HealthSouth working to avoid bankruptcy

Leaders of the outpatient services giant call for more time from creditors to recover from accounting scandals.

By Katherine Vogt, amednews staff. July 28, 2003.

Interim leaders say scandal-and-debt-ravaged HealthSouth can likely avoid bankruptcy if creditors allow more time for turnaround tactics to be planted and take root.

In debt nearly $3.3 billion, the outpatient services giant held a meeting in New York on July 7 to address the concerns of stockholders and creditors. It marked the first major update on the company's finances since March, when a massive accounting scandal involving top executives was revealed and chief executive Richard M. Scrushy was ousted.

See related content
Region: South

"There's no assurance of where we are going, but we feel confident if we have another 90 to 120 days to get the things together, to institute the plans we have and bring them about, we think our company has an awfully good chance of moving forward and avoiding bankruptcy," said Joel C. Gordon, interim chair of the board.

Gordon said company operations were solid but he acknowledged that HealthSouth still faces several "rocks in the road." The company has been accused of overstating expenses by at least $2.4 billion. At least 11 employees, including five former chief financial officers, have pled guilty to criminal charges. Scrushy faces civil insider trading charges and has been accused of urging employees to overstate earnings.

HealthSouth hired corporate turnaround specialists and financial auditors to get the company back on track, and Gordon said it has "come a long way." The company is projecting net consolidated revenue of $4.1 billion over the next 12 months. It also is calling for earnings before interest, taxes, depreciation and amortization of $650 million in the next year.

Bryan Marsal, the chief restructuring officer, said HealthSouth has been working for the last three months to conserve and generate cash and had accumulated about $345 million in cash by the time of the meeting.

Marsal said the crown jewels of HealthSouth's business, its surgery centers and inpatient rehabilitation business, remain "rock solid." Combined, he said they account for nearly 75% of revenue and 85% of the company's profits.

The 198 surgery centers are primarily structured as partnerships with physicians, which has led some physicians to hire attorneys and brace for the worst. But analysts say that even in the event of a bankruptcy, it is unlikely HealthSouth would do anything to jeopardize such a lucrative part of its business.

"They won't touch it and there has been no evidence of decline there," said Tom Shinkle, a health care analyst with Imperial Capital LLC in Beverly Hills, Calif. "The surgery centers are very safe from the impact of any parent-company bankruptcy."

Though uneasy creditors could still team up to force HealthSouth into bankruptcy court, Shinkle said he believes the company has a good chance of avoiding such action.

"If it's just what they show on their balance sheet and they can produce earnings similar to what they forecast, they stand a decent chance of making it without a bankruptcy. It will require most likely some cash, from assets sales or an outside investor, to satisfy their debt," he said.