HealthSouth Corporation 2012 Form 10-K Summary
Business context and reporting period. The filing is HealthSouth Corporation’s annual report for the fiscal year ended December 31, 2012; the 2012 fourth-quarter figures are included in the annual filing. The issuer was then named HealthSouth Corporation, not Encompass Health. Its core business was inpatient rehabilitation: it operated 100 hospitals across 27 states and Puerto Rico, alongside outpatient clinics and hospital-based home-health agencies.
Key financial and operating metrics
| Metric | 2012 | 2011 | Change or context |
|---|---|---|---|
| Net operating revenues | $2,161.9 million | $2,026.9 million | Up 6.7% |
| Net patient revenue, inpatient | $2,012.6 million | $1,866.4 million | Up 7.8% |
| Income from continuing operations | $231.4 million | $205.8 million | Up 12.4% |
| Net income attributable to HealthSouth | $185.0 million | $208.7 million | Down 11.4% |
| Net income attributable to common shareholders | $160.3 million | $182.7 million | Basic and diluted EPS: $1.69 vs. $1.96 |
| Net cash provided by operating activities | $411.5 million | $342.7 million | Up from prior year |
| Adjusted EBITDA | $505.9 million | $466.2 million | Non-GAAP measure; up about 8.5% |
| Long-term debt, including current portion | $1,253.5 million | $1,254.7 million | Includes $71.9 million of capital leases |
| Working capital | $335.9 million | $178.4 million | Improved year over year |
- Total operating expenses were 79.5% of net operating revenues, compared with 79.9% in 2011. The provision for doubtful accounts rose to $27.0 million from $21.0 million.
- Cash and cash equivalents were $132.8 million; restricted cash and restricted marketable securities were additional, but not freely available, resources. The company reported approximately $561 million of revolving-credit availability and approximately $693 million of total liquidity.
- Cash used in investing activities was $178.8 million, including $159.7 million of capital expenditures and capitalized software. Cash used in financing activities was $130.0 million.
- Operating volume increased: discharges rose 4.6% to 123,854, same-store discharges rose 2.9%, occupancy was 68.2% versus 67.7%, and net patient revenue per discharge increased 3.0% to $16,250. Outpatient visits fell 6.7%.
Material changes versus the prior comparable period
- Revenue growth reflected increased discharges and higher revenue per discharge, including pricing adjustments and patient mix. Medicare represented 73.4% of revenue, up from 72.0%.
- Continuing-operations income attributable to HealthSouth increased to $180.5 million from $158.8 million, while total net income attributable to HealthSouth declined, primarily alongside a sharp reduction in discontinued-operations income ($4.5 million versus $48.8 million).
- Interest expense and debt-fee amortization declined to $94.1 million from $119.4 million. The company refinanced and extended its revolving facility, increased its capacity to $600 million, reduced its initial spread to LIBOR plus 1.75%, and issued $275 million of 5.75% notes due 2024. No revolving-credit borrowings remained at year-end.
- In 2012, the company repurchased 46,645 shares of preferred stock for $46.5 million. In February 2013, the board increased the common-stock repurchase authorization to $350 million and said it intended to pursue a tender offer, subject to conditions.
Outlook, commentary, risks, contingencies, and unusual items
- Management described demand prospects as positive, citing an aging population and expected annual growth of about 3% in Medicare-eligible patients. Its stated strategy emphasized organic growth, hospital development, cost efficiency, and balance-sheet flexibility.
- Management estimated Medicare sequestration would reduce 2013 net operating revenues by approximately $28 million, beginning in mid-March. It also estimated a potential annual revenue reduction of about $8 million if a greater-than-26% outpatient Medicare fee-schedule cut took effect; Congress had extended existing rates through 2013.
- Management expected 2013 capital expenditures of approximately $180 million to $220 million, excluding acquisitions. It anticipated no significant debt maturities before 2017.
- Key exposures include reliance on Medicare; reimbursement and healthcare-law changes; Medicare claim denials and audits; staffing shortages and labor-cost inflation; compliance and fraud-and-abuse enforcement; litigation; and execution risks for acquisitions and new hospitals. The filing reports that Medicare was 73.4% of revenue.
- Medicare-denied claims in medical-necessity review were $20.4 million at year-end, versus $12.3 million a year earlier; the company said it historically collected about 58% of denied amounts. The lengthened adjudication process contributed to the higher doubtful-account provision.
- Material legal matters include the ongoing General Medicine action, the appeal of an arbitration decision dismissing HealthSouth’s claims against former auditor Ernst & Young, and a South Carolina patient-care case remanded for retrial after the prior verdict was reversed. The company did not consider an adverse outcome probable in the first two matters; it disclosed a reasonable possibility of loss in the South Carolina case and said the claim was covered through its captive insurer.
- Unusual items include a $4.9 million gain on consolidation and remeasurement of the St. Vincent joint venture interest, a $4.0 million loss on early debt extinguishment, and a $3.5 million gain from recoveries related to Richard Scrushy. A 2012 IRS pre-filing process could affect tax attributes and future tax expense, but the amount and timing were unclear. Gross unrecognized tax benefits were $78.0 million at year-end.
- The company reported effective disclosure controls and internal control over financial reporting; its independent auditor issued an unqualified opinion on the financial statements and internal controls.
Important facts for investors to verify
- Whether sequestration and subsequent Medicare or outpatient reimbursement changes took effect as anticipated, and their actual revenue and margin impact.
- How Medicare medical-necessity denials and audits developed, including collections on the $20.4 million under review and any changes in reserves.
- Whether operating cash flow, Adjusted EBITDA, and liquidity supported the planned capital spending and proposed $350 million common-stock tender offer.
- Debt terms, covenant headroom, and the effect of refinancing and shareholder returns on leverage and interest costs.
- Updates on the General Medicine, Ernst & Young, and South Carolina matters; the IRS pre-filing process; and the realization of tax-loss carryforwards.