Encompass Health Corporation — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Encompass Health provides inpatient rehabilitation and home health and hospice services across 42 states and Puerto Rico.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net operating revenue | $1,287.7 million | $1,074.1 million | $2,518.1 million | $2,256.1 million |
| Income from continuing operations | $142.3 million | $48.2 million | $275.1 million | $157.0 million |
| Net income attributable to Encompass Health | $113.3 million | $33.5 million | $220.6 million | $120.5 million |
| Diluted earnings per share | $1.13 | $0.34 | $2.20 | $1.21 |
| Adjusted EBITDA | $278.9 million | $162.2 million | $529.7 million | $390.2 million |
Q2 revenue rose 19.9% year over year; six-month revenue increased 11.6%. Q2 operating expenses were 83.0% of revenue versus 90.8% a year earlier. The filing attributes improved results mainly to recovering volumes after the pandemic-driven decline in 2020, favorable reimbursement pricing, and lower labor costs as a share of revenue. Q2 net income attributable to Encompass Health equaled approximately 8.8% of revenue, versus 3.1% in Q2 2020.
Segments and operating trends
- Inpatient rehabilitation: Q2 revenue was $1,001.6 million, up 21.5%; Segment Adjusted EBITDA was $254.0 million versus $180.3 million. Discharges rose 18.7%, occupancy increased to 71.1% from 64.5%, and net patient revenue per discharge rose 1.8%.
- Home health and hospice: Q2 revenue was $286.1 million, up 14.6%; Segment Adjusted EBITDA was $61.7 million versus $15.0 million. Starts of care increased 10.9%. Cost of services fell as a percentage of revenue, supported by clinician compensation changes and productivity management.
- Comparisons benefited from the low-volume, pandemic-affected Q2 2020 period. The 2020 quarter also included approximately $43 million in additional paid time off awarded to frontline employees.
Cash flow, debt and liquidity
- For the six months, operating cash flow was $414.4 million, versus $251.6 million; investing cash flow was negative $321.6 million, mainly reflecting acquisitions and higher capital spending; financing cash flow was negative $263.9 million.
- Cash and cash equivalents were $73.2 million at June 30, 2021, compared with $224.0 million at year-end 2020. Restricted cash was $65.0 million, with another $1.6 million of restricted cash in other long-term assets.
- Total reported debt was $3,172.5 million, including current debt and finance lease obligations; long-term debt net of current portion was $3,105.7 million. The company redeemed $200 million of 2023 notes during Q2 and recorded a $1.0 million debt-extinguishment loss.
- Approximately $917 million was available under the revolving credit facility. The company reported compliance with its leverage and interest-coverage covenants and stated there were no significant debt maturities before 2023.
- Capital expenditures were approximately $223 million in the first half. The company expected 2021 capital expenditures of $580–$665 million and approximately $100 million in home health and hospice acquisitions, including Frontier.
Outlook, commentary and risks
- Management remained optimistic about intermediate- and long-term demand, citing an aging population, while noting pandemic-related operating impacts and ongoing staffing challenges. The filing does not provide a consolidated full-year revenue or earnings guidance range.
- The board was pursuing a public or private full or partial separation of the home health and hospice business. The review could entail costs, management distraction, retention challenges, litigation exposure, or failure to achieve expected benefits. A full separation would concentrate revenue in Medicare-reimbursed inpatient rehabilitation.
- Management estimated the final FY2022 inpatient rehabilitation rule would increase Medicare rates by approximately 1.9% from October 1, 2021. Its preliminary estimate for the proposed home health rule was a 2.2%–2.7% rate increase from January 1, 2022; the proposal was subject to review.
- Medicare sequestration suspension was extended through December 31, 2021, contributing $40.7 million of additional segment revenue in the first half. Its scheduled expiration could reduce Medicare reimbursement by approximately 2% in 2022; the filing also noted a potential separate Medicare reduction under Statutory PAYGO unless addressed by Congress.
- Key risks include renewed COVID-19 disruption, staffing shortages and cost pressures, Medicare and other reimbursement changes, audits and claims recoupments, regulatory compliance, and litigation. The company said there were no material changes to previously reported risk factors. It reported its disclosure controls were effective and no material change in internal control over financial reporting.
- The company estimated 2021 income-tax cash payments, net of refunds, at $100–$130 million. A $0.28-per-share quarterly dividend was declared for payment in October 2021.
Most important facts for investors to verify
- Whether patient volumes and margins remain strong as comparisons move beyond the pandemic-affected 2020 period, and whether staffing pressures increase labor costs.
- Progress, costs, and any resulting transaction terms from the home health and hospice strategic review.
- Final Medicare reimbursement impacts, including the proposed home health rule, the end of sequestration relief, and potential Statutory PAYGO reductions.
- Cash generation, acquisition and capital-spending levels, debt repayment, and continued compliance with credit covenants.
- Potential exposure from Medicare audits, billing refunds, undisclosed qui tam claims, and other healthcare litigation.