Executive Summary

Q4 delivered strong top-line and profitability: net operating revenue rose 12.7% to $1.405B, adjusted EPS was $1.17, and Adjusted EBITDA increased 13.6% to $289.6M, driven by discharges up 7.8% and net patient revenue per discharge up 4.2% .
Operating cash flow surged 38.7% to $278.8M; adjusted free cash flow more than doubled to $190.5M; full-year adjusted FCF reached $690.3M and net leverage fell to ~2.2x .
Initial FY2025 guidance: revenue $5.8–$5.9B, Adjusted EBITDA $1.16–$1.20B, adjusted EPS $4.67–$4.96; assumptions include Medicare pricing, labor inflation, Oracle Fusion costs, and NCI from Piedmont JV .
Catalysts: de novo pipeline and accelerated bed additions (7 de novos + 50-bed satellite in 2025; ~100 bed expansions), prefabrication builds enabling ~25% faster speed-to-market, and continued payer mix momentum in MA and Medicare .
Wall Street consensus EPS and revenue via S&P Global were unavailable at time of writing due to API limits; estimate comparisons will be updated when accessible (S&P Global) [GetEstimates error].

What Went Well and What Went Wrong

What Went Well

Broad-based volume and pricing: discharges +7.8% (same-store +5.8%), revenue +12.7%, Adjusted EBITDA +13.6%; management highlighted a “very strong finish to 2024” .
Payer and patient mix tailwinds: Q4 Medicare discharges +6.8%, MA +14.7%; stroke discharges +12.6% and neurological +7.7%, supporting acuity and value proposition .
Cash generation and balance sheet: Q4 operating cash flow $278.8M (+38.7%), Q4 adjusted FCF $190.5M (+103.7%), FY net leverage reduced to ~2.2x .
Strategic capacity build-out: 427 beds added in 2024; prefabricated hospital in Houston opened with ~25% faster build; pipeline includes multiple 2025 Florida openings and additional states (CT) .
Quote: “Our value proposition and operating strategy continue to be validated and we remain bullish on the long-term prospects of our business.” — CEO Mark Tarr .

What Went Wrong

Elevated benefits costs: group medical expense per FTE increased due to large-dollar claims and higher specialty drug utilization (GLP‑1s and certain oncology drugs); management expects pressure through H1 2025 before anniversarying utilization .
Non-operating items and JV impacts: Oracle Fusion implementation costs ($5.5–$6.5M in 2025 vs $2.3M in H2’24) and higher NCI expense from adding Augusta to the Piedmont JV ($6–$7M in 2025 vs $3.2M in H2’24) headwind margins year over year .
Provider tax volatility: FY2024 net provider tax benefit to EBITDA ~$15.4M (incl. ~$5M out-of-period); management flagged low predictability and did not include a point estimate in 2025 guidance .

Financial Results

Consolidated performance vs prior quarters (GAAP and Adjusted)

Metric	Q2 2024	Q3 2024	Q4 2024
Net Operating Revenue ($USD Millions)	$1,301.2	$1,351.0	$1,405.0
Diluted EPS (Continuing Ops, $)	$1.13	$1.07	$1.18
Adjusted EPS ($)	$1.11	$1.03	$1.17
Adjusted EBITDA ($USD Millions)	$271.8	$269.3	$289.6
Adjusted EBITDA Margin (%)	20.9% (271.8/1301.2)	19.9% (269.3/1351.0)	20.6% (289.6/1405.0)
Discharges (Units)	60,833	62,715	63,839
Same-store discharge growth (%)	4.8%	6.8%	5.8%
Net patient revenue per discharge ($)	$20,803	$20,987	$21,399

Note: Adjusted EBITDA margin calculated from reported Adjusted EBITDA and net operating revenue; management does not present a consolidated margin figure directly in the press release.

Segment revenue breakdown (inpatient vs. outpatient/other)

Metric	Q2 2024	Q3 2024	Q4 2024
Inpatient Net Patient Revenue ($USD Millions)	$1,265.5	$1,316.2	$1,366.1
Outpatient and Other Revenues ($USD Millions)	$35.7	$34.8	$38.9

KPIs and operating metrics

KPI	Q2 2024	Q3 2024	Q4 2024
Average Length of Stay (days)	12.2	12.2	12.0
Occupancy (%)	74.5%	75.4%	75.3%
Licensed Beds (#)	10,948	11,041	11,094
Occupied Beds (#)	8,156	8,325	8,354
Internal FTEs	27,297	27,938	28,188
Contract Labor FTEs	450	430	394
Total FTEs	27,747	28,368	28,582
Employees per Occupied Bed (EPOB)	3.40	3.41	3.42
Payment mix – Medicare (%)	—	65.7% (Q4 2023)	65.6%
Payment mix – MA (%)	—	16.0% (Q4 2023)	16.5%

Guidance Changes

FY2025 guidance (initial, per Q4 2024)

Metric	Period	Previous Guidance	Current Guidance	Change
Net Operating Revenue ($USD Billions)	FY2025	N/A	$5.8 – $5.9	Initial
Adjusted EBITDA ($USD Billions)	FY2025	N/A	$1.16 – $1.20	Initial
Adjusted EPS ($)	FY2025	N/A	$4.67 – $4.96	Initial
Tax Rate (%)	FY2025	N/A	~26%	Initial
Diluted Share Count (mm)	FY2025	N/A	~103	Initial
SWB per FTE Inflation (%)	FY2025	N/A	3.25% – 3.75%	Initial
Bad Debt Reserve (% of revenue)	FY2025	N/A	2.0% – 2.5%	Initial
Net Pre-opening & Ramp-up Costs ($USD Millions)	FY2025	N/A	$18 – $22	Initial
Oracle Fusion Costs ($USD Millions)	FY2025	N/A	$5.5 – $6.5	Initial
NCI (Augusta to Piedmont JV) ($USD Millions)	FY2025	N/A	$6 – $7	Initial
Maintenance Capex ($USD Millions)	FY2025	N/A	$215 – $225	Initial
Cash Interest ($USD Millions)	FY2025	N/A	$110 – $120	Initial
Cash Taxes ($USD Millions)	FY2025	N/A	$155 – $175	Initial
Adjusted Free Cash Flow ($USD Millions)	FY2025	N/A	$590 – $690	Initial
Dividend per Quarter ($)	Q2 2025 declared	Prior quarter $0.17 (ongoing)	$0.17 payable 4/15/2025	Maintained

FY2024 guidance evolution (context)

Metric	Period	Previous Guidance (Q2 2024)	Updated Guidance (Q3 2024)	Change
Net Operating Revenue ($USD Billions)	FY2024	$5.275 – $5.350	$5.325 – $5.375	Raised
Adjusted EBITDA ($USD Billions)	FY2024	$1.040 – $1.075	$1.070 – $1.090	Raised
Adjusted EPS ($)	FY2024	$3.97 – $4.22	$4.19 – $4.33	Raised

Earnings Call Themes & Trends

Topic	Q2 2024 (Prior-2)	Q3 2024 (Prior-1)	Q4 2024 (Current)	Trend
Labor inflation & turnover	SWB/FTE +3.5% H1; proactive market adjustments; RN turnover improving	SWB/FTE +4.1%; benefits +14%; RN turnover ~20.7%, therapists ~7.6%	Benefits pressure from GLP‑1, oncology drugs; SWB guide 3.25–3.75%	Normalizing wage inflation; elevated benefits through H1’25
Bad debt / audits	TPE spike at Palmetto drove higher bad debt; reserves established	Aging reserve decreased; favorable audit outcomes; RCD cycle 2 challenges	Bad debt % improved vs Q4’23; reserve tailwind YoY	Tightening audits but improved collections
Provider taxes	Volatile; low visibility; increasing state programs	Net EBITDA benefit YTD ~$13M (incl. out-of-period)	FY net ~$15.4M (incl. ~$5M out-of-period); no point estimate for 2025	Unpredictable; likely smaller in 2025
Capacity additions & prefabrication	194 beds added; ERP (Oracle Fusion) initiated	First full-prefab Houston; Athens next; ~25% faster build	2025 plan: 7 de novos + 50-bed satellite; ~100 bed additions; prefab expanding	Accelerating build cadence
Payer mix & contracting	MA episodic >90%; ~3% discount to Medicare; strong stroke programs	Balanced growth across Medicare, MA, managed care	Medicare discharges +6.8%; MA +14.7%; rate increases mid-to-high 2% for managed care	Broad payer strength
Macro/regulatory (RCD, MA)	TPE audits; MA preauth remain challenge	RCD cycle 2 affirmation below 85%; appealing determinations	Advocacy on MA preauth and network adequacy; monitoring CMS leadership changes	Policy engagement ongoing
Technology/clinical outcomes	ERP Oracle Fusion underway; clinical ladder focus	Prefab learnings; hurricane resilience; strong protocols	Predictive tools: fall model improved ~8% in 2024; ReACT 2.0 reduced transfers >100 bps	Continuous improvement

Management Commentary

“Discharge growth of 7.8% facilitated an increase of 12.7% in net operating revenue and an increase of 13.6% in Adjusted EBITDA.” — CEO Mark Tarr .
“We invested more than $450 million into capacity expansions… In 2025, we expect to open 7 new de novo hospitals with 340 beds, one satellite hospital with 50 beds and add approximately 100 beds to existing hospitals.” — CEO Mark Tarr .
“Revenue increased 12.7% to $1.4 billion… comprised of 7.8% discharge growth and a 4.2% increase in net revenue per discharge.” — CFO Doug Coltharp .
“We expect Oracle Fusion implementation costs of $5.5 to $6.5 million and $6 to $7 million in NCI expense related to the Augusta joint venture in 2025.” — CFO Doug Coltharp .
“Group medical prescription drug cost growth to remain elevated at least through the first half of 2025… notably GLP‑1s and enhanced oncology drugs.” — CFO Doug Coltharp .

Q&A Highlights

Medicare Advantage growth breadth and upside: MA discharges +14.7% in Q4; same-store MA growth 9.9% for FY2024; 5-year MA discharge CAGR ~11.6%; admissions-to-referral rate opportunity vs FFS .
Capital allocation and Capex: Capex up ~$100M in 2025, prioritizing high-return bed additions; increased utilization of buybacks alongside dividends given leverage near ~2.2x .
Bed additions pace: 2025 acceleration driven by more hospitals eligible for expansions; constraints include CON permitting and design/construction capacity — actively adding resources .
Tariffs/supply chain: Prefab cost per bed roughly at parity with conventional; ~25% faster builds; minimal near-term tariff risk; predominantly U.S. steel; potential minor concrete impact if Mexico tariffs .
Leverage philosophy: If leverage drops below ~2x, management views cost of capital inefficiency; implies higher shareholder distributions at low leverage .

Estimates Context

S&P Global (Capital IQ) consensus EPS and revenue estimates for Q4 2024 and FY2025 were unavailable due to daily request limits at the time of analysis. We will update estimate comparisons when access is restored (Values to be retrieved from S&P Global) [GetEstimates error].

Key Takeaways for Investors

Volume-led beat narrative: Broad discharge strength and higher revenue per discharge drove double-digit revenue and Adjusted EBITDA growth; same-store growth remains resilient and above underlying demographic trends .
FY2025 guide constructive: Revenue $5.8–$5.9B and adjusted EPS $4.67–$4.96 reflect continued expansion and cost controls; watch Oracle Fusion/NCI headwinds and bad debt normalization .
Cash flow supports growth and returns: FY2024 adjusted FCF $690.3M with net leverage ~2.2x; expect ongoing capacity investments plus consistent buyback/dividends at low leverage .
Benefits cost is the swing factor: Elevated group medical/drug costs (GLP‑1s, oncology) pressure SWB through H1’25; anniversarying utilization and retention progress could ease H2 .
Prefab advantage and pipeline density: Faster speed-to-market and strong Florida/SE pipeline should sustain discharge growth and occupancy, underpinning margin resilience .
Audit/process risk moderated: Q4 benefited from improved collections and lower bad debt vs Q4’23 reserve spike; RCD cycle 2 affirmation rates are a watch item but no immediate financial penalty .
Policy engagement on MA: Active advocacy on preauthorization and network adequacy; if addressed, could unlock incremental MA volume and improve conversion rates .

Appendix: Additional Quantitative Details

Q4 cash flow and leverage: Net cash provided by operating activities $278.8M; Q4 adjusted free cash flow $190.5M; FY debt-to-Adjusted EBITDA 2.3x; leverage net of cash 2.2x .
Payment mix (Q4): Medicare 65.6%, MA 16.5%, Managed care 10.5% .
Q4 non-GAAP reconciliations: Adjusted EPS reconciled from GAAP with tax and equity mark adjustments; Adjusted EBITDA reconciled from net income including add-backs .

All metrics and statements are sourced from the company’s Q4 2024 8‑K press release and supplemental slides, Q4 2024 earnings call transcript, and prior quarter materials where noted.

Encompass Health Corp (EHC)·Q4 2024 Earnings Summary