Encompass Health Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Encompass Health operates inpatient rehabilitation hospitals; it reported 156 hospitals across 37 states and Puerto Rico. The home health and hospice business was spun off in July 2022 and is presented as discontinued operations in the prior-year comparison.
Financial results and liquidity
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net operating revenue | $1,160.4 million | $1,059.3 million | +9.5% |
| Income from continuing operations | $114.3 million | $86.4 million | +32.3% |
| Net income attributable to Encompass Health | $87.7 million | $87.5 million | +0.2% |
| Diluted EPS | $0.87 | $0.87 | Unchanged |
| Adjusted EBITDA | $229.0 million | $194.9 million | +17.5% |
| Cash from continuing operating activities | $229.2 million | $182.5 million | +25.0% |
| Capital expenditures | Approximately $100 million | — | — |
- Total operating expenses were $981.8 million, or 84.6% of revenue, compared with $906.7 million, or 85.6%. Salaries and benefits were 54.2% of revenue versus 55.5%. The filing does not report a standalone operating-margin measure.
- Revenue growth was primarily volume-driven: discharges rose 9.4%, including 5.9% same-store growth. Net patient revenue per discharge was essentially flat at $20,415. Occupancy was 73.4%, versus 73.1%.
- Cash and cash equivalents were $85.0 million at quarter end; restricted cash was $34.3 million and restricted marketable securities were $111.6 million. Approximately $926 million was available under the revolving credit facility.
- Debt totaled $2,748.5 million, including $40.0 million drawn on the revolver; long-term debt net of current portion was $2,722.5 million. The company reported compliance with its leverage and interest-coverage covenants.
Material changes and management commentary
- Continuing revenue increased 9.5%, principally reflecting higher patient volumes and new hospitals. Medicare was 65.3% of revenue and Medicare Advantage 16.0%, up from 65.1% and 14.7%, respectively.
- Labor expense rose 7.1% in dollars, but contract labor plus sign-on and shift bonuses declined to $37.0 million from $63.0 million. Other operating expense rose 11.9%, including higher provider taxes, recruiting, repairs, maintenance, and utilities.
- Interest expense declined 8.1% to $36.4 million, primarily reflecting prior debt repayments and extinguishment of term loan facilities. Cash from operations improved mainly due to better accounts-receivable collections.
- Management cited aging demographics as a long-term demand driver and described continued hospital development and capacity expansion. It expects 2023 capital expenditures of $565 million to $605 million, including $230 million to $240 million characterized as nondiscretionary.
- Management estimated 2023 cash income-tax payments, net of refunds, of approximately $85 million to $100 million. It expects depreciation and amortization to increase with ongoing capital investment.
Outlook, risks, and unusual items
- CMS’s proposed FY2024 IRF payment rule included a net 3.0% market-basket update. Based on its analysis, management estimated a net increase in the company’s Medicare payment rates of approximately 2.9%, effective October 1, 2023; this was a proposed rule, not a final outcome.
- A Supplemental Medical Review Contractor began reviewing claims from March through December 2020 totaling approximately $21 million. Initial results covered approximately $9 million of claims, of which approximately 78% had been approved as of the filing. Reviews, denials, appeals, and potential recoupments remain risks.
- Key challenges include Medicare reimbursement and regulatory changes, staffing availability and labor costs, maintaining volume growth, and compliance with extensive healthcare rules. The company also identified litigation and potentially undisclosed False Claims Act matters; the filing does not provide a clear quantified exposure for these matters.
- The 2022 comparison includes $23.7 million of after-tax discontinued-operations income, including spin-off-related costs; Q1 2023 discontinued operations recorded a $1.0 million loss. Continuing-operations comparisons are more relevant to the post-spin-off business.
- The company declared a $0.15-per-share quarterly dividend, paid in April 2023. Future dividends remain at the board’s discretion. Approximately $198 million remained under the share repurchase authorization; reported Q1 share purchases were primarily employee tax withholding and plan-related transactions, not purchases under the publicly announced program.
Important facts for investors to verify
- Whether discharge growth, occupancy, and revenue per discharge persist, and how new hospital openings affect utilization and margins.
- Final CMS FY2024 IRF rule and its actual effect on reimbursement, alongside Medicare Advantage and managed-care rate and mix trends.
- Results and any financial impact of the approximately $21 million claims review, other audits, appeals, and revenue reserves.
- Execution of the $565 million to $605 million capital expenditure plan, funding needs, and resulting debt and cash-flow trends.
- Labor-cost trends, covenant headroom, and any material developments in litigation or regulatory matters.