Encompass Health reports results for third quarter 2019 and affirms full-year 2019 guidance

Growth

Q3 2019

Q3 2018

Dollars

Percent

(In Millions, Except per Share Data)

Net operating revenues

$

1,161.6

$

1,067.6

$

94.0

8.8

%

Income from continuing operations
  attributable to Encompass Health per diluted
  share

0.98

0.89

0.09

10.1

%

Adjusted earnings per share

0.93

0.91

0.02

2.2

%

Cash flows provided by operating activities

114.4

198.5

(84.1)

(42.4)

%

Adjusted EBITDA

231.6

224.3

7.3

3.3

%

Adjusted free cash flow

109.6

143.4

(33.8)

(23.6)

%

Nine Months Ended
September 30,

2019

2018

Cash flows provided by operating activities

$

419.7

$

584.0

$

(164.3)

(28.1)

%

Adjusted free cash flow

379.6

424.8

(45.2)

(10.6)

%

Inpatient rehabilitation segment results

Growth

Q3 2019

Q3 2018

Dollars

Percent

Net operating revenues:

(In Millions)

Inpatient

$

850.6

$

798.4

$

52.2

6.5

%

Outpatient and other

21.7

27.2

(5.5)

(20.2)

%

Total segment revenue

$

872.3

$

825.6

$

46.7

5.7

%

(Actual Amounts)

Discharges

46,669

44,230

2,439

5.5

%

Same-store discharge growth

3.1

%

Net patient revenue per discharge

$

18,226

$

18,051

$

175

1.0

%

Revenue reserves related to bad
  debt as a percent of revenue

1.5

%

1.3

%

20 basis
points

(In Millions)

Adjusted EBITDA

$

210.6

$

212.9

$

(2.3)

(1.1)

%

Home health and hospice segment results

Growth

Q3 2019

Q3 2018

Dollars

Percent

Net operating revenues:

(In Millions)

Home health

$

238.9

$

209.2

$

29.7

14.2

%

Hospice

50.4

32.8

17.6

53.7

%

Total segment revenue

$

289.3

$

242.0

$

47.3

19.5

%

Home Health Metrics

(Actual Amounts)

Admissions

42,174

34,364

7,810

22.7

%

Same-store admissions growth

9.7

%

Episodes

72,016

61,765

10,251

16.6

%

Same-store episode growth

3.8

%

Revenue per episode

$

2,980

$

2,995

$

(15)

(0.5)

%

(In Millions)

Adjusted EBITDA

$

50.8

$

43.2

$

7.6

17.6

%

General and administrative expenses

Q3 2019

% of
Consolidated
Revenue

Q3 2018

% of
Consolidated
Revenue

(In Millions)

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

$

29.8

2.6%

$

31.8

3.0%

Full-Year 2019 Guidance

(In Millions, Except Per Share Data)

Net operating revenues

$4,500 to $4,600

Adjusted EBITDA

$940 to $960

Adjusted earnings per share from continuing
  operations attributable to Encompass Health

$3.71 to $3.85

Encompass Health Corporation and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)

Three Months Ended
September 30,

Nine Months Ended
September 30,

2019

2018

2019

2018

(In Millions, Except per Share Data)

Net operating revenues

$

1,161.6

$

1,067.6

$

3,420.6

$

3,181.3

Operating expenses:

Salaries and benefits

660.8

592.3

1,904.5

1,740.7

Other operating expenses

156.6

142.9

456.5

433.5

Occupancy costs

21.8

19.6

61.7

57.7

Supplies

42.9

38.6

124.7

117.8

General and administrative expenses

52.5

49.9

183.0

165.9

Depreciation and amortization

55.1

51.2

160.3

146.8

Total operating expenses

989.7

894.5

2,890.7

2,662.4

Loss on early extinguishment of debt

—

—

2.3

—

Interest expense and amortization of debt discounts and fees

40.3

37.3

115.2

110.6

Other income

(21.0)

(1.7)

(26.9)

(2.9)

Equity in net income of nonconsolidated affiliates

(1.2)

(2.1)

(5.5)

(6.4)

Income from continuing operations before income tax expense

153.8

139.6

444.8

417.6

Provision for income tax expense

34.3

30.2

88.6

89.5

Income from continuing operations

119.5

109.4

356.2

328.1

Loss from discontinued operations, net of tax

—

(0.1)

(0.6)

(0.4)

Net and comprehensive income

119.5

109.3

355.6

327.7

Less: Net and comprehensive income attributable to noncontrolling interests

(21.9)

(20.7)

(64.5)

(63.5)

Net and comprehensive income attributable to Encompass Health

$

97.6

$

88.6

$

291.1

$

264.2

Weighted average common shares outstanding:

Basic

97.8

98.0

98.1

97.9

Diluted

99.4

100.0

99.5

99.7

Earnings per common share:

Basic earnings per share attributable to Encompass Health common shareholders:

Continuing operations

$

0.99

$

0.90

$

2.97

$

2.69

Discontinued operations

—

—

(0.01)

—

Net income

$

0.99

$

0.90

$

2.96

$

2.69

Diluted earnings per share attributable to Encompass Health common shareholders:

Continuing operations

$

0.98

$

0.89

$

2.94

$

2.65

Discontinued operations

—

—

(0.01)

—

Net income

$

0.98

$

0.89

$

2.93

$

2.65

Amounts attributable to Encompass Health common shareholders:

Income from continuing operations

$

97.6

$

88.7

$

291.7

$

264.6

Loss from discontinued operations, net of tax

—

(0.1)

(0.6)

(0.4)

Net income attributable to Encompass Health

$

97.6

$

88.6

$

291.1

$

264.2

Encompass Health Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)

September 30,
 2019

December 31,
 2018

(In Millions)

Assets

Current assets:

Cash and cash equivalents

$

422.0

$

69.2

Restricted cash

66.8

59.0

Accounts receivable

516.9

467.7

Other current assets

71.7

66.2

Total current assets

1,077.4

662.1

Property and equipment, net

1,874.8

1,634.8

Operating lease right-of-use assets

311.4

—

Goodwill

2,305.2

2,100.8

Intangible assets, net

486.8

443.4

Deferred income tax assets

22.4

42.9

Other long-term assets

308.8

291.0

Total assets

$

6,386.8

$

5,175.0

Liabilities and Shareholders' Equity

Current liabilities:

Current portion of long-term debt

$

437.2

$

35.8

Current operating lease liabilities

44.9

—

Accounts payable

101.4

90.0

Accrued expenses and other current liabilities

525.1

546.7

Total current liabilities

1,108.6

672.5

Long-term debt, net of current portion

2,961.9

2,478.6

Long-term operating lease liabilities

273.4

—

Other long-term liabilities

161.6

205.2

4,505.5

3,356.3

Commitments and contingencies

Redeemable noncontrolling interests

210.0

261.7

Shareholders' equity:

Encompass Health shareholders' equity

1,333.1

1,276.7

Noncontrolling interests

338.2

280.3

Total shareholders' equity

1,671.3

1,557.0

Total liabilities and shareholders' equity

$

6,386.8

$

5,175.0

Encompass Health Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)

Nine Months Ended September 30,

2019

2018

(In Millions)

Cash flows from operating activities:

Net income

$

355.6

$

327.7

Loss from discontinued operations, net of tax

0.6

0.4

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

Depreciation and amortization

160.3

146.8

Loss on early extinguishment of debt

2.3

—

Stock-based compensation

87.0

65.6

Deferred tax expense (benefit)

20.8

(8.0)

Gain on consolidation of Yuma Rehabilitation Hospital

(19.2)

—

Other, net

2.3

5.1

Change in assets and liabilities, net of acquisitions—

Accounts receivable

(37.8)

12.3

Other assets

(11.1)

15.3

Accounts payable

(4.2)

—

Accrued payroll

(21.0)

(6.7)

Accrued interest payable

7.4

8.2

Other liabilities

(118.7)

18.0

Net cash used in operating activities of discontinued operations

(4.6)

(0.7)

Total adjustments

63.5

255.9

Net cash provided by operating activities

419.7

584.0

Cash flows from investing activities:

Purchases of property and equipment

(259.9)

(171.5)

Additions to capitalized software costs

(9.2)

(13.2)

Acquisitions of businesses, net of cash acquired

(231.2)

(135.8)

Other, net

(11.4)

(5.8)

Net cash used in investing activities

(511.7)

(326.3)

Encompass Health Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Continued)
(Unaudited)

Nine Months Ended September 30,

2019

2018

(In Millions)

Cash flows from financing activities:

Proceeds from bond issuance

1,000.0

—

Principal payments on debt, including pre-payments

(115.8)

(16.1)

Borrowings on revolving credit facility

525.0

285.0

Payments on revolving credit facility

(555.0)

(315.0)

Principal payments under finance lease obligations

(14.2)

(13.0)

Debt issuance costs

(15.2)

—

Repurchases of common stock, including fees and expenses

(45.9)

—

Dividends paid on common stock

(81.3)

(74.4)

Purchase of equity interests in consolidated affiliates

(162.9)

(65.1)

Distributions paid to noncontrolling interests of consolidated affiliates

(57.6)

(56.5)

Taxes paid on behalf of employees for shares withheld

(16.2)

(8.3)

Other, net

11.4

9.9

Net cash provided by (used in) financing activities

472.3

(253.5)

Increase in cash, cash equivalents, and restricted cash

380.3

4.2

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

133.5

116.8

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

$

513.8

$

121.0

Reconciliation of Cash, Cash Equivalents, and Restricted Cash

Cash and cash equivalents at beginning of period

$

69.2

$

54.4

Restricted cash at beginning of period

59.0

62.4

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

5.3

—

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

$

133.5

$

116.8

Cash and cash equivalents at end of period

$

422.0

$

56.9

Restricted cash at end of period

66.8

62.1

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

25.0

2.0

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

$

513.8

$

121.0

Encompass Health Corporation and Subsidiaries
Supplemental Information
Adjusted Earnings Per Share

Q3

9 Months

2019

2018

2019

2018

Earnings per share, as reported

$

0.98

$

0.89

$

2.94

$

2.65

Adjustments, net of tax:

Mark-to-market adjustments for stock appreciation rights

0.08

0.03

0.36

0.18

Transaction costs

0.01

—

0.02

0.01

Income tax adjustments

—

(0.01)

(0.13)

(0.01)

Loss on early extinguishment of debt

—

—

0.02

—

Change in fair market value of equity securities

—

—

(0.01)

0.01

Gain on consolidation of Yuma

(0.14)

—

(0.14)

—

Payroll taxes on SARs exercise

0.01

—

0.01

—

Adjusted earnings per share⁽¹⁾

$

0.93

$

0.91

$

3.05

$

2.83

⁽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 September 30, 2019

Adjustments

As Reported

Mark-to-Market Adjustment for Stock Comp. Expense

Income Tax Adjustments

Transaction Costs

Gain on Consolidation of Yuma

Payroll Taxes on SARs Exercise

As Adjusted

(In Millions, Except Per Share Amounts)

Adjusted EBITDA⁽¹⁾

$

231.6

$

—

$

—

$

—

$

—

$

—

$

231.6

Depreciation and amortization

(55.1)

—

—

—

—

—

(55.1)

Interest expense and amortization of debt discounts and fees

(40.3)

—

—

—

—

—

(40.3)

Stock-based compensation

(21.7)

12.0

—

—

—

—

(9.7)

Loss on disposal of assets

(0.9)

—

—

—

—

—

(0.9)

Transaction costs

(1.0)

—

—

1.0

—

—

—

SARs mark-to-market impact on noncontrolling interests

0.9

(0.9)

—

—

—

—

—

Gain on consolidation of Yuma

19.2

—

—

—

(19.2)

—

—

Payroll taxes on SARs exercise

(0.8)

—

—

—

—

0.8

—

Income from continuing operations before income tax expense

131.9

11.1

—

1.0

(19.2)

0.8

125.6

Provision for income tax expense

(34.3)

(3.0)

(0.2)

(0.2)

5.2

(0.2)

(32.7)

Income from continuing operations attributable to Encompass Health

$

97.6

$

8.1

$

(0.2)

$

0.8

$

(14.0)

$

0.6

$

92.9

Diluted earnings per share from continuing operations⁽²⁾

$

0.98

$

0.08

$

—

$

0.01

$

(0.14)

$

0.01

$

0.93

Diluted shares used in calculation

99.4

⁽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 September 30, 2018

Adjustments

As Reported

Mark-to-Market
Adjustment for
Stock Compensation
Expense

Income Tax Adjustments

Change in Fair MarketValue of
Equity Securities

As Adjusted

(In Millions, Except Per Share Amounts)

Adjusted EBITDA⁽¹⁾

$

224.3

$

—

$

—

$

—

$

224.3

Depreciation and amortization

(51.2)

—

—

—

(51.2)

Interest expense and amortization of debt discounts and fees

(37.3)

—

—

—

(37.3)

Stock-based compensation

(18.1)

4.2

—

—

(13.9)

Gain on disposal of assets

1.0

—

—

—

1.0

SARs mark-to-market impact on noncontrolling interests

0.3

(0.3)

—

—

—

Change in fair market value of equity securities

(0.1)

—

—

0.1

—

Income from continuing operations before income tax expense

118.9

3.9

—

0.1

122.9

Provision for income tax expense

(30.2)

(1.1)

(0.7)

—

(32.0)

Income from continuing operations attributable to Encompass Health

$

88.7

$

2.8

$

(0.7)

$

0.1

$

90.9

Diluted earnings per share from continuing operations⁽²⁾

$

0.89

$

0.03

$

(0.01)

$

—

$

0.91

Diluted shares used in calculation

100.0

⁽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 Nine Months Ended September 30, 2018

Adjustments

As Reported

Mark-to-Market Adjustment for Stock Compensation Expense

Income Tax Adjustments

Transaction Costs

Change in Fair Market Value of Equity Securities

As Adjusted

(In Millions, Except Per Share Amounts)

Adjusted EBITDA⁽¹⁾

$

679.2

$

—

$

—

$

—

$

—

$

679.2

Depreciation and amortization

(146.8)

—

—

—

—

(146.8)

Interest expense and amortization of debt discounts and fees

(110.6)

—

—

—

—

(110.6)

Stock-based compensation

(65.6)

26.6

—

—

—

(39.0)

Loss on disposal of assets

(2.2)

—

—

—

—

(2.2)

Transaction costs

(1.0)

—

—

1.0

—

—

SARs mark-to-market impact on noncontrolling interests

2.2

(2.2)

—

—

—

—

Change in fair market value of equity securities

(1.1)

—

—

—

1.1

—

Income from continuing operations before income tax expense

354.1

24.4

—

1.0

1.1

380.6

Provision for income tax expense

(89.5)

(6.8)

(1.4)

(0.3)

(0.3)

(98.3)

Income from continuing operations attributable to Encompass Health

$

264.6

$

17.6

$

(1.4)

$

0.7

$

0.8

$

282.3

Diluted earnings per share from continuing operations⁽²⁾

$

2.65

$

0.18

$

(0.01)

$

0.01

$

0.01

$

2.83

Diluted shares used in calculation

99.7

⁽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
Reconciliation of Net Income to Adjusted EBITDA

Three Months Ended
September 30,

Nine Months Ended
September 30,

2019

2018

2019

2018

(In Millions)

Net income

$

119.5

$

109.3

$

355.6

$

327.7

Loss from discontinued operations, net of tax, attributable
  to Encompass Health

—

0.1

0.6

0.4

Net income attributable to noncontrolling interests

(21.9)

(20.7)

(64.5)

(63.5)

Provision for income tax expense

34.3

30.2

88.6

89.5

Interest expense and amortization of debt discounts and fees

40.3

37.3

115.2

110.6

Depreciation and amortization

55.1

51.2

160.3

146.8

Loss on early extinguishment of debt

—

—

2.3

—

Loss (gain) on disposal of assets

0.9

(1.0)

3.3

2.2

Stock-based compensation expense

21.7

18.1

87.0

65.6

Transaction costs

1.0

—

2.0

1.0

Gain on consolidation of Yuma

(19.2)

—

(19.2)

—

SARs mark-to-market impact on noncontrolling interests

(0.9)

(0.3)

(4.3)

(2.2)

Change in fair market value of equity securities

—

0.1

(1.2)

1.1

Payroll taxes on SARs exercise

0.8

—

1.0

—

Adjusted EBITDA

$

231.6

$

224.3

$

726.7

$

679.2

Reconciliation of Segment Adjusted EBITDA to
Income from Continuing Operations Before Income Tax Expense

Three Months Ended September 30,

Nine Months Ended September 30,

Year Ended December 31,

2019

2018

2019

2018

2018

(In Millions)

Total segment Adjusted EBITDA

$

261.4

$

256.1

$

820.7

$

778.5

$

1,034.3

General and administrative expenses

(52.5)

(49.9)

(183.0)

(165.9)

(220.2)

Depreciation and amortization

(55.1)

(51.2)

(160.3)

(146.8)

(199.7)

(Loss) gain on disposal of assets

(0.9)

1.0

(3.3)

(2.2)

(5.7)

Government, class action, and related settlements

—

—

—

—

(52.0)

Loss on early extinguishment of debt

—

—

(2.3)

—

—

Interest expense and amortization of debt discounts and fees

(40.3)

(37.3)

(115.2)

(110.6)

(147.3)

Net income attributable to noncontrolling interests

21.9

20.7

64.5

63.5

83.1

SARs mark-to-market impact on noncontrolling interests

0.9

0.3

4.3

2.2

2.6

Change in fair market value of equity securities

—

(0.1)

1.2

(1.1)

(1.9)

Gain on consolidation of Yuma

19.2

—

19.2

—

—

Payroll taxes on SARs exercise

(0.8)

—

(1.0)

—

—

Income from continuing operations before income tax expense

$

153.8