Business context and reporting period
HealthSouth Corporation (the filing issuer; the request metadata names Encompass Health Corp) filed this unaudited Form 10-Q for the quarter ended March 31, 2014. HealthSouth operated inpatient rehabilitation hospitals and related outpatient services, with 103 inpatient rehabilitation hospitals at quarter-end, including two equity-method joint ventures.
Financial and operating performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net operating revenue | $591.2 million | $572.6 million |
| Net income | $61.5 million | $65.9 million |
| Net income attributable to HealthSouth | $46.7 million | $51.3 million |
| Net income attributable to common shareholders | $45.1 million | $45.6 million |
| Diluted EPS | $0.48 | $0.48 |
| Adjusted EBITDA | $144.1 million | $139.3 million |
| Cash from operating activities | $107.1 million | $121.4 million |
- Revenue increased 3.2%; inpatient revenue rose 3.9%, reflecting 2.4% more discharges and 1.5% higher revenue per discharge. Same-store discharges increased 0.4%.
- Operating expenses increased 5.1% to $467.4 million; they were 79.1% of revenue versus 77.7% a year earlier. Salaries and benefits rose 4.2%, and depreciation and amortization rose 19.5%.
- Pre-tax continuing income fell 5.4% to $94.4 million, and continuing-operations income fell 7.1% to $61.6 million. Sequestration, higher depreciation, and higher interest costs offset revenue growth.
- Adjusted EBITDA margin was approximately 24.4% of revenue, versus 24.3% in Q1 2013 (calculated from reported figures). The company said EBITDA growth reflected revenue growth and expense discipline, partly offset by sequestration and winter-storm impacts.
- Investing cash outflow was $67.8 million, including $56.6 million of property and equipment purchases and $7.0 million of capitalized software. Financing cash outflow was $50.7 million. Cash declined $11.4 million to $53.1 million.
- At March 31, cash was $53.1 million and revolving-credit availability was approximately $520 million. Restricted cash and marketable securities were excluded from available cash. Current assets were $585.2 million and current liabilities $302.0 million.
- Long-term debt, net of current portion, was $1.503 billion; revolving-facility borrowings were $43 million. The company reported no significant debt maturities before 2018 and compliance with its leverage and interest-coverage covenants.
Changes, outlook, risks, and unusual items
- Medicare provided 75.2% of revenue, up from 74.7%; managed care and discount plans contributed 18.1%, down from 18.5%. Sequestration reduced Q1 net patient revenue per discharge by approximately $9 million; management estimated an approximately $8 million EBITDA impact.
- Winter storms reduced same-store discharges by approximately 100 basis points. Outpatient visits declined 9.1%, partly due to clinic closures and competition from physician-office therapy.
- Management expected 2014 doubtful-account expense of 1.3%–1.5% of revenue, cash income taxes of approximately $10–$15 million net of refunds, and capital expenditures of $185–$230 million, excluding acquisitions. Approximately $90–$100 million of planned capex was characterized as nondiscretionary.
- The company expected to close its acquisition of an additional 30% of Fairlawn Rehabilitation Hospital in 2014, subject to regulatory approval, and anticipated a $22–$32 million gain upon consolidation and remeasurement. It also announced a proposed 26-bed Tennessee joint venture, subject to closing conditions and approvals.
- Shareholder returns included a $0.18-per-share quarterly dividend and $26.3 million of open-market share repurchases in Q1. The board increased the repurchase authorization from $200 million to $250 million. Future dividends remain subject to board approval and capital conditions.
- Key risks include Medicare and Medicaid reimbursement changes, regulatory compliance and audits, staffing costs and availability, competition, and execution of new hospital developments. DOJ investigations into alleged improper or fraudulent claims were expanded by subpoenas to seven additional hospitals on April 24, 2014; the company said it could not predict timing or outcome. Significant litigation also remained, including the General Medicine action, with trial scheduled for September 2014; the company said loss was not considered probable but could not estimate a possible loss.
- Management cited population aging and its market position as supports for demand, while noting uncertainty around healthcare reform, coordinated-care models, and future reimbursement. It reported effective disclosure controls and no material change in internal control over financial reporting.
- Q1 included approximately $1 million of gains from investment sales in other income and equity-method income; Adjusted EBITDA included approximately $2 million from two investment sales. Results are interim and not necessarily indicative of full-year performance.
Important facts for investors to verify
- Confirm the issuer identity: this filing is for HealthSouth Corporation, not under the name stated in the request metadata.
- Track Medicare reimbursement and the financial effects of sequestration, RAC audits, and the ongoing DOJ investigations.
- Review operating-cost growth against discharge and revenue-per-discharge trends, particularly labor, other operating expenses, and depreciation.
- Assess cash generation, planned capital spending, debt and covenant capacity, and the sustainability of dividends and repurchases.
- Monitor the Fairlawn transaction, projected gain, new hospital projects, and material litigation developments.