Encompass Health Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless otherwise noted. Encompass Health provides inpatient rehabilitation and home health and hospice services across 39 states and Puerto Rico. Financial amounts below are in millions, except per-share data and operating statistics.
Financial and operating results
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net operating revenues | $1,230.4 | $1,182.0 | +4.1% |
| Income from continuing operations | $132.8 | $108.8 | +22.1% |
| Net income attributable to Encompass Health | $107.3 | $87.0 | +23.3% |
| Diluted earnings per share | $1.07 | $0.87 | +23.0% |
| Adjusted EBITDA | $250.8 | $228.0 | +10.0% |
| Net cash provided by operating activities | $158.5 | $29.3 | +$129.2 |
- Margins and costs: Operating expenses were 83.1% of revenue, down from 84.8%. Supplies rose 13.6%, driven partly by higher medical-supply and PPE use. Salaries and benefits increased 1.2%, but declined as a share of revenue to 55.9% from 57.5%.
- Segments: Inpatient rehabilitation revenue rose 5.6% to $959.9 and segment Adjusted EBITDA increased 9.0% to $234.9. Discharges fell 1.2%; same-store discharges declined 2.2%, while net patient revenue per discharge rose 7.1%. Home health and hospice revenue fell 0.8% to $270.5, while segment Adjusted EBITDA rose 23.9% to $50.8, primarily as service costs declined. Home health admissions decreased 3.7%; hospice admissions increased 11.5%.
- Cash flow and investment: Capital expenditures were approximately $101, compared with $83.5 of property and equipment purchases in Q1 2020. Operating cash flow improved substantially, primarily because Q1 2020 included an approximately $101 payment for management stock appreciation rights. Cash, cash equivalents and restricted cash totaled $296.3 at quarter end, including $223.9 of unrestricted cash and cash equivalents.
- Debt and liquidity: Total debt, including finance leases, was $3,297.2 at March 31; approximately $962 of revolving-credit capacity was available. The company reported compliance with its credit covenants. Current maturities rose to $137.2, including approximately $100 of 2023 notes classified as current ahead of their subsequent redemption.
Material changes and management commentary
- Revenue growth reflected favorable pricing, including reimbursement increases and the temporary suspension of Medicare sequestration, partly offset by lower volumes in both segments. Medicare fell to 68.1% of revenue from 73.4%, while Medicare Advantage and managed care shares increased.
- Management attributed volume pressure to pandemic-related disruptions, including reduced elective procedures, limits on hospital access for referral staff, and staffing constraints. The home health and hospice segment averaged 250 employees per day on COVID-related quarantine during the quarter.
- The company continued its strategic review of home health and hospice, considering a full or partial separation through an IPO, spin-off, merger, sale, or other transaction. No completion timetable was set; costs and execution risks could affect results.
- After quarter end, Encompass announced a $95 cash acquisition of Frontier Home Health and Hospice assets, expected to close in Q2 2021 subject to approvals. It also completed a $100 redemption of 2023 notes on April 5, using cash and revolving-credit capacity, and expected to record an approximately $0.6 early-extinguishment loss in Q2.
Outlook, risks and contingencies
- No consolidated revenue or earnings guidance was provided. Management cited aging-population demand and remained optimistic about the intermediate- and long-term prospects of both segments.
- Management expected 2021 capital expenditures of approximately $580–$665 and home health and hospice acquisitions of $50–$100. Estimated 2021 cash income-tax payments, net of refunds, were $100–$130.
- The proposed FY2022 inpatient rehabilitation rule was estimated by management to increase Medicare payment rates by approximately 2.1%, effective October 1, 2021. The filing noted potential Medicare reductions: approximately 2% if sequestration resumed in 2022 and a possible 4% Statutory PAYGO reduction absent congressional action. These were policy risks, not certain outcomes.
- Other significant exposures include healthcare reimbursement and compliance changes, staffing shortages and wage pressure, pandemic-related operating disruptions, billing audits and potential recoupments, and litigation. The company said an adverse outcome was not probable in the Nichols litigation and that any loss could not be estimated; undisclosed qui tam claims were also possible.
- The quarterly dividend was $0.28 per share. The company reported no shares purchased under its publicly announced repurchase program during the quarter.
Investor facts to verify
- Whether revenue and earnings gains persist as pandemic-related volume constraints ease, and how pricing and patient mix evolve.
- Progress, costs and potential outcome of the home health and hospice strategic review, including the Frontier transaction and expected tax benefit.
- Current debt, revolver availability and covenant headroom after the April note redemption and planned spending.
- Actual capital expenditures, acquisition spending, and Medicare reimbursement effects from sequestration and other policy changes.
- Developments in staffing, medical-supply costs, billing audits, litigation and any other contingencies.