Encompass Health reports results for third quarter 2020

Consolidated results

Growth

Q3 2020

Q3 2019

Dollars

Percent

(In Millions, Except per Share Data)

Net operating revenues

$

1,173.9

$

1,161.6

$

12.3

1.1

%

Income from continuing operations attributable to Encompass Health per diluted share

0.78

0.98

(0.20)

(20.4)

%

Adjusted earnings per share

0.78

0.93

(0.15)

(16.1)

%

Cash flows provided by operating activities

173.4

114.4

59.0

51.6

%

Adjusted EBITDA

230.2

231.6

(1.4)

(0.6)

%

Adjusted free cash flow

124.1

109.6

14.5

13.2

%

Nine Months Ended
September 30,

2020

2019

Cash flows provided by operating activities

$

425.0

$

419.7

$

5.3

1.3

%

Adjusted free cash flow

366.9

379.6

(12.7)

(3.3)

%

Inpatient rehabilitation segment results

Growth

Q3 2020

Q3 2019

Dollars

Percent

Net operating revenues:

(In Millions)

Inpatient

$

883.2

$

850.6

$

32.6

3.8

%

Outpatient and other

16.2

21.7

(5.5)

(25.3)

%

Total segment revenue

$

899.4

$

872.3

$

27.1

3.1

%

(Actual Amounts)

Discharges

45,962

46,669

(707)

(1.5)

%

Same-store discharge growth

(2.8)

%

Net patient revenue per discharge

$

19,216

$

18,226

$

990

5.4

%

Revenue reserves related to bad debt as a percent of revenue

1.4

%

1.5

%

(10 basis points)

(In Millions)

Adjusted EBITDA

$

209.2

$

210.6

$

(1.4)

(0.7)

%

•

Revenue - Inpatient revenue growth resulted from favorable pricing partially offset by decreased volumes. New-store discharge growth of 1.3% resulted from joint ventures in Boise, Idaho (July 2019) and Coralville, Iowa (June 2020) and wholly owned hospitals in Katy, Texas (September 2019) Murrieta, California (February 2020) and Sioux Falls, South Dakota (June 2020). Growth in net patient revenue per discharge primarily resulted from a higher acuity patient mix and the temporary suspension of sequestration.

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.

Revenue reserves related to bad debt as a percent of revenue decreased to 1.4% as Medicare Administrative Contractors did not resume targeted probe and educate audits during the third quarter of 2020.

•

Adjusted EBITDA - The decrease in Adjusted EBITDA primarily related to the COVID-19 pandemic.

Home health and hospice segment results

Growth

Q3 2020

Q3 2019

Dollars

Percent

Net operating revenues:

(In Millions)

Home health

$

223.3

$

238.9

$

(15.6)

(6.5)

%

Hospice

51.2

50.4

0.8

1.6

%

Total segment revenue

$

274.5

$

289.3

$

(14.8)

(5.1)

%

Home Health Metrics

(Actual Amounts)

Admissions

40,765

42,174

(1,409)

(3.3)

%

Same-store admissions growth

(4.6)

%

Episodes

68,261

72,016

(3,755)

(5.2)

%

Same-store episode growth

(6.2)

%

Revenue per episode

$

2,910

$

2,980

$

(70)

(2.3)

%

(In Millions)

Adjusted EBITDA

$

51.8

$

50.8

$

1.0

2.0

%

•

Revenue - Decreased volumes and pricing resulted in a decline in home health revenue. New-store admissions growth primarily resulted from one acquired location in Virginia (Q1 2020) and one de novo location in Florida (Q2 2020). 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 2.3% was favorably impacted by the temporary suspension of sequestration and an increase in new episode starts late in the quarter.

Hospice same-store admissions growth of 15.8% yielded a 1.6% increase in hospice revenue. Hospice revenue growth was impacted by a decrease in length of say resulting from a change in patient mix.

•

Adjusted EBITDA - The increase in Adjusted EBITDA primarily resulted from a decrease in cost of services as a percent of revenue in the third quarter of 2020. Cost of services decreased as a percent of revenue primarily due to changes in the clinician compensation structure implemented in May 2020. The segment's support and overhead costs increased year over year due to an increase in sales force full-time equivalents and increased administrative costs associated with the implementation of PDGM and the Review Choice Demonstration program.

General and administrative expenses

Q3 2020

% of
Consolidated
Revenue

Q3 2019

% of
Consolidated
Revenue

(In Millions)

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

$

30.8

2.6%

$

29.8

2.6%

•

General and administrative expenses were flat as a percent of consolidated revenue.

Q4 2020 Guidance

(In Millions, Except
Per Share Data)

Net operating revenues

$1,150 to $1,220

Adjusted EBITDA

$225 to $240

Adjusted earnings per share from continuing operations attributable to Encompass Health

$0.79 to $0.90

Encompass Health Corporation and Subsidiaries

Supplemental Information

Earnings Per Share

Three Months Ended
September 30,

Nine Months Ended
September 30,

2020

2019

2020

2019

(In Millions, Except Per Share Data)

Consolidated Adjusted EBITDA

$

230.2

$

231.6

$

620.4

$

726.7

Depreciation and amortization

(61.2)

(55.1)

(180.7)

(160.3)

Interest expense and amortization of debt discounts and fees

(49.0)

(40.3)

(138.0)

(115.2)

Stock-based compensation expense

(8.3)

(21.7)

(25.3)

(87.0)

Loss on disposal or impairment of assets

(7.5)

(0.9)

(10.6)

(3.3)

104.2

113.6

265.8

360.9

Certain items non-indicative of ongoing operating performance:

Loss on early extinguishment of debt

—

—

—

(2.3)

Transaction costs

—

(1.0)

—

(2.0)

Gain on consolidation of former equity method location

—

19.2

2.2

19.2

SARs mark-to-market impact on noncontrolling interests

—

0.9

—

4.3

Change in fair market value of equity securities

0.4

—

0.3

1.2

Government, class action, and related settlements

—

—

(2.8)

—

Payroll taxes on SARs exercise

—

(0.8)

(1.5)

(1.0)

Pre-tax income

104.6

131.9

264.0

380.3

Income tax expense

(26.9)

(34.3)

(65.8)

(88.6)

Income from continuing operations ⁽¹⁾

$

77.7

$

97.6

$

198.2

$

291.7

Basic shares

98.7

97.8

98.5

98.1

Diluted shares

99.9

99.4

99.7

99.5

Basic earnings per share ⁽¹⁾

$

0.78

$

0.99

$

2.01

$

2.97

Diluted earnings per share ⁽¹⁾

$

0.78

$

0.98

$

1.99

$

2.94

⁽¹⁾

Income from continuing operations attributable to Encompass Health

Encompass Health Corporation and Subsidiaries

Supplemental Information

Adjusted Earnings Per Share

Q3

9 Months

2020

2019

2020

2019

Earnings per share, as reported

$

0.78

$

0.98

$

1.99

$

2.94

Adjustments, net of tax:

Government, class action, and related settlements

—

—

0.02

—

Mark-to-market adjustments for stock compensation expense

—

0.08

—

0.36

Transaction costs

—

0.01

—

0.02

Income tax adjustments

—

—

(0.05)

(0.13)

Loss on early extinguishment of debt

—

—

—

0.02

Change in fair market value of equity securities

—

—

—

(0.01)

Gain on consolidation of former equity method location

—

(0.14)

(0.02)

(0.14)

Payroll taxes on SARs exercise

—

0.01

0.01

0.01

Adjusted earnings per share⁽¹⁾

$

0.78

$

0.93

$

1.96

$

3.05

⁽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, 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⁾

$

230.2

$

—

$

—

$

230.2

Depreciation and amortization

(61.2)

—

—

(61.2)

Interest expense and amortization of debt discounts and fees

(49.0)

—

—

(49.0)

Stock-based compensation

(8.3)

—

—

(8.3)

Loss on disposal or impairment of assets

(7.5)

—

—

(7.5)

Change in fair market value of equity securities

0.4

—

(0.4)

—

Income from continuing operations before income tax expense

104.6

—

(0.4)

104.2

Provision for income tax expense

(26.9)

0.1

0.1

(26.7)

Income from continuing operations attributable to Encompass Health

$

77.7

$

0.1

$

(0.3)

$

77.5

Diluted earnings per share from continuing operations⁽²⁾

$

0.78

$

—

$

—

$

0.78

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 September 30, 2019

Adjustments

As
Reported

Mark-to-
Market
Adjustment
for Stock
Compensation
Expense

Income Tax
Adjustments

Transaction
Costs

Gain on
Consolidation
of Yuma

Payroll
Taxes on
SARs
xercise

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 Nine Months Ended September 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⁾

620.4

—

—

—

—

—

$

620.4

Depreciation and amortization

(180.7)

—

—

—

—

—

(180.7)

Government, class action and related settlements

(2.8)

2.8

—

—

—

—

—

Interest expense and amortization of debt discounts and fees

(138.0)

—

—

—

—

—

(138.0)

Stock-based compensation

(25.3)

—

—

—

—

—

(25.3)

Loss on disposal or impairment of assets

(10.6)

—

—

—

—

—

(10.6)

Change in fair market value of equity securities

0.3

—

—

(0.3)

—

—

—

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

264.0

2.8

—

(0.3)

(2.2)

1.5

265.8

Provision for income tax expense

(65.8)

(0.7)

(4.6)

0.1

0.6

(0.4)

(70.8)

Income from continuing operations attributable to Encompass Health

$

198.2

$

2.1

$

(4.6)

$

(0.2)

$

(1.6)

$

1.1

$

195.0

Diluted earnings per share from continuing operations⁽²⁾

$

1.99

$

0.02

$

(0.05)

$

—

$

(0.02)

$

0.01

$

1.96

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

Adjusted Earnings Per Share

For the Nine Months Ended September 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

Gain on
Consolidation
of Yuma

Payroll
Taxes
on SARs
Exercise

As
Adjusted

(In Millions, Except Per Share Amounts)

Adjusted EBITDA⁽¹⁾

$

726.7

$

—

$

—

$

—

$

—

$

—

$

—

$

—

$

726.7

Depreciation and amortization

(160.3)

—

—

—

—

—

—

—

(160.3)

Loss on early extinguishment of debt

(2.3)

—

2.3

—

—

—

—

—

—

Interest expense and amortization of debt discounts and fees

(115.2)

—

—

—

—

—

—

—

(115.2)

Stock-based compensation

(87.0)

53.0

—

—

—

—

—

—

(34.0)

Loss on disposal of assets

(3.3)

—

—

—

—

—

—

—

(3.3)

Transaction costs

(2.0)

—

—

—

2.0

—

—

—

—

SARs mark-to-market impact on noncontrolling interests

4.3

(4.3)

—

—

—

—

—

—

—

Change in fair market value of equity securities

1.2

—

—

—

—

(1.2)

—

—

—

Gain on consolidation of Yuma

19.2

—

—

—

—

—

(19.2)

—

Payroll taxes on SARs exercise

(1.0)

—

—

—

—

—

—

1.0

—

Income from continuing operations before income tax expense

380.3

48.7

2.3

—

2.0

(1.2)

(19.2)

1.0

413.9

Provision for income tax expense

(88.6)

(13.2)

(0.6)

(12.6)

(0.5)

0.3

5.2

(0.2)

(110.2)

Income from continuing operations attributable to Encompass Health

$

291.7

$

35.5

$

1.7

$

(12.6)

$

1.5

$

(0.9)

$

(14.0)

$

0.8

$

303.7

Diluted earnings per share from continuing operations⁽²⁾

$

2.94

$

0.36

$

0.02

$

(0.13)

$

0.02

$

(0.01)

$

(0.14)

$

0.01

$

3.05

Diluted shares used in calculation

99.5

⁽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,

2020

2019

2020

2019

(In Millions)

Net income

$

100.1

$

119.5

$

257.1

$

355.6

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

—

—

—

0.6

Net income attributable to noncontrolling interests

(22.4)

(21.9)

(58.9)

(64.5)

Provision for income tax expense

26.9

34.3

65.8

88.6

Interest expense and amortization of debt discounts and fees

49.0

40.3

138.0

115.2

Government, class action, and related settlements

—

—

2.8

—

Depreciation and amortization

61.2

55.1

180.7

160.3

Loss on early extinguishment of debt

—

—

—

2.3

Loss on disposal or impairment of assets

7.5

0.9

10.6

3.3

Stock-based compensation expense

8.3

21.7

25.3

87.0

Transaction costs

—

1.0

—

2.0

Gain on consolidation of former equity method location

—

(19.2)

(2.2)

(19.2)

SARs mark-to-market impact on noncontrolling interests

—

(0.9)

—

(4.3)

Change in fair market value of equity securities

(0.4)

—

(0.3)

(1.2)

Payroll taxes on SARs exercise

—

0.8

1.5

1.0

Adjusted EBITDA

$

230.2