Encompass Health reports results for first quarter 2018 and updates full-year 2018 guidance

BIRMINGHAM, Ala., April 26, 2018 /PRNewswire/ -- Encompass Health Corporation (NYSE: EHC), a national leader in post-acute care, offering facility-based and home-based patient care through its network of inpatient rehabilitation hospitals, home health agencies and hospice agencies, today reported its results of operations for the first quarter ended March 31, 2018.

"We're off to a good start in 2018 as both segments generated strong volume, revenue, and earnings growth. Based on the strength of these results, we made upward adjustments to our full-year 2018 guidance ranges," said Mark Tarr, President and Chief Executive Officer of Encompass Health. "We also made solid progress on our strategic initiatives during the first quarter including portfolio growth in both segments, implementation of our rebranding and name change, increasing clinical collaboration between our two segments, and the development of enhanced patient navigation and post-acute network management tools through the Post-Acute Innovation Center. Initiatives such as these serve to enhance our position as the post-acute provider of choice with healthcare systems, physicians, patients, and payors."

Revenue growth was driven by volume and pricing growth in the inpatient rehabilitation segment and volume growth in the home health and hospice segment. See the "Other Information" section of this release for discussion of the Company's adoption of a new accounting standard for revenue recognition.

The increase in income from continuing operations attributable to Encompass Health per share and adjusted earnings per share resulted primarily from increased revenue and a lower effective tax rate resulting from income tax reform.

Growth in cash flows provided by operating activities and adjusted free cash flow resulted primarily from revenue growth and favorable working capital changes.

See attached supplemental information for calculations of non-GAAP measures and reconciliations to their most comparable GAAP measure.

• Revenue - Revenue growth resulted from volume growth and an increase in net patient revenue per discharge. A heavy incidence of influenza at acute care hospitals and the timing of discharges around Easter and Passover contributed to discharge growth. Discharge growth from new stores resulted from the Company's joint ventures in Gulfport, Mississippi (April 2017), Westerville, Ohio (April 2017), and Jackson, Tennessee (July 2017), as well as a wholly owned hospital in Pearland, Texas (October 2017). Growth in net patient revenue per discharge primarily resulted from an increase in Medicare reimbursement rates and a year-over-year reduction in bad debt, which is now a component of revenue (see the "Other Information" section of this release).

The decrease in outpatient and other revenues primarily was due to the continued closures of hospital-based outpatient programs.

• Adjusted EBITDA - The increase in Adjusted EBITDA primarily resulted from revenue growth. Expense ratios in the first quarter of 2018 compared to the first quarter of 2017 benefited from a year-over-year reduction in bad debt, which is now a component of revenue (see the "Other Information" section of this release). Salaries and benefits as a percent of net operating revenues benefited from labor management and higher volumes. Other operating expenses as a percent of net operating revenues increased primarily due to increases in contract services.

• Revenue - Revenue growth was driven by volume growth. Revenue per episode was negatively impacted by an approximate $4 million reserve for a Zone Program Integrity Contractor, or ZPIC, audit. Excluding this reserve, revenue per episode would have increased by 0.7% as changes in patient mix offset the impact of Medicare reimbursement rate cuts.

Hospice and other revenue increased primarily due to same-store volume growth and acquisitions in 2017.

• Adjusted EBITDA - Growth in Adjusted EBITDA primarily resulted from revenue growth and improvements in caregiver productivity and efficiency.

• General and administrative expenses increased as a percent of consolidated revenue due to expenses associated with the Company's rebranding and name change. During the first quarter of 2018, the Company invested $3.6 million in its rebranding and name change, all of which was included in general and administrative expenses. During the first quarter of 2017, the Company invested $0.5 million in its rebranding and name change.

2018 guidance

Based on its results for the first quarter of 2018 and its current expectations for the remainder of 2018, the Company is increasing its full-year guidance ranges for 2018.

The above guidance ranges are inclusive of the previously announced definitive agreement to acquire Camellia Healthcare, which is expected to close prior to June 1, 2018.

For additional considerations regarding the Company's 2018 guidance ranges, see the supplemental information posted on the Company's website at http://investor.encompasshealth.com. See also the "Other Information" section below for an explanation of why the Company does not provide guidance for comparable GAAP measures for Adjusted EBITDA and adjusted earnings per share.

Earnings conference call and webcast

The Company will host an investor conference call at 9:00 a.m. Eastern Time on Friday, April 27, 2018 to discuss its results for the first quarter of 2018. For reference during the call, the Company will post certain supplemental information at http://investor.encompasshealth.com.

The conference call may be accessed by dialing 877 587-6761 and giving the pass code 7575309. International callers should dial 706 679-1635 and give the same pass code. Please call approximately ten minutes before the start of the call to ensure you are connected. The conference call will also be webcast live and will be available for on-line replay at http://investor.encompasshealth.com by clicking on an available link.

About Encompass Health

As a national leader in post-acute care, Encompass Health (NYSE: EHC) offers both facility-based and home-based patient care through its network of inpatient rehabilitation hospitals, home health agencies and hospice agencies. With a national footprint that spans 127 hospitals and 236 home health & hospice locations in 36 states and Puerto Rico, the Company is committed to delivering high-quality, cost-effective care across the post-acute continuum. Driven by a set of shared values, Encompass Health is the result of the union between HealthSouth Corporation and Encompass Home Health & Hospice, and is ranked as one of Fortune's 100 Best Companies to Work For, as well as Modern Healthcare's Best Places to Work. For more information, visit encompasshealth.com, or follow us on Twitter and Facebook.

Other information

The information in this press release is summarized and should be read in conjunction with the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2018 (the "March 2018 Form 10-Q"), when filed, as well as the Company's Current Report on Form 8-K filed on April 26, 2018 (the "Q1 Earnings Form 8‑K"), to which this press release is attached as Exhibit 99.1. In addition, the Company will post supplemental information today on its website at http://investor.encompasshealth.com for reference during its April 27, 2018 earnings call.

During the first quarter of 2018, the Company adopted a new accounting standard (ASC 606 - Revenue from Contracts with Customers) which clarifies the standards for recognizing revenue. The impact to the Company's financial reporting was that amounts previously presented as provision for doubtful became a component of net operating revenues. This had the effect of reducing net operating revenues but was neutral to Adjusted EBITDA and adjusted earnings per share. The Company retrospectively adopted the new standard during the first quarter of 2018, which means previously reported quarterly and full-year results for 2017 have been updated to reflect the requirements of the new standard. For additional information, see the supplemental information posted on the Company's website at http://investor.encompasshealth.com.

The financial data contained in the press release and supplemental information include non-GAAP financial measures, including the Company's adjusted earnings per share, leverage ratio, Adjusted EBITDA, and adjusted free cash flow. Reconciliations to their most comparable GAAP measure, except with regard to non-GAAP guidance, are included below or in the Q1 Earnings Form 8-K. Readers are encouraged to review the "Note Regarding Presentation of Non-GAAP Financial Measures" included in the Q1 Earnings Form 8-K which provides further explanation and disclosure regarding the Company's use of these non-GAAP financial measures.

Excluding net operating revenues, the Company does not provide guidance on a GAAP basis because it is unable to predict, with reasonable certainty, the future impact of items that are deemed to be outside the control of the Company or otherwise non-indicative of its ongoing operating performance. Such items include government, class action, and related settlements; professional fees—accounting, tax, and legal; mark-to-market adjustments for stock appreciation rights; gains or losses related to hedging instruments; loss on early extinguishment of debt; adjustments to its income tax provision (such as valuation allowance adjustments and settlements of income tax claims); items related to corporate and facility restructurings; and certain other items the Company believes to be non-indicative of its ongoing operations. These items cannot be reasonably predicted and will depend on several factors, including industry and market conditions, and could be material to the Company's results computed in accordance with GAAP.

However, the following reasonably estimable GAAP measures for 2018 would be included in a reconciliation for Adjusted EBITDA if the other reconciling GAAP measures could be reasonably predicted:

• Interest expense and amortization of debt discounts and fees - estimate of $147 million to $157 million
• Amortization of debt-related items - approximately $7 million

The Q1 Earnings Form 8-K and, when filed, the March 2018 Form 10-Q can be found on the Company's website at http://investor.encompasshealth.com and the SEC's website at www.sec.gov.

For the three months ended March 31, 2018, net cash used in investing activities was $60.6 million and primarily resulted from capital expenditures. Net cash used in financing activities during the three months ended March 31, 2018 was $116.7 million and primarily resulted from purchasing one-third of the Rollover Shares held by members of the home health and hospice management team, cash dividends paid on common stock, and distributions paid to noncontrolling interests of consolidated affiliates.

For the three months ended March 31, 2017, net cash used in investing activities was $49.1 million and resulted primarily from capital expenditures and acquisitions of businesses. Net cash used in financing activities during the three months ended March 31, 2017 was $106.3 million and resulted primarily from net debt payments, cash dividends paid on common stock, repurchases of common stock in the open market, and distributions paid to noncontrolling interests of consolidated affiliates offset by proceeds from the exercising of stock warrants.

Encompass Health Corporation and Subsidiaries
Forward-Looking Statements

Statements contained in this press release which are not historical facts, such as those relating to financial guidance and assumptions, balance sheet and cash flow plans, and anticipated acquisitions, are forward-looking statements. In addition, Encompass Health, through its senior management, may from time to time make forward-looking public statements concerning the matters described herein. All such estimates, projections, and forward-looking information speak only as of the date hereof, and Encompass Health undertakes no duty to publicly update or revise such forward-looking information, whether as a result of new information, future events, or otherwise. Such forward-looking statements are necessarily estimates based upon current information, involve a number of risks and uncertainties, and relate to, among other things, future events, Encompass Health's plan to repurchase its debt or equity securities, dividend strategies, effective income tax rates, its business strategy, its financial plans, its future financial performance, its projected business results or model, its ability to return value to shareholders, its projected capital expenditures, its leverage ratio, its acquisition opportunities, and the impact of future legislation or regulation. Actual events or results may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors. While it is impossible to identify all such factors, factors which could cause actual events or results to differ materially from those estimated by Encompass Health include, but are not limited to, the price of Encompass Health's common stock as it affects the Company's willingness and ability to repurchase shares and the financial and accounting effects of any repurchases; any adverse outcome of various lawsuits, claims, and legal or regulatory proceedings involving Encompass Health, including its pending DOJ and HHS-OIG investigations and any matters related to yet undiscovered issues, if any, in acquired operations; Encompass Health's ability to attract and retain key management personnel; any adverse effects on Encompass Health's stock price resulting from the integration of acquired operations; potential disruptions, breaches, or other incidents affecting the proper operation, availability, or security of Encompass Health's information systems, including unauthorized access to or theft of patient, business associate, or other sensitive information or inability to provide patient care because of system unavailability as well as unforeseen issues, if any, related to integration of acquired systems; the ability to successfully integrate acquired operations, including realization of anticipated tax benefits, revenues, and cost savings, minimizing the negative impact on margins arising from changes in staffing and other operating practices, and avoidance of unforeseen exposure to liabilities; Encompass Health's ability to successfully complete and integrate de novo developments, acquisitions, investments, and joint ventures consistent with its growth strategy; increases in Medicare audit activity resulting in additional unpaid reimbursement claims and an increase in the backlog of appealed claims denials; changes, delays in (including in connection with resolution of Medicare payment reviews or appeals), or suspension of reimbursement for Encompass Health's services by governmental or private payors; changes in the regulation of the healthcare industry at either or both of the federal and state levels, including as part of national healthcare reform and deficit reduction (such as the home health groupings model and other payment system reforms); competitive pressures in the healthcare industry and Encompass Health's response thereto; Encompass Health's ability to obtain and retain favorable arrangements with third-party payors; Encompass Health's ability to control costs, particularly labor and employee benefit costs, including group medical expenses; adverse effects resulting from coverage determinations made by Medicare Administrative Contractors regarding its Medicare reimbursement claims and lengthening delays in Encompass Health's ability to recover improperly denied claims through the administrative appeals process on a timely basis; Encompass Health's ability to adapt to changes in the healthcare delivery system, including involvement in coordinated care initiatives or programs that may arise with its referral sources; Encompass Health's ability to attract and retain nurses, therapists, and other healthcare professionals in a highly competitive environment with often severe staffing shortages and the impact on Encompass Health's labor expenses from potential union activity and staffing shortages; general conditions in the economy and capital markets, including any instability or uncertainty related to armed conflict or an act of terrorism, governmental impasse over approval of the United States federal budget, an increase to the debt ceiling, or an international sovereign debt crisis; the increase in the costs of defending and insuring against alleged professional liability claims and Encompass Health's ability to predict the estimated costs related to such claims; the impact of the ongoing rebranding and name change initiative on existing operations, including the ability to maintain or grow patient referrals as well as the associated costs of rebranding; and other factors which may be identified from time to time in Encompass

Health's SEC filings and other public announcements, including Encompass Health's Form 10‑K for the year ended December 31, 2017 and Form 10-Q for the quarter ended March 31, 2018, when filed.

Media Contact
Casey Lassiter, 205 447-6410
[email protected]

Investor Relations Contact
Crissy Carlisle, 205 970-5860
[email protected]

SOURCE Encompass Health Corporation

Related Links

http://www.encompasshealth.com