Enhabit(EHAB) - 2023 Q4 - Annual Report

Part I Business Enhabit, Inc. is a leading U.S. provider of home health and hospice services, strategically focused on organic growth, Medicare Advantage contracts, and exploring strategic alternatives - Enhabit is the fourth-largest provider of home health services and a leading provider of hospice services in the U.S. by 2022 Medicare revenues, operating 255 home health and 110 hospice locations across 34 states as of December 31, 2023[17] Segment Revenue Contribution (FY 2023) | Segment | Net Service Revenue (in millions) | Percentage of Total | | :--- | :--- | :--- | | Home Health | $850.1 | 81.2% | | Hospice | $196.2 | 18.8% | Revenue Sources by Payor (FY 2021-2023) | Payor | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Medicare | 71.5% | 78.4% | 81.9% | | Medicare Advantage | 19.0% | 14.2% | 10.6% | | Managed care | 8.2% | 6.1% | 5.9% | | Medicaid | 1.2% | 1.2% | 1.4% | | Other | 0.1% | 0.1% | 0.2% | | Total | 100.0% | 100.0% | 100.0% | - The company's growth strategy includes driving organic growth, executing a de novo strategy (41 new locations since 2015), creating revenue opportunities through improved Medicare Advantage contracts, and leveraging care transition expertise[43][45][46] - On August 23, 2023, the company announced an ongoing formal process to explore strategic alternatives, including a potential sale or merger, with no set timetable[51] - The company utilizes an electronic medical records system and a predictive analytics platform to improve patient care, manage workflows, and identify patients at risk for hospitalization[138][141] Risk Factors The company faces significant risks from Medicare reimbursement changes, complex healthcare regulations, operational challenges including staffing and competition, and uncertainties related to its spin-off and ongoing strategic alternatives review - Reimbursement Risks: The company's revenue is heavily dependent on Medicare, facing risks from rate reductions, sequestration, and future PDGM adjustments that could significantly decrease payments[145][148][150] - Regulatory Risks: Compliance with extensive healthcare laws like the Anti-Kickback Statute and FCA is critical, as non-compliance can lead to significant penalties, fines, and exclusion from federal programs amidst aggressive enforcement[181][184][185] - Operational & Financial Risks: Key risks include potential cybersecurity breaches, intense competition from other providers including large insurance companies, and shortages of qualified clinical personnel increasing staffing costs and reducing profitability[189][196][203] - Goodwill Impairment Risk: The company holds $1.1 billion in goodwill as of December 31, 2023, with impairment charges of $85.8 million (hospice) in 2023 and $109.0 million (home health) in 2022, indicating a risk of future impairments[222] - Separation from Encompass Risks: The tax-free status of the 2022 spin-off could be jeopardized by certain strategic transactions, potentially incurring significant tax liabilities and restricting mergers or equity issuances until July 2024[229] - Strategic Alternatives Risks: The ongoing review of strategic alternatives, announced in August 2023, is costly, time-consuming, and creates uncertainty, potentially diverting management attention and negatively impacting stock price without assurance of a transaction[232][233][234] Unresolved Staff Comments The company reports no unresolved staff comments - The company reports no unresolved staff comments[243] Cybersecurity Enhabit manages cybersecurity risk via a NIST-guided program, overseen by the Board's committee and led by the CIO, focusing on awareness, monitoring, and incident response, with no material impact from past threats - The company's cybersecurity program is structured around the National Institute of Standards and Technology (NIST) Cybersecurity Framework[245] - The Board of Directors delegates cybersecurity oversight to the Care, Compliance, and Cybersecurity Committee, with the Chief Information Officer (CIO) leading the program and reporting quarterly[244][247][249] - To date, experienced threats like malware and virus attacks have not materially affected the company's business, financial position, or operations[252] Properties As of December 31, 2023, Enhabit operates from its Dallas headquarters and 292 leased agency offices, with 255 home health and 110 hospice locations across 34 states, including 33% in CON states - The company's principal executive office is in Dallas, Texas, supplemented by 292 leased agency offices as of December 31, 2023, typically small with lease terms of five years or less[253][254] Locations by State (Top 3) | State | Home Health Locations | Hospice Locations | Total | | :--- | :--- | :--- | :--- | | Texas | 51 | 23 | 74 | | Alabama | 29 | 27 | 56 | | Florida | 23 | 0 | 23 | - Approximately 33% of the company's home health and hospice locations are in states with Certificate of Need (CON) laws, which can pose a barrier to entry or expansion[103] Legal Proceedings Enhabit is involved in routine legal actions and audits, with no currently material pending proceedings, but acknowledges the risk of undisclosed "qui tam" lawsuits - In the ordinary course of business, the company is a party to various legal actions, proceedings, and governmental audits, with management not believing any pending legal proceedings are currently material[258] - The company acknowledges the possibility of existing "qui tam" actions filed under the False Claims Act that may be under seal and unknown to the company[260] Mine Safety Disclosures This item is not applicable - The company reports that this item is not applicable[261] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Enhabit's common stock trades on the NYSE under "EHAB", with no anticipated cash dividends, and the company repurchased shares in Q4 2023 for employee tax obligations - The company's common stock is listed on the NYSE under the symbol "EHAB"[263] - The company has not declared or paid any cash dividends and does not anticipate doing so in the foreseeable future[264] - In Q4 2023, the company repurchased 12,076 shares to satisfy employee tax-withholding obligations from vested stock awards[265] Reserved This item is reserved Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) In FY2023, Enhabit's net service revenue decreased by 2.3% to $1.046 billion, resulting in an $80.5 million net loss and reduced Adjusted EBITDA, alongside an $85.8 million goodwill impairment and credit facility amendments Consolidated Results of Operations (in Millions) | Metric | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | Net service revenue | $1,046.3 | $1,071.1 | (2.3)% | | Operating (loss) income | $(47.6) | $(11.4) | 317.5% | | Impairment of goodwill | $85.8 | $109.0 | (21.3)% | | Net (loss) attributable to Enhabit | $(80.5) | $(40.4) | 99.3% | Adjusted EBITDA Reconciliation (in Millions) | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net (loss) income | $(79.0) | $(38.3) | $112.9 | | Adjusted EBITDA | $97.6 | $149.3 | $197.2 | - The company's credit facilities were amended in June and November 2023, increasing the maximum permitted total net leverage ratio and permanently reducing the revolving credit facility commitment from $350.0 million to $220.0 million[326][330] - Critical accounting estimates include revenue recognition, where a shift to Medicare Advantage payors has increased collection complexity, and goodwill valuation, where Q2 and Q3 2023 impairment tests indicated fair value was close to carrying value for both reporting units[347][357][358] Segment Results of Operations In FY2023, Home Health revenue decreased 3.1% to $850.1 million with a 16.3% EBITDA drop, while Hospice revenue grew 1.1% to $196.2 million but saw a 6.0% EBITDA decrease due to higher labor costs Home Health Segment Performance (FY 2023 vs 2022) | Metric | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | Net Service Revenue | $850.1M | $877.1M | (3.1)% | | Segment Adjusted EBITDA | $169.3M | $202.2M | (16.3)% | | Total Admissions | 207,448 | 202,495 | 2.4% | | Cost per Visit | $91 | $89 | 2.2% | Hospice Segment Performance (FY 2023 vs 2022) | Metric | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | Net Service Revenue | $196.2M | $194.0M | 1.1% | | Segment Adjusted EBITDA | $36.1M | $38.4M | (6.0)% | | Average Daily Census | 3,441 | 3,519 | (2.2)% | | Cost per Patient Day | $77 | $70 | 10.0% | Liquidity and Capital Resources As of December 31, 2023, Enhabit had $27.4 million cash and $33.4 million available credit, having amended its credit facility twice in 2023 to ensure covenant compliance despite decreased operating cash flow - The company amended its credit facilities in June and November 2023, increasing the maximum permitted Total Net Leverage Ratio to 6.75x for Q4 2023 and reducing the Revolving Credit Facility commitment to $220 million[326][330] - As of December 31, 2023, the company was in compliance with its financial covenants, with forecasted results indicating continued compliance for one year from the financial statement issuance date[332] Cash Flow Summary (in Millions) | Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $48.4 | $80.1 | | Net cash used in investing activities | $(5.3) | $(42.3) | | Net cash used in financing activities | $(40.5) | $(18.6) | Critical Accounting Estimates Critical accounting estimates involve significant judgment in revenue recognition, complicated by Medicare Advantage shifts, and goodwill valuation, where recent impairment tests showed fair values close to carrying values, indicating high sensitivity - Revenue Recognition: Estimating the transaction price is complex due to various allowances and potential adjustments, with a growing shift to Medicare Advantage payors slowing collections and increasing complexity[344][347] - Goodwill: Goodwill is tested for impairment annually, with a Q2 2023 quantitative analysis resulting in an $85.8 million impairment charge for the hospice unit, and Q3 2023 tests showing fair values of both units exceeded carrying values by less than 7% and 5%, indicating high future impairment risk[352][362][363] - Income Taxes: The company makes subjective judgments regarding income tax exposures and deferred tax asset realizability, with no valuation allowance recorded as of December 31, 2023[365][368] Quantitative and Qualitative Disclosures About Market Risks The company's primary market risk is interest rate changes on its variable-rate debt, mitigated by a $200.0 million interest rate swap, with a 1% rate change impacting cash flow by approximately $3.5 million - The primary market risk is interest rate changes on variable-rate debt, totaling $547.1 million as of December 31, 2023[378] - The company uses a $200.0 million notional value interest rate swap, maturing in October 2025, to hedge a portion of its cash flow risk from variable-rate debt[378] - A hypothetical 1% change in interest rates would result in an approximate $3.5 million change in cash flow over the next 12 months[378] Financial Statements and Supplementary Data This section indicates that the company's audited consolidated financial statements and related notes are appended to the Annual Report, as indexed in Item 15 - The required financial statements and supplementary data are appended to the Annual Report and indexed in Item 15[381] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None reported - The company reports no changes in or disagreements with its accountants on accounting and financial disclosure[382] Controls and Procedures As of December 31, 2023, management concluded that disclosure controls and internal control over financial reporting were effective, following the successful remediation of three material weaknesses related to accounts receivable and goodwill impairment - Management concluded that as of December 31, 2023, the company's disclosure controls and procedures and its internal control over financial reporting were effective[384][386] - The company successfully remediated three previously reported material weaknesses as of December 31, 2023[388][391] - The remediated material weaknesses related to controls over monitoring accounts receivable recoverability, identifying goodwill impairment triggering events, and determining carrying amount and measuring potential goodwill impairment[389][390] Other Information None reported - The company reports no other information[393] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections Not applicable - The company reports that this item is not applicable[394] Part III Directors, Executive Officers, and Corporate Governance Information for this item is incorporated by reference from the company's definitive proxy statement for its 2024 Annual Meeting of stockholders - Information is incorporated by reference from the 2024 proxy statement[397] Executive Compensation Information for this item is incorporated by reference from the company's definitive proxy statement for its 2024 Annual Meeting of stockholders - Information is incorporated by reference from the 2024 proxy statement[398] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information for this item is incorporated by reference from the company's definitive proxy statement for its 2024 Annual Meeting of stockholders - Information is incorporated by reference from the 2024 proxy statement[399] Certain Relationships and Related Transactions, and Director Independence Information for this item is incorporated by reference from the company's definitive proxy statement for its 2024 Annual Meeting of stockholders - Information is incorporated by reference from the 2024 proxy statement[400] Principal Accountant Fees and Services Information for this item is incorporated by reference from the company's definitive proxy statement for its 2024 Annual Meeting of stockholders - Information is incorporated by reference from the 2024 proxy statement[401] Part IV Exhibit and Financial Statement Schedules This section provides an index to the audited consolidated financial statements and lists all exhibits filed with the Form 10-K, including the auditor's report and core financial statements - This section contains the index to the company's audited consolidated financial statements and a list of all filed exhibits[404][406] Report of Independent Registered Public Accounting Firm PricewaterhouseCoopers LLP issued unqualified opinions on Enhabit's FY2023 financial statements and internal controls, highlighting goodwill impairment and accounts receivable valuation as Critical Audit Matters due to significant judgment - PricewaterhouseCoopers LLP issued unqualified opinions on both the consolidated financial statements and the effectiveness of internal control over financial reporting as of December 31, 2023[410] - The audit identified two Critical Audit Matters (CAMs): interim goodwill impairment assessments due to significant management judgment in estimating fair value, and valuation of accounts receivable due to significant judgment in estimating price concessions and uncollectible amounts[419][425] - The auditor's report includes an Emphasis of Matter paragraph highlighting the November 2023 amendment to the company's credit facility covenants[414] Consolidated Financial Statements For FY2023, Enhabit reported a $79.0 million net loss on $1.046 billion revenue, with total assets decreasing to $1.43 billion due to an $85.8 million goodwill impairment, and debt including a $367.1 million term loan and $180.0 million revolving credit facility Consolidated Income Statement Highlights (in Millions) | Line Item | 2023 | 2022 | | :--- | :--- | :--- | | Net service revenue | $1,046.3 | $1,071.1 | | Impairment of goodwill | $85.8 | $109.0 | | Net (loss) income attributable to Enhabit, Inc. | $(80.5) | $(40.4) | Consolidated Balance Sheet Highlights (in Millions) | Line Item | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $27.4 | $22.9 | | Accounts receivable, net | $164.7 | $149.6 | | Goodwill | $1,061.7 | $1,144.8 | | Total Assets | $1,433.6 | $1,526.8 | | Long-term debt, net of current portion | $530.1 | $560.0 | | Total Liabilities | $731.9 | $751.5 | | Total Stockholders' Equity | $696.7 | $770.1 | - The company recorded a goodwill impairment charge of $85.8 million for the hospice reporting unit in Q2 2023, following a $109.0 million impairment for the home health unit in Q4 2022[561][570] - As of December 31, 2023, long-term debt consisted primarily of a $367.1 million term loan and $180.0 million drawn on the revolving credit facility[578] Form 10-K Summary None provided - The company provides no summary for this item[643]