8-K
Encompass Health Corp (EHC)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (date of earliest event reported): January 26, 2021
Encompass Health Corporation
(Exact name of Registrant as specified in its Charter)
Delaware
(State or Other Jurisdiction of Incorporation)
| 001-10315 | 63-0860407 |
|---|---|
| (Commission File Number) | (IRS Employer Identification No.) |
9001 Liberty Parkway, Birmingham, Alabama 35242
(Address of Principal Executive Offices, Including Zip Code)
(205) 967-7116
(Registrant’s Telephone Number, Including Area Code)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
| ☐ | Written communication pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
|---|---|
| ☐ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| ☐ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| ☐ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 or Rule 12b-2 of the Securities Exchange Act of 1934. Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
|---|---|---|
| Common Stock, par value $0.01 per share | EHC | New York Stock Exchange |
The information contained herein is being furnished pursuant to Item 2.02 of Form 8‑K, “Results of Operations and Financial Condition,” and Item 7.01 of Form 8-K, “Regulation FD Disclosure.” This information shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or incorporated by reference in any filing under the Securities Act of 1933, as amended, (the “Securities Act”) or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing.
ITEM 2.02. Results of Operations and Financial Condition.
On January 26, 2021, Encompass Health Corporation (“Encompass Health” or the “Company”) issued a press release reporting the financial results of the Company for the three months and year ended December 31, 2020. A copy of the press release is attached to this report as Exhibit 99.1 and incorporated herein by reference.
The Company uses “same-store” comparisons to explain the changes in certain performance metrics and line items within its financial statements. Same-store comparisons are calculated based on hospitals and home health and hospice locations open throughout both the full current and prior periods presented. These comparisons include the financial results of market consolidation transactions in existing markets, as it is difficult to determine, with precision, the incremental impact of these transactions on the Company's results of operations.
ITEM 7.01. Regulation FD Disclosure.
See Item 2.02, “Results of Operations and Financial Condition,” above.
In addition, a copy of the supplemental information which will be discussed during the Company’s earnings call at 9:00 a.m. Eastern Time on Wednesday, January 27, 2021 is attached to this report as Exhibit 99.2 and incorporated herein by reference.
Note Regarding Presentation of Non-GAAP Financial Measures
The financial data contained in the press release and supplemental information include non-GAAP financial measures, including the Company’s adjusted earnings per share, leverage ratio, Adjusted EBITDA, and adjusted free cash flow.
The Company is providing adjusted earnings per share from continuing operations attributable to Encompass Health (“adjusted earnings per share”). The Company believes the presentation of adjusted earnings per share provides useful additional information to investors because it provides better comparability of ongoing operating performance to prior periods given that it excludes the impact of government, class action, and related settlements; professional fees—accounting, tax, and legal; mark-to-market adjustments for stock appreciation rights; gains or losses related to hedging and equity instruments; loss on early extinguishment of debt; adjustments to its income tax provision (such as valuation allowance adjustments and settlements of income tax claims); items related to corporate and facility restructurings; and certain other items the Company believes to be non-indicative of its ongoing operating performance. It is reasonable to expect that one or more of these excluded items will occur in future periods, but the amounts recognized can vary significantly from period to period and may not directly relate to the Company’s ongoing operating performance. Accordingly, they can complicate comparisons of the Company’s results of operations across periods and comparisons of the Company’s results to those of other healthcare companies. Adjusted earnings per share should not be considered as a measure of financial performance under generally accepted accounting principles in the United States (“GAAP”) as the items excluded from it are significant components in understanding and assessing financial performance. Because adjusted earnings per share is not a measurement determined in accordance with GAAP and is thus susceptible to varying calculations, it may not be comparable as presented to other similarly titled measures of other companies. The Company reconciles adjusted earnings per share to earnings per share in the press release attached as Exhibit 99.1 and the supplemental information attached as Exhibit 99.2.
The leverage ratio referenced therein is defined as the ratio of consolidated total debt to Adjusted EBITDA for the trailing four quarters. The Company believes its leverage ratio and Adjusted EBITDA are measures of its ability to service its debt and its ability to make capital expenditures. Additionally, the leverage ratio is a standard measurement used by investors to gauge the creditworthiness of an institution. The Company’s credit agreement also includes a maximum leverage ratio financial covenant which allows the Company to deduct up to $300 million of cash on hand from consolidated total debt. The Company reconciles Adjusted EBITDA to net income and to net cash provided by operating activities in the press release attached as Exhibit 99.1 and the supplemental information attached as Exhibit 99.2. Adjusted EBITDA for the Company’s reportable segments is reconciled to net income from continuing operations before income tax expense in the press release attached as Exhibit 99.1 and the supplemental information attached as Exhibit 99.2.
The Company uses Adjusted EBITDA on a consolidated basis as a liquidity measure. The Company believes this financial measure on a consolidated basis is important in analyzing its liquidity because it is the key component of certain material covenants contained within the Company’s credit agreement, which is discussed in more detail in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Liquidity and Capital Resources,” and Note 10, Long-term Debt, to the consolidated financial statements included in its Annual Report on Form 10‑K for the year ended December 31, 2020 (the “2020 Form 10‑K”), when filed. These covenants are material terms of the credit agreement. Noncompliance with these financial covenants under the credit agreement—its interest coverage ratio and its leverage ratio—could result in the Company’s lenders requiring the Company to immediately repay all amounts borrowed. If the Company anticipated a potential covenant violation, it would seek relief from its lenders, which would have some cost to the Company, and such relief might be on terms less favorable to those in the Company’s existing credit agreement. In addition, if the Company cannot satisfy these financial covenants, it would be prohibited under the credit agreement from engaging in certain activities, such as incurring additional indebtedness, paying common stock dividends, making certain payments, and acquiring and disposing of assets. Consequently, Adjusted EBITDA is critical to the Company’s assessment of its liquidity.
In general terms, the credit agreement definition of Adjusted EBITDA, therein referred to as “Adjusted Consolidated EBITDA,” allows the Company to add back to consolidated net income interest expense, income taxes, and depreciation and amortization and then add back to consolidated net income (1) all unusual or nonrecurring items reducing consolidated net income (of which only up to $10 million in a year may be cash expenditures), (2) any losses from discontinued operations, (3) non-ordinary course fees, costs and expenses incurred with respect to any litigation or settlement, (4) share-based compensation expense, (5) costs and expenses associated with changes in the fair value of marketable securities, (6) costs and expenses associated with the issuance or prepayment debt and acquisitions, and (7) any restructuring charges not in excess of 20% of Adjusted Consolidated EBITDA. The Company also subtracts from consolidated net income all unusual or nonrecurring items to the extent they increase consolidated net income.
The calculation of Adjusted EBITDA under the credit agreement does not require us to deduct net income attributable to noncontrolling interests or gains on fair value adjustments of hedging and equity instruments, disposal of assets and development activities. It also does not allow us to add back losses on fair value adjustments of hedging instruments or unusual or nonrecurring cash expenditures in excess of $10 million. These items and amounts, in addition to the items falling within the credit agreement’s “unusual or nonrecurring” classification, may occur in future periods, but can vary significantly from period to period and may not directly relate to, or be indicative of, the Company’s ongoing liquidity or operating performance. Accordingly, the Adjusted EBITDA calculation presented here includes adjustments for them.
Adjusted EBITDA is not a measure of financial performance under GAAP, and the items excluded from Adjusted EBITDA are significant components in understanding and assessing financial performance. Therefore, Adjusted EBITDA should not be considered a substitute for net income or cash flows from operating, investing, or financing activities. Because Adjusted EBITDA is not a measurement determined in accordance with GAAP and is thus susceptible to varying calculations, Adjusted EBITDA, as presented, may not be comparable to other similarly titled measures of other companies. Revenues and expenses are measured in accordance with the policies and procedures described in Note 1, Summary of Significant Accounting Policies, to the consolidated financial statements accompanying the 2020 Form 10-K, when filed.
The Company also uses adjusted free cash flow as an analytical indicator to assess its performance. Management believes the presentation of adjusted free cash flow provides investors an efficient means by which they can evaluate the Company’s capacity to reduce debt, pursue development activities, and return capital to its common stockholders. The calculation of adjusted free cash flow and a reconciliation of net cash provided by operating activities to adjusted free cash flow are included in the press release attached as Exhibit 99.1 and the supplemental information attached as Exhibit 99.2. This measure is not a defined measure of financial performance under GAAP and should not be considered as an alternative to net cash provided by operating activities. The Company’s definition of adjusted free cash flow is limited and does not represent residual cash flows available for discretionary spending. Because this measure is not determined in accordance with GAAP and is susceptible to varying calculations, it may not be comparable to other similarly titled measures presented by other companies. See the consolidated statements of cash flows included in the 2020 Form 10‑K, when filed, and in the press release attached as Exhibit 99.1 for the GAAP measures of cash flows from operating, investing, and financing activities.
Forward-Looking Statements
The information contained in the press release and supplemental information includes certain estimates, projections, and other forward-looking statements that involve known and unknown risks and relate to, among other things, future events, including the ongoing strategic review and its impact on the business model, outlook and guidance, the expected impact of the COVID-19 pandemic on Encompass Health’s business and financial assumptions, the Company’s business strategy, financial plans, dividend strategies or payments, effective income tax rates, plans to repurchase its debt or equity securities, future financial performance, projected business results or model, ability to return value to its shareholders, projected capital expenditures, leverage ratio, acquisition opportunities, and the impact of future legislation or regulation. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “targets,” “potential,” or “continue” or the negative of these terms or other comparable terminology. These estimates, projections, and other forward-looking statements are based on assumptions the Company believes, as of the date hereof, are reasonable. Inevitably, there will be differences between such estimates and actual results, and those differences may be material.
There can be no assurance that any estimates, projections, or forward-looking statements will be realized.
All such estimates, projections, and forward-looking statements speak only as of the date hereof. The Company undertakes no duty to publicly update or revise that information.
You are cautioned not to place undue reliance on the estimates, projections, and other forward-looking statements in this report, the press release, and supplemental information as they are based on current expectations and general assumptions and are subject to various risks, uncertainties, and other factors, including those set forth in the attached press release and in the 2020 Form 10‑K, when filed, and in other documents the Company previously filed with the SEC, many of which are beyond the Company’s control. These factors may cause actual results to differ materially from the views, beliefs, and estimates expressed herein.
ITEM 9.01. Financial Statements and Exhibits.
(d) Exhibits.
| Exhibit Number | Description |
|---|---|
| 99.1 | Press release of Encompass Health Corporation, dated January 26, 2021. |
| 99.2 | Supplemental information provided in connection with the fourth quarter 2020 earnings call of Encompass Health Corporation. |
| 104 | Cover Page Interactive Data File - the cover page iXBRL tags are embedded within the Inline XBRL document |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned hereunto duly authorized.
| ENCOMPASS HEALTH CORPORATION | ||
|---|---|---|
| By: | /S/ DOUGLAS E. COLTHARP | |
| Name: | Douglas E. Coltharp | |
| Title: | Executive Vice President and Chief Financial Officer |
Dated: January 26, 2021
Document
Exhibit 99.1
| Media Contact | January 26, 2021 |
|---|---|
| Casey Lassiter, 205 447-6410 | |
| casey.lassiter@encompasshealth.com | |
| Investor Relations Contact | |
| Crissy Carlisle, 205 970-5860 | |
| crissy.carlisle@encompasshealth.com |
Encompass Health reports results for fourth quarter 2020
and issues full-year 2021 guidance and longer term growth targets
BIRMINGHAM, Ala. - Encompass Health Corporation (NYSE: EHC), a national leader in integrated healthcare, offering facility-based and home-based patient care through its network of inpatient rehabilitation hospitals, home health agencies and hospice agencies, today reported its results of operations for the fourth quarter ended December 31, 2020.
“We are pleased with our performance in 2020, which demonstrates the resiliency of our business model,” said President and Chief Executive Officer of Encompass Health Mark Tarr. “Throughout the past year, we have continued to successfully meet the needs of our patients, employees and business partners. As we look ahead into 2021, we remain confident in our business and long-term prospects.”
Consolidated results
| Growth | ||||||||
|---|---|---|---|---|---|---|---|---|
| Q4 2020 | Q4 2019 | Dollars | Percent | |||||
| (In Millions, Except per Share Data) | ||||||||
| Net operating revenues | $ | 1,214.4 | $ | 1,184.4 | $ | 30.0 | 2.5 | % |
| Income from continuing operations attributable to Encompass Health per diluted share | 0.86 | 0.68 | 0.18 | 26.5 | % | |||
| Adjusted earnings per share | 0.93 | 0.85 | 0.08 | 9.4 | % | |||
| Cash flows provided by operating activities | 279.7 | 215.6 | 64.1 | 29.7 | % | |||
| Adjusted EBITDA | 239.9 | 238.2 | 1.7 | 0.7 | % | |||
| Adjusted free cash flow | 213.0 | 136.9 | 76.1 | 55.6 | % | |||
| Year Ended December 31, | ||||||||
| 2020 | 2019 | |||||||
| Cash flows provided by operating activities | $ | 704.7 | $ | 635.3 | 69.4 | 10.9 | % | |
| Adjusted free cash flow | 579.9 | 516.5 | 63.4 | 12.3 | % |
Revenue growth resulted from favorable pricing in the inpatient rehabilitation segment partially offset by decreased volumes in both segments and a pricing decrease in the home health and hospice segment.
The increase in income from continuing operations attributable to Encompass Health per diluted share and adjusted earnings per share in 2020 resulted primarily from decreased stock-based compensation resulting from the final exercise of the Home Health Holdings stock appreciation rights in the first quarter of 2020.
The increase in full-year cash flows provided by operating activities and adjusted free cash flow resulted primarily from a decrease in working capital and lower payments for cash taxes.
See attached supplemental information for calculations of non-GAAP measures and reconciliations to their most comparable GAAP measure.
Inpatient rehabilitation segment results
| Growth | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Q4 2020 | Q4 2019 | Dollars | Percent | |||||||
| Net operating revenues: | (In Millions) | |||||||||
| Inpatient | $ | 914.9 | $ | 873.5 | $ | 41.4 | 4.7 | % | ||
| Outpatient and other | 18.2 | 23.2 | (5.0) | (21.6) | % | |||||
| Total segment revenue | $ | 933.1 | $ | 896.7 | $ | 36.4 | 4.1 | % | ||
| (Actual Amounts) | ||||||||||
| Discharges | 46,503 | 47,885 | (1,382) | (2.9) | % | |||||
| Same-store discharge growth | (3.8) | % | ||||||||
| Net patient revenue per discharge | $ | 19,674 | $ | 18,242 | $ | 1,432 | 7.9 | % | ||
| Revenue reserves related to bad debt as a percent of revenue | 2.2 | % | 1.7 | % | 50 basis points | |||||
| (In Millions) | ||||||||||
| Adjusted EBITDA | $ | 218.0 | $ | 225.1 | $ | (7.1) | (3.2) | % |
•Revenue - Inpatient revenue growth resulted from favorable pricing partially offset by decreased volumes. New-store discharge growth of 0.9% resulted from a joint venture in Coralville, Iowa (June 2020) and wholly owned hospitals in Murrieta, California (February 2020) and Sioux Falls, South Dakota (June 2020). Discharge growth was impacted by limitations on elective procedures and capacity and staffing constraints at certain of the Company's hospitals. Growth in net patient revenue per discharge primarily resulted from a higher acuity patient mix, an increase in reimbursement rates and the suspension of sequestration.
The decrease in outpatient and other revenue resulted from the inclusion of $2.5 million of business interruption insurance recoveries in the fourth quarter of 2019 related to Hurricane Michael, the COVID-related suspension of hospital-based outpatient services in 2020 and the closure of certain hospital-based outpatient programs in the fourth quarter of 2019.
Revenue reserves related to bad debt as a percent of revenue increased to 2.2% due to a $4.5 million increase primarily related to prior denied claims.
•Adjusted EBITDA - The decrease in Adjusted EBITDA for the inpatient rehabilitation segment resulted primarily from increases in: bad debt expense, group medical expense, and use and cost of personal protective equipment.
Home health and hospice segment results
| Growth | ||||||||
|---|---|---|---|---|---|---|---|---|
| Q4 2020 | Q4 2019 | Dollars | Percent | |||||
| Net operating revenues: | (In Millions) | |||||||
| Home health | $ | 227.7 | $ | 236.9 | $ | (9.2) | (3.9) | % |
| Hospice | 53.6 | 50.8 | 2.8 | 5.5 | % | |||
| Total segment revenue | $ | 281.3 | $ | 287.7 | $ | (6.4) | (2.2) | % |
| Home Health Metrics | ||||||||
| (Actual Amounts) | ||||||||
| Episodic admissions | 40,830 | 41,781 | (951) | (2.3) | % | |||
| Same-store episodic admissions growth | (3.8) | % | ||||||
| Episodes | 71,441 | 73,055 | (1,614) | (2.2) | % | |||
| Same-store episode growth | (3.2) | % | ||||||
| Revenue per episode | $ | 2,883 | $ | 2,901 | $ | (18) | (0.6) | % |
| (In Millions) | ||||||||
| Adjusted EBITDA | $ | 55.5 | $ | 49.6 | $ | 5.9 | 11.9 | % |
•Revenue - Home health volumes declined as a result of episodic admissions decreasing 27% from patients residing in senior living facilities, 36% from patients discharging from skilled nursing facilities, and 12% from patients receiving elective procedures in acute care hospitals. The combined impact of these declines represented a loss of approximately 3,900 admissions, or a 9% negative impact on the growth rate for the fourth quarter of 2020. During the fourth quarter of 2020, the Company averaged 360 home health employees per day on COVID-related quarantine, which further impacted its ability to accept referrals. Revenue per episode was impacted by the implementation of the Patient Driven Groupings Model (“PDGM”). Revenue per episode benefited from the suspension of sequestration.
Hospice same-store admissions growth of 16.1% yielded a 5.5% increase in hospice revenue. Hospice revenue growth was impacted by a decrease in length of stay resulting from a change in patient mix.
•Adjusted EBITDA - The 11.9% increase in Adjusted EBITDA primarily resulted from improved cost per visit supported by the clinician compensation model changes implemented in May 2020.
General and administrative expenses
| Q4 2020 | % of Consolidated Revenue | Q4 2019 | % of Consolidated Revenue | |||
|---|---|---|---|---|---|---|
| (In Millions) | ||||||
| General and administrative expenses, excluding stock-based compensation | $ | 33.6 | 2.8% | $ | 36.5 | 3.1% |
General and administrative expenses decreased as a percent of consolidated revenue due to lower costs associated with incentive compensation.
Full-year consolidated results
| Full-Year | Growth | |||||||
|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | Dollars | Percent | |||||
| (in millions, except per share data) | ||||||||
| Net operating revenues | $ | 4,644.4 | $ | 4,605.0 | $ | 39.4 | 0.9 | % |
| Income from continuing operations attributable to Encompass Health per diluted share | 2.85 | 3.62 | (0.77) | (21.3) | % | |||
| Adjusted earnings per share | 2.89 | 3.91 | (1.02) | (26.1) | % | |||
| Adjusted EBITDA | 860.3 | 964.9 | (104.6) | (10.8) | % |
See the attached supplemental information for additional details regarding these calculations.
2021 guidance and longer term growth targets
The Company provided the following guidance for full-year 2021 and growth targets for 2020 through 2025.
| Full-year 2021 guidance ranges | ||||
|---|---|---|---|---|
| (in millions, except per share data) | ||||
| Net operating revenues | $5,000 to $5,170 | |||
| Adjusted EBITDA | $925 to $955 | |||
| Adjusted earnings per share from continuing operations attributable to Encompass Health | $3.31 to $3.53 | 2020 through 2025 Growth Targets | ||
| --- | --- | |||
| Net operating revenues | 8% to 10% CAGR | |||
| Adjusted EBITDA | 8% to 10% CAGR | |||
| Adjusted free cash flow | 5% to 7% CAGR |
On December 9, 2020, the Company announced it is exploring strategic alternatives for its home health and hospice business. The review is ongoing, and no decision has been made. Accordingly, the Company's 2021 guidance and longer term growth targets assume the continuation of the current structure of the business. The guidance and growth targets may change depending on the ultimate outcome of the review.
Base year 2020 adjusted free cash flow benefited from a temporary payroll tax holiday. Exclusive of this item, the adjusted free cash flow CAGR target would be 8% to 10%.
For additional considerations regarding the Company's 2021 guidance ranges, see the supplemental information posted on the Company's website at http://investor.encompasshealth.com. See also the “Other Information” section below for an explanation of why the Company does not provide guidance for comparable GAAP measures for Adjusted EBITDA and adjusted earnings per share.
Earnings conference call and webcast
The Company will host an investor conference call at 9:00 a.m. Eastern Time on Wednesday, January 27, 2021 to discuss its results for the fourth quarter of 2020. For reference during the call, the Company will post certain supplemental information at http://investor.encompasshealth.com.
The conference call may be accessed by dialing 877 587-6761 and giving the pass code 6192515. International callers should dial 706 679-1635 and give the same pass code. Please call approximately ten minutes before the start of the call to ensure you are connected. The conference call will also be webcast live and will be available for on-line replay at http://investor.encompasshealth.com by clicking on an available link.
About Encompass Health
As a national leader in integrated healthcare services, Encompass Health (NYSE: EHC) offers both facility-based and home-based patient care through its network of inpatient rehabilitation hospitals, home health agencies and hospice agencies. With a national footprint that includes 137 hospitals and 241 home health locations and 82 hospice locations in 39 states and Puerto Rico, the Company is committed to delivering high-quality, cost-effective, integrated care across the healthcare continuum. Driven by a set of shared values, Encompass Health is ranked as one of Fortune's 100 Best Companies to Work For. For more information, visit encompasshealth.com, or follow us on Twitter and Facebook.
Other information
The information in this press release is summarized and should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Form 10-K”), when filed, as well as the Company's Current Report on Form 8-K filed on January 26, 2021 (the “Q4 Earnings Form 8-K”), to which this press release is attached as Exhibit 99.1. In addition, the Company will post supplemental information today on its website at http://investor.encompasshealth.com for reference during its January 27, 2021 earnings call.
The financial data contained in the press release and supplemental information include non-GAAP financial measures, including the Company’s adjusted earnings per share, leverage ratio, Adjusted EBITDA, and adjusted free cash flow. Reconciliations to their most comparable GAAP measure, except with regard to non-GAAP guidance, are included below or in the Q4 Earnings Form 8-K. Readers are encouraged to review the “Note Regarding Presentation of Non-GAAP Financial Measures” included in the Q4 Earnings Form 8-K which provides further explanation and disclosure regarding the Company’s use of these non-GAAP financial measures.
Excluding net operating revenues, the Company does not provide guidance on a GAAP basis because it is unable to predict, with reasonable certainty, the future impact of items that are deemed to be outside the control of the Company or otherwise non-indicative of its ongoing operating performance. Such items include government, class action, and related settlements; professional fees—accounting, tax, and legal; mark-to-market adjustments for stock appreciation rights; gains or losses related to hedging instruments; loss on early extinguishment of debt; adjustments to its income tax provision (such as valuation allowance adjustments and settlements of income tax claims); items related to corporate and facility restructurings; and certain other items the Company believes to be non-indicative of its ongoing operations. These items cannot be reasonably predicted and will depend on several factors, including industry and market conditions, and could be material to the Company's results computed in accordance with GAAP.
However, the following reasonably estimable GAAP measures for 2021 would be included in a reconciliation for Adjusted EBITDA if the other reconciling GAAP measures could be reasonably predicted:
•Interest expense and amortization of debt discounts and fees - estimate of $164 million to $174 million
•Amortization of debt-related items - approximately $9 million
The Q4 Earnings Form 8-K and, when filed, the 2020 Form 10-K can be found on the Company's website at
http://investor.encompasshealth.com and the SEC's website at www.sec.gov.
Encompass Health Corporation and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
| For the Three Months Ended December 31, | For the Year Ended December 31, | |||||||
|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | 2020 | 2019 | |||||
| (In Millions) | ||||||||
| Net operating revenues | $ | 1,214.4 | $ | 1,184.4 | $ | 4,644.4 | $ | 4,605.0 |
| Operating expenses: | ||||||||
| Salaries and benefits | 686.1 | 668.5 | 2,682.0 | 2,573.0 | ||||
| Other operating expenses | 163.1 | 167.1 | 634.4 | 623.6 | ||||
| Occupancy costs | 20.4 | 20.6 | 81.2 | 82.3 | ||||
| Supplies | 51.7 | 43.2 | 200.5 | 167.9 | ||||
| General and administrative expenses | 37.8 | 64.0 | 155.5 | 247.0 | ||||
| Depreciation and amortization | 62.3 | 58.4 | 243.0 | 218.7 | ||||
| Government, class action, and related settlements | — | — | 2.8 | — | ||||
| Total operating expenses | 1,021.4 | 1,021.8 | 3,999.4 | 3,912.5 | ||||
| Loss on early extinguishment of debt | 2.3 | 5.4 | 2.3 | 7.7 | ||||
| Interest expense and amortization of debt discounts and fees | 46.2 | 44.5 | 184.2 | 159.7 | ||||
| Other income | (4.2) | (3.6) | (10.6) | (30.5) | ||||
| Equity in net income of nonconsolidated affiliates | (1.0) | (1.2) | (3.5) | (6.7) | ||||
| Income from continuing operations before income tax expense | 149.7 | 117.5 | 472.6 | 562.3 | ||||
| Provision for income tax expense | 38.0 | 27.3 | 103.8 | 115.9 | ||||
| Income from continuing operations | 111.7 | 90.2 | 368.8 | 446.4 | ||||
| Loss from discontinued operations, net of tax | — | — | — | (0.6) | ||||
| Net and comprehensive income | 111.7 | 90.2 | 368.8 | 445.8 | ||||
| Less: Net and comprehensive income attributable to<br><br>noncontrolling interests | (25.7) | (22.6) | (84.6) | (87.1) | ||||
| Net and comprehensive income attributable to<br><br>Encompass Health | $ | 86.0 | $ | 67.6 | $ | 284.2 | $ | 358.7 |
| Weighted average common shares outstanding: | ||||||||
| Basic | 98.7 | 97.8 | 98.6 | 98.0 | ||||
| Diluted | 100.1 | 99.5 | 99.8 | 99.4 | ||||
| Earnings per common share: | ||||||||
| Basic earnings per share attributable to Encompass Health common shareholders: | ||||||||
| Continuing operations | $ | 0.87 | $ | 0.69 | $ | 2.87 | $ | 3.66 |
| Discontinued operations | — | — | — | (0.01) | ||||
| Net income | $ | 0.87 | $ | 0.69 | $ | 2.87 | $ | 3.65 |
| Diluted earnings per share attributable to Encompass Health common shareholders: | ||||||||
| Continuing operations | $ | 0.86 | $ | 0.68 | $ | 2.85 | $ | 3.62 |
| Discontinued operations | — | — | — | (0.01) | ||||
| Net income | $ | 0.86 | $ | 0.68 | $ | 2.85 | $ | 3.61 |
| Amounts attributable to Encompass Health: | ||||||||
| Income from continuing operations | $ | 86.0 | $ | 67.6 | $ | 284.2 | $ | 359.3 |
| Loss from discontinued operations, net of tax | — | — | — | (0.6) | ||||
| Net income attributable to Encompass Health | $ | 86.0 | $ | 67.6 | $ | 284.2 | $ | 358.7 |
Encompass Health Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
| December 31, 2020 | December 31, 2019 | |||
|---|---|---|---|---|
| (In Millions) | ||||
| Assets | ||||
| Current assets: | ||||
| Cash and cash equivalents | $ | 224.0 | $ | 94.8 |
| Restricted cash | 65.4 | 57.4 | ||
| Accounts receivable | 572.8 | 506.1 | ||
| Prepaid expenses and other current assets | 86.4 | 97.5 | ||
| Total current assets | 948.6 | 755.8 | ||
| Property and equipment, net | 2,206.6 | 1,959.3 | ||
| Operating lease right-of-use assets | 245.7 | 276.5 | ||
| Goodwill | 2,318.7 | 2,305.2 | ||
| Intangible assets, net | 431.3 | 476.3 | ||
| Deferred income tax assets | — | 2.9 | ||
| Other long-term assets | 295.0 | 304.7 | ||
| Total assets | $ | 6,445.9 | $ | 6,080.7 |
| Liabilities and Shareholders’ Equity | ||||
| Current liabilities: | ||||
| Current portion of long-term debt | $ | 38.3 | $ | 39.3 |
| Current operating lease liabilities | 44.8 | 40.4 | ||
| Accounts payable | 115.0 | 94.6 | ||
| Accrued payroll | 253.8 | 210.5 | ||
| Accrued interest payable | 47.1 | 32.4 | ||
| Other current liabilities | 218.3 | 303.8 | ||
| Total current liabilities | 717.3 | 721.0 | ||
| Long-term debt, net of current portion | 3,250.6 | 3,023.3 | ||
| Long-term operating lease liabilities | 209.6 | 243.8 | ||
| Self-insured risks | 121.2 | 117.2 | ||
| Deferred income tax liabilities | 51.8 | — | ||
| Other long-term liabilities | 93.8 | 42.7 | ||
| 4,444.3 | 4,148.0 | |||
| Commitments and contingencies | ||||
| Redeemable noncontrolling interests | 31.6 | 239.6 | ||
| Shareholders’ equity: | ||||
| Encompass Health shareholders’ equity | 1,588.0 | 1,352.2 | ||
| Noncontrolling interests | 382.0 | 340.9 | ||
| Total shareholders’ equity | 1,970.0 | 1,693.1 | ||
| Total liabilities and shareholders’ equity | $ | 6,445.9 | $ | 6,080.7 |
Encompass Health Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| For the Year Ended December 31, | |||||||
|---|---|---|---|---|---|---|---|
| 2020 | 2019 | ||||||
| (In Millions) | |||||||
| Cash flows from operating activities: | |||||||
| Net income | $ | 368.8 | $ | 445.8 | |||
| Loss from discontinued operations, net of tax | — | 0.6 | |||||
| Adjustments to reconcile net income to net cash provided by operating activities— | |||||||
| Provision for government, class action, and related settlements | 2.8 | — | |||||
| Depreciation and amortization | 243.0 | 218.7 | |||||
| Amortization of debt-related items | 7.2 | 4.5 | |||||
| Loss on early extinguishment of debt | 2.3 | 7.7 | |||||
| Equity in net income of nonconsolidated affiliates | (3.5) | (6.7) | |||||
| Distributions from nonconsolidated affiliates | 3.8 | 6.6 | |||||
| Stock-based compensation | 29.5 | 114.4 | |||||
| Deferred tax expense | 52.4 | 40.0 | |||||
| Gain on consolidation of Yuma Rehabilitation Hospital | — | (19.2) | |||||
| Other, net | 5.9 | 7.4 | |||||
| Changes in assets and liabilities, net of acquisitions — | |||||||
| Accounts receivable | (38.1) | (22.9) | |||||
| Prepaid expenses and other assets | 0.1 | (35.4) | |||||
| Accounts payable | 13.6 | (6.1) | |||||
| Accrued payroll | 92.0 | 13.2 | |||||
| Other liabilities | (74.9) | (128.9) | |||||
| Net cash used in operating activities of discontinued operations | (0.2) | (4.4) | |||||
| Total adjustments | 335.9 | 188.9 | |||||
| Net cash provided by operating activities | 704.7 | 635.3 | |||||
| Cash flows from investing activities: | |||||||
| Acquisition of businesses, net of cash acquired | (1.1) | (231.5) | |||||
| Purchases of property and equipment | (396.0) | (372.4) | |||||
| Additions to capitalized software costs | (8.7) | (13.0) | |||||
| Purchases of intangible assets | (3.5) | (18.7) | |||||
| Proceeds from sale of restricted investments | 12.6 | 17.6 | |||||
| Purchases of restricted investments | (8.7) | (32.9) | |||||
| Other, net | (2.1) | (6.5) | |||||
| Net cash used in investing activities | (407.5) | (657.4) | (Continued) | 8 | |||
| --- | --- |
Encompass Health Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Continued)
(Unaudited)
| For the Year Ended December 31, | ||||
|---|---|---|---|---|
| 2020 | 2019 | |||
| (In Millions) | ||||
| Cash flows from financing activities: | ||||
| Proceeds from bond issuance | 992.5 | 1,000.0 | ||
| Principal payments on debt, including pre-payments | (718.3) | (519.5) | ||
| Borrowings on revolving credit facility | 330.0 | 635.0 | ||
| Payments on revolving credit facility | (375.0) | (620.0) | ||
| Principal payments under finance lease obligations | (22.5) | (19.5) | ||
| Debt amendment and issuance costs | (20.3) | (21.5) | ||
| Repurchases of common stock, including fees and expenses | (6.1) | (45.9) | ||
| Dividends paid on common stock | (111.9) | (108.7) | ||
| Purchase of equity interests in consolidated affiliates | (162.3) | (162.9) | ||
| Distributions paid to noncontrolling interests of consolidated affiliates | (72.2) | (79.8) | ||
| Taxes paid on behalf of employees for shares withheld | (15.7) | (16.6) | ||
| Contributions from consolidated affiliates | 34.9 | 15.9 | ||
| Other, net | 1.0 | (8.3) | ||
| Net cash (used in) provided by financing activities | (145.9) | 48.2 | ||
| Increase in cash, cash equivalents, and restricted cash | 151.3 | 26.1 | ||
| Cash, cash equivalents. and restricted cash at beginning of year | 159.6 | 133.5 | ||
| Cash, cash equivalents, and restricted cash at end of year | $ | 310.9 | $ | 159.6 |
| 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 | $ | 224.0 | $ | 94.8 |
| Restricted cash at end of period | 65.4 | 57.4 | ||
| Restricted cash included in other long-term assets at end of period | 21.5 | 7.4 | ||
| Cash, cash equivalents, and restricted cash at end of period | $ | 310.9 | $ | 159.6 |
Encompass Health Corporation and Subsidiaries
Supplemental Information
Earnings Per Share
| Q4 | Year Ended | |||||||
|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | 2020 | 2019 | |||||
| (In Millions, Except Per Share Data) | ||||||||
| Adjusted EBITDA | $ | 239.9 | $ | 238.2 | $ | 860.3 | $ | 964.9 |
| Depreciation and amortization | (62.3) | (58.4) | (243.0) | (218.7) | ||||
| Interest expense and amortization of debt discounts and fees | (46.2) | (44.5) | (184.2) | (159.7) | ||||
| Stock-based compensation expense | (4.2) | (27.4) | (29.5) | (114.4) | ||||
| Loss on disposal of assets | (1.0) | (7.8) | (11.6) | (11.1) | ||||
| 126.2 | 100.1 | 392.0 | 461.0 | |||||
| Certain items non-indicative of ongoing operating performance: | ||||||||
| Loss on early extinguishment of debt | (2.3) | (5.4) | (2.3) | (7.7) | ||||
| Transaction costs | — | (0.1) | — | (2.1) | ||||
| Gain on consolidation of former equity method location | — | — | 2.2 | 19.2 | ||||
| SARs mark-to-market impact on noncontrolling interests | — | 0.7 | — | 5.0 | ||||
| Change in fair market value of equity securities | 0.1 | (0.4) | 0.4 | 0.8 | ||||
| Government, class action, and related settlements | — | — | (2.8) | — | ||||
| Payroll taxes on SARs exercise | — | — | (1.5) | (1.0) | ||||
| Pre-tax income | 124.0 | 94.9 | 388.0 | 475.2 | ||||
| Income tax expense | (38.0) | (27.3) | (103.8) | (115.9) | ||||
| Income from continuing operations (1) | $ | 86.0 | $ | 67.6 | $ | 284.2 | $ | 359.3 |
| Basic shares | 98.7 | 97.8 | 98.6 | 98.0 | ||||
| Diluted shares | 100.1 | 99.5 | 99.8 | 99.4 | ||||
| Basic earnings per share (1) | $ | 0.87 | $ | 0.69 | $ | 2.87 | $ | 3.66 |
| Diluted earnings per share (1) | $ | 0.86 | $ | 0.68 | $ | 2.85 | $ | 3.62 |
(1)Income from continuing operations attributable to Encompass Health
Encompass Health Corporation and Subsidiaries
Supplemental Information
Adjusted Earnings Per Share
| Q4 | Year Ended | |||||||
|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | 2020 | 2019 | |||||
| Earnings per share, as reported | $ | 0.86 | $ | 0.68 | $ | 2.85 | $ | 3.62 |
| Adjustments, net of tax: | ||||||||
| Government, class action, and related settlements | — | — | 0.02 | — | ||||
| Mark-to-market adjustment for stock appreciation rights | — | 0.11 | — | 0.47 | ||||
| Transaction costs | — | — | — | 0.02 | ||||
| Income tax adjustments | 0.06 | 0.02 | 0.01 | (0.10) | ||||
| Loss on early extinguishment of debt | 0.02 | 0.04 | 0.02 | 0.06 | ||||
| Change in fair market value of equity securities | — | — | — | (0.01) | ||||
| Gain on consolidation of former equity method location | — | — | (0.02) | (0.14) | ||||
| Payroll taxes on SARs exercise | — | — | 0.01 | 0.01 | ||||
| Adjusted earnings per share* | $ | 0.93 | $ | 0.85 | $ | 2.89 | $ | 3.91 |
* Adjusted EPS may not sum due to rounding.
Encompass Health Corporation and Subsidiaries
Supplemental Information
Adjusted Earnings Per Share
| For the Three Months Ended December 31, 2020 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Adjustments | ||||||||||
| As Reported | Loss on Early Extinguishment of Debt | Income Tax Adjustments | Change in Fair Market Value of Equity Securities | As Adjusted | ||||||
| (In Millions, Except Per Share Amounts) | ||||||||||
| Adjusted EBITDA* | $ | 239.9 | $ | — | $ | — | $ | — | $ | 239.9 |
| Depreciation and amortization | (62.3) | — | — | — | (62.3) | |||||
| Interest expense and amortization of debt discounts and fees | (46.2) | — | — | — | (46.2) | |||||
| Stock-based compensation | (4.2) | — | — | — | (4.2) | |||||
| Loss on disposal or impairment of assets | (1.0) | — | — | — | (1.0) | |||||
| Loss on early extinguishment of debt | (2.3) | 2.3 | — | — | — | |||||
| Change in fair market value of equity securities | 0.1 | — | — | (0.1) | — | |||||
| Income from continuing operations before income tax expense | 124.0 | 2.3 | — | (0.1) | 126.2 | |||||
| Provision for income tax expense | (38.0) | (0.6) | 5.6 | — | (33.0) | |||||
| Income from continuing operations attributable to Encompass Health | $ | 86.0 | $ | 1.7 | $ | 5.6 | $ | (0.1) | $ | 93.2 |
| Diluted earnings per share from continuing operations, as reported** | $ | 0.86 | $ | 0.02 | $ | 0.06 | $ | — | $ | 0.93 |
| Diluted shares used in calculation | 100.1 |
* Reconciliation to GAAP provided on page 16
** 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 December 31, 2019 | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Adjustments | ||||||||||||||
| As Reported | Mark-to-Market Adjustment for Stock Comp. Expense | Loss on Early Extinguishment 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* | $ | 238.2 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 238.2 |
| Depreciation and amortization | (58.4) | — | — | — | — | — | (58.4) | |||||||
| Interest expense and amortization of debt discounts and fees | (44.5) | — | — | — | — | — | (44.5) | |||||||
| Stock-based compensation | (27.4) | 15.5 | — | — | — | — | (11.9) | |||||||
| Loss on disposal of assets | (7.8) | — | — | — | — | — | (7.8) | |||||||
| Loss on early extinguishment of debt | (5.4) | — | 5.4 | — | — | — | — | |||||||
| Transaction costs | (0.1) | — | — | — | 0.1 | — | — | |||||||
| SARs mark-to-market impact on noncontrolling interests | 0.7 | (0.7) | — | — | — | — | — | |||||||
| Change in fair market value of equity securities | (0.4) | — | — | — | — | 0.4 | — | |||||||
| Income from continuing operations before income tax expense | 94.9 | 14.8 | 5.4 | — | 0.1 | 0.4 | 115.6 | |||||||
| Provision for income tax expense | (27.3) | (4.0) | (1.5) | 2.3 | (0.1) | (0.1) | (30.7) | |||||||
| Income from continuing operations attributable to Encompass Health | $ | 67.6 | $ | 10.8 | $ | 3.9 | $ | 2.3 | $ | — | $ | 0.3 | $ | 84.9 |
| Diluted earnings per share from continuing operations** | $ | 0.68 | $ | 0.11 | $ | 0.04 | $ | 0.02 | $ | — | $ | — | $ | 0.85 |
| Diluted shares used in calculation | 99.5 |
* Reconciliation to GAAP provided on page 16
** Adjusted EPS may not sum across due to rounding.
Encompass Health Corporation and Subsidiaries
Supplemental Information
Adjusted Earnings Per Share
| For the Year Ended December 31, 2020 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Adjustments | ||||||||||||||||
| As Reported | Gov't, Class Action, & Related Settlements | Loss on Early Exting. of Debt | 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* | $ | 860.3 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 860.3 |
| Depreciation and amortization | (243.0) | — | — | — | — | — | — | (243.0) | ||||||||
| Interest expense and amortization of debt discounts and fees | (184.2) | — | — | — | — | — | — | (184.2) | ||||||||
| Stock-based compensation | (29.5) | — | — | — | — | — | — | (29.5) | ||||||||
| Loss on disposal or impairment of assets | (11.6) | — | — | — | — | — | — | (11.6) | ||||||||
| Loss on early extinguishment of debt | (2.3) | — | 2.3 | — | — | — | — | — | ||||||||
| Gain on consolidation of Treasure Coast | 2.2 | — | — | — | — | (2.2) | — | — | ||||||||
| Change in fair market value of equity securities | 0.4 | — | — | — | (0.4) | — | — | — | ||||||||
| Government, class action, and related settlements | (2.8) | 2.8 | — | — | — | — | — | — | ||||||||
| Payroll taxes on SARs exercise | (1.5) | — | — | — | — | — | 1.5 | — | ||||||||
| Income from continuing operations before income tax expense | 388.0 | 2.8 | 2.3 | — | (0.4) | (2.2) | 1.5 | 392.0 | ||||||||
| Provision for income tax expense | (103.8) | (0.7) | (0.6) | 1.0 | 0.1 | 0.6 | (0.4) | (103.8) | ||||||||
| Income from continuing operations attributable to Encompass Health | $ | 284.2 | $ | 2.1 | $ | 1.7 | $ | 1.0 | $ | (0.3) | $ | (1.6) | $ | 1.1 | $ | 288.2 |
| Diluted earnings per share from continuing operations, as reported** | $ | 2.85 | $ | 0.02 | $ | 0.02 | $ | 0.01 | $ | — | $ | (0.02) | $ | 0.01 | $ | 2.89 |
| Diluted shares used in calculation | 99.8 |
* Reconciliation to GAAP provided on page 16
** Adjusted EPS may not sum across due to rounding.
Encompass Health Corporation and Subsidiaries
Supplemental Information
Adjusted Earnings Per Share
| For the Year Ended December 31, 2019 | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Adjustments | ||||||||||||||||||
| As Reported | Mark-to-Market Adjustment on Stock Compensation 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* | $ | 964.9 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 964.9 |
| Depreciation and amortization | (218.7) | — | — | — | — | — | — | — | (218.7) | |||||||||
| Interest expense and amortization of debt discounts and fees | (159.7) | — | — | — | — | — | — | — | (159.7) | |||||||||
| Stock-based compensation | (114.4) | 68.5 | — | — | — | — | — | — | (45.9) | |||||||||
| Loss on disposal of assets | (11.1) | — | — | — | — | — | — | — | (11.1) | |||||||||
| Loss on early extinguishment of debt | (7.7) | — | 7.7 | — | — | — | — | — | — | |||||||||
| Transaction costs | (2.1) | — | — | — | 2.1 | — | — | — | — | |||||||||
| Gain on consolidation of Yuma | 19.2 | — | — | — | — | — | (19.2) | — | — | |||||||||
| SARs mark-to-market impact on noncontrolling interests | 5.0 | (5.0) | — | — | — | — | — | — | — | |||||||||
| Change in fair market value of equity securities | 0.8 | — | — | — | — | (0.8) | — | — | — | |||||||||
| Payroll taxes on SARs exercise | (1.0) | — | — | — | — | — | — | 1.0 | — | |||||||||
| Income from continuing operations before income tax expense | 475.2 | 63.5 | 7.7 | — | 2.1 | (0.8) | (19.2) | 1.0 | 529.5 | |||||||||
| Provision for income tax<br><br>expense | (115.9) | (17.2) | (2.1) | (10.3) | (0.6) | 0.2 | 5.2 | (0.2) | (140.9) | |||||||||
| Income from continuing operations attributable to Encompass Health | $ | 359.3 | $ | 46.3 | $ | 5.6 | $ | (10.3) | $ | 1.5 | $ | (0.6) | $ | (14.0) | $ | 0.8 | $ | 388.6 |
| Diluted earnings per share from continuing operations** | $ | 3.62 | $ | 0.47 | $ | 0.06 | $ | (0.10) | $ | 0.02 | $ | (0.01) | $ | (0.14) | $ | 0.01 | $ | 3.91 |
| Diluted shares used in calculation | 99.4 |
* Reconciliation to GAAP provided on page 16
** Adjusted EPS may not sum across due to rounding.
Encompass Health Corporation and Subsidiaries
Supplemental Information
Reconciliation of Net Income to Adjusted EBITDA
| For the Three Months Ended December 31, | For the Year Ended December 31, | |||||||
|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | 2020 | 2019 | |||||
| (In Millions) | ||||||||
| Net income | $ | 111.7 | $ | 90.2 | $ | 368.8 | $ | 445.8 |
| Loss from discontinued operations, net of tax, attributable to Encompass Health | — | — | — | 0.6 | ||||
| Net income attributable to noncontrolling interests | (25.7) | (22.6) | (84.6) | (87.1) | ||||
| Provision for income tax expense | 38.0 | 27.3 | 103.8 | 115.9 | ||||
| Interest expense and amortization of debt discounts and fees | 46.2 | 44.5 | 184.2 | 159.7 | ||||
| Depreciation and amortization | 62.3 | 58.4 | 243.0 | 218.7 | ||||
| Government, class action, and related settlements | — | — | 2.8 | — | ||||
| Loss on early extinguishment of debt | 2.3 | 5.4 | 2.3 | 7.7 | ||||
| Loss on disposal or impairment of assets | 1.0 | 7.8 | 11.6 | 11.1 | ||||
| Stock-based compensation expense | 4.2 | 27.4 | 29.5 | 114.4 | ||||
| Transaction costs | — | 0.1 | — | 2.1 | ||||
| Gain on consolidation of former equity method location | — | — | (2.2) | (19.2) | ||||
| SARs mark-to-market impact on noncontrolling interests | — | (0.7) | — | (5.0) | ||||
| Change in fair market value of equity securities | (0.1) | 0.4 | (0.4) | (0.8) | ||||
| Payroll taxes on SARs exercise | — | — | 1.5 | 1.0 | ||||
| Adjusted EBITDA | $ | 239.9 | $ | 238.2 | $ | 860.3 | $ | 964.9 |
Reconciliation of Segment Adjusted EBITDA to Income from Continuing Operations
Before Income Tax Expense
| For the Three Months Ended December 31, | For the Year Ended December 31, | |||||||
|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | 2020 | 2019 | |||||
| (In Millions) | ||||||||
| Total segment Adjusted EBITDA | $ | 273.5 | $ | 274.7 | $ | 986.3 | $ | 1,095.4 |
| General and administrative expenses | (37.8) | (64.0) | (155.5) | (247.0) | ||||
| Depreciation and amortization | (62.3) | (58.4) | (243.0) | (218.7) | ||||
| Loss on disposal or impairment of assets | (1.0) | (7.8) | (11.6) | (11.1) | ||||
| Government, class action, and related settlements | — | — | (2.8) | — | ||||
| Loss on early extinguishment of debt | (2.3) | (5.4) | (2.3) | (7.7) | ||||
| Interest expense and amortization of debt discounts and fees | (46.2) | (44.5) | (184.2) | (159.7) | ||||
| Net income attributable to noncontrolling interests | 25.7 | 22.6 | 84.6 | 87.1 | ||||
| SARS mark-to-market impact on noncontrolling interests | — | 0.7 | — | 5.0 | ||||
| Change in fair market value of equity securities | 0.1 | (0.4) | 0.4 | 0.8 | ||||
| Gain on consolidation of former equity method location | — | — | 2.2 | 19.2 | ||||
| Payroll taxes on SARs exercise | — | — | (1.5) | (1.0) | ||||
| Income from continuing operations before income tax expense | $ | 149.7 | $ | 117.5 | $ | 472.6 | $ | 562.3 |
Encompass Health Corporation and Subsidiaries
Supplemental Information
Reconciliation of Net Cash Provided by Operating Activities to Adjusted EBITDA
| For the Three Months Ended December 31, | For the Year Ended December 31, | |||||||
|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | 2020 | 2019 | |||||
| (In Millions) | ||||||||
| Net cash provided by operating activities | $ | 279.7 | $ | 215.6 | $ | 704.7 | $ | 635.3 |
| Interest expense and amortization of debt discounts and fees | 46.2 | 44.5 | 184.2 | 159.7 | ||||
| Equity in net income of nonconsolidated affiliates | 1.0 | 1.2 | 3.5 | 6.7 | ||||
| Net income attributable to noncontrolling interests in continuing operations | (25.7) | (22.6) | (84.6) | (87.1) | ||||
| Amortization of debt-related items | (2.1) | (1.4) | (7.2) | (4.5) | ||||
| Distributions from nonconsolidated affiliates | (1.0) | (1.8) | (3.8) | (6.6) | ||||
| Current portion of income tax expense | (20.1) | 8.1 | 51.4 | 75.9 | ||||
| Change in assets and liabilities | (40.4) | (5.3) | 7.3 | 180.1 | ||||
| Cash (provided by) used in operating activities of discontinued operations | — | (0.2) | 0.2 | 4.4 | ||||
| Transaction costs | — | 0.1 | — | 2.1 | ||||
| SARS mark-to-market impact on noncontrolling interests | — | (0.7) | — | (5.0) | ||||
| Payroll taxes on SARs exercise | — | — | 1.5 | 1.0 | ||||
| Change in fair market value of equity securities | (0.1) | 0.4 | (0.4) | (0.8) | ||||
| Other | 2.4 | 0.3 | 3.5 | 3.7 | ||||
| Adjusted EBITDA | $ | 239.9 | $ | 238.2 | $ | 860.3 | $ | 964.9 |
Encompass Health Corporation and Subsidiaries
Supplemental Information
Reconciliation of Net Cash Provided by Operating Activities to Adjusted Free Cash Flow
| For the Three Months Ended December 31, | For the Year Ended December 31, | |||||||
|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | 2020 | 2019 | |||||
| (In Millions) | ||||||||
| Net cash provided by operating activities | $ | 279.7 | $ | 215.6 | $ | 704.7 | $ | 635.3 |
| Impact of discontinued operations | — | (0.2) | 0.2 | 4.4 | ||||
| Net cash provided by operating activities of continuing operations | 279.7 | 215.4 | 704.9 | 639.7 | ||||
| Capital expenditures for maintenance | (47.4) | (62.0) | (154.9) | (167.1) | ||||
| Distributions paid to noncontrolling interests of consolidated affiliates | (19.3) | (22.2) | (72.2) | (79.8) | ||||
| Items non-indicative of ongoing operations: | ||||||||
| Cash paid for government, class action, and <br>related settlements | — | 5.6 | — | 52.0 | ||||
| Transaction costs and related assumed liabilities | — | 0.1 | — | 2.1 | ||||
| Cash paid for SARs exercise | — | — | 102.1 | 69.6 | ||||
| Adjusted free cash flow | $ | 213.0 | $ | 136.9 | $ | 579.9 | $ | 516.5 |
For the three months ended December 31, 2020, net cash used in investing activities was $142.7 million and resulted primarily from capital expenditures. Net cash used in financing activities during the three months ended December 31, 2020 was $354.2 million and resulted primarily from net debt repayments, cash dividends paid on common stock, and distributions to noncontrolling interests of consolidated affiliates.
For the three months ended December 31, 2019, net cash used in investing activities was $145.7 million and resulted primarily from capital expenditures. Net cash used in financing activities during the three months ended December 31, 2019 was $424.1 million and resulted primarily from net debt repayments, cash dividends paid on common stock, and distributions to noncontrolling interests of consolidated affiliates.
For the year ended December 31, 2020, net cash used in investing activities was $407.5 million and primarily resulted from capital expenditures. Net cash used in financing activities during the year ended December 31, 2020 was $145.9 million and primarily resulted from the issuance of senior notes in May and October 2020 offset by the redemption of the Company's 5.75% Senior Notes due 2024, the purchase of one-third of the rollover shares held by members of the home health and hospice management team, dividends paid common stock, and distributions paid to noncontrolling interests of consolidated affiliates.
For the year ended December 31, 2019, net cash used in investing activities was $657.4 million and primarily resulted from the acquisition of Alacare and capital expenditures. Net cash provided by financing activities during the year ended December 31, 2019 was $48.2 million and primarily resulted from the issuance of $1.0 billion of senior notes offset by repayments on the Company's revolving credit facility and 5.75% Senior Notes due 2024, the purchase of one-third of the rollover shares held by members of the home health and hospice management team, dividends paid common stock, distributions paid to noncontrolling interests of consolidated affiliates, and repurchases of common stock.
Encompass Health Corporation and Subsidiaries
Forward-Looking Statements
Statements contained in this press release and the supplemental information which are not historical facts, such as those relating to the nature of the COVID-19 pandemic and its impact on Encompass Health's business and financial assumptions, financial guidance, balance sheet and cash flow plans, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, Encompass Health, through its senior management, may from time to time make forward-looking public statements concerning the matters described herein. All such estimates, projections, and forward-looking information speak only as of the date hereof, and Encompass Health undertakes no duty to publicly update or revise such forward-looking information, whether as a result of new information, future events, or otherwise. Such forward-looking statements are necessarily estimates based upon current information, involve a number of risks and uncertainties, and relate to, among other things, future events, Encompass Health's plan to repurchase its debt or equity securities, dividend strategies, effective income tax rates, its business strategy, its financial plans, its future financial performance, its projected business results or model, its ability to return value to shareholders, its projected capital expenditures, its leverage ratio, its acquisition opportunities, and the impact of future legislation or regulation. Actual events or results may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors. While it is impossible to identify all such factors, factors which could cause actual events or results to differ materially from those estimated by Encompass Health include, but are not limited to, the possibility that the Company may not be able to realize higher values for its home health and hospice business through strategic transactions; the possibility that the Company may decide not to undertake a transaction following the review of strategic alternatives or that it is not able to consummate any proposed transactions resulting from the review due to, among other things, market, regulatory and other factors; the potential for disruption to the Company's business resulting from the review of strategic alternatives or the undertaking of any transactions following the review; any potential adverse effects of the Company's stock price resulting from the announcement of the results of the strategic review; the continued spread of COVID-19, including the speed, depth, geographic reach and duration of the spread, which could decrease our patient volumes and revenues and lead to staffing and supply shortages and associated cost increases; actions to be taken by the Company in response to the pandemic; the legal, regulatory and administrative developments that occur at the federal, state and local levels; the Company's infectious disease prevention and control efforts; the demand for the Company's services, including based on any downturns in the economy, consumer confidence, or the capital markets and unemployment among family members; the price of Encompass Health's common stock as it affects the Company's willingness and ability to repurchase shares and the financial and accounting effects of any repurchases; any adverse outcome of various lawsuits, claims, and legal or regulatory proceedings involving Encompass Health, including any matters related to yet undiscovered issues, if any, in acquired operations; Encompass Health's ability to attract and retain key management personnel; any adverse effects on Encompass Health's stock price resulting from the integration of acquired operations; potential disruptions, breaches, or other incidents affecting the proper operation, availability, or security of Encompass Health's or its vendors' information systems, including unauthorized access to or theft of patient, business associate, or other sensitive information or inability to provide patient care because of system unavailability as well as unforeseen issues, if any, related to integration of acquired systems; the ability to successfully integrate acquired operations, including realization of anticipated tax benefits, revenues, and cost savings, minimizing the negative impact on margins arising from the changes in staffing and other operating practices, and avoidance of unforeseen exposure to liabilities; Encompass Health's ability to successfully complete and integrate de novo developments, acquisitions, investments, and joint ventures consistent with its growth strategy; increases in Medicare audit activity, including increased use of sampling and extrapolation, resulting in additional unpaid reimbursement claims and an increase in the backlog of appealed claims denials; changes, delays in (including in connection with resolution of Medicare payment reviews or appeals), or suspension of reimbursement for Encompass Health's services by governmental or private payors; changes in the regulation of the healthcare industry at either or both of the federal and state levels, including as part of national healthcare reform and deficit reduction (such as the Patient-Driven Groupings Model for home health) and Encompass Health's ability to adapt operations to those changes; competitive pressures in the healthcare industry and Encompass Health's response thereto; Encompass Health's ability to obtain and retain favorable arrangements with third-party payors; Encompass Health's ability to control costs, particularly labor and employee benefit costs, including group medical
Encompass Health Corporation and Subsidiaries
Forward-Looking Statements
expenses; adverse effects resulting from coverage determinations made by Medicare Administrative Contractors regarding its Medicare reimbursement claims and lengthening delays in Encompass Health's ability to recover improperly denied claims through the administrative appeals process on a timely basis; Encompass Health's ability to adapt to changes in the healthcare delivery system, including value-based purchasing and involvement in coordinated care initiatives or programs that may arise with its referral sources; Encompass Health's ability to attract and retain nurses, therapists, and other healthcare professionals in a highly competitive environment with often severe staffing shortages, which may be worsened by the pandemic, and the impact on Encompass Health's labor expenses from potential union activity and staffing shortages; general conditions in the economy and capital markets, including any instability or uncertainty related to armed conflict or an act of terrorism, governmental impasse over approval of the United States federal budget, an increase in the debt ceiling, or an international sovereign debt crisis; the increase in the costs of defending and insuring against alleged professional liability claims, including claims associated with patient and employee exposures to COVID-19, and Encompass Health's ability to predict the estimated costs related to such claims; and other factors which may be identified from time to time in Encompass Health's SEC filings and other public announcements, including Encompass Health's Form 10‑K for the year ended December 31, 2020, when filed.
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ehcq42020earningsslides_
January 27, 2021 Supplemental information Fourth Quarter Earnings Call
Encompass Health 2 The information contained in this presentation includes certain estimates, projections and other forward-looking information that reflect Encompass Health’s current outlook, views and plans with respect to future events, including the ongoing strategic review and its impact on the business model, outlook and guidance, the COVID-19 pandemic and its effects, legislative and regulatory developments, strategy, capital expenditures, acquisition and other development activities, cyber security, dividend strategies, repurchases of securities, effective tax rates, financial performance, financial assumptions, business model, balance sheet and cash flow plans, market share, development of new information tools and models, and shareholder value-enhancing transactions. These estimates, projections and other forward-looking information are based on assumptions the Company believes, as of the date hereof, are reasonable. Inevitably, there will be differences between such estimates and actual events or results, and those differences may be material. There can be no assurance any estimates, projections or forward-looking information will be realized. All such estimates, projections and forward-looking information speak only as of the date hereof. Encompass Health undertakes no duty to publicly update or revise the information contained herein. You are cautioned not to place undue reliance on the estimates, projections and other forward-looking information in this presentation as they are based on current expectations and general assumptions and are subject to various risks, uncertainties and other factors, including those set forth in the earnings release attached as Exhibit 99.1 to the Company’s Form 8-K dated January 26, 2021 (the “Q4 Earnings Release Form 8-K”), the Form 10-K for the year ended December 31, 2020, when filed, the Form 10-Q for the quarters ended March 31, 2020, June 30, 2020, and September 30, 2020, and in other documents Encompass Health previously filed with the SEC, many of which are beyond Encompass Health’s control, that may cause actual events or results to differ materially from the views, beliefs and estimates expressed herein. Note regarding presentation of non-GAAP financial measures The following presentation includes certain “non-GAAP financial measures” as defined in Regulation G under the Securities Exchange Act of 1934, including Adjusted EBITDA, leverage ratios, adjusted earnings per share, and adjusted free cash flow. Schedules are attached that reconcile the non-GAAP financial measures included in the following presentation to the most directly comparable financial measures calculated and presented in accordance with Generally Accepted Accounting Principles in the United States. The Q4 Earnings Release Form 8-K, to which the following presentation is attached as Exhibit 99.2, provides further explanation and disclosure regarding Encompass Health’s use of non-GAAP financial measures and should be read in conjunction with this supplemental information. Forward-looking statements
Encompass Health 3 Q4 2020 summary.................................................................................................... 4-5 Inpatient rehabilitation segment.................................................................................. 6-7 Home health & hospice segment.................................................................................. 8-9 Consolidated Adjusted EBITDA..................................................................................... 10 Earnings per share................................................................................................... 11-12 Adjusted free cash flow............................................................................................ 13 Guidance and considerations for 2021........................................................................... 14-15 2020-2025 Growth targets.......................................................................................... 16 Adjusted free cash flow assumptions............................................................................. 17 Uses of free cash flow.............................................................................................. 18 Appendix Map of locations..................................................................................................... 20 Expansion activity................................................................................................... 21 Clinical collaboration............................................................................................... 22 Personal protective equipment - utilization, cost and inventory............................................ 23 Pre-payment claims denials - inpatient rehabilitation segment............................................. 24 Overview of rollover shares and SARs............................................................................ 25 Debt maturity profile and schedule............................................................................... 26-27 New-store/same-store growth..................................................................................... 28-30 Payment sources (percent of revenues).......................................................................... 31 Inpatient rehabilitation operational and labor metrics........................................................ 32 Home health & hospice operational metrics.................................................................... 33 Share information................................................................................................... 34 Segment operating results......................................................................................... 35-36 Reconciliations to GAAP............................................................................................ 37-45 End notes............................................................................................................. 46-47 Table of contents
Encompass Health 4 Q4 2020 summary Q4 Full Year ($millions) 2020 2019 Growth 2020 2019 Growth Encompass Health Consolidated Net operating revenues $ 1,214.4 $ 1,184.4 2.5 % $ 4,644.4 $ 4,605.0 0.9 % Adjusted EBITDA $ 239.9 $ 238.2 0.7 % $ 860.3 $ 964.9 (10.8) % Adjusted EPS $ 0.93 $ 0.85 9.4 % $ 2.89 $ 3.91 (26.1) % Adjusted free cash flow $ 213.0 $ 136.9 55.6 % $ 579.9 $ 516.5 12.3 % Inpatient Rehabilitation Segment Net operating revenues $ 933.1 $ 896.7 4.1 % $ 3,566.2 $ 3,513.0 1.5 % Adjusted EBITDA $ 218.0 $ 225.1 (3.2) % $ 823.0 $ 899.6 (8.5) % Home Health and Hospice Segment Net operating revenues $ 281.3 $ 287.7 (2.2) % $ 1,078.2 $ 1,092.0 (1.3) % Adjusted EBITDA $ 55.5 $ 49.6 11.9 % $ 163.3 $ 195.8 (16.6) % Reconciliations to GAAP provided on pages 37-45
Encompass Health 5 Q4 2020 summary (continued) u Expansion activity (see page 21) Ÿ Opened a new 40-bed inpatient rehabilitation hospital in Toledo, Ohio Ÿ Announced plans to build a new 40-bed inpatient rehabilitation hospital in Shiloh, Illinois Ÿ Added 28 beds to existing hospitals (117 beds added year to date) u Balance sheet - See debt schedule and maturity profile on pages 26-27. Ÿ Approximately $963 million available under $1 billion revolving credit facility and $224 million of cash on hand at year end Ÿ Net leverage ratio of 3.6x at year end Ÿ Issued $400 million of 4.625% Senior Notes due 2031 in October 2020 ü Used proceeds plus approximately $300 million of cash on hand to fully redeem $700 million of 5.75% Senior Notes due 2024 at par on November 1, 2020 u Shareholder and other distributions Ÿ Paid quarterly cash dividend of $0.28 per share in October 2020 Ÿ Declared a $0.28 per share quarterly cash dividend in October 2020 (paid in January 2021) Ÿ Repurchased 18,461 shares of common stock for $1.2 million in Q4 2020 (total of 98,765 shares for $6.1 million in 2020)
Encompass Health 6 Inpatient rehabilitation segment - revenue Q4 Q4 Favorable/ ($millions) 2020 2019 (Unfavorable) Net operating revenues: Inpatient $ 914.9 $ 873.5 4.7% Outpatient and other 18.2 23.2 (21.6%) Total segment revenue $ 933.1 $ 896.7 4.1% (Actual Amounts) Discharges 46,503 47,885 (2.9%) Same-store discharge growth (3.8%) Net patient revenue per discharge $ 19,674 $ 18,242 7.9% Revenue reserves related to bad debt as a percent of revenue 2.2 % 1.7 % 50 basis points u Inpatient revenue growth resulted from favorable pricing partially offset by decreased volumes. Ÿ New-store discharge growth of 0.9% resulted from a joint venture in Coralville, IA (June 2020) and wholly owned hospitals in Murrieta, CA (February 2020) and Sioux Falls, SD (June 2020). Ÿ Discharge growth was impacted by: ü limitations on elective procedures - treated approximately 1,400 fewer orthopedic and lower extremity joint replacement patients in Q4 2020 than in Q4 2019 ü capacity and staffing constraints - 10 to 15 hospitals with constraints at any point in Q4 2020 Ÿ Growth in net patient revenue per discharge primarily resulted from a higher acuity patient mix, an increase in reimbursement rates and the suspension of sequestration. u The decrease in outpatient and other revenue resulted from the inclusion of $2.5 million of business interruption insurance recoveries in Q4 2019 related to Hurricane Michael, the COVID-related suspension of hospital-based outpatient services in 2020 and the closure of certain hospital-based outpatient programs in Q4 2019. u Revenue reserves related to bad debt as a percent of revenue increased to 2.2% due to a $4.5 million increase primarily related to prior denied claims.
Encompass Health 7 Inpatient rehabilitation segment - Adjusted EBITDA Q4 % of Revenue Q4 % of Revenue($millions) 2020 2019 Net operating revenues $ 933.1 $ 896.7 Operating expenses: Salaries and benefits (495.1) 53.1 % (465.4) 51.9 % Other operating expenses(a) (140.2) 15.0 % (135.8) 15.1 % Supplies (44.1) 4.7 % (37.7) 4.2 % Occupancy costs (15.4) 1.7 % (15.7) 1.8 % Hospital operating expenses (199.7) 21.4 % (189.2) 21.1 % Other income(b) 4.1 4.0 Equity in nonconsolidated affiliates 0.9 1.0 Noncontrolling interests (25.3) (22.0) Segment Adjusted EBITDA $ 218.0 $ 225.1 Percent change (3.2) % In arriving at Adjusted EBITDA, the following were excluded: (a) Loss on disposal of assets $ 1.0 $ 7.8 (b) Change in fair market value of equity securities $ (0.1) $ 0.4 Reconciliations to GAAP provided on pages 37-45 u Adjusted EBITDA of $218.0 million was impacted by increases in: Ÿ bad debt expense (see prior page); Ÿ group medical expense; and Ÿ use and cost of PPE.
Encompass Health 8 Home health and hospice segment - revenue Q4 Q4 Favorable/ ($millions) 2020 2019 (Unfavorable) Net operating revenues: Home health revenue $ 227.7 $ 236.9 (3.9) % Hospice revenue 53.6 50.8 5.5 % Total segment revenue $ 281.3 $ 287.7 (2.2) % Home Health Metrics (Actual Amounts) Episodic admissions 40,830 41,781 (2.3) % Same-store episodic admissions growth (3.8) % Episodes 71,441 73,055 (2.2) % Same-store episode growth (3.2) % Revenue per episode $ 2,883 $ 2,901 (0.6) % u Home health volumes declined as a result of episodic admissions decreasing: Ÿ 27% from patients residing in senior living facilities; Ÿ 36% from patients discharging from skilled nursing facilities; and Ÿ 12% from patients receiving elective procedures in acute care hospitals. ü The combined impact of these declines represented a loss of ~3,900 admissions, or a 9% negative impact on the growth rate for Q4 2020. Ÿ During Q4 2020, we averaged 360 employees per day on COVID-related quarantine, which further impacted our ability to accept referrals. u Revenue per episode was impacted by the implementation of the Patient Driven Groupings Model (PDGM). Ÿ Revenue per episode benefited from the suspension of sequestration. u Hospice same-store admissions growth of 16.1% yielded a 5.5% increase in hospice revenue. Ÿ Hospice revenue growth was impacted by a decrease in length of stay resulting from a change in patient mix.
Encompass Health 9 Q4 % of Revenue Q4 % of Revenue($millions) 2020 2019 Net operating revenues $ 281.3 $ 287.7 Cost of services sold (121.9) 43.3 % (133.4) 46.4 % Support and overhead costs (103.6) 36.8 % (103.6) 36.0 % Operating expenses (225.5) 80.2 % (237.0) 82.4 % Equity in net income of nonconsolidated affiliates 0.1 0.2 Noncontrolling interests(a) (0.4) (1.3) Segment Adjusted EBITDA $ 55.5 $ 49.6 Percent change 11.9 % In arriving at Adjusted EBITDA, the following were excluded: (a) SARs mark-to-market impact on noncontrolling interests (see page 25) $ — $ (0.7) Home health and hospice segment - Adjusted EBITDA Adjusted EBITDA increased 11.9%. u All expense ratios in Q4 2020 were impacted by a decrease in revenues. u Cost of services decreased as a percent of revenue primarily due to improved cost per visit supported by the clinician compensation model changes implemented in May 2020. Ÿ Home health cost per visit improved $2.72 during Q4 2020 compared to Q4 2019. Reconciliations to GAAP provided on pages 37-45
Encompass Health 10 Consolidated Adjusted EBITDA ($millions) Q4 2020 % of Consolidated Revenue Q4 2019 % of Consolidated Revenue Inpatient rehabilitation segment Adjusted EBITDA $ 218.0 $ 225.1 Home health and hospice segment Adjusted EBITDA 55.5 49.6 General and administrative expenses* (33.6) 2.8% (36.5) 3.1% Consolidated Adjusted EBITDA $ 239.9 $ 238.2 Percentage change 0.7 % * General and administrative expenses in the above table exclude stock compensation of $4.2 million and $27.4 million for the fourth quarter of 2020 and 2019, respectively, as well as $0.1 million in transaction costs for the fourth quarter of 2019. Reconciliations to GAAP provided on pages 37-45 Consolidated Adjusted EBITDA for the quarter of $239.9 million u General and administrative expenses decreased as a percent of consolidated revenue due to lower costs associated with incentive compensation.
Encompass Health 11 Earnings per share - as reported Q4 Year Ended (In Millions, Except Per Share Data) 2020 2019 2020 2019 Adjusted EBITDA $ 239.9 $ 238.2 $ 860.3 $ 964.9 Depreciation and amortization (62.3) (58.4) (243.0) (218.7) Interest expense and amortization of debt discounts and fees (46.2) (44.5) (184.2) (159.7) Stock-based compensation expense (4.2) (27.4) (29.5) (114.4) Loss on disposal or impairment of assets (1.0) (7.8) (11.6) (11.1) 126.2 100.1 392.0 461.0 Certain items non-indicative of ongoing operating performance: Loss on early extinguishment of debt(1) (2.3) (5.4) (2.3) (7.7) Transaction costs — (0.1) — (2.1) Gain on consolidation of former equity method location(2)(3) — — 2.2 19.2 SARs mark-to-market impact on noncontrolling interests (see page 25) — 0.7 — 5.0 Change in fair market value of equity securities 0.1 (0.4) 0.4 0.8 Government, class action, and related settlements(4) — — (2.8) — Payroll taxes on SARs exercise (see page 25) — — (1.5) (1.0) Pre-tax income 124.0 94.9 388.0 475.2 Income tax expense (38.0) (27.3) (103.8) (115.9) Income from continuing operations* $ 86.0 $ 67.6 $ 284.2 $ 359.3 Diluted shares (see page 34) 100.1 99.5 99.8 99.4 Diluted earnings per share* $ 0.86 $ 0.68 $ 2.85 $ 3.62 u The increase in EPS in the fourth quarter of 2020 primarily resulted from decreased stock-based compensation due to the final exercise of the Home Health Holdings SARs in Q1 2020 (see page 25). * Earnings per share are determined using income from continuing operations attributable to Encompass Health. Refer to pages 46-47 for end notes.
Encompass Health 12 Adjusted earnings per share(5) * Adjusted EPS may not sum due to rounding. See complete calculations of adjusted earnings per share on pages 42-45. Refer to pages 46-47 for end notes. Adjusted earnings per share removes from the GAAP earnings per share calculation the impact of items the Company believes are non-indicative of its ongoing operating performance. Q4 Year Ended 2020 2019 2020 2019 Earnings per share, as reported $ 0.86 $ 0.68 $ 2.85 $ 3.62 Adjustments, net of tax: Government, class action, and related settlements(4) — — 0.02 — Mark-to-market adjustment for stock compensation expense (see page 25) — 0.11 — 0.47 Transaction costs — — — 0.02 Income tax adjustments 0.06 0.02 0.01 (0.10) Loss on early extinguishment of debt(1) 0.02 0.04 0.02 0.06 Change in fair market value of equity securities — — — (0.01) Gain on consolidation of former equity method location(2)(3) — — (0.02) (0.14) Payroll taxes on SARs exercise — — 0.01 0.01 Adjusted earnings per share* $ 0.93 $ 0.85 $ 2.89 $ 3.91
Encompass Health 13 $516.5 $(104.6) $106.4 $(21.8) $71.2 $12.2 $579.9 Adjusted free cash flow FY 2019 Adjusted EBITDA Working capital and other Cash interest payments Cash tax payments, net of refunds Maintenance capital expenditures Adjusted free cash flow FY 2020 2020 Adjusted free cash flow(6) Reconciliations to GAAP provided on pages 37-45 Refer to pages 46-47 for end notes. u Adjusted free cash flow was higher in 2020 than 2019 primarily due to a decrease in working capital and lower payments for cash taxes. Ÿ Decreased working capital primarily resulted from the timing of and increase in payroll accruals. ü Accrued payroll increased due to the award of additional PTO to employees during Q2 2020 in response to COVID-19, as well as the deferral of payroll taxes resulting from government relief efforts. Ÿ Cash payments for taxes decreased due to the overpayment of cash taxes in 2019, lower book income in 2020, additional bonus depreciation resulting from the CARES Act and the expected deduction for the exercise of 2020 SARs (see page 25). Ÿ Cash interest payments increased primarily due to the funding of the Alacare acquisition and the purchase of the Home Health Holdings rollover shares and exercise of SARs (see page 25).
Encompass Health 14Refer to pages 46-47 for end notes. 2021 Guidance Adjusted EBITDA(7) Adjusted earnings per share from continuing operations attributable to Encompass Health(5) Net operating revenues 2020 Actuals 2021 Guidance Net operating revenues Adjusted EBITDA(7) $925 million to $955 million Adjusted earnings per share from continuing operations attributable to Encompass Health(5) $3.31 to $3.53 $4,644.4 million $860.3 million $2.89 $5,000 million to $5,170 million On December 9, 2020, the Company announced it is exploring strategic alternatives for its home health and hospice business. The review is ongoing, and no decision has been made. Accordingly, the Company’s 2021 guidance and longer term growth targets assume the continuation of the current structure of the business. The guidance and growth targets may change depending on the ultimate outcome of the review.
Encompass Health 15 2021 Guidance considerations Inpatient Rehabilitation u Estimated 2.3% increase in Medicare pricing u Revenue reserve related to bad debt of 1.4% to 1.6% of net operating revenues u Pre-opening and new store ramp up costs of $15 million to $20 million Home Health and Hospice u Estimated 1.9% increase in Medicare pricing for home health; estimated 2.4% pricing increase for hospice u Inclusive of $50 million to $100 million of home health and hospice acquisitions Both Segments u Salary increase of approx. 3%; benefits increase of approx. 5% to 8% u Suspension of sequestration through March 31, 2021 u Continued higher utilization and costs of personal protective equipment
Encompass Health 16 2020-2025 Growth Targets 2020 through 2025 INPATIENT REHABILITATION HOME HEALTH AND HOSPICE CONSOLIDATED CAGR TARGETS Not inclusive of larger scale acquisitions 6 to 10 De Novos per year 100 to 150 bed additions per year 6% to 8% Discharge CAGR 10%+ Home Health admissions CAGR 10% to 15% Hospice admissions CAGR $50 million to $100 million Acquisitions per year 8% to 10% Consolidated net operating revenues 8% to 10% Consolidated adjusted EBITDA 5% to 7% Adjusted free cash flow* On December 9, 2020, the Company announced it is exploring strategic alternatives for its home health and hospice business. The review is ongoing, and no decision has been made. Accordingly, the Company’s 2021 guidance and longer term growth targets assume the continuation of the current structure of the business. The guidance and growth targets may change depending on the ultimate outcome of the review. * Base year 2020 adjusted free cash flow benefited from a temporary payroll tax holiday. Exclusive of this item, the adjusted free cash flow CAGR target would be 8% to 10%. Reconciliations to GAAP provided on pages 37-45
Encompass Health 17 Adjusted free cash flow(6) assumptions Reconciliations to GAAP provided on pages 37-45; Refer to pages 46-47 for end notes. Certain cash flow items (millions) 2019 Actuals 2020 Actuals 2021 Assumptions Cash interest payments (net of amortization of debt discounts and fees) $155.2 $177.0 $155 to $165 Cash payments for income taxes, net of refunds $104.1 $32.9 $80 to $110 Working capital and other $22.0 ($84.4) $115 to $135 Maintenance CAPEX $167.1 $154.9 $165 to $195 Adjusted free cash flow $516.5 $579.9 $320 to $440 u Lower average interest rate expected in 2021 due to the redemption of the 5.75% Senior Notes due 2024 in the fourth quarter of 2020 u Higher cash payments for taxes expected in 2021 due to: Ÿ higher expected book income Ÿ elimination of benefits received under the CARES Act Ÿ lower stock-based compensation due to the final payout of the SARs (see page 25) u Increased working capital expected in 2021 resulting from the payroll tax deferrals under the CARES Act in 2020 and the payout of the remaining $20 million of the COVID- related paid-time-off accrual. u Increased maintenance CAPEX due to expanding hospital portfolio
Encompass Health 18 Uses of free cash flow ($millions) 2020 Actuals 2021 Assumptions Growth in core business IRF bed expansions $44.8 $50 to $70 New IRFs - De novos 173.0 325 to 350 - Acquisitions — opportunistic - Replacement IRFs and other 35.5 40 to 50 Home health and hospice acquisitions 1.1 50 to 100 $254.4 $465 to $570 Debt reduction Debt (borrowings) redemptions, net ($226.3) opportunistic Shareholder and other distributions Cash dividends on common stock 111.9 ~$112 Purchase of Home Health Holdings rollover shares and exercise of SARs (see page 25) 262.9 N/A Common stock repurchases 6.1 opportunistic ~$198 million authorization remaining as of December 31, 2021(8) See the debt schedule on page 27. Refer to pages 46-47 for end notes. Quarterly cash dividend currently set at $0.28 per common share
Appendix
Encompass Health 20 Inpatient rehabilitation - 12/31/20 137 IRFs (50 are joint ventures) 35 States and Puerto Rico ~31,700 Employees 23 % of licensed beds† 31 % of Medicare patients served† Key statistics - trailing 4 quarters ~181,900 Inpatient discharges ~$3.5 Billion in revenue * Excluding markets that have home health licensure barriers ** Future IRFs - Previously announced under development as of January 26, 2021 † Based on 2017 and 2018 data Note: One of the 241 home health locations is nonconsolidated. This location is accounted for using the equity method of accounting. Portfolio as of December 31, 2020 Inpatient rehabilitation hospitals (“IRFs”) Home health locations Hospice locations 18 Future IRFs** 39 States and Puerto Rico ~43,000 employees Encompass Health a leading provider of inpatient rehabilitation and home-based care Market overlap 89 of EHC’s IRFs have an EHC home health location within the service area.* Home health and hospice - 12/31/20 241 Home health locations 82 Hospice locations 31 States ~11,300 Employees Key statistics - trailing 4 quarters ~158,900 Home health episodic admissions ~12,900 Hospice admissions ~$1.1 Billion in revenue Largest owner and operator of IRFs 4th Largest provider of Medicare-certified skilled home health services
Encompass Health 21 Expansion activity Inpatient Rehabilitation Facilities Opened or Under Development* # of New Beds 2020 2021 2022 De novo: Murrieta, CA 50 — — Sioux Falls, SD 40 — — Toledo, OH 40 — — Cumming, GA — 50 — North Tampa, FL — 50 — Stockbridge, GA — 50 — Greenville, SC — 40 — Pensacola, FL — 40 — Shreveport, LA — 40 — Waco, TX — 40 — Libertyville, IL — — 60 St. Augustine, FL — — 40 Lakeland, FL — — 50 Clermont, FL — — 50 Naples, FL — — 50 Cape Coral, FL — — 40 Jacksonville, FL — — 50 Joint ventures: Coralville, IA 40 — — San Angelo, TX — 40 — Knoxville, TN — — 73 Shiloh, IL — — 40 Moline, IL — — 40 Bed expansions, net** 117 ~100 ~100 287 ~450 ~600 * Certain development projects may be delayed due to the COVID-19 pandemic. ** Net bed expansions in each year may change due to the timing of certain regulatory approvals and/or construction delays. For 2021 and 2022, the currently expected range for bed expansions is 100 to 150. Q4 2020 expansion activity highlights: u Announced plans to build a 40-bed inpatient rehabilitation hospital in Shiloh, IL u Opened a 40-bed inpatient rehabilitation hospital in Toledo, OH. u Added 28 beds to existing hospitals In January 2021, announced plans to build a 40-bed inpatient rehabilitation hospital in Moline, IL with UnityPoint Health - Trinity. Previously announced IRF development projects underway 2 New states Home Health and Hospice Locations # of Locations December 31, 2019 328 Acquisitions 1 Opening of new locations 2 Merging of locations (8) December 31, 2020 323 1 2 3 4 5 6 7 8 9 10 11 18 12 14 13 16 17 15 18
Encompass Health 22 * Overlap markets have an Encompass Health IRF and an Encompass Health home health location within an approximate 30-mile radius, excluding markets that have home health licensure barriers. Overlap markets are open for 12 months before inclusion in the clinical collaboration rate. The Company continues to improve the patient experience and outcomes through integrated care delivery. Inpatient rehabilitation–home health clinical collaboration (all payors) overlap markets* EHC Home Health Non-EHC Home Health Encompass Health IRF discharges to: Overlap Markets* 8,555 Clinical Collaboration Rate 17.260 u The lower clinical collaboration rate for FY 2020 was driven by a higher mix of Medicare Advantage patients (see page 31). Ÿ Medicare fee-for-service clinical collaboration rate increased 10 bps from 43.2% in FY 2019 to 43.3% in FY 2020. Ÿ Medicare Advantage clinical collaboration rate increased 110 bps from 14.1% in FY 2019 to 15.2% in FY 2020. u Clinical collaboration objectives: Ÿ Improve patient experience and outcomes Ÿ Reduce total cost of care across a post-acute episode u Coordination between our IRFs and HH teams is resulting in lower discharges to SNFs and higher discharges home. 71 72 76 81 89 89 18.5% 25.4% 29.5% 34.0% 35.6% 33.2% 2015 2016 2017 2018 2019 2020 37,671 40,637 42,950 41,858 44,479 51,287 8,555 13,800 17,947 21,547 24,560 25,444
Encompass Health 23 INPATIENT REHABILITATION Avg. Monthly Utilization Avg. Monthly Spend Months of Current Utilization in Inventory Historical Current* Historical Current* MASKS 130,000 914,000 $ 10,400 $ 692,000 4.8 RESPIRATORS 5,000 60,000 $ 2,200 $ 156,000 4.0 GOWNS 137,500 252,000 $ 45,375 $ 511,000 5.3 **GLOVES 9,500,000 11,213,000 $ 350,000 $ 698,000 1.0 Total PPE $ 407,975 $ 2,057,000 u Increased PPE Utilization due to COVID-19 ñ Utilization of PPE has increased as a result of new infection control policies in response to the COVID-19 pandemic, including mandatory masking for employees and patients. u Impact on Pricing ñ As the pandemic spread, our demand for PPE increased beyond the capacity of our primary suppliers. We have diversified sourcing to secondary vendors, generally at significantly higher prices. Average pricing for masks and gowns have increased 10x and 6x, respectively, during the pandemic. ñ We have implemented a multi-tier approach to obtaining necessary PPE that includes maximizing the allocated inventory from our primary suppliers (at a lower contractual price) and contracting with multiple secondary suppliers to source clinically-approved, price-protected products which are distributed through our centralized warehouses. Personal Protective Equipment (PPE) – Utilization, Cost and Inventory MAS RESPIRAT GO GLO Total PPE HOME HEALTH AND HOSPICE Avg. Monthly Utilization Avg. Monthly Spend Months of Current Utilization in Inventory Historical Current* Historical Current* MASKS - 123,000 - $ 112,000 1.7 RESPIRATORS - 35,000 - $ 162,000 3.8 GOWNS - 48,000 - $ 169,000 3.1 **GLOVES 1,735,400 2,508,000 $ 58,700 $ 97,000 1.0 Total PPE $ 58,700 $ 540,000 RESPIR S Total PPE *April through December 2020
Encompass Health 24 Pre-payment claims denials - inpatient rehabilitation segment Impact to Income Statement Period New Denials Collections of Previously Denied Claims Revenue Reserve for New Denials Update of Reserve for Prior Denials (In Millions) Q4 2020 $(0.4) $(7.2) $— $4.5 Q3 2020 (0.6) (6.3) — — Q2 2020 (1.5) (3.5) — — Q1 2020 4.2 (5.0) 1.3 — Q4 2019 3.8 (4.6) 1.1 — Q3 2019 11.3 (6.1) 3.4 — Q2 2019 3.5 (1.7) 1.1 — Q1 2019 1.6 (2.5) 0.5 — Q4 2018 4.6 (3.2) 1.4 — Q3 2018 0.7 (1.3) 0.2 — Q2 2018 1.8 (2.8) 0.5 — Q1 2018 3.1 (6.8) 0.9 — Impact to Balance Sheet Dec. 31, 2020 Dec. 31, 2019 Dec. 31, 2018 (In Millions) Pre-payment claims denials $ 122.8 $ 155.3 $ 158.1 Recorded reserves (41.3) (46.6) (47.4) Net accounts receivable from pre-payment claims denials $ 81.5 $ 108.7 $ 110.7 Background • For several years prior to 2018, under programs designated as “widespread probes,” certain Medicare Administrative Contractors (“MACs”) conducted pre-payment claim reviews and denied payment for certain diagnosis codes. • Encompass Health appeals most denials. – MACs identify medical documentation issues as a leading basis for denials. – Encompass Health’s investment in clinical information systems and its medical services department has further improved its documentation and reduced technical denials. • By statute, ALJ decisions are due within 90 days of a request for hearing, but appeals are taking years. HHS has implemented rule changes to address the backlog of appeals, but their effect is uncertain. • In November 2018, a federal court ordered HHS to reduce the backlog in the following increments: a 19% reduction by the end of FY 2019; a 49% reduction by the end of FY 2020; a 75% reduction by the end of FY 2021; and elimination of the backlog by the end of FY 2022. • After years of delay in processing appeals, ALJs recently increased the frequency of hearings and the number of claims set at each hearing. Notwithstanding the recent acceleration, Encompass Health still has over 7,500 claims in the backlog, including claims from up to 10 years ago. • Since 2018, CMS has replaced the “widespread probes” with the Targeted Probe and Educate (“TPE”) initiative.* • Effective March 2020, CMS suspended most Medicare fee-for-service medical reviews during the public health emergency, including TPE and current post-payment reviews, allowing reviews for potential fraud. CMS authorized its contractors to resume reviews as of Aug. 3, 2020. Encompass Health reserves pre-payment claim denials as a reduction of net operating revenues upon notice from a MAC a claim is under review. * For more information regarding TPE, see https://www.cms.gov/Research-Statistics-Data-and-Systems/Monitoring-Programs/ Medicare-FFS-Compliance-Programs/Medical-Review/Targeted-Probe-and-EducateTPE.html
Encompass Health 25 Options Holder – The right (but not the obligation) to sell for cash up to 1/3 of the Rollover Shares to the parent after 1/1/18; 2/3 after 1/1/19; and all outstanding Rollover Shares after 1/1/20 Company – The right (but not the obligation) to purchase for cash all or any portion of the Rollover Shares after 1/1/20 Valuation Fair value of the Rollover Shares and SARs was determined using the product of Home Health Holdings’ EBITDA for the trailing 12-month period and a median market price multiple based on a basket of public home health companies and recent transactions, less the current balance of the intracompany note(s) to the parent. Activity In Feb. 2018, July 2019, and Jan. 2020, holders exercised their rights to sell Rollover Shares to EHC. EHC settled the exercises upon payment of approximately $65 million, approximately $163 million, and approximately $162 million in Q1 2018, Q3 2019 and Q1 2020, respectively. After the approximate $162 million payment was made in February 2020, only $46 million of the rollover shares remained outstanding, or approximately 1.2% of Home Health Holdings. In Q1 2019 and Q3 2019, holders exercised vested SARs for cash proceeds of approximately $13 million and approximately $55 million, respectively. In Q1 2020, holders exercised the remaining SARs for cash proceeds of approximately $101 million. On Feb. 20, 2020, the Company and each of April Anthony and Luke James agreed to exchange the remaining rollover shares (approximately $45 million and $1 million, respectively) for an equal value of shares of EHC. The exchange settled in March 2020. In connection with the 2014 acquisition of Encompass Home Health and Hospice: • Certain members of that management team rolled a portion of their pre-acquisition equity into the post-acquisition entity (“Home Health Holdings”) resulting in a 16.7% ownership interest (the “Rollover Shares”). • The Company also granted stock appreciation rights (“SARs”) based on the fair value of the common stock of Home Health Holdings to certain members of that management team. Half of the SARs vested on Jan. 1, 2019, and the other half vested on Jan. 1, 2020. • Home Health Holdings was capitalized with a promissory note to the parent company totaling approximately $385 million (equal to 5.5x the segment’s 2014 EBITDA). This was done to provide the opportunity for leveraged returns on the equity, thereby mimicking a private equity transaction structure. • To the extent Home Health Holdings needed cash (e.g., acquisitions, capex, etc.), such amounts were added to the principal amount of the original note and subsequent new notes. Cash generated from the operations of Home Health Holdings has been used to pay interest and a portion of the principal on the notes. Overview of rollover shares and SARs previously held by members of the home health and hospice management team Background Home Health Holdings Original Rollover Shares 16.7%
Encompass Health 26 * This chart does not include ~$392 of finance lease obligations or ~$40 of other notes payable. See the debt schedule on page 27; Refer to pages 46-47 for end notes. Debt maturity profile - face value 2020 2022 2023 2024 2024 2025 2026 2027 2028 2029 2030 2031 $350 Senior Notes 5.75% $300 Senior Notes 5.125% ($ in millions) Revolver capacity $255 Term Loans No significant debt maturities prior to 2023 Callable beginning March 2018 $800 Senior Notes 4.75% $800 Senior Notes 4.5% Revolver As of December 31, 2020* $963 Available $0 Drawn + $37 reserved for LCs Callable beginning September 2020 Callable beginning February 2025(9) Callable beginning February 2023(9) $400 Senior Notes 4.625% Callable beginning April 2026(10) In October 2020, the Company issued $400 million of 2031 senior notes; used proceeds plus $300 million of available cash to redeem all $700 million of 2024 senior notes on November 1, 2020(10).
Encompass Health 27 Debt schedule Change in December 31, December 31, Debt vs. ($millions) 2020 2019 YE 2019 Advances under $1 billion revolving credit facility, November 2024 - LIBOR +150bps $ — $ 45.0 $ (45.0) Term loan facility, November 2024 - LIBOR +150bps 251.6 265.2 (13.6) Bonds Payable: 5.125% Senior Notes due 2023 298.1 297.3 0.8 5.75% Senior Notes due 2024(1)(9) — 697.3 (697.3) 5.75% Senior Notes due 2025 346.3 345.6 0.7 4.50% Senior Notes due 2028(9) 785.0 491.7 293.3 4.75% Senior Notes due 2030(9) 783.2 491.7 291.5 4.625% Senior Notes due 2031(10) 393.2 — 393.2 Other notes payable 39.8 44.7 (4.9) Finance lease obligations 391.7 384.1 7.6 Long-term debt $ 3,288.9 $ 3,062.6 $ 226.3 Debt to Adjusted EBITDA 3.8 x 3.2 x Leverage net of cash on balance sheet 3.6 x 3.1 x Reconciliations to GAAP provided on pages 37-45; Refer to pages 46-47 for end notes.
Encompass Health 28 * Includes consolidated inpatient rehabilitation hospitals classified as same store during each period Refer to pages 46-47 for end notes. Q1 2018 Q2 2018 Q3 2018 Q4 2018 Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 -15.0 -10.0 -5.0 0.0 5.0 10.0 15.0 New-store/same-store growth Inpatient Rehabilitation Yuma, AZ (51 beds)(2) Boise, ID (40 beds) Katy, TX (40 beds) Shelby County, AL (34 beds) Bluffton, SC (38 beds) Murrells Inlet, SC (29 beds) Winston-Salem, NC (68 beds) Lubbock, TX (40 beds) Discharges Q1 2018 Q2 2018 Q3 2018 Q4 2018 Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 New store 1.9% 1.6% 1.0% 1.7% 1.3% 1.5% 2.4% 2.0% 2.3% 2.1% 1.3% 0.9% Same store* 4.8% 3.6% 2.0% 1.9% (0.2)% 2.2% 3.1% 3.2% 2.4% (12.8)% (2.8)% (3.8)% Total by qtr. 6.7% 5.2% 3.0% 3.6% 1.1% 3.7% 5.5% 5.2% 4.7% (10.7)% (1.5)% (2.9)% Total by year 4.6% 3.9% (2.6)% Same-store year* 2.8% 1.8% (4.4)% Same-store year UDS(11) 1.1% 1.3% Murrieta, CA (50 beds) Sioux Falls, SD (40 beds) Coralville, IA (40 beds) Beginning in mid-March 2020, volume growth was impacted by COVID-19. Toledo, OH (40 beds)
Encompass Health 29 Q1 2018 Q2 2018 Q3 2018 Q4 2018 Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 -20.0 -10.0 0.0 10.0 20.0 30.0 New-store/same-store growth Home Health Episodic admissions Q1 2018 Q2 2018 Q3 2018 Q4 2018 Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 New store 2.5% 5.3% 5.4% 5.3% 5.7% 2.9% 13.0% 12.3% 11.7% 9.4% 1.3% 1.5% Same store* 7.4% 5.1% 3.8% 5.4% 6.4% 8.3% 9.7% 6.6% 0.2% (17.3)% (4.6)% (3.8)% Total by quarter 9.9% 10.4% 9.2% 10.7% 12.1% 11.2% 22.7% 18.9% 11.9% (7.9)% (3.3)% (2.3)% Total by year 10.0% 16.3% (0.5)% Same-store year* 5.6% 7.7% (6.1)% u In 2018, the Company acquired or opened 23 home health locations. u In 2019, the Company acquired or opened 27 home health locations. u In 2020, the Company acquired or opened two home health locations and consolidated one former equity method location (3). Acquired Camellia Healthcare (14 home health locations in 3 states) in May 2018 Acquired Alacare Home Health & Hospice (23 home health locations in Alabama) in July 2019 * Includes consolidated home health agencies classified as same store during each period Refer to pages 46-47 for end notes. Beginning in mid-March 2020, volume growth was impacted by COVID-19.
Encompass Health 30 Q1 2018 Q2 2018 Q3 2018 Q4 2018 Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 -10.0 0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 * Includes consolidated hospice agencies classified as same store during each period New-store/same-store growth Hospice Admissions Q1 2018 Q2 2018 Q3 2018 Q4 2018 Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 New store 4.4% 26.1% 40.3% 41.2% 35.5% 15.7% 34.6% 31.1% 30.9% 30.6% 0.5% 0.7% Same store* 36.8% 35.2% 21.1% 8.6% 13.7% 13.6% 5.8% 10.1% (5.3)% 6.7% 15.8% 16.1% Total by quarter 41.2% 61.3% 61.4% 49.8% 49.2% 29.3% 40.4% 41.2% 25.6% 37.3% 16.3% 16.8% Total by year 53.5% 39.8% 23.2% Same-store year* 24.6% 12.2% 8.1% u In 2018, the Company acquired or opened 22 hospice locations. u In 2019, the Company acquired or opened 25 hospice locations. u In 2020, the Company opened one hospice location. Acquired Camellia Healthcare (18 hospice locations in 3 states) in May 2018 Acquired Alacare Home Health & Hospice (23 hospice locations in Alabama) in July 2019
Encompass Health 31 Payment sources (percent of revenues) Inpatient Rehabilitation Segment Home Health and Hospice Segment Consolidated Q4 Q4 Q4 Full Year 2020 2019 2020 2019 2020 2019 2020 2019 Medicare 68.3 % 71.9 % 84.3 % 83.8 % 72.0 % 74.8 % 70.5 % 75.1 % Medicare Advantage 13.6 % 11.1 % 9.9 % 10.1 % 12.7 % 10.8 % 14.2 % 10.6 % Managed care 10.4 % 9.5 % 4.2 % 4.3 % 9.0 % 8.2 % 9.0 % 8.3 % Medicaid 3.9 % 3.2 % 1.4 % 1.6 % 3.3 % 2.8 % 3.4 % 2.8 % Other third-party payors 1.3 % 1.2 % — % — % 1.0 % 0.9 % 0.9 % 0.9 % Workers’ compensation 0.6 % 0.8 % 0.1 % 0.1 % 0.5 % 0.7 % 0.5 % 0.7 % Patients 0.5 % 0.6 % — % — % 0.4 % 0.5 % 0.4 % 0.5 % Other income 1.4 % 1.7 % 0.1 % 0.1 % 1.1 % 1.3 % 1.1 % 1.1 % Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % Growth in Medicare Advantage as a percent of revenue within the inpatient rehabilitation segment for 2020 resulted in part from suspension of prior authorization requirements.
Encompass Health 32 Inpatient rehabilitation operational and labor metrics Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Full Year 2020 2020 2020 2020 2019 2019 2019 2019 2020 2019 (In Millions) Net patient revenue- inpatient $ 914.9 $ 883.2 $ 808.0 $ 890.0 $ 873.5 $ 850.6 $ 851.8 $ 847.6 $ 3,496.1 $ 3,423.5 Net patient revenue- outpatient and other revenues 18.2 16.2 16.5 19.2 23.2 21.7 22.1 22.5 70.1 89.5 Net operating revenues $ 933.1 $ 899.4 $ 824.5 $ 909.2 $ 896.7 $ 872.3 $ 873.9 $ 870.1 $ 3,566.2 $ 3,513.0 (Actual Amounts) Discharges(12) 46,503 45,962 41,682 47,750 47,885 46,669 46,679 45,609 181,897 186,842 Net patient revenue per discharge $ 19,674 $ 19,216 $ 19,385 $ 18,639 $ 18,242 $ 18,226 $ 18,248 $ 18,584 $ 19,220 $ 18,323 Outpatient visits 48,786 51,968 15,760 69,743 82,536 86,395 104,566 102,028 186,257 375,525 Average length of stay 12.9 13.0 13.2 12.7 12.4 12.6 12.5 12.8 12.9 12.6 Occupancy % 68.7 % 68.8 % 64.5 % 71.3 % 70.0 % 69.2 % 70.6 % 72.3 % 67.7 % 69.5 % # of licensed beds 9,505 9,437 9,401 9,322 9,249 9,219 9,062 8,941 9,505 9,249 Occupied beds 6,530 6,493 6,064 6,647 6,474 6,380 6,398 6,464 6,435 6,428 Full-time equivalents (FTEs)(13) 22,383 22,147 20,809 22,318 22,096 22,037 21,570 21,345 21,915 21,762 Contract labor 192 176 116 161 159 187 227 246 161 205 Total FTE and contract labor 22,575 22,323 20,925 22,479 22,255 22,224 21,797 21,591 22,076 21,967 EPOB(14) 3.46 3.44 3.45 3.38 3.44 3.48 3.41 3.34 3.43 3.42 Refer to pages 46-47 for end notes.
Encompass Health 33 Home health and hospice operational metrics Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Full Year 2020 2020 2020 2020 2019 2019 2019 2019 2020 2019 (In Millions) Net home health revenue $ 227.7 $ 223.3 $ 201.8 $ 224.8 $ 236.9 $ 238.9 $ 222.7 $ 219.5 $ 877.6 $ 918.0 Net hospice revenue 53.6 51.2 47.8 48.0 50.8 50.4 38.4 34.4 200.6 174.0 Net operating revenues $ 281.3 $ 274.5 $ 249.6 $ 272.8 $ 287.7 $ 289.3 $ 261.1 $ 253.9 $ 1,078.2 $ 1,092.0 Home Health: (Actual Amounts) Total admissions(15) 49,398 49,863 45,253 54,403 51,958 52,959 46,941 47,186 198,917 199,044 Episodic admissions(15) 40,830 40,765 34,841 42,476 41,781 42,174 37,828 37,944 158,912 159,727 Recertifications 30,064 29,830 28,328 26,553 29,460 30,213 28,129 28,282 114,775 116,084 Episodes 71,441 68,261 60,154 68,652 73,055 72,016 66,881 63,626 268,508 275,578 Average revenue per episode $ 2,883 $ 2,910 $ 2,920 $ 2,909 $ 2,901 $ 2,980 $ 2,959 $ 3,057 $ 2,905 $ 2,972 Episodic visits per episode 15.7 16.4 17.4 16.3 16.4 17.3 17.1 17.7 16.4 17.1 Total visits 1,281,830 1,300,866 1,250,546 1,306,230 1,372,326 1,425,323 1,325,362 1,308,610 5,139,472 5,431,621 Cost per visit $ 76 $ 75 $ 89 $ 81 $ 79 $ 78 $ 76 $ 75 $ 80 $ 77 Hospice: Admissions(16) 3,348 3,354 3,190 2,986 2,866 2,884 2,324 2,378 12,878 10,452 Patient days 349,989 346,019 336,507 334,545 345,855 353,549 259,501 239,022 1,367,060 1,197,927 Average daily census 3,804 3,761 3,698 3,676 3,759 3,843 2,852 2,656 3,735 $ 3,282 Revenue per day $ 153 $ 148 $ 142 $ 144 $ 147 $ 142 $ 148 $ 144 $ 147 $ 145 Refer to pages 46-47 for end notes.
Encompass Health 34 Share information Weighted Average for the Period Q4 Full Year (In Millions) 2020 2019 2020 2019 2018 Basic shares outstanding 98.7 97.8 98.6 98.0 97.9 Restricted stock awards, dilutive stock options, restricted stock units, and common stock warrants 1.4 1.7 1.2 1.4 1.9 Diluted shares outstanding 100.1 99.5 99.8 99.4 99.8 End of Period Q4 Full Year (In Millions) 2020 2019 2020 2019 2018 Basic shares outstanding 99.4 98.6 99.4 98.6 98.9
Encompass Health 35 Segment operating results Q4 2020 Q4 2019 (In Millions) IRF Home Health and Hospice Reclasses Consolidated IRF Home Health and Hospice Reclasses Consolidated Net operating revenues $ 933.1 $ 281.3 $ — $ 1,214.4 $ 896.7 $ 287.7 $ — $ 1,184.4 Operating Expenses: Inpatient Rehabilitation: Salaries and benefits (495.1) — (191.0) (686.1) (465.4) — (203.1) (668.5) Other operating expenses(a) (140.2) — (21.9) (162.1) (135.8) — (23.5) (159.3) Supplies (44.1) — (7.6) (51.7) (37.7) — (5.5) (43.2) Occupancy costs (15.4) — (5.0) (20.4) (15.7) — (4.9) (20.6) Home Health and Hospice: Cost of services sold (excluding depreciation and amortization) — (121.9) 121.9 — — (133.4) 133.4 — Support and overhead costs — (103.6) 103.6 — — (103.6) 103.6 — (694.8) (225.5) — (920.3) (654.6) (237.0) — (891.6) Other income(b) 4.1 — — 4.1 4.0 — — 4.0 Equity in net income of nonconsolidated affiliates 0.9 0.1 — 1.0 1.0 0.2 — 1.2 Noncontrolling interests(c) (25.3) (0.4) — (25.7) (22.0) (1.3) — (23.3) Segment Adjusted EBITDA $ 218.0 $ 55.5 $ — 273.5 $ 225.1 $ 49.6 $ — 274.7 General and administrative expenses(d)(e) (33.6) (36.5) Adjusted EBITDA $ 239.9 $ 238.2 In arriving at Adjusted EBITDA, the following were excluded: (a) Loss on disposal or impairment of assets $ 1.0 $ — $ — $ 1.0 $ 7.8 $ — $ — $ 7.8 (b) Change in fair market value of equity securities $ (0.1) $ — $ — $ (0.1) $ 0.4 $ — $ — $ 0.4 (c) SARs mark-to-market impact on noncontrolling interests (see p. 25) $ — $ — $ — $ — $ — $ (0.7) $ — $ (0.7) (d) Stock-based compensation $ — $ — $ — $ 4.2 $ — $ — $ — $ 27.4 (e) Transaction costs $ — $ — $ — $ — $ — $ — $ — $ 0.1 Reconciliations to GAAP provided on pages 37-45; Refer to pages 46-47 for end notes.
Encompass Health 36 Segment operating results Year Ended December 31, 2020 Year Ended December 31, 2019 (In Millions) IRF Home Health and Hospice Reclasses Consolidated IRF Home Health and Hospice Reclasses Consolidated Net operating revenues $ 3,566.2 $ 1,078.2 $ — $ 4,644.4 $ 3,513.0 $ 1,092.0 $ — $ 4,605.0 Operating Expenses: Inpatient Rehabilitation: Salaries and benefits (1,903.8) — (776.7) (2,680.5) (1,813.1) — (758.9) (2,572.0) Other operating expenses(a) (534.7) — (88.1) (622.8) (521.9) — (90.6) (612.5) Supplies (171.0) — (29.5) (200.5) (147.0) — (20.9) (167.9) Occupancy costs (61.4) — (19.8) (81.2) (64.8) — (17.5) (82.3) Home Health and Hospice: Cost of services sold (excluding depreciation and amortization) — (511.3) 511.3 — — (506.2) 506.2 — Support and overhead costs(b) — (402.8) 402.8 — — (381.7) 381.7 — (2,670.9) (914.1) — (3,585.0) (2,546.8) (887.9) — (3,434.7) Other income(c)(d) 8.0 — — 8.0 10.5 — — 10.5 Equity in net income of nonconsolidated affiliates 3.0 0.5 — 3.5 5.5 1.2 — 6.7 Noncontrolling interests(e) (83.3) (1.3) — (84.6) (82.6) (9.5) — (92.1) Segment Adjusted EBITDA $ 823.0 $ 163.3 $ — 986.3 $ 899.6 $ 195.8 $ — 1,095.4 General and administrative expenses(f)(g) (126.0) (130.5) Adjusted EBITDA $ 860.3 $ 964.9 In arriving at Adjusted EBITDA, the following were excluded: (a) Loss (gain) on disposal or impairment of assets $ 10.4 $ 1.2 $ — $ 11.6 $ 11.2 $ (0.1) $ — $ 11.1 (b) Payroll taxes on SARs exercise $ — $ 1.5 $ — $ 1.5 $ — $ 1.0 $ — $ 1.0 (c) Change in fair market value of equity securities $ (0.4) $ — $ — $ (0.4) $ (0.8) $ — $ — $ (0.8) (d) Gain on consolidation of former equity method location(2)(3) $ — $ (2.2) $ — $ (2.2) $ (19.2) $ — $ — $ (19.2) (e) SARs mark-to-market impact on noncontrolling interests (see p. 25) $ — $ — $ — $ — $ — $ (5.0) $ — $ (5.0) (f) Stock-based compensation $ — $ — $ — $ 29.5 $ — $ — $ — $ 114.4 (g) Transaction costs $ — $ — $ — $ — $ — $ — $ — $ 2.1 Reconciliations to GAAP provided on pages 37-45; Refer to pages 46-47 for end notes.
Encompass Health 37 Reconciliation of net income to Adjusted EBITDA(7) 2020 Q1 Q2 Q3 Q4 Full Year (in millions, except per share data) Total Per Share Total Per Share Total Per Share Total Per Share Total Per Share Net Income $ 108.7 $ 48.3 $ 100.1 $ 111.7 $ 368.8 Loss (income) from disc ops, net of tax, attributable to Encompass Health 0.1 (0.1) — — — Net income attributable to noncontrolling interests (21.7) (14.8) (22.4) (25.7) (84.6) Income from continuing operations attributable to Encompass Health* 87.1 $ 0.87 33.4 $ 0.34 77.7 $ 0.78 86.0 $ 0.86 284.2 $ 2.85 Government, class action, and related settlements 2.8 — — — 2.8 Provision for income tax expense 27.1 11.8 26.9 38.0 103.8 Interest expense and amortization of debt discounts and fees 43.2 45.8 49.0 46.2 184.2 Depreciation and amortization 58.8 60.7 61.2 62.3 243.0 Loss on early extinguishment of debt(1) — — — 2.3 2.3 Loss on disposal or impairment of assets 0.1 3.0 7.5 1.0 11.6 Stock-based compensation expense 7.1 9.9 8.3 4.2 29.5 Gain on consolidation of Treasure Coast(3) (2.2) — — — (2.2) Change in fair market value of equity securities 2.5 (2.4) (0.4) (0.1) (0.4) Payroll taxes on SARs exercise 1.5 — — — 1.5 Adjusted EBITDA $ 228.0 $ 162.2 $ 230.2 $ 239.9 $ 860.3 Weighted average common shares outstanding: Basic 98.2 98.7 98.7 98.7 98.6 Diluted 99.6 99.9 99.9 100.1 99.8 * Per share amounts for each period presented are based on diluted weighted-average shares outstanding. Refer to pages 46-47 for end notes.
Encompass Health 38 Reconciliation of net income to Adjusted EBITDA(7) 2019 Q1 Q2 Q3 Q4 Full Year (in millions, except per share data) Total Per Share Total Per Share Total Per Share Total Per Share Total Per Share Net Income $ 125.2 $ 110.9 $ 119.5 $ 90.2 $ 445.8 Loss from disc ops, net of tax, attributable to Encompass Health 0.5 0.1 — — 0.6 Net income attributable to noncontrolling interests (22.9) (19.7) (21.9) (22.6) (87.1) Income from continuing operations attributable to Encompass Health* 102.8 $ 1.04 91.3 $ 0.92 97.6 $ 0.98 67.6 $ 0.68 359.3 $ 3.62 Provision for income tax expense 30.8 23.5 34.3 27.3 115.9 Interest expense and amortization of debt discounts and fees 37.2 37.7 40.3 44.5 159.7 Depreciation and amortization 52.5 52.7 55.1 58.4 218.7 Loss on early extinguishment of debt(1) — 2.3 — 5.4 7.7 Loss on disposal of assets 1.1 1.3 0.9 7.8 11.1 Stock-based compensation expense 19.4 45.9 21.7 27.4 114.4 Transaction costs 0.6 0.4 1.0 0.1 2.1 Gain on consolidation of Yuma(2) — — (19.2) — (19.2) SARs mark-to-market impact on noncontrolling interests (see page 25) (0.8) (2.6) (0.9) (0.7) (5.0) Change in fair market value of equity securities (0.9) (0.3) — 0.4 (0.8) Payroll taxes on SARs exercise 0.2 — 0.8 — 1.0 Adjusted EBITDA $ 242.9 $ 252.2 $ 231.6 $ 238.2 $ 964.9 Weighted average common shares outstanding: Basic 98.4 98.0 97.8 97.8 98.0 Diluted 99.7 99.3 99.4 99.5 99.4 * Per share amounts for each period presented are based on diluted weighted-average shares outstanding. Refer to pages 46-47 for end notes.
Encompass Health 39 Net cash provided by operating activities reconciled to Adjusted EBITDA(7) Q4 Full Year (In Millions) 2020 2019 2020 2019 Net cash provided by operating activities $ 279.7 $ 215.6 $ 704.7 $ 635.3 Interest expense and amortization of debt discounts and fees 46.2 44.5 184.2 159.7 Equity in net income of nonconsolidated affiliates 1.0 1.2 3.5 6.7 Net income attributable to noncontrolling interests in continuing operations (25.7) (22.6) (84.6) (87.1) Amortization of debt-related items (2.1) (1.4) (7.2) (4.5) Distributions from nonconsolidated affiliates (1.0) (1.8) (3.8) (6.6) Current portion of income tax expense (20.1) 8.1 51.4 75.9 Change in assets and liabilities (40.4) (5.3) 7.3 180.1 Cash used in operating activities of discontinued operations — (0.2) 0.2 4.4 Transaction costs — 0.1 — 2.1 SARs mark-to-market impact on noncontrolling interests (see page 25) — (0.7) — (5.0) Payroll taxes on SARs exercise — — 1.5 1.0 Change in fair market value of equity securities (0.1) 0.4 (0.4) (0.8) Other 2.4 0.3 3.5 3.7 Adjusted EBITDA $ 239.9 $ 238.2 $ 860.3 $ 964.9 Refer to pages 46-47 for end notes.
Encompass Health 40 Reconciliation of segment Adjusted EBITDA to income from continuing operations before income tax expense Three Months Ended Year Ended December 31, December 31, 2020 2019 2020 2019 (In Millions) Total segment Adjusted EBITDA $ 273.5 $ 274.7 $ 986.3 $ 1,095.4 General and administrative expenses (37.8) (64.0) (155.5) (247.0) Depreciation and amortization (62.3) (58.4) (243.0) (218.7) Loss on disposal or impairment of assets (1.0) (7.8) (11.6) (11.1) Government, class action, and related settlements(4) — — (2.8) — Loss on early extinguishment of debt(1) (2.3) (5.4) (2.3) (7.7) Interest expense and amortization of debt discounts and fees (46.2) (44.5) (184.2) (159.7) Net income attributable to noncontrolling interests 25.7 22.6 84.6 87.1 SARs mark-to-market impact on noncontrolling interests (see page 25) — 0.7 — 5.0 Change in fair market value of equity securities 0.1 (0.4) 0.4 0.8 Gain on consolidation of former equity method location(2)(3) — — 2.2 19.2 Payroll taxes on SARs exercise — — (1.5) (1.0) Income from continuing operations before income tax expense $ 149.7 $ 117.5 $ 472.6 $ 562.3 Refer to pages 46-47 for end notes.
Encompass Health 41 Reconciliation of net cash provided by operating activities to adjusted free cash flow(6) Q4 Full Year (In Millions) 2020 2019 2020 2019 Net cash provided by operating activities $ 279.7 $ 215.6 $ 704.7 $ 635.3 Impact of discontinued operations — (0.2) 0.2 4.4 Net cash provided by operating activities of continuing operations 279.7 215.4 704.9 639.7 Capital expenditures for maintenance (47.4) (62.0) (154.9) (167.1) Distributions paid to noncontrolling interests of consolidated affiliates (19.3) (22.2) (72.2) (79.8) Items non-indicative of ongoing operating performance: Cash paid for SARs exercise (inclusive of payroll taxes) — — 102.1 69.6 Transaction costs and related assumed liabilities — 0.1 — 2.1 Cash paid for government, class action, and related settlements(4) — 5.6 — 52.0 Adjusted free cash flow $ 213.0 $ 136.9 $ 579.9 $ 516.5 Cash dividends on common stock $ 27.6 $ 27.4 $ 111.9 $ 108.7 Refer to pages 46-47 for end notes.
Encompass Health 42 Adjusted EPS(5) - Q4 2020 For the Three Months Ended December 31, 2020 Adjustments As Reported Loss on Early Extinguishment of Debt Income Tax Adjustments Change in Fair Market Value of Equity Securities As Adjusted (In Millions, Except Per Share Amounts) Adjusted EBITDA $ 239.9 $ — $ — $ — $ 239.9 Depreciation and amortization (62.3) — — — (62.3) Loss on early extinguishment of debt(1) (2.3) 2.3 — — — Interest expense and amortization of debt discounts and fees (46.2) — — — (46.2) Stock-based compensation (4.2) — — — (4.2) Loss on disposal or impairment of assets (1.0) — — — (1.0) Change in fair market value of equity securities 0.1 — — (0.1) — Income from continuing operations before income tax expense 124.0 2.3 — (0.1) 126.2 Provision for income tax expense (38.0) (0.6) 5.6 — (33.0) Income from continuing operations attributable to Encompass Health $ 86.0 $ 1.7 $ 5.6 $ (0.1) $ 93.2 Diluted earnings per share from continuing operations* $ 0.86 $ 0.02 $ 0.06 $ — $ 0.93 Diluted shares used in calculation 100.1 * Adjusted EPS may not sum across due to rounding. Refer to pages 46-47 for end notes.
Encompass Health 43 For the Three Months Ended December 31, 2019 Adjustments As Reported Mark-to- Market Adjustment for Stock Comp. Expense Loss on Early Exting. of Debt Income Tax Adj. Transaction Costs Change in Fair Market Value of Equity Securities As Adjusted (In Millions, Except Per Share Amounts) Adjusted EBITDA $ 238.2 $ — $ — $ — $ — $ — $ 238.2 Depreciation and amortization (58.4) — — — — — (58.4) Loss on early extinguishment of debt(1) (5.4) — 5.4 — — — — Interest expense and amortization of debt discounts and fees (44.5) — — — — — (44.5) Stock-based compensation (27.4) 15.5 — — — — (11.9) Loss on disposal of assets (7.8) — — — — — (7.8) Transaction costs (0.1) — — — 0.1 — — SARs mark-to-market impact on noncontrolling interests (see page 25) 0.7 (0.7) — — — — — Change in fair market value of equity securities (0.4) — — — — 0.4 — Income from continuing operations before income tax expense 94.9 14.8 5.4 — 0.1 0.4 115.6 Provision for income tax expense (27.3) (4.0) (1.5) 2.3 (0.1) (0.1) (30.7) Income from continuing operations attributable to Encompass Health $ 67.6 $ 10.8 $ 3.9 $ 2.3 $ — $ 0.3 $ 84.9 Diluted earnings per share from continuing operations* $ 0.68 $ 0.11 $ 0.04 $ 0.02 $ — $ — $ 0.85 Diluted shares used in calculation 99.5 Adjusted EPS(5) - Q4 2019 * Adjusted EPS may not sum across due to rounding. Refer to pages 46-47 for end notes.
Encompass Health 44 Adjusted EPS(5) - YTD 2020 For the Year Ended December 31, 2020 Adjustments As Reported Gov’t, Class Action, & Related Settlements Loss on Early Exting. of Debt Income Tax Adj. 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 $ 860.3 $ — $ — $ — $ — $ — $ — $ 860.3 Depreciation and amortization (243.0) — — — — — — (243.0) Government, class action and related settlements (2.8) 2.8 — — — — — — Loss on early extinguishment of debt(1) (2.3) — 2.3 — — — — — Interest expense and amortization of debt discounts and fees (184.2) — — — — — — (184.2) Stock-based compensation (29.5) — — — — — — (29.5) Loss on disposal or impairment of assets (11.6) — — — — — — (11.6) Change in fair market value of equity securities 0.4 — — — (0.4) — — — Gain on consolidation of Treasure Coast(3) 2.2 — — — — (2.2) — — Payroll taxes on SARs exercise (1.5) — — — — — 1.5 — Income from continuing operations before income tax expense 388.0 2.8 2.3 — (0.4) (2.2) 1.5 392.0 Provision for income tax expense (103.8) (0.7) (0.6) 1.0 0.1 0.6 (0.4) (103.8) Income from continuing operations attributable to Encompass Health $ 284.2 $ 2.1 $ 1.7 $ 1.0 $ (0.3) $ (1.6) $ 1.1 $ 288.2 Diluted earnings per share from continuing operations* $ 2.85 $ 0.02 $ 0.02 $ 0.01 $ — $ (0.02) $ 0.01 $ 2.89 Diluted shares used in calculation 99.8 * Adjusted EPS may not sum across due to rounding. Refer to pages 46-47 for end notes.
Encompass Health 45 For the Year Ended December 31, 2019 Adjustments As Reported Mark-to- Market Adj. for Stock Comp. Expense Loss on Early Exting. of Debt Income Tax Adj. 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 $ 964.9 $ — $ — $ — $ — $ — $ — $ — $ 964.9 Depreciation and amortization (218.7) — — — — — — — (218.7) Loss on early extinguishment of debt(1) (7.7) — 7.7 — — — — — — Interest expense and amortization of debt discounts and fees (159.7) — — — — — — — (159.7) Stock-based compensation (114.4) 68.5 — — — — — — (45.9) Loss on disposal of assets (11.1) — — — — — — — (11.1) Transaction costs (2.1) — — — 2.1 — — — — SARs mark-to-market impact on noncontrolling interests (see page 25) 5.0 (5.0) — — — — — — — Change in fair market value of equity securities 0.8 — — — — (0.8) — — — Gain on consolidation of Yuma(2) 19.2 — — — — — (19.2) — — Payroll taxes on SARs exercise (1.0) — — — — — — 1.0 — Income from continuing operations before income tax expense 475.2 63.5 7.7 — 2.1 (0.8) (19.2) 1.0 529.5 Provision for income tax expense (115.9) (17.2) (2.1) (10.3) (0.6) 0.2 5.2 (0.2) (140.9) Income from continuing operations attributable to Encompass Health $ 359.3 $ 46.3 $ 5.6 $ (10.3) $ 1.5 $ (0.6) $ (14.0) $ 0.8 $ 388.6 Diluted earnings per share from continuing operations* $ 3.62 $ 0.47 $ 0.06 $ (0.10) $ 0.02 $ (0.01) $ (0.14) $ 0.01 $ 3.91 Diluted shares used in calculation 99.4 Adjusted EPS(5) - YTD 2019 * Adjusted EPS may not sum across due to rounding. Refer to pages 46-47 for end notes.
Encompass Health 46 End notes (1) In June 2019, the Company redeemed $100 million of its 5.75% Senior Notes due 2024 at a price of 101.917%, which resulted in a total cash outlay of approximately $102 million. The redemption was funded using cash on hand and funding under the Company’s revolving credit facility. As a result of this redemption, the Company recorded an approximate $2 million loss on early extinguishment of debt in the second quarter of 2019. In November 2019, the Company redeemed $400 million of its 5.75% Senior Notes due 2024 at a price of 100.958%, which resulted in a total cash outlay of approximately $404 million. The redemption was funded using a portion of the proceeds from the Company’s September 2019 public offering of $1 billion of senior unsecured notes (see end note 10). As a result of the redemption, the Company recorded an approximate $5 million loss on early extinguishment of debt in the fourth quarter of 2019. See also end note 10. (2) As a result of negotiations with our partner to amend the joint venture agreement related to Yuma Rehabilitation Hospital, the accounting for this hospital changed from the equity method of accounting to a consolidated entity effective July 1, 2019. We accounted for this change in control as a business combination and consolidated this entity using the acquisition method. As a result of our consolidation of this hospital and the remeasurement of our previously held equity interest at fair value, we recorded a $19.2 million gain as part of other income in the third quarter of 2019. (3) As a result of an amendment to the joint venture agreement related to our home health location in Treasure Coast, Florida, the accounting for this agency changed from the equity method of accounting to a consolidated entity effective January 1, 2020. We accounted for this change in control as a business combination and consolidated this entity using the acquisition method. As a result of our consolidation of this agency and the remeasurement of our previously held equity interest at fair value, we recorded a $2.2 million gain as part of other income in the first quarter of 2020. (4) As previously disclosed, from 2013 to 2019, the Company cooperated with an investigation of alleged improper or fraudulent Medicare and Medicaid claims. The investigation, under the direction of DOJ, produced no evidence of fraud, falsity or wrongdoing. However, based on discussions with DOJ, and having considered the burdens and distractions associated with continuing the investigation and the likely costs of future litigation, the Company estimated a settlement value of $48 million and accrued a loss contingency in that amount in the fourth quarter of 2018. Following further discussions, the Company entered into an agreement effective as of June 21, 2019 to settle all claims related to the DOJ investigation, together with related qui tam or “whistleblower” lawsuits, for cash payments totaling $48 million. (5) The Company is providing adjusted earnings per share from continuing operations attributable to Encompass Health (“adjusted earnings per share”), which is a non- GAAP measure. The Company believes the presentation of adjusted earnings per share provides useful additional information to investors because it provides better comparability of ongoing operating performance to prior periods given that it excludes the impact of government, class action, and related settlements, professional fees - accounting, tax, and legal, mark-to-market adjustments for stock appreciation rights, gains or losses related to hedging and equity instruments, loss on early extinguishment of debt, adjustments to its income tax provision (such as valuation allowance adjustments, settlements of income tax claims and windfall tax benefits), items related to corporate and facility restructurings, and certain other items deemed to be non-indicative of ongoing operating performance. It is reasonable to expect that one or more of these excluded items will occur in future periods, but the amounts recognized can vary significantly from period to period and may not directly relate to the Company's ongoing operating performance. Accordingly, they can complicate comparisons of the Company's results of operations across periods and comparisons of the Company's results to those of other healthcare companies. Adjusted earnings per share should not be considered as a measure of financial performance under generally accepted accounting principles in the United States as the items excluded from it are significant components in understanding and assessing financial performance. Because adjusted earnings per share is not a measurement determined in accordance with GAAP and is thus susceptible to varying calculations, it may not be comparable as presented to other similarly titled measures of other companies.* (6) Definition of adjusted free cash flow, which is a non-GAAP measure, is net cash provided by operating activities of continuing operations minus capital expenditures for maintenance, dividends paid on preferred stock, distributions to noncontrolling interests, and certain other items deemed to be non-indicative of ongoing operating performance. Common stock dividends are not included in the calculation of adjusted free cash flow. Because this measure is not determined in accordance with GAAP and is susceptible to varying calculations, it may not be comparable to other similarly titled measures presented by other companies. (7) Adjusted EBITDA is a non-GAAP financial measure. The Company’s leverage ratio (total consolidated debt to Adjusted EBITDA for the trailing four quarters) is, likewise, a non-GAAP measure. Management and some members of the investment community utilize Adjusted EBITDA as a financial measure and the leverage ratio as a liquidity measure on an ongoing basis. These measures are not recognized in accordance with GAAP and should not be viewed as an alternative to GAAP measures of performance or liquidity. In evaluating Adjusted EBITDA, the reader should be aware that in the future the Company may incur expenses similar to the adjustments set forth. (8) On Oct. 28, 2013, the Company announced its board of directors authorized the repurchase of up to $200 million of its common stock. On Feb. 14, 2014, the Company's board approved an increase in this common stock repurchase authorization from $200 million to $250 million. As of June 30, 2018, the remaining repurchase authorization was approximately $58 million. On July 24, 2018, the Company's board approved resetting the aggregate common stock repurchase authorization to $250 million. As of Dec. 31, 2020, the remaining repurchase authorization was approximately $198 million. * Reconciliations to GAAP provided on pages 37-45
Encompass Health 47 End notes, continued (9) In September 2019, the Company issued $500 million of 4.5% Senior Notes due 2028 and $500 million of 4.75% Senior Notes due 2030. The proceeds were used to fund the purchase of the home health rollover shares and exercise of SARs in Q3 2019, fund a call of $400 million of 5.75% Senior Notes due 2024 in Q4 2019, and repay borrowings under the Company’s revolving credit facility. In May 2020, the Company re-opened these notes and issued an additional $300 million of 4.5% Senior Notes due 2028 and $300 million of 4.75% Senior Notes due 2030. The proceeds were used to repay borrowings under the Company’s revolving credit facility. (10) In October 2020, the Company issued $400 million of 4.625% Senior Notes due 2031. The proceeds plus approximately $300 million of cash on hand were used to fully redeem $700 million of 5.75% Senior Notes due 2024 at par on November 1, 2020. As a result of this redemption, the Company recorded an approximate $2 million loss on early extinguishment of debt in the fourth quarter of 2020. (11) Data provided by Uniform Data System for Medical Rehabilitation, a division of UB Foundation Activities, Inc., a data gathering and analysis organization for the rehabilitation industry; represents ~80% of industry, including Encompass Health inpatient rehabilitation sites (12) Represents discharges from 137 consolidated hospitals in Q4 2020; 136 consolidated hospitals in Q3 and Q2 2020; 134 consolidated hospitals in Q1 2020; 133 consolidated hospitals in Q4 and Q3 2019; 130 consolidated hospitals in Q2 2019; and 129 consolidated hospitals in Q1 2019 (13) Full-time equivalents included in the table represent Encompass Health employees who participate in or support the operations of our hospitals and include an estimate of full-time equivalents related to contract labor. (14) Employees per occupied bed, or “EPOB,” is calculated by dividing the number of full-time equivalents, including an estimate of full-time equivalents from the utilization of contract labor, by the number of occupied beds during each period. The number of occupied beds is determined by multiplying the number of licensed beds by the Company’s occupancy percentage. (15) Represents home health admissions from 240 consolidated locations in Q4 2020; 241 consolidated locations in Q3 2020; 244 consolidated locations in Q2 2020 and Q1 2020; 243 consolidated locations in Q4 2019; 243 consolidated locations in Q3 2019; 220 consolidated locations in Q2 2019; and 219 consolidated locations in Q1 2019 (16) Represents hospice admissions from 82 locations in Q4 2020; 83 locations in Q3 and Q2 2020; Q1 2020 and Q4 2019; 82 locations in Q3 2019; and 59 locations in Q2 and Q1 2019