Encompass Health Corporation — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Amounts are in millions unless noted. The reported periods include both inpatient rehabilitation and home health and hospice; the Enhabit separation closed July 1, 2022, so these results are not representative of Encompass Health’s post-separation business.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net operating revenue | $1,330.5 | $1,287.7 | $2,664.1 | $2,518.1 |
| Income from continuing operations | $71.3 | $142.3 | $181.4 | $275.1 |
| Net income attributable to Encompass Health | $48.7 | $113.3 | $136.2 | $220.6 |
| Diluted EPS attributable to Encompass Health | $0.49 | $1.13 | $1.36 | $2.20 |
| Adjusted EBITDA (non-GAAP) | $240.2 | $278.9 | $485.2 | $529.7 |
- Revenue increased 3.3% in Q2 and 5.8% in the first half, primarily on inpatient rehabilitation volume growth. Operating expenses grew faster than revenue: Q2 expenses were 87.8% of revenue versus 83.0% a year earlier.
- Inpatient rehabilitation revenue rose 6.1% in Q2; segment Adjusted EBITDA fell 11.4% to $225.0. Discharges increased 4.9%, while labor and other costs rose.
- Home health and hospice revenue declined 6.3% in Q2; segment Adjusted EBITDA declined 29.0% to $43.8, reflecting lower volumes and higher service costs.
- Q2 interest expense and debt-fee amortization increased 45.0% to $60.6; the company cited a $20.5 consent-solicitation payment, partly offset by debt redemption. Salaries and benefits rose 9.3%, including higher contract labor and clinician compensation.
Cash flow, debt and liquidity
- For the six months, operating cash flow was $463.5, compared with $414.4 in 2021; investing cash outflow was $246.3, versus $321.6; financing cash outflow was $80.2, versus $263.9. The company attributed stronger operating cash flow mainly to improved receivables collections.
- At June 30, cash and cash equivalents were $186.5; restricted cash was $70.8. Total debt was $3,282.7, including current debt of $49.2. The company reported approximately $967 of availability under its revolving credit facility and compliance with its credit-agreement covenants.
- Enhabit borrowed $400 under a term loan and $170 under its revolver on June 30; $566.6 of net proceeds went to Encompass Health, which used them to repay its revolver and approximately $236 of term debt. Following the July 1 separation, Encompass Health no longer consolidates Enhabit’s business or debt.
- Six-month capital expenditures were approximately $240. The company expected 2022 capital expenditures of $570–$650, including $200–$240 described as nondiscretionary. It estimated 2022 cash income-tax payments, net of refunds, of $70–$80.
Separation, outlook and risks
- On July 1, Encompass Health distributed one Enhabit share for every two Encompass Health shares held on the June 24 record date. Future filings are expected to report inpatient rehabilitation as the company’s sole segment and treat pre-separation Enhabit results as discontinued operations.
- Management cited aging demographics and expected growth in Medicare enrollment as long-term demand drivers, while noting uncertainty from the pandemic and healthcare payment-system changes. No company-wide earnings or revenue guidance is provided in the supplied filing text.
- The company estimated the FY2023 final inpatient rehabilitation Medicare rule would increase its payment rates by approximately 4.0%, effective October 1, 2022. Medicare sequestration returned to the full 2% reduction on July 1; the six-month suspension/partial reduction had added approximately $31 of revenue across the two segments.
- Key risks include labor shortages and higher staffing costs, Medicare reimbursement and regulatory changes, audits and potential repayment demands, litigation and undisclosed qui tam claims, and the post-spin concentration in inpatient rehabilitation and Medicare-related exposure. Management also flagged a possible future IRF transfer-payment policy change; its effect and timing are uncertain.
- The company reported a favorable June 2022 court ruling enforcing a former executive’s noncompete and nonsolicitation obligations and said it was evaluating further remedies. It did not quantify any potential financial recovery.
- The board declared a $0.15-per-share dividend payable October 17, 2022. The filing states future dividends remain subject to board discretion.
Most important facts to verify
- Post-separation results and leverage, excluding Enhabit; the June 30 balance sheet still includes Enhabit and its newly drawn debt.
- Whether inpatient rehabilitation volume growth can offset persistent wage, contract-labor and other cost inflation.
- Actual cash available after restricted balances, capital spending, dividends and debt service, and continued covenant compliance.
- Implementation and realized impact of the FY2023 IRF reimbursement update, full sequestration, and any future transfer-policy or review-choice changes.
- Financial and operational effects of separation agreements, tax matters, pending or undisclosed legal claims, and any potential refunds arising from reimbursement audits.