Encompass Health Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited results compared with Q1 2021. Encompass Health operates inpatient rehabilitation and home health and hospice businesses across 42 states and Puerto Rico. The company expected to separate its home health and hospice business, to be named Enhabit Home Health & Hospice, on July 1, 2022, subject to customary conditions.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net operating revenues | $1,333.6 million | $1,230.4 million | +8.4% |
| Income from continuing operations | $110.1 million | $132.8 million | -17.1% |
| Net income attributable to Encompass Health | $87.5 million | $107.3 million | -18.5% |
| Diluted EPS | $0.87 | $1.07 | Lower year over year |
| Adjusted EBITDA | $245.0 million | $250.8 million | Lower year over year |
| Cash provided by operating activities | $218.9 million | $158.5 million | Higher year over year |
Operating expenses rose 12.4% to $1,149.7 million, faster than revenue. Salaries and benefits increased 12.9% to $776.0 million and rose to 58.2% of revenue from 55.9%. Total operating expenses were 86.2% of revenue versus 83.1%. Management cited wage increases, contract labor, clinician compensation and bonuses, recruiting and travel costs, provider taxes, and higher spin-off expenses. Strategic alternatives review costs were $9.6 million, compared with $0.9 million a year earlier.
Inpatient rehabilitation revenue increased 10.4% to $1,059.3 million, while segment Adjusted EBITDA decreased 3.7% to $226.2 million. Discharges rose 7.6% and net patient revenue per discharge rose 2.2%; same-store discharges increased 3.8%. Home health and hospice revenue increased 1.4% to $274.3 million, while segment Adjusted EBITDA decreased 1.4% to $50.1 million. Home health episodes fell 5.0%, and cost per visit rose 7.8%; hospice admissions and patient days declined.
Cash, debt and liquidity
At March 31, 2022, cash and cash equivalents were $94.2 million; restricted cash was an additional $61.0 million. The company reported approximately $658 million available under its revolving credit facility. Total debt was $3,264.1 million, including $305.0 million drawn on the revolver; long-term debt, net of current maturities, was $3,221.3 million. The company reported compliance with its credit agreement covenants. It redeemed the remaining $100 million of 5.125% notes due 2023 in March, funded with revolver borrowings.
Operating cash flow was $218.9 million; capital expenditures were $115.2 million in the cash flow statement. Investing activities used $123.1 million, and financing activities used $60.9 million. The company declared a quarterly dividend of $0.28 per share. Its 2022 capital expenditure outlook was approximately $570 million to $660 million, including $200 million to $250 million described as nondiscretionary; it also expected $50 million to $100 million for home health and hospice acquisitions.
Outlook, risks and notable items
- Management expressed optimism about longer-term demand, citing population aging, but gave no full-year revenue or earnings guidance in the provided filing text.
- The expected July 1, 2022 spin-off remained conditional on, among other things, an effective Form 10 registration statement, regulatory approvals and a favorable IRS private letter ruling. Debt indenture amendments permit a distribution subject to a pro forma leverage ratio no greater than 3.5 to 1.0. A further $20.5 million consent payment was contingent on execution of a distribution.
- CMS’s proposed FY2023 inpatient rehabilitation rule was estimated by the company to increase its Medicare payment rates approximately 2.9% from October 1, 2022. The proposal also solicited comment on a possible transfer-payment policy change; the filing cites an OIG estimate that such a change could reduce industry reimbursement by about 6%, based on 2017–2018 data.
- Medicare sequestration resumed April 1, 2022, at a 1% reduction through June 30, with the full 2% reduction expected thereafter. The suspension had added approximately $21 million to Q1 revenue across the two segments.
- Key operating risks include staffing shortages and rising labor costs, COVID-19-related disruption, Medicare reimbursement and regulatory changes, audits and potential recoupments, and execution risks and costs associated with the planned separation. A 1% increase in interest rates was estimated to add approximately $4.9 million of cash outflow over 12 months, assuming variable-rate debt balances remained unchanged.
- The company disclosed routine healthcare litigation and regulatory matters, possible undisclosed sealed False Claims Act cases, and an ongoing lawsuit against a former home health and hospice executive. Trial was scheduled to begin on the docket starting May 23, 2022. The filing states there were no material changes to the previously disclosed risk factors.
Important facts for investors to verify
- Whether the Enhabit separation closed on the expected timetable and satisfied its regulatory, tax and registration conditions, and the related costs and pro forma leverage.
- Whether labor-cost growth moderates and inpatient volume and segment profitability improve; Q1 revenue growth did not translate into higher consolidated or inpatient segment Adjusted EBITDA.
- The final FY2023 IRF payment rule, the impact of resumed sequestration, and any subsequent changes to Medicare reimbursement policy.
- Liquidity and debt covenant headroom after spin-off-related payments, capital spending, acquisitions, dividends and variable-rate borrowing.
- Developments in litigation, Medicare audits, overpayment disclosures and other contingencies; the filing text does not provide a clear quantified estimate of potential exposure.