ENCOMPASS HEALTH CORPORATION
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") relates to Encompass Health Corporation and its
subsidiaries and should be read in conjunction with our condensed consolidated
financial statements included under Part I, Item 1, Financial Statements
(Unaudited), of this report. In addition, the following MD&A should be read in
conjunction with our audited consolidated financial statements for the year
ended December 31, 2020 , Part II, Item 7, Management's Discussion and Analysis
of Financial Condition and Results of Operations, Part I, Item 1, Business, and
Item 1A, Risk Factors, included in our Annual Report on Form 10-K for the year
ended December 31, 2020 filed on February 26, 2021 (collectively, the "2020 Form
10K").
This MD&A is designed to provide the reader with information that will assist in
understanding our condensed consolidated financial statements, the changes in
certain key items in those financial statements from period to period, and the
primary factors that accounted for those changes, as well as how certain
accounting principles affect our condensed consolidated financial statements.
See "Cautionary Statement Regarding Forward-Looking Statements" on page ii of
this report for a description of important factors that could cause actual
results to differ from expected results. See also Item 1A, Risk Factors, of this
report and to the 2020 Form 10K.
Executive Overview
Our Business
We are a leading provider of post-acute healthcare services, offering both
facility-based and home-based patient care through our network of inpatient
rehabilitation hospitals, home health agencies, and hospice agencies. As of
September 30, 2021 , our national footprint includes 42 states and Puerto Rico .
As discussed in this Item, "Segment Results of Operations," we manage our
operations in two operating segments which are also our reportable segments:
(1) inpatient rehabilitation and (2) home health and hospice. For additional
information about our business, see Item 1, Business, of the 2020 Form 10K.
On December 9, 2020 , we announced a formal process to explore strategic
alternatives for our home health and hospice business. We expect to effect a
partial or full separation of our home health and hospice business into an
independent public company via a carve-out IPO, spin-off, or split-off. We are
targeting such a transaction in the first half of 2022 and expect to announce a
more precise timing and the form of the separation transaction in connection
with our fourth quarter earnings release. While there can be no assurance that a
transaction of this nature will be consummated, we have made significant
progress on the various tasks necessary to complete a separation transaction and
will further our state of readiness over the balance of this year.
We have previously indicated that we believe a full or partial separation of the
home health and hospice business will enhance the long-term success and value of
the business. We have thoroughly evaluated a broad array of public and private
transaction alternatives and believe effecting the separation via the formation
of an independent public company is superior to the other alternatives
considered. Among other considerations, this belief is based on the anticipated
strategic focus, future growth and value creating opportunities, execution
risks, and tax efficiency resulting from such a transaction.
The onset of the COVID-19 Pandemic (the "pandemic") in the United States
resulted in significant changes to our operating environment. For discussion of
the financial and operational impacts we experienced in 2020 as a result of the
pandemic, see Item 1, Business, Item 1A, Risk Factors, and Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations,
"Results of Operations" and "Segment Results of Operations" of the 2020 Form
10-K. For discussion of the financial and operational impacts we are
experiencing in 2021 as a result of the pandemic, see "Key Challenges" below and
the "Results of Operations" and "Segment Results of Operations" sections of this
Item.
Inpatient Rehabilitation
We are the nation's largest owner and operator of inpatient rehabilitation
hospitals in terms of patients treated, revenues, and number of hospitals. We
provide specialized rehabilitative treatment on predominantly an inpatient
basis. We operate hospitals in 35 states and Puerto Rico , with concentrations in
the eastern half of the United States and Texas . As of September 30, 2021 , we
operate 144 inpatient rehabilitation hospitals and manage four inpatient
rehabilitation units through management contracts. Our inpatient rehabilitation
segment represents approximately 79% of our Net operating revenues for the three
months ended September 30, 2021 and 78% for the nine months ended September 30,
2021 .
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Home Health and Hospice
Our home health business is the nation's fourth largest provider of
Medicare-certified skilled home health services in terms of revenues. Our home
health services include a comprehensive range of Medicare-certified home nursing
services to adult patients in need of care. Our hospice business is the nation's
eighth largest provider of Medicare-certified hospice services in terms of
revenues. We provide hospice services to terminally ill patients and their
families that address patients' physical needs, including pain control and
symptom management, and to provide emotional and spiritual support. As of
September 30, 2021 , we provide home health services in 249 locations and provide
hospice services in 95 locations across 34 states, with concentrations in the
southern half of the United States . In addition, one of these home health
locations operates as a joint venture that we account for using the equity
method of accounting. Our home health and hospice segment represents
approximately 21% of our Net operating revenues for the three months ended
September 30, 2021 and 22% for the nine months ended September 30, 2021 .
2021 Overview
During the three months ended September 30, 2021 , Net operating revenues
increased 9.4% over the same period of 2020 due primarily to increased volumes
and favorable pricing in the inpatient rehabilitation segment. During the nine
months ended September 30, 2021 , Net operating revenues increased 10.9% over the
same period of 2020 due primarily to increased volumes and favorable pricing in
both segments. See "Results of Operations" and the "Segment Results of
Operations" sections of this Item for additional volume and pricing information.
We have continued our development and expansion efforts in 2021. In our
inpatient rehabilitation segment we:
•began operating our new 40-bed inpatient rehabilitation hospital in San Angelo,
Texas with our joint venture partner Shannon Health in March 2021 ;
•began operating our new 50-bed inpatient rehabilitation hospital in North
Tampa, Florida in April 2021 ;
•began operating our new 50-bed inpatient rehabilitation hospital in Cumming,
Georgia in June 2021 ;
•began operating our new 40-bed inpatient rehabilitation hospital in Waco, Texas
in August 2021 ;
•began operating our new 40-bed inpatient rehabilitation hospital in Shreveport,
Louisiana in August 2021 ;
•began operating our new 40-bed inpatient rehabilitation hospital in Greenville,
South Carolina in August 2021 ;
•began operating our new 40-bed inpatient rehabilitation hospital in Pensacola,
Florida in September 2021 ;
•continued our capacity expansions by adding 89 new beds to existing hospitals;
and
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--------------------------------------------------------------------------------•announced or continued the development of the following hospitals:
Number of New Beds
2021 2022 2023 2024
De novos:
Henry County, Georgia* 50 - - -
Libertyville, Illinois - 60 - -
St. Augustine, Florida - 40 - -
Lakeland, Florida - 50 - -
Cape Coral, Florida - 40 - -
Jacksonville, Florida - 50 - -
Naples, Florida - 50 - -
Clermont, Florida - - 50 -
Bowie, Maryland - - 60 -
Prosper, Texas - - 40 -
Fitchburg, Wisconsin - - 40 -
Kissimmee, Florida - - 50 -
Fort Mill, South Carolina - - 39 -
Palm Beach Gardens, Florida - - - 50
Lake Worth, Florida - - - 50
Joint ventures:
Shiloh, Illinois - 40 - -
Grand Forks, North Dakota - 40 - -
Moline, Illinois - 40 - -
Eau Claire, Wisconsin - 36 - -
Owasso, Oklahoma - - 40 -
Knoxville, Tennessee - - 73 -
Columbus, Georgia*** - - 40 -
Louisville, Kentucky** - - 40 -
Atlanta, Georgia*** - - - 40
*Opened in October 2021 ; **Announced in October 2021
***Piedmont Healthcare , our joint venture partner in these hospitals, assumed
50% ownership in our existing hospital in Newnan, Georgia during the second
quarter of 2021.
We also continued our expansion efforts in our home health and hospice segment.
On June 1, 2021 , we completed the acquisition of the home health and hospice
assets of Frontier Home Health and Hospice ("Frontier") in Alaska , Colorado ,
Montana , Washington , and Wyoming for a cash purchase price of approximately $99
million . The Frontier acquisition included the purchase of a 50% equity interest
in the Heart of the Rockies Home Health joint venture and a 90% equity interest
in the Hospice of Southwest Montana joint venture (inclusive of an additional
40% equity interest purchased for approximately $4 million ). We consolidate both
of these joint ventures. On the acquisition date, nine home health and eleven
hospice locations became part of our national network of home health and hospice
locations. This acquisition was made to expand our existing presence in Colorado
and Wyoming and extend our services to Alaska , Montana and Washington . We funded
this transaction using cash on hand and borrowings under our revolving credit
facility. For additional information regarding this transaction, see Note 2,
Business Combinations, to the accompanying condensed consolidated financial
statements. In addition to the Frontier acquisition, we began accepting patients
at our new hospice locations in Las Cruces, New Mexico (May 2021 ) and Abilene,
Texas (September 2021 ).
We continued our shareholder distributions during the nine months ended
September 30, 2021 by paying a quarterly cash dividend of $0.28 per share on our
common stock in January, April, July and October. On October 21, 2021 , our board
of directors declared a cash dividend of $0.28 per share, payable on January 18,
2022 to stockholders of record on January 3, 2022 . For additional information
see the "Liquidity and Capital Resources" section of this Item.
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Business Outlook
Notwithstanding the current impacts from the pandemic, we remain optimistic
regarding the intermediate and long-term prospects for our business. Demographic
trends, such as population aging, should continue to increase long-term demand
for the services we provide. While we treat patients of all ages, most of our
patients are 65 and older, and the number of Medicare enrollees is expected to
grow approximately 3% per year for the foreseeable future. Even more
specifically, the average age of our patients is approximately 76, and the
population group ranging in ages from 75 to 79 is expected to grow at
approximately 5% per year through 2026. We believe the demand for the services
we provide will continue to increase as the U.S. population ages. We believe
these factors align with our strengths in, and focus on, post-acute services. In
addition, we believe we can address the demand for facility-based and home-based
post-acute care services in markets where we currently do not have a presence by
constructing or acquiring new hospitals and by acquiring or opening home health
and hospice agencies in those fragmented industries.
We are a leading provider of post-acute healthcare services, offering both
facility-based and home-based patient care through our network of inpatient
rehabilitation hospitals, home health agencies, and hospice agencies. We are
committed to delivering high-quality, cost-effective, integrated patient care.
As the nation's largest owner and operator of inpatient rehabilitation hospitals
in terms of patients treated, revenues, and number of hospitals, we believe we
differentiate ourselves from our competitors based on the quality of our
clinical outcomes, our cost-effectiveness, our financial strength, and our
extensive application of technology. As the fourth largest provider of
Medicare-certified skilled home health services in terms of revenues, we believe
we differentiate ourselves from our competitors by the application of a highly
integrated technology platform, our ability to manage a variety of care
pathways, and a proven track record of consummating and integrating
acquisitions.
Although the healthcare industry is currently engaged in addressing the
healthcare crisis caused by the pandemic, the industry also faces the prospect
of ongoing efforts to transform the healthcare system to coordinated care
delivery and payment models. The nature, timing and extent of that
transformation remains uncertain, as the development and implementation of new
care delivery and payment systems will require significant time and resources.
Our short-term goal is to serve our communities and provide the best care
possible during the pandemic. Our long-term goal is to position the Company in a
prudent manner to be responsive to industry shifts. We have invested in our core
business and created an infrastructure that enables us to provide high-quality
care on a cost-effective basis. We have been disciplined in creating a capital
structure that is flexible with no significant debt maturities prior to 2023. We
continue to have a strong, well-capitalized balance sheet, including a
substantial portfolio of owned real estate and significant availability under
our revolving credit facility. For these and other reasons, we believe we will
be able to adapt to changes in reimbursement, sustain our business model, and
grow through acquisition and consolidation opportunities as they arise. See also
Item 1, Business, "Competitive Strengths" and "Strategy and 2021 Strategic
Priorities" of the 2020 Form 10K.
Key Challenges
Healthcare is a highly regulated industry facing many well-publicized regulatory
and reimbursement challenges. The Medicare reimbursement systems for both
inpatient rehabilitation and home health have recently undergone significant
changes. The future of many aspects of healthcare regulation remains uncertain.
Successful healthcare providers are those able to adapt to changes in the
regulatory and operating environments, build strategic relationships, and
consistently provide high-quality, cost-effective care. We believe we have the
necessary capabilities - change agility, strategic relationships, quality of
patient outcomes, cost effectiveness, and ability to capitalize on growth
opportunities - to adapt to and succeed in a dynamic, highly regulated industry,
and we have a proven track record of doing so. For a detailed discussion of the
challenges we face, see Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations, "Executive Overview-Key
Challenges" of the 2020 Form 10K.
As we continue to execute our business plan, the following are some of the
challenges we face.
•Operating in a Highly Regulated Industry. We are required to comply with
extensive and complex laws and regulations at the federal, state, and local
government levels. More specifically, because Medicare comprises a significant
portion of our Net operating revenues, failure to comply with the laws and
regulations governing the Medicare program and related matters could materially
and adversely affect us. These rules and regulations have affected, or could in
the future affect, our business activities by having an impact on the
reimbursement we receive for services provided or the costs of compliance,
mandating new documentation standards, requiring additional licensure or
certification, regulating our relationships with physicians and other referral
sources, regulating the use of our properties, and limiting our ability to enter
new markets or add new capacity to existing hospitals and agencies. Ensuring
continuous compliance with extensive laws and regulations is an operating
requirement for all healthcare providers. See Item 1, Business, "Regulation,"
Item 1A, Risk Factors, and Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations, "Executive Overview-Key
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Challenges," of the 2020 Form 10K for detailed discussions of the most
important regulations we face and our programs intended to ensure we comply with
those regulations.
•Changes to Our Operating Environment Resulting from the pandemic. In response
to the public health emergency associated with the pandemic, Congress and the
Centers for Medicare & Medicaid Services ("CMS") adopted several statutory and
regulatory measures intended to provide relief to healthcare providers in order
to ensure patients would continue to have adequate access to care. On March 27,
2020 , former President Trump signed into law the Coronavirus Aid, Relief, and
Economic Security Act of 2020 (the "CARES Act"), which suspended sequestration,
an automatic 2% reduction of Medicare program payments for all healthcare
providers, under the Budget Control Act of 2011 (the "2011 BCA") for the period
of May 1 through December 31, 2020 . On December 27, 2020 , the Consolidated
Appropriations Act, 2021 (the "2021 Budget Act") extended the sequestration
suspension through March 31, 2021 . On April 14, 2021 , Congress further extended
the sequestration suspension period through December 31, 2021 . During the nine
months ended September 30, 2021 , the sequestration suspension provided
additional revenues in our inpatient rehabilitation segment and home health and
hospice segment of approximately $46 million and $14 million , respectively. For
additional discussion, see the "Results of Operations" and "Segment Results of
Operations" sections of this Item. The CARES Act, the 2021 Budget Act, and CMS
regulatory actions include a number of other provisions affecting our
reimbursement and operations in both segments. These provisions are discussed in
Item 1, Business, "Sources of Revenue," Item 1A, Risk Factors, and Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, "Results of Operations" of the 2020 Form 10-K.
•Changes to Our Operating Environment Resulting from Federal Regulatory and
Legislative Actions. On July 29, 2021 , CMS released its Notice of Final
Rulemaking for Fiscal Year 2022 for inpatient rehabilitation facilities under
the inpatient rehabilitation facility prospective payment system (the "2022
Final IRF Rule"). The 2022 Final IRF Rule will implement a net 1.9% market
basket increase (market basket update of 2.6% reduced by a productivity
adjustment of 0.7%) effective for discharges between October 1, 2021 and
September 30, 2022 . The 2022 Final IRF Rule also includes changes that impact
our hospital-by-hospital base rate for Medicare reimbursement. Such changes
include, but are not limited to, revisions to the wage index and labor-related
share values, updates to outlier payments and updates to the case-mix group
relative weights and average lengths of stay values. The 2022 Final IRF Rule
will also add one new quality reporting measure and update the denominator of
another measure. Based on our analysis, which utilizes, among other things, the
acuity of our patients annualized over a six-month period ended June 30, 2021 ,
our experience with outlier payments over this same time frame, and other
factors, we believe the 2022 Final IRF Rule will result in a net increase to our
Medicare payment rates of approximately 1.9% effective October 1, 2021 .
On June 28, 2021 , CMS released its Notice of Proposed Rulemaking for Calendar
Year 2022 for home health agencies under the home health prospective payment
system (the "2022 Proposed HH Rule"). The 2022 Proposed HH Rule would, among
others, implement a net 1.7% market basket increase (market basket update of
2.4% reduced by 0.6% for a productivity adjustment and 0.1% for the phase-out of
the rural payment add-on factor), update the case-mix weights and fixed dollar
loss ratio for outlier payments, and include a low utilization payment
adjustment ("LUPA") add-on factor for the first skilled occupational therapy
visit in LUPA periods. CMS did not propose to modify the current behavioral
adjustment in CY 2022 while they continue to analyze home health payments to
ensure budget neutrality under the new Patient-Driven Groupings Model ("PDGM")
payment system. CMS provided preliminary analysis indicating that an additional
approximate 6% budget neutrality adjustment may be necessary in future years
although stating that they believe that claims data could be affected by the
pandemic and home health agencies adjusting to the new PDGM payment system that
was effective in 2020. The 2022 Proposed HH Rule also would expand the Home
Health Value-Based Purchasing ("HHVBP") Model, beginning January 1, 2022 , to all
Medicare-certified home health agencies in the 50 States, territories, and
District of Columbia (with a maximum payment adjustment, upward or downward of
5%). This rulemaking also proposes to end the original HHVBP Model one year
early for the home health agencies in the nine original Model States. Based on
our preliminary analysis, which utilizes, among other things, our patient mix
annualized over a six-month period ended June 30, 2021 , our specific geographic
coverage area, and other factors, we believe the 2022 Proposed HH Rule will
result in a net increase to our Medicare payment rates of approximately 2.2% to
2.7% effective for 30-day payment periods ending on or after January 1, 2022 .
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On July 16, 2021 , CMS announced the full implementation of the home health
Review Choice Demonstration will begin effective September 1, 2021 in North
Carolina and Florida . CMS will discontinue exercising the existing phased-in
approach for these two states.
As discussed above, the suspension of Medicare sequestration under the 2011 BCA
is currently set to end December 31, 2021 , which would result in an approximate
2% reduction in Medicare reimbursement otherwise due in 2022. Additional
Medicare payment reductions are also possible under the Statutory Pay-As-You-Go
Act of 2010 ("Statutory PAYGO"). Statutory PAYGO requires, among other things,
that mandatory spending and revenue legislation not increase the federal budget
deficit over a 5- or 10-year period. If the Office of Management and Budget (the
"OMB") finds there is a deficit, Statutory PAYGO requires OMB to order
sequestration of Medicare. The Congressional Budget Office has estimated that
the COVID-19 relief package enacted in March 2021 , the American Rescue Plan Act
of 2021, would result in a 4% reduction in fiscal year 2022 Medicare spending
under Statutory PAYGO unless Congress acts to waive or otherwise avoid this
sequestration.
•Maintaining Strong Volume Growth. In addition to the factors described in our
2020 Form 10K, we believe a number of conditions related to the pandemic
negatively impacted volumes so far in 2021, predominately in the home health and
hospice segment. While we continue to see our volumes recover in our inpatient
rehabilitation segment, as discussed in the "Results of Operations" and "Segment
Results of Operations" sections of this Item, a current or future resurgence of
COVID-19 infections could cause disruptions to our volume growth.
•Recruiting and Retaining High-Quality Personnel. See Item 1A, Risk Factors, of
the 2020 Form 10K for a discussion of competition for staffing, shortages of
qualified personnel, and other factors that may increase our labor costs and
constrain our ability to take new patients. Additionally, our operations have
been affected and may in the future be affected by staffing shortages where
employees must self-quarantine due to exposure to COVID-19, where employees are
unavailable due to a lack of childcare or care for elderly family, or due to
competition within the local market. These factors have resulted in increased
labor costs and increased use of contract labor.
We remain confident in the prospects of our business based on the increasing
demands for the services we provide to an aging population. This confidence is
further supported by our strong financial foundation and the substantial
investments we have made in our businesses. We have a proven track record of
working through difficult situations, and we believe in our ability to overcome
current and future challenges.
Results of Operations
Payor Mix
We derived consolidated Net operating revenues from the following payor sources:
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Medicare 68.0 % 69.9 % 68.3 % 69.8 %
Medicare Advantage 14.1 % 14.5 % 14.5 % 14.8 %
Managed care 10.9 % 9.2 % 10.5 % 9.0 %
Medicaid 3.5 % 3.6 % 3.5 % 3.4 %
Other third-party payors 0.8 % 0.9 % 0.9 % 0.9 %
Workers' compensation 0.5 % 0.4 % 0.4 % 0.5 %
Patients 0.4 % 0.5 % 0.4 % 0.5 %
Other income 1.8 % 1.0 % 1.5 % 1.1 %
Total 100.0 % 100.0 % 100.0 % 100.0 %
For information regarding our payors by segment, see the "Segment Results of
Operations" section of this Item. For additional information regarding our
payors, see the "Sources of Revenues" section of Item 1, Business, of the 2020
Form 10K.
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Our Results
Our consolidated results of operations were as follows:
Three Months Ended September 30, Percentage Change Nine Months Ended September 30, Percentage Change
2021 2020 2021 vs. 2020 2021 2020 2021 vs. 2020
(In Millions, Except Percentage Change)
Net operating revenues $ 1,284.8 $ 1,173.9 9.4 % $ 3,802.9 $ 3,430.0 10.9 %
Operating expenses:
Salaries and benefits 730.1 664.9 9.8 % 2,125.5 1,995.9 6.5 %
Other operating expenses 173.4 163.4 6.1 % 508.4 471.3 7.9 %
Occupancy costs 19.8 20.3 (2.5) % 60.2 60.8 (1.0) %
Supplies 53.2 52.5 1.3 % 155.1 148.8 4.2 %
General and administrative expenses 43.9 39.1 12.3 % 136.7 117.7 16.1 %
Depreciation and amortization 64.9 61.2 6.0 % 190.8 180.7 5.6 %
Government, class action, and related
settlements - - - % - 2.8 (100.0) %
Total operating expenses 1,085.3 1,001.4 8.4 % 3,176.7 2,978.0 6.7 %
Loss on early extinguishment of debt - - - % 1.0 - N/A
Interest expense and amortization of debt discounts and fees 39.9 49.0 (18.6) % 124.5 138.0 (9.8) % Other income (0.4) (2.5) (84.0) % (6.4) (6.4) - % Equity in net income of nonconsolidated affiliates (0.9) (1.0) (10.0) % (2.9) (2.5) 16.0 % Income from continuing operations before income tax expense 160.9 127.0 26.7 % 510.0 322.9 57.9 % Provision for income tax expense 34.1 26.9 26.8 % 108.1 65.8 64.3 % Income from continuing operations 126.8 100.1 26.7 % 401.9 257.1 56.3 % Loss from discontinued operations, net of tax (0.1) - N/A (0.4) - N/A Net income 126.7 100.1 26.6 % 401.5 257.1 56.2 % Less: Net income attributable to noncontrolling interests (26.7) (22.4) 19.2 % (80.9) (58.9) 37.4 % Net income attributable to Encompass Health$ 100.0 $ 77.7 28.7 %$ 320.6 $ 198.2 61.8 % Operating Expenses as a % of Net Operating Revenues Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Operating expenses: Salaries and benefits 56.8 % 56.6 % 55.9 % 58.2 % Other operating expenses 13.5 % 13.9 % 13.4 % 13.7 % Occupancy costs 1.5 % 1.7 % 1.6 % 1.8 % Supplies 4.1 % 4.5 % 4.1 % 4.3 % General and administrative expenses 3.4 % 3.3 % 3.6 % 3.4 % Depreciation and amortization 5.1 % 5.2 % 5.0 % 5.3 % Government, class action, and related settlements - % - % - % 0.1 % Total operating expenses 84.5 % 85.3 % 83.5 % 86.8 % 27
-------------------------------------------------------------------------------- In the discussion that follows, we use "same-store" comparisons to explain the changes in certain performance metrics and line items within our financial statements. We calculate same-store comparisons based on hospitals and home health and hospice locations open throughout both the full current periods 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 our results of operations. Net Operating Revenues Our consolidated Net operating revenues increased during the three months endedSeptember 30, 2021 compared to the same period of 2020 primarily due to increased volumes and favorable pricing in the inpatient rehabilitation segment partially offset by a decline in home health volumes due to the resurgence of COVID-19 in the third quarter of 2021. Our consolidated Net operating revenues increased during the nine months endedSeptember 30, 2021 compared to the same period of 2020 primarily due to increased volumes as we anniversaried the most significant impact of the pandemic. Pricing was also favorable in both segments during the nine months endedSeptember 30, 2021 and included reimbursement rate increases and the suspension of sequestration. See additional discussion in the "Segment Results of Operations" section of this Item. Beginning inmid-March 2020 , we experienced decreased volumes in both segments which we believe resulted from a number of conditions related to the pandemic including: lower acute-care hospital censuses due to the deferral of elective surgeries and shelter-in-place orders, restrictive visitation policies in place at acute-care hospitals that severely limit access to patients and caregivers by our clinical rehabilitation liaisons and care transition coordinators, lock down of assisted living facilities, and heightened anxiety among patients and their family members regarding the risk of exposure to COVID-19 during acute-care and post-acute care treatment. Volumes in both segments reached a low point during the second quarter of 2020. For a discussion on current year-over-year volume growth, see the "Segment Results of Operations" section of this Item. InAugust 2021 , many of our markets experienced a resurgence in COVID-19 infection rates resulting in a decline in volumes due to many of the same factors we experienced in 2020. The impact of the resurgence was more pronounced in our home health and hospice segment. See additional discussion in the "Segment Results of Operations" section of this Item. Salaries and Benefits Salaries and benefits increased during the three and nine months endedSeptember 30, 2021 compared to the same periods of 2020 primarily due to salary and benefit cost increases for our employees, the ramping up of new stores, and increased contract labor to meet higher patient volumes. Salaries and benefits as a percent of Net operating revenues increased during the three months endedSeptember 30, 2021 compared to the same period of 2020 primarily due to increases in clinician compensation and contract labor to meet higher patient volumes and address industry-wide staffing challenges, and the ramping up of new stores partially offset by improved labor productivity which contributed to lower employees per occupied bed (as defined in "Segment Results of Operations" of this Item). Salaries and benefits as a percent of Net operating revenues decreased during the nine months endedSeptember 30, 2021 compared to the same period of 2020 primarily due to the increase in Net operating revenues as discussed above, improved labor productivity which contributed to lower employees per occupied bed, the additional paid-time-off awarded to employees in the second quarter of 2020 as discussed below, and the home health and hospice clinician compensation model changes implemented inMay 2020 . See additional discussion in the "Segment Results of Operations" section of this Item. InApril 2020 , we implemented a program for eligible frontline employees to earn additional paid-time-off in recognition of their outstanding efforts responding to the pandemic. We accrued approximately$43 million in salary and benefits expense in the second quarter of 2020 in connection with this award (approximately$29 million in the inpatient rehabilitation segment; approximately$14 million in the home health and hospice segment). Salaries and benefits are expected to increase in the fourth quarter of 2021 due to an approximate 2.75% merit increase provided to our nonmanagement hospital employees effective inOctober 2021 . Other Operating Expenses As a percent of Net operating revenues, Other operating expenses decreased during the three and nine months endedSeptember 30, 2021 compared to the same periods of 2020 primarily due to the increase in Net operating revenues as discussed above. 28 --------------------------------------------------------------------------------
Supplies
As a percent of Net operating revenues, Supplies decreased during the three months endedSeptember 30, 2021 compared to the same period of 2020 primarily due to lower utilization and cost of medical supplies. As a percent of Net operating revenues, Supplies decreased during the nine months endedSeptember 30, 2021 compared to the same period of 2020 primarily due to the increase in Net operating revenues as discussed above. General and Administrative Expenses General and administrative expenses increased in terms of dollars and as a percent of revenue during the three and nine months endedSeptember 30, 2021 compared to the same periods of 2020 primarily due to the costs associated with the strategic alternatives review for the home health and hospice business in 2021 and higher costs associated with incentive compensation. See the "Executive Overview" section of this Item, for additional information on the strategic alternatives review. Depreciation and Amortization Depreciation and amortization increased during the three and nine months endedSeptember 30, 2021 compared to the same periods of 2020 due to our capital investments. We expect Depreciation and amortization to increase going forward as a result of our recent and ongoing capital investments. Interest Expense and Amortization of Debt Discounts and Fees The decrease in Interest expense and amortization of debt discounts and fees during the three and nine months endedSeptember 30, 2021 compared to the same periods of 2020 primarily resulted from theNovember 2020 redemption of our 5.75% Senior Notes due 2024 and the April andJune 2021 redemptions of our 5.125% Senior Notes due 2023 partially offset by the issuance of our 4.625% Senior Notes due 2031 inOctober 2020 . The decrease during the nine months endedSeptember 30, 2021 compared to the same period of 2020 was also partially offset by theMay 2020 issuance of our 4.50% Senior Notes due 2028 and our 4.75% Senior Notes due 2030. For additional information, see Note 4, Long-term Debt, to the accompanying condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report, and Note 10, Long-term Debt, to the consolidated financial statements accompanying the 2020 Form 10-K. Income from Continuing Operations Before Income Tax Expense Our pre-tax income from continuing operations increased during the three and nine months endedSeptember 30, 2021 compared to the same periods of 2020 primarily due to the increase in Net operating revenues as discussed above. Provision for Income Tax Expense Our Provision for income tax expense increased during the three and nine months endedSeptember 30, 2021 compared to the same periods of 2020 primarily due to higher Income from continuing operations before income tax expense. We currently estimate our cash payments for income taxes to be approximately$125 million to$140 million , net of refunds, for 2021. These payments are expected to primarily result from federal and state income tax expenses based on estimates of taxable income for 2021. In certain jurisdictions, we do not expect to generate sufficient income to use all of the available state net operating losses and other credits prior to their expiration. This determination is based on our evaluation of all available evidence in these jurisdictions including results of operations during the preceding three years, our forecast of future earnings, and prudent tax planning strategies. It is possible we may be required to increase or decrease our valuation allowance at some future time if our forecast of future earnings varies from actual results on a consolidated basis or in the applicable tax jurisdiction, if the timing of future tax deductions differs from our expectations, or pursuant to changes in state tax laws and rates. We recognize the financial statement effects of uncertain tax positions when it is more likely than not, based on the technical merits, a position will be sustained upon examination by and resolution with the taxing authorities. Total remaining unrecognized tax benefits were immaterial as ofSeptember 30, 2021 andDecember 31, 2020 . See Note 8, Income Taxes, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report and Note 16, Income Taxes, to the consolidated financial statements accompanying the 2020 Form 10K. 29 -------------------------------------------------------------------------------- Net Income Attributable to Noncontrolling Interests The increase in Net income attributable to noncontrolling interests during the three and nine months endedSeptember 30, 2021 compared to the same periods of 2020 resulted from increased profitability of our existing joint ventures due to the impact of the pandemic on 2020. Segment Results of Operations Our internal financial reporting and management structure is focused on the major types of services provided byEncompass Health . We manage our operations using two operating segments which are also our reportable segments: (1) inpatient rehabilitation and (2) home health and hospice. For additional information regarding our business segments, including a detailed description of the services we provide, financial data for each segment, and a reconciliation of total segment Adjusted EBITDA to income from continuing operations before income tax expense, see Note 11, Segment Reporting, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report. Inpatient Rehabilitation Our inpatient rehabilitation segment derived its Net operating revenues from the following payor sources: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Medicare 64.2 % 65.8 % 64.4 % 66.0 % Medicare Advantage 15.1 % 15.7 % 15.6 % 15.9 % Managed care 12.2 % 10.7 % 11.8 % 10.4 % Medicaid 4.1 % 4.3 % 4.1 % 3.9 % Other third-party payors 1.0 % 1.2 % 1.1 % 1.2 % Workers' compensation 0.6 % 0.5 % 0.6 % 0.6 % Patients 0.5 % 0.6 % 0.5 % 0.6 % Other income 2.3 % 1.2 % 1.9 % 1.4 % Total 100.0 % 100.0 % 100.0 % 100.0 % 30
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Additional information regarding our inpatient rehabilitation segment's operating results is as follows:
Three Months Ended September 30, Percentage Change Nine Months Ended September 30, Percentage Change
2021 2020 2021 vs. 2020 2021 2020 2021 vs. 2020
(In Millions, Except Percentage Change)
Net operating revenues:
Inpatient $ 983.7 $ 883.2 11.4 % $ 2,902.9 $ 2,581.2 12.5 %
Outpatient and other 27.2 16.2 67.9 % 69.5 51.9 33.9 %
Inpatient rehabilitation segment
revenues 1,010.9 899.4 12.4 % 2,972.4 2,633.1 12.9 %
Operating expenses:
Salaries and benefits 537.1 475.0 13.1 % 1,554.9 1,408.7 10.4 %
Other operating expenses 156.2 135.5 15.3 % 443.7 394.5 12.5 %
Supplies 46.8 45.3 3.3 % 136.1 126.9 7.2 %
Occupancy costs 14.4 15.3 (5.9) % 44.5 46.0 (3.3) %
Other income (0.7) (2.1) (66.7) % (4.5) (3.9) 15.4 %
Equity in net income of
nonconsolidated affiliates (0.8) (0.9) (11.1) % (2.4) (2.1) 14.3 %
Noncontrolling interests 26.3 22.1 19.0 % 79.6 58.0 37.2 %
Segment Adjusted EBITDA $ 231.6 $ 209.2 10.7 % $ 720.5 $ 605.0 19.1 %
(Actual Amounts)
Discharges 49,983 45,962 8.7 % 146,662 135,394 8.3 %
Net patient revenue per discharge $ 19,681 $ 19,216 2.4 % $ 19,793 $ 19,064 3.8 %
Outpatient visits 38,904 51,968 (25.1) % 123,118 137,471 (10.4) %
Average length of stay (days) 12.8 13.0 (1.5) % 12.8 13.0 (1.5) %
Occupancy % 70.6 % 68.8 % 2.6 % 70.0 % 67.8 % 3.2 %
# of licensed beds 9,846 9,437 4.3 % 9,846 9,437 4.3 %
Full-time equivalents* 23,054 22,147 4.1 % 22,657 21,758 4.1 %
Employees per occupied bed 3.37 3.44 (2.0) % 3.33 3.42 (2.6) %
* Full-time equivalents included in the above table represent our employees who
participate in or support the operations of our hospitals and exclude an
estimate of full-time equivalents related to contract labor.
We actively manage the productive portion of our Salaries and benefits utilizing
certain metrics, including employees per occupied bed, or "EPOB." This metric is
determined 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 our occupancy
percentage.
Operating Expenses as a % of Net Operating Revenues
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Operating expenses:
Salaries and benefits 53.1 % 52.8 % 52.3 % 53.5 %
Other operating expenses 15.5 % 15.1 % 14.9 % 15.0 %
Supplies 4.6 % 5.0 % 4.6 % 4.8 %
Occupancy costs 1.4 % 1.7 % 1.5 % 1.7 %
Total operating expenses 74.6 % 74.6 % 73.3 % 75.0 %
31-------------------------------------------------------------------------------- Net Operating Revenues Inpatient revenue increased during the three months endedSeptember 30, 2021 compared to the same period of 2020 primarily due to increased volumes and favorable pricing. Discharge growth included a 6.7% increase in same-store discharges. New-store discharge growth during the three months endedSeptember 30, 2021 compared to the same period of 2020 resulted from our joint venture inSan Angelo, Texas (March 2021 ), as well as wholly owned hospitals inToledo, Ohio (November 2020 ),North Tampa, Florida (April 2021 ),Cumming, Georgia (June 2021 ),Waco, Texas (August 2021 ),Shreveport, Louisiana (August 2021 ),Greenville, South Carolina (August 2021 ), andPensacola, Florida (September 2021 ). Growth in net patient revenue per discharge during the three months endedSeptember 30, 2021 compared to the same period of 2020 primarily resulted from an increase in reimbursement rates and higher patient acuity. Inpatient revenue increased during the nine months endedSeptember 30, 2021 compared to the same period of 2020 primarily due to increased volumes and favorable pricing. Discharge growth from new stores resulted from the same factors as discussed above for the third quarter of 2021 as well as our joint venture inCoralville, Iowa (June 2020 ) and our wholly owned hospitals inMurrieta, California (February 2020 ) andSioux Falls, South Dakota (June 2020 ). Growth in net patient revenue per discharge for the nine months endedSeptember 30, 2021 compared to the same period of 2020 resulted from the same factors as discussed above for the third quarter of 2020 as well as the suspension of sequestration. The increase in outpatient and other revenue during the three and nine months endedSeptember 30, 2021 included an increase of$11.3 million in provider tax revenues (offset by$9.3 million of provider tax expenses included in Other operating expenses). For information regarding the joint ventures discussed above, see Note 2, Business Combinations, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report and Note 2, Business Combinations, to the consolidated financial statements accompanying the 2020 Form 10K. Adjusted EBITDA The increase in Adjusted EBITDA during the three months endedSeptember 30, 2021 compared to the same period of 2020 primarily resulted from the increase in net patient revenue as discussed above. Salaries and benefits as a percent of revenues increased during the three months endedSeptember 30, 2021 compared to the same period of 2020 primarily due to higher sign-on and shift bonuses plus contract labor to meet increased patient volumes. This ratio also increased due to the ramping up of new stores and was partially offset by improved labor productivity which contributed to lower employees per occupied bed. Supplies as a percent of revenues decreased during the three months endedSeptember 30, 2021 compared to the same period of 2020 primarily due to lower utilization and cost of medical supplies. The increase in Adjusted EBITDA during the nine months endedSeptember 30, 2021 compared to the same period of 2020 primarily resulted from the increase in net patient revenue as discussed above. Salaries and benefits as a percent of revenues decreased during the nine months endedSeptember 30, 2021 compared to the same period of 2020 primarily due to revenue growth, improved labor productivity which contributed to lower employees per occupied bed, and the additional paid-time-off awarded to employees in the second quarter of 2020 in response to the pandemic as discussed above. Supplies as a percent of revenues decreased during the nine months endedSeptember 30, 2021 compared to the same period of 2020 primarily due to the increase in Net operating revenues as discussed above. 32 --------------------------------------------------------------------------------Home Health and Hospice Our home health and hospice segment derived its Net operating revenues from the following payor sources: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Medicare 81.9 % 83.3 % 82.2 % 82.6 % Medicare Advantage 10.4 % 10.8 % 10.4 % 11.1 % Managed care 6.2 % 4.5 % 5.8 % 4.5 % Medicaid 1.4 % 1.2 % 1.4 % 1.5 % Workers' compensation - % 0.1 % - % 0.1 % Patients - % 0.1 % 0.1 % 0.1 % Other income 0.1 % - % 0.1 % 0.1 % Total 100.0 % 100.0 % 100.0 % 100.0 % 33
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Additional information regarding our home health and hospice segment's operating
results is as follows:
Three Months Ended September 30, Percentage Change Nine Months Ended September 30, Percentage Change
2021 2020 2021 vs. 2020 2021 2020 2021 vs. 2020
(In Millions, Except Percentage Change)
Net operating revenues:
Home health $ 221.1 $ 223.3 (1.0) % $ 673.3 $ 649.9 3.6 %
Hospice 52.8 51.2 3.1 % 157.2 147.0 6.9 %
Home health and hospice segment
revenues 273.9 274.5 (0.2) % 830.5 796.9 4.2 %
Operating expenses:
Cost of services (excluding
depreciation and amortization) 124.0 121.8 1.8 % 364.7 389.4 (6.3) %
Support and overhead costs 103.2 100.7 2.5 % 307.7 299.2 2.8 %
Other income - - - % (1.6) - N/A
Equity in net income of
nonconsolidated affiliates (0.1) (0.1) - % (0.5) (0.4) 25.0 %
Noncontrolling interests 0.4 0.3 33.3 % 1.3 0.9 44.4 %
Segment Adjusted EBITDA $ 46.4 $ 51.8 (10.4) % $ 158.9 $ 107.8 47.4 %
(Actual Amounts)
Home health:
Total admissions 48,412 48,838 (0.9) % 149,809 145,716 2.8 %
Episodic admissions 37,577 40,765 (7.8) % 117,449 118,082 (0.5) %
Total recertifications 32,942 33,786 (2.5) % 98,638 95,201 3.6 %
Episodic recertifications 27,742 29,830 (7.0) % 84,121 84,711 (0.7) %
Episodes 66,065 68,261 (3.2) % 200,339 197,067 1.7 %
Total starts of care 81,354 82,624 (1.5) % 248,447 240,917 3.1 %
Revenue per episode $ 2,916 $ 2,910 0.2 % $ 2,936 $ 2,913 0.8 %
Episodic visits per episode 15.0 16.4 (8.5) % 15.5 16.7 (7.2) %
Total visits 1,213,370 1,300,866 (6.7) % 3,749,793 3,857,642 (2.8) %
Cost per visit $ 82 $ 75 9.3 % $ 78 $ 81 (3.7) %
Hospice:
Admissions 3,262 3,354 (2.7) % 9,890 9,530 3.8 %
Patient days 352,691 346,019 1.9 % 1,038,969 1,017,071 2.2 %
Average daily census 3,834 3,761 1.9 % 3,806 3,712 2.5 %
Revenue per day $ 150 $ 148 1.4 % $ 151 $ 144 4.9 %
Operating Expenses as a % of Net Operating Revenues
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Operating expenses:
Cost of services (excluding depreciation and
amortization) 45.3 % 44.4 % 43.9 % 48.9 %
Support and overhead costs 37.7 % 36.7 % 37.0 % 37.5 %
Total operating expenses 82.9 % 81.1 % 81.0 % 86.4 %
34-------------------------------------------------------------------------------- Net Operating Revenues Home health revenue declined during the three months endedSeptember 30, 2021 compared to the same period of 2020 due to decreased episodic admissions largely offset by the continued growth in non-episodic admissions, primarily due to our national contract withUnited Healthcare . Total starts of care declined during the three months endedSeptember 30, 2021 compared to the same period of 2020 primarily due to staffing constraints, continued lower occupancy levels at senior living facilities, and limited elective procedures. Revenue per episode growth during the three months endedSeptember 30, 2021 compared to the same period of 2020 primarily resulted from an increase in reimbursement rates offset by the mix between early and late payment periods resulting from the decline in episodic admissions during the third quarter of 2021. Revenue growth during the nine months endedSeptember 31, 2021 compared to the same period of 2020 primarily was driven by increased volumes. Total starts of care increased during the nine months endedSeptember 30, 2021 compared to the same period of 2020 primarily due to the recovery of volumes during the second quarter of 2021 and increased non-episodic admissions and recertifications as a result of the national contract withUnited Healthcare . The increase in revenue per episode during the nine months endedSeptember 30, 2021 compared to the same period of 2020 resulted from an increase in reimbursement rates and the suspension of sequestration partially offset by the mix between early and late payment periods resulting from the decline in episodic admissions during the third quarter of 2021. Adjusted EBITDA The decrease in Adjusted EBITDA during the three months endedSeptember 30, 2021 compared to the same period of 2020 resulted from higher Cost of services as a percent of revenue related to industry-wide staffing challenges. Cost of services increased as a percent of revenues for the three months endedSeptember 30, 2021 compared to the same period of 2020 primarily due to higher cost per visit resulting from lower clinician productivity associated with recent hires, market rate increases for nurses, and increased contract labor. The increase in Adjusted EBITDA during the nine months endedSeptember 30, 2021 compared to the same period of 2020 resulted from a decrease in Cost of services as a percent of revenue. Cost of services decreased as a percent of revenues for the nine months endedSeptember 30, 2021 compared to the same period of 2020 primarily due to lower cost per visit supported by the clinician compensation model changes implemented inMay 2020 . Adjusted EBITDA during the nine months endedSeptember 30, 2020 included the additional paid time-off awarded to employees in response to the pandemic as discussed above. Liquidity and Capital Resources Our primary sources of liquidity are cash on hand, cash flows from operations, and borrowings under our revolving credit facility. The objectives of our capital structure strategy are to ensure we maintain adequate liquidity and flexibility. Pursuing and achieving those objectives allow us to support the execution of our operating and strategic plans and weather temporary disruptions in the capital markets and general business environment. Maintaining adequate liquidity is a function of our unrestricted Cash and cash equivalents and our available borrowing capacity. Maintaining flexibility in our capital structure is a function of, among other things, the amount of debt maturities in any given year, the options for debt prepayments without onerous penalties, and limiting restrictive terms and maintenance covenants in our debt agreements. Consistent with these objectives, in both April andJune 2021 , we redeemed$100 million in outstanding principal amount of the 5.125% Senior Notes due 2023 (the "2023 Notes") using cash on hand and capacity under our revolving credit facility. Pursuant to the terms of the 2023 Notes, these optional redemptions were made at a price of par. As a result of these redemptions, we recorded an aggregate$1.0 million Loss on early extinguishment of debt during the nine months endedSeptember 30, 2021 . We have been disciplined in creating a capital structure that is flexible with no significant debt maturities prior to 2023. We continue to have a strong, well-capitalized balance sheet, including a substantial portfolio of owned real estate, and we have significant availability under our revolving credit facility. We continue to generate cash flows from operations and we have significant flexibility with how we choose to invest our cash and return capital to shareholders. For additional information, see Note 4, Long-term Debt, to the accompanying condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report, and Note 10, Long-term Debt, to the consolidated financial statements accompanying the 2020 Form 10K. 35 -------------------------------------------------------------------------------- Current Liquidity As ofSeptember 30, 2021 , we had$94.8 million in Cash and cash equivalents. This amount excludes$80.1 million in restricted cash ($75.9 million included in Restricted cash and$4.2 million included in Other long-term assets in our condensed consolidated balance sheet) and$81.2 million of restricted marketable securities (included in Other long-term assets in our condensed consolidated balance sheet). Our restricted assets pertain primarily to obligations associated with our captive insurance company, as well as obligations we have under agreements with joint venture partners. See Note 4,Cash and Marketable Securities , to the consolidated financial statements accompanying the 2020 Form 10K. In addition to Cash and cash equivalents, as ofSeptember 30, 2021 , we had approximately$872 million available to us under our revolving credit facility. Our credit agreement governs the substantial majority of our senior secured borrowing capacity and contains a leverage ratio and an interest coverage ratio as financial covenants. Our leverage ratio is defined in our credit agreement as the ratio of consolidated total debt (less up to$300 million of cash on hand) to Adjusted EBITDA for the trailing four quarters. In calculating the leverage ratio under our credit agreement, we are permitted to use pro forma Adjusted EBITDA, the calculation of which includes historical income statement items and pro forma adjustments resulting from (1) the dispositions and repayments or incurrence of debt and (2) the investments, acquisitions, mergers, amalgamations, consolidations and operational changes from acquisitions to the extent such items or effects are not yet reflected in our trailing four-quarter financial statements. Our interest coverage ratio is defined in our credit agreement as the ratio of Adjusted EBITDA to consolidated interest expense, excluding the amortization of financing fees, for the trailing four quarters. As ofSeptember 30, 2021 , the maximum leverage ratio requirement per our credit agreement was 5.5x and the minimum interest coverage ratio requirement was 2.0x, and we were in compliance with these covenants. Based on Adjusted EBITDA for the trailing four quarters and the interest rate in effect under our credit agreement during the three-month period endedSeptember 30, 2021 , if we had drawn on the first day and maintained the maximum amount of outstanding draws under our revolving credit facility for that entire period, we would still be in compliance with the maximum leverage ratio and minimum interest coverage ratio requirements. We do not face near-term refinancing risk, as the amounts outstanding under our credit agreement do not mature until 2024, and our bonds all mature in 2023 and beyond. See the "Contractual Obligations" section below for information related to our contractual obligations as ofSeptember 30, 2021 . For a discussion of risks and uncertainties facing us see Item 1A, Risk Factors, under Part II, Other Information, of this report and Item 1A, Risk Factors, of the 2020 Form 10K. Sources and Uses of Cash The following table shows the cash flows provided by or used in operating, investing, and financing activities (in millions):
Nine Months Ended
2021 2020
Net cash provided by operating activities $ 592.0 $ 425.0
Net cash used in investing activities (445.6) (264.8)
Net cash (used in) provided by financing activities (282.4) 208.3
(Decrease) increase in cash, cash equivalents, and restricted cash
Operating activities. The increase in Net cash provided by operating activities for the nine months endedSeptember 30, 2021 compared to the same period of 2020 primarily resulted from the approximate$101 million payment to management investors of our home health and hospice segment for vested stock appreciation rights during the first quarter of 2020 and lower revenues during 2020 resulting from the pandemic. For additional information, see Note 7, Share-Based Payments, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report. Investing activities. The increase in Net cash used in investing activities during the nine months endedSeptember 30, 2021 compared to the same period of 2020 primarily resulted from the acquisition of Frontier during the second quarter of 2021 and an increase in purchases of property and equipment. For additional information regarding Frontier, see Note 2, Business Combinations, to the accompanying condensed consolidated financial statements. 36 -------------------------------------------------------------------------------- Financing activities. The increase in Net cash used in financing activities during the nine months endedSeptember 30, 2021 compared to the same period of 2020 primarily resulted from the two partial redemptions of our 2023 Notes during the second quarter of 2021 and the purchase of equity interests held by the home health and hospice management team during the first quarter of 2020 offset by the proceeds received from the additional offering of our 4.50% Senior Notes due 2028 and of our existing 4.75% Senior Notes due 2030 during the second quarter of 2020. For additional information, see Note 5, Redeemable Noncontrolling Interests, to the accompanying condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report and Note 10, Long-term Debt, to the consolidated financial statements accompanying the 2020 Form 10K. Contractual Obligations Our consolidated contractual obligations as ofSeptember 30, 2021 are as follows (in millions): October 1 through 2026 and Total December 31, 2021 2022 - 2023 2024 - 2025 thereafter Long-term debt obligations: Long-term debt, excluding revolving credit facility and finance lease obligations (a)$ 2,702.2 $ 3.6
90.0 - - 90.0 -
Interest on long-term debt (b) 835.2 31.7 249.1 228.3 326.1
Finance lease obligations (c) 642.8 36.2 103.7 101.2 401.7
Operating lease obligations (d) 325.0 12.3 103.4 73.6 135.7
Purchase obligations (e) 125.4 14.8 60.8 27.9 21.9
Other long-term liabilities (f)(g) 3.2 0.1 0.5 0.5 2.1
Total $ 4,723.8 $ 98.7 $ 656.7 $ 1,104.2 $ 2,864.2
(a) Included in long-term debt are amounts owed on our bonds payable and other
notes payable. These borrowings are further explained in Note 4, Long-term Debt,
accompanying the condensed consolidated financial statements included in Part I,
Item 1, Financial Statements (Unaudited), of this report, and Note 10, Long-term
Debt, to the consolidated financial statements accompanying the 2020 Form 10K.
(b) Interest on our fixed rate debt is presented using the stated interest
rate. Interest expense on our variable rate debt is estimated using the rate in
effect as of September 30, 2021 . Interest pertaining to our credit agreement and
bonds is included to their respective ultimate maturity dates. Interest related
to finance lease obligations is excluded from this line. Amounts exclude
amortization of debt discounts, amortization of loan fees, or fees for lines of
credit that would be included in interest expense in our consolidated statements
of comprehensive income.
(c) Amounts include interest portion of future minimum finance lease payments.
(d) Our inpatient rehabilitation segment leases approximately 11% of its
hospitals as well as other property and equipment under operating leases in the
normal course of business. Our home health and hospice segment leases relatively
small office spaces in the localities it serves, space for its corporate office,
and other equipment under operating leases in the normal course of business.
Amounts include interest portion of future minimum operating lease payments. For
more information, see Note 7, Leases, to the consolidated financial statements
accompanying the 2020 Form 10K.
(e) Purchase obligations include agreements to purchase goods or services that
are enforceable and legally binding on Encompass Health and that specify all
significant terms, including: fixed or minimum quantities to be purchased;
fixed, minimum, or variable price provisions; and the approximate timing of the
transaction. Purchase obligations exclude agreements that are cancelable without
penalty. Our purchase obligations primarily relate to software licensing and
support and medical equipment. Purchase obligations are not recognized in our
condensed consolidated balance sheet.
(f) Because their future cash outflows are uncertain, the following noncurrent
liabilities are excluded from the table above: general liability, professional
liability, and workers' compensation risks, noncurrent amounts related to third-
37
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party billing audits, and deferred income taxes. For more information, see
Note 11, Self-Insured Risks, Note 16, Income Taxes, and Note 18, Contingencies
and Other Commitments, to the consolidated financial statements accompanying the
2020 Form 10K and Note 8, Income Taxes, to the condensed consolidated financial
statements included in Part I, Item 1, Financial Statements (Unaudited), of this
report.
(g) The table above does not include Redeemable noncontrolling interests of
$32.5 million because of the uncertainty surrounding the timing and amounts of
any related cash outflows. See Note 5, Redeemable Noncontrolling Interests, to
the condensed consolidated financial statements included in Part I, Item 1,
Financial Statements (Unaudited), of this report.
Our capital expenditures include costs associated with our hospital refresh
program, de novo projects, capacity expansions, technology initiatives, and
building and equipment upgrades and purchases. During the nine months ended
September 30, 2021 , we made capital expenditures of approximately $353 million
for property and equipment, capitalized software, and other intangible assets.
During 2021, we expect to spend approximately $530 million to $580 million for
capital expenditures. Approximately $140 million to $150 million of this
budgeted amount is considered nondiscretionary expenditures, which we may refer
to in other filings as "maintenance" expenditures. In addition, we expect to
spend approximately $100 million on home health and hospice acquisitions during
2021, inclusive of the Frontier acquisition discussed in the "Executive
Overview" section of this Item. Actual amounts spent will be dependent upon the
timing of development projects and acquisition opportunities for our home health
and hospice business.
Authorizations for Returning Capital to Stakeholders
In October 2020 , February 2021 , May 2021 , and July 2021 , our board of directors
declared cash dividends of $0.28 per share that were paid in January 2021 , April
2021 , July 2021 , and October 2021 , respectively. On October 21, 2021 , our board
of directors declared a cash dividend of $0.28 per share, payable on January 18,
2022 to stockholders of record on January 3, 2022 . We expect quarterly dividends
to be paid in January, April, July, and October. However, the actual declaration
of any future cash dividends, and the setting of record and payment dates as
well as the per share amounts, will be at the discretion of our board of
directors after consideration of various factors, including our capital position
and alternative uses of funds. Cash dividends are expected to be funded using
cash flows from operations, cash on hand, and availability under our revolving
credit facility.
On July 24, 2018 , our board approved resetting the aggregate common stock
repurchase authorization to $250 million . As of September 30, 2021 ,
approximately $198 million remained under this authorization. The repurchase
authorization does not require the repurchase of a specific number of shares,
has an indefinite term, and is subject to termination at any time by our board
of directors. Subject to certain terms and conditions, including a maximum price
per share and compliance with federal and state securities and other laws, the
repurchases may be made from time to time in open market transactions, privately
negotiated transactions, or other transactions, including trades under a plan
established in accordance with Rule 10b5-1 under the Securities Exchange Act of
1934, as amended. For additional information, see Part II, Item 2, Unregistered
Sales of Equity Securities and Use of Proceeds, of this report.
Supplemental Guarantor Financial Information
Our indebtedness under our credit agreement and the 5.125% Senior Notes due
2023, 5.75% Senior Notes due 2025, 4.50% Senior Notes due 2028, 4.75% Senior
Notes due 2030, and 4.625% Senior Notes due 2031 (collectively, the "Senior
Notes") are guaranteed by certain consolidated subsidiaries. These guarantees
are full and unconditional and joint and several, subject to certain customary
conditions for release. The Senior Notes are guaranteed on a senior, unsecured
basis by all of our existing and future subsidiaries that guarantee borrowings
under our credit agreement and other capital markets debt. The other
subsidiaries of Encompass Health do not guarantee the Senior Notes (such
subsidiaries are referred to as the "non-guarantor subsidiaries").
The terms of our credit agreement allow us to declare and pay cash dividends on
our common stock so long as: (1) we are not in default under our credit
agreement, and (2) either (a) our senior secured leverage ratio (as defined in
our credit agreement) remains less than or equal to 2x and our leverage ratio
(as defined in our credit agreement) remains less than or equal to 4.50x or (b)
there is capacity under the Available Amount as defined in the credit agreement.
The terms of our Senior Notes indenture allow us to declare and pay cash
dividends on our common stock so long as (1) we are not in default, (2) the
consolidated coverage ratio (as defined in the indenture) exceeds 2x or we are
otherwise allowed under the indenture to incur debt, and (3) we have capacity
under the indenture's restricted payments covenant to declare and pay dividends.
See Note 4, Long-term Debt, to the accompanying condensed consolidated financial
statements included in Part I, Item 1, Financial
38
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Statements (Unaudited), of this report, and Note 10, Long-term Debt, to the
consolidated financial statements accompanying the 2020 Form 10K.
Summarized financial information is presented below for Encompass Health , the
parent company, and the subsidiary guarantors on a combined basis after
elimination of intercompany transactions and balances among Encompass Health and
the subsidiary guarantors and does not include investments in and equity in the
earnings of non-guarantor subsidiaries. Amounts for prior periods have been
revised to reflect the status of guarantors and non-guarantors as of
September 30, 2021 .
Nine Months Ended
September 30, 2021
(In Millions)
Net operating revenues $ 2,739.7
Intercompany revenues generated from non-guarantor subsidiaries 14.3
Total net operating revenues $ 2,754.0
Operating expenses $ 2,338.6
Intercompany expenses incurred in transactions with non-guarantor
subsidiaries 23.4
Total operating expenses $ 2,362.0
Income from continuing operations $ 208.1
Net income $
207.8
Net income attributable to Encompass Health $ 207.8
As of As of
September 30, 2021 December 31, 2020
(In Millions)
Total current assets $ 688.8 $ 712.4
Property and equipment, net $ 1,791.3 $ 1,574.6
Goodwill 2,048.1 1,973.6
Intercompany receivable due from non-guarantor
subsidiaries 122.3 147.8
Other noncurrent assets 670.5 701.2
Total noncurrent assets $ 4,632.2 $ 4,397.2
Total current liabilities $ 673.7 $ 579.3
Long-term debt, net of current portion $ 3,091.5 $ 3,213.1
Other noncurrent liabilities 307.9 306.3
Total noncurrent liabilities $ 3,399.4 $ 3,519.4
Adjusted EBITDA
Management believes Adjusted EBITDA as defined in our credit agreement is a
measure of our ability to service our debt and our ability to make capital
expenditures. We reconcile Adjusted EBITDA to Net income and to Net cash
provided by operating activities.
We use Adjusted EBITDA on a consolidated basis as a liquidity measure. We
believe this financial measure on a consolidated basis is important in analyzing
our liquidity because it is the key component of certain material covenants
contained within our credit agreement, which is discussed in more detail in
Note 10, Long-term Debt, to the consolidated financial statements accompanying
the 2020 Form 10K. These covenants are material terms of the credit agreement.
Noncompliance with these financial covenants under our credit agreement-our
interest coverage ratio and our leverage ratio-could result in our lenders
requiring us to immediately repay all amounts borrowed. If we anticipated a
potential covenant violation, we would seek relief from our lenders, which would
have some cost to us, and such relief might be on terms less
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favorable to us than those in our existing credit agreement. In addition, if we
cannot satisfy these financial covenants, we would be prohibited under our
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 our assessment of our liquidity.
In general terms, the credit agreement definition of Adjusted EBITDA, therein
referred to as "Adjusted Consolidated EBITDA," allows us 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. We also subtract from consolidated Net income all
unusual or nonrecurring items to the extent they increase consolidated Net
income.
Under the credit agreement, the Adjusted EBITDA calculation 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, our
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 generally
accepted accounting principles in the United States of America , 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 10K.
40
--------------------------------------------------------------------------------Our Adjusted EBITDA was as follows (in millions):
Reconciliation of Net Income to Adjusted EBITDA
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Net income $ 126.7 $ 100.1 $ 401.5 $ 257.1
Loss from discontinued operations, net of tax,
attributable to Encompass Health 0.1 - 0.4 -
Net income attributable to noncontrolling
interests (26.7) (22.4) (80.9) (58.9)
Provision for income tax expense 34.1 26.9 108.1 65.8
Interest expense and amortization of debt
discounts and fees 39.9 49.0 124.5 138.0
Government, class action, and related settlements - - - 2.8
(Gain) loss on disposal or impairment of assets (5.2) 7.5 (2.4) 10.6
Depreciation and amortization 64.9 61.2 190.8 180.7
Loss on early extinguishment of debt - - 1.0 -
Stock-based compensation expense 6.9 8.3 21.7 25.3
Costs associated with the strategic alternatives
review 4.6 - 9.6 -
Costs associated with the Frontier acquisition - - 1.3 -
Gain on consolidation of joint venture formerly
accounted for under the equity method of
accounting - - - (2.2)
Change in fair market value of equity securities 0.3 (0.4) (0.3) (0.3)
Payroll taxes on SARs exercise - - - 1.5
Adjusted EBITDA $ 245.6 $ 230.2 $ 775.3 $ 620.4 Reconciliation of Net Cash Provided by Operating Activities to Adjusted EBITDA
Nine Months Ended
2021 2020
Net cash provided by operating activities $
592.0
Interest expense and amortization of debt discounts and fees 124.5 138.0 Equity in net income of nonconsolidated affiliates 2.9 2.5
Net income attributable to noncontrolling interests in continuing operations
(80.9) (58.9)
Amortization of debt-related items (5.8) (5.1)
Distributions from nonconsolidated affiliates (2.7) (2.8)
Current portion of income tax expense 103.7 71.5
Change in assets and liabilities 27.0 47.7
Cash used in operating activities of discontinued operations 0.6 0.2
Costs associated with the strategic alternatives review 9.6 -
Costs associated with the Frontier acquisition 1.3 -
Change in fair market value of equity securities (0.3) (0.3)
Payroll taxes on SARs exercise - 1.5
Other 3.4 1.1
Adjusted EBITDA $ 775.3 $ 620.4 For additional information see the "Results of Operations" and "Segment Results of Operations" sections of this Item.
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Recent Accounting Pronouncements For information regarding recent accounting pronouncements, see Note 1, Basis of Presentation, to our condensed consolidated financial statements included under Part I, Item 1, Financial Statements (Unaudited), of this report.
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