Encompass Health Corporation — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual filing; the supplied text does not provide standalone fourth-quarter results. Encompass Health operated 145 inpatient rehabilitation hospitals and 251 home health and 96 hospice locations across 42 states and Puerto Rico. Its two reportable segments were inpatient rehabilitation and home health and hospice.
Financial performance
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Net operating revenue | $5,121.6 million | $4,644.4 million | +10.3% |
| Operating expenses | $4,315.1 million | $3,999.4 million | +7.9% |
| Income from continuing operations | $517.6 million | $368.8 million | +40.3% |
| Net income attributable to Encompass Health | $412.2 million | $284.2 million | +45.0% |
| Diluted EPS | $4.11 | $2.85 | +44.2% |
| Adjusted EBITDA (non-GAAP) | $1,028.0 million | $860.3 million | +19.5% |
| Net cash from operating activities | $715.8 million | $704.7 million | +$11.1 million |
Operating margin was approximately 15.8% of revenue, versus 13.9% in 2020; net income attributable to Encompass Health was approximately 8.0% of revenue, versus 6.1%. Adjusted EBITDA margin was approximately 20.1%, versus 18.5%; this is a non-GAAP measure and should not be treated as a substitute for GAAP earnings or cash flow.
- Segments: Inpatient rehabilitation revenue was $4,015.0 million, up 12.6%, and segment Adjusted EBITDA was $956.8 million, up 16.3%. Home health and hospice revenue was $1,106.6 million, up 2.6%, and segment Adjusted EBITDA was $211.5 million, up 29.5%.
- Operating drivers: Inpatient rehabilitation discharges rose 8.7% to 197,639; same-store discharges increased 6.2%. Net patient revenue per discharge rose 3.1% to $19,825. Home health and hospice growth reflected the Frontier acquisition, pricing and volume; home health episodes declined 1.5%, while hospice admissions increased 1.8%.
- Cash generation and investment: Operating cash flow was $715.8 million. Investing activities used $666.3 million, including $528.9 million for property and equipment and $118.6 million net cash for acquisitions. Financing activities used $240.1 million. Cash, cash equivalents and restricted cash ended the year at $120.3 million; unrestricted cash was $54.8 million.
- Liquidity: The company reported $762 million available under its revolving credit facility. Current assets were $921.4 million and current liabilities $748.8 million. Restricted cash and marketable securities are not freely available for general purposes.
- Debt: Long-term debt at year-end was $3,286.7 million, including $386.8 million of finance lease obligations; excluding finance leases, reported borrowings were approximately $2.9 billion. The company had $200 million drawn on its revolver and $238.5 million in term loans. It reported compliance with credit agreement covenants and no significant debt maturities before 2024, although the remaining $100 million of 2023 notes was scheduled for redemption in March 2022.
Material changes versus prior year
- Revenue and earnings rebounded from 2020, when pandemic-related disruptions affected patient volumes. 2021 growth was led by inpatient rehabilitation volume and pricing.
- Operating cash flow increased modestly, while investing cash outflow rose to $666.3 million from $407.5 million, primarily due to Frontier and higher capital expenditures. Cash and cash equivalents fell to $54.8 million from $224.0 million.
- Interest expense declined 10.6%, primarily following the 2020 redemption of $700 million of 2024 notes and 2021 repayments of 2023 notes.
- General and administrative expense rose 26.9% to $197.3 million, principally reflecting strategic-review and planned separation costs and higher incentive compensation. The filing identified $22.9 million of strategic-alternatives costs in its Adjusted EBITDA reconciliation.
- Encompass acquired Frontier Home Health and Hospice for approximately $99 million in June 2021, adding locations in five states. It also opened eight inpatient rehabilitation hospitals and added 117 beds at existing hospitals.
Outlook, commentary and risks
- Management remained optimistic about longer-term demand, citing an aging population, and planned continued hospital expansion, home health and hospice growth, value-based care participation and workforce recruitment. The filing does not provide a clear consolidated earnings or revenue forecast for 2022.
- Management expected 2022 capital expenditures of $570 million to $660 million, including $200 million to $250 million characterized as nondiscretionary, and $50 million to $100 million of home health and hospice acquisitions.
- Management estimated 2022 Medicare rate increases of approximately 1.9% for inpatient rehabilitation and 3.4% for home health. These were company estimates based on preliminary analysis, not guarantees. Management expected wage and benefit costs to increase faster than aggregate Medicare reimbursement rates.
- The filing reported that the suspension of Medicare sequestration contributed approximately $82 million of additional 2021 revenue ($62 million inpatient rehabilitation; $20 million home health and hospice). At filing, sequestration was scheduled to resume at 1% from April through June 2022 and 2% thereafter.
- The company expected to spin off home health and hospice as a separate public company by the end of the second quarter of 2022, to be named Enhabit. Completion, timing, costs and anticipated benefits remained uncertain; debt covenants and leverage conditions apply. Encompass and Enhabit would each become less diversified and more exposed to reimbursement changes in their respective businesses.
- Key risks include COVID-19 effects on patient volumes, staffing, labor expense and supplies; dependence on Medicare (about 68% of consolidated revenue); reimbursement and regulatory changes; claims audits and delayed appeals; competition and referral-source concentration; cybersecurity and privacy incidents; litigation; and debt covenants. The company disclosed six lawsuits alleging former patients were exposed to COVID-19 in its hospitals.
- In 2021, the company received $29.3 million from previously denied inpatient rehabilitation claims and recorded $0.4 million of revenue reserve for new denials. At year-end, $77.8 million of inpatient rehabilitation receivables related to claims under review or audit. A prior UPIC audit had recouped an extrapolated approximately $30 million on less than $2 million of denied claims; the company said it appealed substantially all such denials.
- The company settled a DOJ investigation and related whistleblower lawsuits in 2019 for $48 million, while denying wrongdoing. A separate lawsuit against a former home health and hospice executive over alleged covenant breaches was pending, with trial scheduled for April 2022.
Important facts for investors to verify
- Whether the Enhabit separation closed as planned, its final terms and costs, and the resulting debt allocation and capital structures.
- Whether 2022 patient volumes and margins can withstand pandemic-related staffing pressures and labor costs that management expected to outpace reimbursement increases.
- Actual Medicare reimbursement effects, sequestration reductions, and any changes to audit, denial, appeal or recoupment activity.
- Cash conversion and liquidity, including unrestricted cash, revolver availability, capital spending, dividends and debt repayment after the planned notes redemption.
- Acquisition performance and integration, including Frontier, and the impact of the planned growth pipeline on returns and leverage.
- Claims, litigation and self-insurance exposures; reported net self-insurance reserves were $139.4 million, based on a 50% statistical confidence level.