Encompass Health Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are with Q1 2019 unless noted. Encompass Health provides inpatient rehabilitation and home health and hospice services across 37 states and Puerto Rico.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net operating revenue | $1,182.0 million | $1,124.0 million | +5.2% |
| Operating expenses | $1,001.8 million | $936.5 million | +7.0% |
| Income from continuing operations | $108.8 million | $125.7 million | -13.4% |
| Net income attributable to Encompass Health | $87.0 million | $102.3 million | -15.0% |
| Diluted EPS | $0.87 | $1.03 | Down $0.16 |
| Adjusted EBITDA | $228.0 million | $242.9 million | -6.1% |
| Cash from operations | $29.3 million | $159.9 million | Down $130.6 million |
Operating margin was approximately 15.2%, versus 16.7% a year earlier; net income attributable to Encompass Health was approximately 7.4% of revenue, versus 9.1%. Earnings were pressured by higher labor and supply costs, lower segment Adjusted EBITDA, and higher interest expense. The company attributed the sharp operating cash-flow decline in part to a $101 million cash settlement of vested stock appreciation rights and changes in assets and liabilities.
Segments
- Inpatient rehabilitation: Revenue was $909.2 million, up 4.5%; Segment Adjusted EBITDA was $215.5 million, down 6.3%. Discharges rose 4.7%, while net patient revenue per discharge increased 0.3%. Salaries and benefits and supplies rose faster than revenue.
- Home health and hospice: Revenue was $272.8 million, up 7.4%; Segment Adjusted EBITDA was $41.0 million, down 11.4%. Admissions increased 11.9% in home health and 25.6% in hospice. Home health revenue per episode fell 4.8%, with management citing the new Patient-Driven Groupings Model (PDGM) and pandemic-related effects.
Revenue growth included strong volume growth in January and February. Pandemic-related conditions drove declines beginning in mid-March: March year-over-year inpatient rehabilitation discharges fell 1.0% and home health admissions fell 0.5%. April data showed further pressure: inpatient rehabilitation discharges declined 20.9% and home health admissions declined 23.5% year over year, while hospice admissions increased 27.8%.
Balance sheet, debt and liquidity
- At March 31, cash and cash equivalents were $104.9 million; restricted cash was $56.7 million, with another $15.4 million of restricted cash included in other long-term assets.
- Long-term debt, including current maturities, was $3,362.1 million, compared with $3,062.6 million at December 31, 2019. The company had $350 million drawn on its revolving credit facility and $261.9 million in term loans.
- The company reported approximately $613.3 million available under its revolving credit facility and stated that it was in compliance with its credit covenants at March 31. It reported no significant debt maturities before 2023.
- Investing cash outflow was $83.0 million, including $83.5 million of property and equipment purchases. Financing cash inflow was $71.1 million, including net revolver borrowings, partly offset by $162.3 million paid to purchase equity interests in affiliates.
- The quarterly dividend was $0.28 per share. The company suspended open-market share repurchases in mid-March.
COVID-19, outlook and other material matters
- Management reported lower patient volumes, supply-chain disruption, higher PPE and other medical supply costs, and potential staffing shortages. It said the pandemic’s effects continued into April and May and could materially affect results, cash flows and liquidity. The company could not reasonably estimate full-year 2020 results or capital expenditures.
- Management cited up to $50 million of additional Q2 salaries and benefits expense for a frontline employee paid-time-off program, alongside plans to align staffing with demand and reduce capital spending. Executives also voluntarily reduced base compensation for six months.
- In April, the company amended its credit agreement to provide pandemic-related covenant relief, including revised leverage and interest-coverage requirements. These changes were subsequent to the March 31 reporting date.
- Hospitals and agencies received approximately $238 million in CARES Act relief funds. On May 7, 2020, the company informed HHS it would not accept the funds and was seeking instructions for repayment. The CARES Act also temporarily suspended the 2% Medicare sequestration reduction from May 1 through December 31, 2020.
- Management remained optimistic about longer-term demand tied to an aging population but emphasized uncertainty from the pandemic and healthcare regulation. It estimated the proposed FY2021 inpatient rehabilitation payment rule would increase its Medicare payment rates by approximately 2.4% from October 1, 2020; this was a management estimate based on a proposed rule, not finalized guidance.
- The filing reports ongoing healthcare litigation and audit exposure, including possible undisclosed False Claims Act qui tam actions. For the remaining Nichols litigation plaintiff, the company said an adverse judgment or settlement was not probable and that a loss amount or range could not be estimated.
Most important facts for investors to verify
- Subsequent quarterly results and patient-volume trends, particularly whether inpatient rehabilitation and home health volumes recovered after the April declines.
- The final disposition and repayment timing of the approximately $238 million in CARES Act relief funds, and the financial effect of the Medicare sequestration suspension.
- Compliance with amended debt covenants, revolver availability, and the effect of increased borrowing and interest costs.
- The magnitude and duration of pandemic-related labor, PPE, supply, and utilization costs, including the expected Q2 paid-time-off expense.
- Whether the proposed inpatient rehabilitation payment update is finalized as described and how PDGM affects home health revenue per episode and segment profitability.
- Any developments in litigation, Medicare billing reviews, regulatory audits, or other contingencies that could lead to material payments or recoupments.