Encompass Health Corporation — FY 2022 Form 10-K
Reporting period: Year ended December 31, 2022. This is an annual filing; fourth-quarter figures are included in the filing’s unaudited quarterly data. Encompass Health now reports a single segment focused on inpatient rehabilitation following the July 1, 2022 spin-off of its home health and hospice business, Enhabit, Inc. Prior periods are presented with Enhabit as discontinued operations.
Business context and key financial metrics
Encompass Health operated 153 inpatient rehabilitation hospitals in 36 states and Puerto Rico, with 10,356 licensed beds. It recorded 211,116 discharges in 2022. Medicare and Medicare Advantage together represented 80.4% of revenue, including 65.3% from traditional Medicare.
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Net operating revenue | $4,348.6 million | $4,014.9 million | +8.3% |
| Income from continuing operations | $350.7 million | $403.1 million | -13.0% |
| Net income attributable to Encompass Health | $271.0 million | $412.2 million | -34.3% |
| Diluted EPS from continuing operations | $2.56 | $2.99 | Lower |
| Adjusted EBITDA, as defined under credit agreement | $819.3 million | $816.4 million | +0.4% |
| Cash provided by operating activities of continuing operations | $653.5 million | $564.7 million | Higher |
| Long-term debt, excluding finance leases | Approximately $2.4 billion | — | — |
Total operating expenses were 85.5% of revenue, versus 83.6% in 2021. Salaries and benefits rose to 55.0% of revenue from 53.0%. Net patient revenue per discharge increased 1.6% to $20,139; discharges rose 6.8%, same-store discharges increased 3.1%, and occupancy was 70.9% versus 70.0%.
For Q4 2022, revenue was $1,137.3 million, operating earnings were $151.9 million, income from continuing operations was $119.0 million, and net income attributable to Encompass Health was $89.4 million. Diluted EPS was $0.90 from continuing operations and $0.89 overall.
Liquidity, debt and capital allocation
- At year-end, cash and cash equivalents were $21.8 million; restricted cash was $31.6 million and restricted marketable securities were $110.0 million. The company reported $912 million available under its $1 billion revolving credit facility, with $55 million drawn.
- Cash provided by operating activities of continuing operations was $653.5 million; cash used in continuing investing and financing activities was $623.5 million and $660.8 million, respectively. The filing’s consolidated cash flow statement reports total operating cash flow of $705.8 million, including discontinued operations.
- Debt maturities are primarily long-dated. The revolving facility matures in October 2027; senior notes mature in 2025, 2028, 2030 and 2031. The company reported compliance with its leverage and interest-coverage covenants at year-end.
- Capital expenditures were approximately $584 million in 2022. The company expects to spend $565 million to $605 million in 2023, including $230 million to $240 million described as nondiscretionary or maintenance spending.
- The quarterly dividend was reduced from $0.28 to $0.15 per share following the Enhabit spin-off. Future dividends remain subject to board approval. Approximately $198 million remained under the share repurchase authorization, though no open-market repurchases were reported in 2022.
Material changes versus the prior comparable period
- Revenue increased on higher patient volumes and pricing, including contributions from new hospitals. However, operating expenses rose faster than revenue, particularly salaries and benefits, contributing to lower continuing-operations income.
- Contract labor plus sign-on and shift bonuses increased approximately $70 million, from $134.2 million in 2021 to $204.3 million in 2022. Management cited clinician compensation, staffing needs and new-hospital ramp-up.
- The Enhabit spin-off changed the business perimeter and reduced reported discontinued-operations income to $15.2 million from $114.1 million in 2021. The decrease in total net income therefore also reflects the removal of Enhabit’s results from continuing operations.
- Cash flow from continuing operations improved, supported by lower cash tax payments and improved receivable collections, including recovery of previously denied Medicare claims. Investing outflows increased with property and equipment spending.
- The company redeemed the remaining $100 million of 5.125% notes due 2023 and used $566.6 million distributed by Enhabit to repay revolving-credit and term-loan balances. A June 2022 noteholder consent process incurred $40.5 million of fees, and the credit facility was amended in October to extend its maturity to 2027.
Outlook, risks and unusual items
Management expressed optimism about intermediate- and long-term demand, citing population aging, but did not provide specific full-year 2023 revenue or earnings guidance in the supplied filing text. Its operating plans include opening eight hospitals with approximately 395 beds and adding 80 to 100 beds at existing hospitals in 2023. The company estimated that the FY2023 IRF payment rule would raise its Medicare payment rates by approximately 4.0%, effective October 1, 2022.
- Reimbursement and audit exposure: Medicare is a major revenue source, and payment rules, coverage interpretations, quality reporting, audits and appeals can affect revenue and collections. At year-end, $73.6 million of patient receivables represented claims under review or audit. A separate UPIC matter had $18.0 million remaining under appeal after an administrative judge overturned $12.5 million of the determination; the company received that amount plus $3.2 million in interest in December 2022. The outcome and timing of the remaining appeal are uncertain.
- Potential payment-policy changes: CMS may consider changing IRF transfer payments for early discharges to home health. The filing cites an HHS-OIG estimate that such a change could reduce industry payments by approximately 6% based on 2017–2018 data; no implementation decision was reported.
- Labor and cost pressure: Staffing shortages, turnover, contract labor, wage inflation and higher supply costs may pressure margins. Management noted wage and benefit costs rose faster than aggregate Medicare reimbursement increases in 2022.
- Regulatory, operating and financing risks: The filing highlights possible healthcare-law changes, site-neutral payment reforms, competition for referrals, cybersecurity and privacy incidents, litigation, and debt covenants. The spin-off’s intended tax-free treatment also depends on compliance with applicable restrictions and could entail significant tax exposure if disqualified.
- Unusual items: The company recorded a $7.4 million unrealized loss on restricted marketable securities in 2022. The filing also reported $56.7 million of 2022 Enhabit spin-off transaction costs within discontinued operations.
Most important facts for investors to verify
- Whether continuing revenue growth and discharge gains can offset labor, staffing and other operating-cost inflation.
- The collectability and timing of the $73.6 million of denied or reviewed receivables, including the outcome of the remaining $18.0 million UPIC appeal.
- Actual 2023 hospital openings, bed additions, capital expenditures and Medicare reimbursement effects compared with management’s plans and estimates.
- Liquidity, covenant headroom and debt maturity requirements, particularly as the company funds growth and shareholder distributions.
- Post-spin-off tax obligations and any continuing costs or obligations under agreements with Enhabit.