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Executive Summary
Encompass Health Corporation (NYSE:EHC) reported strong first-quarter 2025 results on April 25, with double-digit growth across key financial metrics and an upgraded outlook for the full year. The rehabilitation hospital operator saw its shares rise 2.5% in after-hours trading following the earnings release, building on a 0.69% gain during the regular session.
The company delivered net operating revenue of $1.45 billion, up 10.6% year-over-year, while adjusted EBITDA grew 14.9% to $313.6 million. Adjusted earnings per share increased 22.3% to $1.37, and adjusted free cash flow surged 32.7% to $222.4 million.
Based on these strong results, Encompass Health raised its full-year 2025 guidance for revenue, adjusted EBITDA, and adjusted earnings per share.
Quarterly Performance Highlights
Encompass Health’s Q1 2025 performance showed significant improvement across all key metrics compared to the same period in 2024, with growth in both volume and pricing contributing to the strong results.
As shown in the following summary of Q1 2025 performance:
The company reported 64,985 patient discharges in Q1 2025, representing a 6.3% increase from the prior year. This growth was driven by a 4.4% increase in same-store discharges and a 1.9% contribution from new facilities. Revenue per discharge also improved, rising 3.9% to $21,816.
A detailed breakdown of revenue sources reveals strong performance across both inpatient and outpatient segments:
Inpatient revenue, which accounts for the vast majority of Encompass Health’s business, grew 10.5% to $1.42 billion. Outpatient and other revenue increased 13.2% to $37.7 million, which included a $5.3 million increase in Medicaid supplemental payments.
The company also improved its operational efficiency, with revenue reserves related to bad debt decreasing by 20 basis points to 2.0% of revenue.
Growth Strategy & Development
Encompass Health continues to execute on its growth strategy, which focuses on expanding its network of inpatient rehabilitation facilities through both new hospital development and additions to existing facilities.
During Q1 2025, the company opened a new 40-bed hospital in Athens, Georgia, and added 25 beds to existing facilities. This expansion activity is part of Encompass Health’s broader 2023-2027 growth targets, which include opening 6-10 de novo hospitals per year and adding 80-120 beds annually to existing facilities.
The company’s development pipeline remains robust, as illustrated in the following slide:
For the remainder of 2025, Encompass Health plans to open 7 de novo hospitals with a total of 340 beds, plus a 50-bed satellite hospital. The company also expects to add 100-120 beds to existing hospitals during the year.
This expansion strategy is supported by Encompass Health’s strong market position and extensive geographic footprint, which currently includes 167 rehabilitation hospitals across 38 states and Puerto Rico. Of these facilities, 66 are operated as joint ventures, which helps the company leverage local partnerships to enter new markets.
Updated 2025 Guidance
Following the strong Q1 results, Encompass Health raised its full-year 2025 guidance across all key metrics:
The company now expects net operating revenue of $5.85 billion to $5.93 billion, up from its previous range of $5.80 billion to $5.90 billion. Adjusted EBITDA guidance was raised to $1.19 billion to $1.22 billion, compared to the previous range of $1.16 billion to $1.20 billion. Adjusted earnings per share from continuing operations is now projected to be between $4.85 and $5.10, up from $4.67 to $4.96 previously.
This improved outlook is based on several key assumptions:
The guidance incorporates a Medicare pricing increase of 3.3% for Q2 and Q3, and an estimated 2.7% for Q4. Managed care pricing is expected to increase by 2.0% to 3.0%. On the cost side, salaries, wages, and benefits per full-time equivalent are projected to rise by 3.25% to 3.75%.
The company also provided detailed assumptions for its adjusted free cash flow guidance:
Encompass Health expects adjusted free cash flow of $620 million to $715 million for 2025, compared to $690.3 million in 2024. The company anticipates lower cash interest payments due to the repayment of $250 million of Senior Notes during 2024, but higher maintenance capital expenditures related to major renovation projects and programmatic hospital asset replacements.
Financial Position & Capital Allocation
Encompass Health maintains a strong financial position, with a net leverage ratio of 2.1x as of March 31, 2025. The company’s debt maturity profile is well-structured, with no significant maturities until 2028:
Total (EPA:TTEF) long-term debt stood at $2.47 billion as of March 31, 2025, with available liquidity of $953 million. The company’s debt consists primarily of senior notes due between 2025 and 2031, along with finance lease obligations.
The following waterfall chart illustrates the components contributing to the strong growth in adjusted free cash flow:
The $54.8 million increase in adjusted free cash flow from Q1 2024 to Q1 2025 was primarily driven by a $40.6 million improvement in adjusted EBITDA, partially offset by higher cash interest payments, cash tax payments, and maintenance capital expenditures.
Encompass Health continues to balance growth investments with shareholder returns. During Q1 2025, the company paid a quarterly cash dividend of $0.17 per share and repurchased 333,679 shares of common stock for $32.1 million. As of March 31, 2025, approximately $458 million remained available under the current stock repurchase authorization.
Conclusion
Encompass Health’s Q1 2025 results demonstrate the company’s continued strong execution of its growth strategy and operational excellence. The double-digit increases in revenue, adjusted EBITDA, and adjusted earnings per share, along with the raised full-year guidance, reflect management’s confidence in the company’s ability to maintain this momentum throughout 2025.
The company’s focus on expanding its network of rehabilitation hospitals through both new facilities and additions to existing locations positions it well to capitalize on the growing demand for inpatient rehabilitation services. With a solid financial position, strong cash flow generation, and a clear growth strategy, Encompass Health appears well-positioned for continued success in the healthcare sector.
Full presentation:
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