Business Context and Reporting Period
Company: HealthSouth Corporation (filing as Encompass Health Corp in metadata, but text confirms HealthSouth Corporation)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2009
Business Overview: The Company is the largest provider of inpatient rehabilitative healthcare services in the United States, operating inpatient rehabilitation hospitals, long-term acute care hospitals (LTCHs), and outpatient facilities. As of September 30, 2009, it operated 94 inpatient rehabilitation hospitals and 6 freestanding LTCHs across 26 states.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 | Balance Sheet (Sep 30, 2009) |
|---|---|---|---|
| Net Operating Revenues | $472.7 million | $1,431.5 million | - |
| Net Income (Total) | $24.8 million | $81.9 million | - |
| Net Income Attributable to HealthSouth Common Shareholders | $10.3 million | $36.7 million | - |
| Diluted EPS (Common Shareholders) | $0.12 | $0.42 | - |
| Operating Cash Flow | - | $362.1 million | - |
| Cash and Cash Equivalents | - | - | $117.3 million |
| Total Debt (Long-term + Current) | - | - | $1,696.7 million |
| Shareholders' Deficit | - | - | $(921.9) million |
Note: The Company reported a shareholders' deficit due to accumulated losses from prior periods, though the deficit narrowed during the period.
Material Changes vs. Prior Period
- Revenue Growth: Net operating revenues increased 3.8% for the quarter and 4.0% for the nine-month period compared to 2008. This was driven by a 5.3% increase in inpatient discharges for the quarter and 5.5% for the nine months.
- Profitability Improvement: Net income attributable to HealthSouth common shareholders increased significantly from $0.1 million in the prior year quarter to $10.3 million. Pre-tax income from continuing operations improved from a loss of $6.8 million in the prior year quarter to income of $28.5 million.
- Settlement Expenses: "Government, class action, and related settlements expense" decreased to $8.5 million for the quarter (from $17.1 million in 2008) and was $41.3 million for the nine months (compared to a gain of $27.9 million in 2008). These fluctuations are primarily due to fair value adjustments on the securities litigation settlement liability based on stock price movements.
- Interest Expense: Interest expense decreased 26.8% for the quarter and 27.5% for the nine months, driven by debt reductions and lower average interest rates.
- Debt Reduction: Total debt outstanding was reduced by approximately $117 million during the nine months ended September 30, 2009.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
Management emphasizes debt reduction and deleveraging as the primary strategic focus. The Company anticipates continued growth in patient volumes due to an aging population and expects the 2.5% Medicare market basket update effective October 1, 2009, to be beneficial, though potential healthcare reform legislation poses a risk of future payment reductions.
Capital expenditures for 2009 are expected to range between $70 million and $85 million.
Risks and Contingencies
- Legal Proceedings:
- Securities Litigation: On September 30, 2009, the Company issued 5.0 million shares and 8.2 million warrants to settle the consolidated securities action. The liability was extinguished upon issuance.
- UBS Settlement: The Company received $100.0 million in cash proceeds from the UBS litigation settlement in January 2009.
- Scrushy Litigation: A court awarded the Company $2.9 billion in damages against former CEO Richard Scrushy for fraud and breach of fiduciary duty. However, the Company notes no assurance regarding collectability, and the amount is not included in financial statements.
- Ernst & Young: Arbitration proceedings regarding accounting fraud allegations remain pending.
- Regulatory Risk: The Company is heavily dependent on Medicare reimbursement (approx. 67.5% of revenue). Changes in regulations, including potential "bundling" of payments or reductions in market basket updates due to healthcare reform, could materially impact results.
- Liquidity: While the Company is in compliance with its Credit Agreement covenants, it maintains a high leverage ratio. It has a $400 million revolving credit facility with no amounts drawn as of September 30, 2009.
Unusual Items
- Out-of-Period Adjustment: The Company corrected an error related to a joint venture investment, resulting in an understatement of net income of approximately $4.5 million for the nine months ended September 30, 2009.
- Discontinued Operations: Results of certain rental properties and the surgery centers division (pending final transfer) are reported as discontinued operations, resulting in a net loss of $6.8 million for the nine months ended September 30, 2009.
Investor Verification Checklist
- Debt Covenants: Verify continued compliance with the leverage and interest coverage ratios in the Credit Agreement, especially given the high debt load relative to equity.
- Collectability of Scrushy Judgment: Assess the likelihood of recovering any portion of the $2.9 billion judgment against Richard Scrushy, as this is a significant potential non-operating asset not currently recognized.
- Medicare Reimbursement Trends: Monitor the impact of the October 2009 market basket update and any subsequent healthcare reform legislation on reimbursement rates.
- Settlement Finality: Confirm that the securities litigation settlement liability has been fully extinguished and no further adjustments are expected.
- Discontinued Operations: Track the final transfer of the remaining surgery center facility to ASC Acquisition LLC and the associated gain recognition.