HealthSouth Corporation (NYSE:HLS) Files An 8-K Results of Operations and Financial Condition

ITEM 2.02. Results of Operations and Financial Condition.

On April 27, 2017, HealthSouth Corporation (the Company) issued a
press release reporting the financial results of the Company for
the three months ended March 31, 2017. A copy of the press release
is attached to this report as Exhibit 99.1 and incorporated herein
by reference.

The Company uses same-store comparisons to explain the changes in
certain performance metrics and line items within its financial
statements. Same-store comparisons are calculated based on
hospitals open throughout both the full current and prior periods
presented. These comparisons include the financial results of
market consolidation transactions in existing markets, as it is
difficult to determine, with precision, the incremental impact of
these transactions on the Company’s results of operations.

ITEM 7.01. Regulation FD Disclosure.

See Item 2.02, Results of Operations and Financial Condition,
above.

In addition, a copy of the supplemental information which will be
discussed during the Companys earnings call at 9:00 a.m. Eastern
Time on Friday,>April 28, 2017>is attached to this report as
Exhibit 99.2 and incorporated herein by reference.

Note Regarding Presentation of Non-GAAP Financial Measures

The financial data contained in the press release and supplemental
information include non-GAAP financial measures, including the
Companys adjusted earnings per share, leverage ratio, Adjusted
EBITDA, and adjusted free cash flow.

The Company is providing adjusted earnings per share from
continuing operations attributable to HealthSouth (adjusted
earnings per share). The Company believes the presentation of
adjusted earnings per share provides useful additional information
to investors because it provides better comparability of ongoing
performance to prior periods given that it excludes the impact of
government, class action, and related settlements; professional
feesaccounting, tax, and legal; mark-to-market adjustments for
stock appreciation rights; gains or losses related to hedging
instruments; loss on early extinguishment of debt; adjustments to
its income tax provision (such as valuation allowance adjustments
and settlements of income tax claims); items related to corporate
and facility restructurings; and certain other items the Company
believes to be non-indicative of its ongoing operations. It is
reasonable to expect that one or more of these excluded items will
occur in future periods, but the amounts recognized can vary
significantly from period to period and may not directly relate to
the Companys ongoing operations. Accordingly, they can complicate
comparisons of the Companys results of operations across periods
and comparisons of the Companys results to those of other
healthcare companies. Adjusted earnings per share should not be
considered as a measure of financial performance under generally
accepted accounting principles in the United States (GAAP) as the
items excluded from it are significant components in understanding
and assessing financial performance. Because adjusted earnings per
share is not a measurement determined in accordance with GAAP and
is thus susceptible to varying calculations, it may not be
comparable as presented to other similarly titled measures of other
companies. The Company reconciles adjusted earnings per share to
earnings per share in the press release attached as Exhibit 99.1
and the supplemental information attached as Exhibit 99.2.

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 Companys 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 and to net cash provided by operating activities in the
press release attached as Exhibit 99.1 and the supplemental
information attached as Exhibit 99.2. Adjusted EBITDA for the
Companys reportable segments is reconciled to net income from
continuing operations before income tax expense in the press
release attached as Exhibit 99.1 and the supplemental information
attached as Exhibit 99.2.

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 Companys credit agreement,
which is discussed in more detail in Item 7, Managements Discussion
and Analysis of Financial Condition and Results of Operations,
Liquidity and Capital Resources, and Note 9, Long-term Debt, to the
consolidated financial statements included in its Annual Report on
Form 10K for the year ended December 31, 2016 (the 2016 Form 10K).
These covenants are material terms of the credit agreement.
Noncompliance with these financial covenants under the credit
agreementits interest coverage ratio and its leverage ratiocould
result in the Companys 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 be on
terms less favorable to those in the Companys 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 Companys
assessment of its liquidity.

In general terms, the credit agreement definition of Adjusted
EBITDA, therein referred to as Adjusted Consolidated EBITDA, 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, 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.

The calculation of Adjusted EBITDA under the credit agreement does
not require us to deduct net income attributable to noncontrolling
interests or gains on disposal of assets and development
activities. It also does not allow us to add back professional fees
unrelated to the stockholder derivative litigation, losses on
disposal of assets, unusual or nonrecurring cash expenditures in
excess of $10 million, and charges resulting from debt transactions
and development activities. These items and amounts, in addition to
the items falling within the credit agreements unusual or
nonrecurring classification, may occur in future periods, but can
vary significantly from period to period and may not directly
relate to our ongoing operations. Accordingly, these items may not
be indicative of our ongoing performance, so the Adjusted EBITDA
calculation presented here includes adjustments for them.

Adjusted EBITDA is not a measure of financial performance under
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 2016 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 Companys 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 information 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
Companys 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 Company’s quarterly report on Form 10-Q for the
quarterly period ended March 2017 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.

Excluding net operating revenues, the Company does not provide
guidance on a GAAP basis because it is unable to predict, with
reasonable certainty, the future impact of items that are deemed to
be non-indicative of its ongoing operations. Such items include
government, class action, and related settlements; professional
fees-accounting, tax, and legal; mark-to-market adjustments for
stock appreciation rights; gains or losses related to hedging
instruments; loss on early extinguishment of debt; adjustments to
its income tax provision (such as valuation allowance adjustments
and settlements of income tax claims); items related to corporate
and facility restructurings; and certain other items the Company
believes to be non-indicative of its ongoing operations. These
items are uncertain and will depend on several factors, including
industry and market conditions, and could be material to the
Company’s results computed in accordance with GAAP.

Forward-Looking Statements

The information contained in the press release and supplemental
information includes certain estimates, projections, and other
forward-looking statements that involve known and unknown risks and
relate to, among other things, future events, the Companys business
strategy, financial plans, dividend strategies or payments,
effective income tax rates, plans to repurchase its debt or equity
securities, future financial performance, projected business
results or model, ability to return value to its shareholders,
projected capital expenditures, leverage ratio, acquisition
opportunities, and the impact of future legislation or regulation.
In some cases, you can identify forward-looking statements by
terminology such as may, will, should, expects, plans, anticipates,
believes, estimates, predicts, targets, potential, or continue or
the negative of these terms or other comparable terminology. These
estimates, projections, and other forward-looking statements 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 statements will be realized.

All such estimates, projections, and forward-looking statements
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 statements in this report,
the press release, and supplemental information 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 2016 Form 10K,
the Companys quarterly report on Form 10-Q for the quarterly period
ended March 31, 2017, when filed, and in other documents the
Company previously filed with the SEC, many of which are beyond the
Companys 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.