Encompass Health Corporation — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed February 27, 2020. The company provides inpatient rehabilitation, home health and hospice services. At year-end it operated 133 rehabilitation hospitals, 245 home health locations and 83 hospice locations across 37 states and Puerto Rico.
Financial and operating performance
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Net operating revenue | $4,605.0 million | $4,277.3 million | +7.7% |
| Income from continuing operations | $446.4 million | $374.3 million | +19.3% |
| Net income attributable to Encompass Health | $358.7 million | $292.3 million | +22.7% |
| Diluted EPS | $3.61 | $2.93 | +23.2% |
| Net cash from operating activities | $635.3 million | $762.4 million | Down $127.1 million |
| Adjusted EBITDA | $964.9 million | $901.0 million | +7.1% |
Revenue growth was driven by inpatient rehabilitation pricing and volume gains and by home health and hospice volume growth. Inpatient rehabilitation revenue rose 5.0%; discharges increased 3.9% and revenue per discharge rose 1.5%. Home health and hospice revenue increased 17.3%, with admissions up 16.3% in home health and 39.8% in hospice. The Alacare acquisition contributed to segment growth.
Operating expenses were 85.0% of revenue, versus 85.3% in 2018. Salaries and benefits rose 9.3%, faster than revenue, and increased to 55.9% of revenue from 55.0%. Adjusted EBITDA by segment was $899.6 million for inpatient rehabilitation and $195.8 million for home health and hospice. The filing’s company-defined operating earnings were $612.1 million, up from $555.2 million.
Fourth quarter: Revenue was $1,184.4 million versus $1,096.0 million in Q4 2018; net income attributable to Encompass Health was $67.6 million versus $28.1 million, and diluted EPS was $0.68 versus $0.28. Quarterly figures are unaudited.
Cash, debt and liquidity
- Cash and cash equivalents were $94.8 million at year-end; approximately $916 million was available under the revolving credit facility, which had a $1 billion commitment. Some cash and investments were restricted.
- Total reported long-term debt, including current maturities and $384.1 million of finance lease obligations, was $3,062.6 million, up from $2,514.4 million. Working capital was $34.8 million, versus negative $10.4 million in 2018.
- Operating cash flow fell to $635.3 million from $762.4 million, reflecting payments for management stock appreciation rights and the DOJ settlement, as well as higher receivables. Investing cash outflow was $657.4 million, including acquisition spending and increased capital expenditures.
- The company issued $1 billion of senior notes in 2019, redeemed $500 million of its 2024 notes and amended its credit agreement, extending maturity to 2024 and increasing revolver capacity from $700 million to $1 billion. Management reported compliance with debt covenants and no significant debt maturities before 2023.
Material changes and unusual items
- Acquired Alacare Home Health & Hospice for $217.8 million in July 2019. The acquisition added 23 home health and 23 hospice locations in Alabama.
- Consolidated Yuma Rehabilitation Hospital effective July 1, 2019, recognizing a $19.2 million gain on remeasurement of the prior equity interest.
- Paid $48 million in 2019 to settle the DOJ investigation and related whistleblower lawsuits; the company expressly denied wrongdoing. The corresponding loss contingency had been accrued in 2018.
- Stock appreciation rights generated approximately $82 million of compensation expense in 2019, compared with approximately $56 million in 2018. The remaining awards, valued at approximately $101 million at year-end, were settled in cash in February 2020.
- Adoption of the new lease accounting standard added approximately $349 million of assets and $347 million of liabilities to the balance sheet at January 1, 2019.
Outlook, commentary and risks
Management described the outlook as positive, citing aging demographics, organic growth opportunities, planned hospital development and continued acquisitions. For 2020, it expected capital expenditures of approximately $440 million to $510 million and home health and hospice acquisitions of $50 million to $100 million. The company targeted four to six new rehabilitation hospitals annually.
Management estimated 2020 Medicare payment rates would be flat to up 0.75% for inpatient rehabilitation, down 2.0% to 3.0% for home health following implementation of the Patient-Driven Groupings Model, and up 0.25% to 0.75% for hospice. It also expected wage and benefit cost growth to exceed the aggregate Medicare reimbursement increase.
Key risks include substantial reliance on Medicare (75.1% of consolidated revenue; Medicare Advantage contributed another 10.6%), reimbursement and regulatory changes, claim audits and delayed appeals, staffing shortages and labor-cost pressure, competition and referral access, integration and execution of acquisitions, and cybersecurity and patient-data risks. The company reported $144.5 million of inpatient rehabilitation receivables associated with denied claims under review or audit. It also cited uncertainty from proposed Medicaid financing rules and expanding home health pre-claim review demonstrations. No goodwill impairment was recorded in 2019.
Important facts for investors to verify
- Whether the home health payment changes under PDGM, including the projected reimbursement decline, are offset by operating performance and productivity.
- Trends in denied Medicare claims, appeals collections and the $144.5 million of denied receivables under review or audit.
- Cash generation after capital expenditures, acquisition spending, dividends, debt service and remaining management-related cash settlements.
- Alacare integration, acquisition returns and the planned hospital openings and expansions.
- Debt and covenant headroom, including the effects of lease obligations, variable-rate borrowings and shareholder distributions.