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): July 28, 2014

HealthSouth Corporation
(Exact name of Registrant as specified in its Charter)
Delaware
(State or Other Jurisdiction of Incorporation)
001-10315
63-0860407
(Commission File Number)
(IRS Employer Identification No.)
 
 
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:

¨
Written communication pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 
 
¨
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
 
 
¨
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
 
 
¨
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))





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, (the “Securities Act”) or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing.
On July 28, 2014, HealthSouth Corporation (the “Company”) issued a press release reporting the financial results of the Company for the three and six months ended June 30, 2014. 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, July 29, 2014 is attached to this report as Exhibit 99.2 and incorporated herein by reference. The information in this report shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or incorporated by reference in any filing under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing.
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 EBITDA. The leverage ratio referenced therein is defined as the ratio of consolidated total debt to Adjusted EBITDA for the trailing four quarters. The Company believes its leverage ratio and Adjusted EBITDA are measures of its ability to service its debt and its ability to make capital expenditures. Additionally, the leverage ratio is a standard measurement used by investors to gauge the creditworthiness of an institution. The Company's credit agreement also includes a maximum leverage ratio financial covenant which allows the Company to deduct up to $75 million of cash on hand from consolidated total debt. The Company reconciles Adjusted EBITDA to net income in the press release attached as Exhibit 99.1 and the supplemental slides attached as Exhibit 99.2 and to net cash provided by operating activities in the supplemental slides attached as Exhibit 99.2 and below.
The Company uses Adjusted 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 Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, "Liquidity and Capital Resources," and 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, 2013 (the “2013 Form 10‑K”). These covenants are material terms of the credit agreement. Noncompliance 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, paying common stock dividends, making certain payments, and acquiring and disposing of assets. Consequently, Adjusted EBITDA is critical to the Company's assessment of its liquidity.
In general terms, the credit agreement definition of Adjusted EBITDA, referred to as “Adjusted Consolidated EBITDA” there, allows the Company to add back to consolidated net income interest expense, income taxes, and depreciation and amortization and then add back to consolidated net income (1) all unusual or nonrecurring items reducing consolidated net income (of which only up to $10 million in a year may be cash expenditures), (2) any losses from discontinued operations and closed locations, (3) costs and expenses, including legal fees and expert witness fees, incurred with respect to litigation associated with stockholder derivative litigation, including the matters related to Ernst & Young LLP and Richard Scrushy discussed in Note 18, Contingencies and Other Commitments, to the consolidated financial statements accompanying the 2013 Form 10-K and Note 10, Contingencies and Other Commitments, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of the Company's quarterly report on Form 10-Q for the quarterly period ended June 30, 2014 (the "June 2014 Form 10-Q"), when filed, and (4) share-based compensation expense. The Company also subtracts from consolidated net income all unusual or nonrecurring items to the extent they increase consolidated net income.




Under the credit agreement, the Adjusted EBITDA calculation does not include net income attributable to noncontrolling interests and includes (1) gain or loss on disposal of assets, (2) professional fees unrelated to the stockholder derivative litigation, and (3) unusual or nonrecurring cash expenditures in excess of $10 million. These items may not be indicative of the Company's ongoing performance, so the Adjusted EBITDA calculation presented here includes adjustments for them.
Adjusted 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 EBITDA are significant components in understanding and assessing financial performance. Therefore, Adjusted EBITDA should not be considered a substitute for net income or cash flows from operating, investing, or financing activities. Because Adjusted EBITDA is not a measurement determined in accordance with GAAP and is thus susceptible to varying calculations, Adjusted 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 the 2013 Form 10-K.
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, pursue development activities, and return capital to its common stockholders. The calculation of adjusted free cash flow and a reconciliation of net cash provided by operating activities to adjusted free cash flow are included in the press release attached as Exhibit 99.1 and 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. The Company's 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 condensed consolidated statements of cash flows included in the June 2014 Form 10-Q, when filed, and in the press release attached as Exhibit 99.1 for the GAAP measures of cash flows from operating, investing, and financing activities.
Reconciliation of Net Cash Provided by Operating Activities to Adjusted EBITDA
 
Three Months Ended June 30, 2014
 
Six Months Ended June 30, 2014
 
Year Ended December 31,
 
 
 
 
2014
 
2013
 
2014
 
2013
 
2013
 
2012
 
(In Millions)
Net cash provided by operating activities
$
128.0

 
$
105.4

 
$
235.1

 
$
226.8

 
$
470.3

 
$
411.5

Provision for doubtful accounts
(9.3
)
 
(7.0
)
 
(16.8
)
 
(14.4
)
 
(26.0
)
 
(27.0
)
Professional fees—accounting, tax, and legal
2.0

 
2.2

 
3.6

 
3.6

 
9.5

 
16.1

Interest expense and amortization of debt discounts and fees
27.8

 
24.4

 
55.7

 
48.6

 
100.4

 
94.1

Equity in net income of nonconsolidated affiliates
2.6

 
3.3

 
6.9

 
6.2

 
11.2

 
12.7

Net income attributable to noncontrolling interests in continuing operations
(14.8
)
 
(13.8
)
 
(29.6
)
 
(28.4
)
 
(57.8
)
 
(50.9
)
Amortization of debt discounts and fees
(3.2
)
 
(1.0
)
 
(6.3
)
 
(2.0
)
 
(5.0
)
 
(3.7
)
Distributions from nonconsolidated affiliates
(3.1
)
 
(1.6
)
 
(6.5
)
 
(5.0
)
 
(11.4
)
 
(11.0
)
Current portion of income tax expense (benefit)
3.0

 
(1.3
)
 
6.6

 
0.5

 
6.3

 
5.9

Change in assets and liabilities
17.6

 
23.2

 
44.5

 
36.2

 
48.9

 
58.1

Premium paid on bond redemption
—

 
—

 
—

 
—

 
1.7

 
1.9

Net cash used in (provided by) operating activities of discontinued operations
1.0

 
(0.5
)
 
1.2

 
0.2

 
1.9

 
(2.0
)
Other
1.1

 
1.2

 
2.4

 
1.5

 
1.6

 
0.2

Adjusted EBITDA
$
152.7

 
$
134.5

 
$
296.8

 
$
273.8

 
$
551.6

 
$
505.9





Forward-Looking Statements
The information contained in this report, the press release, and supplemental slides includes certain estimates, projections, and other forward-looking information that involve known and unknown risks and relate to, among other things, future events, the Company's business strategy, financial plans, dividend strategies, plans to repurchase its debt or equity securities, future financial performance, projected business results, projected capital expenditures, or leverage ratio. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “could,” “should,” “expect,” “plan,” “anticipate,” “believe,” “intend,” “estimate,” “predict,” “project,” “target,” “potential,” or “continue” or the negative of these terms or other comparable terminology. 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 that information.
You are cautioned not to place undue reliance on the estimates, projections, and other forward-looking information in this report, the press 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 attached press release and in the 2013 Form 10-K, the Company's quarterly report on Form 10-Q for the quarterly period ended June 30, 2014, when filed, and March 31, 2014, 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.
Exhibit Number
 
Description
99.1
 
Press release of HealthSouth Corporation, dated July 28, 2014.
99.2
 
Supplemental slides provided in connection with the second quarter 2014 earnings call of HealthSouth Corporation.





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.
HEALTHSOUTH CORPORATION
 
 
 
By:
/S/   JOHN P. WHITTINGTON
 
Name:
John P. Whittington
 
Title:
Executive Vice President, General Counsel
and Corporate Secretary
Dated: July 28, 2014



HLS Earnings Release 6/30/14
Exhibit 99.1

Media Contact
July 28, 2014
Casey Lassiter, 205-410-2777
For Immediate Release
casey.lassiter@healthsouth.com
 
 
 
Investor Relations Contact
 
Mary Ann Arico, 205-969-6175
 
maryann.arico@healthsouth.com
 
HealthSouth Reports Strong Results for Second Quarter 2014 and Raises Full-Year Guidance
Revenue Growth of 7.1% and Discharge Growth of 3.0%
Cash Provided by Operating Activities of $128.0 million ($235.1 million Year-to-Date)
Adjusted EBITDA Increased by 13.5%
BIRMINGHAM, Ala. - HealthSouth Corporation (NYSE: HLS), the nation's largest owner and operator of inpatient rehabilitation hospitals, today reported its results of operations for the second quarter ended June 30, 2014.
“The second quarter was another excellent quarter for HealthSouth,” said Jay Grinney, HealthSouth President and Chief Executive Officer. “We achieved revenue growth of 7.1%, increased our Adjusted EBITDA by 13.5%, and saw our adjusted free cash flow grow to $97.9 million from $72.5 million when compared to the second quarter of 2013. We also continued to invest in the future growth of the company with the ongoing development of three new hospitals that are scheduled to open in the fourth quarter of this year, the execution of a joint venture agreement with Mountain States Health Alliance to own and operate Quillen Rehabilitation Hospital in Johnson City, Tennessee, and the execution of an agreement with Memorial Health to form a joint venture to own and operate an inpatient rehabilitation hospital in Savannah, Georgia. And, as a result of the company's strong results, we raised our full-year Adjusted EBITDA and earnings per share guidance.”
Second Quarter Results
•
Consolidated net operating revenues were $604.4 million for the second quarter of 2014 compared to $564.5 million for the second quarter of 2013, or an increase of 7.1%. This increase was attributable to a 3.0% increase in patient discharges and a 4.9% increase in net patient revenue per discharge. Discharge growth included a 1.4% increase in same-store discharges. Approximately 60 basis points of discharge growth from new stores resulted from the consolidation of Fairlawn Rehabilitation Hospital (“Fairlawn”) in Worcester, Massachusetts effective June 1, 2014, as discussed below. The increase in net patient revenue per discharge resulted from price adjustments, higher average acuity for the patients served, and contributions from hospitals that opened in the second quarter of 2013 and were undergoing Medicare certification.
•
Income from continuing operations attributable to HealthSouth per diluted share for the second quarter of 2014 was $0.81 per share compared to $1.66 per share for the second quarter of 2013. Earnings per share for the second quarter of 2014 included strong operating results and the $27.2 million, or $0.27 per diluted share, nontaxable gain related to the increase in ownership and consolidation of Fairlawn. Earnings per share for the second quarter of 2013 included a $1.15 per diluted share benefit associated with a settlement with the Internal Revenue Service.
•
Cash flows provided by operating activities were $235.1 million for the six months ended June 30, 2014 compared to $226.8 million for the six months ended June 30, 2013. This increase was primarily due to increased net operating revenues and continued disciplined expense management.
•
Adjusted EBITDA (see attached supplemental information) for the second quarter of 2014 was $152.7 million compared to $134.5 million for the second quarter of 2013, or an increase of 13.5%. This improvement was due

 
 
1


primarily to continued revenue growth and disciplined expense management, including contributions from hospitals that opened in the second quarter of 2013. Adjusted EBITDA in the second quarter of 2014 also included a $1.4 million benefit from the increase in ownership and consolidation of Fairlawn.
•
Adjusted free cash flow (see attached supplemental information) for the second quarter of 2014 was $97.9 million compared to $72.5 million for the second quarter of 2013. Adjusted free cash flow for the second quarter of 2014 benefited from higher Adjusted EBITDA, lower working capital, and a reduction in preferred dividends.
“The strength of our cash flow generation was again evidenced by first half 2014 adjusted free cash flow of $163 million,” said Doug Coltharp, Executive Vice President and Chief Financial Officer of HealthSouth. “The cash we generated supported $52.7 million in discretionary capital expenditures, $43.1 million in common stock repurchases, $31.6 million in common stock dividends, and the purchase of our increased equity ownership in Fairlawn.”
Acquisition of Additional Ownership Interest in Joint Venture Hospital
As previously announced, in June 2014, the Company acquired an additional 30% equity interest from UMass Memorial Health Care, its joint venture partner in Fairlawn. This transaction increased the Company's ownership interest from 50% to 80% and resulted in a change in accounting for this hospital from the equity method of accounting to a consolidated entity. As a result of its consolidation of this hospital and the remeasurement of its previously held equity interest at fair value, the Company recorded a $27.2 million gain as part of other income during the three and six months ended June 30, 2014. The transaction was funded using cash on hand.
2014 Guidance
Based on its results for the first half of 2014, including the impact of the increase in ownership and consolidation of Fairlawn, the Company is:
•
raising its full-year 2014 Adjusted EBITDA guidance to a range of $570 million to $580 million from a range of $555 million to $565 million.
•
raising its full-year 2014 guidance for income from continuing operations attributable to HealthSouth per diluted share to $2.25 to $2.31 per share from $1.86 to $1.91 per share.
Earnings Conference Call and Webcast
The Company will host an investor conference call at 9:00 a.m. Eastern Time on Tuesday, July 29, 2014 to discuss its results for the second quarter of 2014. For reference during the call, the Company will post certain supplemental slides at
http://investor.healthsouth.com.
The conference call may be accessed by dialing 877-587-6761 and giving the pass code 55539778. International callers should dial 706-679-1635 and give the same pass code. Please call approximately ten minutes before the start of the call to ensure you are connected. The conference call will also be webcast live and will be available at http://investor.healthsouth.com by clicking on an available link.
An on-line replay of the conference call will be available after the live broadcast at http://investor.healthsouth.com.
About HealthSouth
HealthSouth is the nation's largest owner and operator of inpatient rehabilitation hospitals in terms of patients treated and discharged, revenues, and number of hospitals. Operating in 28 states across the country and in Puerto Rico, HealthSouth serves patients through its network of inpatient rehabilitation hospitals, outpatient rehabilitation satellite clinics, and home health agencies. HealthSouth's hospitals provide a higher level of rehabilitative care to patients who are recovering from conditions such as stroke and other neurological disorders, cardiac and pulmonary conditions, brain and spinal cord injuries, complex orthopedic conditions, and amputations. HealthSouth can be found on the Web at www.healthsouth.com.

 
 
2


Other Information
The information in this press release is summarized and should be read in conjunction with the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 (the “June 2014 Form 10-Q”), when filed, as well as the Company's Current Report on Form 8-K filed on July 28, 2014. In addition, the Company will post supplemental slides today on its website at http://investor.healthsouth.com for reference during its July 29, 2014 earnings call.
When filed, the June 2014 Form 10-Q can be found on the Company's website at http://investor.healthsouth.com and the SEC's website at www.sec.gov.

 
 
3
HealthSouth Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(In Millions)
Net operating revenues
$
604.4

 
$
564.5

 
$
1,195.6

 
$
1,137.1

Less: Provision for doubtful accounts
(9.3
)
 
(7.0
)
 
(16.8
)
 
(14.4
)
Net operating revenues less provision for doubtful accounts
595.1

 
557.5

 
1,178.8

 
1,122.7

Operating expenses:
 

 
 

 
 
 
 
Salaries and benefits
285.3

 
273.6

 
571.4

 
548.2

Other operating expenses
86.3

 
81.0

 
170.8

 
159.1

Occupancy costs
10.3

 
11.9

 
20.8

 
24.1

Supplies
27.8

 
26.6

 
55.4

 
52.8

General and administrative expenses
30.2

 
29.5

 
60.9

 
59.7

Depreciation and amortization
26.4

 
23.1

 
52.8

 
45.2

Government, class action, and related settlements
(0.8
)
 
(2.0
)
 
(0.8
)
 
(2.0
)
Professional fees—accounting, tax, and legal
2.0

 
2.2

 
3.6

 
3.6

Total operating expenses
467.5

 
445.9

 
934.9

 
890.7

Interest expense and amortization of debt discounts and fees
27.8

 
24.4

 
55.7

 
48.6

Other income
(28.2
)
 
(1.9
)
 
(29.9
)
 
(2.6
)
Equity in net income of nonconsolidated affiliates
(2.6
)
 
(3.3
)
 
(6.9
)
 
(6.2
)
Income from continuing operations before income tax expense (benefit)
130.6

 
92.4

 
225.0

 
192.2

Provision for income tax expense (benefit)
36.5

 
(86.5
)
 
69.3

 
(53.0
)
Income from continuing operations
94.1

 
178.9

 
155.7

 
245.2

Income (loss) from discontinued operations, net of tax
3.8

 
0.1

 
3.7

 
(0.3
)
Net income
97.9

 
179.0

 
159.4

 
244.9

Less: Net income attributable to noncontrolling interests
(14.8
)
 
(13.8
)
 
(29.6
)
 
(28.4
)
Net income attributable to HealthSouth
83.1

 
165.2

 
129.8

 
216.5

Less: Convertible perpetual preferred stock dividends
(1.5
)
 
(5.8
)
 
(3.1
)
 
(11.5
)
Net income attributable to HealthSouth common shareholders
$
81.6

 
$
159.4

 
$
126.7

 
$
205.0



 
(Continued)
4
HealthSouth Corporation and Subsidiaries
Condensed Consolidated Statements of Operations (Continued)
(Unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(In Millions, Except Per Share Data)
Weighted average common shares outstanding:
 

 
 

 
 
 
 
Basic
86.7

 
86.1

 
87.0

 
90.0

Diluted
100.6

 
99.8

 
100.8

 
103.4

 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
Basic earnings per share attributable to HealthSouth common shareholders:
 
 
 

 
 
 
 
Continuing operations
$
0.89

 
$
1.82

 
$
1.40

 
$
2.24

Discontinued operations
0.04

 
—

 
0.04

 
—

Net income
$
0.93

 
$
1.82

 
$
1.44

 
$
2.24

Diluted earnings per share attributable to HealthSouth common shareholders:
 
 
 
 
 
 
 
Continuing operations
$
0.81

 
$
1.66

 
$
1.29

 
$
2.09

Discontinued operations
0.04

 
—

 
0.04

 
—

Net income
$
0.85

 
$
1.66

 
$
1.33

 
$
2.09

 
 
 
 
 
 
 
 
Cash dividends per common share
$
0.18

 
$
—

 
$
0.36

 
$
—

 
 
 
 
 
 
 
 
Amounts attributable to HealthSouth common shareholders:
 
 
 

 
 
 
 
Income from continuing operations
$
79.3

 
$
165.1

 
$
126.1

 
$
216.8

Income (loss) from discontinued operations, net of tax
3.8

 
0.1

 
3.7

 
(0.3
)
Net income attributable to HealthSouth
$
83.1

 
$
165.2

 
$
129.8

 
$
216.5



 
 
5
HealthSouth Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)

 
June 30,
2014
 
December 31,
2013
 
(In Millions)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
65.8

 
$
64.5

Accounts receivable, net of allowance for doubtful accounts of $24.8 in 2014; $23.1 in 2013
272.3

 
261.8

Deferred income tax assets
138.9

 
139.0

Other current assets
103.9

 
115.1

Total current assets
580.9

 
580.4

Property and equipment, net
976.5

 
910.5

Goodwill
491.7

 
456.9

Intangible assets, net
103.3

 
88.2

Deferred income tax assets
276.1

 
354.3

Other long-term assets
148.0

 
144.1

Total assets
$
2,576.5

 
$
2,534.4

Liabilities and Shareholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
55.7

 
$
61.9

Accrued expenses and other current liabilities
243.6

 
249.7

Total current liabilities
299.3

 
311.6

Long-term debt, net of current portion
1,475.1

 
1,505.2

Other long-term liabilities
141.1

 
142.2

 
1,915.5

 
1,959.0

Commitments and contingencies


 


Convertible perpetual preferred stock
93.2

 
93.2

Redeemable noncontrolling interests
12.4

 
13.5

Shareholders’ equity:
 

 
 

HealthSouth shareholders’ equity
413.7

 
344.6

Noncontrolling interests
141.7

 
124.1

Total shareholders’ equity
555.4

 
468.7

Total liabilities and shareholders’ equity
$
2,576.5

 
$
2,534.4


 
 
6
HealthSouth Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)

 
Six Months Ended June 30,
 
2014
 
2013
 
(In Millions)
Cash flows from operating activities:
 
 
 
Net income
$
159.4

 
$
244.9

(Income) loss from discontinued operations
(3.7
)
 
0.3

Adjustments to reconcile net income to net cash provided by operating activities—
 

 
 

Provision for doubtful accounts
16.8

 
14.4

Depreciation and amortization
52.8

 
45.2

Equity in net income of nonconsolidated affiliates
(6.9
)
 
(6.2
)
Distributions from nonconsolidated affiliates
6.5

 
5.0

Stock-based compensation
14.3

 
12.8

Deferred tax expense (benefit)
62.7

 
(53.5
)
Gain on consolidation of Fairlawn Rehabilitation Hospital
(27.2
)
 
—

Other
6.1

 
0.3

(Increase) decrease in assets—
 
 
 

Accounts receivable
(35.6
)
 
(38.8
)
Other assets
8.4

 
(0.7
)
Increase (decrease) in liabilities—
 
 
 

Accounts payable
2.7

 
9.5

Other liabilities
(20.0
)
 
(6.2
)
Net cash used in operating activities of discontinued operations
(1.2
)
 
(0.2
)
Total adjustments
79.4

 
(18.4
)
Net cash provided by operating activities
235.1

 
226.8

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(89.5
)
 
(69.0
)
Capitalized software costs
(11.0
)
 
(11.9
)
Acquisition of business, net of cash acquired
(15.9
)
 
(28.9
)
Other
9.4

 
8.4

Net cash used in investing activities
(107.0
)
 
(101.4
)
Cash flows from financing activities:
 
 
 
Borrowings on revolving credit facility
65.0

 
132.0

Payments on revolving credit facility
(95.0
)
 
(59.0
)
Repurchases of common stock, including fees and expenses
(43.1
)
 
(234.1
)
Dividends paid on common stock
(31.6
)
 
—

Dividends paid on convertible perpetual preferred stock
(3.1
)
 
(11.5
)
Distributions paid to noncontrolling interests of consolidated affiliates
(25.4
)
 
(23.9
)
Other
6.4

 
7.0

Net cash used in financing activities
(126.8
)
 
(189.5
)
Increase (decrease) in cash and cash equivalents
1.3

 
(64.1
)
Cash and cash equivalents at beginning of period
64.5

 
132.8

Cash and cash equivalents at end of period
$
65.8

 
$
68.7




 
 
7
HealthSouth Corporation and Subsidiaries
Supplemental Information
Earnings Per Share

 
QTD
 
 
Q2 2014
 
Q2 2013
 
 
(In Millions, Except Per Share Data)
 
Adjusted EBITDA
$
152.7

 
$
134.5

 
Interest expense and amortization of debt discounts and fees
(27.8
)
 
(24.4
)
 
Depreciation and amortization
(26.4
)
 
(23.1
)
 
Stock-based compensation expense
(7.0
)
 
(6.5
)
 
Noncash loss on disposal of assets
(1.7
)
 
(1.7
)
 
 
89.8

 
78.8

 
Certain nonrecurring expenses:
 
 
 
 
Government, class action, and related settlements
0.8

 
2.0

 
Professional fees—accounting, tax, and legal
(2.0
)
 
(2.2
)
 
Gain on consolidation of Fairlawn Rehabilitation Hospital

27.2

 
—

 
Pre-tax income
115.8

 
78.6

 
Income tax (expense) benefit (1)
(36.5
)
(2) 
86.5

(3) 
Income from continuing operations (4)
$
79.3

 
$
165.1

 
 
 
 
 
 
Basic shares
86.7

 
86.1

 
Diluted shares
100.6

 
99.8

 
 
 
 
 
 
Basic earnings per share (4)
$
0.89

 
$
1.82

 
Diluted earnings per share (4)
$
0.81

 
$
1.66

 
(1) 
Current income tax expense (benefit) for the three months ended June 30, 2014 and 2013 was $3.0 million and ($1.3) million, respectively.
(2) 
The Company's effective income tax rate was reduced as a result of the nontaxable gain related to its acquisition of an additional 30% equity interest in Fairlawn Rehabilitation Hospital, as discussed elsewhere in this document.
(3) 
Includes an approximate $115 million, or $1.15 per diluted share, benefit related to the Company's settlement with the IRS related to the previous restatement of its 2000 and 2001 financial statements, as well as certain other tax matters, through December 31, 2008.
(4) 
Income from continuing operations attributable to HealthSouth.

 
 
8
HealthSouth Corporation and Subsidiaries
Supplemental Information
Earnings Per Share

 
YTD
 
 
Q2 2014
 
Q2 2013
 
 
(In Millions, Except Per Share Data)
 
Adjusted EBITDA
$
296.8

 
$
273.8

 
Interest expense and amortization of debt discounts and fees
(55.7
)
 
(48.6
)
 
Depreciation and amortization
(52.8
)
 
(45.2
)
 
Stock-based compensation expense
(14.3
)
 
(12.8
)
 
Noncash loss on disposal or impairment of assets
(3.0
)
 
(1.8
)
 
 
171.0

 
165.4

 
Certain nonrecurring expenses:
 
 
 
 
Government, class action, and related settlements
0.8

 
2.0

 
Professional fees—accounting, tax, and legal
(3.6
)
 
(3.6
)
 
Gain on consolidation of Fairlawn Rehabilitation Hospital

27.2

 
—

 
Pre-tax income
195.4

 
163.8

 
Income tax (expense) benefit (1)
(69.3
)
(2) 
53.0

(3) 
Income from continuing operations (4)
$
126.1

 
$
216.8

 
 
 
 
 
 
Basic shares
87.0

 
90.0

 
Diluted shares
100.8

 
103.4

 
 
 
 
 
 
Basic earnings per share (4)
$
1.40

 
$
2.24

 
Diluted earnings per share (4)
$
1.29

 
$
2.09

 
(1) 
Current income tax expense for the six months ended June 30, 2014 and 2013 was $6.6 million and $0.5 million, respectively.
(2) 
The Company's effective income tax rate was reduced as a result of the nontaxable gain related to its acquisition of an additional 30% equity interest in Fairlawn Rehabilitation Hospital, as discussed elsewhere in this document.
(3) 
Includes an approximate $115 million, or $1.11 per diluted share, benefit related to the Company's settlement with the IRS related to the previous restatement of its 2000 and 2001 financial statements, as well as certain other tax matters, through December 31, 2008.
(4) 
Income from continuing operations attributable to HealthSouth.


 
 
9
HealthSouth Corporation and Subsidiaries
Supplemental Information
Reconciliation of Net Income to Adjusted EBITDA


 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(In Millions)
Net income
$
97.9

 
$
179.0

 
$
159.4

 
$
244.9

(Income) loss from discontinued operations, net of tax, attributable to HealthSouth
(3.8
)
 
(0.1
)
 
(3.7
)
 
0.3

Provision for income tax expense (benefit)
36.5

 
(86.5
)
 
69.3

 
(53.0
)
Interest expense and amortization of debt discounts and fees
27.8

 
24.4

 
55.7

 
48.6

Professional fees—accounting, tax, and legal
2.0

 
2.2

 
3.6

 
3.6

Government, class action, and related settlements
(0.8
)
 
(2.0
)
 
(0.8
)
 
(2.0
)
Net noncash loss on disposal or impairment of assets
1.7

 
1.7

 
3.0

 
1.8

Depreciation and amortization
26.4

 
23.1

 
52.8

 
45.2

Stock-based compensation expense
7.0

 
6.5

 
14.3

 
12.8

Net income attributable to noncontrolling interests
(14.8
)
 
(13.8
)
 
(29.6
)
 
(28.4
)
Gain on consolidation of Fairlawn Rehabilitation Hospital

(27.2
)
 
—

 
(27.2
)
 
—

Adjusted EBITDA
$
152.7

 
$
134.5

 
$
296.8

 
$
273.8


 
 
10
HealthSouth Corporation and Subsidiaries
Supplemental Information
Reconciliation of Net Cash Provided by Operating Activities to Adjusted Free Cash Flow

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
Year Ended December 31,
 
 
 
 
2014
 
2013
 
2014
 
2013
 
2013
 
(In Millions)
Net cash provided by operating activities
$
128.0

 
$
105.4

 
$
235.1

 
$
226.8

 
$
470.3

Impact of discontinued operations
1.0

 
(0.5
)
 
1.2

 
0.2

 
1.9

Net cash provided by operating activities of continuing operations
129.0

 
104.9

 
236.3

 
227.0

 
472.2

Capital expenditures for maintenance
(17.6
)
 
(16.8
)
 
(47.8
)
 
(35.7
)
 
(74.8
)
Dividends paid on convertible perpetual preferred stock
(1.5
)
 
(5.8
)
 
(3.1
)
 
(11.5
)
 
(23.0
)
Distributions paid to noncontrolling interests of consolidated affiliates
(13.4
)
 
(10.7
)
 
(25.4
)
 
(23.9
)
 
(46.3
)
Nonrecurring items:
 
 
 
 
 
 
 
 
 
Premium paid on redemption of bonds
—

 
—

 
—

 
—

 
1.7

Cash paid (received) for:
 
 
 
 
 
 
 
 
 
Professional fees—accounting, tax, and legal
2.0

 
2.2

 
3.6

 
3.6

 
7.0

Government, class action, and related settlements
(0.6
)
 
(1.3
)
 
(0.6
)
 
(1.3
)
 
(5.9
)
Adjusted free cash flow
$
97.9

 
$
72.5

 
$
163.0

 
$
158.2

 
$
330.9

For the three months ended June 30, 2014, net cash used in investing activities was $39.2 million and resulted primarily from capital expenditures and acquisition activity. Net cash used in financing activities during the three months ended June 30, 2014 was $76.1 million and resulted primarily from net debt payments, repurchases of common stock, cash dividends on common stock, and distributions paid to noncontrolling interests of consolidated affiliates.
For the three months ended June 30, 2013, net cash used in investing activities was $53.5 million and resulted primarily from capital expenditures and acquisition activity. Net cash used in financing activities during the three months ended June 30, 2013 was $63.3 million and resulted primarily from net debt payments, distributions paid to noncontrolling interests of consolidated affiliates, and dividends paid on the Company's convertible perpetual preferred stock.
For the six months ended June 30, 2014, net cash used in investing activities was $107.0 million and resulted primarily from capital expenditures and acquisition activity. Net cash used in financing activities during the six months ended June 30, 2014 was $126.8 million and resulted primarily from repurchases of common stock, net debt payments, cash dividends on common stock, and distributions paid to noncontrolling interests of consolidated affiliates.
For the six months ended June 30, 2013, net cash used in investing activities was $101.4 million and resulted primarily from capital expenditures and acquisition activity. Net cash used in financing activities during the six months ended June 30, 2013 was $189.5 million and resulted primarily from repurchases of common stock as part of the tender offer completed in the first quarter of 2013.
For the year ended December 31, 2013, net cash used in investing activities was $226.2 million and resulted primarily from increased capital expenditures and the acquisition of Walton Rehabilitation Hospital. Net cash used in financing activities during the year ended December 31, 2013 was $312.4 million and resulted primarily from repurchases of common stock as part of the tender offer completed in the first quarter of 2013.

 
 
11
HealthSouth Corporation and Subsidiaries
Forward-Looking Statements

Statements contained in this press release which are not historical facts, such as the financial guidance, are forward-looking statements. In addition, HealthSouth, through its senior management, may from time to time make forward-looking public statements concerning the matters described herein. All such estimates, projections, and forward-looking information speak only as of the date hereof, and HealthSouth undertakes no duty to publicly update or revise such forward-looking information, whether as a result of new information, future events, or otherwise. Such forward-looking statements are necessarily estimates based upon current information, involve a number of risks and uncertainties, and relate to, among other things, future events, HealthSouth's plan to repurchase its debt or equity securities, dividend strategies, effective income tax rates, HealthSouth's business strategy, its financial plans, its future financial performance, its projected business results or model, its projected capital expenditures, or its leverage ratio. Actual events or results may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors. While it is impossible to identify all such factors, factors which could cause actual events or results to differ materially from those estimated by HealthSouth include, but are not limited to, the price of HealthSouth's common or preferred stock as it affects the Company's willingness and ability to repurchase shares and the financial and accounting effects of any repurchases; any adverse outcome of various lawsuits, claims, and legal or regulatory proceedings involving HealthSouth, including its pending DOJ and HHS-OIG investigations; potential disruptions, breaches, or other incidents affecting the proper operation, availability, or security of HealthSouth's information systems, including unauthorized access to or theft of patient information; significant changes in HealthSouth's management team; HealthSouth's ability to successfully complete and integrate de novo developments, acquisitions, investments, and joint ventures consistent with its growth strategy; changes, delays in (including in connection with resolution of Medicare payment reviews or appeals), or suspension of reimbursement for HealthSouth's services by governmental or private payors; changes in the regulation of the healthcare industry at either or both of the federal and state levels, including as part of national healthcare reform and deficit reduction; competitive pressures in the healthcare industry and HealthSouth's response thereto; HealthSouth's ability to obtain and retain favorable arrangements with third-party payors; HealthSouth's 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 HealthSouth's labor expenses from potential union activity and staffing shortages; general conditions in the economy and capital markets; the increase in the costs of defending and insuring against alleged professional liability claims and HealthSouth's ability to predict the estimated costs related to such claims; and other factors which may be identified from time to time in HealthSouth's SEC filings and other public announcements, including HealthSouth's Form 10‑K for the year ended December 31, 2013 and Form 10-Q for the quarters ended March 31, 2014, and June 30, 2014, when filed.

 
 
12
hlsq22014earningsslides0
Second Quarter 2014 Earnings Call July 29, 2014 Supplemental Slides

 
The information contained in this presentation includes certain estimates, projections and other forward- looking information that reflect our current outlook, views and plans with respect to future events, including legislative and regulatory developments, strategy, capital expenditures, development activities, dividend strategies, repurchases of securities, effective tax rates, financial performance, and business model. These estimates, projections and other forward-looking information are based on assumptions that HealthSouth believes, as of the date hereof, are reasonable. Inevitably, there will be differences between such estimates and actual events or 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. HealthSouth 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 this presentation 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 Form 10-K for the year ended December 31, 2013, and the Form 10-Q for the quarters ended March 31, 2014 and June 30, 2014, when filed, and in other documents we previously filed with the SEC, many of which are beyond our control, that may cause actual events or results to differ materially from the views, beliefs and estimates expressed herein. Note Regarding Presentation of Non-GAAP Financial Measures The following presentation includes certain “non-GAAP financial measures” as defined in Regulation G under the Securities Exchange Act of 1934. Schedules are attached that reconcile the non-GAAP financial measures included in the following presentation to the most directly comparable financial measures calculated and presented in accordance with Generally Accepted Accounting Principles in the United States. Our Form 8-K, dated July 28, 2014, to which the following supplemental slides are attached as Exhibit 99.2, provides further explanation and disclosure regarding our use of non-GAAP financial measures and should be read in conjunction with these supplemental slides. Forward-Looking Statements 2

 
Table of Contents 3 4-7 8-9 10 11 12 13 14 15-16 2014 Guidance - Adjusted EBITDA …………………………………………………………………………………………………………………………………………………………….17 2014 Guidance - Earnings per Share ……………………………………………………………………………………………………………………….18 Income Tax Considerations…………………………………………………………………………………………………………………………………………19 Adjusted Free Cash Flow Considerations…………………………………………………………………………………………………………………………………………20 21 22 23 24 25 26 27 28 29-30 Outstanding Share Summary, Warrant Information, and Conversion Price……………………………………………………………………………….31-32 Adjusted EBITDA History……………………………………………………………………………………………………………………………………………….33 34 Reconciliations to GAAP…………………………………………………………………………………………………………………………………………………………35-39 Adjusted Free Cash Flow ……………………………………………………………………………………………………………………………………… Q2 2014 Summary……………………………………………………………………………………………………………………….. Revenues (Q2 2014 vs. Q2 2013)…………………………………………………………………………………………………………………………………………. Expenses (Q2 2014 vs. Q2 2013)…………………………………………………………………………………………………… Adjusted EBITDA……………………………………………………………………………………………………………………………………………………………….. Earnings per Share………………………………………………………………………………………………………………………………………… Highlights…………………………………………………………………………………………………………………………………. Quality……………………………………………………………………………………………………………………………………. Adjusted Free Cash Flow ……………………………………………………………………………………………………………………………………… Appendix………………………………………………………………………………………………………………………………………… Priorities for Reinvesting Free Cash Flow………………………………………………………………………………………………………………………………………… Revenues & Expenses (Sequential)………………………………………………………………………………………………………………………………………… Payment Sources (Percent of Revenues) ……………………………………………………………………………………………………………………………………… Operational and Labor Metrics………………………………………………………………………………………………………………………………………… Debt Schedule……………………………………………………………………………………………………………………………………………………………. Business Outlook: 2014 to 2016………………………………………………………………………………………………………………………………………… Revenues & Expenses (6 Months)………………………………………………………………………………………………………………………………………… Our New-Store/Same-Store Growth…………………………………………………………………………………………………………………………………………

 
Q2 2014 Summary (Q2 2014 vs. Q2 2013) 4 (1) HealthSouth acquired an additional 30% equity interest in Fairlawn Rehabilitation Hospital in Worcester, MA from its joint venture partner. This transaction increased HealthSouth’s ownership interest from 50% to 80% and resulted in a change in accounting for this hospital from the equity method to a consolidated entity effective June 1, 2014. (2) New hospitals are required to treat a minimum of 30 patients each for zero revenue as part of their Medicare certification.  Revenue growth of 7.1% ― Inpatient revenue growth of 8.0% (80 bps for Fairlawn (1))  Discharge growth of 3.0% (6.3% in prior year) • Same-store discharge growth of 1.4% • New-store growth of 1.6% (60 bps for Fairlawn (1)); Littleton, CO and Stuart, FL both opened in Q2 2013  Revenue per discharge increased by 4.9%, positively impacted by: • Price adjustments (Medicare and Managed care) • Higher average acuity for the patients we served • Contributions from hospitals that opened in Q2 2013 and were undergoing Medicare certifications (2) ― Outpatient and other revenue decline of 6.5% ($2.4 million)  Q2 2013 included a $1.6 million benefit for state provider tax refunds.

 
 Bad debt as a percent of revenue was 1.5%.  Disciplined expense management benefited from increased revenue and the maturation of three new hospitals that opened in Q2 2013. ― Salaries and benefits as a percent of revenue improved by 130 bps. ― EPOB was essentially flat, after excluding the ramp up of three new hospitals in Q2 2013. ― Hospital-related expenses as a percent of revenue improved by 60 bps. Q2 2014 Summary (Q2 2014 vs. Q2 2013) (cont.) 5 (1) General & Administrative excludes stock-based compensation. (2) Hospital-related expenses include other operating expenses, supplies, and occupancy costs. Other operating expenses exclude the loss on disposal or impairment of assets. 0% 40% 80% Q2 2014 Q2 2013 General & Administrative Hospital-related Expenses Salaries, Wages & Benefits 71.3% 73.4% 3.39 3.43 3.00 3.20 3.40 Q2 2014 Q2 2013 Employees per Occupied Bed (EPOB) % o f R eve n u e (1) (2)

 
Q2 2014 Summary (Q2 2014 vs. Q2 2013) (cont.) 6  Adjusted EBITDA (1) for the quarter of $152.7 million reflected growth of 13.5% and benefited from: ― Revenue growth and disciplined expense management ― The increase in ownership and consolidation of Fairlawn  Adjusted free cash flow (2) for the quarter of $97.9 million benefited from: ― Higher Adjusted EBITDA ― Lower working capital and a reduction in preferred dividends (1) Reconciliation to GAAP provided on slides 35-39 (2) Reconciliation to GAAP provided on slide 34

 
Q2 2014 Summary (Q2 2014 vs. Q2 2013) (cont.)  Diluted earnings (1) (2) per share of $0.81 (see table on slide 14). ― Includes a $27.2 million gain related to the increase in ownership and consolidation of Fairlawn  Shareholder distributions: ― Quarterly cash dividends on common stock:  Paid quarterly cash dividend of $0.18 per share on April 15, 2014  Declared an $0.18 per share quarterly cash dividend paid on July 15, 2014 ― Repurchased $16.7 million of common stock under existing authorization; 494,321 common shares at an average price of $33.86 per share ― Year to date, the Company has repurchased $43.1 million of common stock; 1,303,201 common shares at an average price of $33.05.  $207 million remains under current authorization 7 (1) Income from continuing operations attributable to HealthSouth (2) The interest and amortization related to the convertible senior subordinated notes must be added to income from continuing operations when calculating diluted earnings per share.

 
Highlights  On July 17, 2014, the Company’s Board of Directors approved an increase in the quarterly dividend of 16.7% to $0.21 per common share.  Capacity expansion and new development ― Continued construction of three de novos; expect all to be operational in Q4 2014:  Altamonte Springs, FL (50 beds)  Newnan, GA (50 beds)  Middletown, DE (34 beds) ― Continued the design and permitting process to construct a 50-bed inpatient rehabilitation hospital in Modesto, CA; expected to be operational Q1 2016  Purchased additional ownership interest in Fairlawn 8

 
Highlights (cont.)  Signed an agreement with Mountain States Health Alliance to form a joint venture to own and operate a 26-bed free-standing inpatient rehabilitation hospital in Johnson City, TN. We expect to begin operating the joint venture by year-end 2014.  Signed an agreement with Memorial Health to form a joint venture to own and operate a 50-bed inpatient rehabilitation hospital in Savannah, GA. We expect to begin operating the inpatient rehabilitation hospital at Memorial University Center in early 2015.  New clinical information system now installed in 46 of the Company’s hospitals  96 HealthSouth hospitals have received one or more disease-specific certifications from The Joint Commission’s Disease-Specific Care Certification Program. 9

 
 HealthSouth Functional Outcomes Continue to Outpace Industry Average (1) FIM Gain LOS Efficiency Source: UDSMR Database – On Demand Report: Q1 2014 Report (1) In Q1 2014, we began reporting quality outcomes without HealthSouth included in the UDSMR Average. As a result, we will be reporting one quarter in arrears. Average = Expected, Risk-adjusted (2) FIM instrument is a trademark of Uniform Data System for Medical Rehabilitation, a division of UB Foundation Activities, Inc. Quality 10 36.8 28.0 15.0 20.0 25.0 30.0 35.0 40.0 3.28 2.36 1.5 2.0 2.5 3.0 3.5 4.0 HealthSouth Average UDSMR Average (1) without HealthSouth

 
Q2 Q2 Increase/ (Millions) 2014 2013 (Decrease) Inpatient 569.7$ 527.4$ 8.0% Outpatient and other 34.7 37.1 (6.5%) Consolidated net operating 604.4$ 564.5$ 7.1% (Actual Amounts) Discharges 33,620 32,645 3.0% Net patient revenue / discharge 16,945$ 16,156$ 4.9% Revenues (Q2 2014 vs. Q2 2013) 11  Revenue growth of 7.1% ― Inpatient revenue growth of 8.0% (80 bps for Fairlawn (1))  Discharge growth of 3.0% (6.3% in prior year) • Same-store discharge growth of 1.4% • New-store growth of 1.6% (60 bps for Fairlawn (1)): Littleton, CO and Stuart, FL both opened in Q2 2013  Revenue per discharge increased by 4.9%, positively impacted by: • Price adjustments (Medicare and Managed care) • Higher average acuity for the patients we served • Contributions from hospitals that opened in Q2 2013 and were undergoing Medicare certifications (2) ― Outpatient and other revenue decline of 6.5% ($2.4 million)  Q2 2013 included a $1.6 million benefit for state provider tax refunds. (1) HealthSouth acquired an additional 30% equity interest in Fairlawn Rehabilitation Hospital in Worcester, MA from its joint venture partner. This transaction increased HealthSouth’s ownership interest from 50% to 80% and resulted in a change in accounting for this hospital from the equity method to a consolidated entity effective June 1, 2014. (2) New hospitals are required to treat a minimum of 30 patients each for zero revenue as part of their Medicare certification.

 
 Bad debt as a percent of revenue was 1.5%.  Disciplined expense management benefited from increased revenue and the maturation of three new hospitals that opened in Q2 2013. ― Salaries and benefits as a percent of revenue improved by 130 bps. ― EPOB was essentially flat, after excluding the ramp up of three new hospitals in Q2 2013. ― Hospital-related expenses as a percent of revenue improved by 60 bps. Expenses (Q2 2014 vs. Q2 2013) 12 Q2 Q2 Increase/ (Millions) 2014 2013 (Decrease) Salaries and benefits 285.3$ 273.6$ 4.3% Percent of net operating revenues 47.2% 48.5% (130 bps) EPOB (employees per occupied bed) 3.39 3.43 (1.2%) Hospital-related expenses 122.7$ 117.8$ 4.2% (other operating (1), supplies, occupancy) Percent of net operating revenues 20.3% 20.9% (60 bps) General and administrative 23.2$ 23.0$ 0.9% (excludes stock-based compensation) Percent of net operating revenues 3.8% 4.1% (30 bps) Provision for doubtful accounts 9.3$ 7.0$ 32.9% Percent of net operating revenues 1.5% 1.2% 30 bps (1) Other operating expenses exclude the loss on disposal or impairment of assets.

 
Adjusted EBITDA Change Q2 2014 6Mo.2014 +$18.2M +23.0M +13.5% 8.4% Benefited from: • Revenue growth and disciplined expense management, including contributions from hospitals that opened in Q2 2013 • The increase in ownership and consolidation of Fairlawn (slide 36) Adjusted EBITDA (1) 13 (Millions) 2014 2013 2014 2013 Net operating revenues 604.4$ 564.5$ 1,195.6$ 1,137.1$ Less: Provision for doubtful accounts (9.3) (7.0) (16.8) (14.4) Net operating revenues less provision for doubtful accounts 595.1 557.5 1,178.8 1,122.7 Operating expenses: Salaries and benefits (285.3) (273.6) (571.4) (548.2) Hospital-related expenses: Other operating expenses (2) (84.6) (79.3) (167.8) (157.3) Supplies (27.8) (26.6) (55.4) (52.8) Occupancy costs (10.3) (11.9) (20.8) (24.1) (122.7) (117.8) (244.0) (234.2) General and administrative expenses (3) (23.2) (23.0) (46.6) (46.9) Equity in nonconsolidated affiliates 2.6 3.3 6.9 6.2 Other income (4) 1.0 1.9 2.7 2.6 Noncontrolling interests (14.8) (13.8) (29.6) (28.4) Adjusted EBITDA 152.7$ 134.5$ 296.8$ 273.8$ (1) Reconciliation to GAAP provided on slides 35-39 In arriving at Adjusted EBITDA, the following items were excluded: 2014 2013 2014 2013 (2) Loss on disposal or impairment of assets 1.7$ 1.7$ 3.0$ 1.8$ (3) Stock-based compensation expense 7.0 6.5 14.3 12.8 (4) Gain related to consolidation of Fairlawn Rehabilitation Hospital 27.2 - 27.2 - Q2 Q2 6 Months 6 Months

 
Q2 2014 benefited from: • Higher Adjusted EBITDA • A $27.2 million gain related to the increase in ownership and consolidation of Fairlawn Earnings per Share 14 (In Millions, Except Per Share Data) 2014 2013 2014 2013 Adjusted EBITDA 152.7$ 134.5$ 296.8$ 273.8$ Interest expense and amortization of debt discounts and fees (27.8) (24.4) (55.7) (48.6) Depreciation and amortization (26.4) (23.1) (52.8) (45.2) Stock-based compensation expense (7.0) (6.5) (14.3) (12.8) Other, including noncash loss on disposal or impairments of assets (1.7) (1.7) (3.0) (1.8) 89.8 78.8 171.0 165.4 Certain nonrecurring items: Government, class action and related settlements 0.8 2.0 0.8 2.0 Gain related to consolidation of Fairlawn Rehabilitation Hospital 27.2 - 27.2 Professional fees-accounting, tax, and legal (2.0) (2.2) (3.6) (3.6) Pre-tax income 115.8 78.6 195.4 163.8 Income tax (expense) benefit (1) (36.5) (2) 86.5 (3) (69.3) (2) 53.0 (3) Income from continuing operations (4) 79.3$ 165.1$ 126.1$ 216.8$ Income allocated to participating securities 1.1 2.9 1.6 3.5 Convertible perpetual preferred div idends 1.5 5.8 3.1 11.5 Interest and amortization on 2.0% Convertible Senior Subordinated Notes (net of tax) (5) 2.3 - 4.5 - Basic shares 86.7 86.1 87.0 90.0 Diluted shares 100.6 99.8 100.8 103.4 Basic earnings per share (4) 0.89$ 1.82$ 1.40$ 2.24$ Diluted earnings per share (4) (5) 0.81$ 1.66$ 1.29$ 2.09$ Q2 6 Months (1) Current income tax expense (benefit) was $3.0 million, ($1.3) million, $6.6 million, and $0.5 million for Q2 2014, Q2 2013, and 6 months 2014 and 2013, respectively. (2) The company’s effective income tax rate was reduced as a result of the nontaxable gain related to its acquisition of an additional 30% equity interest in Fairlawn. (3) Includes an approx. $115 million ($1.15 and $1.11per diluted share in the three and six months ended June 30, 2013, respectively) benefit related to a settlement with the IRS (4) Income from continuing operations attributable to HealthSouth (5) The interest and amortization related to the convertible senior subordinated notes must be added to income from continuing operations when calculating diluted earnings per share.

 
Adjusted Free Cash Flow (1) 15 (Millions) 2014 2013 2014 2013 $128.0 105.4$ 235.1$ 226.8$ 1.0 (0.5) 1.2 0.2 Capital expenditures for maintenance (17.6) (16.8) (47.8) (35.7) Dividends paid on convertible, perpetual, preferred stock (1.5) (5.8) (3.1) (11.5) Distributions paid to noncontrolling interests of consolidated affiliates (13.4) (10.7) (25.4) (23.9) Nonrecurring items: Cash paid for professional fees - accounting, tax, and legal 2.0 2.2 3.6 3.6 Cash received for government, class action, and related settlements (0.6) (1.3) (0.6) (1.3) Adjusted free cash flow (1) 97.9$ 72.5$ 163.0$ 158.2$ Cash dividends on common stock 15.8$ -$ 31.6$ -$ 227.0 Q2 129.0 104.9 6 Months Net cash provided by operating activities Net cash provided by operating activities of continuing operations Impact of discontinued operations 236.3  Adjusted free cash flow (1) for the quarter of $97.9 million benefited from: ― Higher Adjusted EBITDA ― Lower working capital and a reduction in preferred dividends (1) Definition of adjusted free cash flow is net cash provided by operating activities of continuing operations minus capital expenditures for maintenance, dividends paid on preferred stock, distributions to noncontrolling interests, and nonrecurring items. Common stock dividends are not included in the calculation of adjusted free cash flow.

 
$158.2 $163.0 $23.0 ($11.7) ($12.1) $8.4 Adjusted Free Cash Flow 6 Mos. 2013 Adjusted EBITDA Cash Interest Expense Working Capital and Other Maintenance Capital Expenditures Preferred Dividends Adjusted Free Cash Flow 6 Mos. 2014 (4) ($2.8) (2) Adjusted Free Cash Flow (1) (Millions) 2014 2013 $ % Adjusted free cash flow (1) 6 Months Change 163.0$ 158.2$ 4.8$ 3.0 (1) Reconciliation to GAAP provided on slide 34 (2) Working capital was impacted by higher payroll tax withholding related to the vesting of restricted stock awards in 2014. (3) Q1 2014 included approx. $12 million for equipment purchases that were invoiced in Q4 2013 and paid in early 2014. (4) On November 18, 2013, the Company closed separate, privately negotiated exchange agreements under which it issued $320 million of 2.0% Convertible Senior Subordinated Notes due 2043 in exchange for 257,110 shares of the Company’s 6.5% Series A Convertible Perpetual Preferred Stock. The transactions will reduce preferred dividends by $16.7 million in 2014. 16 Operating Cash Flows Investing and Financing Cash Flows (3)

 
2014 Guidance - Adjusted EBITDA(1) 17 (1) Reconciliation to GAAP provided on slides 35, 38, and 39 Considerations for July through December:  Revenue growth of 6.0% to 7.0% ― Discharge growth between 4.3% and 5.3% (includes 180 bps for Fairlawn) ― Revenue per discharge growth between 2.3% and 2.6% ― Lower outpatient revenues  2013 second half benefited from reductions to self-insurance reserves, including $6.7 million attributable to lowering the Company’s statistical confidence level.  Includes the impact for the ramp up of three de novo hospitals  Bad debt expense of approx. 1.5% of revenue Considerations for full-year 2014:  Adjusted EBITDA impact of approx. $8 million (net of noncontrolling interests) for sequestration (sequestration anniversaried on April 1, 2014)  Increased operating expense of approx. $4 million for continued implementation of CIS and a TeamWorks project to enhance the patient experience $570 million to $580 million (previous guidance $555 million to $565 million)

 
2014 Guidance - EPS 18 Actual Low High (In Millions, Except Per Share Data) 2013 Adjusted EBITDA 551.6$ 570$ 580$ Interest expense and amortization of debt discounts and fees (100.4) Depreciation and amortization (94.7) Stock-based compensation expense (24.8) Other, including noncash loss on disposal and impairment of assets (5.9) 325.8 320 330 Certain Nonrecurring Expenses: Government, class action, and related settlements 23.5 1 Professional fees - accounting, tax, and legal (9.5) Loss on early extinguishment of debt (2.4) - Gain related to consolidation of Fairlawn Rehabilitation Hospital - 27 Pre-tax income 337.4 341 351 Income tax (12.7) (122) (126) Income from continuing operations (1) 324.7 219 225 Income allocated to participating securities (2) (3.4) (2) (2) Convertible perpetual preferred dividends (2) (21.0) (6) (6) Repurchase of convertible perpetual preferred stock (2) (71.6) - - After-tax convertible debt interest expense (3) - 8 8 Basic shares (2) 88.1 87.0 87.0 Diluted shares (3) 102.1 101.0 101.0 Earnings per share (1) 2.59$ (2)(4) 2.25$ (3) 2.31$ (3) EPS Guidance (7) (7) 2014 (112) (106) (25) Considerations:  Higher depreciation and amortization related to recent capital investments  Higher interest expense and amortization of debt discounts and fees related to the exchange of convertible senior subordinated notes for convertible perpetual preferred stock (3)  Assumes provision for income tax of approx. 36%, which has been reduced primarily as the result of the nontaxable gain related to the Fairlawn transaction (cash taxes expected to be $12 - $17 million for full-year 2014)  Basic and diluted share counts reflect first six months 2014 share repurchase activity. (1) Income from continuing operations attributable to HealthSouth (2) The income allocated to participating securities, the convertible perpetual preferred dividends, and the repurchase premium on preferred stock need to be subtracted from income from continuing operations to calculate basic earnings per share. (3) The interest and amortization related to the convertible senior subordinated notes must be added to income from continuing operations when calculating diluted earnings per share. (4) Diluted earnings per share are the same as basic earnings per share due to antidilution. Earnings per Share from Continuing Operations Attributable to HealthSouth (1) $2.25 to $2.31 (Previous guidance $1.86 to $1.91)

 
Income Tax Considerations GAAP Considerations: •As of 6/30/14, the Company’s federal NOL had a gross balance of approx. $761 million. • The Company has a remaining valuation allowance of approx. $30 million related to state NOLs. Cash Tax Payments: • In 2014, the Company expects to pay approx. $12 million to $17 million of income tax, net of refunds. •HealthSouth is not currently subject to an annual use limitation (“AUL”) under Internal Revenue Code Section 382 (“Section 382”). An “ownership change,” as defined by Section 382, could subject the Company to an AUL, which would approximate the value of the Company at the time of the “ownership change” multiplied by the long- term tax exempt rate. 19

 
Adjusted Free Cash Flow (1) Considerations (1) Reconciliation to GAAP provided on slide 34 (2) Definition of adjusted free cash flow is net cash provided by operating activities of continuing operations minus capital expenditures for maintenance, dividends paid on preferred stock, distributions to noncontrolling interests, and nonrecurring items. Common stock dividends (approx. $16 million paid in Q4 2013 and approx. $66 million projected for 2014) are not included in the calculation of adjusted free cash flow. (3) Net of amortization of debt discounts and fees (4) 2013 benefited by approx. $12 million for equipment purchases that were invoiced in Q4 2013 and paid in early 2014. 20 Certain Cash Flow Items (2) (millions) 2013 Actual 6 Months 2014 Actual 2014 Assumptions • Cash interest expense (3) $95.4 $49.4 $100 • Cash payments for taxes, net of refunds $7.7 $11.4 $12 to $17 • Working capital and other $19.6 $22.2 $15 to $25 • Maintenance CAPEX (4) $74.8 $47.8 $90 to $100 • Dividends paid on preferred stock $23.0 $3.1 $6 Reflects: • Continued investment in the CIS and hospital refresh projects • Timing of maintenance capital expenditures in 2013 and 2014 $243 $268 $331 $336 2011 2012 2013 Trailing 4 Qtrs. Adjusted Free Cash Flow (1) (millions)

 
Priorities for Reinvesting Free Cash Flow 21 Growth in Core Business Debt Reduction Shareholder Distribution (1) Issued $320 million of 2.0% Convertible Senior Subordinated Notes due 2043 in exchange for 257,110 shares of the Company’s 6.5% Series A Convertible Perpetual Preferred Stock. Excluding fees, no cash was used in the transaction. The Company recorded approx. $249 million as debt and approx. $71 million as equity. (2) On July 17, 2014, the board of directors approved a $0.03 per share, or 16.7%, increase to the quarterly cash dividend on the Company’s common stock. On July 25, 2013, the board of directors initiated a quarterly cash dividend on the Company’s common stock of $0.18 per share. (3) On February 14, 2014, the board of directors approved an increase in our existing common stock repurchase authorization from $200 million to $250 million. The $234 million reflects the tender offer completed in Q1 2013 for approx. 9.5% of the common shares. (millions) 2013 6 Months 2014 Actual 2014 Assumptions Bed expansions (target ~ 80 beds/yr) and unit consolidations $24.9 $8.4 $25 to $35 New IRF's (target 4-6/yr) 55.5 24.9 55 to 75 Fairlawn transaction - 15.9 - $80 to $110, excluding $80.4 $49.2 acquisitions 2013 6 Months 2014 Actual 2014 Assumptions Debt pay down, net (1) ($264.0) - N/A Purchase leased properties 90.3 19.4 $19.4 Convertible preferred stock repurchase (1) 249.0 - - Cash dividends on common stock (2) 15.7 31.6 66 Common stock repurchase (~$207 million authorization remaining as of 234.1 43.1 TBD June 30, 2014) (3) $325.1 $94.1 TBD Remain s H ig h e st P rio rit y Objectives Achieved Complements Growth Investments

 
Appendix

 
Business Outlook: 2014 to 2016(1) Business Model • Adjusted EBITDA CAGR: 4-8% (2) • Continued strong free cash flow generation Strategy Leverage < 3.0x Debt to Adjusted EBITDA < 3.0x Debt to Adjusted EBITDA (subject to shareholder value-creating opportunities) Core Growth Same-store Growth (Includes bed expansions and unit consolidations) Consider opportunistic, disciplined acquisitions (1) If legislation affecting Medicare is passed, HealthSouth will evaluate its effect on the Company’s business model. (2) This is a multi-year CAGR; annual results may fall outside the range. Reconciliation to GAAP provided on slides 35-39. 23 New IRF’s = 3 Littleton, CO, Stuart, FL, Augusta, GA Key Operational Initiatives • Enhancing outcomes and patient experience • Implementing CIS: Target 20 hospitals/year; Installation complete in 46 hospitals through Q2 2014; Expect installation at all hospitals by YE2017. New IRF’s Altamonte Springs, FL; Newnan, GA; Middletown, DE Opportunistic Growth Bed expansion = 68 • Positioning for evolving delivery and payment models: ACO, bundling, etc. Shareholder Distributions • Quarterly cash dividends • Opportunistic share repurchases ($43.1 million; 1,303,201 common shares repurchased in first 6 months of 2014) $234 million common stock tender; initiated dividends 2013 2014 2015 2016 Potential depletion of the federal NOL during the 2014 to 2016 timeframe will affect Cash Flow CAGR. New IRF’s (target of 4-6/year)

 
0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0% Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Fairlawn (1) 0.6% St.Vincent's (2) 1.3% 1.2% 1.2% 1.3% New Store 2.1% 2.5% 2.8% 2.6% 1.1% 0.4% 1.0% 1.1% 1.2 1.2 0.7 1.7 2.5% 2.5% 2.0% 1.0% Same Store 0.6 3.4 5.0 3.5 4.0 1.7 5.0 1.9 1.7% 3.0% 2.2% 3.3% 3.2 1.3 0.4 1.4 Total by Qtr. 2.7% 5.9% 7.8% 6.1% 5.1% 2.1% 6.0% 3.0% 4.2 5.4 4.1 6.3 5.7% 3.8% 2.4% 3.0% Total y Year 3.1 5.2 4.6% 5.0 Our New-Store/Same-Store Growth 24 (1) HealthSouth acquired an additional 30% equity interest in Fairlawn Rehabilitation Hospital in Worcester, MA from its joint venture partner. This transaction increased HealthSouth’s ownership interest from 50% to 80% and resulted in a change in accounting for this hospital from the equity method to a consolidated entity effective June 1, 2014. (2) In Q3 2012, HealthSouth amended the joint venture agreement related to St. Vincent Rehabilitation Hospital in Sherwood, AR which resulted in a change in accounting for this hospital from the equity method of accounting to a consolidated entity. Moved to same store in Q3 2013. Ocala, FL (40 Beds) Cypress, TX (40 beds) Cincinnati, OH (40 beds) Augusta, GA (58 beds) Littleton, CO (40 beds) Stuart, FL (34 beds) HealthSouth’s volume growth is driven by bed expansions and new IRFs. Bristol, VA (25 beds) Sugar Land, TX (50 Beds)

 
Debt Schedule (1) On November 18, 2013, the Company closed separate, privately negotiated exchange agreements under which it issued $320 million of 2.0% Convertible Senior Subordinated Notes due 2043 in exchange for 257,110 shares of the Company’s 6.5% Series A Convertible Perpetual Preferred Stock. The Company recorded approx. $249 million as debt and approx. $71 million as equity. (2) Based on 4 Qtr. trailing and 2013 Adjusted EBITDA of $574.6 million and $551.6 million, respectively; reconciliation to GAAP provided on slides 35, 37, 38, and 39 25 Change in S&P Moody June 30, Dec. 31, Debt vs. (Millions) Corporate BB- Ba3 2014 2013 YE 2013 Advances under $600 million revolving credit facility, June 2018 - 1 Month LIBOR +175bps BB+ Baa3 15.0$ 45.0$ (30.0) Bonds Payable: 7.25% Senior Notes due 2018 BB- Ba3 272.3 272.4 (0.1) 8.125% Senior Notes due 2020 BB- Ba3 286.8 286.6 0.2 7.75% Senior Notes due 2022 BB- Ba3 252.4 252.5 (0.1) 5.75% Senior Notes due 2024 BB- Ba3 275.0 275.0 - 2.00% Convertible Senior Subordinated Notes due 2043 (1) 253.7 249.5 4.2 Other notes payable 44.6 47.6 (3.0) Capital lease obligations 85.9 88.9 (3.0) Long-term debt 1,485.7$ 1,517.5$ (31.8)$ Debt to Adjusted EBITDA (2) 2.6x 2.8x Credit Rating

 
Revenues & Expenses (Sequential) Q2 Q1 Increase/ Revenues (millions) 2014 2014 (Decrease) Inpatient 569.7$ 558.2$ 2.1% Outpatient and other 34.7 33.0 5.2% Consolidated net operating 604.4$ 591.2$ 2.2% (Actual Amounts) Discharges 33,620 32,889 2.2% Net patient revenue / discharge 16,945$ 16,972$ (0.2%) Expenses (millions) Salaries and benefits 285.3$ 286.1$ (0.3%) Percent of net operating revenues 47.2% 48.4% (120 bps) EPOB (employees per occupied bed) 3.39 3.32 2.1% Hospital-related expenses 122.7$ 121.3$ 1.2% (other operating(1) supplies, occupancy, bad debts) Percent of net operating revenues 20.3% 20.5% (20 bps) General and administrative 23.2$ 23.4$ (0.9%) (excludes stock-based compensation) Percent of net operating revenues 3.8% 4.0% (20 bps) Provision for doubtful acounts 9.3$ 7.5$ 24.0% Percent of net operating revenues 1.5% 1.3% 20 bps 26 (1) Excludes loss on disposal or impairment of assets

 
Revenues & Expenses (6 Months) 6 Months 6 Months Increase/ Revenues (millions) 2014 2013 (Decrease) Inpatient 1,128.0$ 1,064.5$ 6.0% Outpatient and other 67.6 72.6 (6.9%) Consolidated net operating 1,195.6$ 1,137.1$ 5.1% (Actual Amounts) Discharges 66,509 64,775 2.7% Net patient revenue / discharge 16,960$ 16,434$ 3.2% Expenses (millions) Salaries and benefits 571.4$ 548.2$ 4.2% Percent of net operating revenues 47.8% 48.2% (40 bps) EPOB (employees per occupied bed) 3.36 3.37 (0.3%) Hospital-related expenses 244.0$ 234.2$ 4.2% (other operating(1) supplies, occupancy, bad debts) Percent of net operating revenues 20.4% 20.6% (20 bps) General and administrative 46.6$ 46.9$ (0.6%) (excludes stock-based compensation) Percent of net operating revenues 3.9% 4.1% (20 bps) Provision for doubtful acounts 16.8$ 14.4$ 16.7% Percent of net operating revenues 1.4% 1.3% 10 bps 27 (1) Excludes loss on disposal or impairment of assets

 
Payment Sources (Percent of Revenues) 2014 2013 2014 2013 2013 2012 Medicare 74.1% 74.6% 74.7% 74.6% 74.5% 73.4% Medicaid 1.8% 1.0% 1.5% 1.1% 1.2% 1.2% Workers' compensation 1.2% 1.2% 1.2% 1.3% 1.2% 1.5% Managed care and other discount plans, including Medicare Adv antage (1) 18.7% 18.4% 18.4% 18.4% 18.5% 19.3% Other third-party payors 1.7% 1.7% 1.6% 1.7% 1.8% 1.8% Patients 0.9% 1.2% 1.0% 1.2% 1.1% 1.3% Other income 1.6% 1.9% 1.6% 1.7% 1.7% 1.5% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Q2 6 Months Full Year (1) Medicare Advantage revenues represent approx. 7% of total revenues for Q2 2014 and 8% of total revenues for all other periods presented. 28

 
Operational and Labor Metrics (1) Represents discharges from HealthSouth’s 102 consolidated hospitals in Q2 2014; 101 consolidated hospitals in Q1 2014, Q4 2013, Q3 2013 and Q2 2013; 98 consolidated hospitals in Q1 2013 and Q4 2012; 97 consolidated hospitals in Q3 2012; 96 consolidated hospitals in Q2 2012 and Q1 2012. (2) 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 represent HealthSouth employees who participate in or support the operations of the Company’s hospitals. (3) Employees per occupied bed, or “EPOB,” is calculated by dividing the number of full-time equivalents, including an estimate of full-time equivalents from the utilization of contract labor, by the number of occupied beds during each period. The number of occupied beds is determined by multiplying the number of licensed beds by the Company’s occupancy percentage. 29 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 2014 2014 2013 2013 2013 2013 2012 2012 2012 2012 2013 2012 (In Millions) Net patient revenue-inpatient 569.7$ 558.2$ 537.5$ 528.8$ 527.4$ 537.1$ 518.1$ 498.9$ 495.0$ 500.6$ 2,130.8$ 2,012.6$ Net patient revenue-outpatient and other revenues 34.7 33.0 34.6 35.2 37.1 35.5 34.8 38.1 38.4 38.0 142.4 149.3 Net operating revenues 604.4$ 591.2$ 572.1$ 564.0$ 564.5$ 572.6$ 552.9$ 537.0$ 533.4$ 538.6$ 2,273.2$ 2,161.9$ (Actual Amounts) Discharges (1) 33,620 32,889 32,906 32,307 32,645 32,130 31,695 30,569 30,719 30,871 129,988 123,854 Outpatient v isits 189,540 182,170 192,474 202,479 211,207 200,471 198,139 221,648 229,152 231,243 806,631 880,182 Average length of stay 13.1 13.4 13.1 13.3 13.2 13.5 13.2 13.6 13.4 13.5 13.3 13.4 Occupancy % 70.5% 71.9% 68.6% 69.0% 69.9% 72.4% 68.2% 68.3% 69.2% 70.7% 69.3% 68.2% # of licensed beds 6,884 6,825 6,825 6,789 6,777 6,646 6,656 6,598 6,538 6,500 6,825 6,656 Occupied beds 4,853 4,907 4,682 4,684 4,737 4,812 4,539 4,506 4,524 4,596 4,730 4,539 Full-time equivalents (FTEs) (2) 16,374 16,209 16,159 16,213 16,180 15,819 15,617 15,545 15,378 15,271 16,093 15,453 Contract labor 99 83 72 76 72 85 73 61 56 69 76 65 Total FTE and contract labor 16,473 16,292 16,231 16,289 16,252 15,904 15,690 15,606 15,434 15,340 16,169 15,518 EPOB (3) 3.39 3.32 3.47 3.48 3.43 3.31 3.46 3.46 3.41 3.34 3.42 3.42 Full Year

 
Operational and Labor Metrics – Impact of Fairlawn Rehabilitation Hospital Consolidation 30 Fairlawn Rehabilitation Hospital as Consolidated Entity(1) Fairlawn Rehabilitation Hospital as Equity Method Entity(1) Q2 2014 As Reported Q2 2014 Without Accounting or Ownership Change Difference Net patient revenue-inpatient 569.7$ 565.3$ 4.4$ Net patient revenue-outpatient and other revenues 34.7 25.2 9.5 Net operating revenues 604.4$ 590.5$ 13.9$ Discharges (2) 33,620 33,415 205 Outpatient v isits 189,540 188,691 849 Average length of stay (days) 13.1 13.1 - Occupancy % 70.5% 71.1% (0.6%) # of licensed beds 6,884 6,774 110 Occupied beds 4,853 4,816 37 Full-time equivalents (FTEs) (2) 16,374 16,276 98 Contract labor 99 99 - Total FTE and contract labor 16,473 16,375 98 EPOB (2) 3.39 3.40 (0.01) Actual Amounts (In Millions) (1) HealthSouth acquired an additional 30% equity interest in Fairlawn Rehabilitation Hospital in Worcester, MA from its joint venture partner. This transaction increased HealthSouth’s ownership interest from 50% to 80% and resulted in a change in accounting for this hospital from the equity method to a consolidated entity effective June 1, 2014. (2) See footnotes on slide 29.

 
Outstanding Share Summary, Warrant Information, and Conversion Price Weighted Average for the Period (Millions) 2014 2013 2014 2013 2013 2012 2011 Basic shares outstanding (1) (2) (3) 86.7 86.1 87.0 90.0 88.1 94.6 93.3 Diluted shares outstanding (1) (2) (3) (4) 100.6 99.8 100.8 103.4 102.1 108.1 109.2 (Millions) 2014 2013 2014 2013 2013 2012 2011 Basic shares outstanding (1) (2) (3) 86.5 86.1 86.5 86.1 86.8 94.6 93.3 Convertible perpetual preferred stock (4) 0.096 0.353 0.096 0.353 0.096 0.353 0.400 If converted, equivalent common shares 3.2 11.6 3.2 11.6 3.2 11.6 13.1 Convertible senior subordinated notes (4) $320.0 - $320.0 - $320.0 - - If converted, equivalent common shares 8.2 - 8.2 - 8.1 - - Date Convertible perpetual preferred stock 7/2/2014 Convertible senior subordinated notes $30.01 6 months 25.4896 $39.23 Approx. 7/2/2014 Conversion Rates 33.3222 Approx. Conversion Price Q2 Full Year End of Period Q2 6 months Full Year 31 (1)(2)(3)(4) – Notes on slide 32

 
Outstanding Share Summary, Warrant Information, and Conversion Price Notes 32 (1) The Company purchased 9,119,450 common shares in Q1 2013 through a tender offer at a price of $25.50 per share. (2) 10 million warrants (pre-October 2006 reverse split) were issued in connection with a January 2004 loan repaid to Credit Suisse First Boston. The warrants expired on January 16, 2014. The holders of these warrants chose both cash and cashless exercises into shares of our common stock. Prior to warrant expiration, 755,323 shares of our common stock were issued upon exercise between September 30, 2013 and January 16, 2014. (3) The agreement to settle our class action securities litigation received final court approval in January 2007. These shares of common stock and warrants were issued on September 30, 2009. The 5.0 million of common shares are included in the outstanding shares. The warrants to purchase approx. 8.2 million shares of common stock at a strike price of $41.40 (expire January 17, 2017) were not assumed exercised for the dilutive shares outstanding because they were antidilutive in the periods presented. (4) The difference between the basic and diluted shares outstanding is primarily related to the convertible senior subordinated notes and our convertible perpetual preferred stock (convertible into 8.2 million and 3.2 million common shares, respectively, as of June 30, 2014). a. On November 18, 2013, the Company closed separate, privately negotiated exchanges in which it issued $320 million of 2.0% Convertible Senior Subordinated Notes due 2043 in exchange for 257,110 shares of the Company’s 6.5% Series A Convertible Perpetual Preferred Stock. The Company recorded approx. $249 million as debt and approx. $71 million as equity. The convertible notes are convertible, at the option of the holders, at any time on or prior to the close of business on the business day immediately preceding December 1, 2043 into shares of the Company’s common stock at a conversion rate of approx. 25.4896 shares per $1,000 in principal amount, which is equal to a conversion price of approximately $39.23 per share, subject to customary antidilution adjustments. The Company has the right to redeem the convertible notes before December 1, 2018 if the volume weighted average price of the Company’s common stock is at least 120% ($47.08) of the conversion price of the convertible notes for a specified period. On or after December 1, 2018, the Company may, at its option, redeem all or any part of the convertible notes. In either case, the redemption price will be equal to 100% of the principal amount of the convertible notes to be redeemed, plus accrued and unpaid interest. As a result of the transaction, the dividend on the convertible perpetual preferred stock was reduced from approx. $5.7 million per quarter to approx. $1.6 million per quarter. b. The 96,245 shares of preferred stock outstanding after the exchange transaction are convertible at the option of the holder, at any time into shares of common stock at a conversion price of $30.01 per share, which is equal to a conversion rate of approx. 33.3222 shares of common stock per share of preferred stock, subject to a specified adjustment. We may at any time cause the shares of preferred stock to be automatically converted into shares of our common stock at the conversion rate then in effect if the closing price of our common stock for 20 trading days within a period of 30 consecutive trading days ending on the trading day before the date we give the notice of forced conversion exceeds 150% ($45.02) of the conversion price of the preferred stock.

 
Adjusted EBITDA History (1) 33 Q2 Q1 Q4 Q3 Q2 Q1 6 Months 6 Months (Millions) 2014 2014 2013 2013 2013 2013 2014 2013 2013 2012 Net operating revenues 604.4$ 591.2$ 572.1$ 564.0$ 564.5$ 572.6$ 1,195.6$ 1,137.1$ 2,273.2$ 2,161.9$ Less: Provision for doubtful accounts (9.3) (7.5) (3.6) (8.0) (7.0) (7.4) (16.8) (14.4) (26.0) (27.0) Net operating revenues less provision for doubtful accounts 595.1 583.7 568.5 556.0 557.5 565.2 1,178.8 1,122.7 2,247.2 2,134.9 Operating expenses: Salaries and benefits (285.3) (286.1) (272.0) (269.5) (273.6) (274.6) (571.4) (548.2) (1,089.7) (1,050.2) Hospital-related expenses: Other operating expenses (2) (84.6) (83.2) (80.1) (79.7) (79.3) (78.0) (167.8) (157.3) (317.1) (299.4) Supplies (27.8) (27.6) (27.1) (25.5) (26.6) (26.2) (55.4) (52.8) (105.4) (102.4) Occupancy costs (10.3) (10.5) (11.2) (11.7) (11.9) (12.2) (20.8) (24.1) (47.0) (48.6) (122.7) (121.3) (118.4) (116.9) (117.8) (116.4) (244.0) (234.2) (469.5) (450.4) General and administrative expenses (3) (23.2) (23.4) (24.8) (22.6) (23.0) (23.9) (46.6) (46.9) (94.3) (93.8) Equity in nonconsolidated affiliates 2.6 4.3 3.0 2.0 3.3 2.9 6.9 6.2 11.2 12.7 Other income (4)(5) 1.0 1.7 1.3 0.6 1.9 0.7 2.7 2.6 4.5 3.6 Noncontrolling interests (14.8) (14.8) (15.3) (14.1) (13.8) (14.6) (29.6) (28.4) (57.8) (50.9) Adjusted EBITDA 152.7$ 144.1$ 142.3$ 135.5$ 134.5$ 139.3$ 296.8$ 273.8$ 551.6$ 505.9$ (1) Reconciliation to GAAP provided on slides 35-39 Q2 Q1 Q4 Q3 Q2 Q1 6 Months 6 Months 2014 2014 2013 2013 2013 2013 2014 2013 2013 2012 In arriving at Adj. EBITDA, the following were excluded: (2) Loss on disposal or impairment of assets $1.7 $ 1.3 $ 1.6 $ 2.5 $ 1.7 $ 0.1 3.0$ 1.8$ $ 5.9 $ 4.4 (3) Stock-based compensation expense 7.0 7.3 5.8 6.2 6.5 6.3 14.3 12.8 24.8 24.1 (4) Gain related to our consolidation of St. Vincent Rehabilitation Hospital - - - - - - - - - 4.9 (5) Gain related to our consolidation of Fairlawn Rehabilitation Hospital 27.2 - - - - - 27.2 - - - Full Year Full Year

 
Adjusted Free Cash Flow (Millions) 2014 2013 2014 2013 2013 2012 2011 128.0$ 105.4$ 235.1$ 226.8$ 470.3$ 411.5$ 342.7$ 1.0 (0.5) 1.2 0.2 1.9 (2.0) (9.1) Capital expenditures for maintenance (1) (17.6) (16.8) (47.8) (35.7) (74.8) (83.0) (50.8) Net settlements on interest rate swaps - - - - - - (10.9) Div idends paid on convertible perpetual preferred stock Distributions paid to noncontrolling interests of consolidated affiliates Non-recurring items: Net premium paid on bond issuance/redemption - - - - 1.7 1.9 22.8 Cash paid for professional fees - accounting, tax, and legal Cash paid for government, class action, and related settlements (0.6) (1.3) (0.6) (1.3) (5.9) (2.6) 5.7 Income tax refunds related to prior periods - - - - - - (7.9) Adjusted free cash flow (2) 97.9$ 72.5$ 163.0$ 158.2$ 330.9$ 268.0$ 243.3$ Cash dividends on common stock 15.8$ - 31.6$ - 15.7$ - - Full Year6 Months 236.3 227.0 (11.5) (25.4) (23.9) (23.0) 409.5 472.2 16.1 3.6 3.6 Q2 129.0 104.9 (1.5) (5.8) (13.4) 21.0 333.6 (26.0) (44.2) Net cash provided by operating Impact of discontinued operations (46.3) (3.1) 7.0 2.0 2.2 (24.6) activities of continuing operations Net cash provided by operating activities (49.3) (10.7) (1) Maintenance capital expenditures are expected to be $90 to $100 million in 2014. (2) Definition of adjusted free cash flow is net cash provided by operating activities of continuing operations minus capital expenditures for maintenance, dividends paid on preferred stock, distributions to noncontrolling interests, and nonrecurring items. Common stock dividends are not included in the calculation of adjusted free cash flow. 34 Reconciliation of Net Cash Provided by Operating Activities to Adjusted Free Cash Flow

 
Reconciliation of Net Income to Adjusted EBITDA (1) (1) (2) – See notes on slide 38 (in millions, except per share data) Total Per Share Total Per Share Total Per Share Net income 61.5$ 97.9$ 159.4$ Loss (income) from disc ops, net of tax, attributable to HealthSouth 0.1 (3.8) (3.7) Net income attributable to noncontrolling interests (14.8) (14.8) (29.6) Income from continuing operations attributable to HealthSouth (2) 46.8 $0.48 79.3 $0.81 126.1 $1.29 Gov't., class action, and related settlements - (0.8) (0.8) Pro fees - acct, tax, and legal 1.6 2.0 3.6 Prov ision for income tax expense 32.8 36.5 69.3 Interest expense and amortization of debt discounts and fees 27.9 27.8 55.7 Depreciation and amortization 26.4 26.4 52.8 Gain related to consolidation of Fairlawn Rehabilitation Hospital - (27.2) (27.2) Other, including net noncash loss on disposal or impairment of assets 1.3 1.7 3.0 Stock-based compensation expense 7.3 7.0 14.3 Adjusted EBITDA (1) 144.1$ 152.7$ 296.8$ Weighted average common shares outstanding: Basic 87.3 86.7 87.0 Diluted 100.9 100.6 100.8 Q1 Q2 6 Months 2014 35

 
36 (1)(2) - Notes on page 38 (3) HealthSouth acquired an additional 30% equity interest in Fairlawn Rehabilitation Hospital in Worcester, MA from its joint venture partner. This transaction increased HealthSouth’s ownership interest from 50% to 80% and resulted in a change in accounting for this hospital from the equity method to a consolidated entity effective June 1, 2014. Total Per Share Total Per Share Total Per Share Net income 97.9$ 70.7$ 27.2$ Income from discops, net of tax, attributable to HealthSouth (3.8) (3.8) - Net income attributable to noncontrolling interests (14.8) (14.5) (0.3) Income from continuing operations attributable to HealthSouth (2) 79.3 0.81$ 52.4 0.54$ 26.9 0.27$ Gov't, class action, and related settlements (0.8) (0.8) - Pro fees—acct, tax, and legal 2.0 2.0 - Provision for income tax expense 36.5 35.0 1.5 Interest expense and amortization of debt discounts and fees 27.8 27.8 - Depreciation and amortization 26.4 26.2 0.2 Gain on consolidation of Fairlawn Rehabilitation Hospital (27.2) - (27.2) Other, including net noncash loss on disposal or impairment of assets 1.7 1.7 - Stock-based compensation expense 7.0 7.0 - Adjusted EBITDA 152.7$ 151.3$ 1.4$ Weighted average common shares outstanding: Basic 86.7 86.7 - Diluted 100.6 100.6 - Fairlawn Rehabilitation Hospital Fairlawn Rehabilitation Hospital as Consolidated Entity (3) as Equity Method Entity (3) DifferenceAs Reported or Ownership Change Q2 2014 Q2 2014 Without Accounting Reconciliation of Net Income to Adjusted EBITDA (1) - Impact of Consolidation of Fairlawn Rehabilitation Hospital

 
Reconciliation of Net Income to Adjusted EBITDA (1) (1) (2) – See notes on slide 38 . (in millions, except per share data) Total Per Share Total Per Share Total Per Share Total Per Share Total Per Share Net income 65.9$ 179.0$ 72.3$ 64.2$ 381.4$ Loss (income) from disc ops, net of tax, attributable to HealthSouth 0.4 (0.1) 0.9 (0.1) 1.1 Net income attributable to noncontrolling interests (14.6) (13.8) (14.1) (15.3) (57.8) Income from continuing operations attributable to HealthSouth (2) 51.7 0.48$ 165.1 1.66$ 59.1 0.59$ 48.8 (0.31)$ 324.7 2.59$ Gov't, class action, and related settlements - (2.0) (21.3) (0.2) (23.5) Pro fees - acct, tax, and legal 1.4 2.2 4.2 1.7 9.5 Provision for income tax expense (benefit) 33.5 (86.5) 35.2 30.5 12.7 Interest expense and amortization of debt discounts and fees 24.2 24.4 25.3 26.5 100.4 Depreciation and amortization 22.1 23.1 24.3 25.2 94.7 Loss on early extinquishment of debt - - - 2.4 2.4 Other, including net noncash loss on disposal of assets 0.1 1.7 2.5 1.6 5.9 Stock-based compensation expense 6.3 6.5 6.2 5.8 24.8 Adjusted EBITDA (1) 139.3$ 134.5$ 135.5$ 142.3$ 551.6$ Weighted average common shares outstanding: Basic 94.0 86.1 86.2 86.4 88.1 Diluted 107.1 99.8 100.4 100.8 102.1 2013 Full YearQ1 Q2 Q3 Q4 37

 
Reconciliation Notes for Slides 35-37 1. Adjusted EBITDA is a non-GAAP financial measure. 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 some members of the investment community utilize Adjusted EBITDA as a financial measure and the leverage ratio as a liquidity measure on an ongoing basis. These measures are not recognized in accordance with GAAP and should not be viewed as an alternative to GAAP measures of performance or liquidity. In evaluating Adjusted EBITDA, the reader should be aware that in the future HealthSouth may incur expenses similar to the adjustments set forth. 2. Per share amounts for each period presented are based on diluted weighted average shares outstanding unless the amounts are antidilutive, in which case the per share amount is calculated using the basic share count after subtracting the quarterly dividend on the convertible perpetual preferred stock, income allocated to participating securities, and the repurchase premium on shares of preferred stock. The difference in shares between the basic and diluted shares outstanding is primarily related to the convertible senior subordinated notes and our convertible perpetual preferred stock. 38

 
(Millions) 2014 2013 2014 2013 2013 2012 Net cash provided by operating activities 128.0$ 105.4$ 235.1$ 226.8$ 470.3$ 411.5$ Provision for doubtful accounts (9.3) (7.0) (16.8) (14.4) (26.0) (27.0) Professional fees—accounting, tax, and legal 2.0 2.2 3.6 3.6 9.5 16.1 Interest expense and amortization of debt discounts and fees 27.8 24.4 55.7 48.6 100.4 94.1 Equity in net income of nonconsolidated affiliates 2.6 3.3 6.9 6.2 11.2 12.7 Net income attributable to noncontrolling interests in continuing operations (14.8) (13.8) (29.6) (28.4) (57.8) (50.9) Amortization of debt discounts and fees (3.2) (1.0) (6.3) (2.0) (5.0) (3.7) Distributions from nonconsolidated affiliates (3.1) (1.6) (6.5) (5.0) (11.4) (11.0) Current portion of income tax expense (benefit) 3.0 (1.3) 6.6 0.5 6.3 5.9 Change in assets and liabilit ies 17.6 23.2 44.5 36.2 48.9 58.1 Premium paid on bond redemption - - - - 1.7 1.9 Cash used in (provided by) operating activ ities of discontinued operations 1.0 (0.5) 1.2 0.2 1.9 (2.0) Other 1.1 1.2 2.4 1.5 1.6 0.2 Adjusted EBITDA 152.7$ 134.5$ 296.8$ 273.8$ 551.6$ 505.9$ Q2 6 Months Full Year Net Cash Provided by Operating Activities Reconciled to Adjusted EBITDA 39