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EH

Encompass Health Corp (EHC)·Q3 2025 Earnings Summary

Executive Summary

  • Solid quarter with revenue +9.4% YoY to $1.48B and adjusted EBITDA +11.4% YoY to $300.1M, driven by 5.0% discharge growth and +3.3% net patient revenue (NPR) per discharge; adjusted EPS was $1.23 and GAAP diluted EPS $1.24 .
  • Versus S&P Global consensus, EHC delivered an EPS beat and a slight revenue miss: EPS $1.23 vs $1.19 consensus; revenue $1.478B vs $1.480B consensus (EPS beat; revenue slight miss). The company raised full‑year 2025 guidance for revenue, adjusted EBITDA, and adjusted EPS, tightening ranges . Primary EPS Consensus Mean and Revenue Consensus Mean estimates are from S&P Global*.
  • Operating execution tailwinds: continued bed expansion (3 new hospitals, +39 beds), reduced premium labor spend (-$5.6M YoY to $27M), and favorable provider tax items; offset by a retroactive California property tax assessment ($1.3M) and accelerated supplies ahead of the Oracle ERP go‑live (~$3M) .
  • Capital returns and balance sheet: quarterly dividend increased to $0.19 per share in October and net leverage at ~2.0x after retiring the remaining $100M 5.75% 2025 notes; repurchased ~$25M of stock in Q3 and ~$82M YTD .

What Went Well and What Went Wrong

What Went Well

  • Capacity additions and growth: Opened three hospitals (Danbury, CT; Daytona Beach, FL; Wildwood, FL) and added 39 beds, supporting 5.0% discharge growth and +11.4% YoY adjusted EBITDA; management remains “highly optimistic” on long‑term demand .
    Quote: “Our value proposition and operating strategy continue to be validated and we remain highly optimistic about the long‑term prospects of our business.” — CEO Mark Tarr .
  • Labor management improved: Premium labor spend fell by $5.6M YoY to $27M; RN and therapist turnover remained favorable; Q3 SWB per FTE up only 2.6% YoY despite growth .
    Quote: “Premium labor cost… declined $5.6 million from Q3 2024 to $27 million.” — CFO Doug Coltharp .
  • Technology transition executed: Oracle Fusion ERP went live Oct 3 with “no significant disruptions,” supporting process efficiencies longer‑term (with some post‑implementation costs) .
    Quote: “We experienced no significant disruptions to our operations from the [Oracle Fusion] conversion…” — CEO Mark Tarr .

What Went Wrong

  • Free cash flow optics in the quarter: Q3 adjusted FCF declined 8.2% YoY to $174.2M, largely due to a $55.8M working capital increase tied to accelerated AP payments for Oracle conversion; management expects normalization in Q4 .
  • Non‑recurring cost items: Retroactive property tax assessment ($1.3M) and ~$3M accelerated supplies in preparation for ERP go‑live pressured Q3 expenses .
  • Volume headwind from satellite consolidation: Closure of two satellite units (Cincinnati and Sewickley) reduced total and same‑store discharge growth by ~35 bps in Q3; expected to fade to ~25–30 bps in Q4 as volume consolidates into host hospitals .

Financial Results

Quarterly trend (sequential)

MetricQ1 2025Q2 2025Q3 2025
Net Operating Revenue ($B)$1.455 $1.458 $1.478
Adjusted EBITDA ($M)$313.6 $318.6 $300.1
Diluted EPS (GAAP)$1.48 $1.40 $1.24
Adjusted EPS ($)$1.37 $1.40 $1.23
Discharges (000s)65.0 65.2 65.8
NPR per Discharge ($)$21,816 $21,670 $21,679
Occupancy (%)78.8% 76.6% 76.2%

YoY comparison (Q3 2025 vs Q3 2024)

MetricQ3 2024Q3 2025YoY Change
Net Operating Revenue ($B)$1.351 $1.478 +9.4%
Diluted EPS (GAAP)$1.07 $1.24 +15.9%
Adjusted EPS ($)$1.03 $1.23 +19.4%
Adjusted EBITDA ($M)$269.3 $300.1 +11.4%
Discharges62,715 65,839 +5.0%
Same‑store Discharge Growth6.8% 2.9% (down YoY)
NPR per Discharge ($)$20,987 $21,679 +3.3%
Adjusted Free Cash Flow ($M)$189.7 $174.2 -8.2%

Actuals vs S&P Global consensus (Q3 2025)

MetricConsensusActualOutcome
Revenue ($B)$1.480*$1.478 Slight miss
Adjusted/Primary EPS ($)$1.19*$1.23 Beat

*Values retrieved from S&P Global.

Revenue mix (Q3)

Revenue Component ($M)Q3 2024Q3 2025YoY Change
Inpatient$1,316.2 $1,427.3 +8.4%
Outpatient and Other$34.8 $50.2 +44.3%
Total Net Operating Revenue$1,351.0 $1,477.5 +9.4%

KPIs

KPIQ3 2024Q3 2025
Discharges62,715 65,839
Same‑store Discharge Growth6.8% 2.9%
NPR per Discharge ($)$20,987 $21,679
Occupancy (%)75.4% 76.2%
EPOB3.41 3.42
Premium Labor Spend ($M)—$27.0; down $5.6M YoY
Quality: Community Discharge Rate—84.6%
Discharge to Acute Rate—8.6%
Discharge to SNF Rate—6.0%

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Net Operating Revenue ($B)FY 2025$5.880–$5.980 $5.905–$5.955 Raised (midpoint +$0.015B), narrowed
Adjusted EBITDA ($B)FY 2025$1.220–$1.250 $1.235–$1.255 Raised (midpoint +$0.010B)
Adjusted EPS ($)FY 2025$5.12–$5.34 $5.22–$5.37 Raised, narrowed
Pricing assumptionsFY 2025—Medicare +~2.9% in Q4; Managed Care +~3.0% —
Bad debt reservesFY 2025—~2.0%–2.25% of revenue —
Labor (SWB per FTE)FY 2025—~+3.25% —
Capacity additionsFY 2025—8 new hospitals (7 de novo + 1 satellite); ~127 bed adds —
Pre‑opening & ramp‑up costsFY 2025—~$18–$22M —
Corporate/ERPFY 2025—~+$15M Adj. EBITDA impact incl. ~$6M Oracle implementation + $3M post‑implementation; JV NCI +$6M —
Tax rateFY 2025—~26% —
Diluted sharesFY 2025—102–103M —
Maintenance CAPEX ($M)FY 2025—$215–$225 —
Dividend per share (quarterly)Oct 2025$0.17 earlier in 2025 $0.19 declared (payable Jan 15, 2026) Raised

Earnings Call Themes & Trends

TopicPrevious Mentions (Q2 2025 and Q1 2025)Current Period (Q3 2025)Trend
Capacity expansionQ2: Opened Fort Myers (60 beds), +26 beds; raised FY25 guidance . Q1: Opened one 40‑bed hospital and +25 beds .Opened Danbury (40), Daytona Beach (50), Wildwood (50) and +39 beds; pipeline now includes 14 hospitals with 690 beds beyond 2025 .Acceleration and multi‑year visibility improving.
Labor/talentNoted strong EBITDA leverage and operating cash flow; no specific quarterly premium labor detail in releases .Premium labor spend down $5.6M YoY to $27M; RN turnover 20.2% annualized; therapist 7.8% annualized; strong net hiring .Improving labor quality and cost.
Pricing/payer mix & VARevenue growth from pricing across Q1/Q2 .Balanced growth across Medicare FFS and MA; VA Community Care Network volume +~26% YoY from small base and ~18% of managed care volume .VA channel scaling; payer mix balanced.
Regulatory/RCD—Alabama RCD affirmation rates >90% across seven hospitals since 7/1 (cycle 4); cycle 3 slightly below due to early cycle performance .Process stabilizing at high affirmation rates.
Technology (ERP)—Oracle Fusion went live Oct 3; no major disruptions; ~$3M post‑implementation support planned in 2025 .Implemented; near‑term cost with long‑term workflow benefits.
Provider taxes—Net provider tax revenue +$7.7M YoY (retroactive TN/WV); NCI +$1.6M on JV share .Tailwind (timing‑related).
Development/prefab—Evaluating broader prefab and small‑format 24‑bed hospitals to accelerate capacity; considering rail logistics or second manufacturing site .Innovation to speed expansion.

Management Commentary

  • “We have again increased our expected bed addition growth… we now expect to add ~127 beds to existing hospitals in 2025 and ~150–200 in both 2026 and 2027.” — CEO Mark Tarr .
  • “Q3 adjusted EBITDA included… ~$1.3M [retroactive] property tax assessment [CA] and ~+$3M [accelerated] supplies purchases ahead of the October Oracle Fusion conversion.” — CFO Doug Coltharp .
  • “Premium labor cost… declined $5.6 million from Q3 2024 to $27 million.” — CFO Doug Coltharp .
  • “We experienced no significant disruptions to our operations from the [Oracle Fusion] conversion.” — CEO Mark Tarr .
  • “Net operating revenue $1,477.5 million… adjusted EBITDA $300.1 million… adjusted EPS $1.23.” — Company press release .

Q&A Highlights

  • Growth algorithm and capacity: Management reiterated 6–8% discharge CAGR through 2027 and highlighted increased emphasis on bed additions (highest ROIC), with targeted occupancy thresholds (~>80% all‑private builds) triggering expansions; capex per added bed ~$0.8M .
  • Payer mix/VA: Growth was well balanced between Medicare and MA; VA Community Care Network is scaling (up ~26% YoY off a small base) and pays at CMG Medicare rates; now ~18% of managed care volume .
  • Regulatory: RCD affirmation rates >90% in Alabama since July; process requires sustained administrative attention but improving versus prior cycles .
  • ERP go‑live: Oracle Fusion implementation proceeded smoothly; ~+$3M post‑implementation expenses in 2025; efficiency gains expected over time (no specific near‑term P&L target) .
  • Satellite consolidation: Q3 headwind ~35 bps to discharge growth, moderating to ~25–30 bps in Q4 as volumes consolidate into host facilities .

Estimates Context

  • S&P Global consensus for Q3 2025: Primary EPS $1.19 vs actual $1.23 (beat); Revenue $1.480B vs actual $1.478B (slight miss). Expect upward bias to EPS models given cost discipline (lower premium labor) and net provider tax tailwind, with modest revenue tweaks around NPR per discharge and Q4 calendar effects . Primary EPS Consensus Mean and Revenue Consensus Mean values retrieved from S&P Global*.

*Values retrieved from S&P Global.

Key Takeaways for Investors

  • EPS beat despite slight revenue miss, supported by tight expense control and provider tax timing; guidance raised across revenue, adjusted EBITDA, and adjusted EPS with tighter ranges — a constructive setup into Q4 .
  • Capacity expansion remains the core driver (3 new hospitals, +39 beds in Q3; multi‑year bed‑add plan escalated), with innovation in prefab and small‑format hospitals to accelerate supply in constrained markets .
  • Labor is a differentiator: premium labor spend fell to $27M and turnover metrics remain favorable, underpinning margin durability into 2026 .
  • Oracle ERP go‑live reduces operational risk; near‑term costs (~$9M in 2025 across implementation/post‑implementation) are known and in guidance .
  • Watch quarterly volume cadence (holiday/calendar effects) and the residual headwind from satellite consolidation; management expects normalization and remains confident in the multi‑year growth algorithm .
  • Capital returns intact (dividend to $0.19, buybacks YTD ~$82M) with net leverage ~2.0x, offering flexibility to fund growth and return cash .
  • Trading implication: Near‑term sentiment likely supported by the guidance raise and labor improvements; any stock pressure on volume optics may present opportunities given sustained pricing/mix tailwinds and capacity pipeline .