HealthSouth Corporation — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. The supplied filing is for HealthSouth Corporation, not Encompass Health Corp; the filing identifies HealthSouth as an inpatient rehabilitation hospital operator.
Business context and operating performance
HealthSouth operated 99 inpatient rehabilitation hospitals, 26 outpatient rehabilitation satellite clinics and 25 hospital-based home health agencies. Medicare represented 73.5% of revenue, up from 71.5% a year earlier.
- Discharges increased 6.0% to 30,871, including 5.0% same-store growth; inpatient revenue per discharge rose 2.2%. Hospital net patient revenue grew 8.3%.
- Occupancy was 70.7%, versus 70.2%; outpatient visits declined to 231,243 from 236,761.
- Net operating revenue rose 6.4% to $538.6 million. After the $6.3 million provision for doubtful accounts, revenue was $532.3 million.
Financial results and liquidity
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Operating expenses | $426.9 million | $402.6 million |
| Income from continuing operations before tax | $86.3 million | $66.6 million |
| Income from continuing operations | $57.2 million | $74.0 million |
| Net income attributable to HealthSouth | $44.2 million | $79.8 million |
| Net income attributable to common shareholders | $37.3 million | $73.3 million |
| Basic and diluted EPS | $0.39 | $0.79 basic; $0.73 diluted |
| Adjusted EBITDA | $127.0 million | $117.5 million |
| Cash from operating activities | $81.0 million | $89.5 million |
Operating expenses were 79.3% of net operating revenue, compared with 79.6%. The filing attributes higher pre-tax income to revenue growth, improved operating leverage and labor productivity, and lower interest expense. The fall in reported net income principally reflects the prior-year discontinued-operations gain and tax benefit: Q1 2011 included a $24.8 million Delaware settlement gain and approximately $29 million of tax benefits from IRS settlement and other items. Q1 2012 had a $29.1 million income-tax expense.
At March 31, cash was $44.3 million, excluding $34.1 million of restricted cash and $46.1 million of restricted marketable securities. Current assets were $431.1 million and current liabilities $314.7 million. Long-term debt, net of current portion, was $1,246.2 million; the balance-sheet presentation does not provide a single total-debt figure. The company reported approximately $331 million available under its revolving credit facility and compliance with its leverage and interest-coverage covenants. Cash increased $14.2 million during the quarter.
Investing used $32.9 million and financing used $33.9 million. Capital expenditures and capitalized software totaled $34.1 million. Preferred-stock repurchases used $24.7 million of cash-flow-statement cash (the filing reports $25.0 million total consideration including fees).
Changes, outlook and material risks
- Interest expense fell 33.6% to $23.3 million; the average interest rate declined to 7.1% from 8.9%, following prior debt reduction and lower borrowing rates.
- Cash from operations declined amid working-capital needs, including timing of interest payments and payroll-tax remittances when incentive-plan shares vested.
- Management expected 2012 capital expenditures of $145 million to $180 million, excluding acquisitions, with $70 million to $95 million considered discretionary. Growth plans included new hospitals, bed additions and investment in an electronic clinical information system.
- Management cited continued uncertainty in Medicare reimbursement. It estimated 2013 Medicare sequestration could reduce annual revenue by about $32 million. If Congress did not extend or change the outpatient physician-fee schedule, a potential reduction of more than 27% could reduce annual revenue by about $8 million, before mitigation.
- Other risks include healthcare reform and payment-rule changes, patient-volume and staffing pressures, Medicare claim denials, and collection uncertainty. The doubtful-account provision increased to 1.2% of revenue from 0.9%; management cited increased Medicare claim denials.
- Significant contingencies include the General Medicine litigation: the Sixth Circuit reinstated a $376 million judgment against the former subsidiary, and HealthSouth sought rehearing. The filing says a loss estimate cannot be made reliably. A separate $12.3 million patient-care verdict was under appeal, with a liability recorded and insurance-related receivable recognized. A hospital joint-venture property dispute could require relocation and disrupt service. The company also disclosed an HHS-OIG investigation concerning claims at a closed hospital.
- HealthSouth disclosed up to $22.0 million of potential exposure under 16 lease guarantees; no liability was recorded because performance was not considered probable. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Investor verification points
- Reconcile growth in hospital revenue and discharges with rising labor costs, Medicare denials and the provision for doubtful accounts.
- Review the drivers of the large year-over-year decline in net income, separating ongoing results from prior-year discontinued-operation and tax items.
- Monitor cash conversion, capital spending, revolving-credit availability and covenant headroom as development investment continues.
- Track Medicare sequestration and outpatient reimbursement policy, along with the impact of any final rule changes.
- Follow developments in the General Medicine, patient-care, property and HHS-OIG matters, including any updated loss estimates or operational effects.