HealthSouth Corporation — Q2 2015 Form 10-Q
Business context and period. The filing covers the quarter and six months ended June 30, 2015. HealthSouth provided inpatient rehabilitation, home health, and hospice services in 33 states and Puerto Rico. Results reflect the December 2014 acquisition of Encompass Home Health and Hospice; prior-period segment data was recast to align with the company’s two reportable segments.
Key financial metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net operating revenues | $764.4 million | $604.4 million | $1,505.0 million | $1,195.6 million |
| Income from continuing operations | $61.8 million | $94.1 million | $121.1 million | $155.7 million |
| Net income attributable to HealthSouth | $42.9 million | $83.1 million | $85.4 million | $129.8 million |
| Diluted EPS | $0.45 | $0.85 | $0.89 | $1.33 |
| Adjusted EBITDA | $169.5 million | $152.7 million | $325.6 million | $296.8 million |
- Revenue rose 26.5% in Q2 and 25.9% year to date, primarily from Encompass. Inpatient rehabilitation revenue grew 8.1% in Q2; discharges increased 8.3%, including 2.8% same-store growth. Home health and hospice revenue was $119.1 million in Q2, versus $7.3 million in the prior-year quarter, chiefly reflecting the acquisition.
- Despite higher revenue and Adjusted EBITDA, earnings declined. Q2 operating income, calculated as revenue after doubtful-account provisions less operating expenses, was $138.4 million (about 18.4% of that revenue) versus $127.6 million (about 21.4%). Higher labor costs, bad-debt expense, depreciation, and interest weighed on results.
- Q2 included an $18.8 million loss on early debt extinguishment. Prior-year results included a $27.2 million gain on consolidation of Fairlawn; the 2014 comparison also benefited from a gain on the SCA option. Q2 2015 included $2.6 million of SCA-related gains.
- Six-month operating cash flow was $204.9 million, down from $235.1 million. Investing cash outflow was $126.7 million, including $77.7 million for acquisitions; financing cash outflow was $99.4 million. Cash declined $21.2 million to $45.5 million.
- At June 30, debt was $2.126 billion, including $153.0 million drawn on the revolver; current debt was $21.4 million. The company reported approximately $414 million of revolver availability and compliance with its leverage and interest-coverage covenants. Total current assets were $712.4 million and current liabilities $364.6 million.
Material changes, outlook, and risks
- The company issued $300 million of 5.125% notes due 2023 and redeemed its 8.125% notes due 2020, recording the $18.8 million extinguishment loss. A July 2015 credit amendment added $500 million of term-loan facilities, extended borrowings to July 2020, and temporarily raised the maximum leverage covenant to 4.50x through June 2017.
- Management described the outlook as positive, citing aging demographics, its post-acute care position, and growth opportunities. The filing does not provide full-year revenue, earnings, or EBITDA guidance. It projected 2015 capital expenditures of $190–$240 million and cash income taxes of approximately $10–$15 million, net of refunds.
- A June agreement to acquire Reliant’s 11 rehabilitation hospitals for $730 million, subject to customary and regulatory approvals, was expected to close in Q4 2015. Management expected the deal to be immediately accretive to EPS after closing, excluding transaction costs; the company expected to fund it with cash and senior debt and assume lease obligations.
- Management estimated the proposed FY2016 IRF Medicare rule would increase its rates by approximately 2.0%, before sequestration. The proposed 2016 home-health rule estimated a 1.8% Medicare payment reduction for the sector; the company was still assessing its impact. These were proposals, not final rules.
- Key exposures include Medicare and Medicaid reimbursement changes, claims audits and delayed appeals, staffing costs, acquisition integration and leverage, and legal or regulatory proceedings. DOJ subpoenas and requests concerned alleged improper Medicare and Medicaid claims at certain hospitals; the company said it was cooperating and could not predict the outcome. The General Medicine litigation was settled for a cash amount described as not material. No material risk-factor changes from the 2014 Form 10-K were reported.
- The board raised the quarterly common dividend from $0.21 to $0.23 per share in July 2015. Future dividends remain subject to board approval and covenant capacity.
Investor facts to verify
- How much of reported revenue and Adjusted EBITDA growth is attributable to acquired operations versus organic performance, and whether the acquired businesses meet expected returns.
- Reliant’s closing, financing, assumed lease obligations, integration costs, and effect on leverage and covenant headroom.
- Final Medicare and home-health reimbursement rules and the effects of claims denials, audit outcomes, and appeals on revenue, receivables, and cash flow.
- Whether labor, medical-insurance, and other operating costs moderate sufficiently to support margin recovery, alongside the planned capital spending and dividend.
- Developments in the DOJ investigation and other contingencies, including any material financial exposure not estimable from the filing.