Encompass Health reports results for second quarter 2020

Consolidated results

Growth

Q2 2020

Q2 2019

Dollars

Percent

(In Millions, Except per Share Data)

Net operating revenues

$

1,074.1

$

1,135.0

$

(60.9)

(5.4)

%

Income from continuing operations attributable to Encompass Health per diluted share

0.34

0.92

(0.58)

(63.0)

%

Adjusted earnings per share

0.31

1.08

(0.77)

(71.3)

%

Cash flows provided by operating activities

222.3

145.4

76.9

52.9

%

Adjusted EBITDA

162.2

252.2

(90.0)

(35.7)

%

Adjusted free cash flow

168.2

142.2

26.0

18.3

%

Six Months Ended June 30,

2020

2019

Cash flows provided by operating activities

$

251.6

$

305.3

$

(53.7)

(17.6)

%

Adjusted free cash flow

242.8

270.0

(27.2)

(10.1)

%

Inpatient rehabilitation segment results

Growth

Q2 2020

Q2 2019

Dollars

Percent

Net operating revenues:

(In Millions)

Inpatient

$

808.0

$

851.8

$

(43.8)

(5.1)

%

Outpatient and other

16.5

22.1

(5.6)

(25.3)

%

Total segment revenue

$

824.5

$

873.9

$

(49.4)

(5.7)

%

(Actual Amounts)

Discharges

41,682

46,679

(4,997)

(10.7)

%

Same-store discharge growth

(12.8)

%

Net patient revenue per discharge

$

19,385

$

18,248

$

1,137

6.2

%

Revenue reserves related to bad debt as a percent of revenue

1.4

%

1.4

%

(0 basis points)

(In Millions)

Adjusted EBITDA

$

180.3

$

233.9

$

(53.6)

(22.9)

%

•

Revenue - The revenue decline was driven by decreased volumes partially offset by favorable pricing. Same-store discharges declined primarily due to the COVID-19 pandemic. New-store discharge growth of 2.1% resulted from joint ventures in Lubbock, Texas (May 2019) and Boise, Idaho (July 2019), and wholly owned hospitals in Katy, Texas (September 2019) and Murrieta, California (February 2020). New-store growth also resulted from a joint venture hospital in Yuma, Arizona changing from the equity method of accounting to a consolidated entity effective July 1, 2019. Growth in net patient revenue per discharge primarily resulted from a higher acuity patient mix and the suspension of sequestration starting in May 2020.

The decrease in outpatient and other revenue resulted from the COVID-19 pandemic related suspension of hospital-based outpatient services in mid-March 2020 and the closure of certain hospital-based outpatient programs in 2019.

•

Adjusted EBITDA - The decrease in Adjusted EBITDA primarily resulted from COVID-19 pandemic related impacts on patient volumes, staff productivity and medical supplies, as well as the award of additional paid-time-off to employees in response to the COVID-19 pandemic.

Home health and hospice segment results

Growth

Q2 2020

Q2 2019

Dollars

Percent

Net operating revenues:

(In Millions)

Home health

$

201.8

$

222.7

$

(20.9)

(9.4)

%

Hospice

47.8

38.4

9.4

24.5

%

Total segment revenue

$

249.6

$

261.1

$

(11.5)

(4.4)

%

Home Health Metrics

(Actual Amounts)

Admissions

34,841

37,828

(2,987)

(7.9)

%

Same-store admissions growth

(17.3)

%

Episodes

60,154

66,881

(6,727)

(10.1)

%

Same-store episode growth

(19.1)

%

Revenue per episode

$

2,920

$

2,959

$

(39)

(1.3)

%

(In Millions)

Adjusted EBITDA

$

15.0

$

49.1

$

(34.1)

(69.5)

%

•

Revenue - Decreased volumes and pricing resulted in a decline in revenue. Same-store admissions declined primarily due to the COVID-19 pandemic. New-store admissions growth was primarily due to the acquisition of Alacare on July 1, 2019. Revenue per episode was negatively impacted by the implementation of the Patient Driven Groupings Model ("PDGM"), the effects of which were exacerbated by the COVID-19 pandemic. The revenue per episode decrease of 1.3% was favorably impacted by an increase in new episode starts late in the quarter and the suspension of sequestration starting in May 2020.

Hospice revenue increased 24.5% due to the acquisition of Alacare.

•

Adjusted EBITDA - The decrease in Adjusted EBITDA primarily resulted from COVID-19 pandemic related impacts on patient volumes, staff productivity and medical supplies, lower reimbursement rates under PDGM, and the award of additional paid-time-off to employees in response to the COVID-19 pandemic. The segment's administrative costs also increased year over year due to the implementation of PDGM and the Review Choice Demonstration, as well as an increase in sales force full-time equivalents.

General and administrative expenses

% of Consolidated Revenue

Q2 2019

% of Consolidated Revenue

(In Millions)

General and administrative expenses, excluding stock-based compensation and transaction costs

$

33.1

3.1%

$

30.8

2.7%

•

General and administrative expenses increased as a percent of consolidated revenue primarily due to the decrease in the revenue base resulting from the COVID-19 pandemic.

Encompass Health Corporation and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

Three Months Ended
June 30,

Six Months Ended
June 30,

2020

2019

2020

2019

(In Millions, Except per Share Data)

Net operating revenues

$

1,074.1

$

1,135.0

$

2,256.1

$

2,259.0

Operating expenses:

Salaries and benefits

651.9

622.9

1,331.0

1,243.7

Other operating expenses

148.3

149.8

307.9

299.9

Occupancy costs

20.3

20.3

40.5

39.9

Supplies

50.6

41.7

96.3

81.8

General and administrative expenses

43.0

77.1

78.6

130.5

Depreciation and amortization

60.7

52.7

119.5

105.2

Government, class action, and related settlements

—

—

2.8

—

Total operating expenses

974.8

964.5

1,976.6

1,901.0

Loss on early extinguishment of debt

—

2.3

—

2.3

Interest expense and amortization of debt discounts and fees

45.8

37.7

89.0

74.9

Other income

(5.8)

(2.2)

(3.9)

(5.9)

Equity in net income of nonconsolidated affiliates

(0.7)

(1.8)

(1.5)

(4.3)

Income from continuing operations before income tax expense

60.0

134.5

195.9

291.0

Provision for income tax expense

11.8

23.5

38.9

54.3

Income from continuing operations

48.2

111.0

157.0

236.7

Income (loss) from discontinued operations, net of tax

0.1

(0.1)

—

(0.6)

Net and comprehensive income

48.3

110.9

157.0

236.1

Less: Net and comprehensive income attributable to noncontrolling interests

(14.8)

(19.7)

(36.5)

(42.6)

Net and comprehensive income attributable to Encompass Health

$

33.5

$

91.2

$

120.5

$

193.5

Weighted average common shares outstanding:

Basic

98.7

98.0

98.5

98.2

Diluted

99.9

99.3

99.6

99.5

Earnings per common share:

Basic earnings per share attributable to Encompass Health common shareholders:

Continuing operations

$

0.34

$

0.93

$

1.22

$

1.97

Discontinued operations

—

—

—

(0.01)

Net income

$

0.34

$

0.93

$

1.22

$

1.96

Diluted earnings per share attributable to Encompass Health common shareholders:

Continuing operations

$

0.34

$

0.92

$

1.21

$

1.95

Discontinued operations

—

—

—

(0.01)

Net income

$

0.34

$

0.92

$

1.21

$

1.94

Amounts attributable to Encompass Health common shareholders:

Income from continuing operations

$

33.4

$

91.3

$

120.5

$

194.1

Income (loss) from discontinued operations, net of tax

0.1

(0.1)

—

(0.6)

Net income attributable to Encompass Health

$

33.5

$

91.2

$

120.5

$

193.5

Encompass Health Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

June 30,
 2020

December 31,
 2019

(In Millions)

Assets

Current assets:

Cash and cash equivalents

$

419.0

$

94.8

Restricted cash

56.4

57.4

Accounts receivable

553.2

506.1

Other current assets

73.1

97.5

Total current assets

1,101.7

755.8

Property and equipment, net

2,041.4

1,959.3

Operating lease right-of-use assets

268.5

276.5

Goodwill

2,318.7

2,305.2

Intangible assets, net

455.8

476.3

Deferred income tax assets

11.1

2.9

Other long-term assets

305.3

304.7

Total assets

$

6,502.5

$

6,080.7

Liabilities and Shareholders' Equity

Current liabilities:

Current portion of long-term debt

$

36.9

$

39.3

Current operating lease liabilities

42.2

40.4

Accounts payable

93.1

94.6

Accrued expenses and other current liabilities

492.2

546.7

Total current liabilities

664.4

721.0

Long-term debt, net of current portion

3,546.7

3,023.3

Long-term operating lease liabilities

234.9

243.8

Other long-term liabilities

191.7

159.9

4,637.7

4,148.0

Commitments and contingencies

Redeemable noncontrolling interests

33.4

239.6

Shareholders' equity:

Encompass Health shareholders' equity

1,462.8

1,352.2

Noncontrolling interests

368.6

340.9

Total shareholders' equity

1,831.4

1,693.1

Total liabilities and shareholders' equity

$

6,502.5

$

6,080.7

Encompass Health Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

Six Months Ended June 30,

2020

2019

(In Millions)

Cash flows from operating activities:

Net income

$

157.0

$

236.1

Loss from discontinued operations, net of tax

—

0.6

Adjustments to reconcile net income to net cash provided by operating activities—

Depreciation and amortization

119.5

105.2

Stock-based compensation

17.0

65.3

Deferred tax (benefit) expense

(9.1)

0.5

Other, net

7.8

3.8

Change in assets and liabilities, net of acquisitions—

Accounts receivable

(38.5)

(22.6)

Other assets

20.0

(11.8)

Accounts payable

(0.4)

(4.5)

Accrued payroll

58.4

(7.7)

Other liabilities

(80.0)

(55.1)

Net cash used in operating activities of discontinued operations

(0.1)

(4.5)

Total adjustments

94.6

68.6

Net cash provided by operating activities

251.6

305.3

Cash flows from investing activities:

Purchases of property and equipment

(166.6)

(155.8)

Additions to capitalized software costs

(4.4)

(6.6)

Acquisitions of businesses, net of cash acquired

(1.1)

(13.7)

Other, net

(3.0)

(15.5)

Net cash used in investing activities

(175.1)

(191.6)

Encompass Health Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Continued)

(Unaudited)

Six Months Ended June 30,

2020

2019

(In Millions)

Cash flows from financing activities:

Proceeds from bond issuance

592.5

—

Principal payments on debt, including pre-payments

(11.0)

(112.1)

Borrowings on revolving credit facility

330.0

400.0

Payments on revolving credit facility

(375.0)

(95.0)

Principal payments under finance lease obligations

(10.9)

(9.3)

Repurchases of common stock, including fees and expenses

(4.9)

(43.8)

Dividends paid on common stock

(56.7)

(54.9)

Purchase of equity interests in consolidated affiliates

(162.3)

—

Distributions paid to noncontrolling interests of consolidated affiliates

(37.4)

(36.5)

Taxes paid on behalf of employees for shares withheld

(15.7)

(16.1)

Other, net

5.3

8.2

Net cash provided by financing activities

253.9

40.5

Increase in cash, cash equivalents, and restricted cash

330.4

154.2

Cash, cash equivalents, and restricted cash at beginning of period

159.6

133.5

Cash, cash equivalents, and restricted cash at end of period

$

490.0

$

287.7

Reconciliation of Cash, Cash Equivalents, and Restricted Cash

Cash and cash equivalents at beginning of period

$

94.8

$

69.2

Restricted cash at beginning of period

57.4

59.0

Restricted cash included in other long-term assets at beginning of period

7.4

5.3

Cash, cash equivalents, and restricted cash at beginning of period

$

159.6

$

133.5

Cash and cash equivalents at end of period

$

419.0

$

221.7

Restricted cash at end of period

56.4

56.8

Restricted cash included in other long-term assets at end of period

14.6

9.2

Cash, cash equivalents, and restricted cash at end of period

$

490.0

$

287.7

Encompass Health Corporation and Subsidiaries

Supplemental Information

Earnings Per Share

Three Months Ended
June 30,

Six Months Ended
June 30,

2020

2019

2020

2019

(In Millions, Except Per Share Data)

Consolidated Adjusted EBITDA

$

162.2

$

252.2

$

390.2

$

495.1

Depreciation and amortization

(60.7)

(52.7)

(119.5)

(105.2)

Interest expense and amortization of debt discounts and fees

(45.8)

(37.7)

(89.0)

(74.9)

Stock-based compensation expense

(9.9)

(45.9)

(17.0)

(65.3)

Loss on disposal or impairment of assets

(3.0)

(1.3)

(3.1)

(2.4)

42.8

114.6

161.6

247.3

Certain items non-indicative of ongoing operating performance:

Loss on early extinguishment of debt

—

(2.3)

—

(2.3)

Transaction costs

—

(0.4)

—

(1.0)

Gain on consolidation of Treasure Coast

—

—

2.2

—

SARs mark-to-market impact on noncontrolling interests

—

2.6

—

3.4

Change in fair market value of equity securities

2.4

0.3

(0.1)

1.2

Government, class action, and related settlements

—

—

(2.8)

—

Payroll taxes on SARs exercise

—

—

(1.5)

(0.2)

Pre-tax income

45.2

114.8

159.4

248.4

Income tax expense

(11.8)

(23.5)

(38.9)

(54.3)

Income from continuing operations ⁽¹⁾

$

33.4

$

91.3

$

120.5

$

194.1

Basic shares

98.7

98.0

98.5

98.2

Diluted shares

99.9

99.3

99.6

99.5

Basic earnings per share ⁽¹⁾

$

0.34

$

0.93

$

1.22

$

1.97

Diluted earnings per share ⁽¹⁾

$

0.34

$

0.92

$

1.21

$

1.95

⁽¹⁾       Income from continuing operations attributable to Encompass Health

Encompass Health Corporation and Subsidiaries

Supplemental Information

Adjusted Earnings Per Share

Q2

6 Months

2020

2019

2020

2019

Earnings per share, as reported

$

0.34

$

0.92

$

1.21

$

1.95

Adjustments, net of tax:

Government, class action, and related settlements

—

—

0.02

—

Mark-to-market adjustments for stock compensation expense

—

0.21

—

0.28

Transaction costs

—

—

—

0.01

Income tax adjustments

—

(0.07)

(0.05)

(0.12)

Loss on early extinguishment of debt

—

0.02

—

0.02

Change in fair market value of equity securities

(0.02)

—

—

(0.01)

Gain on consolidation of Treasure Coast

—

—

(0.02)

—

Payroll taxes on SARs exercise

—

—

0.01

—

Adjusted earnings per share⁽¹⁾

$

0.31

$

1.08

$

1.18

$

2.12

⁽¹⁾       Adjusted EPS may not sum due to rounding.

Encompass Health Corporation and Subsidiaries

Supplemental Information

Adjusted Earnings Per Share

For the Three Months Ended June 30, 2020

Adjustments

As
Reported

Income Tax
Adjustments

Change in Fair
Market Value of
Equity Securities

As
Adjusted

(In Millions, Except Per Share Amounts)

Adjusted EBITDA⁽¹⁾

$

162.2

$

—

$

—

$

162.2

Depreciation and amortization

(60.7)

—

—

(60.7)

Interest expense and amortization of debt discounts and fees

(45.8)

—

—

(45.8)

Stock-based compensation

(9.9)

—

—

(9.9)

Loss on disposal or impairment of assets

(3.0)

—

—

(3.0)

Change in fair market value of equity securities

2.4

—

(2.4)

—

Income from continuing operations before income tax expense

45.2

—

(2.4)

42.8

Provision for income tax expense

(11.8)

(0.4)

0.6

(11.6)

Income from continuing operations attributable to Encompass Health

$

33.4

$

(0.4)

$

(1.8)

$

31.2

Diluted earnings per share from continuing operations⁽²⁾

$

0.34

$

—

$

(0.02)

$

0.31

Diluted shares used in calculation

99.9

⁽¹⁾       See reconciliation of net income to Adjusted EBITDA

⁽²⁾       Adjusted EPS may not sum across due to rounding.

Encompass Health Corporation and Subsidiaries

Supplemental Information

Adjusted Earnings Per Share

For the Three Months Ended June 30, 2019

Adjustments

As
Reported

Mark-to-
Market
Adjustment
for Stock
Compensation
Expense

Loss on
Early
Exting. of
Debt

Income Tax
Adjustments

Transaction
Costs

Change in
Fair Market
Value of
Equity
Securities

As
Adjusted

(In Millions, Except Per Share Amounts)

Adjusted EBITDA⁽¹⁾

$

252.2

$

—

$

—

$

—

$

—

$

—

$

252.2

Depreciation and amortization

(52.7)

—

—

—

—

—

(52.7)

Loss on early extinguishment of debt

(2.3)

—

2.3

—

—

Interest expense and amortization of debt discounts and fees

(37.7)

—

—

—

—

—

(37.7)

Stock-based compensation

(45.9)

31.4

—

—

—

—

(14.5)

Loss on disposal of assets

(1.3)

—

—

—

—

—

(1.3)

Transaction costs

(0.4)

—

—

—

0.4

—

—

SARs mark-to-market impact on noncontrolling interests

2.6

(2.6)

—

—

—

—

—

Change in fair market value of equity securities

0.3

—

—

—

—

(0.3)

—

Income from continuing operations before income tax expense

114.8

28.8

2.3

—

0.4

(0.3)

146.0

Provision for income tax expense

(23.5)

(7.8)

(0.6)

(7.2)

(0.1)

0.1

(39.1)

Income from continuing operations attributable to Encompass Health

$

91.3

$

21.0

$

1.7

$

(7.2)

$

0.3

$

(0.2)

$

106.9

Diluted earnings per share from continuing operations⁽²⁾

$

0.92

$

0.21

$

0.02

$

(0.07)

$

—

$

—

$

1.08

Diluted shares used in calculation

99.3

⁽¹⁾       See reconciliation of net income to Adjusted EBITDA

⁽²⁾       Adjusted EPS may not sum across due to rounding.

Encompass Health Corporation and Subsidiaries

Supplemental Information

Adjusted Earnings Per Share

For the Six Months Ended June 30, 2020

Adjustments

As
Reported

Gov't, Class
Action, &
Related
Settlements

Income Tax
Adjustments

Change in
Fair
Market
Value of
Equity
Securities

Gain on
Consolidation
of Treasure
Coast

Payroll
Taxes on
SARs
Exercise

As
Adjusted

(In Millions, Except Per Share Amounts)

Adjusted EBITDA⁽¹⁾

390.2

—

—

—

—

—

$

390.2

Depreciation and amortization

(119.5)

—

—

—

—

—

(119.5)

Government, class action and related settlements

(2.8)

2.8

—

—

—

—

—

Interest expense and amortization of debt discounts and fees

(89.0)

—

—

—

—

—

(89.0)

Stock-based compensation

(17.0)

—

—

—

—

—

(17.0)

Loss on disposal or impairment of assets

(3.1)

—

—

—

—

—

(3.1)

Change in fair market value of equity securities

(0.1)

—

—

0.1

—

—

—

Gain on consolidation of Treasure Coast

2.2

—

—

—

(2.2)

—

—

Payroll taxes on SARs exercise

(1.5)

—

—

—

—

1.5

—

Income from continuing operations before income tax expense

159.4

2.8

—

0.1

(2.2)

1.5

161.6

Provision for income tax expense

(38.9)

(0.7)

(4.7)

—

0.6

(0.4)

(44.1)

Income from continuing operations attributable to Encompass Health

$

120.5

$

2.1

$

(4.7)

$

0.1

$

(1.6)

$

1.1

$

117.5

Diluted earnings per share from continuing operations⁽²⁾

$

1.21

$

0.02

$

(0.05)

$

—

$

(0.02)

$

0.01

$

1.18

Diluted shares used in calculation

99.6

⁽¹⁾       See reconciliation of net income to Adjusted EBITDA

⁽²⁾       Adjusted EPS may not sum across due to rounding.

Encompass Health Corporation and Subsidiaries

Supplemental Information

Adjusted Earnings Per Share

For the Six Months Ended June 30, 2019

Adjustments

As
Reported

Mark-to-
Market
Adjustment
for Stock
Comp.
Expense

Loss on
Early
Exting.
of Debt

Income Tax
Adjustments

Transaction
Costs

Change in
Fair
Market
Value of
Equity
Securities

Payroll
Taxes on
SARs
Exercise

As
Adjusted

(In Millions, Except Per Share Amounts)

Adjusted EBITDA⁽¹⁾

$

495.1

$

—