HealthSouth expects less debt repayment in 2010; deleveraging efforts to focus on EBITDA growth

By Jennifer Lanning Drey

Portland, Ore., Feb. 23 - HealthSouth Corp. plans to continue reducing its leverage in 2010 but is likely to do so primarily through adjusted EBITDA growth rather than by making major debt repayments during the year, Ed Fay, HealthSouth's senior vice president of finance and treasurer, said Tuesday during the company's fourth-quarter and year-end earnings conference call.

Fay noted that with the improvement in credit markets, the company's note maturing in 2016 continues to trade above its 2011 call price, while Libor remains at historic lows, making opportunities to repurchase debt less attractive going into 2010.

"This is not to say that debt repayment will not continue to be a priority for us, but in the current environment, we prefer to be patient in allowing those occasions to develop," Fay said.

In 2009, HealthSouth used free cash flow to reduce outstanding debt by $151 million, as turmoil in the credit markets created opportunities to repurchase notes in the open market at discounted prices.

During the fourth quarter, HealthSouth completed a tender offer for its 2014 floating-rate notes and issued a new fixed-rate note maturing in 2020. The transactions contributed to a $34 million reduction of debt during the period.

Health South had total debt outstanding to $1.7 billion at Dec. 31.

The company remains on track to achieve its targeted leverage ratio range of 3.5 times to 4.0 times by the end of 2011, Fay said.

HealthSouth ended 2009 with a leverage ratio of 4.3 times.

Plans for adjusted EBITDA growth

With opportunities for debt repurchases expected to be limited in 2010, HealthSouth will look to grow its adjusted EBITDA through continued market share gains, expense management and capacity expansion, Jay Grinney, chief executive officer of HealthSouth, said during the call.

Additionally, HealthSouth plans to grow by adding new hospitals. The company has targeted breaking ground on two to three new rehabilitation hospitals each year for the next several years, he said.

Another source of adjusted-EBITDA growth will be acquisitions of, or joint ventures with, in-patient rehabilitation providers, which will be pursued to round out existing markets or to enter into new markets, Grinney said.

Growth will be funded through free cash flow, he said.

Grinney also said long-term, acute-care hospitals and home health are two adjacent services that may provide potential growth opportunities for HealthSouth in the future.

However, the CEO noted that the company will not pursue such opportunities until it has realized the lower end of its leverage goal and adequately capitalized on growth opportunities in the core rehabilitation segment.

"A strong balance sheet is extremely important to us, so it's essential to understand that we will not pursue major acquisitions of other post-acute services until we have a capital structure that can absorb the additional risk that inevitably comes with any acquisition, let alone a major acquisition of a new business," Grinney said.

Q4 adjusted EBITDA improvement

HealthSouth posted fourth-quarter adjusted consolidated EBTIDA of $94.7 million, compared with $87.5 million for the same period of 2008. The increase resulted from higher revenues and effective expense management, the company said.

HealthSouth reported consolidated net operating revenues of $486.2 million for the fourth quarter, compared with net operating revenues of $460.8 million for the fourth quarter of 2008. The improvement was driven by increased patient discharges, which were up 4.2% quarter over quarter on a same-store basis.

Improved cash position

HealthSouth also reported Tuesday that its cash and cash equivalents increased by $49 million during 2009, and the company ended the year with available cash of $80.9 million.

Based on its available cash and undrawn revolver capacity, the company had $481 million of available liquidity at Dec. 31.

"We have continued to hold cash sufficient to limit our revolver dependence, and we have not made use of the revolver for cash or letters of credit since February of last year," Fay said.

Cash flows provided by operating activities were $406.1 million for 2009, compared with $227.2 million in 2008. The 2009 figure included $73.8 million in net cash proceeds related to a settlement with UBS and the receipt of $63.7 million in income tax refunds associated with amended tax returns from previous periods.

HealthSouth is a Birmingham, Ala.-based provider of inpatient rehabilitation services.

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