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 Statements 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
March 31, 2021 , our national footprint includes 39 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. A range of options are
under consideration, including the full or partial separation of the home health
and hospice business from Encompass Health through an initial public offering,
spin-off, merger, sale or other transaction. No timetable has been established
for the completion of the strategic review.
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 March 31, 2021 , we
operate 138 inpatient rehabilitation hospitals and manage four inpatient
rehabilitation units through management contracts. Our inpatient rehabilitation
segment represents approximately 78% of our Net operating revenues for the three
months ended March 31, 2021 .
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
March 31, 2021 , we provide home health services in 241 locations and provide
hospice services in 82 locations across 31 states, with concentrations in the
southern half of the United States . In addition, one of these home health
agencies operates as a joint venture that we account for using the equity method
of accounting. Our home health and hospice segment represents approximately 22%
of our Net operating revenues for the three months ended March 31, 2021 .
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2021 Overview
During the three months ended March 31, 2021 , Net operating revenues increased
4.1% over the same period of 2020 due primarily to favorable pricing partially
offset by decreased volumes 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 ;
•continued our capacity expansions by adding 15 new beds to existing hospitals;
and
•announced or continued the development of the following hospitals:
Number of New Beds
2021 2022 2023
De novos:
Cumming, Georgia 50 - -
North Tampa, Florida* 50 - -
Stockbridge, Georgia 50 - -
Greenville, South Carolina 40 - -
Pensacola, Florida 40 - -
Shreveport, Louisiana 40 - -
Waco, Texas 40 - -
Libertyville, Illinois - 60 -
St. Augustine, Florida - 40 -
Lakeland, Florida - 50 -
Clermont, Florida - 50 -
Naples, Florida - 50 -
Cape Coral, Florida - 40 -
Jacksonville, Florida - 50 -
Bowie, Maryland - 60 -
Kissimmee, Florida - - 50
Prosper, Texas - - 40
Fort Mill, South Carolina - - 39
Joint ventures:
Knoxville, Tennessee - 73 -
Shiloh, Illinois - 40 -
Moline, Illinois - 40 -
Owasso, Oklahoma - 40 -
*We began operating this hospital in April 2021 .
We also continued our expansion efforts in our home health and hospice segment.
In April 2021 , we announced we entered into a definitive agreement to purchase
the home health and hospice assets of Frontier Home Health and Hospice in
Alaska , Colorado , Montana , Washington , and Wyoming for a cash purchase price of
$95 million . At closing, 9 home health and 11 hospice locations will become part
of our national network of home health and hospice locations. This transaction,
which is subject to customary closing conditions and regulatory approvals, is
expected to close in the second quarter of 2021. We expect to fund this
transaction with cash on hand and borrowings under our revolving credit
facility. In connection with this transaction, we expect to realize an income
tax benefit with an estimated present value of approximately $10 million .
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We continued our shareholder distributions during the three months ended
March 31, 2021 by paying a quarterly cash dividend of $0.28 per share on our
common stock in January and April. For additional information see the "Liquidity
and Capital Resources" section of this Item.
Business Outlook
Notwithstanding the current impacts from the pandemic, we remain optimistic
regarding the intermediate and long-term prospects for both of our business
segments. 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
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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 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
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") was enacted into law, which extended the
sequestration suspension through March 31, 2021 . On April 14, 2021 , the
sequestration suspension period was extended through December 31, 2021 by the
enactment into law of An Act to Prevent Across-the-Board Direct Spending Cuts,
and for Other Purposes. During the three months ended March 31, 2021 , the impact
of the sequestration suspension on our inpatient rehabilitation and home health
and hospice revenues was $12.5 million and $4.2 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.
On August 21, 2020 , CMS announced a new "phased-in approach" to the home health
Review Choice Demonstration ("RCD") due to the public health emergency and
subsequently announced the delay of the phased-in participation of the RCD in
Florida and North Carolina until June 30, 2021 . As a result, North Carolina and
Florida agencies may submit pre-claim review requests for billing periods
beginning August 31, 2020 .
•Changes to Our Operating Environment Resulting from Federal Regulatory and
Legislative Actions. On April 7, 2021 , CMS released its Notice of Proposed
Rulemaking for Fiscal Year 2022 for inpatient rehabilitation facilities under
the inpatient rehabilitation facility prospective payment system (the "2022
Proposed IRF Rule"). The 2022 Proposed IRF Rule would implement a net 2.2%
market basket increase (market basket update of 2.4% reduced by a productivity
adjustment of 0.2%) effective for discharges between October 1, 2021 and
September 30, 2022 . The 2022 Proposed 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 and updates to the case-mix group relative weights and average
lengths of stay values. The 2022 Proposed IRF Rule would also add one new
quality reporting measure and update the denominator of another measure. Based
on our analysis that utilizes, among other things, the acuity of our patients
annualized over a six-month period ended March 31, 2021 , our experience with
outlier payments over this same time frame, and other factors, we believe the
2022 Proposed IRF Rule will result in a net increase to our Medicare payment
rates of approximately 2.1% effective October 1, 2021 .
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 continued to experience decreased volumes in both segments
which we believe resulted from a number of conditions related to the pandemic
which are expected to continue as discussed in the "Results of Operations"
section of this Item.
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•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.
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 or where employees are unavailable due to a lack of
childcare or care for elderly family.
We remain confident in the prospects of both of our business segments 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 March 31,
2021 2020
Medicare 68.1 % 73.4 %
Medicare Advantage 15.1 % 11.9 %
Managed care 10.3 % 8.7 %
Medicaid 3.5 % 3.0 %
Other third-party payors 1.0 % 0.9 %
Workers' compensation 0.5 % 0.6 %
Patients 0.4 % 0.5 %
Other income 1.1 % 1.0 %
Total 100.0 % 100.0 %
Medicare as a percentage of revenue decreased during the three months ended
March 31, 2021 as compared to the same period of 2020 primarily due to the
pandemic, as discussed below. For additional discussion 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
For the three months ended March 31, 2021 and 2020, our consolidated results of
operations were as follows:
Three Months Ended March 31, Percentage Change
2021 2020 2021 vs. 2020
(In Millions, Except Percentage Change)
Net operating revenues $ 1,230.4 $ 1,182.0 4.1 %
Operating expenses:
Salaries and benefits 687.2 679.1 1.2 %
Other operating expenses 162.3 159.6 1.7 %
Occupancy costs 20.2 20.2 - %
Supplies 51.9 45.7 13.6 %
General and administrative expenses 38.6 35.6 8.4 %
Depreciation and amortization 62.5 58.8 6.3 %
Government, class action, and related settlements - 2.8 (100.0) %
Total operating expenses 1,022.7 1,001.8 2.1 %
Interest expense and amortization of debt discounts and fees
42.8 43.2 (0.9) %
Other (income) expense (1.4) 1.9 (173.7) %
Equity in net income of nonconsolidated affiliates (1.0) (0.8) 25.0 %
Income from continuing operations before income tax expense 167.3 135.9 23.1 %
Provision for income tax expense 34.5 27.1 27.3 %
Income from continuing operations 132.8 108.8 22.1 %
Loss from discontinued operations, net of tax - (0.1) (100.0) %
Net income 132.8 108.7 22.2 %
Less: Net income attributable to noncontrolling interests (25.5) (21.7) 17.5 %
Net income attributable to Encompass Health $ 107.3 $ 87.0 23.3 %
Operating Expenses as a % of Net Operating Revenues
Three Months Ended March 31,
2021 2020
Operating expenses:
Salaries and benefits 55.9 % 57.5 %
Other operating expenses 13.2 % 13.5 %
Occupancy costs 1.6 % 1.7 %
Supplies 4.2 % 3.9 %
General and administrative expenses 3.1 % 3.0 %
Depreciation and amortization 5.1 % 5.0 %
Government, class action, and related settlements - % 0.2 %
Total operating expenses 83.1 % 84.8 %
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.
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Net Operating Revenues
Our consolidated Net operating revenues increased during the three months ended
March 31, 2021 compared to the same period of 2020 primarily due to favorable
pricing partially offset by decreased volumes in both segments. Pricing included
reimbursement rate increases and the suspension of sequestration for both
segments. See additional discussion in the "Segment Results of Operations"
section of this Item.
Beginning in mid-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. Certain of these conditions have continued into 2021
resulting in a year-over-year decrease in volumes in both segments.
Salaries and Benefits
Salaries and benefits increased during the three months ended March 31, 2021
compared to the same period of 2020 primarily due to salary increases for our
employees and the ramping up of new stores partially offset by the home health
and hospice clinician compensation model changes implemented in May 2020 and
improved clinician labor management in both segments.
Salaries and benefits as a percent of Net operating revenues decreased during
the three months ended March 31, 2021 compared to the same period of 2020
primarily due to revenue growth, improved labor management which contributed to
lower employees per occupied bed (as defined in "Segment Results" of this Item),
and the clinician compensation model changes discussed above. See additional
discussion in the "Segment Results of Operations" section of this Item.
Other Operating Expenses
As a percent of Net operating revenues, Other operating expenses decreased
during the three months ended March 31, 2021 compared to the same period of 2020
primarily due to the increase in Net operating revenues as discussed above.
Supplies
Supplies increased in terms of dollars and as a percent of revenue during the
three months ended March 31, 2021 compared to the same period of 2020 primarily
due to increased utilization and cost of medical supplies, including personal
protective equipment ("PPE"), due to the pandemic. We expect to continue to see
increased utilization and cost of medical supplies in 2021.
General and Administrative Expenses
General and administrative expenses increased in terms of dollars and as a
percent of revenue during the three months ended March 31, 2021 compared to the
same period of 2020 primarily due to the $3.5 million year-over-year change in
the mark-to-market adjustment on our non-qualified 401(k) liability and higher
costs associated with incentive compensation.
Depreciation and Amortization
Depreciation and amortization increased during the three months ended March 31,
2021 compared to the same period 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.
Other (Income) Expense
Other (income) expense increased during the three months ended March 31, 2021
compared to the same period of 2020 primarily due to the $3.5 million
year-over-year change in the mark-to-market adjustment on our non-qualified
401(k) liability (offsetting impact in General and administrative expenses).
Income from Continuing Operations Before Income Tax Expense
Our pre-tax income from continuing operations increased during the three months
ended March 31, 2021 compared to the same period of 2020 primarily due to the
increase in Net operating revenues as discussed above.
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Provision for Income Tax Expense
Our Provision for income tax expense increased during the three months ended
March 31, 2021 compared to the same period 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
$100 million to $130 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 $0.2 million as of March 31, 2021 and
December 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.
Net Income Attributable to Noncontrolling Interests
The increase in Net Income Attributable to Noncontrolling Interests during the
three months ended March 31, 2021
compared to the same period of 2020 resulted from new joint ventures and
increased profitability of our existing joint ventures.
Segment Results of Operations
Our internal financial reporting and management structure is focused on the
major types of services provided by Encompass 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 March 31,
2021 2020
Medicare 63.9 % 70.5 %
Medicare Advantage 16.5 % 12.3 %
Managed care 11.7 % 9.9 %
Medicaid 4.1 % 3.4 %
Other third-party payors 1.3 % 1.2 %
Workers' compensation 0.6 % 0.8 %
Patients 0.5 % 0.6 %
Other income 1.4 % 1.3 %
Total 100.0 % 100.0 %
22-------------------------------------------------------------------------------- Additional information regarding our inpatient rehabilitation segment's operating results for the three months endedMarch 31, 2021 and 2020 is as follows: Three Months Ended March 31, Percentage Change 2021 2020 2021 vs. 2020 (In Millions, Except Percentage Change) Net operating revenues: Inpatient$ 942.3 $ 890.0 5.9 % Outpatient and other 17.6 19.2 (8.3) % Inpatient rehabilitation segment revenues 959.9 909.2 5.6 % Operating expenses: Salaries and benefits 501.9 482.3 4.1 % Other operating expenses 140.0 134.7 3.9 % Supplies 45.2 39.6 14.1 % Occupancy costs 15.1 15.3 (1.3) % Other (income) expense (1.5) 1.6 (193.8) % Equity in net income of nonconsolidated affiliates (0.8) (0.6) 33.3 % Noncontrolling interests 25.1 20.8 20.7 % Segment Adjusted EBITDA$ 234.9 $ 215.5 9.0 % (Actual Amounts) Discharges 47,187 47,750 (1.2) % Net patient revenue per discharge$ 19,969 $ 18,639 7.1 % Outpatient visits 40,194 69,743 (42.4) % Average length of stay (days) 13.0 12.7 2.4 % Occupancy % 71.4 % 71.3 % 0.1 % # of licensed beds 9,560 9,322 2.6 % Full-time equivalents* 22,383 22,318 0.3 % Employees per occupied bed 3.31 3.38 (2.1) % * 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 March 31, 2021 2020 Operating expenses: Salaries and benefits 52.3 % 53.0 % Other operating expenses 14.6 % 14.8 % Supplies 4.7 % 4.4 % Occupancy costs 1.6 % 1.7 % Total operating expenses 73.2 % 73.9 % 23
-------------------------------------------------------------------------------- Net Operating Revenues Inpatient revenue increased during the three months endedMarch 31, 2021 compared to the same period of 2020 primarily due to favorable pricing partially offset by decreased volumes. Discharge growth from new stores of 1.0% during the three months endedMarch 31, 2021 resulted from our joint venture inCoralville, Iowa (June 2020 ) and wholly owned hospitals inMurrieta, California (February 2020 ),Sioux Falls, South Dakota (June 2020 ), andToledo, Ohio (November 2020 ). Same-store discharges declined 2.2% during the three months endedMarch 31, 2021 compared to the same period of 2020 primarily due to the pandemic. Discharge growth was impacted by COVID-related limitations on elective procedures and capacity and staffing constraints at certain of our hospitals. Growth in net patient revenue per discharge during the three months endedMarch 31, 2021 compared to the same period of 2020 primarily resulted from a higher acuity patient mix, an increase in reimbursement rates, and the suspension of sequestration. See Note 2, Business Combinations, to the consolidated financial statements accompanying the 2020 Form 10K for information regarding the joint venture discussed above. Adjusted EBITDA The increase in Adjusted EBITDA during the three months endedMarch 31, 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 three months endedMarch 31, 2021 compared to the same period of 2020 primarily due to revenue growth and improved labor management which contributed to lower employees per occupied bed. Supplies increased as a percent of revenue primarily due to increased purchase and use of medical supplies inMarch 2021 due to the pandemic. Other (income) expense within the segment increased$3.5 million primarily due to the year-over-year change in the mark-to-market adjustment on our nonqualified 401(k) liability, which is offset in General and administrative expenses.Home Health and Hospice Our home health and hospice segment derived its Net operating revenues from the following payor sources: Three Months Ended March 31, 2021 2020 Medicare 82.7 % 83.0 % Medicare Advantage 10.4 % 10.8 % Managed care 5.3 % 4.4 % Medicaid 1.4 % 1.5 % Workers' compensation - % 0.1 % Patients 0.1 % 0.1 % Other income 0.1 % 0.1 % Total 100.0 % 100.0 % 24
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Additional information regarding our home health and hospice segment's operating
results for the three months ended
Three Months Ended March 31, Percentage Change
2021 2020 2021 vs. 2020
(In Millions, Except Percentage Change)
Net operating revenues:
Home health $ 219.9 $ 224.8 (2.2) %
Hospice 50.6 48.0 5.4 %
Home health and hospice segment revenues 270.5 272.8 (0.8) %
Operating expenses:
Cost of services (excluding depreciation and
amortization) 118.1 130.9 (9.8) %
Support and overhead costs 101.4 100.2 1.2 %
Equity in net income of nonconsolidated affiliates (0.2) (0.2) - %
Noncontrolling interests 0.4 0.9 (55.6) %
Segment Adjusted EBITDA $ 50.8 $ 41.0 23.9 %
(Actual Amounts)
Home health:
Total admissions 50,799 52,754 (3.7) %
Episodic admissions 40,215 42,476 (5.3) %
Total recertifications 31,902 29,463 8.3 %
Episodic recertifications 28,083 26,553 5.8 %
Episodes 66,435 68,652 (3.2) %
Total starts of care 82,701 82,217 0.6 %
Revenue per episode $ 2,923 $ 2,909 0.5 %
Episodic visits per episode 15.8 16.3 (3.1) %
Total visits 1,239,073 1,306,230 (5.1) %
Cost per visit $ 77 $ 81 (4.9) %
Hospice:
Admissions 3,330 2,986 11.5 %
Patient days 334,400 334,545 - %
Average daily census 3,716 3,676 1.1 %
Revenue per day $ 151 $ 144 4.9 %
Operating Expenses as a % of Net Operating Revenues
Three Months Ended March 31,
2021 2020
Operating expenses:
Cost of services (excluding depreciation and amortization) 43.7 % 48.0 %
Support and overhead costs 37.5 % 36.7 %
Total operating expenses 81.1 % 84.7 %
Net Operating Revenues
Total starts of care (total admissions plus total recertifications) were up
0.6% during the three months ended March 31, 2021 compared to the same period of
2020 due to increases in recertifications and non-episodic admissions.
Non-episodic admissions increased 3% year over year primarily due to the new
national contract with United Healthcare . Total home health admissions declined
during the three months ended March 31, 2021 compared to the same period of 2020
as a result of episodic admissions decreasing 22% from patients residing in
senior living facilities, 35% from patients discharging from skilled nursing
25
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facilities, and 18% from patients receiving elective procedures in acute care
hospitals. The combined impact of these declines represented a loss of
approximately 3,700 admissions, or a 880 basis points negative impact on the
episodic growth rate for the three months ended March 31, 2021 . During the three
months ended March 31, 2021 , the segment averaged 250 home health employees per
day on COVID-related quarantine, which further impacted its ability to accept
referrals.
The increase in revenue per episode during the three months ended March 31, 2021
compared to the same period of 2020 resulted from an increase in reimbursement
rates and the suspension of sequestration partially offset by the impact of the
timing of completed episodes. Revenue per episode during the three months ended
March 31, 2020 benefited from the reversal of a $1.6 million reserve for a Zone
Program Integrity Contractor audit.
Hospice same-store admissions growth of 11.4% yielded a 5.4% increase in
hospice revenue during the three months ended March 31, 2021 compared to the
same period of 2020. Hospice revenue growth was impacted by a decrease in length
of stay resulting from a change in patient mix.
Adjusted EBITDA
The increase in Adjusted EBITDA during the three months ended March 31, 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 three months ended March 31, 2021 compared to the same period of 2020
primarily due to lower cost per visit supported by changes in the clinician
compensation model changes implemented in May 2020 , as well as effective
management of overall productivity of full-time staff.
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 March 2021 , we issued notice for redemption
of $100 million in outstanding principal amount of the 5.125% Senior Notes due
2023 (the "2023 Notes"). We completed this redemption on April 5, 2021 using
cash on hand and capacity under our revolving credit facility. Pursuant to the
terms of the 2023 Notes, this optional redemption was made at a price of par. As
a result of this redemption, we have classified approximately $100 million of
the 2023 Notes as current in our accompanying March 31, 2021 condensed
consolidated balance sheet, and we expect to record an approximate $0.6 million
loss on early extinguishment of debt in the second quarter of 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.
Current Liquidity
As of March 31, 2021 , we had $223.9 million in Cash and cash equivalents. This
amount excludes $72.4 million in restricted cash ($62.2 million included in
Restricted cash and $10.2 million included in Other long-term assets in our
condensed consolidated balance sheet) and $73.1 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 of March 31, 2021 , we had
approximately $962 million available to us under our revolving credit facility.
Our credit agreement governs the substantial majority of our senior secured
borrowing
26
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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
of March 31, 2021 , the maximum leverage ratio requirement per our credit
agreement was 6.50x 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 ended March 31, 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 of March 31, 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 for the three months ended March 31, 2021
and 2020 (in millions):
Three Months Ended March 31,
2021 2020
Net cash provided by operating activities $ 158.5 $ 29.3
Net cash used in investing activities (95.6) (83.0)
Net cash (used in) provided by financing activities (77.5) 71.1
(Decrease) increase in cash, cash equivalents, and restricted cash $
(14.6)
Operating activities. The increase in Net cash provided by operating activities for the three months endedMarch 31, 2021 compared to the same period of 2020 primarily resulted from the approximate$101 million payment to management investors of our home health and hospice segment during the first quarter of 2020 for vested stock appreciation rights. For additional information, see Note 7, Share-Based Payments, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report. Investing activities. The increase in Net cash used in investing activities during the three months endedMarch 31, 2021 compared to the same period of 2020 primarily resulted from an increase in purchases of property and equipment. Financing activities. The increase in Net cash used in financing activities during the three months endedMarch 31, 2021 compared to the same period of 2020 primarily resulted from the 2020 net borrowings on our revolving credit facility offset by cash used for the purchase of equity interests held by the home health and hospice management team during the first quarter of 2020. For additional information, see Note 5, Redeemable Noncontrolling Interests, to the accompanying condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report and Note 10, Long-term Debt, to the consolidated financial statements accompanying the 2020 Form 10K. 27 -------------------------------------------------------------------------------- Contractual Obligations Our consolidated contractual obligations as ofMarch 31, 2021 are as follows (in millions): April 1 through December 31, 2026 and Total 2021 2022 - 2023 2024 - 2025 thereafter Long-term debt obligations: Long-term debt, excluding revolving credit facility and finance lease obligations (a)$ 2,895.1 $ 110.3
Interest on long-term debt (b) 897.7 98.0 250.6 224.9 324.2 Finance lease obligations (c) 645.0 40.4 101.3 100.9 402.4 Operating lease obligations (d) 340.2 44.5 95.8 67.2 132.7 Purchase obligations (e) 110.8 40.6 43.0 17.9 9.3 Other long-term liabilities (f)(g) 3.3 0.3 0.4 0.4 2.2 Total$ 4,892.1 $ 334.1 $ 731.5 $ 993.4 $ 2,833.1 (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 ofMarch 31, 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 12% 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 onEncompass 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-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$31.7 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. 28 -------------------------------------------------------------------------------- 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 three months endedMarch 31, 2021 , we made capital expenditures of approximately$101 million for property and equipment, capitalized software, and other intangible assets. During 2021, we expect to spend approximately$580 million to$665 million for capital expenditures. Approximately$165 million to$195 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$50 million to$100 million on home health and hospice acquisitions during 2021. Actual amounts spent will be dependent upon the timing of development projects and acquisition opportunities for our home health and hospice business. Authorizations forReturning Capital to Stakeholders InOctober 2020 andFebruary 2021 , our board of directors declared cash dividends of$0.28 per share that were paid inJanuary 2021 andApril 2021 , respectively. 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. OnFebruary 14, 2014 , our board of directors approved an increase in our existing common stock repurchase authorization from$200 million to$250 million . OnJuly 24, 2018 , our board approved resetting the aggregate common stock repurchase authorization to$250 million . As ofMarch 31, 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. 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 ofEncompass 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 Statements (Unaudited), of this report, and Note 10, Long-term Debt, to the consolidated financial statements accompanying the 2020 Form 10K. 29 -------------------------------------------------------------------------------- Summarized financial information is presented below forEncompass Health , the parent company, and the subsidiary guarantors on a combined basis after elimination of intercompany transactions and balances amongEncompass 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 ofMarch 31, 2021 . Three Months Ended For the Year Ended March 31, 2021 December 31, 2020 (In Millions) Net operating revenues $ 894.8 $ 3,387.1 Intercompany revenues generated from non-guarantor subsidiaries 4.9 19.9 Total net operating revenues $ 899.7 $ 3,407.0 Operating expenses $ 759.8 $ 2,976.0 Intercompany expenses incurred in transactions with non-guarantor subsidiaries 7.6 30.3 Total operating expenses $ 767.4 $ 3,006.3 Income from continuing operations $ 70.6 $ 166.2 Net income $ 70.6 $ 166.2 Net income attributable to Encompass Health $ 70.6 $ 165.7 As of As of March 31, 2021 December 31, 2020 (In Millions) Total current assets $ 767.4 $ 716.5 Property and equipment, net$ 1,648.3 $ 1,593.9 Goodwill 1,973.6 1,973.6 Intercompany receivable due from non-guarantor subsidiaries 157.8 152.4 Other noncurrent assets 679.9 701.4 Total noncurrent assets$ 4,459.6 $ 4,421.3 Total current liabilities $ 679.5 $ 580.8 Long-term debt, net of current portion$ 3,106.9 $ 3,213.1 Other noncurrent liabilities 251.7 253.9 Total noncurrent liabilities$ 3,358.6
$ 3,467.0
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 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.
30
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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.
Our Adjusted EBITDA for the three months ended March 31, 2021 and 2020 was as
follows (in millions):
Reconciliation of Net Income to Adjusted EBITDA
Three Months Ended
2021 2020
Net income $
132.8
- 0.1
Net income attributable to noncontrolling interests (25.5) (21.7)
Provision for income tax expense 34.5 27.1
Interest expense and amortization of debt discounts and fees 42.8 43.2
Government, class action, and related settlements - 2.8
(Gain) loss on disposal of assets (0.1) 0.1
Depreciation and amortization 62.5 58.8
Stock-based compensation expense 2.8 7.1
Costs associated with the strategic alternatives review 0.9 -
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 0.1 2.5
Payroll taxes on SARs exercise - 1.5
Adjusted EBITDA $ 250.8 $ 228.0
31--------------------------------------------------------------------------------
Reconciliation of Net Cash Provided by Operating Activities to Adjusted EBITDA
Three Months Ended
2021 2020
Net cash provided by operating activities $
158.5
Interest expense and amortization of debt discounts and fees 42.8 43.2 Equity in net income of nonconsolidated affiliates 1.0 0.8
Net income attributable to noncontrolling interests in continuing operations
(25.5) (21.7)
Amortization of debt-related items (2.0) (1.4)
Distributions from nonconsolidated affiliates (1.0) (1.0)
Current portion of income tax expense 25.8 25.7
Change in assets and liabilities 50.3 154.4
Cash used in operating activities of discontinued operations - 0.1
Costs associated with the strategic alternatives review 0.9 -
Change in fair market value of equity securities 0.1 2.5
Payroll taxes on SARs exercise - 1.5
Other (0.1) (5.4)
Adjusted EBITDA $ 250.8 $ 228.0
For additional information see the "Results of Operations" and "Segment Results
of Operations" sections of this Item.
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.
Item 3.Quantitative and Qualitative Disclosures about Market Risk
Our primary exposure to market risk is to changes in interest rates on our
variable rate long-term debt. We use sensitivity analysis models to evaluate the
impact of interest rate changes on our variable rate debt. As of March 31, 2021 ,
our primary variable rate debt outstanding related to $248.3 million under our
term loan facilities. Assuming outstanding balances were to remain the same, a
1% increase in interest rates would result in an incremental negative cash flow
of approximately $2.1 million over the next 12 months, while a 1% decrease in
interest rates would result in an incremental positive cash flow of
approximately $0.3 million over the next 12 months.
See Note 4, Long-term Debt, and Note 6, Fair Value Measurements, to the
condensed consolidated financial statements included in Part I, Item 1,
Financial Statements (Unaudited), of this report, for additional information
regarding our long-term debt.
Item 4.Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, an evaluation was carried
out by our management, including our chief executive officer and chief financial
officer, of the effectiveness of our disclosure controls and procedures as
defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934,
as amended. Based on our evaluation, our chief executive officer and chief
financial officer concluded that our disclosure controls and procedures were
effective as of the end of the period covered by this report.
Changes in Internal Control Over Financial Reporting
There have been no changes in our Internal Control over Financial Reporting
during the quarter ended March 31, 2021 that have a material effect on our
Internal Control over Financial Reporting.
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