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HealthSouth Reports Results for Third Quarter Ended September 30, 2008

Wednesday, November 5, 2008 General News J E 4
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BIRMINGHAM, Ala., Nov. 4 HealthSouth Corporation(NYSE: HLS) today reported its results of operations for the third quarterended September 30, 2008. The results showed consolidated net operatingrevenues of $456.2 million for the third quarter of 2008 versus $428.3 millionfor the third quarter of 2007. This increase was driven by increaseddischarges quarter over quarter. Compared to the third quarter of 2007,consolidated net operating revenues increased by 6.5%.

In addition, the Company continued to deleverage its balance sheet. Intotal and through October 2008, the Company has reduced its total debtoutstanding by approximately $208 million since December 31, 2007. Total debtoutstanding approximated $1.8 billion as of October 31, 2008.

"Same store discharges were up a solid 8.1% compared to the same quarterof 2007 reflecting the continued benefits of our TeamWorks best practicesinitiative focusing on sales and marketing," said Jay Grinney, President andChief Executive Officer of HealthSouth. "With rising demand for our services,continued productivity improvements, and our plans to address labor costs, webelieve we are well positioned for continued profitable growth."

The information in this press release is summarized and should be read inconjunction with the Form 10-Q for the quarterly period ended September 30,2008, when filed. In addition, the Company expects to post certainsupplemental slides today on its website at www.healthsouth.com for referenceduring its November 5th earnings call.

Net Operating Revenues

Consolidated net operating revenues for the third quarter of 2008 were$456.2 million, which represents a $27.9 million, or 6.5%, increase over thesame quarter of 2007. Higher net operating revenues were driven by 9.3% higherdischarge volumes quarter over quarter, offset slightly by lower revenue perdischarge and lower outpatient and other revenues.

Net patient revenue from the Company's inpatient hospitals was $411.5million, representing a $31.1 million, or 8.2%, increase over the same quarterof 2007. Net patient revenue from the Company's inpatient hospitals benefitedfrom the implementation of standardized sales and marketing activities in 92of HealthSouth's 93 hospitals and three acquisitions in the third quarter of2008. Same store discharges were 8.1% higher quarter over quarter. A slightdecrease in the acuity of the Company's patients resulted in a decrease to itsnet patient revenue per discharge quarter over quarter.

Decreased outpatient volumes in the third quarter of 2008 compared to thesame period of 2007 resulted primarily from the net closure of 15 outpatientsatellites since the third quarter of 2007. In addition, staffing challengesand continued competition from physicians offering physical therapy servicesalso contributed to the decline. HealthSouth continuously monitors theperformance of its outpatient satellites and will take appropriate action withrespect to underperforming facilities, including closure.

Operating Expenses

Salaries and Benefits

As reported previously, salaries and benefits have grown as a percent ofnet operating revenues during 2008. While the Company has improved itsproductivity, as shown in its employees per occupied bed, or "EPOB," metric(see attached supplemental information for this calculation), productivitygains have not been enough to offset the higher cost of adding full-timeequivalents needed as a result of higher volumes (e.g., recruitment, training,and orientation costs), annual merit increases, and increases in the cost ofbenefits provided to employees.

The Company routinely awards merit increases on October 1 of each year,which normally coincides with Medicare pricing adjustments. However, as partof the Medicare pricing roll-back that became effective April 1, 2008, theOctober 2007 pricing adjustment was rescinded, which had the effect ofincreasing salaries and benefits as a percent of net operating revenues in thequarter.

As previously reported, the Company made adjustments to certain benefitseffective January 1, 2008. Some of these changes resulted in the consolidationof certain benefits, such as our paid-time-off program, which, in turn, iscontributing to the increase in salaries and benefits. The Company hasanalyzed the competitiveness of these programs and has decided to modifycertain aspects of these programs effective November 15, 2008, with additionalmodifications to be effective January 1, 2009.

Hospital Related Expenses

Hospital related expenses (which includes other operating expenses,supplies, occupancy costs, and the provision for doubtful accounts) for thethird quarter of 2008 increased primarily due to increased patient volumes,repairs and maintenance expenses associated with the refurbishment of some ofHealthSouth's aging hospitals, rising utility costs, costs associated with theimplementation of the Company's TeamWorks initiative, the effect of hurricaneson some of the Company's hospitals in Texas and Louisiana, and increasedpricing related to supplies, especially pharmaceutical costs.

The Company's provision for doubtful accounts continued to show thepositive trend that resulted from the installation of new collections softwarein the latter half of 2006 and the standardization of certain business officeprocesses.

General and Administrative Expenses

As discussed previously, the Company's targeted level of general andadministrative expenses (excluding stock compensation expense) is 4.75% of netoperating revenues by the end of 2008. General and administrative expenseswere 5.0% of net operating revenues during the third quarter of 2008, on thisbasis.

All Other Operating Expenses

In the third quarter of 2008, the Company recorded a net charge of $17.1million as government, class action, and related settlements due primarily toan increase in the liability associated with its securities litigationsettlement based on the value of HealthSouth's common stock and warrantsunderlying the settlement as of September 30, 2008. These charges are noncashin nature.

Professional fees decreased as the Company concluded the vast majority ofits various restructuring efforts in 2007.

Pre-tax Loss from Continuing Operations and Net Income

"Our primary focus continues to be deleveraging the Company," said JohnWorkman, Executive Vice President and Chief Financial Officer of HealthSouth."As a result of our focus in this area, interest expense decreased byapproximately $20 million quarter over quarter and was the main reason pre-taxloss from continuing operations improved versus the third quarter of 2007."

The Company reported a pre-tax loss from continuing operations of ($13.1)million for the third quarter of 2008 compared to a pre-tax loss fromcontinuing operations of ($31.1) million for the third quarter of 2007. Thequarter-over-quarter improvement was primarily a result of lower interestexpense and a lower loss on our interest rate swap, offset by higher operatingexpenses, as noted above.

Net income available to common shareholders was $0.1 million, or ($0.00)per share (basic and diluted), for the third quarter of 2008 compared to netincome available to common shareholders of $281.1 million, or $3.58 per basicshare ($3.13 per diluted share), for the third quarter of 2007. The Company'snet income for the third quarter of 2007 included a $281.2 million income taxbenefit primarily as a result of its recovery of federal income taxes paid andassociated interest related to tax years 1996 through 1999 and approximately$40.4 million of post-tax gains associated with the divestitures of itssurgery centers, outpatient, and diagnostic divisions.

On an adjusted basis, income (loss) from continuing operations was $14.7million, or $0.15 per diluted share, and ($6.5) million, or ($0.07) perdiluted share, for the three months ended September 30, 2008 and 2007,respectively. See the supplemental information attached to this press releasefor a calculation of adjusted income (loss) from continuing operations.

Adjusted Consolidated EBITDA

Adjusted Consolidated EBITDA was $79.3 million for the third quarter of2008 compared to $88.3 million for the same period of 2007. During the thirdquarter of 2008, some of HealthSouth's hospitals in Texas and Louisianaexperienced disruption to their operations as a result of three hurricanes.The estimated negative impact to Adjusted Consolidated EBITDA from thesehurricanes was approximately $1.0 million. Adjusted Consolidated EBITDA forthe third quarter of 2007 included an $8.6 million gain on the sale of theCompany's investment in Source Medical. Excluding the gain on sale of theCompany's investment in Source Medical, Adjusted Consolidated EBITDA was flatquarter over quarter. In general, higher net operating revenues from increaseddischarge volumes were offset by higher expenses mainly attributable tosalaries and benefits, which are being addressed as discussed above.

Cash Flow and Balance Sheet

Net cash provided by operating activities was $149.3 million for the ninemonths ended September 30, 2008. Capital expenditures were $20.8 million forthe third quarter of 2008 and $39.5 million for the year-to-date period. Ofthe $20.8 million of capital expenditures during the third quarter of 2008,approximately $5.9 million related to the acquisition of land for de novoprojects.

Cash and cash equivalents were $24.9 million as of September 30, 2008. Asof September 30, 2008, restricted cash of $73.4 million included approximately$30.3 million held in escrow by the trustee of the Company's 10.750% SeniorSubordinated Notes due 2008. This cash was used to redeem the remainingbalance of these notes on their maturity date of October 1, 2008.

With the continued deleveraging of the Company as a priority, on June 27,2008, HealthSouth finalized the issuance and sale of 8.8 million shares of itscommon stock to J.P. Morgan Securities Inc. for net proceeds of approximately$150 million and used the majority of these net proceeds to reduce its totaldebt outstanding. This debt reduction was in addition to the use of the netproceeds from the sale of the Company's corporate campus in April 2008 toreduce total debt outstanding. In addition, during October 2008, the Companyreceived an approximate $46 million income tax refund (including associatedinterest) from the Internal Revenue Service for tax years 2000 through 2003and used the majority of this cash refund to reduce amounts outstanding underits Credit Agreement. In total and through October 2008, the Company hasreduced its total debt outstanding by approximately $208 million sinceDecember 31, 2007.

Subsequent Event - Settlement with UBS

On October 22, 2008, the Company and the lead derivative stockholderplaintiffs entered into an agreement in principle with UBS Securities, LLC andUBS AG, Stamford Branch (together, "UBS"), as well as UBS's insurancecarriers, to settle the claims against and by UBS in the Tucker derivativelitigation. For additional information related to this settlement, please seethe Current Report on Form 8-K furnished to the SEC on October 27, 2008. TheCompany plans to use the majority of the net proceeds from its settlement withUBS to reduce long-term debt. However, no assurances can be given as to theexact timing of the receipt of such proceeds.

2008 Guidance

As discussed above, the Company has reduced its total debt outstanding byapproximately $208 million since December 31, 2007. This includes the use ofthe majority of its $46 million federal income tax refund, includingassociated interest, which was received in October 2008 to pay down long-termdebt, which in turn lowers the Company's interest expense.

Therefore, due to its year-to-date debt reduction through October 31, 2008and based on its results for the third quarter of 2008, the Company isupdating its 2008 guidance related to discharges and earnings per share, aspreviously provided in the Company's prior earnings release and the relatedCurrent Report on Form 8-K dated August 5, 2008. The Company's ability to meetthis updated guidance is dependent upon its ability to continue to growinpatient discharges to offset the negative impact of the Medicare pricingroll-back that became effective on April 1, 2008 (and will continue untilSeptember 30, 2009) and its ability to control costs associated with salariesand benefits.

(1) As previously reported, the Company's earnings per share guidance doesnot incorporate any assumptions related to actual amounts already incurred in2008 or amounts that may be incurred in 2008 for: (1) government, classaction, and related settlement amounts, including the fair value adjustmentsto the liability associated with the Company's securities litigationsettlement that are required until the applicable common stock and warrantsare issued and (2) any gain or loss associated with the fair value adjustmentsto the Company's interest rate swap over the remaining term of this agreement.In addition, due to the income tax benefits associated with the Company'scontinued pursuit of its remaining income tax refund claims, the Company'searnings per share guidance does not include its provision for income taxbenefit, as such amounts are not reflective of the Company's expected incometax expense in future periods.

See the supplemental information attached to this press release for acalculation of adjusted income (loss) from continuing operations per dilutedshare.

Other Information

The Company expects to file its Form 10-Q for the quarterly period endedSeptember 30, 2008 this week. When filed, the report can be found on the SEC'swebsite at www.sec.gov. The information in this press release is summarizedand should be read in conjunction with the Form 10-Q for the quarterly periodended September 30, 2008, when filed.

Operating activities. Net cash provided by operating activities increasedperiod over period due to the increase in net operating revenues, as discussedpreviously, and a decrease in cash settlement payments. Net cash used inoperating activities for the nine months ended September 30, 2007 included$110.8 million of cash settlement payments related primarily to the Company'sMedicare Program Settlement negotiated in 2004 and its SEC Settlementnegotiated in 2005. The nine months ended September 30, 2008 included cashsettlement payments of $7.4 million related primarily to the Company'ssettlement with the United States Department of Health and Human ServicesOffice of Inspector General negotiated in 2007.

Investing activities. The decrease in net cash provided by investingactivities was due to the cash proceeds received from the divestitures of theCompany's surgery centers, outpatient, and diagnostic divisions during thesecond and third quarters of 2007. Net cash used in investing activities forthe nine months ended September 30, 2008 included $38.7 million inexpenditures associated with the Company's development activities, including$5.9 million of capital expenditures associated with land purchases for denovo projects.

Financing activities. The decrease in net cash used in financingactivities was due to the use of the cash proceeds from the divestitures ofthe Company's surgery centers, outpatient, and diagnostic divisions to reducedebt outstanding under its Credit Agreement during the second and thirdquarters of 2007. During the nine months ended September 30, 2008, the Companymade approximately $194.3 million of net debt payments. During the nine monthsended September 30, 2007, the Company made approximately $985.5 million of netdebt payments. The net debt payments made during the nine months endedSeptember 30, 2008 primarily resulted from the sale of the Company's corporatecampus in March 2008 and the net proceeds from its June 2008 equity offering.Net cash used in financing activities for the nine months ended September 30,2008 also included $30.3 million of cash that was sent on September 30, 2008to the trustee of the Company's 10.750% Senior Subordinated Notes due 2008 forredemption of these notes on their maturity date of October 1, 2008.

(1) Adjusted income (loss) from continuing operations and AdjustedConsolidated EBITDA are non-GAAP financial measures. Management and somemembers of the investment community utilize adjusted income (loss) fromcontinuing operations as a financial measure and Adjusted Consolidated EBITDAas a liquidity measure on an ongoing basis. These measures are not recognizedin accordance with GAAP and should not be viewed as an alternative to GAAPmeasures of performance or liquidity. In evaluating these adjusted measures,the reader should be aware that in the future HealthSouth may incur expensessimilar to the adjustments set forth above.

(2) Per share amounts for the three months ended September 30, 2008 and2007 are based on basic weighted average common shares outstanding for allamounts except adjusted income (loss) from continuing operations per dilutedshare, which is based on diluted shares outstanding. The diluted share countsfor the three months ended September 30, 2008 and 2007 contain 13.1 millionshares related to the potential dilution of the Company's convertibleperpetual preferred stock. Per share amounts do not include 5.0 million sharesof common stock or warrants to purchase approximately 8.2 million shares ofcommon stock not yet issued under the securities litigation settlement. Theincrease in the Company's basic and diluted weighted average common sharesoutstanding for the three months ended September 30, 2008 compared to the sameperiod of 2007 was primarily the result of its equity offering of 8.8 millionshares that was completed on June 27, 2008. The calculation of adjusted lossfrom continuing operations per diluted share ignores the antidilutive impactin 2007.

(3) Adjusted income (loss) from continuing operations per diluted shareand Adjusted Consolidated EBITDA are two components of the Company's guidance.

(4) The Company's Credit Agreement allows certain items to be added toarrive at Adjusted Consolidated EBITDA that are viewed as not being ongoingcosts once the Company has completed its restructuring. In addition, theCompany is allowed to add other income, including interest income, to thecalculation of Adjusted Consolidated EBITDA under its Credit Agreement. Thisincludes interest income associated with the Company's federal income taxrecoveries. This amount has not been included in the above calculation as itwould not be indicative of the Company's Adjusted Consolidated EBITDA forfuture periods.

(1) Adjusted income (loss) from continuing operations and AdjustedConsolidated EBITDA are non-GAAP financial measures. Management and somemembers of the investment community utilize adjusted income (loss) fromcontinuing operations as a financial measure and Adjusted Consolidated EBITDAas a liquidity measure on an ongoing basis. These measures are not recognizedin accordance with GAAP and should not be viewed as an alternative to GAAPmeasures of performance or liquidity. In evaluating these adjusted measures,the reader should be aware that in the future HealthSouth may incur expensessimilar to the adjustments set forth above.

(2) Per share amounts for the nine months ended September 30, 2008 and2007 are based on basic weighted average common shares outstanding for allamounts except adjusted income (loss) from continuing operations per dilutedshare, which is based on diluted shares outstanding. The diluted share countsfor the nine months ended September 30, 2008 and 2007 contain 13.1 millionshares related to the potential dilution of the Company's convertibleperpetual preferred stock. Per share amounts do not include 5.0 million sharesof common stock or warrants to purchase approximately 8.2 million shares ofcommon stock not yet issued under the securities litigation settlement. Theincrease in the Company's basic and diluted weighted average common sharesoutstanding for the nine months ended September 30, 2008 compared to the sameperiod of 2007 was primarily the result of its equity offering of 8.8 millionshares that was completed on June 27, 2008. The calculation of adjusted lossfrom continuing operations per diluted share ignores the antidilutive impactin 2007.

(3) In the first quarter of 2008, and in accordance with FinancialAccounting Standards Board Statement No. 144, Accounting for the Impairment orDisposal of Long-Lived Assets, the Company accelerated the depreciation of itscorporate campus so that the net book value of the campus equaled theestimated net proceeds the Company expected to receive on the saletransaction's closing date. The year-over-year impact of this acceleration ofdepreciation approximated $10 million. No similar charges are expected in2009.

(4) Adjusted income (loss) from continuing operations per diluted shareand Adjusted Consolidated EBITDA are two components of the Company's guidance.

(5) The Company's Credit Agreement allows certain items to be added toarrive at Adjusted Consolidated EBITDA that are viewed as not being ongoingcosts once the Company has completed its restructuring. In addition, theCompany is allowed to add other income, including interest income, to thecalculation of Adjusted Consolidated EBITDA under its Credit Agreement. Thisincludes interest income associated with the Company's federal income taxrecoveries. This amount has not been included in the above calculation as itwould not be indicative of the Company's Adjusted Consolidated EBITDA forfuture periods.

* Represents discharges from HealthSouth's consolidated hospitals. As ofSeptember 30, 2008, the Company had 90 consolidated hospitals.

** Excludes 396 and 513 full-time equivalents for the three months endedSeptember 30, 2008 and 2007, respectively, and 413 and 601 full-timeequivalents for the nine months ended September 30, 2008 and 2007,respectively, who are considered part of corporate overhead with theirsalaries and benefits included in general and administrative expenses in theCompany's condensed consolidated statements of operations. Full-timeequivalents included in the above table represent HealthSouth employees whoparticipate in or support the operations of the Company's hospitals andexclude an estimate of full-time equivalents related to contract labor.

EPOB is calculated by dividing the number of full-time equivalents,including an estimate of full-time equivalents from the utilization ofcontract labor, by the number of occupied beds during each period. The numberof occupied beds is determined by multiplying the number of licensed beds bythe Company's occupancy percentage.

The Company's TeamWorks initiative is producing results during 2008 thathas yielded increased patient discharges. The table below shows the number ofhospitals by quarter that has been introduced to TeamWorks and theconsolidated total discharge volume growth for each period. During the fourthquarter of 2008, TeamWorks is being implemented at the HealthSouth hospital inVineland, New Jersey, which the Company acquired on July 31, 2008.

The Company will host an investor conference call at 9:30 a.m. EasternTime on Wednesday, November 5, 2008, to discuss its results for the thirdquarter of 2008. For reference during the call, the Company expects to postcertain supplemental slides on its website at www.healthsouth.com .

The conference call may be accessed by dialing 866-406-5369 and giving thepass code 68111688. International callers should dial 973-582-2847 and givethe same pass code. Please call approximately ten minutes before the start ofthe call to ensure you are connected. The conference call will also be webcastlive and will be available at www.healthsouth.com by clicking on an availablelink.

A replay of the conference call will be available, beginning approximatelytwo hours after the completion of the conference call, from November 5 untilNovember 26, 2008. To access the replay, please dial 800-642-1687.International callers should dial 706-645-9291. The webcast will also bearchived for replay purposes after the live broadcast on www.healthsouth.com .

About HealthSouth

HealthSouth is the nation's largest provider of inpatient rehabilitationservices. Operating in 26 states across the country and in Puerto Rico,HealthSouth serves more than 250,000 patients annually through its network ofinpatient rehabilitation hospitals, long-term acute care hospitals, outpatientrehabilitation satellites, and home health agencies. HealthSouth strives to bethe nation's preeminent provider of inpatient rehabilitation services and canbe found on the Web at www.healthsouth.com .

Statements contained in this press release which are not historical factsare forward-looking statements. In addition, HealthSouth, through its seniormanagement, may from time to time make forward-looking public statementsconcerning the matters described herein. All such estimates, projections, andforward-looking information speak only as of the date hereof, and HealthSouthundertakes no duty to publicly update or revise such forward-lookinginformation, whether as a result of new information, future events, orotherwise. Such forward-looking statements are necessarily estimates basedupon current information and involve a number of risks and uncertainties.HealthSouth's actual results may differ materially from the resultsanticipated in these forward-looking statements as a result of a variety offactors. While it is impossible to identify all such factors, factors whichcould cause actual results to differ materially from those estimated byHealthSouth include, but are not limited to, any adverse outcome of variouslawsuits, claims, and legal or regulatory proceedings that may be broughtagainst the Company; significant changes in HealthSouth's management team;HealthSouth's ability to continue to operate in the ordinary course and manageits relationships with its creditors, including its lenders, bondholders,vendors and suppliers, employees, and customers; changes, delays in, orsuspension of reimbursement for HealthSouth's services by governmental orprivate payors; changes in the regulation of the healthcare industry at eitheror both of the federal and state levels; competitive pressures in thehealthcare industry and HealthSouth's response thereto; HealthSouth's abilityto obtain and retain favorable arrangements with third-party payors;HealthSouth's ability to attract and retain nurses, therapists, and otherhealthcare professionals in a highly competitive environment with often severestaffing shortages; general conditions in the economy and capital markets; andother factors which may be identified from time to time in the Company's SECfilings and other public announcements, including HealthSouth's Form 10-K forthe year ended December 31, 2007 and Form 10-Q for the quarters endedSeptember 30, June 30, 2008, and March 31, 2008.2008 Guidance Former Updated Year-over-year growth in inpatient discharges 4% to 5% 5% to 6% Consolidated net operating revenues $1.825 billion $1.825 billion to to $1.875 billion $1.875 billion Adjusted Consolidated EBITDA $330 million $330 million to to $335 million $335 million Net income per diluted share (1) $0.15 per share $0.23 per share to to $0.20 per share $0.25 per share Adjusted income from continuing operations per diluted share $0.50 per share $0.58 per share to to $0.55 per share $0.60 per share

SOURCE HealthSouth Corporation
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