 16, 2004, General Medicine, P.C. (“General Medicine”) filed a lawsuit against us captioned General Medicine, P.C. v. HealthSouth Corp. seeking the recovery of allegedly fraudulent transfers involving assets of Horizon/CMS Healthcare Corporation (“Horizon/CMS”),
a former subsidiary of HealthSouth. The lawsuit was filed in the Circuit Court of Shelby County, Alabama, but was transferred to the Circuit Court of Jefferson County, Alabama on February 28, 2005, where it was assigned case number CV-05-1483 (the “Alabama Action”).
The underlying claim against Horizon/CMS originates from a services contract entered into in 1995 between General Medicine and Horizon/CMS whereby General Medicine agreed to provide medical director services to skilled nursing facilities owned by Horizon/CMS for a term of three years. Horizon/CMS terminated the agreement six months after
it was executed, and General Medicine then initiated a lawsuit in the United States District Court for the Eastern District of Michigan in 1996 (the “Michigan Action”). General Medicine’s complaint in the Michigan Action alleged that Horizon/CMS breached the services contract by wrongfully terminating General Medicine. We acquired Horizon/CMS in 1997 and sold it to Meadowbrook Healthcare, Inc. (“Meadowbrook”) in 2001 pursuant to a stock purchase agreement. In 2004, Meadowbrook consented
to the entry of a final judgment in the Michigan Action in the amount of $376 million (the “Consent Judgment”) in favor of General Medicine against Horizon/CMS for the alleged wrongful termination of the contract with General Medicine. We were not a party to the Michigan Action or the settlement negotiated by Meadowbrook. The settlement agreement which was the basis for the Consent Judgment provided that Meadowbrook would pay only $0.3 million to General Medicine to settle the Michigan Action. The
settlement agreement further provided that General Medicine would seek to recover the remaining balance of the Consent Judgment solely from us. The Alabama Action and the Michigan Action are more fully described in Note 21, Contingencies and Other Commitments, “General Medicine Action,” to the consolidated financial statements accompanying our 2008 Form 10-K.
On May 21, 2009, the court in the Michigan Action granted our motion to set aside the Consent Judgment on grounds that it was the product of fraud on the court and collusion by the parties. In its order setting aside the Consent Judgment, the court directed General Medicine and Horizon/CMS to confer with each other and the court’s case
manager to determine what further proceedings are appropriate in the Michigan Action. On June 16, 2009, Horizon/CMS filed a motion for clarification requesting the court rule that Horizon/CMS has fully complied with its obligations under the settlement agreement and is therefore not required to participate in any further proceedings. On June 17, 2009, we filed a motion to intervene in the Michigan Action for the limited purpose of protecting our interests and a motion to dismiss the Michigan Action as settled
and as a sanction for General Medicine’s fraud on the court. The court has not yet ruled on the pending motions.
Based on the stage of litigation, and review of the current facts and circumstances, it is not possible to estimate the amount of loss or range of possible loss that might result from an adverse judgment or settlement of this case.
United HealthCare Services Litigation—
On March 19, 2009, United HealthCare Services, Inc. and certain affiliates (“United”) filed an initial arbitration demand with the AAA against us relating to disputes over therapy service claims paid from 1997 through 2003. United alleges that during that period we submitted fraudulent claims, or claims otherwise in breach
of various provider agreements, for reimbursement of therapy services for patients insured under plans provided or administered by United. United requests an accounting and seeks compensatory damages in excess of $10 million, punitive damages, interest, and attorneys’ fees.
On April 14, 2009, we filed an action in Circuit Court in Jefferson County, Alabama, captioned HealthSouth Corp. v. United Healthcare Services, Inc., CV-2009-901288, seeking a declaratory judgment that we are not required to arbitrate the claims alleged in United’s arbitration
demand, seeking an order enjoining the AAA arbitration, and reserving our claims against United for underpayment and breach of contract. We assert that the AAA lacks jurisdiction to arbitrate these claims because we did not agree to arbitration and because, among other reasons, United’s arbitration demand disregards the conditions precedent to arbitration and other terms contained in the provider agreements upon which United relies, seeks damages expressly excluded from arbitration, and violates state insurance
laws which prohibit United from seeking to recoup claims many years after they were submitted and paid. United has not yet answered our complaint, but on May 18, 2009, United filed a motion with the court to compel arbitration of the claims presented in their AAA arbitration demand. On July 9, 2009, the court heard oral argument on United’s motion to compel arbitration. At this time, we do not know when the court will rule on the matters pending before it.
On May 1, 2009, we filed our answer requesting that the AAA arbitration be stayed pending the outcome of our action filed in Circuit Court in Jefferson County, challenging, as a preliminary matter, the AAA’s jurisdiction to arbitrate the claims alleged by United, denying the claims asserted by United, raising defenses and asserting
counterclaims including breaches of contract, breach of implied covenant of good faith and fair dealing. In connection with our counterclaim, we are seeking restitution for, among other things, United’s wrongful recoupment and underpayment of paid claims submitted and compensatory damages in excess of $10 million, together with interest and the costs, fees and expenses of arbitration.
On May 16, 2009, United filed with AAA an amended arbitration demand adding certain Select Medical Corporation (“Select”) subsidiaries as named respondents, which, with one exception, are successors to HealthSouth entities that signed one or more of the provider agreements at issue in United’s demand. Pursuant to the
Stock Purchase Agreement between us and Select, we are obligated to defend and indemnify Select and its affiliates named in United’s amended arbitration demand. See Note 16, Assets Held for Sale and Results of Discontinued Operations, and Note 21, Contingencies and Other Commitments, “Other Matters,” to the consolidated
financial statements accompanying our 2008 Form 10-K and Note 8, Assets Held for Sale and Results of Discontinued Operations, to these condensed consolidated financial statements. On June 11, 2009, answers were filed with AAA on behalf of all HealthSouth and Select respondents. These answers reiterated the denials, defenses, jurisdictional objections and challenges, and counterclaims previously asserted in our initial answer. The Select entities did not
assert any counterclaims. AAA has indicated it will request that the parties file contentions regarding the specific locales the parties believe would be appropriate to hear any arbitrations and from where any potential arbitration panels may be selected. Should the arbitration proceed, we intend to vigorously defend ourselves.
We intend to vigorously defend ourselves against United’s claims and to vigorously prosecute our counterclaims against United. Although we continue to believe in the merit of our claims and counterclaims and the lack of merit in United’s, we have included an estimate of this potential liability in our results of discontinued
operations for the three and nine months ended September 30, 2009, as this claim relates primarily to our former outpatient division. We consider this estimate to be adequate for these liability risks. However, there can be no assurance the ultimate liability, if any, will not exceed our estimate.
Other Litigation—
We have been named as a defendant in a lawsuit brought by individuals in the Circuit Court of Jefferson County, Alabama, Nichols v. HealthSouth Corp., CV-03-2023, filed March 28, 2003. The plaintiffs alleged that we, some of our former officers, and our former auditor engaged in
a scheme to overstate and misrepresent our earnings and financial position. The plaintiffs sought compensatory and punitive damages. The Nichols lawsuit is more fully described in Note 21, Contingencies and Other Commitments, “Other Litigation,” to the consolidated financial statements accompanying our 2008 Form 10-K. The Nichols lawsuit
is currently stayed in the Circuit Court. On January 12, 2009, the plaintiffs in that case filed a motion to lift the stay which the court subsequently denied. We intend to vigorously defend ourselves in this case. Based on the stage of litigation, and review of the current facts and circumstances, it is not possible to estimate the amount of loss or range of possible loss that might result from an adverse judgment or a settlement of this case.
Other Matters—
It is our obligation as a participant in Medicare and other federal healthcare programs to routinely conduct audits and reviews of the accuracy of our billing systems and other regulatory compliance matters. As a result of these reviews, we have made, and will continue to make, disclosures to the United States Department of Health and Human
Services Office of Inspector General relating to amounts we suspect represent over-payments from these programs, whether due to inaccurate billing or otherwise. Some of these disclosures have resulted in, or may result in, HealthSouth refunding amounts to Medicare or other federal healthcare programs. See Note 20, Settlements, to the consolidated financial statements accompanying our 2008 Form 10-K for additional information.
The reconstruction of our historical financial records resulted in the restatement of not only our 2001 and 2000 consolidated financial statements, but also the financial statements of certain of our subsidiary partnerships, including partnerships of our divested surgery centers division. We have completed settlement negotiations with outside
partners in the majority of our inpatient rehabilitation hospital partnerships. However, negotiations continue with certain of our former subsidiary partnerships, primarily within our surgery centers division. We have and may continue to incur additional charges to reduce the economic impact to our former partners.
We also face certain financial risks and challenges relating to our 2007 divestiture transactions (see Note 16, Assets Held for Sale and Results of Discontinued Operations, to the consolidated financial statements accompanying our 2008 Form 10-K and Note 8, Assets
Held for Sale and Results of Discontinued Operations, to these condensed consolidated financial statements) following their closing. These include indemnification obligations, disputes with former partners (as discussed above), and certain contract termination or repurchase rights that may have been triggered by the divestitures, which in the aggregate could have a material adverse effect on our financial position, results of operations, and cash flows. In addition, we continue to seek regulatory approval
for the transfer of one surgery center included in the divestiture transactions from the applicable agency.
13. Condensed Consolidating Financial Information:
The accompanying condensed consolidating financial information has been prepared and presented pursuant to SEC Regulation S-X, Rule 3-10, “Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered.” Each of the subsidiary guarantors is 100% owned by HealthSouth, and all guarantees
are full and unconditional and joint and several. HealthSouth’s investments in its consolidated subsidiaries, as well as guarantor subsidiaries’ investments in non-guarantor subsidiaries and non-guarantor subsidiaries’ investments in guarantor subsidiaries, are presented under the equity method of accounting.
As described in Note 8, Long-term Debt, to the consolidated financial statements accompanying our 2008 Form 10-K, the terms of our Credit Agreement restrict us from declaring or paying cash dividends on our common stock unless: (1) we are not in default under our Credit Agreement
and (2) the amount of the dividend, when added to the aggregate amount of certain other defined payments made during the same fiscal year, does not exceed certain maximum thresholds. However, as described in Note 9, Convertible Perpetual Preferred Stock, to the consolidated financial statements accompanying our 2008 Form 10-K, our Series A Preferred Stock generally provides for the payment of cash dividends, subject to certain limitations.
HealthSouth Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Condensed Consolidating Balance Sheet
|
|
As of September 30, 2009 |
|
|
|
HealthSouth Corporation |
|
|
Guarantor Subsidiaries |
|
|
Non Guarantor Subsidiaries |
|
|
Eliminating
Entries |
|
|
HealthSouth Consolidated |
|
|
|
(In Millions) |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
113.1 |
|
|
$ |
1.2 |
|
|
$ |
3.0 |
|
|
$ |
- |
|
|
$ |
117.3 |
|
Restricted cash |
|
|
2.5 |
|
|
|
- |
|
|
|
85.6 |
|
|
|
- |
|
|
|
88.1 |
|
Restricted marketable securities |
|
|
- |
|
|
|
- |
|
|
|
7.7 |
|
|
|
- |
|
|
|
7.7 |
|
Accounts receivable, net |
|
|
10.8 |
|
|
|
140.2 |
|
|
|
65.2 |
|
|
|
- |
|
|
|
216.2 |
|
Other current assets |
|
|
42.2 |
|
|
|
61.5 |
|
|
|
53.7 |
|
|
|
(102.4 |
) |
|
|
55.0 |
|
Total current assets |
|
|
168.6 |
|
|
|
202.9 |
|
|
|
215.2 |
|
|
|
(102.4 |
) |
|
|
484.3 |
|
Property and equipment, net |
|
|
40.0 |
|
|
|
481.2 |
|
|
|
150.3 |
|
|
|
- |
|
|
|
671.5 |
|
Goodwill |
|
|
- |
|
|
|
264.1 |
|
|
|
150.6 |
|
|
|
- |
|
|
|
414.7 |
|
Intangible assets, net |
|
|
0.4 |
|
|
|
31.0 |
|
|
|
6.3 |
|
|
|
- |
|
|
|
37.7 |
|
Investments in and advances to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
nonconsolidated affiliates |
|
|
3.3 |
|
|
|
20.6 |
|
|
|
3.7 |
|
|
|
- |
|
|
|
27.6 |
|
Income tax refund receivable |
|
|
8.6 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
8.6 |
|
Other long-term assets |
|
|
55.2 |
|
|
|
212.8 |
|
|
|
90.7 |
|
|
|
(248.7 |
) |
|
|
110.0 |
|
Intercompany receivable |
|
|
1,082.9 |
|
|
|
- |
|
|
|
- |
|
|
|
(1,082.9 |
) |
|
|
- |
|
Total assets |
|
$ |
1,359.0 |
|
|
$ |
1,212.6 |
|
|
$ |
616.8 |
|
|
$ |
(1,434.0 |
) |
|
$ |
1,754.4 |
|
Liabilities and Shareholders’ (Deficit) Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt |
|
$ |
8.2 |
|
|
$ |
10.0 |
|
|
$ |
3.7 |
|
|
$ |
- |
|
|
$ |
21.9 |
|
Accounts payable |
|
|
10.9 |
|
|
|
29.1 |
|
|
|
10.6 |
|
|
|
- |
|
|
|
50.6 |
|
Accrued expenses and other current |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
liabilities |
|
|
260.8 |
|
|
|
56.5 |
|
|
|
70.3 |
|
|
|
(17.8 |
) |
|
|
369.8 |
|
Government, class action, and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
related settlements |
|
|
6.1 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
6.1 |
|
Total current liabilities |
|
|
286.0 |
|
|
|
95.6 |
|
|
|
84.6 |
|
|
|
(17.8 |
) |
|
|
448.4 |
|
Long-term debt, net of current portion |
|
|
1,599.1 |
|
|
|
73.1 |
|
|
|
28.6 |
|
|
|
(26.0 |
) |
|
|
1,674.8 |
|
Other long-term liabilities |
|
|
89.2 |
|
|
|
11.2 |
|
|
|
77.0 |
|
|
|
(11.7 |
) |
|
|
165.7 |
|
Intercompany payable |
|
|
- |
|
|
|
933.5 |
|
|
|
1,214.2 |
|
|
|
(2,147.7 |
) |
|
|
- |
|
|
|
|
1,974.3 |
|
|
|
1,113.4 |
|
|
|
1,404.4 |
|
|
|
(2,203.2 |
) |
|
|
2,288.9 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible perpetual preferred stock |
|
|
387.4 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
387.4 |
|
Shareholders’ (deficit) equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HealthSouth shareholders' (deficit) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
equity |
|
|
(1,002.7 |
) |
|
|
99.2 |
|
|
|
(868.4 |
) |
|
|
769.2 |
|
|
|
(1,002.7 |
) |
Noncontrolling interests |
|
|
- |
|
|
|
- |
|
|
|
80.8 |
|
|
|
- |
|
|
|
80.8 |
|
Total shareholders' (deficit) equity |
|
|
(1,002.7 |
) |
|
|
99.2 |
|
|
|
(787.6 |
) |
|
|
769.2 |
|
|
|
(921.9 |
) |
Total liabilities and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shareholders’ (deficit) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
equity |
|
$ |
1,359.0 |
|
|
$ |
1,212.6 |
|
|
$ |
616.8 |
|
|
$ |
(1,434.0 |
) |
|
$ |
1,754.4 |
|
HealthSouth Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Condensed Consolidating Balance Sheet
|
|
As of December 31, 2008 |
|
|
|
HealthSouth Corporation |
|
|
Guarantor Subsidiaries |
|
|
Non Guarantor Subsidiaries |
|
|
Eliminating
Entries |
|
|
HealthSouth Consolidated |
|
|
|
(In Millions) |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
23.1 |
|
|
$ |
0.9 |
|
|
$ |
8.2 |
|
|
$ |
- |
|
|
$ |
32.2 |
|
Restricted cash |
|
|
100.2 |
|
|
|
- |
|
|
|
53.8 |
|
|
|
- |
|
|
|
154.0 |
|
Restricted marketable securities |
|
|
- |
|
|
|
- |
|
|
|
20.3 |
|
|
|
- |
|
|
|
20.3 |
|
Accounts receivable, net |
|
|
12.6 |
|
|
|
156.6 |
|
|
|
66.6 |
|
|
|
- |
|
|
|
235.8 |
|
Insurance recoveries receivable |
|
|
182.8 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
182.8 |
|
Other current assets |
|
|
37.3 |
|
|
|
62.9 |
|
|
|
45.9 |
|
|
|
(88.5 |
) |
|
|
57.6 |
|
Total current assets |
|
|
356.0 |
|
|
|
220.4 |
|
|
|
194.8 |
|
|
|
(88.5 |
) |
|
|
682.7 |
|
Property and equipment, net |
|
|
45.9 |
|
|
|
467.5 |
|
|
|
160.5 |
|
|
|
- |
|
|
|
673.9 |
|
Goodwill |
|
|
- |
|
|
|
264.1 |
|
|
|
150.6 |
|
|
|
- |
|
|
|
414.7 |
|
Intangible assets, net |
|
|
- |
|
|
|
34.7 |
|
|
|
8.1 |
|
|
|
- |
|
|
|
42.8 |
|
Investments in and advances to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
nonconsolidated affiliates |
|
|
2.8 |
|
|
|
29.6 |
|
|
|
4.3 |
|
|
|
- |
|
|
|
36.7 |
|
Income tax refund receivable |
|
|
55.9 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
55.9 |
|
Other long-term assets |
|
|
57.0 |
|
|
|
209.3 |
|
|
|
77.2 |
|
|
|
(252.0 |
) |
|
|
91.5 |
|
Intercompany receivable |
|
|
1,091.2 |
|
|
|
- |
|
|
|
- |
|
|
|
(1,091.2 |
) |
|
|
- |
|
Total assets |
|
$ |
1,608.8 |
|
|
$ |
1,225.6 |
|
|
$ |
595.5 |
|
|
$ |
(1,431.7 |
) |
|
$ |
1,998.2 |
|
Liabilities and Shareholders’ (Deficit) Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt |
|
$ |
10.2 |
|
|
$ |
10.0 |
|
|
$ |
3.4 |
|
|
$ |
- |
|
|
$ |
23.6 |
|
Accounts payable |
|
|
11.8 |
|
|
|
23.8 |
|
|
|
10.0 |
|
|
|
- |
|
|
|
45.6 |
|
Accrued expenses and other current |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
liabilities |
|
|
300.7 |
|
|
|
60.0 |
|
|
|
57.8 |
|
|
|
(10.0 |
) |
|
|
408.5 |
|
Government, class action, and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
related settlements |
|
|
268.5 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
268.5 |
|
Total current liabilities |
|
|
591.2 |
|
|
|
93.8 |
|
|
|
71.2 |
|
|
|
(10.0 |
) |
|
|
746.2 |
|
Long-term debt, net of current portion |
|
|
1,706.5 |
|
|
|
80.6 |
|
|
|
31.5 |
|
|
|
(29.0 |
) |
|
|
1,789.6 |
|
Other long-term liabilities |
|
|
93.1 |
|
|
|
12.2 |
|
|
|
62.8 |
|
|
|
(5.9 |
) |
|
|
162.2 |
|
Intercompany payable |
|
|
- |
|
|
|
956.6 |
|
|
|
1,207.6 |
|
|
|
(2,164.2 |
) |
|
|
- |
|
|
|
|
2,390.8 |
|
|
|
1,143.2 |
|
|
|
1,373.1 |
|
|
|
(2,209.1 |
) |
|
|
2,698.0 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible perpetual preferred stock |
|
|
387.4 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
387.4 |
|
Shareholders' (deficit) equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HealthSouth shareholders' (deficit) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
equity |
|
|
(1,169.4 |
) |
|
|
82.4 |
|
|
|
(859.8 |
) |
|
|
777.4 |
|
|
|
(1,169.4 |
) |
Noncontrolling interests |
|
|
- |
|
|
|
- |
|
|
|
82.2 |
|
|
|
- |
|
|
|
82.2 |
|
Total shareholders' (deficit) equity |
|
|
(1,169.4 |
) |
|
|
82.4 |
|
|
|
(777.6 |
) |
|
|
777.4 |
|
|
|
(1,087.2 |
) |
Total liabilities and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shareholders’ (deficit) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
equity |
|
$ |
1,608.8 |
|
|
$ |
1,225.6 |
|
|
$ |
595.5 |
|
|
$ |
(1,431.7 |
) |
|
$ |
1,998.2 |
|
HealthSouth Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Condensed Consolidating Statement of Operations
|
|
Three Months Ended September 30, 2009 |
|
|
|
HealthSouth Corporation |
|
|
Guarantor Subsidiaries |
|
|
Non Guarantor Subsidiaries |
|
|
Eliminating
Entries |
|
|
HealthSouth Consolidated |
|
|
|
(In Millions) |
|
Net operating revenues |
|
$ |
21.8 |
|
|
$ |
317.5 |
|
|
$ |
142.5 |
|
|
$ |
(9.1 |
) |
|
$ |
472.7 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
14.1 |
|
|
|
154.4 |
|
|
|
70.0 |
|
|
|
(3.1 |
) |
|
|
235.4 |
|
Other operating expenses |
|
|
4.0 |
|
|
|
44.7 |
|
|
|
21.8 |
|
|
|
(3.7 |
) |
|
|
66.8 |
|
General and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expenses |
|
|
26.0 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
26.0 |
|
Supplies |
|
|
1.8 |
|
|
|
18.2 |
|
|
|
7.7 |
|
|
|
- |
|
|
|
27.7 |
|
Depreciation and amortization |
|
|
2.4 |
|
|
|
11.6 |
|
|
|
4.1 |
|
|
|
- |
|
|
|
18.1 |
|
Impairment of long lived assets |
|
|
- |
|
|
|
4.0 |
|
|
|
- |
|
|
|
- |
|
|
|
4.0 |
|
Occupancy costs |
|
|
0.8 |
|
|
|
8.7 |
|
|
|
4.6 |
|
|
|
(2.3 |
) |
|
|
11.8 |
|
Provision for doubtful accounts |
|
|
0.8 |
|
|
|
5.1 |
|
|
|
2.0 |
|
|
|
- |
|
|
|
7.9 |
|
Loss on disposal of assets |
|
|
- |
|
|
|
0.7 |
|
|
|
- |
|
|
|
- |
|
|
|
0.7 |
|
Government, class action, and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
related settlements expense |
|
|
8.5 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
8.5 |
|
Professional fees—accounting, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
tax, and legal |
|
|
3.5 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3.5 |
|
Total operating expenses |
|
|
61.9 |
|
|
|
247.4 |
|
|
|
110.2 |
|
|
|
(9.1 |
) |
|
|
410.4 |
|
Interest expense and amortization of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
debt discounts and fees |
|
|
26.7 |
|
|
|
2.0 |
|
|
|
0.9 |
|
|
|
(0.1 |
) |
|
|
29.5 |
|
Other expense (income) |
|
|
0.2 |
|
|
|
(0.1 |
) |
|
|
(0.8 |
) |
|
|
0.1 |
|
|
|
(0.6 |
) |
Loss on interest rate swaps |
|
|
7.9 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
7.9 |
|
Equity in net income of nonconsolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
affiliates |
|
|
(0.8 |
) |
|
|
(2.1 |
) |
|
|
(0.1 |
) |
|
|
- |
|
|
|
(3.0 |
) |
Equity in net income of consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
affiliates |
|
|
(38.9 |
) |
|
|
(3.0 |
) |
|
|
(0.8 |
) |
|
|
42.7 |
|
|
|
- |
|
Management fees |
|
|
(20.8 |
) |
|
|
15.6 |
|
|
|
5.2 |
|
|
|
- |
|
|
|
- |
|
(Loss) income from continuing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations before income tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(benefit) expense |
|
|
(14.4 |
) |
|
|
57.7 |
|
|
|
27.9 |
|
|
|
(42.7 |
) |
|
|
28.5 |
|
Provision for income tax (benefit) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expense |
|
|
(36.6 |
) |
|
|
27.1 |
|
|
|
7.8 |
|
|
|
- |
|
|
|
(1.7 |
) |
Income from continuing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations |
|
|
22.2 |
|
|
|
30.6 |
|
|
|
20.1 |
|
|
|
(42.7 |
) |
|
|
30.2 |
|
(Loss) income from discontinued |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations, net of tax |
|
|
(5.4 |
) |
|
|
(0.5 |
) |
|
|
0.5 |
|
|
|
- |
|
|
|
(5.4 |
) |
Net income |
|
|
16.8 |
|
|
|
30.1 |
|
|
|
20.6 |
|
|
|
(42.7 |
) |
|
|
24.8 |
|
Less: Net income attributable to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
noncontrolling interests |
|
|
- |
|
|
|
- |
|
|
|
(8.0 |
) |
|
|
- |
|
|
|
(8.0 |
) |
Net income attributable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to HealthSouth |
|
$ |
16.8 |
|
|
$ |
30.1 |
|
|
$ |
12.6 |
|
|
$ |
(42.7 |
) |
|
$ |
16.8 |
|
HealthSouth Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Condensed Consolidating Statement of Operations
|
|
Three Months Ended September 30, 2008 |
|
|
|
HealthSouth Corporation |
|
|
Guarantor Subsidiaries |
|
|
Non Guarantor Subsidiaries |
|
|
Eliminating
Entries |
|
|
HealthSouth Consolidated |
|
|
|
(In Millions) |
|
Net operating revenues |
|
$ |
23.3 |
|
|
$ |
305.2 |
|
|
$ |
135.8 |
|
|
$ |
(8.8 |
) |
|
$ |
455.5 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
14.6 |
|
|
|
155.3 |
|
|
|
69.2 |
|
|
|
(2.8 |
) |
|
|
236.3 |
|
Other operating expenses |
|
|
4.9 |
|
|
|
45.7 |
|
|
|
21.5 |
|
|
|
(3.5 |
) |
|
|
68.6 |
|
General and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expenses |
|
|
25.5 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
25.5 |
|
Supplies |
|
|
1.9 |
|
|
|
17.1 |
|
|
|
7.2 |
|
|
|
- |
|
|
|
26.2 |
|
Depreciation and amortization |
|
|
2.8 |
|
|
|
10.9 |
|
|
|
4.2 |
|
|
|
- |
|
|
|
17.9 |
|
Occupancy costs |
|
|
1.0 |
|
|
|
9.1 |
|
|
|
4.7 |
|
|
|
(2.2 |
) |
|
|
12.6 |
|
Provision for doubtful accounts |
|
|
0.3 |
|
|
|
4.2 |
|
|
|
2.1 |
|
|
|
- |
|
|
|
6.6 |
|
Loss on disposal of assets |
|
|
0.2 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.2 |
|
Government, class action, and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
related settlements expense |
|
|
15.7 |
|
|
|
- |
|
|
|
1.4 |
|
|
|
- |
|
|
|
17.1 |
|
Professional fees—accounting, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
tax, and legal |
|
|
4.0 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4.0 |
|
Total operating expenses |
|
|
70.9 |
|
|
|
242.3 |
|
|
|
110.3 |
|
|
|
(8.5 |
) |
|
|
415.0 |
|
Loss on early extinguishment of debt |
|
|
2.1 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2.1 |
|
Interest expense and amortization of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
debt discounts and fees |
|
|
37.4 |
|
|
|
2.0 |
|
|
|
1.1 |
|
|
|
(0.2 |
) |
|
|
40.3 |
|
Other expense (income) |
|
|
0.3 |
|
|
|
(0.1 |
) |
|
|
(0.8 |
) |
|
|
0.2 |
|
|
|
(0.4 |
) |
Loss on interest rate swap |
|
|
8.0 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
8.0 |
|
Equity in net income of nonconsolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
affiliates |
|
|
(0.8 |
) |
|
|
(1.7 |
) |
|
|
(0.2 |
) |
|
|
- |
|
|
|
(2.7 |
) |
Equity in net income of consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
affiliates |
|
|
(31.9 |
) |
|
|
(3.8 |
) |
|
|
(0.5 |
) |
|
|
36.2 |
|
|
|
- |
|
Management fees |
|
|
(20.7 |
) |
|
|
15.4 |
|
|
|
5.3 |
|
|
|
- |
|
|
|
- |
|
(Loss) income from continuing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations before income tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(benefit) expense |
|
|
(42.0 |
) |
|
|
51.1 |
|
|
|
20.6 |
|
|
|
(36.5 |
) |
|
|
(6.8 |
) |
Provision for income tax (benefit) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expense |
|
|
(50.0 |
) |
|
|
21.9 |
|
|
|
5.6 |
|
|
|
- |
|
|
|
(22.5 |
) |
Income from continuing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations |
|
|
8.0 |
|
|
|
29.2 |
|
|
|
15.0 |
|
|
|
(36.5 |
) |
|
|
15.7 |
|
(Loss) income from discontinued |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations, net of tax |
|
|
(1.4 |
) |
|
|
(5.3 |
) |
|
|
3.5 |
|
|
|
0.3 |
|
|
|
(2.9 |
) |
Net income |
|
|
6.6 |
|
|
|
23.9 |
|
|
|
18.5 |
|
|
|
(36.2 |
) |
|
|
12.8 |
|
Less: Net income attributable to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
noncontrolling interests |
|
|
- |
|
|
|
- |
|
|
|
(6.2 |
) |
|
|
- |
|
|
|
(6.2 |
) |
Net income attributable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to HealthSouth |
|
$ |
6.6 |
|
|
$ |
23.9 |
|
|
$ |
12.3 |
|
|
$ |
(36.2 |
) |
|
$ |
6.6 |
|
HealthSouth Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Condensed Consolidating Statement of Operations
|
|
Nine Months Ended September 30, 2009 |
|
|
|
HealthSouth Corporation |
|
|
Guarantor Subsidiaries |
|
|
Non Guarantor Subsidiaries |
|
|
Eliminating
Entries |
|
|
HealthSouth Consolidated |
|
|
|
(In Millions) |
|
Net operating revenues |
|
$ |
68.2 |
|
|
$ |
965.2 |
|
|
$ |
425.5 |
|
|
$ |
(27.4 |
) |
|
$ |
1,431.5 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
42.5 |
|
|
|
467.5 |
|
|
|
208.5 |
|
|
|
(9.3 |
) |
|
|
709.2 |
|
Other operating expenses |
|
|
13.9 |
|
|
|
133.0 |
|
|
|
65.9 |
|
|
|
(11.2 |
) |
|
|
201.6 |
|
General and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expenses |
|
|
76.4 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
76.4 |
|
Supplies |
|
|
5.4 |
|
|
|
55.4 |
|
|
|
23.1 |
|
|
|
- |
|
|
|
83.9 |
|
Depreciation and amortization |
|
|
6.8 |
|
|
|
34.3 |
|
|
|
12.3 |
|
|
|
- |
|
|
|
53.4 |
|
Impairment of long lived assets |
|
|
- |
|
|
|
4.0 |
|
|
|
- |
|
|
|
- |
|
|
|
4.0 |
|
Occupancy costs |
|
|
3.0 |
|
|
|
26.0 |
|
|
|
13.8 |
|
|
|
(6.9 |
) |
|
|
35.9 |
|
Provision for doubtful accounts |
|
|
2.3 |
|
|
|
16.4 |
|
|
|
6.8 |
|
|
|
- |
|
|
|
25.5 |
|
Loss on disposal of assets |
|
|
- |
|
|
|
2.9 |
|
|
|
0.1 |
|
|
|
- |
|
|
|
3.0 |
|
Government, class action, and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
related settlements expense |
|
|
41.3 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
41.3 |
|
Professional fees—accounting, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
tax, and legal |
|
|
5.0 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5.0 |
|
Total operating expenses |
|
|
196.6 |
|
|
|
739.5 |
|
|
|
330.5 |
|
|
|
(27.4 |
) |
|
|
1,239.2 |
|
Gain on early extinguishment of debt |
|
|
(3.1 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(3.1 |
) |
Interest expense and amortization of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
debt discounts and fees |
|
|
86.6 |
|
|
|
6.1 |
|
|
|
2.5 |
|
|
|
(0.2 |
) |
|
|
95.0 |
|
Other expense (income) |
|
|
0.9 |
|
|
|
(0.2 |
) |
|
|
(2.3 |
) |
|
|
0.2 |
|
|
|
(1.4 |
) |
Loss on interest rate swaps |
|
|
16.7 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
16.7 |
|
Equity in net income of nonconsolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
affiliates |
|
|
(1.7 |
) |
|
|
(0.9 |
) |
|
|
(0.2 |
) |
|
|
- |
|
|
|
(2.8 |
) |
Equity in net income of consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
affiliates |
|
|
(120.9 |
) |
|
|
(8.3 |
) |
|
|
(2.6 |
) |
|
|
131.8 |
|
|
|
- |
|
Management fees |
|
|
(62.6 |
) |
|
|
47.1 |
|
|
|
15.5 |
|
|
|
- |
|
|
|
- |
|
(Loss) income from continuing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations before income tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(benefit) expense |
|
|
(44.3 |
) |
|
|
181.9 |
|
|
|
82.1 |
|
|
|
(131.8 |
) |
|
|
87.9 |
|
Provision for income tax (benefit) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expense |
|
|
(108.2 |
) |
|
|
84.7 |
|
|
|
22.7 |
|
|
|
- |
|
|
|
(0.8 |
) |
Income from continuing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations |
|
|
63.9 |
|
|
|
97.2 |
|
|
|
59.4 |
|
|
|
(131.8 |
) |
|
|
88.7 |
|
(Loss) income from discontinued |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations, net of tax |
|
|
(7.7 |
) |
|
|
(0.8 |
) |
|
|
1.7 |
|
|
|
- |
|
|
|
(6.8 |
) |
Net income |
|
|
56.2 |
|
|
|
96.4 |
|
|
|
61.1 |
|
|
|
(131.8 |
) |
|
|
81.9 |
|
Less: Net income attributable to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
noncontrolling interests |
|
|
- |
|
|
|
- |
|
|
|
(25.7 |
) |
|
|
- |
|
|
|
(25.7 |
) |
Net income attributable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to HealthSouth |
|
$ |
56.2 |
|
|
$ |
96.4 |
|
|
$ |
35.4 |
|
|
$ |
(131.8 |
) |
|
$ |
56.2 |
|
HealthSouth Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Condensed Consolidating Statement of Operations
|
|
Nine Months Ended September 30, 2008 |
|
|
|
HealthSouth Corporation |
|
|
Guarantor Subsidiaries |
|
|
Non Guarantor Subsidiaries |
|
|
Eliminating
Entries |
|
|
HealthSouth Consolidated |
|
|
|
(In Millions) |
|
Net operating revenues |
|
$ |
71.2 |
|
|
$ |
926.8 |
|
|
$ |
398.2 |
|
|
$ |
(19.9 |
) |
|
$ |
1,376.3 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
42.5 |
|
|
|
462.5 |
|
|
|
202.6 |
|
|
|
(6.8 |
) |
|
|
700.8 |
|
Other operating expenses |
|
|
15.8 |
|
|
|
133.5 |
|
|
|
58.0 |
|
|
|
(6.3 |
) |
|
|
201.0 |
|
General and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expenses |
|
|
78.8 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
78.8 |
|
Supplies |
|
|
5.9 |
|
|
|
53.1 |
|
|
|
22.1 |
|
|
|
- |
|
|
|
81.1 |
|
Depreciation and amortization |
|
|
20.4 |
|
|
|
32.1 |
|
|
|
12.8 |
|
|
|
- |
|
|
|
65.3 |
|
Impairment of long-lived assets |
|
|
- |
|
|
|
0.6 |
|
|
|
- |
|
|
|
- |
|
|
|
0.6 |
|
Occupancy costs |
|
|
3.0 |
|
|
|
26.5 |
|
|
|
13.9 |
|
|
|
(6.6 |
) |
|
|
36.8 |
|
Provision for doubtful accounts |
|
|
1.4 |
|
|
|
14.7 |
|
|
|
4.4 |
|
|
|
- |
|
|
|
20.5 |
|
(Gain) loss on disposal of assets |
|
|
(0.3 |
) |
|
|
1.2 |
|
|
|
(0.3 |
) |
|
|
- |
|
|
|
0.6 |
|
Government, class action, and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
related settlements expense |
|
|
(29.1 |
) |
|
|
(0.2 |
) |
|
|
1.4 |
|
|
|
- |
|
|
|
(27.9 |
) |
Professional fees—accounting, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
tax, and legal |
|
|
12.9 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
12.9 |
|
Total operating expenses |
|
|
151.3 |
|
|
|
724.0 |
|
|
|
314.9 |
|
|
|
(19.7 |
) |
|
|
1,170.5 |
|
Loss on early extinguishment of debt |
|
|
5.8 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5.8 |
|
Interest expense and amortization of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
debt discounts and fees |
|
|
122.4 |
|
|
|
6.1 |
|
|
|
3.6 |
|
|
|
(1.0 |
) |
|
|
131.1 |
|
Other expense (income) |
|
|
0.6 |
|
|
|
(0.2 |
) |
|
|
(3.5 |
) |
|
|
1.0 |
|
|
|
(2.1 |
) |
Loss on interest rate swap |
|
|
16.1 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
16.1 |
|
Equity in net income of nonconsolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
affiliates |
|
|
(2.1 |
) |
|
|
(5.5 |
) |
|
|
(0.2 |
) |
|
|
- |
|
|
|
(7.8 |
) |
Equity in net income of consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
affiliates— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
affiliates |
|
|
(18.8 |
) |
|
|
- |
|
|
|
- |
|
|
|
18.8 |
|
|
|
- |
|
Income from operations of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
consolidated affiliates |
|
|
(101.0 |
) |
|
|
(13.3 |
) |
|
|
(0.9 |
) |
|
|
115.2 |
|
|
|
- |
|
Management fees |
|
|
(62.4 |
) |
|
|
46.6 |
|
|
|
15.8 |
|
|
|
- |
|
|
|
- |
|
(Loss) income from continuing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations before income tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(benefit) expense |
|
|
(40.7 |
) |
|
|
169.1 |
|
|
|
68.5 |
|
|
|
(134.2 |
) |
|
|
62.7 |
|
Provision for income tax (benefit) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expense |
|
|
(119.1 |
) |
|
|
78.0 |
|
|
|
19.4 |
|
|
|
- |
|
|
|
(21.7 |
) |
Income from continuing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations |
|
|
78.4 |
|
|
|
91.1 |
|
|
|
49.1 |
|
|
|
(134.2 |
) |
|
|
84.4 |
|
Income (loss) from discontinued |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations, net of tax |
|
|
(7.9 |
) |
|
|
(6.5 |
) |
|
|
2.6 |
|
|
|
19.0 |
|
|
|
7.2 |
|
Net income |
|
|
70.5 |
|
|
|
84.6 |
|
|
|
51.7 |
|
|
|
(115.2 |
) |
|
|
91.6 |
|
Less: Net income attributable to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
noncontrolling interests |
|
|
- |
|
|
|
- |
|
|
|
(21.1 |
) |
|
|
- |
|
|
|
(21.1 |
) |
Net income attributable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to HealthSouth |
|
$ |
70.5 |
|
|
$ |
84.6 |
|
|
$ |
30.6 |
|
|
$ |
(115.2 |
) |
|
$ |
70.5 |
|
HealthSouth Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Condensed Consolidating Statement of Cash Flows
|
|
Nine Months Ended September 30, 2009 |
|
|
|
HealthSouth Corporation |
|
|
Guarantor Subsidiaries |
|
|
Non Guarantor Subsidiaries |
|
|
Eliminating
Entries |
|
|
HealthSouth Consolidated |
|
|
|
(In Millions) |
|
Net cash provided by operating |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
activities |
|
$ |
242.3 |
|
|
$ |
161.6 |
|
|
$ |
93.0 |
|
|
$ |
(134.8 |
) |
|
$ |
362.1 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(7.3 |
) |
|
|
(39.6 |
) |
|
|
(7.8 |
) |
|
|
- |
|
|
|
(54.7 |
) |
Acquisition of intangible assets |
|
|
(0.4 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(0.4 |
) |
Proceeds from disposal of assets |
|
|
- |
|
|
|
0.9 |
|
|
|
- |
|
|
|
- |
|
|
|
0.9 |
|
Net change in restricted cash |
|
|
(0.2 |
) |
|
|
- |
|
|
|
(31.8 |
) |
|
|
- |
|
|
|
(32.0 |
) |
Net settlements on interest rate swap |
|
|
(30.3 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(30.3 |
) |
Net investments in interest rate swap |
|
|
(6.4 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(6.4 |
) |
Other |
|
|
- |
|
|
|
- |
|
|
|
(1.7 |
) |
|
|
- |
|
|
|
(1.7 |
) |
Net cash provided by (used in) investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of discontinued operations |
|
|
- |
|
|
|
1.0 |
|
|
|
(0.8 |
) |
|
|
- |
|
|
|
0.2 |
|
Net cash used in investing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
activities |
|
|
(44.6 |
) |
|
|
(37.7 |
) |
|
|
(42.1 |
) |
|
|
- |
|
|
|
(124.4 |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments on debt, including |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
pre-payments |
|
|
(65.7 |
) |
|
|
(0.2 |
) |
|
|
- |
|
|
|
3.0 |
|
|
|
(62.9 |
) |
Borrowings on revolving credit facility |
|
|
10.0 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
10.0 |
|
Payments on revolving credit facility |
|
|
(50.0 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(50.0 |
) |
Principal payments under capital lease |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
obligations |
|
|
(0.2 |
) |
|
|
(7.2 |
) |
|
|
(2.5 |
) |
|
|
- |
|
|
|
(9.9 |
) |
Dividends paid on convertible perpetual |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
preferred stock |
|
|
(19.5 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(19.5 |
) |
Distributions paid to noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of consolidated affiliates |
|
|
- |
|
|
|
- |
|
|
|
(22.8 |
) |
|
|
- |
|
|
|
(22.8 |
) |
Other |
|
|
(0.1 |
) |
|
|
- |
|
|
|
1.2 |
|
|
|
- |
|
|
|
1.1 |
|
Change in intercompany advances |
|
|
18.3 |
|
|
|
(116.2 |
) |
|
|
(33.9 |
) |
|
|
131.8 |
|
|
|
- |
|
Net cash (used in) provided by financing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
activities of discontinued operations |
|
|
(0.5 |
) |
|
|
- |
|
|
|
1.9 |
|
|
|
- |
|
|
|
1.4 |
|
Net cash used in financing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
activities |
|
|
(107.7 |
) |
|
|
(123.6 |
) |
|
|
(56.1 |
) |
|
|
134.8 |
|
|
|
(152.6 |
) |
Increase (decrease) in cash and cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
equivalents |
|
|
90.0 |
|
|
|
0.3 |
|
|
|
(5.2 |
) |
|
|
- |
|
|
|
85.1 |
|
Cash and cash equivalents at |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
beginning of period |
|
|
23.1 |
|
|
|
0.9 |
|
|
|
8.2 |
|
|
|
- |
|
|
|
32.2 |
|
Cash and cash equivalents at end of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
period |
|
$ |
113.1 |
|
|
$ |
1.2 |
|
|
$ |
3.0 |
|
|
$ |
- |
|
|
$ |
117.3 |
|
HealthSouth Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Condensed Consolidating Statement of Cash Flows
|
|
Nine Months Ended September 30, 2008 |
|
|
|
HealthSouth Corporation |
|
|
Guarantor Subsidiaries |
|
|
Non Guarantor Subsidiaries |
|
|
Eliminating
Entries |
|
|
HealthSouth Consolidated |
|
|
|
(In Millions) |
|
Net cash provided by operating |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
activities |
|
$ |
52.1 |
|
|
$ |
132.4 |
|
|
$ |
84.4 |
|
|
$ |
(119.6 |
) |
|
$ |
149.3 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(15.4 |
) |
|
|
(19.4 |
) |
|
|
(4.6 |
) |
|
|
- |
|
|
|
(39.4 |
) |
Acquisition of business, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net of cash acquired |
|
|
- |
|
|
|
(14.6 |
) |
|
|
- |
|
|
|
- |
|
|
|
(14.6 |
) |
Acquisition of intangible assets |
|
|
- |
|
|
|
(18.2 |
) |
|
|
- |
|
|
|
- |
|
|
|
(18.2 |
) |
Proceeds from disposal of assets |
|
|
43.9 |
|
|
|
9.9 |
|
|
|
- |
|
|
|
- |
|
|
|
53.8 |
|
Net change in restricted cash, excluding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
cash in escrow related to debt |
|
|
0.2 |
|
|
|
- |
|
|
|
20.3 |
|
|
|
|
|
|
|
20.5 |
|
Net settlements on interest rate swap |
|
|
(13.9 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(13.9 |
) |
Other |
|
|
- |
|
|
|
- |
|
|
|
(0.3 |
) |
|
|
- |
|
|
|
(0.3 |
) |
Net cash (used in) provided by investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of discontinued operations |
|
|
- |
|
|
|
(0.4 |
) |
|
|
0.6 |
|
|
|
- |
|
|
|
0.2 |
|
Net cash provided by (used in) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
investing activities |
|
|
14.8 |
|
|
|
(42.7 |
) |
|
|
16.0 |
|
|
|
- |
|
|
|
(11.9 |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Checks in excess of bank balances |
|
|
(16.7 |
) |
|
|
- |
|
|
|
- |
|
|
|
5.3 |
|
|
|
(11.4 |
) |
Change in restricted cash for amounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in escrow related to debt |
|
|
(30.3 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(30.3 |
) |
Principal payments on debt, including |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
pre-payments |
|
|
(126.5 |
) |
|
|
(4.1 |
) |
|
|
- |
|
|
|
9.1 |
|
|
|
(121.5 |
) |
Borrowings on revolving credit facility |
|
|
88.0 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
88.0 |
|
Payments on revolving credit facility |
|
|
(150.0 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(150.0 |
) |
Principal payments under capital lease |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
obligations |
|
|
(0.2 |
) |
|
|
(6.8 |
) |
|
|
(2.3 |
) |
|
|
- |
|
|
|
(9.3 |
) |
Issuance of common stock |
|
|
150.2 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
150.2 |
|
Dividends paid on convertible perpetual |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
preferred stock |
|
|
(19.5 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(19.5 |
) |
Distributions paid to noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of consolidated affiliates |
|
|
- |
|
|
|
- |
|
|
|
(26.3 |
) |
|
|
- |
|
|
|
(26.3 |
) |
Other |
|
|
(0.3 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(0.3 |
) |
Change in intercompany advances |
|
|
51.0 |
|
|
|
(88.6 |
) |
|
|
(72.9 |
) |
|
|
110.5 |
|
|
|
- |
|
Net cash used in financing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
activities of discontinued operations |
|
|
(1.9 |
) |
|
|
- |
|
|
|
(1.1 |
) |
|
|
- |
|
|
|
(3.0 |
) |
Net cash used in financing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
activities |
|
|
(56.2 |
) |
|
|
(99.5 |
) |
|
|
(102.6 |
) |
|
|
124.9 |
|
|
|
(133.4 |
) |
Effect of exchange rate changees on |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
cash and cash equivalents |
|
|
- |
|
|
|
- |
|
|
|
0.8 |
|
|
|
- |
|
|
|
0.8 |
|
Increase (decrease) in cash and cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
equivalents |
|
|
10.7 |
|
|
|
(9.8 |
) |
|
|
(1.4 |
) |
|
|
5.3 |
|
|
|
4.8 |
|
Cash and cash equivalents at |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
beginning of period |
|
|
2.0 |
|
|
|
13.8 |
|
|
|
9.3 |
|
|
|
(5.3 |
) |
|
|
19.8 |
|
Cash and cash equivalents of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
divisions and facilities held for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
at beginning of period |
|
|
- |
|
|
|
- |
|
|
|
0.4 |
|
|
|
- |
|
|
|
0.4 |
|
Less: cash and cash equivalents of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
divisions and facilities held for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
at end of period |
|
|
- |
|
|
|
(0.1 |
) |
|
|
- |
|
|
|
- |
|
|
|
(0.1 |
) |
Cash and cash equivalents at end of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
period |
|
$ |
12.7 |
|
|
$ |
3.9 |
|
|
$ |
8.3 |
|
|
$ |
- |
|
|
$ |
24.9 |
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) relates to HealthSouth Corporation and its subsidiaries and should be read in conjunction with our condensed consolidated financial statements included under Part I, Item 1, Financial
Statements (Unaudited), of this report and our audited consolidated financial statements for the year ended December 31, 2008 and Management’s Discussion and Analysis of Financial Condition and Results of Operations which are included in our Annual Report on Form 10-K for the year ended December 31, 2008 (the “2008 Form 10-K”). As used in this report, the terms “HealthSouth,” “we,” “our,”
“us,” and the “Company” refer to HealthSouth Corporation and its subsidiaries, unless otherwise stated or indicated by context.
This MD&A is designed to provide the reader with information that will assist in understanding our condensed consolidated financial statements, the changes in certain key items in those financial statements from period to period, and the primary factors that accounted for those changes, as well as how certain accounting principles affect
our condensed consolidated financial statements.
Executive Overview
Our Business
We operate inpatient rehabilitation hospitals and long-term acute care hospitals (“LTCHs”) and provide treatment on both an inpatient and outpatient basis. As of September 30, 2009, we operated 94 inpatient rehabilitation hospitals (including 3 hospitals that operate as joint ventures which we account for using the equity method
of accounting), 6 freestanding LTCHs, 44 outpatient rehabilitation satellites (operated by our hospitals), and 25 licensed, hospital-based home health agencies. In addition to HealthSouth hospitals, we manage six inpatient rehabilitation units and one outpatient satellite through management contracts. Our inpatient hospitals are located in 26 states, with a concentration of hospitals in Texas, Pennsylvania, Florida, Tennessee, and Alabama. We also have two hospitals in Puerto Rico.
We are the nation’s largest provider of inpatient rehabilitative healthcare services in terms of revenues, number of hospitals, and patients treated and discharged. Our inpatient rehabilitation hospitals offer specialized rehabilitative care across a wide array of diagnoses and deliver comprehensive patient care services. The majority
of patients we serve experience significant physical disabilities due to medical conditions, such as strokes, hip fractures, head injury, spinal cord injury, and neurological disorders, that are non-discretionary in nature and which require rehabilitative services in an inpatient setting. Our team of highly skilled physicians, nurses, and physical, occupational, and speech therapists utilize the latest in equipment and techniques to return patients to home and work. Patient care is provided by nursing and therapy
staff as directed by a physician order. Internal case managers monitor each patient’s progress and provide documentation of patient status, achievement of goals, discharge planning, and functional outcomes. Our hospitals provide a comprehensive interdisciplinary clinical approach to treatment that leads to what we believe is a higher level of care and superior outcomes.
Period-over-period comparisons for the nine months ended September 30, 2009 are not on an equal basis to the prior year due to a Medicare pricing roll-back that occurred in the second quarter of 2008. The first quarter of 2008 contained a Medicare market basket update that went into effect October 1, 2007 but was “rolled-back”
from our Medicare reimbursement on April 1, 2008. The roll-back ended on September 30, 2009, and, as discussed below, we received a 2.5% increase to our reimbursement from Medicare (i.e., a “market basket update”) effective October 1, 2009. However, as a result of various healthcare reform initiatives being discussed, this market basket update may be reduced by Congress effective January 1, 2010. For additional information on the Medicare pricing roll-back, see Item 1, Business,
“Sources of Revenues – Medicare Reimbursement,” and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, to our 2008 Form 10-K. For additional information on the market basket update and the impact of healthcare reform, see the “Key Challenges” section of this Item.
Net patient revenue from our hospitals was 4.8% and 5.0% higher for the three and nine months ended September 30, 2009, respectively, than the same periods of 2008. Inpatient discharges increased 5.3% and 5.5% during the three and nine months ended September 30, 2009 compared to the same periods of 2008. Operating earnings (as
defined in Note 22, Quarterly Data (Unaudited), to the consolidated financial statements accompanying our 2008 Form 10-K, as adjusted for the reclassification of noncontrolling interests) for the three and nine months ended September 30, 2009 were $57.3 million and $169.9 million, respectively, compared to $37.3 million and $191.9 million for the same periods of 2008, respectively. Operating earnings for the three and nine months ended September 30, 2009
included charges of $8.5 million and $41.3 million, respectively, associated with Government, class action, and related settlements expense, as discussed in the “Results of Operations” section of this Item. Operating earnings for the three and nine months ended September 30, 2008 included charges (gains) of $17.1 million and ($27.9) million, respectively, associated with Government, class action,
and related settlements expense. Net cash provided by operating activities was $362.1 million and $149.3 million for the nine months ended September 30, 2009 and 2008, respectively. Cash flows during 2009 included $73.8 million related to the net cash proceeds from the UBS Settlement and the receipt of an approximate $42 million additional federal income tax refund for tax years 1995 through 1999. See Note 9, Income
Taxes, and Note 11, Settlements, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of the report.
As discussed in the “Business Outlook” section below and throughout this report, our primary emphasis, especially during this period of global economic uncertainty, remains on debt reduction and further deleveraging. During the nine months ended September 30, 2009, we reduced our total debt outstanding by approximately $117 million
(see Note 2, Liquidity, and Note 5, Long-term Debt, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report).
We believe the demand for inpatient rehabilitative healthcare services will increase as the U.S. population ages. In addition, the number of Medicare “compliant patients” (i.e., a patient who qualifies for inpatient rehabilitative care under Medicare rules) is expected to grow approximately 2% per year for the foreseeable future,
creating an attractive market. We believe these market factors align with our strengths in and focus on inpatient rehabilitative care. Unlike many of our competitors that may offer inpatient rehabilitation as one of many secondary services, inpatient rehabilitation is our core business.
Key Challenges
While we met our operational goals in 2008 and are meeting our goals in 2009, the following are some of the challenges we are addressing:
• |
Leverage and Liquidity. Our primary sources of liquidity are cash on hand, cash flows from operations (which were $362.1 million during the nine months ended September 30, 2009), and borrowings under our $400 million revolving credit facility. As of September 30, 2009, we had $117.3 million
in Cash and cash equivalents. This amount excluded $88.1 million in Restricted cash and $23.3 million of restricted marketable securities. As of September 30, 2009, no amounts were drawn on our revolving credit facility. In addition, and while no assurances can be provided, we anticipate cash flows from certain non-operating sources. |
Reducing debt is a primary strategic focus, and our leverage and liquidity are improving. During the nine months ended September 30, 2009, we reduced our total debt outstanding by approximately $117 million and increased our Cash and cash equivalents by approximately $85 million. We
believe our higher Adjusted Consolidated EBITDA and our strong cash flows from operations will allow us to continue to reduce our debt and leverage. However, our leverage remains higher than we would like and, consequently, we will continue to emphasize debt reduction.
For additional information regarding our leverage and liquidity, see the “Liquidity and Capital Resources” section of this Item and Note 2, Liquidity, and Note 5, Long-term Debt, to the condensed consolidated
financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report. See Item 1A, Risk Factors, of our 2008 Form 10-K and Note 1, Summary of Significant Accounting Policies, to the consolidated financial statements accompanying our 2008 Form 10-K for a discussion of risks and uncertainties facing
us.
• |
Highly Regulated Industry. Over the last several years, changes in regulations governing inpatient rehabilitation reimbursement have created a challenging operating environment for inpatient rehabilitative providers. Many of these changes have resulted in limitations on, and in some cases,
reductions in, the levels of payments to healthcare providers. For example, and as reported previously, while The Medicare, Medicaid and State Children’s Health Insurance Program (SCHIP) Extension Act of 2007 signed on December 29, 2007 may have stabilized much of the volatility in patient volumes created by setting the compliance threshold of the 75% Rule at 60%, it also included a reduction in the pricing of services eligible for Medicare reimbursement to a pricing level that existed in the third quarter
of 2007 (the Medicare pricing “roll-back”). See Item 1, Business, “Sources of Revenue – Medicare Reimbursement,” of our 2008 Form 10-K for additional information. During the period of the Medicare pricing roll-back, we incurred increased costs, including costs associated with providing annual merit increases and benefits to our employees. |
On August 7, 2009, the Centers for Medicare and Medicaid Services (“CMS”) published in the federal register the fiscal year 2010 notice of final rulemaking for inpatient rehabilitation facilities under the prospective payment system (“IRF-PPS”). This rule contains Medicare pricing changes as well as new coverage requirements.
The pricing changes are effective for Medicare discharges between October 1, 2009 and September 30, 2010 and include a 2.5% market basket update, which is the first market basket update we have received in 18 months. However, as discussed below, the various healthcare bills being discussed in Congress include reductions to market basket updates for providers as a means of helping to pay for healthcare reform. Accordingly, it is possible this market basket update could be reduced by Congress. We have analyzed
the other aspects of the pricing changes and believe the remaining pricing changes will have a neutral to slightly positive impact on our Net operating revenues. The new coverage requirements under the rule will be effective for discharges occurring on or after January 1, 2010, which allows hospitals adequate time to make any necessary operational adjustments. Our hospitals already operate using many of the new requirements, and these changes will not result
in material modifications to our clinical or business models. In addition, when the final rule was released, CMS indicated there were several areas related to the new coverage requirements where additional discussion and clarification was necessary. Along with other providers, we participated in these discussions with CMS, and we anticipate further clarification will come from CMS later this year. Based on what we know at this juncture, we expect to be in full compliance with all new coverage requirements, including
any additional clarifications released by CMS, by the required date.
Additionally, we are required to comply with extensive and complex laws and regulations at the federal, state, and local government levels. These rules and regulations affect our business activities by controlling the reimbursement we receive for services provided, requiring licensure or certification of our hospitals, regulating our relationships
with physicians and other referral sources, regulating the use of our properties, and controlling our growth. Ensuring continuous compliance with these laws and regulations is an operating requirement for all healthcare providers.
We have invested substantial time, effort, and expense in implementing internal controls and procedures designed to ensure regulatory compliance, and we are committed to continued adherence to these guidelines. More specifically, because Medicare comprises a significant portion of our Net
operating revenues, it is important for us to remain compliant with the laws and regulations governing the Medicare program. If we were unable to remain compliant with these regulations, our financial position, results of operations, and cash flows could be materially, adversely impacted.
Potential Impact of Healthcare Reform. President Obama has identified healthcare reform as a major domestic priority, and Congress is devoting considerable effort to drafting healthcare reform legislation. At the time of this writing, no specific healthcare reform legislation
has been adopted, though all relevant committees of jurisdiction have passed major healthcare reform legislation or legislative concepts. Many issues are being discussed within the context of healthcare reform, several of which could have an impact on our business. The three issues with the greatest potential impact are: (1) reducing annual market basket updates to providers, (2) combining, or “bundling,” of acute care hospital and post-acute Medicare reimbursement at some point in the future, and
(3) creating an Independent Medicare Commission.
With respect to future reductions to market basket updates, and as previously noted, while no specific healthcare legislation has been adopted at this time, the healthcare reform bills that have been passed out of Congressional committees include some kind of payment reductions to providers. While we cannot be certain of the magnitude of
these potential market basket reductions, or if they will be enacted, we will be working with other providers, as well as other parties who have a vested interest, to help ensure they do not compromise our ability to provide high-quality services to the patients we serve.
The probability of enacting a “bundled” payment system is difficult to predict at this time. The major healthcare reform bills being contemplated currently by Congress include provisions to examine the feasibility of bundling, including the potential for a voluntary bundling pilot program to test and evaluate alternative payment
methodologies. We will continue to work with the acute hospital and post-acute care provider communities on this important issue.
There has also been discussion of establishing an “Independent Medicare Commission” (“IMC”) that would be charged with presenting proposals to Congress to reduce Medicare expenditures upon the occurrence of Medicare expenditures exceeding a certain level. At this point, it is difficult to determine whether an IMC will
be enacted into law, and, if so, how it would function. Similar to the reform concerns discussed above, we will continue to work with other providers, as well as other parties who have a vested interest, to help ensure they do not compromise our ability to provide high-quality services to the patients we serve.
• |
Staffing. Our operations are dependent on the efforts, abilities, and experience of our medical support personnel, such as physical therapists, nurses, and other healthcare professionals. In some markets, the lack of availability of physical therapists, nurses, and other medical support personnel
is an operating issue to healthcare providers, although the weak economy has mitigated this issue to some degree. We have refined our comprehensive benefits package to remain competitive in this challenging staffing environment while also being consistent with our goal of being a high quality, cost-effective provider of inpatient rehabilitative services. As a result of our efforts, we are experiencing improved retention rates and reduced turnover. Going forward, recruiting and retaining qualified personnel for
our hospitals will remain a high priority for us. |
We also are monitoring efforts in Congress that could make it more difficult for employees to avoid or reject labor organization. At this time, it is not clear whether, when, or in what form, such legislation might be enacted into law, nor are we able to predict the impact, if any, this legislation would have on our business, if enacted.
Business Outlook
As previously noted, the inpatient rehabilitation sector of the healthcare industry is an attractive market: the aging demographics of the U.S. population coupled with an approximate 2% projected annual growth rate in the number of compliant patients create a favorable business environment for us. As the nation’s largest
provider of inpatient rehabilitative healthcare services, we believe we differentiate ourselves from our competitors based on the quality of our clinical outcomes, our broad base of clinical expertise, the application and leverage of rehabilitative technology, and the standardization of best practices that result in high-quality, cost-effective care for the patients we serve.
Our ability to continue to create shareholder value in the near term will be predicated on our ability to: (1) deleverage our balance sheet; (2) adapt to regulatory changes affecting our industry; (3) grow organically; (4) provide high-quality, cost-effective care; and, to a much lesser extent in the immediate-term, (5) pursue acquisitions
on a disciplined, opportunistic basis – all within the context of uncertain economic times.
During the nine months ended September 30, 2009, we reduced our total debt outstanding by approximately $117 million, and we believe our higher Adjusted Consolidated EBITDA and our strong cash flows from operations will allow us to continue to reduce our debt and leverage. Further, we believe we have adequate sources of liquidity due to our Cash
and cash equivalents and the availability of our revolving credit facility. In addition, and as discussed in the “Liquidity and Capital Resources” section of this Item, we do not face substantial near-term refinancing risk.
As discussed previously, healthcare always has been a highly regulated industry, and the inpatient rehabilitation segment is no exception. Successful healthcare providers are those who provide high-quality care and have the capabilities to adapt to changes in the regulatory environment. We believe we have the necessary capabilities –
scale, infrastructure, and management – to adapt and succeed in a highly regulated industry, and we have a proven track record of being able to do so. The healthcare reform proposals that are being discussed are fluid and changing. However, we are confident, based on our track record, we will be able to adapt to whatever changes may impact our industry.
We believe our ability to continue to grow at a faster rate than the rest of the industry is attributable to our higher level of care and is sustainable. In addition, the majority of patients we serve have medical conditions, such as strokes, hip fractures, and neurological disorders, that are non-discretionary in nature and which require
rehabilitative services in an inpatient setting. Consequently, we believe we are well positioned to grow volumes, despite the challenging economic environment. The area of our business at the most risk for decreases in discretionary spending is outpatient services. However, this area of our business represents less than 10% of our consolidated Net operating revenues, so we anticipate minimal impact to our overall results.
Healthcare providers are under increasing obligation to control healthcare costs. We take this challenge seriously and pride ourselves in our ability to provide high-quality, cost-effective care. We will continue to focus on ensuring we provide high-quality care and finding efficiencies in our cost structure at both the corporate and operational
levels in an effort to remain competitive. Our largest costs are our Salaries and benefits, and they represent our investment in our most valuable resource: our employees. We continue to actively manage these expenses. We will continue to monitor the labor market and will make any necessary adjustments to remain competitive in this challenging environment while also being consistent with our goal of being a high-quality, cost-effective provider of inpatient
rehabilitative services.
In recognition of the current economic uncertainty, we will continue to be disciplined in our approach to development opportunities, carefully evaluating these opportunities against our deleveraging priority. For the foreseeable future, reducing our long-term debt will be our key objective. We will continue to pursue bed expansions in existing
hospitals as they provide immediate earnings growth and will pursue acquisitions and market consolidations where we can do so with minimal initial cash outlays. For any de-novo project we decide to pursue, we may work with third parties willing to assume the majority of the financing risks associated with these projects.
In summary, we believe the business outlook remains positive, despite the current economic environment, and, based on the discharge growth we have experienced thus far in 2009, we continue to believe our volumes will not be materially adversely impacted by the current economy. We will continue to monitor the economic climate and focus on
initiatives designed to control costs. We plan to continue to use the majority of our excess cash flow to reduce debt. We also anticipate we will be able to generate cash flows to fund additional debt reduction as well as disciplined, opportunistic development activities, which we believe will bring long-term, sustainable growth and returns to our stockholders. Finally, we will continue to work with the acute hospital and post-acute care provider communities, as well as other parties who have a vested interest,
to bring positive healthcare reform that rewards healthcare providers, like HealthSouth, that strive to provide high-quality, cost-effective services to patients who need these services.
Results of Operations
During the three and nine months ended September 30, 2009 and 2008, we derived consolidated Net operating revenues from the following payor sources:
|
Three Months Ended |
|
Nine Months Ended |
|
September 30, |
|
September 30, |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
Medicare |
67.6% |
|
66.2% |
|
67.5% |
|
67.1% |
Medicaid |
2.1% |
|
2.2% |
|
2.2% |
|
2.2% |
Workers’ compensation |
1.7% |
|
2.2% |
|
1.7% |
|
2.2% |
Managed care and other discount plans |
23.4% |
|
23.0% |
|
23.2% |
|
22.3% |
Other third-party payors |
2.5% |
|
3.8% |
|
2.8% |
|
3.6% |
Patients |
1.4% |
|
1.1% |
|
1.2% |
|
1.0% |
Other income |
1.3% |
|
1.5% |
|
1.4% |
|
1.6% |
Total |
100.0% |
|
100.0% |
|
100.0% |
|
100.0% |
Our payor mix is weighted heavily towards Medicare, and Medicare patients are segmented into two categories: (1) “traditional” Medicare and (2) “managed” Medicare. Our hospitals receive traditional Medicare reimbursements under IRF-PPS. With IRF-PPS, our hospitals receive fixed payment amounts per discharge based on
certain rehabilitation impairment categories established by the United States Department of Health and Human Services. Under IRF-PPS, our hospitals retain the difference, if any, between the fixed payment from Medicare and their operating costs. Thus, our hospitals benefit from being high quality, low cost providers. For additional information regarding Medicare reimbursement, please see the “Sources of Revenues” section of Item 1, Business,
of our 2008 Form 10-K.
Over the past few years, we have experienced an increase in managed Medicare and private fee-for-service plans that are included in the “managed care and other discount plans” category in the above table. As part of the Balanced Budget Act of 1997, Congress created a program of private, managed healthcare coverage for Medicare
beneficiaries. This program has been referred to as Medicare Part C, Medicare+Choice, or Medicare Advantage. The program offers beneficiaries a range of Medicare coverage options by providing a choice between the traditional fee-for-service program (under Medicare Parts A and B) or enrollment in a health maintenance organization, preferred provider organization, point-of-service plan, provider sponsored organization, or an insurance plan operated in conjunction with a medical savings account. While we expect
our payor mix will remain heavily weighted towards traditional Medicare, we expect this increase of patients in managed Medicare and private fee-for-service plans will continue. However, the future of Medicare Part C will be determined, ultimately, by Congress, and any changes to Medicare Part C may have an impact on this trend.
Under IRF-PPS, hospitals are reimbursed on a “per discharge” basis. Thus, the number of patient discharges is a key metric utilized by management to monitor and evaluate our performance. The number of outpatient visits is also tracked in order to measure the volume of outpatient activity each period.
Certain financial results have been reclassified to conform to the current year presentation. Such reclassifications primarily relate to rental properties where we terminated the leases associated with certain properties. As a result, we reclassified our condensed consolidated balance sheet as of December 31, 2008, our condensed consolidated
statements of operations for the three and nine months ended September 30, 2008, and our condensed consolidated statement of cash flows for the nine months ended September 30, 2008 to include these properties and their results of operations in discontinued operations.
As of January 1, 2009 we reclassified our noncontrolling interests (formerly known as “minority interests”) as a component of equity and now report net income and comprehensive income attributable to our noncontrolling interests separately from net income and comprehensive income attributable to HealthSouth.
During the preparation of our condensed consolidated financial statements for the quarterly period ended June 30, 2009, we identified an error in our consolidated financial statements as of and for the year ended December 31, 2008 and prior periods and our condensed consolidated financial statements as of and for the quarterly period
ended March 31, 2009. We corrected this error in our financial statements by adjusting Equity in net income of nonconsolidated affiliates, which resulted in an understatement of both our Income (loss) from continuing operations before income tax benefit and our Net income of approximately $4.5 million for the nine months ended September 30,
2009. This error related primarily to an approximate $9.6 million overstatement of our investment in a joint venture hospital we account for using the equity method of accounting due to the understatement of prior period income tax provisions of this joint venture hospital and the adjustment of certain liabilities due to this joint venture hospital. We also adjusted Accrued expenses and other current liabilities by approximately $4.7 million due to changes
in amounts due to us for expenses paid on behalf of this joint venture hospital. We do not believe these adjustments are material to the condensed consolidated financial statements as of September 30, 2009 and for the nine months then ended or to any prior years’ consolidated financial statements. As a result, we have not restated any prior period amounts.
For the three and nine months ended September 30, 2009 and 2008, our consolidated results of operations were as follows:
|
|
Three Months Ended
September 30, |
|
|
Percentage
Change |
|
|
Nine Months Ended
September 30, |
|
|
Percentage
Change |
|
|
|
2009 |
|
|
2008 |
|
|
2009 vs. 2008 |
|
|
2009 |
|
|
2008 |
|
|
2009 vs. 2008 |
|
|
|
|
|
|
(As Adjusted) |
|
|
|
|
|
|
|
|
(As Adjusted) |
|
|
|
|
|
|
(In Millions) |
|
|
|
|
|
(In Millions) |
|
|
|
|
Net operating revenues |
|
$ |
472.7 |
|
|
$ |
455.5 |
|
|
|
3.8 |
% |
|
$ |
1,431.5 |
|
|
$ |
1,376.3 |
|
|
|
4.0 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
235.4 |
|
|
|
236.3 |
|
|
|
(0.4 |
%) |
|
|
709.2 |
|
|
|
700.8 |
|
|
|
1.2 |
% |
Other operating expenses |
|
|
66.8 |
|
|
|
68.6 |
|
|
|
(2.6 |
%) |
|
|
201.6 |
|
|
|
201.0 |
|
|
|
0.3 |
% |
General and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expenses |
|
|
26.0 |
|
|
|
25.5 |
|
|
|
2.0 |
% |
|
|
76.4 |
|
|
|
78.8 |
|
|
|
(3.0 |
%) |
Supplies |
|
|
27.7 |
|
|
|
26.2 |
|
|
|
5.7 |
% |
|
|
83.9 |
|
|
|
81.1 |
|
|
|
3.5 |
% |
Depreciation and amortization |
|
|
18.1 |
|
|
|
17.9 |
|
|
|
1.1 |
% |
|
|
53.4 |
|
|
|
65.3 |
|
|
|
(18.2 |
%) |
Impairment of long-lived assets |
|
|
4.0 |
|
|
|
- |
|
|
|
N/A |
|
|
|
4.0 |
|
|
|
0.6 |
|
|
|
566.7 |
% |
Occupancy costs |
|
|
11.8 |
|
|
|
12.6 |
|
|
|
(6.3 |
%) |
|
|
35.9 |
|
|
|
36.8 |
|
|
|
(2.4 |
%) |
Provision for doubtful accounts |
|
|
7.9 |
|
|
|
6.6 |
|
|
|
19.7 |
% |
|
|
25.5 |
|
|
|
20.5 |
|
|
|
24.4 |
% |
Loss on disposal of assets |
|
|
0.7 |
|
|
|
0.2 |
|
|
|
250.0 |
% |
|
|
3.0 |
|
|
|
0.6 |
|
|
|
400.0 |
% |
Government, class action, and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
related settlements expense |
|
|
8.5 |
|
|
|
17.1 |
|
|
|
(50.3 |
%) |
|
|
41.3 |
|
|
|
(27.9 |
) |
|
|
(248.0 |
%) |
Professional fees—accounting, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
tax, and legal |
|
|
3.5 |
|
|
|
4.0 |
|
|
|
(12.5 |
%) |
|
|
5.0 |
|
|
|
12.9 |
|
|
|
(61.2 |
%) |
Total operating expenses |
|
|
410.4 |
|
|
|
415.0 |
|
|
|
(1.1 |
%) |
|
|
1,239.2 |
|
|
|
1,170.5 |
|
|
|
5.9 |
% |
Loss (gain) on early extinguishment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of debt |
|
|
- |
|
|
|
2.1 |
|
|
|
(100.0 |
%) |
|
|
(3.1 |
) |
|
|
5.8 |
|
|
|
(153.4 |
%) |
Interest expense and amortization of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
debt discounts and fees |
|
|
29.5 |
|
|
|
40.3 |
|
|
|
(26.8 |
%) |
|
|
95.0 |
|
|
|
131.1 |
|
|
|
(27.5 |
%) |
Other income |
|
|
(0.6 |
) |
|
|
(0.4 |
) |
|
|
50.0 |
% |
|
|
(1.4 |
) |
|
|
(2.1 |
) |
|
|
(33.3 |
%) |
Loss on interest rate swaps |
|
|
7.9 |
|
|
|
8.0 |
|
|
|
(1.3 |
%) |
|
|
16.7 |
|
|
|
16.1 |
|
|
|
3.7 |
% |
Equity in net income of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
nonconsolidated affiliates |
|
|
(3.0 |
) |
|
|
(2.7 |
) |
|
|
11.1 |
% |
|
|
(2.8 |
) |
|
|
(7.8 |
) |
|
|
(64.1 |
%) |
Income (loss) from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
before income tax benefit |
|
|
28.5 |
|
|
|
(6.8 |
) |
|
|
(519.1 |
%) |
|
|
87.9 |
|
|
|
62.7 |
|
|
|
40.2 |
% |
Provision for income tax benefit |
|
|
(1.7 |
) |
|
|
(22.5 |
) |
|
|
(92.4 |
%) |
|
|
(0.8 |
) |
|
|
(21.7 |
) |
|
|
(96.3 |
%) |
Income from continuing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations |
|
|
30.2 |
|
|
|
15.7 |
|
|
|
92.4 |
% |
|
|
88.7 |
|
|
|
84.4 |
|
|
|
5.1 |
% |
(Loss) income from discontinued |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations, net of tax |
|
|
(5.4 |
) |
|
|
(2.9 |
) |
|
|
86.2 |
% |
|
|
(6.8 |
) |
|
|
7.2 |
|
|
|
(194.4 |
%) |
Net income |
|
|
24.8 |
|
|
|
12.8 |
|
|
|
93.8 |
% |
|
|
81.9 |
|
|
|
91.6 |
|
|
|
(10.6 |
%) |
Less: Net income attributable to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
noncontrolling interests |
|
|
(8.0 |
) |
|
|
(6.2 |
) |
|
|
29.0 |
% |
|
|
(25.7 |
) |
|
|
(21.1 |
) |
|
|
21.8 |
% |
Net income attributable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to HealthSouth |
|
$ |
16.8 |
|
|
$ |
6.6 |
|
|
|
154.5 |
% |
|
$ |
56.2 |
|
|
$ |
70.5 |
|
|
|
(20.3 |
%) |
Operating Expenses as a % of Net Operating Revenues
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
Salaries and benefits |
|
49.8% |
|
51.9% |
|
49.5% |
|
50.9% |
Other operating expenses |
|
14.1% |
|
15.1% |
|
14.1% |
|
14.6% |
General and administrative expenses |
|
5.5% |
|
5.6% |
|
5.3% |
|
5.7% |
Supplies |
|
5.9% |
|
5.8% |
|
5.9% |
|
5.9% |
Depreciation and amortization |
|
3.8% |
|
3.9% |
|
3.7% |
|
4.7% |
Impairment of long-lived assets |
|
0.8% |
|
0.0% |
|
0.3% |
|
0.0% |
Occupancy costs |
|
2.5% |
|
2.8% |
|
2.5% |
|
2.7% |
Provision for doubtful accounts |
|
1.7% |
|
1.4% |
|
1.8% |
|
1.5% |
Loss on disposal of assets |
|
0.1% |
|
0.0% |
|
0.2% |
|
0.0% |
Government, class action, and related |
|
|
|
|
|
|
|
|
settlements expense |
|
1.8% |
|
3.8% |
|
2.9% |
|
(2.0%) |
Professional fees—accounting, tax, and |
|
|
|
|
|
|
|
|
legal |
|
0.7% |
|
0.9% |
|
0.3% |
|
0.9% |
Total |
|
86.8% |
|
91.1% |
|
86.6% |
|
85.0% |
Additional information regarding our operating results for the three and nine months ended September 30, 2009 and 2008 is as follows:
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(In Millions) |
|
|
(In Millions) |
|
Net patient revenue—inpatient |
|
$ |
431.3 |
|
|
$ |
411.5 |
|
|
$ |
1,303.4 |
|
|
$ |
1,241.1 |
|
Net patient revenue—outpatient and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other revenues |
|
|
41.4 |
|
|
|
44.0 |
|
|
|
128.1 |
|
|
|
135.2 |
|
Net operating revenues |
|
$ |
472.7 |
|
|
$ |
455.5 |
|
|
$ |
1,431.5 |
|
|
$ |
1,376.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Actual Amounts) |
|
|
(Actual Amounts) |
|
Discharges |
|
|
28,241 |
|
|
|
26,827 |
|
|
|
84,542 |
|
|
|
80,126 |
|
Outpatient visits |
|
|
283,229 |
|
|
|
310,279 |
|
|
|
861,594 |
|
|
|
936,152 |
|
Average length of stay |
|
14.3 days |
|
|
14.7 days |
|
|
14.4 days |
|
|
14.9 days |
|
Occupancy % |
|
|
66.5 |
% |
|
|
65.6 |
% |
|
|
67.8 |
% |
|
|
66.4 |
% |
# of licensed beds |
|
|
6,587 |
|
|
|
6,556 |
|
|
|
6,587 |
|
|
|
6,556 |
|
Full-time equivalents* |
|
|
15,622 |
|
|
|
15,744 |
|
|
|
15,625 |
|
|
|
15,590 |
|
|
* |
Excludes 392 and 396 full-time equivalents for the three months ended September 30, 2009 and 2008, respectively, and 390 and 413 full-time equivalents for the nine months ended September 30, 2009 and 2008, 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. Full-time equivalents included in the above table represent HealthSouth employees who participate in or support the operations of our hospitals and exclude an estimate of full-time equivalents related to contract labor. |
In the discussion that follows, we use “same store” comparisons to explain the changes in certain performance metrics and line items within our financial statements. We calculate same store comparisons based on hospitals open throughout both the full current periods and throughout the full prior periods presented. These comparisons
include the financial results of market consolidation transactions in existing markets, as it is difficult to determine, with precision, the incremental impact of these transactions on our results of operations.
Net Operating Revenues
Our consolidated Net operating revenues consist primarily of revenues derived from patient care services. Net operating revenues also include other revenues generated from management and administrative fees and other non-patient
care services. These other revenues approximated 1.3% and 1.5% of consolidated Net operating revenues for the three months ended September 30, 2009 and 2008, respectively, and 1.4% and 1.6% of consolidated Net operating revenues for the nine months ended September 30, 2009 and 2008, respectively.
Net patient revenue from our hospitals was 4.8% higher for the three months ended September 30, 2009 than the three months ended September 30, 2008. This increase was primarily attributable to a 5.3% quarter-over-quarter increase in patient discharges on both a consolidated and same store basis. Pricing was comparable quarter over quarter.
Net patient revenue from our hospitals was 5.0% higher for the nine months ended September 30, 2009 than the same period of 2008. Higher revenue resulted from a 5.5% period-over-period increase in patient discharges. Same store discharges were 4.9% higher in the nine months ended September 30, 2009 compared to the same period of 2008. Net
patient revenue per discharge decreased in the year-to-date period of 2009 compared to the same period of 2008. As noted above, period-over-period comparisons for the nine months ended September 30, 2009 are not on an equal basis to the prior year due to the Medicare pricing roll-back. The first quarter of 2008 contained a Medicare market basket update that became effective October 1, 2007 but was “rolled-back” from our Medicare reimbursement on April 1, 2008.
Decreased outpatient volumes in all periods presented resulted primarily from the closure of outpatient satellites, but challenges in securing therapy staffing for these outpatient satellites in certain markets and continued competition from physicians offering physical therapy services within their own offices also contributed to the decline.
As of September 30, 2009, we operated 44 outpatient satellites, while as of September 30, 2008, we operated 55 outpatient satellites. We continuously monitor the performance of our outpatient satellites and will take appropriate action with respect to underperforming facilities, including closure.
Salaries and Benefits
Salaries and benefits represent the most significant cost to us and represent an investment in our most important asset: our employees. Salaries and benefits include all amounts paid to full- and part-time employees who directly
participate in or support the operations of our hospitals, including all related costs of benefits provided to employees. It also includes amounts paid for contract labor.
Salaries and benefits were 49.8% and 49.5% of Net operating revenues during the three and nine months ended September 30, 2009, respectively, which is a decrease from 51.9% and 50.9% of Net
operating revenues during the three and nine months ended September 30, 2008, respectively. This improvement was despite an approximate 3% merit increase provided to our employees effective October 1, 2008 and, for the year-to-date period, despite the Medicare market basket update that was included in our Net operating revenues during the first quarter of 2008. Also, as a result of our recruiting and retention efforts, costs associated with contract
labor decreased in both periods of 2009.
We continue to actively manage the productive component of our Salaries and benefits, with employees per occupied bed, or “EPOB,” decreasing from 3.69 and 3.62 during the three and nine months ended September 30, 2008, respectively, to 3.58 and 3.52 during the three and
nine months ended September 30, 2009, respectively. This represents an improvement of 3.0% and 2.8% for the quarter and year-to-date periods, respectively. As discussed previously, we have also addressed the non-productive component of our Salaries and benefits and, with the transition to a new benefit year on January 1, 2009, are realizing the benefits of refinements made to our comprehensive benefits package. Such refinements included, but were not limited
to, passing along a portion of the increased costs associated with medical plan benefits to our employees and reducing certain aspects of our paid-time-off program.
As it is routine to provide merit increases to our employees on October 1 of each year, which normally coincides with our annual Medicare pricing adjustment, we provided an approximate 2.3% merit increase to our employees effective October 1, 2009.
See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Results of Operations,” of our 2008 Form 10-K for the calculation of EPOB.
Other Operating Expenses
Other operating expenses include costs associated with managing and maintaining our hospitals. These expenses include such items as contract services, utilities, professional fees, insurance, and repairs and maintenance.
Other operating expenses were lower in the three months ended September 30, 2009 than the three months ended September 30, 2008 primarily due to the effect of hurricanes, primarily in the form of higher repairs and maintenance costs, on some of our hospitals in Texas and Louisiana during
the third quarter of 2008.
During the nine months ended September 30, 2008, we experienced a reduction in self-insurance costs due to revised actuarial estimates that resulted from current claims history and industry-wide loss development trends. These reductions were primarily included in Other operating expenses in
our condensed consolidated statement of operations for the nine months ended September 30, 2008. This reduction in costs was somewhat mitigated by costs associated with the implementation of our TeamWorks initiative during the nine months ended September 30, 2008. See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our 2008 Form 10-K for additional information related to TeamWorks.
General and Administrative Expenses
General and administrative expenses primarily include administrative expenses such as corporate accounting, internal audit and controls, legal, and information technology services that are managed from our corporate headquarters in Birmingham, Alabama. These expenses also include all
stock-based compensation expenses recorded for all eligible employees.
Our General and administrative expenses increased quarter over quarter due primarily to non-cash expenses associated with stock-based compensation. General and administrative expenses as a percent of Net
operating revenues decreased in all periods presented due to a reduction in corporate-related, full-time equivalents and moving certain processes “in-house” verses using external consultants and other professionals. General and administrative expenses were 5.5% and 5.3% of Net operating revenues for the three and nine months ended September 30, 2009, respectively. Excluding non-cash
expenses associated with stock-based compensation of $3.4 million and $9.9 million during the three and nine months ended September 30, 2009, respectively, our General and administrative expenses would have been 4.8% and 4.6%, respectively, of Net operating revenues.
Supplies
Supplies expense includes all costs associated with supplies used while providing patient care. These costs include pharmaceuticals, food, needles, bandages, and other similar items. The increase in Supplies expense in each period
was due to an increase in the number of patients treated.
Depreciation and Amortization
Depreciation and amortization for the nine months ended September 30, 2008 included an approximate $11.0 million charge related to the accelerated depreciation of our corporate campus so that the net book value of the corporate campus equaled the net proceeds we received on the transaction’s
closing date. See Note 5, Property and Equipment, to the consolidated financial statements accompanying our 2008 Form 10-K for additional information.
Impairment of Long-Lived Assets
During the three and nine months ended September 30, 2009, we recorded an impairment charge of $4.0 million. This charge represented our write-down of certain long-lived assets associated with one of our hospitals to their estimated fair value based on an offer we received from a third party
to acquire the assets. During the nine months ended September 30, 2008, similar charges were $0.6 million.
Occupancy Costs
Occupancy costs include amounts paid for rent associated with leased hospitals, including common area maintenance and similar charges. These costs did not change significantly in the periods presented.
Provision for Doubtful Accounts
As disclosed previously, we have experienced denials of certain diagnosis codes by Medicare contractors based on medical necessity. We appeal most of these denials and have experienced a strong success rate for claims that have completed the appeals process. While our success rate is a positive reflection of the medical necessity of
the applicable patients, the appeal process can take in excess of one year, and we cannot provide assurance as to the ongoing and future success of our appeals. As such, we have made provisions against these receivables in accordance with our accounting policy that necessarily considers the age of the receivables under appeal as part of our Provision for doubtful accounts. The aging of these types of claims has resulted in an increase in our Provision
for doubtful accounts as a percent of Net operating revenues during 2009.
Loss on Disposal of Assets
The Loss on disposal of assets in each period presented primarily resulted from various equipment disposals throughout each period. For the three and nine months ended September 30, 2009, it also included losses associated with our write-down of certain assets held for sale to their
estimated fair value based on offers we received from third parties to acquire the assets, as well as the write-off of certain assets as we updated, or “refreshed,” some of our hospitals. For additional information, see Note 7, Fair Value Measurements, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report.
Government, Class Action, and Related Settlements Expense
The majority of the amounts recorded as Government, class action, and related settlements expense in each period resulted from changes in the fair value of our common stock and the associated common stock warrants underlying our securities litigation settlement. Prior to the issuance
of these shares of common stock and common stock warrants on September 30, 2009, at each quarter end, we adjusted our liability for this settlement based on the value of our common stock and the associated common stock warrants. To the extent the price of our common stock increased, we would increase our liability and record losses. When the price of our common stock decreased, we would reduce our liability and record gains. The final fair value adjustment related to these shares and warrants was made on September
30, 2009 at the time of issuance of the underlying common stock and common stock warrants. For additional information related to the Securities Litigation Settlement and the issuance of our common stock and the associated common stock warrants underlying this settlement, see Note 11, Settlements, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited),
of this report.
Government, class action, and related settlements expense for the three and nine months ended September 30, 2009 included an $8.2 million and $41.9 million, respectively, increase in the liability associated with our securities litigation based on the value
of our common stock and the associated common stock warrants underlying this settlement. Government, class action, and related settlements expense for the three months ended September 30, 2009 also included a net charge of $0.3 million associated with certain settlements and other matters discussed in Note 11, Settlements, and Note 12, Contingencies,
to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report. Similar items resulted in a net gain of $0.6 million during the nine months ended September 30, 2009.
Government, class action, and related settlements expense for the three and nine months ended September 30, 2008 included a $14.7 million and ($28.6) million, respectively, increase (reduction) in the liability associated with our securities litigation based on
the value of our common stock and the associated common stock warrants underlying this settlement. Government, class action, and related settlements expense also included a net charge of $2.4 million during the three months ended September 30, 2008 for certain settlements and indemnification obligations. Similar items resulted in a net charge of $0.7 million during the nine months ended September 30, 2008.
Professional Fees—Accounting, Tax, and Legal
Based on our bylaws and certain indemnification agreements, we accrued an estimate of legal fees associated with Mr. Scrushy’s criminal defense in Professional fees – accounting, tax, and legal in our 2005 and 2004 consolidated statements of operations. In October 2006,
an arbitrator issued a final award to Mr. Scrushy for such fees, and we offset that award against the approximate $48 million judgment we received for repayment of bonuses he received during his time as chairman and chief executive officer during the historic fraudulent reporting periods. Based on the arbitrator’s ruling, we continued to maintain an accrual for certain costs associated with then-ongoing litigation involving Mr. Scrushy.
As discussed in Note 12, Contingencies, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report, in June 2009, a court ruled that Mr. Scrushy committed fraud
and breached his fiduciary duties during his time with HealthSouth. Based on this judgment, we have no obligation to indemnify him for any litigation costs. Therefore, we reversed the remainder of this accrual for his legal fees during the second quarter of 2009, which resulted in a reduction in Professional fees – accounting, tax, and legal of $6.5 million during the nine months ended September 30, 2009.
Excluding the reversal of accrued fees discussed above, Professional fees – accounting, tax, and legal for the three and nine months ended September 30, 2009 and 2008 related primarily to legal and consulting fees for continued litigation defense and support matters arising from
prior reporting and restatement issues and income tax return preparation and consulting fees for various tax projects related to our pursuit of our remaining income tax refund claims.
Loss (Gain) on Early Extinguishment of Debt
As disclosed previously and throughout this report, during 2009 and 2008, we used the net proceeds from various non-operating sources of cash, as well as available cash, to pay down long-term debt. As a result of these pre-payments and bond redemptions, we allocated a portion of the debt discounts or premiums and fees associated with this
debt to the debt that was extinguished. The amounts included in Loss (gain) on early extinguishment of debt in each period presented are a result of these debt reductions.
Interest Expense and Amortization of Debt Discounts and Fees
As discussed in Note 5, Long-term Debt, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), as well as in Part I, Item 3, Quantitative
and Qualitative Disclosures about Market Risk, of this report, we have effectively converted $1.0 billion of variable rate interest to a fixed rate via interest rate swaps that are not designated as hedges. Because these swaps are not designated as hedges, the line item Interest expense and amortization of debt discounts and fees benefits from lower interest rates. However, lower rates generate increased payments on our interest rate swaps and increase
amounts included in the line item Loss on interest rate swaps.
Approximately $7.1 million of the quarter-over-quarter decrease in Interest expense and amortization of debt discounts and fees was due to a decrease in our average interest rate quarter over quarter. Our average interest rate was 8.2% during the three months ended September 30, 2008
compared to an average rate of 6.6% during the three months ended September 30, 2009. The remainder of the decrease was due to lower average borrowings which resulted from the debt reductions discussed in Note 8, Long-term Debt, to the consolidated financial statements accompanying our 2008 Form 10-K and Note 2, Liquidity, to the condensed consolidated financial statements included in Part I, Item
1, Financial Statements (Unaudited), of this report.
Approximately $22.9 million of the decrease in Interest expense and amortization of debt discounts and fees during the nine months ended September 30, 2009 compared to the same period of 2008 was due to a decrease in our average interest rate period over period. Our average interest
rate was 8.6% during the nine months ended September 30, 2008 compared to an average rate of 6.9% during the nine months ended September 30, 2009. The remainder of the decrease was due to lower average borrowings which resulted from the debt reductions discussed in Note 8, Long-term Debt, to the consolidated financial statements accompanying our 2008 Form 10-K and Note 2, Liquidity, to the condensed
consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report.
Other Income
Other income is primarily comprised of interest income and gains and losses on sales of investments. Other income for the nine months ended September 30, 2009 included $0.8 million of impairment charges associated with our
marketable equity securities. See Note 3, Cash and Marketable Securities, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report.
Loss on Interest Rate Swaps
Our Loss on interest rate swaps in each period represents amounts recorded related to the fair value adjustments and quarterly settlements recorded for our interest rate swaps that are not designated as hedges. The loss or gain recorded in each period presented represents the change
in the market’s expectations for interest rates over the remaining term of the swap agreements. To the extent the expected LIBOR rates increase, we will record net gains. When expected LIBOR rates decrease, we will record net losses.
During the three and nine months ended September 30, 2009, we made net cash settlement payments of $11.2 million and $30.3 million, respectively, to our counterparties under these interest rate swap agreements. During the three and nine months ended September 30, 2008, we made net cash settlement payments of $7.3 million and $13.9 million,
respectively, to our counterparties under these interest rate swap agreements. For additional information regarding these interest rate swap agreements, see Note 5, Long-term Debt, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), and Part I, Item 3, Quantitative and Qualitative
Disclosures about Market Risk, of this report.
Equity in Net Income of Nonconsolidated Affiliates
As discussed above and in Note 1, Basis of Presentation, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report, Equity
in net income of nonconsolidated affiliates for the nine months ended September 30, 2009 included an out-of-period adjustment associated with a facility we account for using the equity method of accounting. This adjustment created a charge of approximately $4.5 million for the nine months ended September 30, 2009.
Income (Loss) from Continuing Operations Before Income Tax Benefit
Our Income (loss) from continuing operations before income tax benefit for the three and nine months ended September 30, 2009 included $8.5 million and $41.3 million, respectively, of net charges associated with Government,
class action, and related settlements expense, while during the three and nine months ended September 30, 2008, we experienced net charges (gains) of $17.1 million and ($27.9) million, respectively, related to Government, class action, and related settlements expense. Excluding this line item, the improvement in pre-tax income from continuing operations in all periods presented primarily resulted from the increase in Net
operating revenues and the decrease in interest expense, as discussed above. Pre-tax income from continuing operations for the nine months ended September 30, 2009 also benefitted from a decrease in depreciation and the reduction in Professional fees – accounting, tax, and legal due to the judgment against Mr. Scrushy, as discussed above.
Provision for Income Tax Benefit
Our Provision for income tax benefit of $1.7 million for the three months ended September 30, 2009 includes the following: (1) current income tax benefit of $3.9 million primarily attributable to state income tax refunds received, or expected to be received, offset by (2) current
income tax expense of $1.7 million attributable to state income tax expense of subsidiaries which have separate state filing requirements and federal income taxes for subsidiaries not included in our federal consolidated income tax return and (3) deferred income tax expense of $0.5 million attributable to increases in basis differences of certain indefinite-lived assets.
Our Provision for income tax benefit of $0.8 million for the nine months ended September 30, 2009 includes the following: (1) current income tax benefit of $9.1 million primarily attributable to state income tax refunds received, or expected to be received, offset by (2) current
income tax expense of $5.9 million attributable to state income tax expense of subsidiaries which have separate state filing requirements and federal income taxes for subsidiaries not included in our federal consolidated income tax return and (3) deferred income tax expense of $2.4 million attributable to increases in basis differences of certain indefinite-lived assets and a decrease in our deferred tax asset related to the Alternative Minimum Tax Refundable Tax Credit.
Our Provision for income tax benefit of $22.5 million for the three months ended September 30, 2008, included the following: (1) current income tax expense of approximately $2.0 million attributable to state income tax expense of subsidiaries which have separate state filing
requirements and federal income taxes for subsidiaries not included in our federal consolidated income tax return and (2) deferred income tax expense of approximately $0.6 million attributable to increases in the basis difference of certain indefinite-lived assets offset by (3) current income tax benefit of approximately $25.1 million primarily attributable to state income tax refunds received, or expected to be received, and changes in the amount of unrecognized tax benefits, as discussed in Note 9, Income
Taxes, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report.
Our Provision for income tax benefit of $21.7 million for the nine months ended September 30, 2008, included the following: (1) current income tax expense of approximately $20.5 million attributable to a revision in previously estimated federal income tax refunds and related
interest as a result of our settlement with the Internal Revenue Service for the tax years 2000 through 2003, state income tax expense of subsidiaries which have separate state filing requirements, and federal income taxes for subsidiaries not included in our federal consolidated income tax return and (2) deferred income tax expense of approximately $2.0 million attributable to increases in the basis difference of certain indefinite-lived assets offset by (3) current income tax benefit of approximately $44.2
million primarily attributable to state income tax refunds received, or expected to be received, and changes in the amount of unrecognized tax benefits, as discussed in Note 9, Income Taxes, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests represents the share of net income or loss allocated to members or partners in our consolidated affiliates. Fluctuations in these amounts are primarily driven by the financial performance of the applicable hospital population each
period.
Results of Discontinued Operations
During the nine months ended September 30, 2009, we terminated the leases associated with certain rental properties. As a result, we reclassified our condensed consolidated balance sheet as of December 31, 2008, our condensed consolidated statements of operations for the three and nine months ended September 30, 2009 and 2008, and our condensed
consolidated statement of cash flows for the nine months ended September 30, 2008 to include these properties and their results of operations in discontinued operations.
The operating results of discontinued operations, by division and in total, are as follows (in millions):
|
|
Three Months Ended
September 30, |
|
|
Nine Months Ended
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
HealthSouth Corporation: |
|
|
|
|
|
|
|
|
|
|
|
|
Net operating revenues |
|
$ |
0.1 |
|
|
$ |
6.4 |
|
|
$ |
0.8 |
|
|
$ |
16.2 |
|
Costs and expenses |
|
|
1.0 |
|
|
|
6.2 |
|
|
|
4.2 |
|
|
|
19.4 |
|
Impairments |
|
|
- |
|
|
|
7.7 |
|
|
|
- |
|
|
|
7.7 |
|
Loss from discontinued operations |
|
|
(0.9 |
) |
|
|
(7.5 |
) |
|
|
(3.4 |
) |
|
|
(10.9 |
) |
Loss on disposal of assets of discontinued operations |
|
|
- |
|
|
|
(0.1 |
) |
|
|
(0.4 |
) |
|
|
(0.2 |
) |
Income tax benefit |
|
|
- |
|
|
|
- |
|
|
|
0.1 |
|
|
|
- |
|
Loss from discontinued operations, net of tax |
|
$ |
(0.9 |
) |
|
$ |
(7.6 |
) |
|
$ |
(3.7 |
) |
|
$ |
(11.1 |
) |
Surgery Centers: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating revenues |
|
$ |
2.2 |
|
|
$ |
2.2 |
|
|
$ |
6.7 |
|
|
$ |
8.5 |
|
Costs and expenses |
|
|
1.6 |
|
|
|
1.7 |
|
|
|
4.4 |
|
|
|
11.2 |
|
Impairments |
|
|
- |
|
|
|
0.3 |
|
|
|
- |
|
|
|
0.9 |
|
Income (loss) from discontinued operations |
|
|
0.6 |
|
|
|
0.2 |
|
|
|
2.3 |
|
|
|
(3.6 |
) |
Gain on disposal of assets of discontinued operations |
|
|
0.7 |
|
|
|
- |
|
|
|
0.7 |
|
|
|
0.1 |
|
Gain on divestiture of division |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
19.3 |
|
Income tax (expense) benefit |
|
|
- |
|
|
|
- |
|
|
|
(0.1 |
) |
|
|
0.7 |
|
Income from discontinued operations, net of tax |
|
$ |
1.3 |
|
|
$ |
0.2 |
|
|
$ |
2.9 |
|
|
$ |
16.5 |
|
Other: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating revenues |
|
$ |
- |
|
|
$ |
0.1 |
|
|
$ |
0.5 |
|
|
$ |
2.4 |
|
Costs and expenses |
|
|
5.8 |
|
|
|
(4.8 |
) |
|
|
6.6 |
|
|
|
(0.4 |
) |
Impairments |
|
|
- |
|
|
|
0.4 |
|
|
|
- |
|
|
|
0.4 |
|
(Loss) income from discontinued operations |
|
|
(5.8 |
) |
|
|
4.5 |
|
|
|
(6.1 |
) |
|
|
2.4 |
|
Gain on disposal of assets of discontinued operations |
|
|
- |
|
|
|
- |
|
|
|
0.1 |
|
|
|
- |
|
Loss on divestiture of diagnostic division |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(0.6 |
) |
(Loss) income from discontinued operations, net of tax |
|
$ |
(5.8 |
) |
|
$ |
4.5 |
|
|
$ |
(6.0 |
) |
|
$ |
1.8 |
|
Total: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating revenues |
|
$ |
2.3 |
|
|
$ |
8.7 |
|
|
$ |
8.0 |
|
|
$ |
27.1 |
|
Costs and expenses |
|
|
8.4 |
|
|
|
3.1 |
|
|
|
15.2 |
|
|
|
30.2 |
|
Impairments |
|
|
- |
|
|
|
8.4 |
|
|
|
- |
|
|
|
9.0 |
|
Loss from discontinued operations |
|
|
(6.1 |
) |
|
|
(2.8 |
) |
|
|
(7.2 |
) |
|
|
(12.1 |
) |
Gain (loss) on disposal of assets of discontinued operations |
|
|
0.7 |
|
|
|
(0.1 |
) |
|
|
0.4 |
|
|
|
(0.1 |
) |
Gain on divestitures of divisions |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
18.7 |
|
Income tax benefit |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.7 |
|
(Loss) income from discontinued operations, net of tax |
|
$ |
(5.4 |
) |
|
$ |
(2.9 |
) |
|
$ |
(6.8 |
) |
|
$ |
7.2 |
|
HealthSouth Corporation. Our results of discontinued operations primarily included the operations of our Dallas Medical Center, which we closed in October 2008. The decrease in net operating revenues and costs and expenses in each period presented were due primarily to the performance
and eventual closure of this hospital.
Surgery Centers. We closed the transaction to sell our surgery centers division to ASC Acquisition LLC (“ASC”) on June 29, 2007, other than with respect to certain facilities for which approvals for the transfer to ASC had not yet been received as of such date. As of
December 31, 2007, approval for six facilities in Illinois remained pending. In January 2008, we received approval for the change in control of five of the six Illinois facilities. The sixth facility had an outstanding relocation project which was completed during the second quarter of 2009. In October 2009, we received approval for the transfer of this facility to ASC, and the transfer to ASC became effective as of November 1, 2009. No portion of the purchase price was withheld at closing pending the transfer
of these facilities. As of September 30, 2009, we had deferred $26.5 million of cash proceeds received at closing associated with the facility that was still awaiting approval for the transfer to ASC as of September 30, 2009.
As a result of the transfer of the five Illinois facilities during the first quarter of 2008, we recorded a gain on disposal of $19.3 million during the nine months ended September 30, 2008. We expect to record an additional gain of approximately $14 million for the facility that was transferred to ASC during the fourth quarter of 2009. For
additional information, see Note 8, Assets Held for Sale and Results of Discontinued Operations, to our condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report.
The change in operating results for this division for all periods presented resulted from the divestiture activity discussed above.
Other. Results of operations in “other” primarily include the results of operations of our former outpatient and diagnostic divisions. Costs recorded during the three and nine months ended September 30, 2009 primarily relate to indemnification obligations and matters discussed
in Note 12, Contingencies, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report. See also Note 16, Assets Held for Sale and Results of Discontinued Operations, to the consolidated financial statements accompanying our 2008 Form 10-K for additional information.
Liquidity and Capital Resources
We continue to make progress in improving our leverage and liquidity. Our progress was confirmed during the second quarter of 2009 when Moody’s upgraded our corporate credit rating to B2, allowing the spread on our Term Loan Facility to be reduced by 25 basis points effective June 10, 2009. In addition, Standard and Poor’s moved
our outlook to “positive” from “stable.”
During the nine months ended September 30, 2009, we reduced our total debt outstanding by approximately $117 million and increased our Cash and cash equivalents by approximately $85 million. See Note 2, Liquidity, and Note 5, Long-term
Debt, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report for additional information regarding debt reductions. Our primary sources of liquidity are cash on hand, cash flows from operations, and borrowings under our revolving credit facility. As of September 30, 2009, we had $117.3 million in Cash and cash equivalents. This
amount excludes $88.1 million in Restricted cash and $23.3 million of restricted marketable securities. Our restricted assets pertain to various obligations we have under partnership agreements and other arrangements, primarily related to our captive insurance company. Cash and cash equivalents as of September 30, 2009 included net proceeds associated with the UBS Settlement. See Note 2, Liquidity,
and Note 11, Settlements, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report for additional information.
As of September 30, 2009, we had all $400 million available to us under our revolving credit facility. We monitor the financial strength of our depositories, creditors, insurance carriers, and other counterparties using publicly available information, as well as qualitative inputs. Based on our current borrowing capacity and compliance with
the financial covenants under our Credit Agreement, we do not believe there is significant risk in our ability to make draws under our revolving credit facility, if needed. However, no such assurances can be provided. In addition, we anticipate cash flows from certain non-operating sources, such as those related to certain legal matters discussed in Note 11, Settlements, and Note 12, Contingencies,
including the judgment against Mr. Scrushy. However, no assurances can be given as to whether or when such non-operating cash flows will be received, nor can we provide any assurances as to the collectability of any amounts owed from Mr. Scrushy.
We have scheduled principal payments of $6.2 million and $24.9 million in the remainder of 2009 and 2010, respectively, related to long-term debt obligations (see Note 5, Long-term Debt, to the condensed consolidated financial statements included in Part I, Item 1, Financial
Statements (Unaudited), of this report). We do not face substantial near-term refinancing risk, as our revolving credit facility does not expire until 2012, a portion of our Term Loan Facility does not mature until 2013, with the remainder maturing in 2015, depending on certain conditions (see Note 5, Long-term Debt, for a discussion of an amendment and extension related to our Credit Agreement), and the majority of our bonds are not due until 2014
and 2016.
Our Credit Agreement governs the vast majority of our senior secured borrowings and contains financial covenants that include a leverage ratio and an interest coverage ratio. As of September 30, 2009, we were in compliance with the covenants under our Credit Agreement. If we anticipated a potential covenant violation, we would seek relief
from our lenders, which would have some cost to us, and such relief might not be on terms as favorable to those in our existing Credit Agreement. Under such circumstances, there is also the potential our lenders would not grant relief to us which, among other things, would depend on the state of the credit markets at that time. However, we believe we have reduced this risk by significantly lowering our senior secured leverage ratio since the inception of our Credit Agreement.
See Item 1A, Risk Factors, and Note 1, Summary of Significant Accounting Policies, to the consolidated financial statements accompanying our 2008 Form 10-K for a discussion of risks and uncertainties facing us. See also Note
2, Liquidity, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report.
Sources and Uses of Cash
As noted above, our primary sources of liquidity are cash on hand, cash flows from operations, and borrowings under our revolving credit facility The following table shows the cash flows provided by or used in operating, investing, and financing activities for the nine months ended September 30, 2009 and 2008, as well as the effect of exchange
rates for those same periods (in millions):
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
Net cash provided by operating activities |
|
$ |
362.1 |
|
|
$ |
149.3 |
|
Net cash used in investing activities |
|
|
(124.4 |
) |
|
|
(11.9 |
) |
Net cash used in financing activities |
|
|
(152.6 |
) |
|
|
(133.4 |
) |
Effect of exchange rate changes |
|
|
- |
|
|
|
0.8 |
|
Increase in cash and cash equivalents |
|
$ |
85.1 |
|
|
$ |
4.8 |
|
Operating activities. Net cash provided by operating activities increased period over period due to the increase in Net operating revenues, as discussed above, and a decrease
in cash interest expense. Net cash provided by operating activities for the nine months ended September 30, 2009 included $73.8 million in net cash proceeds related to the UBS Settlement and the receipt of an approximate $42 million additional federal income tax refund for tax years 1995 through 1999. See Note 11, Settlements, and Note 9, Income Taxes,
to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report.
Investing activities. Decreased proceeds from asset disposals, increased restricted cash, increased capital expenditures, and increased payments associated with interest rate swaps not designated as cash flow hedges in 2009 caused the change in Net
cash used in investing activities period over period. Net cash used in investing activities for the nine months ended September 30, 2008 included $53.8 million from asset disposals, including our corporate campus (see Note 5, Property and Equipment, to the consolidated financial statements accompanying our 2008 Form 10-K).
Financing activities. Net debt payments during the nine months ended September 30, 2009 and 2008 were $112.8 million and $192.8 million, respectively. Net debt payments during the nine months ended September 30, 2009 primarily resulted from receipt of the net cash proceeds related to
the UBS Settlement and the receipt of the additional federal income tax refund discussed above. Net debt payments during the nine months ended September 30, 2008 resulted primarily from the sale of our corporate campus and the net proceeds from our June 2008 equity offering. Proceeds of $150.2 million related to our June 2008 equity offering were included in financing activities for the nine months ended September 30, 2008. For additional information regarding these transactions, see Note 5, Property
and Equipment, and Note 10, Shareholders’ Deficit, to the consolidated financial statements accompanying our 2008 Form 10-K.
Adjusted Consolidated EBITDA
Management continues to believe Adjusted Consolidated EBITDA as defined in our Credit Agreement is a measure of leverage capacity, our ability to service our debt, and our ability to make capital expenditures.
We use Adjusted Consolidated EBITDA on a consolidated basis as a liquidity measure. We believe this financial measure on a consolidated basis is important in analyzing our liquidity because it is the key component of certain material covenants contained within our Credit Agreement, which is discussed in more detail in Note 8, Long-term
Debt, to the consolidated financial statements accompanying our 2008 Form 10-K. These covenants are material terms of the Credit Agreement, and the Credit Agreement represents a substantial portion of our capitalization. Non-compliance with these financial covenants under our Credit Agreement—our interest coverage ratio and our leverage ratio—could result in our lenders requiring us to immediately repay all amounts borrowed. If we anticipated a potential covenant violation, we would seek relief
from our lenders, which would have some cost to us, and such relief might not be on terms favorable to those in our existing Credit Agreement. In addition, if we cannot satisfy these financial covenants, we would be prohibited under our Credit Agreement from engaging in certain activities, such as incurring additional indebtedness, making certain payments, and acquiring and disposing of assets. Consequently, Adjusted Consolidated EBITDA is critical to our assessment of our liquidity.
In general terms, the definition of Adjusted Consolidated EBITDA, per our Credit Agreement, allows us to add back to consolidated Net income unusual non-cash or non-recurring items. These items include, but may not be limited to, (1) amounts associated with government, class action,
and related settlements, (2) fees, costs, and expenses related to our recapitalization transactions, (3) any losses from discontinued operations and closed locations, (4) charges in respect of professional fees for reconstruction and restatement of financial statements, including fees paid to outside professional firms for matters related to internal controls and legal fees for continued litigation defense and support matters discussed in Note 11, Settlements,
and Note 12, Contingencies, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report, (5) stock- based compensation expense recorded for eligible employees , (6) investment and other income (including interest income), and (7) fees associated with our divestiture activities. We reconcile Adjusted Consolidated
EBITDA to Net income and to Net cash provided by operating activities.
However, Adjusted Consolidated EBITDA is not a measure of financial performance under generally accepted accounting principles in the United States of America (“GAAP”), and the items excluded from Adjusted Consolidated EBITDA are significant components in understanding and assessing financial performance. Therefore, Adjusted Consolidated
EBITDA should not be considered a substitute for Net income or cash flows from operating, investing, or financing activities. Because Adjusted Consolidated EBITDA is not a measurement determined in accordance with GAAP and is thus susceptible to varying calculations, Adjusted Consolidated EBITDA, as presented, may not be comparable to other similarly titled measures of other companies. Revenues and expenses are measured in accordance with the policies and
procedures described in Note 1, Summary of Significant Accounting Policies, to the consolidated financial statements accompanying our 2008 Form 10-K.
Our Adjusted Consolidated EBITDA for the three and nine months ended September 30, 2009 and 2008 was as follows (in millions):
Reconciliation of Net Income to Adjusted Consolidated EBITDA
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Net income |
|
$ |
24.8 |
|
|
$ |
12.8 |
|
|
$ |
81.9 |
|
|
$ |
91.6 |
|
Loss (income) from discontinued operations, net of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
tax, attributable to HealthSouth |
|
|
5.4 |
|
|
|
3.2 |
|
|
|
7.3 |
|
|
|
(7.8 |
) |
Provision for income tax benefit |
|
|
(1.7 |
) |
|
|
(22.5 |
) |
|
|
(0.8 |
) |
|
|
(21.7 |
) |
Loss on interest rate swaps |
|
|
7.9 |
|
|
|
8.0 |
|
|
|
16.7 |
|
|
|
16.1 |
|
Interest expense and amortization of debt discounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
and fees |
|
|
29.5 |
|
|
|
40.3 |
|
|
|
95.0 |
|
|
|
131.1 |
|
Loss (gain) on early extinguishment of debt |
|
|
- |
|
|
|
2.1 |
|
|
|
(3.1 |
) |
|
|
5.8 |
|
Professional fees—accounting, tax, and legal |
|
|
3.5 |
|
|
|
4.0 |
|
|
|
5.0 |
|
|
|
12.9 |
|
Government, class action, and related settlements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expense |
|
|
8.5 |
|
|
|
17.1 |
|
|
|
41.3 |
|
|
|
(27.9 |
) |
Net noncash loss on disposal of assets |
|
|
0.7 |
|
|
|
0.2 |
|
|
|
3.0 |
|
|
|
0.8 |
|
Depreciation and amortization |
|
|
18.1 |
|
|
|
17.9 |
|
|
|
53.4 |
|
|
|
65.3 |
|
Impairment charges, including investments |
|
|
4.3 |
|
|
|
- |
|
|
|
5.2 |
|
|
|
0.6 |
|
Stock-based compensation expense |
|
|
3.4 |
|
|
|
2.5 |
|
|
|
9.9 |
|
|
|
8.5 |
|
Net income attributable to noncontrolling interests |
|
|
(8.0 |
) |
|
|
(6.2 |
) |
|
|
(25.7 |
) |
|
|
(21.1 |
) |
Adjusted Consolidated EBITDA |
|
$ |
96.4 |
|
|
$ |
79.4 |
|
|
$ |
289.1 |
|
|
$ |
254.2 |
|
In accordance with our Credit Agreement, we are allowed to add certain other items to the calculation of Adjusted Consolidated EBITDA, and there may also be certain other deductions required. As these adjustments may not be indicative of our ongoing performance, they have been excluded from the above table.
Reconciliation of Adjusted Consolidated EBITDA to Net Cash Provided by Operating Activities
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
Adjusted Consolidated EBITDA |
|
$ |
289.1 |
|
|
$ |
254.2 |
|
Provision for doubtful accounts |
|
|
25.5 |
|
|
|
20.5 |
|
Professional fees—accounting, tax, and legal |
|
|
(5.0 |
) |
|
|
(12.9 |
) |
Interest expense and amortization of debt discounts and fees |
|
|
(95.0 |
) |
|
|
(131.1 |
) |
UBS Settlement proceeds, gross |
|
|
100.0 |
|
|
|
- |
|
Equity in net income of nonconsolidated affiliates |
|
|
(2.8 |
) |
|
|
(7.8 |
) |
Net income attributable to noncontrolling interests |
|
|
25.7 |
|
|
|
21.1 |
|
Amortization of debt discounts and fees |
|
|
4.8 |
|
|
|
4.9 |
|
Distributions from nonconsolidated affiliates |
|
|
6.5 |
|
|
|
7.6 |
|
Current portion of income tax benefit |
|
|
3.2 |
|
|
|
23.7 |
|
Change in assets and liabilities |
|
|
31.8 |
|
|
|
(22.5 |
) |
Change in government, class action, and related settlements |
|
|
(11.0 |
) |
|
|
(7.4 |
) |
Other operating cash used in discontinued operations |
|
|
(9.6 |
) |
|
|
(1.6 |
) |
Other |
|
|
(1.1 |
) |
|
|
0.6 |
|
Net cash provided by operating activities |
|
$ |
362.1 |
|
|
$ |
149.3 |
|
The increase in Adjusted Consolidated EBITDA for all periods presented was due primarily to the increase in Net operating revenues discussed above.
Funding Commitments
We have scheduled principal payments of $6.2 million and $24.9 million in the remainder of 2009 and 2010, respectively, related to long-term debt obligations (see Note 5, Long-term Debt, to the condensed consolidated financial statements included in Part I, Item 1, Financial
Statements (Unaudited), of this report). For additional information about our long-term debt obligations, see Note 8, Long-term Debt, to the consolidated financial statements accompanying our 2008 Form 10-K.
During the nine months ended September 30, 2009, we made capital expenditures of $54.7 million. The total amounts expected for capital expenditures and development efforts for 2009 approximate $70 million to $85 million, net of any potential proceeds from sale-leaseback transactions. Actual amounts spent will be dependent upon the timing
of development projects and receipt of non-operating cash flows associated with certain matters discussed in Note 12, Contingencies, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report. These expenditures include IT initiatives, new business opportunities, bed expansions, hospital refresh programs, and equipment upgrades and
purchases. Approximately $35 million of this budgeted amount is non-discretionary.
For a discussion of risk factors related to our business and our industry, please see Item 1A, Risk Factors, of our 2008 Form 10-K and Note 1, Summary of Significant Accounting Policies, to the consolidated financial
statements accompanying our 2008 Form 10-K.
Off-Balance Sheet Arrangements
Other than the guarantees discussed below and in Note 6, Guarantees, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report, there have been no material
changes to the off-balance sheet arrangements described in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our 2008 Form 10-K.
We are secondarily liable for certain lease obligations primarily associated with sold facilities, including the sale of our surgery centers, outpatient, and diagnostic divisions during 2007. Also, in connection with the closing of the transaction to sell our diagnostic division, HealthSouth remained as a guarantor to certain purchase contracts
that were assigned to the buyer in connection with the sale.
As of September 30, 2009, we were secondarily liable for 84 such guarantees. The remaining terms of these guarantees ranged from one month to 117 months. If we were required to perform under all such guarantees, the maximum amount we would be required to pay approximated $51.9 million.
We have not recorded a liability for these guarantees, as we do not believe it is probable we will have to perform under these agreements. If we are required to perform under these guarantees, we could potentially have recourse against the purchaser for recovery of any amounts paid. In addition, the purchasers of our surgery centers, outpatient,
and diagnostic divisions have agreed to seek releases from the lessors and vendors in favor of HealthSouth with respect to the guarantee obligations associated with these divestitures. To the extent the purchasers of these divisions are unable to obtain releases for HealthSouth, the purchasers have agreed to indemnify HealthSouth for damages incurred under the guarantee obligations, if any. For additional information regarding these guarantees, see Note 6, Guarantees,
to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report.
Contractual Obligations
Our consolidated contractual obligations as of September 30, 2009 are as follows (in millions):
|
|
Total |
|
|
October 1 through December 31, 2009 |
|
|
|
2010 – 2011 |
|
|
|
2012 – 2013 |
|
|
2014 and Thereafter |
|
Long-term debt obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, excluding revolving |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
credit facility and capital lease |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
obligations (a) |
|
$ |
1,591.8 |
|
|
$ |
2.0 |
|
|
$ |
16.2 |
|
|
$ |
736.8 |
|
|
$ |
836.8 |
|
Interest on long-term debt (b) |
|
|
552.1 |
|
|
|
24.6 |
|
|
|
196.0 |
|
|
|
179.8 |
|
|
|
151.7 |
|
Capital lease obligations (c) |
|
|
162.8 |
|
|
|
5.4 |
|
|
|
40.2 |
|
|
|
31.0 |
|
|
|
86.2 |
|
Operating lease obligations (d)(e) |
|
|
209.7 |
|
|
|
8.5 |
|
|
|
58.6 |
|
|
|
39.9 |
|
|
|
102.7 |
|
Purchase obligations (e)(f) |
|
|
28.8 |
|
|
|
2.7 |
|
|
|
22.4 |
|
|
|
2.6 |
|
|
|
1.1 |
|
Other long-term liabilities (g) |
|
|
3.7 |
|
|
|
0.2 |
|
|
|
0.5 |
|
|
|
0.4 |
|
|
|
2.6 |
|
Total |
|
$ |
2,548.9 |
|
|
$ |
43.4 |
|
|
$ |
333.9 |
|
|
$ |
990.5 |
|
|
$ |
1,181.1 |
|
(a) |
Included in long-term debt are amounts owed on our bonds payable and other notes payable. These borrowings are further explained in Note 8, Long-term Debt, to the consolidated financial statements accompanying our 2008 Form 10-K. As discussed in Note 5, Long-term Debt, to the condensed consolidated
financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report, in October 2009, we entered into an agreement with the lenders in our Credit Agreement to extend the maturity of a portion of our Term Loan Facility and to amend certain provisions of the Credit Agreement. Amounts in the above table for long-term debt obligations do not include the extended maturity for $300.0 million of our Term Loan Facility from 2013 to
2015, contingent on certain conditions. |
(b) |
Interest on our fixed rate debt is presented using the stated interest rate. Interest expense on our variable rate debt is estimated using the rate in effect as of September 30, 2009. Interest related to capital lease obligations is excluded from this line. Amounts exclude amortization of debt discounts, amortization of loan fees, or fees for lines of credit that would be included in interest expense in our condensed
consolidated statements of operations. Amounts also exclude the impact of our interest rate swaps. In addition, as discussed in Note 5, Long-term Debt, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report, the October 2009 amendment and extension of our Credit Agreement includes provisions to increase the interest rate for
the $300.0 million extended portion of our Term Loan Facility from LIBOR plus 2.25% to LIBOR plus 3.75%. The impact of this increase in rates for a portion of our Term Loan Facility has not been included in the above table. |
(c) |
Amounts include the interest portion of future minimum capital lease payments. |
(d) |
We lease many of our hospitals as well as other property and equipment under operating leases in the normal course of business. Some of our hospital leases require percentage rentals on patient revenues above specified minimums and contain escalation clauses. The minimum lease payments do not include contingent rental expense. Some lease agreements provide us with the option to renew the lease or purchase the leased
property. Our future operating lease obligations would change if we exercised these renewal options and if we entered into additional operating lease agreements. For more information, see Note 5, Property and Equipment, to the consolidated financial statements accompanying our 2008 Form 10-K. In addition, as of September 30, 2009, these amounts exclude $1.8 million of operating lease obligations associated with facilities that are reported in
discontinued operations. |
(e) |
Future operating lease obligations and purchase obligations are not recognized in our condensed consolidated balance sheet. |
(f) |
Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding on HealthSouth and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancelable without penalty. Our purchase obligations primarily
relate to software licensing and support, medical supplies, certain equipment, and telecommunications. |
(g) |
Because their future cash outflows are uncertain, the following noncurrent liabilities are excluded from the table above: medical malpractice and workers’ compensation risks, deferred income taxes, and our estimated liability for unsettled litigation. For more information, see Note 1, Summary of Significant
Accounting Policies, “Self-Insured Risks,” Note 17, Income Taxes, and Note 21, Contingencies and Other Commitments, to the consolidated financial statements accompanying our 2008 Form 10-K. Also, at September 30, 2009 we had $59.4 million of total gross unrecognized tax benefits. In addition, we had an accrual
for related interest income of $3.0 million as of September 30, 2009. We continue to actively pursue the maximization of our remaining state income tax refund claims. The process of resolving these tax matters with the applicable taxing authorities will continue throughout 2009. At this time, we cannot estimate a range of the reasonably possible change that may occur. |
Indemnifications
In the ordinary course of business, HealthSouth enters into contractual arrangements under which HealthSouth may agree to indemnify another party to such arrangement from any losses incurred relating to the services they perform on behalf of HealthSouth or for losses arising from certain events as defined within the particular contract, which
may include, for example, litigation or claims relating to past performance. Such indemnification obligations may not be subject to maximum loss clauses. For additional information related to indemnifications, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Contractual Obligations,” to our 2008 Form 10-K and Note 11, Settlements,
and Note 12, Contingencies, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report.
Critical Accounting Policies
Our significant accounting policies are discussed in Note 1, Summary of Significant Accounting Policies, to the consolidated financial statements accompanying our 2008 Form 10-K. Of those significant accounting policies, those that we consider to be the most critical to aid in
fully understanding and evaluating our reported financial results, as they require management’s most difficult, subjective, or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain, are disclosed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Critical Accounting Policies,” to our 2008 Form 10-K.
Since the filing of our 2008 Form 10-K, there have been no material changes to our critical accounting policies.
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements, see Note 1, Basis of Presentation, to our condensed consolidated financial statements included under Part I, Item 1, Financial Statements (Unaudited), of this report.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Our primary exposure to market risk is to changes in interest rates on our long-term debt. We use sensitivity analysis models to evaluate the impact of interest rate changes on these items.
Changes in interest rates have different impacts on the fixed and variable rate portions of our debt portfolio. A change in interest rates impacts the net fair value of our fixed rate debt but has no impact on interest expense or cash flows. Interest rate changes on variable rate debt impacts our interest expense and cash flows, but does
not impact the net fair value of the underlying debt instruments. Our fixed and variable rate debt (excluding capital lease obligations and other notes payable) as of September 30, 2009 is shown in the following table (in millions):
|
|
As of September 30, 2009 |
|
|
|
Carrying Amount |
|
|
% of Total |
|
|
Estimated Fair Value |
|
|
% of Total |
|
Fixed rate debt |
|
$ |
496.6 |
|
|
|
31.4 |
% |
|
$ |
544.4 |
|
|
|
34.3 |
% |
Variable rate debt |
|
|
1,082.8 |
|
|
|
68.6 |
% |
|
|
1,043.5 |
|
|
|
65.7 |
% |
Total long-term debt |
|
$ |
1,579.4 |
|
|
|
100.0 |
% |
|
$ |
1,587.9 |
|
|
|
100.0 |
% |
As discussed in Note 5, Long-term Debt, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report, in March 2006, we entered into an interest rate swap
to effectively convert the floating rate of a portion of our Credit Agreement to a fixed rate in order to limit the variability of interest-related payments caused by changes in LIBOR. Under this interest rate swap agreement, we pay a fixed rate of 5.2% on an amortizing notional principal of $1.1 billion, while the counterparties to this interest rate swap agreement pay a floating rate based on 3-month LIBOR. As also discussed in Note 5, Long-term Debt,
to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report, in June 2009, we entered into a receive-fixed swap as a mirror offset to $100.0 million of the $1.1 billion interest rate swap discussed above in order to reduce our effective fixed rate to total debt ratio.
Our variable-rate interest expense increases or decreases as interest rates change. However, the net settlement payments or receipts on interest rate swaps described above offset a majority of those changes. Because these swaps are not designated as hedges, net settlements are included in the line item Loss
on interest rate swaps in our condensed consolidated statements of operations and are not included in interest expense.
Based on the size of our variable rate debt as of September 30, 2009 and inclusive of the impact of the net conversion of $1.0 billion of variable rate interest to a fixed rate via interest rate swaps, as discussed above, a 1% increase in interest rates would result in an incremental negative cash flow of approximately $1.3 million over
the next 12 months, while a 1% decrease in interest rates would result in an incremental positive cash flow of approximately $2.1 million over the next twelve months.
A 1% increase in interest rates would result in an approximate $17.4 million decrease in the estimated net fair value of our fixed rate debt, and a 1% decrease in interest rates would result in an approximate $7.8 million increase in its estimated net fair value.
We also maintain two forward-starting interest rate swaps that are designated as cash flow hedges. See Note 5, Long-term Debt, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited),
of this report. There will be no cash flow impact associated with these forward-starting swaps over the next 12 months because net settlements do not begin until June 2011.
Foreign operations, and the related market risks associated with foreign currencies, are currently, and have been, insignificant to our financial position, results of operations, and cash flows.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, an evaluation was carried out by our management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended. Based on our
evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in Internal Control Over Financial Reporting
There have been no changes in our Internal Control over Financial Reporting during the quarter ended September 30, 2009 that have a material effect on our Internal Control over Financial Reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Information relating to certain legal proceedings in which we are involved is included in Note 11, Settlements, and Note 12, Contingencies, to the condensed consolidated financial statements contained in Part I,
Item 1, Financial Statements (Unaudited), of this report and is incorporated herein by reference and should be read in conjunction with the related disclosure previously reported in our Quarterly Reports on Form 10-Q for the quarters ended June 30, 2009 and March 31, 2009 and our Annual Report on Form 10-K for the year ended December 31, 2008.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table summarizes our repurchases of equity securities during the three months ended September 30, 2009:
Period |
|
Total Number of Shares (or Units) Purchased (1) |
|
|
Average Price
Paid per Share (or Unit) |
|
|
Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs |
|
|
Maximum Number of Shares (or Units) That May Yet Be Purchased Under the Plans or Programs |
|
July 1 through
July 31, 2009 |
|
|
119 |
|
|
$ |
13.41 |
|
|
|
- |
|
|
|
- |
|
August 1 through
August 30, 2009 |
|
|
576 |
|
|
|
14.40 |
|
|
|
- |
|
|
|
- |
|
September 1 through
September 30, 2009 |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total |
|
|
695 |
|
|
|
14.23 |
|
|
|
- |
|
|
|
- |
|
(1) |
Shares in this column were tendered by employees as payment of tax liability incident to the vesting of previously awarded shares of restricted stock. |
Item 5. Other Matters
Compensatory Arrangements of Certain Officers
On November 2, 2009, our board of directors, acting by unanimous written consent, approved and adopted the final form of a senior management compensation recoupment policy applicable to awards granted and bonus compensation paid after January 1, 2010. The policy provides that if the board has, in its sole discretion, determined that any fraud,
illegal conduct, intentional misconduct or gross neglect by any officer participating in the senior management bonus plan, as may be amended from time to time, was a significant contributing factor to the Company having to restate all or a portion of its financial statement(s), the board may, to the extent permitted by applicable law and to the extent it determines in its sole judgment that it is in the best interests of the Company to do so, (a) require reimbursement of any bonus or incentive compensation paid
to such officer, (b) cause the cancellation of such officer’s restricted or deferred stock awards and outstanding stock options, and (c) require reimbursement of any gains realized on the exercise of stock options attributable to incentive awards, if and to the extent that (x) the amount of such compensation was calculated based upon the achievement of certain financial results that were subsequently reduced due to a restatement and (y) the amount of such compensation that would have been awarded to such
officer had the financial results been properly reported would have been lower than the amount actually awarded. Additionally, if such an officer is found to have committed fraud or engaged in intentional misconduct in the performance of his or her duties for the Company, as determined by a final, non-appealable judgment of a court of competent jurisdiction, and the board determines in its sole judgment that such action caused substantial harm to the Company, the board may, to the extent permitted by applicable
law and to the extent it determines in its sole judgment that it is in the best interests of the Company to do so, (A) require reimbursement of any bonus or incentive compensation paid to such officer, (B) cause the cancellation of such officer’s restricted or deferred stock awards and outstanding stock options, and (C) require reimbursement of any gains realized on the exercise of stock options attributable to incentive awards.
Amendments to Bylaws
Effective as of October 30, 2009, our board of directors, acting by unanimous written consent, approved and adopted the final form of our Amended and Restated Bylaws (the “Bylaws”), previously approved in principle at the October 22, 2009 meeting. The following summary does not purport to be complete and is qualified in its
entirety by reference to the full text of the Bylaws, as amended and restated October 30, 2009, which are attached hereto as Exhibit 3.1 and incorporated herein by reference. A description of the material amendments is set forth below.
1) Article II, Section 2.1 has been modified to provide that the annual meeting of stockholders shall be held on such date and at such time as shall be designated from time to time by the board of directors. The prior provision provided for a specific date and time for the annual meeting in the event that the board of directors did not otherwise
specify.
2) Article II, Section 2.2 has been modified to provide that special meetings of stockholders may be called at any time in accordance with the requirements of our Certificate of Incorporation. The prior provision provided that special meetings of stockholders, unless otherwise required by law, may only be called by the chairman of the board,
the president or by order of the board of directors.
3) Article II, Section 2.5 has been modified to reference expressly the discretion to adjourn any meeting of stockholders if the board of directors determines that such adjournment is necessary or appropriate to enable stockholders to fully consider information presented at such meeting or is otherwise determined to be in the best interest
of stockholders.
4) Article II, Section 2.7 has been modified with respect to the appointment of inspectors of election and provides authority to appoint alternate inspectors of election, as needed, and for emergency appointments in the event that the appointed or alternate inspectors of election are not able to act or who fail to act.
5) Article II, Section 2.9 has been modified with respect to the exclusive means by which stockholders may propose business at an annual meeting of stockholders. Under the new provisions, a stockholder must provide additional information in its notice to the secretary of the Company and must update such information prior to the applicable
meeting. In addition, information must be provided with respect to any beneficial owners on whose behalf the proposed business is being made. The notice requirements are immediately applicable and supersede the requirements disclosed in our definitive proxy statement dated April 2, 2009.
6) Article III, Section 3.4, paragraph (b), has been modified with respect to the exclusive means by which stockholders may nominate directors for election. Under the new provisions, a stockholder must provide additional information in its notice to the secretary of the company and must update such information prior to the applicable meeting.
In addition, information must be provided with respect to any beneficial owners on whose behalf the nomination is being made. The notice requirements are immediately applicable and supersede the requirements disclosed in our definitive proxy statement dated April 2, 2009.
7) Article III, Section 3.4, paragraph (c), has been modified to provide for reimbursement of certain reasonable expenses incurred by a stockholder or a group of stockholders in connection with a proxy solicitation campaign for the election of one nominee to the board of directors, subject to certain conditions including the board of
director’s determination that reimbursement is consistent with its fiduciary duties.
8) Article IV has been modified to (a) expand the officer positions that are and may be designated as principal officers of the Company in Section 4.1, (b) expand Section 4.3 to give the chief executive officer express authority to appoint subordinate officers of the Company as may be deemed necessary, desirable or appropriate where the board
of directors has not otherwise acted, (c) clarify the provisions for the removal of officers under Section 4.5, and (d) expressly set forth a description of the office, if any, of each of the vice chairman of the board, the chief executive officer, the chief financial officer and the chief operating officer under Sections 4.7, 4.8, 4.9, and 4.11, respectively.
9) Article V, Section 5.8 has been modified to provide that the board of directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of any meeting of stockholders, nor more than sixty days prior to any other action, for the purpose of determining stockholders entitled to notice
of such meeting of stockholders or any adjournment thereof, or to receive payment of any dividend or other distribution or allotment of any rights, or to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action. The prior provision provided for fifty days rather than sixty days for these record date matters. The board of directors may also elect to fix a separate record date for determining the stockholders entitled to vote at such meeting.
10) Article VII has been modified (a) with respect to the use of the corporate seal and acceptable substitutes therefore under Section 7.1, (b) to clarify the operation of the waiver of notice by stockholders that attend the applicable meeting under Section 7.3 and (c) to insert previously omitted Section 7.4 regarding the manner and authority
to execute instruments, contracts and other arrangements in the name of the company with private and governmental parties.
11) Article VIII regarding amendments to the Bylaws, previously omitted, has been inserted. Section 8.1 provides that the Bylaws may be amended, altered or repealed, or new Bylaws may be adopted, at any meeting of stockholders by the vote of the holders of not less than a majority of the outstanding shares of stock entitled to vote thereat,
provided that, in the case of a special meeting, notice that an amendment is to be considered and acted upon shall be inserted in the notice or waiver of notice of said meeting. Section 8.2 provides that to the extent permitted by the Certificate of Incorporation, the Bylaws may be amended, altered or repealed, or new Bylaws may be adopted, at any regular or special meeting of the board of directors by the affirmative vote of a majority of the board of directors.
12) Other minor amendments were made to the Bylaws that involved immaterial language changes, clarifying or conforming changes in the Sections above and in the following provisions: Article III and Sections 4.12, 4.13, 4.14 and 4.15.
Item 6. Exhibits
The exhibits required by Regulation S-K are set forth in the following list and are filed by attachment to this report unless otherwise noted.
No. |
|
Description |
3.1 |
|
Restated Certificate of Incorporation of HealthSouth Corporation, as filed in the Office of the Secretary of State of the State of Delaware on May 21, 1998 (incorporated by reference to HealthSouth’s Annual Report on Form 10-K filed with the SEC on June 27, 2005).
|
|
3.2 |
|
Certificate of Amendment to the Restated Certificate of Incorporation of HealthSouth Corporation, as filed in the Office of the Secretary of State of the State of Delaware on October 25, 2006 (incorporated by reference to Exhibit 3.1 to HealthSouth’s Current Report on Form 8-K filed on October 31, 2006).
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|
3.3 |
|
Amended and Restated Bylaws of HealthSouth Corporation, effective as of October 30, 2009.
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|
3.4 |
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Certificate of Designations of 6.50% Series A Convertible Perpetual Preferred Stock, as filed with the Secretary of State of the State of Delaware on March 7, 2006 (incorporated by reference to Exhibit 3.1 to HealthSouth’s Current Report on Form 8-K filed on March 9, 2006).
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4.1 |
|
Warrant Agreement, dated as of September 30, 2009, among HealthSouth Corporation and Computershare Inc. and Computershare Trust Company, N.A., jointly and severally as Warrant Agent (incorporated by reference to Exhibit 4.1
to HealthSouth’s Registration Statement on Form 8-A filed on October 1, 2009).
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|
10.1 |
|
Amendment No. 2, dated as of October 23, 2009, to the Credit Agreement, dated March 10, 2006, among HealthSouth Corporation, the lenders party thereto, JPMorgan Chase Bank, N.A., as the administrative agent and the collateral agent, and the other parties thereto, attaching
and effecting the Amended and Restated Credit Agreement, by and among HealthSouth, the lenders party thereto, JPMorgan Chase Bank, N.A., as the administrative agent and the collateral agent, Citicorp North America, Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as co-syndication agents; and Deutsche Bank Securities Inc., Goldman Sachs Credit Partners L.P. and Wachovia Bank, National Association, as co-documentation agents (incorporated by reference to Exhibit 10.1 to HealthSouth’s Current
Report on Form 8-K filed on October 27, 2009).
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|
31.1 |
|
Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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|
31.2 |
|
Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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|
32.1 |
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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|
32.2 |
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
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HEALTHSOUTH CORPORATION |
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|
|
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By: |
/s/ John L. Workman |
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John L. Workman |
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Executive Vice President, Chief Financial Officer
and Principal Accounting Officer |
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Date: |
November 4, 2009 |
EXHIBIT INDEX
No. |
|
Description |
3.1 |
|
Restated Certificate of Incorporation of HealthSouth Corporation, as filed in the Office of the Secretary of State of the State of Delaware on May 21, 1998 (incorporated by reference to HealthSouth’s Annual Report on Form 10-K filed with the SEC on June 27, 2005).
|
|
3.2 |
|
Certificate of Amendment to the Restated Certificate of Incorporation of HealthSouth Corporation, as filed in the Office of the Secretary of State of the State of Delaware on October 25, 2006 (incorporated by reference to Exhibit 3.1 to HealthSouth’s Current Report on Form 8-K filed on October 31, 2006).
|
|
3.3 |
|
Amended and Restated Bylaws of HealthSouth Corporation, effective as of October 30, 2009.
|
|
3.4 |
|
Certificate of Designations of 6.50% Series A Convertible Perpetual Preferred Stock, as filed with the Secretary of State of the State of Delaware on March 7, 2006 (incorporated by reference to Exhibit 3.1 to HealthSouth’s Current Report on Form 8-K filed on March 9, 2006).
|
|
4.1 |
|
Warrant Agreement, dated as of September 30, 2009, among HealthSouth Corporation and Computershare Inc. and Computershare Trust Company, N.A., jointly and severally as Warrant Agent (incorporated by reference to Exhibit 4.1
to HealthSouth’s Registration Statement on Form 8-A filed on October 1, 2009).
|
|
10.1 |
|
Amendment No. 2, dated as of October 23, 2009, to the Credit Agreement, dated March 10, 2006, among HealthSouth Corporation, the lenders party thereto, JPMorgan Chase Bank, N.A., as the administrative agent and the collateral agent, and the other parties thereto, attaching
and effecting the Amended and Restated Credit Agreement, by and among HealthSouth, the lenders party thereto, JPMorgan Chase Bank, N.A., as the administrative agent and the collateral agent, Citicorp North America, Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as co-syndication agents; and Deutsche Bank Securities Inc., Goldman Sachs Credit Partners L.P. and Wachovia Bank, National Association, as co-documentation agents (incorporated by reference to Exhibit 10.1 to HealthSouth’s Current
Report on Form 8-K filed on October 27, 2009).
|
|
31.1 |
|
Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
31.2 |
|
Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32.1 |
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
32.2 |
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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