UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 ______________________________

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

OR 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-10315

______________________________ 

Encompass Health Corporation

(Exact name of Registrant as specified in its Charter)

Delaware	63-0860407
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

9001 Liberty Parkway

Birmingham, Alabama 35242

(Address of Principal Executive Offices)

(205) 967-7116

(Registrant’s telephone number)

 Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	EHC	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	x	Accelerated filer	o	Non-Accelerated filer	o
Smaller reporting company	☐	Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   o

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes ☐ No ý

The registrant had 98,644,648 shares of common stock outstanding, net of treasury shares, as of July 24, 2019.

TABLE OF CONTENTS

		Page
PART I	Financial Information
Item 1.	Financial Statements (Unaudited)	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	55
Item 4.	Controls and Procedures	55
PART II	Other Information
Item 1.	Legal Proceedings	56
Item 1A.	Risk Factors	56
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	56
Item 6.	Exhibits	56

NOTE TO READERS

As used in this report, the terms “Encompass Health,” “we,” “us,” “our,” and the “Company” refer to Encompass Health Corporation and its consolidated subsidiaries, unless otherwise stated or indicated by context. This drafting style is suggested by the Securities and Exchange Commission and is not meant to imply that Encompass Health Corporation, the publicly traded parent company, owns or operates any specific asset, business, or property. The hospitals, operations, and businesses described in this filing are primarily owned and operated by subsidiaries of the parent company. In addition, we use the term “Encompass Health Corporation” to refer to Encompass Health Corporation alone wherever a distinction between Encompass Health Corporation and its subsidiaries is required or aids in the understanding of this filing.

i

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report contains historical information, as well as forward-looking statements that involve known and unknown risks and relate to, among other things, future events, changes to Medicare reimbursement and other healthcare laws and regulations from time to time, our business strategy, our dividend and stock repurchase strategies, our financial plans, our growth plans, our future financial performance, our projected business results, or our projected capital expenditures. In some cases, the reader can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “targets,” “potential,” or “continue” or the negative of these terms or other comparable terminology. Such forward-looking statements are necessarily estimates based upon current information and involve a number of risks and uncertainties, many of which are beyond our control. Any forward-looking statement is based on information current as of the date of this report and speaks only as of the date on which such statement is made. Actual events or results may differ materially from the results anticipated in these forward-looking statements as a result of a variety of factors. While it is impossible to identify all such factors, factors that could cause actual results to differ, such as decreases in revenues or increases in costs or charges, materially from those estimated by us include, but are not limited to, the following:

• each of the factors discussed in Item 1A, Risk Factors, of our Annual Report on Form 10-K for the year ended December 31, 2018, as well as uncertainties and factors, if any, discussed elsewhere in this Form 10-Q, including in the “Executive Overview—Key Challenges” section of Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our other filings from time to time with the SEC, or in materials incorporated therein by reference;

• changes in the rules and regulations of the healthcare industry at either or both of the federal and state levels, including those contemplated now and in the future as part of national healthcare reform and deficit reduction (such as the re-basing of payment systems, the introduction of site neutral payments or case-mix weightings across post-acute settings, the Patient-Driven Groupings Model for home health, the CARE Tool for inpatient rehabilitation, and other payment system reforms), which may decrease revenues and increase the costs of complying with the rules and regulations;

• reductions or delays in, or suspension of, reimbursement for our services by governmental or private payors, including our ability to obtain and retain favorable arrangements with third-party payors;

• restrictive interpretations of the regulations governing the claims that are reimbursable by Medicare;

• our ability to comply with extensive and changing healthcare regulations as well as the increased costs of regulatory compliance and compliance monitoring in the healthcare industry, including the costs of investigating and defending asserted claims, whether meritorious or not;

• any adverse outcome of various lawsuits, claims, and legal or regulatory proceedings, including disclosed and undisclosed qui tam suits;

• the use by governmental agencies and contractors of statistical sampling and extrapolation to expand claims of overpayment or noncompliance;

• delays in the administrative appeals process associated with denied Medicare reimbursement claims, including from various Medicare audit programs, and our exposure to the related delay or reduction in the receipt of the reimbursement amounts for services previously provided, including through recoupment of ongoing claims reimbursement by CMS;

• the ongoing evolution of the healthcare delivery system, including alternative payment models and value-based purchasing initiatives, which may decrease our reimbursement rate or increase costs associated with our operations;

• our 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 our labor expenses from potential union activity and staffing recruitment and retention;

• competitive pressures in the healthcare industry, including from other providers that may be participating in integrated delivery payment arrangements in which we do not participate, and our response to those pressures;

• changes in our payor mix or the acuity of our patients affecting reimbursement rates;

ii

• our ability to successfully complete and integrate de novo developments, acquisitions, investments, and joint ventures consistent with our growth strategy, including realization of anticipated revenues, cost savings, productivity improvements arising from the related operations and avoidance of unanticipated difficulties, costs or liabilities that could arise from acquisitions or integrations;

• increased costs of defending and insuring against alleged professional liability and other claims and the ability to predict the costs related to claims;

• potential incidents affecting the proper operation, availability, or security of our information systems, including the patient information stored there;

• new or changing quality reporting requirements impacting operational costs or our Medicare reimbursement;

• the price of our common stock as it affects our willingness and ability to repurchase shares and the financial and accounting effects of any repurchases;

• our ability and willingness to continue to declare and pay dividends on our common stock;

• our ability to maintain proper local, state and federal licensing, including compliance with the Medicare conditions of participation, which is required to participate in the Medicare program;

• our ability to attract and retain key management personnel; and

• 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 cautionary statements referred to in this section also should be considered in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf. We undertake no duty to update these forward-looking statements, even though our situation may change in the future. Furthermore, we cannot guarantee future results, events, levels of activity, performance, or achievements.

iii

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Encompass Health Corporation and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
	(In Millions, Except Per Share Data)
Net operating revenues	$	1,135.0		$	1,067.7		$	2,259.0		$	2,113.7
Operating expenses:
Salaries and benefits	622.9			578.2			1,243.7			1,148.4
Other operating expenses	149.8			149.4			299.9			290.6
Occupancy costs	20.3			19.5			39.9			38.1
Supplies	41.7			39.3			81.8			79.2
General and administrative expenses	77.1			54.9			130.5			116.0
Depreciation and amortization	52.7			49.7			105.2			95.6
Total operating expenses	964.5			891.0			1,901.0			1,767.9
Loss on early extinguishment of debt	2.3			—			2.3			—
Interest expense and amortization of debt discounts and fees	37.7			37.7			74.9			73.3
Other income	(2.2		)	(1.3		)	(5.9		)	(1.2		)
Equity in net income of nonconsolidated affiliates	(1.8		)	(2.0		)	(4.3		)	(4.3		)
Income from continuing operations before income tax expense	134.5			142.3			291.0			278.0
Provision for income tax expense	23.5			29.3			54.3			59.3
Income from continuing operations	111.0			113.0			236.7			218.7
(Loss) income from discontinued operations, net of tax	(0.1		)	0.2			(0.6		)	(0.3		)
Net and comprehensive income	110.9			113.2			236.1			218.4
Less: Net and comprehensive income attributable to noncontrolling interests	(19.7		)	(21.4		)	(42.6		)	(42.8		)
Net and comprehensive income attributable to Encompass Health	$	91.2		$	91.8		$	193.5		$	175.6
Weighted average common shares outstanding:
Basic	98.0			97.9			98.2			97.9
Diluted	99.3			99.6			99.5			99.6
Earnings per common share:
Basic earnings per share attributable to Encompass Health common shareholders:
Continuing operations	$	0.93		$	0.93		$	1.97		$	1.79
Discontinued operations	—			—			(0.01		)	—
Net income	$	0.93		$	0.93		$	1.96		$	1.79
Diluted earnings per share attributable to Encompass Health common shareholders:
Continuing operations	$	0.92		$	0.92		$	1.95		$	1.76
Discontinued operations	—			—			(0.01		)	—
Net income	$	0.92		$	0.92		$	1.94		$	1.76
Amounts attributable to Encompass Health common shareholders:
Income from continuing operations	$	91.3		$	91.6		$	194.1		$	175.9
(Loss) income from discontinued operations, net of tax	(0.1		)	0.2			(0.6		)	(0.3		)
Net income attributable to Encompass Health	$	91.2		$	91.8		$	193.5		$	175.6

The accompanying notes to condensed consolidated financial statements are an integral part of these condensed statements.

1

Encompass Health Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

	June 30, 2019		December 31, 2018
	(In Millions)
Assets
Current assets:
Cash and cash equivalents	$	221.7	$	69.2
Restricted cash	56.8		59.0
Accounts receivable	496.0		467.7
Other current assets	70.4		66.2
Total current assets	844.9		662.1
Property and equipment, net	1,788.1		1,634.8
Operating lease right-of-use assets	284.4		—
Goodwill	2,111.6		2,100.8
Intangible assets, net	443.6		443.4
Deferred income tax assets	42.6		42.9
Other long-term assets	296.9		291.0
Total assets(1)	$	5,812.1	$	5,175.0
Liabilities and Shareholders’ Equity
Current liabilities:
Current portion of long-term debt	$	38.1	$	35.8
Current operating lease liabilities	45.2		—
Accounts payable	95.6		90.0
Accrued expenses and other current liabilities	574.0		546.7
Total current liabilities	752.9		672.5
Long-term debt, net of current portion	2,719.6		2,478.6
Long-term operating lease liabilities	245.8		—
Other long-term liabilities	157.2		205.2
	3,875.5		3,356.3
Commitments and contingencies
Redeemable noncontrolling interests	352.8		261.7
Shareholders’ equity:
Encompass Health shareholders’ equity	1,275.9		1,276.7
Noncontrolling interests	307.9		280.3
Total shareholders’ equity	1,583.8		1,557.0
Total liabilities(1) and shareholders’ equity	$	5,812.1	$	5,175.0

⁽¹⁾  Our consolidated assets as of June 30, 2019 and December 31, 2018 include total assets of variable interest entities of $216.4 million and $197.5 million, respectively, which cannot be used by us to settle the obligations of other entities. Our consolidated liabilities as of June 30, 2019 and December 31, 2018 include total liabilities of the variable interest entities of $55.8 million and $50.8 million, respectively. See Note 3, Variable Interest Entities.

The accompanying notes to condensed consolidated financial statements are an integral part of these condensed statements.

2

Encompass Health Corporation and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity

(Unaudited)

	Three Months Ended June 30, 2019
	(In Millions)
	Encompass Health Common Shareholders
	Number of Common Shares Outstanding		Common Stock		Capital in Excess of Par Value			Accumulated Deficit			Accumulated Other Comprehensive Loss		Treasury Stock			Noncontrolling Interests			Total
Balance at beginning of period	99.1		$	1.1	$	2,551.3		$	(782.9	)	$	—	$	(455.2	)	$	302.2		$	1,616.5
Net income	—		—		—			91.2			—		—			17.3			108.5
Receipt of treasury stock	—		—		—			—			—		(0.2		)	—			(0.2		)
Dividends declared ($0.27 per share)	—		—		(26.8		)	—			—		—			—			(26.8		)
Stock-based compensation	—		—		9.3			—			—		—			—			9.3
Distributions declared	—		—		—			—			—		—			(17.3		)	(17.3		)
Capital contributions from consolidated affiliates	—		—		—			—			—		—			5.7			5.7
Fair value adjustments to redeemable noncontrolling interests	—		—		(80.4		)	—			—		—			—			(80.4		)
Repurchases of common stock in open market	(0.5	)	—		—			—			—		(32.8		)	—			(32.8		)
Other	—		—		2.2			—			—		(0.9		)	—			1.3
Balance at end of period	98.6		$	1.1	$	2,455.6		$	(691.7	)	$	—	$	(489.1	)	$	307.9		$	1,583.8

	Three Months Ended June 30, 2018
	(In Millions)
	Encompass Health Common Shareholders
	Number of Common Shares Outstanding	Common Stock		Capital in Excess of Par Value			Accumulated Deficit			Accumulated Other Comprehensive Loss		Treasury Stock			Noncontrolling Interests			Total
Balance at beginning of period	98.8	$	1.1	$	2,685.9		$	(1,093.7	)	$	—	$	(427.2	)	$	243.8		$	1,409.9
Net income	—	—		—			91.8			—		—			17.7			109.5
Dividends declared ($0.25 per share)	—	—		(24.9		)	—			—		—			—			(24.9		)
Stock-based compensation	—	—		8.0			—			—		—			—			8.0
Distributions declared	—	—		—			—			—		—			(19.1		)	(19.1		)
Capital contributions from consolidated affiliates	—	—		—			—			—		—			4.0			4.0
Fair value adjustments to redeemable noncontrolling interests	—	—		(24.1		)	—			—		—			—			(24.1		)
Other	0.1	—		1.0			—			—		(0.3		)	—			0.7
Balance at end of period	98.9	$	1.1	$	2,645.9		$	(1,001.9	)	$	—	$	(427.5	)	$	246.4		$	1,464.0

(Continued)

3

Encompass Health Corporation and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity (Continued)

(Unaudited)

	Six Months Ended June 30, 2019
	(In Millions)
	Encompass Health Common Shareholders
	Number of Common Shares Outstanding		Common Stock		Capital in Excess of Par Value			Accumulated Deficit			Accumulated Other Comprehensive Loss		Treasury Stock			Noncontrolling Interests			Total
Balance at beginning of period	98.9		$	1.1	$	2,588.7		$	(885.2	)	$	—	$	(427.9	)	$	280.3		$	1,557.0
Net income	—		—		—			193.5			—		—			36.2			229.7
Receipt of treasury stock	(0.3	)	—		—			—			—		(16.1		)	—			(16.1		)
Dividends declared ($0.54 per share)	—		—		(53.7		)	—			—		—			—			(53.7		)
Stock-based compensation	—		—		16.3			—			—		—			—			16.3
Distributions declared	—		—		—			—			—		—			(32.6		)	(32.6		)
Capital contributions from consolidated affiliates	—		—		—			—			—		—			12.8			12.8
Fair value adjustments to redeemable noncontrolling interests	—		—		(100.7		)	—			—		—			—			(100.7		)
Repurchases of common stock in open market	(0.7	)	—		—			—			—		(43.8		)	—			(43.8		)
Other	0.7		—		5.0			—			—		(1.3		)	11.2			14.9
Balance at end of period	98.6		$	1.1	$	2,455.6		$	(691.7	)	$	—	$	(489.1	)	$	307.9		$	1,583.8

	Six Months Ended June 30, 2018
	(In Millions)
	Encompass Health Common Shareholders
	Number of Common Shares Outstanding		Common Stock		Capital in Excess of Par Value			Accumulated Deficit			Accumulated Other Comprehensive Loss			Treasury Stock			Noncontrolling Interests			Total
Balance at beginning of period	98.3		$	1.1	$	2,747.4		$	(1,176.2	)	$	(1.3	)	$	(418.5	)	$	242.9		$	1,395.4
Net income	—		—		—			175.6			—			—			36.3			211.9
Receipt of treasury stock	(0.2	)	—		—			—			—			(8.3		)	—			(8.3		)
Dividends declared ($0.50 per share)	—		—		(49.8		)	—			—			—			—			(49.8		)
Stock-based compensation	—		—		13.3			—			—			—			—			13.3
Distributions declared	—		—		—			—			—			—			(36.8		)	(36.8		)
Capital contributions from consolidated affiliates	—		—		—			—			—			—			4.0			4.0
Fair value adjustments to redeemable noncontrolling interests	—		—		(66.3		)	—			—			—			—			(66.3		)
Other	0.8		—		1.3			(1.3		)	1.3			(0.7		)	—			0.6
Balance at end of period	98.9		$	1.1	$	2,645.9		$	(1,001.9	)	$	—		$	(427.5	)	$	246.4		$	1,464.0

The accompanying notes to condensed consolidated financial statements are an integral part of these condensed statements.

4

Encompass Health Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	Six Months Ended June 30,
	2019			2018
	(In Millions)
Cash flows from operating activities:
Net income	$	236.1		$	218.4
Loss from discontinued operations, net of tax	0.6			0.3
Adjustments to reconcile net income to net cash provided by operating activities—
Depreciation and amortization	105.2			95.6
Stock-based compensation	65.3			47.5
Deferred tax expense (benefit)	0.5			(3.6		)
Other, net	3.8			5.6
Change in assets and liabilities, net of acquisitions—
Accounts receivable	(22.6		)	9.9
Other assets	(11.8		)	11.4
Accounts payable	(4.5		)	(0.4		)
Accrued payroll	(7.7		)	(10.6		)
Other liabilities	(55.1		)	12.0
Net cash used in operating activities of discontinued operations	(4.5		)	(0.6		)
Total adjustments	68.6			166.8
Net cash provided by operating activities	305.3			385.5
Cash flows from investing activities:
Purchases of property and equipment	(155.8		)	(108.8		)
Additions to capitalized software costs	(6.6		)	(9.7		)
Acquisitions of businesses, net of cash acquired	(13.7		)	(135.8		)
Other, net	(15.5		)	(6.7		)
Net cash used in investing activities	(191.6		)	(261.0		)

(Continued)

5

Encompass Health Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Continued)

(Unaudited)

	Six Months Ended June 30,
	2019			2018
	(In Millions)
Cash flows from financing activities:
Principal payments on debt, including pre-payments	(112.1		)	(9.1		)
Borrowings on revolving credit facility	400.0			245.0
Payments on revolving credit facility	(95.0		)	(190.0		)
Principal payments under finance lease obligations	(9.3		)	(8.4		)
Repurchases of common stock, including fees and expenses	(43.8		)	—
Dividends paid on common stock	(54.9		)	(49.9		)
Purchase of equity interests in consolidated affiliates	—			(65.1		)
Distributions paid to noncontrolling interests of consolidated affiliates	(36.5		)	(35.2		)
Taxes paid on behalf of employees for shares withheld	(16.1		)	(8.3		)
Other, net	8.2			4.5
Net cash provided by (used in) financing activities	40.5			(116.5		)
Increase in cash, cash equivalents, and restricted cash	154.2			8.0
Cash, cash equivalents, and restricted cash at beginning of period	133.5			116.8
Cash, cash equivalents, and restricted cash at end of period	$	287.7		$	124.8
Reconciliation of Cash, Cash Equivalents, and Restricted Cash
Cash and cash equivalents at beginning of period	$	69.2		$	54.4
Restricted cash at beginning of period	59.0			62.4
Restricted cash included in other long-term assets at beginning of period	5.3			—
Cash, cash equivalents, and restricted cash at beginning of period	$	133.5		$	116.8
Cash and cash equivalents at end of period	$	221.7		$	59.0
Restricted cash at end of period	56.8			65.8
Restricted cash included in other long-term assets at end of period	9.2			—
Cash, cash equivalents, and restricted cash at end of period	$	287.7		$	124.8

The accompanying notes to condensed consolidated financial statements are an integral part of these condensed statements.

6

Encompass Health Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

1. Basis of Presentation

Encompass Health Corporation, incorporated in Delaware in 1984, including its subsidiaries, is one of the nation’s largest providers of post-acute healthcare services, offering both facility-based and home-based patient services in 37 states and Puerto Rico through its network of inpatient rehabilitation hospitals, home health agencies, and hospice agencies. We manage our operations and disclose financial information using two reportable segments: (1) inpatient rehabilitation and (2) home health and hospice. See also Note 13, Segment Reporting.

The accompanying unaudited condensed consolidated financial statements of Encompass Health Corporation and Subsidiaries should be read in conjunction with the consolidated financial statements and accompanying notes contained in Encompass Health’s Annual Report on Form 10-K filed with the United States Securities and Exchange Commission on February 27, 2019 (the “2018 Form 10‑K”). The unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the SEC applicable to interim financial information. Certain information and note disclosures included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been omitted in these interim statements, as allowed by such SEC rules and regulations. The condensed consolidated balance sheet as of December 31, 2018 has been derived from audited financial statements, but it does not include all disclosures required by GAAP. However, we believe the disclosures are adequate to make the information presented not misleading.

The unaudited results of operations for the interim periods shown in these financial statements are not necessarily indicative of operating results for the entire year. In our opinion, the accompanying condensed consolidated financial statements recognize all adjustments of a normal recurring nature considered necessary to fairly state the financial position, results of operations, and cash flows for each interim period presented.

Net Operating Revenues—

Our Net operating revenues disaggregated by payor source and segment are as follows (in millions):

	Inpatient Rehabilitation				Home Health and Hospice				Consolidated
	Three Months Ended June 30,				Three Months Ended June 30,				Three Months Ended June 30,
	2019		2018		2019		2018		2019		2018
Medicare	$	629.0	$	607.1	$	221.1	$	199.2	$	850.1	$	806.3
Medicare Advantage	97.0		78.7		26.7		21.8		123.7		100.5
Managed care	86.5		86.6		8.0		8.7		94.5		95.3
Medicaid	27.1		26.8		4.6