HealthSouth Corporation (now Encompass Health) — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. The filing is by HealthSouth Corporation, the largest U.S. owner and operator of inpatient rehabilitation hospitals. Results are unaudited and consolidated.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net operating revenue | $572.6 million | $538.6 million | +6.3% |
| Revenue after doubtful-account provision | $565.2 million | $532.3 million | +6.2% |
| Income from continuing operations | $66.3 million | $57.2 million | +15.9% |
| Net income attributable to HealthSouth | $51.3 million | $44.2 million | +16.1% |
| Common diluted EPS | $0.48 | $0.39 | Up $0.09 |
| Adjusted EBITDA (non-GAAP) | $139.3 million | $127.0 million | +9.7% |
| Cash from operations | $121.4 million | $81.0 million | +$40.4 million |
Operating expenses were $444.8 million, up 4.2%; salaries and benefits were $274.6 million, or 48.0% of revenue versus 48.5% a year earlier. Management attributed improved pre-tax results to revenue growth, operating leverage and labor productivity. Adjusted EBITDA increased on revenue growth and expense discipline, partly offset by clinical-system implementation costs and higher noncontrolling-interest expense.
Hospital inpatient net patient revenue rose 7.3%, driven by 4.1% more discharges and 3.1% higher net patient revenue per discharge. Same-store discharges increased 2.2%. Occupancy was 72.4% versus 70.7%; outpatient visits declined 13.3%. Medicare accounted for 74.7% of revenue, compared with 73.5%.
Balance sheet, liquidity and cash flow
- At March 31, cash and cash equivalents were $80.1 million, down from $132.8 million at year-end. Current assets were $597.3 million and current liabilities $317.0 million.
- Total debt was $1,377.6 million, including $122.0 million drawn on the revolving credit facility; long-term debt, net of current portion, was $1,365.3 million. Debt increased from $1,253.5 million at December 31, 2012.
- Cash from operations was $121.4 million; investing used $47.9 million and financing used $126.2 million. The financing outflow largely reflected the common-stock tender offer. Cash declined $52.7 million during the quarter.
- Capital expenditures and capitalized software totaled $38.2 million. Management expected 2013 capital expenditures, excluding acquisitions, of $180 million to $220 million, including $80 million to $90 million of nondiscretionary spending.
- The company reported approximately $442 million available under its revolver and compliance with its credit covenants. It stated no significant debt maturities were due before 2017. A 1% interest-rate increase was estimated to add about $1.2 million to cash interest over the next 12 months.
Material developments and outlook
- In March, the company repurchased approximately 9.1 million shares at $25.50 per share for about $234.1 million including fees, funded with cash and revolver borrowings. The remaining authorization expired with the tender offer.
- On April 1, 2013, after quarter-end, HealthSouth completed its acquisition of Walton Rehabilitation Hospital, a 58-bed facility in Augusta, Georgia. An $11.0 million escrow deposit was funded in March. The filing characterized the transaction as not material to the reported financial statements.
- HealthSouth formed a joint venture for its Jonesboro, Arkansas hospital, retaining approximately 56% ownership. It also reported ongoing development projects and expected new hospitals in Littleton and Stuart to open in Q2 2013.
- Management described demand prospects as favorable due to aging demographics, but warned that Medicare reimbursement changes, healthcare reform, staffing costs, referral volumes, competition and regulatory compliance could affect results. The company estimated sequestration would reduce 2013 net operating revenue by approximately $28 million.
- On April 25, 2013, the company reached IRS closing agreements covering federal tax matters through 2008. It expected a net federal tax benefit of at least $91 million in Q2 2013 and at least a $260 million gross increase in federal net operating loss carryforwards; the state-tax impact remained undetermined.
Risks, contingencies and unusual items
- HHS-OIG subpoenas received in March 2013 concerned four hospitals and alleged improper or fraudulent Medicare and Medicaid claims, including admissions practices and compliance with the Medicare 60% rule. The company said it was cooperating and could not predict the investigations’ timing or outcome. A separate subpoena concerned a closed long-term acute care hospital.
- The General Medicine fraudulent-transfer litigation and shareholder litigation remained ongoing; the company said an adverse outcome was not probable in those matters but could not estimate potential loss. A South Carolina patient-injury case was settled in March for an amount described as immaterial and below prior accruals.
- Gross unrecognized tax benefits were $116.4 million at March 31, 2013; the company expected a reduction of approximately $112 million in Q2 following the IRS agreements. Deferred tax assets depend on forecasts of future taxable income and could require valuation-allowance changes.
- Management said there were no material changes to previously disclosed risk factors. Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether discharge growth, revenue per discharge and labor productivity are sustained, particularly given Medicare’s 74.7% revenue share and the estimated $28 million sequestration impact.
- Actual 2013 capital spending and project openings, and the operating contribution and integration costs of the Walton acquisition.
- Availability under the revolver, leverage and covenant headroom following the share repurchase and increased borrowings.
- The realization and final accounting impact of the IRS settlement, including any state-tax consequences and deferred-tax-asset assumptions.
- Developments in the HHS-OIG investigations and other litigation, including any resulting repayment obligations, penalties or changes in loss estimates.