Encompass Health Corporation (then HealthSouth Corporation) — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Unaudited consolidated results; comparisons are with Q1 2016 unless noted. The company provides inpatient rehabilitation and home health and hospice services.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net operating revenue | $974.8 million | $909.8 million | +7.1% |
| Net income attributable to HealthSouth | $66.8 million | $58.0 million | +15.2% |
| Diluted EPS | $0.70 | $0.61 | +14.8% |
| Adjusted EBITDA | $200.8 million | $192.1 million | +4.5% |
| Cash from operations | $180.8 million | $169.6 million | +6.6% |
- Operating expenses increased 8.6% to $795.8 million, faster than revenue growth. Salaries and benefits rose 9.1%; these expenses were 54.4% of revenue versus 53.4% a year earlier. Adjusted EBITDA growth was slower than revenue growth.
- Income from continuing operations was $84.7 million, compared with $76.8 million. Interest expense declined to $41.3 million from $44.6 million; the prior-year quarter included a $2.4 million debt-extinguishment loss.
- Investing cash outflow was $53.8 million, including $41.2 million of property and equipment purchases and $16.4 million for acquisitions. Financing cash outflow was $106.3 million. Cash increased $20.7 million to $61.2 million.
- At March 31, cash was $61.2 million and current assets were $682.3 million versus current liabilities of $487.3 million. A further $65.6 million of restricted cash and $54.3 million of restricted marketable securities were not unrestricted liquidity.
- Total debt carrying value was $2.953 billion, including $85.0 million drawn on the revolver; long-term debt, net of current maturities, was $2.916 billion. Revolver availability was approximately $479 million. The company reported compliance with its credit agreement covenants.
Material changes and operating trends
- Inpatient rehabilitation revenue rose 5.8% to $792.5 million. Discharges increased 2.8%, net patient revenue per discharge increased 3.6%, and segment Adjusted EBITDA grew 4.3% to $205.4 million. Same-store discharges rose 1.6%.
- Home health and hospice revenue increased 13.5% to $182.3 million; segment Adjusted EBITDA grew 5.8% to $23.9 million. Home health admissions rose 19.6%, including 13.9% same-store growth, while average revenue per episode fell 1.4%, partly reflecting Medicare reimbursement cuts. Hospice revenue rose 75.3% from a smaller base.
- Company-wide Medicare represented 75.2% of revenue, making reimbursement and Medicare policy significant drivers of results. Medicare Advantage share rose to 8.8% from 7.8%.
- Revenue growth reflected inpatient rehabilitation pricing and volume gains and home health and hospice volume growth. The company also cited resolution of administrative payment delays as a factor in improved receivables and operating cash flow.
Outlook, risks and unusual items
- Management described its outlook as positive, citing aging demographics, its market position, and growth opportunities. It gave no specific full-year revenue, earnings, or Adjusted EBITDA guidance in this filing.
- Management expected 2017 capital expenditures of approximately $305 million to $415 million, including $130 million to $150 million characterized as nondiscretionary. It estimated 2017 cash tax payments of $95 million to $115 million, net of refunds.
- The company planned continued expansion through new hospitals, added beds, and home health and hospice acquisitions. It expected to complete installation of its ACE-IT clinical information system in substantially all existing hospitals by year-end 2017.
- CMS’s proposed FY2018 inpatient rehabilitation payment rule, issued April 27, 2017, included a proposed net 1.0% market-basket increase; the company was evaluating other proposed changes. This was a proposal, not a finalized payment update.
- In March 2017, the IRS approved a tax accounting method change that generated approximately $54 million of tax benefits through March 31, expected to reverse as denied prepayment claims are resolved and collected. The filing said this did not materially affect the effective tax rate.
- Key risks include Medicare and other reimbursement changes, audits and delayed appeals, staffing availability and labor costs, regulatory compliance, competition, and uncertainty around healthcare reform and alternative payment models. A DOJ investigation concerns alleged improper Medicare and Medicaid claims at certain hospitals; the company said it was cooperating and could not estimate potential loss.
- A hospital subsidiary’s appeal of a $20.0 million jury verdict remained pending. The company recorded a $20.0 million liability and a $15.0 million insurance-related receivable at quarter-end. Another long-running shareholder lawsuit dismissal was on appeal; the company said an adverse outcome was not probable and loss could not be estimated.
- Management reported no material change in risk factors from its 2016 Form 10-K and concluded disclosure controls were effective.
Important facts for investors to verify
- Whether inpatient rehabilitation volume and per-discharge revenue gains, and home health admission growth, persist as reimbursement rates and service costs change.
- How labor, support costs, and other operating expenses affect margins and Adjusted EBITDA relative to revenue growth.
- Cash conversion, receivables and Medicare appeal developments, including the timing and reversal of the tax benefits tied to denied claims.
- Debt, covenant headroom, planned capital spending, shareholder distributions, and potential cash requirements from redeemable noncontrolling interests.
- Developments in the DOJ investigation and the appeal of the $20 million verdict, including any changes to recorded liabilities or insurance recovery.