form8k-2009q4.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
8-K
CURRENT
REPORT
Pursuant
To Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of
Report (date of earliest event reported): February 22, 2010
HealthSouth
Corporation
(Exact
name of Registrant as specified in its Charter)
Delaware
(State or
Other Jurisdiction of Incorporation)
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001-10315
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63-0860407
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(Commission
File Number)
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(IRS
Employer Identification No.)
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3660 Grandview Parkway,
Suite 200, Birmingham, Alabama 35243
(Address
of Principal Executive Offices, Including Zip Code)
(205) 967-7116
(Registrant’s
Telephone Number, Including Area Code)
Check the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions:
o Written
communication pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
o Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
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o
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Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b))
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o
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Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR
240.13e-4(c))
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ITEM 2.02. Results of Operations and Financial
Condition.
The
information contained herein is being furnished pursuant to Item 2.02 of Form
8-K, “Results of Operations and Financial Condition,” and Item 7.01 of Form 8-K,
“Regulation FD Disclosure.” This information shall not be deemed “filed” for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), or incorporated by reference in any filing under the Securities
Act of 1933, as amended, or the Exchange Act, except as shall be expressly set
forth by specific reference in such a filing.
On
February 22, 2010, HealthSouth Corporation (the “Company”) issued a press
release reporting the financial results of the Company for the three months and
year ended December 31, 2009. A copy of the press release is attached to
this report as Exhibit 99.1 and incorporated herein by reference.
ITEM 7.01. Regulation FD
Disclosure.
See Item
2.02, “Results of Operations and Financial Condition,” above.
In
addition, a copy of the supplemental slides which will be discussed during the
Company’s earnings call at 9:00 a.m. Eastern Time on Tuesday, February 23, 2010
is attached to this report as Exhibit 99.2 and incorporated herein by
reference.
Note
Regarding Adoption of New Accounting Pronouncement
As of
January 1, 2009, we have 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.
Note
Regarding Presentation of Non-GAAP Financial Measures
The
financial data contained in the press release and supplemental slides include
non-GAAP financial measures, including the Company’s leverage ratio and Adjusted
Consolidated EBITDA. The Company’s leverage ratio is defined in its credit
agreement as the ratio of consolidated total debt to Adjusted Consolidated
EBITDA for the trailing four quarters. The Company continues to believe both its
leverage ratio and Adjusted Consolidated EBITDA as defined in its credit
agreement are measures of its ability to service its debt and its ability to
make capital expenditures.
The
Company uses Adjusted Consolidated EBITDA on a consolidated basis as a liquidity
measure. The Company believes this financial measure on a consolidated basis is
important in analyzing its liquidity because it is the key component of certain
material covenants contained within the Company’s credit agreement, which is
discussed in more detail in Note 8, Long-term Debt, to the
consolidated financial statements included in its Annual Report on Form 10-K for
the year ended December 31, 2009 (the “2009 Form 10-K”), when filed. These
covenants are material terms of the credit agreement, and the credit agreement
represents a substantial portion of the Company’s capitalization. Non-compliance
with these financial covenants under the credit agreement – its interest
coverage ratio and its leverage ratio – could result in the Company’s lenders
requiring the Company to immediately repay all amounts borrowed. If the Company
anticipated a potential covenant violation, it would seek relief from its
lenders, which would have some cost to the Company, and such relief might not be
on terms favorable to those in the Company’s existing credit agreement. In
addition, if the Company cannot satisfy these financial covenants, it would be
prohibited under the 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
the Company’s assessment of its liquidity.
In
general terms, the definition of Adjusted Consolidated EBITDA, per the credit
agreement, allows the Company to add back to or subtract from 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) amounts related to discontinued operations and
closed locations, (3) 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 22,
Settlements, and
Note 23, Contingencies
and Other Commitments, to the consolidated
financial
statements included in the 2009 Form 10-K, when filed, (4) stock-based
compensation expense, (5) net investment and other income (including
interest income), and (6) fees associated with the Company’s divestiture
activities.
In
accordance with the credit agreement, the Company is allowed to add certain
other items to the calculation of Adjusted Consolidated EBITDA, and there may
also be certain other deductions required. This includes the interest income
associated with income tax recoveries, as discussed in Note 19, Income Taxes, to the
consolidated financial statements included in the 2009 Form 10-K, when filed. In
addition, the Company is allowed to add non-recurring cash gains, such as the
cash proceeds from the UBS Settlement (see Note 22, Settlements, to the
consolidated financial statements included in the 2009 Form 10-K, when filed) to
the calculation of Adjusted Consolidated EBITDA. As these adjustments may not be
indicative of the Company’s ongoing performance, they have been excluded from
Adjusted Consolidated EBITDA presented herein and in the press release and
supplemental slides attached as Exhibits 99.1 and 99.2,
respectively.
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.
The Company reconciles Adjusted Consolidated EBITDA to net income, which
reconciliation is set forth in the press release attached as Exhibit 99.1,
and to net cash provided by operating activities, which reconciliation is set
forth below. 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 the 2009
Form 10-K.
The
Company also uses adjusted income from continuing operations and the related per
share amounts, which amounts are also referred to as “adjusted earnings per
share,” as analytical indicators to assess its performance. Management believes
the presentation of adjusted income from continuing operations and the related
per share amounts provides useful information to management and investors about
the Company’s operating business before taking into account certain items that
are non-operational or infrequent in nature. These measures are not defined
measures of financial performance under GAAP and should not be considered as
alternatives to net income and net income per share attributable to HealthSouth
common shareholders. Because these measures are not measures determined in
accordance with GAAP and are susceptible to varying calculations, they may not
be comparable to other similarly titled measures presented by other companies.
See the consolidated statements of operations included in the press release
attached as Exhibit 99.1 for the GAAP measures of net income, income from
continuing operations, and basic and diluted earnings per common share. A
reconciliation of net income to adjusted income from continuing operations, and
the related per share amounts, is included in the earnings release attached as
Exhibit 99.1 and the supplemental slides attached as Exhibit 99.2.
The
Company also uses adjusted free cash flow as an analytical indicator to assess
its performance. Management believes the presentation of adjusted free cash flow
provides investors an efficient means by which they can evaluate the Company’s
capacity to reduce debt and pursue development activities. The calculation of
adjusted free cash flow is included in the supplemental slides attached as
Exhibit 99.2. This measure is not a defined measure of financial performance
under GAAP and should not be considered as an alternative to net cash provided
by operating activities. Our definition of adjusted free cash flow is limited
and does not represent residual cash flows available for discretionary spending.
Because this measure is not determined in accordance with GAAP and is
susceptible to varying calculations, it may not be comparable to other similarly
titled measures presented by other companies. See the consolidated statements of
cash flows included in the press release attached as Exhibit 99.1 for the GAAP
measures of cash flows from operating, investing, and financing activities. A
reconciliation of net cash provided by operating activities to adjusted free
cash flow is presented below.
Reconciliation
of Net Cash Provided by Operating Activities to Adjusted Consolidated
EBITDA
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For
the Year Ended
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December
31,
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2009
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2008
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(As
Adjusted)
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Net
cash provided by operating activities
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$ |
406.1 |
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$ |
227.2 |
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Provision
for doubtful accounts
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(33.1 |
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(27.0 |
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Professional
fees - accounting, tax, and legal
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8.8 |
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44.4 |
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Interest
expense and amortization of debt discounts and fees
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125.8 |
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159.5 |
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Gain
(loss) on sale of investments
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0.8 |
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(1.4 |
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UBS
Settlement proceeds, gross
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(100.0 |
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- |
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Equity
in net income of nonconsolidated affiliates
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4.6 |
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10.6 |
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Net
income attributable to noncontrolling interests in continuing
operations
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(33.4 |
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(29.8 |
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Amortization
of debt discounts and fees
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(6.6 |
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(6.5 |
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Distributions
from nonconsolidated affiliates
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(8.6 |
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(10.9 |
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Current
portion of income tax benefit
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(7.3 |
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(73.8 |
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Change
in assets and liabilities
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0.8 |
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53.1 |
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Change
in government, class action, and related settlements
liability
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11.2 |
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7.4 |
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Other
operating cash used in (provided by) discontinued
operations
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13.5 |
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(11.4 |
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Other
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0.4 |
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(0.2 |
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Adjusted
Consolidated EBITDA
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$ |
383.0 |
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$ |
341.2 |
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Reconciliation
of Net Cash Provided by Operating Activities to Adjusted Free Cash
Flow
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Three
Months
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Three
Months
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Year
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Year
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Ended
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Ended
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Ended
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Ended
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December
31,
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December
31,
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December
31,
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December
31,
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2009
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2008
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2009
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2008
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Net
cash provided by operating activities
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$ |
44.0 |
(1) |
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$ |
77.9 |
(1) |
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$ |
406.1 |
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$ |
227.2 |
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Impact
of discontinued operations
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4.1 |
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(11.9 |
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13.5 |
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(11.4 |
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Net
cash provided by operating activities of continuing
operations
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48.1 |
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66.0 |
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419.6 |
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215.8 |
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Capital
expenditures for maintenance
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(9.6 |
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(17.4 |
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(34.1 |
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(42.6 |
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Net
settlements on interest rate swaps
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(11.9 |
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(6.8 |
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(42.2 |
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(20.7 |
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Dividends
paid on convertible perpetual preferred stock
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(6.5 |
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(6.5 |
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(26.0 |
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(26.0 |
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Distributions
paid to noncontrolling interests of consolidated
affiliates
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(9.9 |
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(7.1 |
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(32.7 |
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(33.4 |
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Non-recurring
items:
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UBS
Settlement proceeds, less fees to derivative plaintiffs'
attorneys
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- |
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- |
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(73.8 |
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- |
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Income
tax refunds related to prior periods
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(4.2 |
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(63.1 |
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(63.7 |
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(90.4 |
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Cash
paid for:
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Professional
fees - accounting, tax, and legal
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3.8 |
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5.3 |
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15.3 |
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18.2 |
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Government,
class action, and related settlements
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0.2 |
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- |
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11.2 |
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7.4 |
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Adjusted
free cash flow
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$ |
10.0 |
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$ |
(29.6 |
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$ |
173.6 |
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$ |
28.3 |
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(1)
Net cash provided by operating activities for the year ended December 31,
2009 and 2008 was $406.1 million and $227.2 million, respectively. Net cash
provided by operating activities for the nine months ended September 30, 2009
and 2008 was $362.1 million and $149.3 million, respectively, as reported in the
Company’s Form 10-Q for the quarterly period ended September 30, 2009. The
difference is the $44.0 million and $77.9 million of net cash provided by
operating activities for the three months ended December 31, 2009 and 2008,
respectively.
For the
three months ended December 31, 2009, net cash used in investing activities was
$8.6 million and resulted primarily from capital expenditures and net settlement
payments related to interest rate swaps offset by a decrease in restricted cash.
Net cash used in financing activities during the three months ended December 31,
2009 was $71.6 million and resulted primarily from net debt payments, debt
amendment and issuance costs, distributions paid to noncontrolling interests of
consolidated affiliates, and dividends paid on the Company’s convertible
perpetual preferred stock.
For the
three months ended December 31, 2008, net cash used in investing activities was
$28.1 million and resulted primarily from capital expenditures and net
settlement payments related to an interest rate swap. Net cash used in financing
activities during the three months ended December 31, 2008 was $42.6 million and
resulted primarily from net debt payments made during the period, as well as
distributions paid to noncontrolling interests of consolidated affiliates and
dividends paid on the Company’s convertible perpetual preferred
stock.
For the
year ended December 31, 2009, net cash used in investing activities was $133.0
million and resulted primarily from capital expenditures and net settlement
payments related to interest rate swaps. Net cash used in financing activities
during the year ended December 31, 2009 was $224.3 million and resulted
primarily from net debt payments made during the period, as well as
distributions paid to noncontrolling interests of consolidated affiliates,
dividends paid on the Company’s convertible perpetual preferred stock, and debt
amendment and issuance costs.
For the
year ended December 31, 2008, net cash used in investing activities was $40.0
million and resulted primarily from capital expenditures, including expenditures
associated with development activities, and net settlement payments related to
an interest rate swap offset by proceeds from asset disposals, including our
corporate campus. Net cash used in financing activities during the year ended
December 31, 2008 was $176.0 million and resulted primarily from net debt
payments made during the period, as well as distributions paid to
noncontrolling
interests
of consolidated affiliates and dividends paid on the Company’s perpetual
preferred stock, offset by proceeds from the issuance of common
stock.
Forward-Looking
Statements
The
information contained in the earnings release and supplemental slides includes
certain estimates, projections, and other forward-looking information that
reflect the Company’s current views with respect to future events and financial
performance. These estimates, projections, and other forward-looking information
are based on assumptions the Company believes, as of the date hereof, are
reasonable. Inevitably, there will be differences between such estimates and
actual results, and those differences may be material.
There can
be no assurance that any estimates, projections, or forward-looking information
will be realized.
All such
estimates, projections, and forward-looking information speak only as of the
date hereof. The Company undertakes no duty to publicly update or revise the
information contained herein.
You are
cautioned not to place undue reliance on the estimates, projections, and other
forward-looking information in the earnings release and supplemental slides as
they are based on current expectations and general assumptions and are subject
to various risks, uncertainties, and other factors, including those set forth in
the 2009 Form 10-K (when filed), and in other documents the Company previously
filed with the SEC, many of which are beyond the Company’s control. These
factors may cause actual results to differ materially from the views, beliefs,
and estimates expressed herein.
ITEM 9.01. Financial Statements and
Exhibits.
(d) Exhibits.
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Exhibit Number
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Description
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99.1
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Press
release of HealthSouth Corporation, dated February 22,
2010.
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99.2
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Supplemental
slides provided in connection with the fourth quarter 2009 earnings call
of HealthSouth Corporation.
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SIGNATURES
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 hereunto
duly authorized.
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HEALTHSOUTH
Corporation |
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By:
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/s/ JOHN P. WHITTINGTON |
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Name:
John P. Whittington |
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Title:
Executive Vice President, General Counsel and Corporate
Secretary |
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Dated:
February 22, 2010