Encompass Health (US:EHC)2024-05-01 22:01PART I Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements for Q1 2024, detailing financial performance including a 13.4% increase in net operating revenues and a 28.3% increase in net income attributable to Encompass Health - Encompass Health is a provider of inpatient rehabilitation services, operating 160 inpatient rehabilitation hospitals across 37 states and Puerto Rico as of March 31, 202430 Condensed Consolidated Statements of Comprehensive Income (Q1 2024 vs Q1 2023) | Metric | Three Months Ended March 31, 2024 (In Millions) | Three Months Ended March 31, 2023 (In Millions) | | :--- | :--- | :--- | | Net operating revenues | $1,316.0 | $1,160.4 | | Income from continuing operations | $140.1 | $114.3 | | Net income attributable to Encompass Health | $112.5 | $87.7 | | Diluted EPS (Continuing operations) | $1.11 | $0.88 | Condensed Consolidated Balance Sheet Highlights | Metric | March 31, 2024 (In Millions) | December 31, 2023 (In Millions) | | :--- | :--- | :--- | | Total current assets | $929.8 | $841.8 | | Total assets | $6,231.4 | $6,102.4 | | Total current liabilities | $680.3 | $656.4 | | Total liabilities | $3,828.0 | $3,805.2 | | Total shareholders' equity | $2,362.3 | $2,255.2 | Condensed Consolidated Statements of Cash Flows | Metric | Three Months Ended March 31, 2024 (In Millions) | Three Months Ended March 31, 2023 (In Millions) | | :--- | :--- | :--- | | Net cash provided by operating activities | $238.8 | $227.9 | | Net cash used in investing activities | $(129.7) | $(104.0) | | Net cash used in financing activities | $(40.6) | $(58.0) | Net Operating Revenues by Payor Source (Q1 2024 vs Q1 2023) | Payor Source | 2024 (In Millions) | 2023 (In Millions) | | :--- | :--- | :--- | | Medicare | $854.1 | $757.7 | | Medicare Advantage | $223.8 | $186.2 | | Managed care | $142.8 | $127.1 | | Total | $1,316.0 | $1,160.4 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2024 financial results, highlighting 13.4% revenue growth driven by volume, while addressing regulatory challenges and maintaining strong liquidity for operations and capital returns Executive Overview The company reported a 13.4% increase in net operating revenues for Q1 2024, driven by volume growth and ongoing capacity expansion through new bed additions and hospital developments - Net operating revenues increased 13.4% in Q1 2024 compared to Q1 2023, driven by volume growth65 - In 2024, the company continued its capacity expansion by adding 51 new beds to existing hospitals66 New Hospital Development Pipeline | Location | Expected Opening Year | Number of New Beds | | :--- | :--- | :--- | | Kissimmee, FL | 2024 | 50 | | Atlanta, GA (JV) | 2024 | 40 | | Johnston, RI | 2024 | 50 | | Daytona Beach, FL | 2025 | 50 | | Fort Myers, FL (JV) | 2025 | 60 | | Palm Beach Gardens, FL | 2026 | 50 | | Amarillo, TX | 2026 | 50 | Business Outlook and Key Challenges The company anticipates long-term demand growth from an aging population but faces challenges from healthcare regulations, including the CMS 2025 Proposed Rule and the expanding Review Choice Demonstration program, alongside competitive and labor market pressures - Long-term demand is expected to grow as the number of Medicare enrollees is projected to increase by approximately 3% annually69 - The CMS 2025 Proposed Rule for IRFs is expected to result in a net increase to the company's Medicare payment rates of approximately 3.0%, effective October 1, 202474 - The CMS Review Choice Demonstration (RCD) is expanding to states where the company has a significant presence, including Pennsylvania, Texas, and California, which will require additional claim review processes75 - Key operational challenges include maintaining strong patient volume growth against competition and recruiting and retaining high-quality personnel amid industry-wide staffing shortages78 Results of Operations Q1 2024 net operating revenues increased 13.4% to $1.316 billion, driven by higher patient discharges and revenue per discharge, leading to a 28.3% increase in net income despite an impairment charge Key Operational Metrics (Q1 2024 vs Q1 2023) | Metric | Q1 2024 | Q1 2023 | % Change | | :--- | :--- | :--- | :--- | | Discharges | 61,111 | 55,557 | 10.0% | | Net patient revenue per discharge | $20,990 | $20,415 | 2.8% | | Occupancy % | 76.7% | 73.4% | 4.5% | | Employees per occupied bed | 3.34 | 3.32 | 0.6% | - Revenue growth was driven by increased volumes, with same-store discharges increasing 6.7% and new hospitals contributing to the remainder of the growth85 - Other operating expenses increased due to higher provider taxes and a one-time impairment charge of $10.4 million related to the closure of a joint venture hospital in Eau Claire, Wisconsin88 - Salaries and benefits as a percentage of revenue slightly decreased from 54.2% to 54.1%, primarily due to lower contract labor usage and reduced sign-on/shift bonuses8287 Liquidity and Capital Resources The company maintains strong liquidity with $134.4 million in cash and $964 million available under its revolving credit facility, supporting planned $580-$610 million capital expenditures and continued shareholder returns through dividends and repurchases - As of March 31, 2024, the company had $134.4 million in cash and cash equivalents and approximately $964 million available under its revolving credit facility101102 Cash Flow Summary (Q1 2024 vs Q1 2023) | Activity | Q1 2024 (In Millions) | Q1 2023 (In Millions) | | :--- | :--- | :--- | | Net cash provided by operating activities | $238.8 | $227.9 | | Net cash used in investing activities | $(129.7) | $(104.0) | | Net cash used in financing activities | $(40.6) | $(58.0) | - The company expects to spend approximately $580 million to $610 million on capital expenditures in 2024110 - The company declared a cash dividend of $0.15 per share and has approximately $198 million remaining under its stock repurchase authorization as of March 31, 2024111113 Adjusted EBITDA Adjusted EBITDA, a key non-GAAP liquidity measure for credit agreement covenants, increased significantly to $273.0 million in Q1 2024 from $229.0 million in Q1 2023, with detailed reconciliations provided Reconciliation of Net Income to Adjusted EBITDA | Metric | Three Months Ended March 31, 2024 (In Millions) | Three Months Ended March 31, 2023 (In Millions) | | :--- | :--- | :--- | | Net income | $138.8 | $113.3 | | Provision for income tax expense | $38.3 | $31.9 | | Interest expense and amortization | $35.2 | $36.4 | | Depreciation and amortization | $70.3 | $63.9 | | Adjusted EBITDA | $273.0 | $229.0 | - Adjusted EBITDA is a critical liquidity measure used to assess compliance with material covenants in the company's credit agreement, such as the leverage ratio and interest coverage ratio118119 Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of March 31, 2024, with no material changes to internal control over financial reporting during the quarter - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of March 31, 2024130 - There were no material changes to the company's Internal Control over Financial Reporting during the first quarter of 2024131 PART II Legal Proceedings The company is subject to various legal actions, governmental audits, and potential undisclosed qui tam lawsuits under the False Claims Act, common in the highly regulated healthcare industry - In the ordinary course of business, the company is subject to regulatory audits, investigations, and various legal actions, including employment and personal injury claims134 - The company acknowledges the possibility of undisclosed qui tam lawsuits filed against it under the False Claims Act, which allows private citizens to sue on behalf of the government135 Risk Factors No material changes to risk factors from the 2023 Annual Report on Form 10-K are reported, with relevant updates incorporated by reference from the 'Key Challenges' section of the MD&A - There have been no material changes from the risk factors disclosed in the Annual Report on Form 10-K for the year ended December 31, 2023137 - The report incorporates by reference the discussion in the "Executive Overview—Key Challenges" section of the MD&A for updates to risk factors137 Unregistered Sales of Equity Securities and Use of Proceeds In Q1 2024, the company repurchased 176,390 shares at an average price of $69.86, primarily for tax liabilities on vested stock awards, with $198 million remaining under the repurchase authorization Purchases of Equity Securities (Q1 2024) | Period | Total Number of Shares Purchased | Average Price Paid per Share ($) | | :--- | :--- | :--- | | January 2024 | 111,761 | $66.77 | | February 2024 | 64,410 | $75.17 | | March 2024 | 219 | $82.58 | | Total | 176,390 | $69.86 | - As of March 31, 2024, approximately $198 million remained under the company's common stock repurchase authorization, which was reset to $250 million in July 2018140 Other Information No new or modified insider trading arrangements under Item 408(a) of Regulation S-K were reported during the quarter - The company reported no insider trading arrangements for the period141 Exhibits This section refers to the Exhibit Index, listing all documents filed as part of the quarterly report, including CEO/CFO certifications and XBRL data files - Refers to the Exhibit Index for a list of all exhibits filed with the Form 10-Q142