Encompass Health Corporation · NYSE:EHC
Encompass Health — HealthSouth — Q4 2010 Earnings Presentation
39 slides from Encompass Health's earnings presentation, Feb 17, 2011
Slide 1: Fourth Quarter 2010 Earnings Call Supplemental Slides
Exhibit 99.2 Fourth Quarter 2010 Earnings Call Supplemental Slides
Slide 2: Forward-Looking Statements
Exhibit 99.2 The information contained in this presentation includes certain estimates, projections and other forward- looking information that reflect our current views with respect to future events, strategy, capital expenditures and financial performance. These estimates, projections and other fo
Slide 3: Table of Contents
Exhibit 99.2 Table of Contents
Slide 4: Q4 2010 Summary (Q4 2010 vs. Q4 2009)
Location # of Beds Transaction Date Same store Mesa, AZ 40 De Novo Q3 2009 Yes Altoona, PA 0 Acquired unit through JV Q4 2009 Yes FT. Smith, AR 0 Acquired unit (consolidation) Q3 2010 Yes Loudoun County, VA 40 De Novo Q2 2010 No Las Vegas, NV 50 Acquired new IRF Q2 2010 No Bristol, VA 25 De Novo Q3
Slide 5: Q4 2010 Summary (cont.)
Exhibit 99.2 Q4 2010 Summary (Q4 2010 vs. Q4 2009) (cont.) ü SWB as a percent of revenue decreased 160 bps. ― Improved productivity as measured by EPOB ― Improved occupancy at new hospitals ― Benefited from lower workers’ compensation self-insurance costs ü Hospital-related expenses decreased 110 bp
Slide 6: Q4 2010 Summary (cont.)
Exhibit 99.2 Q4 2010 Summary (Q4 2010 vs. Q4 2009) (cont.) ü Continued strong adjusted free cash flow generation (1) ― Q4 2010 benefited from a shift in timing of interest payments related to the Q4 2010 refinancing. ― Offset by the $6.9 million unwind fee related to the termination of two forward-
Slide 7: Q4 2010 Summary (cont.)
Exhibit 99.2 Q4 2010 Summary (Q4 2010 vs. Q4 2009) (cont.) ü Adjusted EPS (1) increased 68.2%. ― Driven by higher Adjusted EBITDA ― Offset by higher interest expense ü A significant portion of the valuation allowance against deferred income tax assets was released in Q4 2010. ― Income statement incl
Slide 8: HealthSouth Functional Outcomes Continue to Outpace Industry Average
Exhibit 99.2 HealthSouth Functional Outcomes Continue to Outpace Industry Average HealthSouth Average UDS Average* FIM Gain LOS Efficiency * Average = Expected, Risk-adjusted Source: UDSmr Database - On Demand Report: Q4 2010 Report FIM Gain Change in Functional Independence Measurement (based on an
Slide 9: Inpatient revenue growth drivers
Inpatient revenue growth was driven by : Discharge growth of 5.3%; same-store discharge growth of 2.9% Continued market share gains, including new hospitals Higher revenue per discharge of 2.5%, predominantly driven by Medicare and managed care price increases Outpatient revenue declined primarily a
Slide 10: SWB and hospital-related expenses
SWB as a percent of revenue decreased 160 bps. Improved productivity as measured by EPOB and improved occupancy at new hospitals Benefited from lower workers’ compensation self-insurance costs Hospital-related expenses decreased 110 bps. Lower than expected bad debt expense Fewer than expected Medic
Slide 11: Adjusted EBITDA Change
Adjusted EBITDA Change Q4 Full Year +$22.1M +$44.4M +23.3% +11.6% Improvements driven by : Revenue growth Disciplined expense management New hospitals Improvements benefited from : Lower bad debt expense Offset by : Higher professional & general liability self-insurance costs TeamWorks investment Ex
Slide 12: Adjusted EPS (Q4 2010 vs. Q4 2009)
Adjusted EPS (1) increased 68.2% Higher Adjusted EBITDA Lower loss on early extinguishment of debt Offset by higher interest expense and higher stock-based compensation Exhibit 99.2 Adjusted EPS (1) (Q4 2010 vs. Q4 2009) (1) Adjusted income from continuing operations; reconciliation to GAAP provided
Slide 13: Adjusted EPS (2010 vs. 2009)
Exhibit 99.2 Adjusted EPS (1) (2010 vs. 2009) (1) Adjusted income from continuing operations; reconciliation to GAAP provided on slides 36 through 39.
Slide 14: Adjusted Free Cash Flow (Q4 2010 vs. Q4 2009)
Q4 2010 operating cash flow benefited from the timing of interest payments related to the refinancing in Q4 2010. Offset by the $6.9 million unwind fee related to the termination of the two forward-starting interest rate swaps (1) Exhibit 99.2 Adjusted Free Cash Flow (Q4 2010 vs. Q4 2009) (1) The $6
Slide 15: Adjusted Free Cash Flow (2010 vs. 2009)
Exhibit 99.2 Adjusted Free Cash Flow (1) (2010 vs. 2009) (1) Reconciliation to GAAP provided on slide 34.
Slide 16: Debt, Liquidity, and Swaps
Swaps (2)(3) The final cash settlement on our net $884 million swaps for $10.9 million will be made in Q1 2011. Exhibit 99.2 (1) Based on 2008 and 2010 Adjusted EBITDA of $341.2 million and $427.4 million, respectively; reconciliation to GAAP provided on slides 33 and 36 through 39. (2) Cash settlem
Slide 17: Our Track Record
Exhibit 99.2 Our Track Record (1) Reconciliation to GAAP provided on slides 33 and 36 through 39.
Slide 18: Business Outlook: 2011 to 2013
Business Model • Adjusted EBITDA CAGR: 5-8% (1) • Adjusted Free Cash Flow CAGR: 12-17% (1) Deleveraging (2) Goal: < 4.0x debt to EBITDA Longer-Term Goal: ~ 3.0x debt to EBITDA (3.5x goal achieved at year-end 2010) Growth Organic growth (includes capacity expansions) De novos (~ 2-3/year) IRF acquisi
Slide 19: Business Outlook: Revenue Assumptions
Volume • 2.5% to 3.5% annual growth (excludes acquisitions) • Includes bed expansions, de novos and unit consolidations Medicare Managed Care Exhibit 99.2 Business Outlook: Revenue Assumptions Revenue Other (1) We believe based on the 2011 Medicare rule for IRFs, HealthSouth should realize an increa
Slide 20: Business Outlook: Expense Assumptions
Salaries & Benefits (1) Hospital Expenses • Other operating and supplies tracking with inflation Salaries & Benefits Hospital Expenses Exhibit 99.2 Business Outlook: Expense Assumptions Expense 4.5% of revenue (excludes stock-based compensation) (1) Salaries, Wages and Benefits: 85% Salaries and Wag
Slide 21: 2011 Guidance - Adjusted EBITDA
Adjusted EBITDA (1) $440 million to $450 million Reflects: 2.9% to 5.3% growth over 2010 7.2% to 8.4% CAGR over 2009 Exhibit 99.2 2011 Guidance - Adjusted EBITDA (1) Reconciliation to GAAP provided on slides 33 and 36 through 39. Considerations: ü 2010 bad debt expense was 0.9% of revenue; expect 20
Slide 22: Business Outlook: Income Tax Considerations
GAAP Considerations: • Valuation allowance reduced by approximately $825 million resulting in a $736.6 million benefit to 2010 income tax provision. • As of 12/31/10, the Company had a remaining valuation allowance of approximately $113 million, primarily related to state NOLs. Future Cash Tax Payme
Slide 23: Business Outlook: Adjusted Free Cash Flow
HealthSouth’s GAAP income statement will be affected by a number of items that will not affect cash flow from operating activities or adjusted free cash flow: Normalized GAAP tax rate resulting from the valuation allowance reversal in Q4 2010. Loss on early extinguishment of debt Multi-Year Adjusted
Slide 24: Options for Addressing the 10.75% Senior Notes
Sources $ Million (1) Assumed Call Price (3) Annual Interest Savings Cash on hand $100.0 105.375 $10.2 Revolving credit facility (LIBOR + 350 bps) (2) $100.0 105.375 $6.4 New senior notes (assumed coupon of 7.50%) $100.0 105.375 $2.7 Accounting effect for early repayment/ refinancing : “Loss on earl
Slide 25: 2011 Guidance - EPS
Diluted Earnings per Share from Continuing Operations Attributable to HealthSouth (1) $1.01 to $1.06 HealthSouth is transitioning EPS guidance to a GAAP measure. Exhibit 99.2 2011 Guidance - EPS Considerations: ü Assumes provision for income tax of 40%; cash taxes expected to be $6-$8 million. ü Gui
Slide 26: Appendix
Exhibit 99.2 Appendix
Slide 27: Historic Discharge Growth vs. Industry
10.7% 9.4% 5.6% 2.6% 4.6% 5.5% 5.8% 5.8% 5.3% 2.5% 2.2% 1.1% Exhibit 99.2 (1) Data provided by UDSMR, a data gathering and analysis organization for the rehabilitation industry; represents ~ 65-70% of industry, including HealthSouth sites. (2) Includes consolidated HealthSouth inpatient rehabilitati
Slide 28: Debt Schedule and Interest Expense
Exhibit 99.2 Debt Schedule and Interest Expense (1) Based on 2010 and 2009 Adjusted EBITDA of $427.4 million and $383.0 million, respectively; reconciliation to GAAP provided on slides 33 and 36 through 39. (2) Based on debt balances as of December 31, 2010 and assumes 3 month LIBOR of 0.302%.
Slide 29: Revenues & Expenses (Sequential)
Exhibit 99.2 Revenues & Expenses (Sequential)
Slide 30: Revenues & Expenses (Year over Year)
Exhibit 99.2 Revenues & Expenses (Year over Year)
Slide 31: Payment Sources
Exhibit 99.2 Payment Sources (1 ) Managed Medicare revenues represent ~ 8%, 7%, 8%, and 8% of total revenues for Q4 2010, Q4 2009, 2010, and 2009, respectively, and are included in “Managed care and other discount plans.”
Slide 32: Employee and Operating Statistics Notes
Exhibit 99.2 ( 3) Excludes approximately 400 full-time equivalents, who are considered part of corporate overhead with their salaries and benefits included in general and administrative expenses in the Company’s consolidated statements of operations. Full-time equivalents included in the above table
Slide 33: Net Cash Provided by Operating Activities
Exhibit 99.2 Net Cash Provided by Operating Activities
Slide 34: Adjusted Free Cash Flow
Exhibit 99.2 Adjusted Free Cash Flow (1) Q4 2010 and full-year 2010 working capital benefited from a shift in timing of interest payments related to the refinancing in Q4 2010. (2) Q4 2010 and full-year 2010 were negatively affected by the $6.9 million unwind fee related to the termination of two fo
Slide 35: Outstanding Share Summary
Exhibit 99.2 Outstanding Share Summary (Millions) Notes : (1) Does not include 2.0 million warrants issued in connection with a January 2004 loan repaid to Credit Suisse First Boston. In connection with this transaction, we issued warrants to the lender to purchase two million shares of our common s
Slide 36: Reconciliation of Net Income to Adjusted Income and Adjusted EBITDA
Exhibit 99.2 Reconciliation of Net Income to Adjusted Income from Continuing Operations and Adjusted EBITDA (1) (3) (4)
Slide 37: (1 ) (2) (3) (4) - Notes on page 39.
Exhibit 99.2 (1 ) (2) (3) (4) - Notes on page 39.
Slide 38: (1 ) (2) (3) (4) - Notes on page 39.
Exhibit 99.2 (1 ) (2) (3) (4) - Notes on page 39.
Slide 39: Reconciliation Notes
Exhibit 99.2 Reconciliation Notes 1. Adjusted income from continuing operations and Adjusted EBITDA are non-GAAP financial measures. The Company’s leverage ratio (total consolidated debt to Adjusted EBITDA for the trailing four quarters) is, likewise, a non-GAAP financial measure. Management and som