Encompass Health Corporation — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; comparisons are with the corresponding 2020 periods. Encompass Health provides inpatient rehabilitation and home health and hospice services.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net operating revenue | $1,284.8 million | $1,173.9 million | $3,802.9 million | $3,430.0 million |
| Income from continuing operations | $126.8 million | $100.1 million | $401.9 million | $257.1 million |
| Net income attributable to Encompass Health | $100.0 million | $77.7 million | $320.6 million | $198.2 million |
| Diluted EPS | $1.00 | $0.78 | $3.20 | $1.99 |
| Adjusted EBITDA (non-GAAP) | $245.6 million | $230.2 million | $775.3 million | $620.4 million |
Q3 revenue increased 9.4%; nine-month revenue increased 10.9%. Q3 operating expenses were 84.5% of revenue, versus 85.3% a year earlier; the nine-month ratio was 83.5%, versus 86.8%. Q3 revenue growth was led by inpatient rehabilitation; home health and hospice revenue was nearly flat. Segment Adjusted EBITDA was $231.6 million for inpatient rehabilitation and $46.4 million for home health and hospice in Q3, compared with $209.2 million and $51.8 million, respectively, a year earlier.
Cash flow and liquidity: For the first nine months, operating cash flow was $592.0 million, investing cash flow was negative $445.6 million, and financing cash flow was negative $282.4 million. Cash, cash equivalents and restricted cash declined $136.0 million to $174.9 million, including $94.8 million of unrestricted cash and cash equivalents. The company reported approximately $872 million available under its revolving credit facility and stated it was in compliance with its financial covenants.
Debt: Total debt, including current maturities and finance lease obligations, was $3,207.9 million at September 30, 2021, versus $3,288.9 million at December 31, 2020. Long-term debt, net of current portion, was $3,142.0 million. The company redeemed $200 million principal amount of its 5.125% notes due 2023 during the first half of 2021.
Material changes and business developments
- Inpatient rehabilitation revenue rose 12.4% in Q3, supported by 8.7% growth in discharges and a 2.4% increase in net patient revenue per discharge. Same-store discharges increased 6.7%.
- Home health and hospice revenue decreased 0.2% in Q3. Home health starts of care fell 1.5%, and episodes fell 3.2%; hospice revenue increased 3.1%. Segment Adjusted EBITDA declined 10.4% in Q3, primarily reflecting higher service costs and staffing pressures.
- The company acquired Frontier Home Health and Hospice in June for approximately $99 million, adding locations in Alaska, Colorado, Montana, Washington and Wyoming. The acquisition contributed $11.6 million of revenue from its acquisition date through September 30.
- Capital spending and development continued, including new rehabilitation hospitals and capacity expansions. Nine-month capital expenditures were approximately $353 million, including property, equipment, software and other intangible assets.
Outlook, commentary and risks
- Management said it remained optimistic about intermediate- and long-term demand, citing aging demographics, while noting ongoing pandemic-related operating effects. The filing does not provide a consolidated earnings or revenue forecast.
- The company was pursuing a partial or full separation of home health and hospice, targeting a transaction in the first half of 2022. It expected to provide more precise timing and transaction form with its fourth-quarter earnings release; completion was not assured.
- Management estimated 2021 capital expenditures of $530 million to $580 million, including $140 million to $150 million of nondiscretionary spending, and approximately $100 million of home health and hospice acquisitions, inclusive of Frontier. Estimated 2021 income tax cash payments, net of refunds, were $125 million to $140 million.
- Staffing shortages, higher clinician compensation and contract labor increased costs and constrained volumes. A 2.75% merit increase for nonmanagement hospital employees took effect in October 2021.
- Medicare sequestration suspension was scheduled to end December 31, 2021, potentially reducing Medicare reimbursement by approximately 2% in 2022. The filing also discusses possible additional Medicare reductions under Statutory PAYGO and proposed home health payment changes, including a potential future budget-neutrality adjustment.
- COVID-19 resurgence in August 2021 negatively affected volumes, particularly in home health and hospice. Other significant risks include changes in reimbursement and regulation, audits and potential refunds, labor availability, litigation, and information-system security.
- The company disclosed a suit filed October 26, 2021 against a former home health and hospice executive, alleging violations of contractual restrictions and trade-secret misappropriation. It also noted possible undisclosed False Claims Act cases. The Nichols litigation concluded without financial-statement impact.
Important facts for investors to verify
- Progress, timing, transaction structure and potential costs or consequences of the planned home health and hospice separation.
- Whether inpatient rehabilitation volume growth continues and whether home health and hospice volumes and margins recover amid staffing constraints.
- Actual capital spending, acquisition spending and cash generation compared with management’s estimates.
- Medicare reimbursement outcomes, including sequestration and any future home health payment adjustments.
- Debt, revolver availability and covenant compliance, as well as the potential financial effects of disclosed or undisclosed legal and billing matters.