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 March 31, 2021

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 ☒ No ☐

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 ☒ No ☐

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	☒	Accelerated filer	☐	Non-Accelerated filer	☐
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.   ☐

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

The registrant had 99,542,410 shares of common stock outstanding, net of treasury shares, as of April 22, 2021.

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	15
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	32
Item 4.	Controls and Procedures	32
PART II	Other Information
Item 1.	Legal Proceedings	33
Item 1A.	Risk Factors	33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 6.	Exhibits	34

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, the spread and impact of the COVID-19 pandemic, 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, the factors described below could cause, and in the case of the COVID-19 pandemic has already caused, actual results to differ materially from those estimated by us.

•Each of the factors discussed in Item 1A, Risk Factors, of our Annual Report on Form 10-K for the year ended December 31, 2020 and Part II, Item 1A, Risk Factors, of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, 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;

•Our ongoing strategic review exposes us to a number of risks and uncertainties, including diversion of management’s time to the process; the incurrence of significant expenses associated with the review and pursuit of any transaction; increased difficulties in attracting, retaining or motivating key management personnel; exposure to potential litigation; and inability to realize anticipated benefits from a potential transaction or other strategic alternative involving our home health and hospice business, any of which could adversely affect our business, financial results or condition, or stock price.

•A pandemic, epidemic, or other widespread outbreak of an infectious disease or other public health crisis could decrease our patient volumes, pricing, and revenues, lead to staffing and supply shortages and associated cost increases, otherwise interrupt operations, or lead to increased litigation risk and, in the case of the COVID-19 pandemic, has already done so in many instances.

•Governmental actions in response to the COVID-19 pandemic, such as shelter-in-place orders, new workplace regulations, facility closures and quarantines, could reduce volumes and otherwise impair our ability to operate and provide care and in many instances already have done so.

•Our inability to maintain infectious disease prevention and control efforts that are required and effectively minimize the spread of COVID-19 among patients and employees could decrease our patient volumes and revenues, lead to staffing shortages or otherwise interrupt operations, or lead to increased litigation risk.

•Reductions or delays in, or suspension of, reimbursement for our services by governmental or private payors, including our inability to obtain and retain favorable arrangements with third-party payors, could decrease our revenues and adversely affect other operating results.

•Restrictive interpretations of the regulations governing the claims that are reimbursable by Medicare could decrease our revenues and adversely affect other operating results.

•New or changing Medicare quality reporting requirements could adversely affect our operating costs or Medicare reimbursement.

•Reimbursement claims are subject to various audits from time to time and such audits may lead to assertions that we have been overpaid or have submitted improper claims, and such assertions may require us to incur additional costs to respond to requests for records and defend the validity of payments and claims and may ultimately require us to refund any amounts determined to have been overpaid.

•The use by governmental agencies and contractors of statistical sampling and extrapolation may substantially expand claims of overpayment or noncompliance.

ii

•Delays and other substantive and procedural deficiencies in the administrative appeals process associated with denied Medicare reimbursement claims, including from various Medicare audit programs, could delay or reduce our reimbursement for services previously provided, including through recoupment from other claims due to us from Medicare.

•Efforts to reduce payments to healthcare providers undertaken by third-party payors, conveners, and referral sources could adversely affect our revenues or profitability.

•Changes in our payor mix or the acuity of our patients could reduce our revenues or profitability.

•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, and other payment system reforms, including the Patient-Driven Groupings Model for home health) could decrease revenues and increase the costs of complying with the rules and regulations.

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

•Compliance with the extensive and frequently changing laws and regulations applicable to healthcare providers requires substantial time, effort and expense, and if we fail to comply, we could incur penalties and significant costs of investigating and defending asserted claims, whether meritorious or not, or be required to make significant changes to our operations.

•Our inability to maintain proper local, state and federal licensing, including compliance with the Medicare conditions of participation and provider enrollment requirements, could decrease our revenues.

•Incidents affecting the proper operation, availability, or security of our or our vendors’ or partners’ information systems, including the patient information stored there, could cause substantial losses and adversely affect our operations and governmental mandates to increase use of electronic records and interoperability exacerbate that risk.

•Any adverse outcome of various lawsuits, claims, and legal or regulatory proceedings, including disclosed and undisclosed qui tam suits could be difficult to predict and could adversely affect our financial results or condition or our operations, and we could experience increased costs of defending and insuring against alleged professional liability and other claims.

•Our inability 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 could adversely affect our financial results or condition.

•Our inability to attract and retain nurses, therapists, and other healthcare professionals in a highly competitive environment with often severe staffing shortages and potential union activity could increase labor expenses and adversely affect other financial and operating results.

•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 could adversely affect our revenues or other financial results.

•Our inability to maintain or develop relationships with patient referral sources could decrease our revenues.

•Our debt and the associated restrictive covenants could have negative consequences for our business and limit our ability to execute aspects of our business plan successfully.

•The price of our common stock could adversely affect our willingness and ability to repurchase shares.

•We may be unable or unwilling to continue to declare and pay dividends on our common stock.

•General conditions in the economy and capital markets, including any disruption, instability, or uncertainty related to armed conflict or an act of terrorism, a governmental impasse over approval of the United States federal budget, an increase to the debt ceiling, an international trade war, or a sovereign debt crisis could adversely affect our financial results or condition, including access to the capital markets.

iii

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.

iv

PART I. FINANCIAL INFORMATION

Item 1.Financial Statements (Unaudited)

Encompass Health Corporation and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

	Three Months Ended March 31,
	2021		2020
	(In Millions, Except Per Share Data)
Net operating revenues	$	1,230.4	$	1,182.0
Operating expenses:
Salaries and benefits	687.2		679.1
Other operating expenses	162.3		159.6
Occupancy costs	20.2		20.2
Supplies	51.9		45.7
General and administrative expenses	38.6		35.6
Depreciation and amortization	62.5		58.8
Government, class action, and related settlements	—		2.8
Total operating expenses	1,022.7		1,001.8
Interest expense and amortization of debt discounts and fees	42.8		43.2
Other (income) expense	(1.4)		1.9
Equity in net income of nonconsolidated affiliates	(1.0)		(0.8)
Income from continuing operations before income tax expense	167.3		135.9
Provision for income tax expense	34.5		27.1
Income from continuing operations	132.8		108.8
Loss from discontinued operations, net of tax	—		(0.1)
Net and comprehensive income	132.8		108.7
Less: Net and comprehensive income attributable to noncontrolling interests	(25.5)		(21.7)
Net and comprehensive income attributable to Encompass Health	$	107.3	$	87.0
Weighted average common shares outstanding:
Basic	99.0		98.2
Diluted	100.2		99.6
Earnings per common share:
Basic earnings per share attributable to Encompass Health common shareholders:
Continuing operations	$	1.08	$	0.88
Discontinued operations	—		—
Net income	$	1.08	$	0.88
Diluted earnings per share attributable to Encompass Health common shareholders:
Continuing operations	$	1.07	$	0.87
Discontinued operations	—		—
Net income	$	1.07	$	0.87
Amounts attributable to Encompass Health common shareholders:
Income from continuing operations	$	107.3	$	87.1
Loss from discontinued operations, net of tax	—		(0.1)
Net income attributable to Encompass Health	$	107.3	$	87.0

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)

	March 31, 2021		December 31, 2020
	(In Millions)
Assets
Current assets:
Cash and cash equivalents	$	223.9	$	224.0
Restricted cash	62.2		65.4
Accounts receivable	633.6		572.8
Other current assets	81.4		86.4
Total current assets	1,001.1		948.6
Property and equipment, net	2,280.5		2,206.6
Operating lease right-of-use assets	248.3		245.7
Goodwill	2,318.7		2,318.7
Intangible assets, net	419.2		431.3
Other long-term assets	274.4		295.0
Total assets(1)	$	6,542.2	$	6,445.9
Liabilities and Shareholders’ Equity
Current liabilities:
Current portion of long-term debt	$	137.2	$	38.3
Current operating lease liabilities	44.2		44.8
Accounts payable	122.8		115.0
Accrued expenses and other current liabilities	508.0		519.2
Total current liabilities	812.2		717.3
Long-term debt, net of current portion	3,160.0		3,250.6
Long-term operating lease liabilities	214.2		209.6
Deferred income tax liabilities	60.6		51.8
Other long-term liabilities	220.5		215.0
	4,467.5		4,444.3
Commitments and contingencies
Redeemable noncontrolling interests	31.7		31.6
Shareholders’ equity:
Encompass Health shareholders’ equity	1,655.1		1,588.0
Noncontrolling interests	387.9		382.0
Total shareholders’ equity	2,043.0		1,970.0
Total liabilities(1) and shareholders’ equity	$	6,542.2	$	6,445.9

(1)Our consolidated assets as of March 31, 2021 and December 31, 2020 include total assets of variable interest entities of $219.2 million and $221.2 million, respectively, which cannot be used by us to settle the obligations of other entities. Our consolidated liabilities as of March 31, 2021 and December 31, 2020 include total liabilities of the variable interest entities of $44.6 million and $46.8 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 March 31, 2021
	(In Millions)
	Encompass Health Common Shareholders
	Number of Common Shares Outstanding	Common Stock		Capital in Excess of Par Value		Accumulated Deficit		Treasury Stock		Noncontrolling Interests		Total
Balance at beginning of period	99.4	$	1.1	$	2,326.6	$	(242.3)	$	(497.4)	$	382.0	$	1,970.0
Net income	—	—		—		107.3		—		23.1		130.4
Receipt of treasury stock	(0.2)	—		—		—		(15.6)		—		(15.6)
Dividends declared ($0.28 per share)	—	—		(27.8)		—		—		—		(27.8)
Stock-based compensation	—	—		2.8		—		—		—		2.8
Distributions declared	—	—		—		—		—		(22.4)		(22.4)
Capital contributions from consolidated affiliates	—	—		—		—		—		5.8		5.8
Other	0.4	—		1.1		—		(0.7)		(0.6)		(0.2)
Balance at end of period	99.6	$	1.1	$	2,302.7	$	(135.0)	$	(513.7)	$	387.9	$	2,043.0

	Three Months Ended March 31, 2020
	(In Millions)
	Encompass Health Common Shareholders
	Number of Common Shares Outstanding	Common Stock		Capital in Excess of Par Value		Accumulated Deficit		Treasury Stock		Noncontrolling Interests		Total
Balance at beginning of period	98.6	$	1.1	$	2,369.9	$	(526.5)	$	(492.3)	$	340.9	$	1,693.1
Net income	—	—		—		87.0		—		19.7		106.7
Receipt of treasury stock	(0.2)	—		—		—		(15.6)		—		(15.6)
Dividends declared ($0.28 per share)	—	—		(27.9)		—		—		—		(27.9)
Exchange of Holdings shares	0.6	—		27.1		—		19.2		—		46.3
Stock-based compensation	—	—		7.1		—		—		—		7.1
Distributions declared	—	—		—		—		—		(15.5)		(15.5)
Capital contributions from consolidated affiliates	—	—		—		—		—		5.8		5.8
Repurchases of common stock in open market	(0.1)	—		—		—		(4.9)		—		(4.9)
Other	0.5	—		—		—		(0.3)		2.4		2.1
Balance at end of period	99.4	$	1.1	$	2,376.2	$	(439.5)	$	(493.9)	$	353.3	$	1,797.2

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

3

Encompass Health Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	Three Months Ended March 31,
	2021		2020
	(In Millions)
Cash flows from operating activities:
Net income	$	132.8	$	108.7
Loss from discontinued operations, net of tax	—		0.1
Adjustments to reconcile net income to net cash provided by operating activities—
Depreciation and amortization	62.5		58.8
Stock-based compensation	2.8		7.1
Deferred tax expense	8.7		1.4
Other, net	2.0		7.7
Change in assets and liabilities, net of acquisitions—
Accounts receivable	(55.1)		(36.6)
Other assets	1.3		15.8
Accrued payroll	5.7		(24.0)
Other liabilities	(2.2)		(109.6)
Net cash used in operating activities of discontinued operations	—		(0.1)
Total adjustments	25.7		(79.5)
Net cash provided by operating activities	158.5		29.3
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired	—		(1.1)
Purchases of property and equipment	(98.8)		(83.5)
Other, net	3.2		1.6
Net cash used in investing activities	(95.6)		(83.0)
Cash flows from financing activities:
Borrowings on revolving credit facility	—		330.0
Payments on revolving credit facility	—		(25.0)
Taxes paid on behalf of employees for shares withheld	(15.6)		(15.6)
Dividends paid on common stock	(29.1)		(29.0)
Distributions paid to noncontrolling interests of consolidated affiliates	(27.8)		(19.1)
Purchase of equity interests in consolidated affiliates	—		(162.3)
Other, net	(5.0)		(7.9)
Net cash (used in) provided by financing activities	(77.5)		71.1
(Decrease) increase in cash, cash equivalents, and restricted cash	(14.6)		17.4
Cash, cash equivalents, and restricted cash at beginning of period	310.9		159.6
Cash, cash equivalents, and restricted cash at end of period	$	296.3	$	177.0
Reconciliation of Cash, Cash Equivalents, and Restricted Cash
Cash and cash equivalents at beginning of period	$	224.0	$	94.8
Restricted cash at beginning of period	65.4		57.4
Restricted cash included in other long-term assets at beginning of period	21.5		7.4
Cash, cash equivalents, and restricted cash at beginning of period	$	310.9	$	159.6
Cash and cash equivalents at end of period	$	223.9	$	104.9
Restricted cash at end of period	62.2		56.7
Restricted cash included in other long-term assets at end of period	10.2		15.4
Cash, cash equivalents, and restricted cash at end of period	$	296.3	$	177.0

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

4

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 a leading provider of post-acute healthcare services, offering both facility-based and home-based patient services in 39 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 11, 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 26, 2021 (the “2020 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, 2020 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 March 31,				Three Months Ended March 31,				Three Months Ended March 31,
	2021		2020		2021		2020		2021		2020
Medicare	$	614.5	$	641.9	$	223.9	$	226.2	$	838.4	$	868.1
Medicare Advantage	158.4		111.5		28.0		29.4		186.4		140.9
Managed care	112.2		90.2		14.3		12.1		126.5		102.3
Medicaid	39.0		30.7		3.8		4.2		42.8		34.9
Other third-party payors	12.1		11.0		—		—		12.1		11.0
Workers’ compensation	5.7		6.9		0.1		0.3		5.8		7.2
Patients	4.9		5.5		0.2		0.4		5.1		5.9
Other income	13.1		11.5		0.2		0.2		13.3		11.7
Total	$	959.9	$	909.2	$	270.5	$	272.8	$	1,230.4	$	1,182.0

    See Note 1, Summary of Significant Accounting Policies, to the consolidated financial statements accompanying the

2020 Form 10-K for our policy related to Net operating revenues.

Recently Adopted Accounting Pronouncements—

    In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” The standard removes certain exceptions to the general principles of ASC 740 and simplifies other areas such as accounting for outside basis differences of equity method investments. Either prospective or retrospective transition of this standard is dependent upon the specific amendments. The new guidance was effective for us beginning January 1, 2021. The adoption of this guidance did not have a material impact to our condensed consolidated financial statements.

We do not believe any other recently issued, but not yet effective, accounting standards will have a material effect on our condensed consolidated financial position, results of operations, or cash flows.

5

Encompass Health Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

2.Business Combinations

Home Health and Hospice

In April 2021, we announced we entered into a definitive agreement to purchase the home health and hospice assets of Frontier Home Health and Hospice in Alaska, Colorado, Montana, Washington, and Wyoming for a cash purchase price of $95 million. At closing, 9 home health and 11 hospice locations will become part of our national network of home health and hospice locations. This transaction, which is subject to customary closing conditions and regulatory approvals, is expected to close in the second quarter of 2021. We expect to fund this transaction with cash on hand and borrowings under our revolving credit facility.

3.Variable Interest Entities

As of March 31, 2021 and December 31, 2020, we consolidated nine limited partnership-like entities that are variable interest entities (“VIEs”) and of which we are the primary beneficiary. Our ownership percentages in these entities range from 50.0% to 75.0% as of March 31, 2021. Through partnership and management agreements with or governing each of these entities, we manage all of these entities and handle all day-to-day operating decisions. Accordingly, we have the decision making power over the activities that most significantly impact the economic performance of our VIEs and an obligation to absorb losses or receive benefits from the VIE that could potentially be significant to the VIE. These decisions and significant activities include, but are not limited to, marketing efforts, oversight of patient admissions, medical training, nurse and therapist scheduling, provision of healthcare services, billing, collections, and creation and maintenance of medical records. The terms of the agreements governing each of our VIEs prohibit us from using the assets of each VIE to satisfy the obligations of other entities.

    The carrying amounts and classifications of the consolidated VIEs’ assets and liabilities, which are included in our condensed consolidated balance sheet, are as follows (in millions):

	March 31, 2021		December 31, 2020
Assets
Current assets:
Cash and cash equivalents	$	0.5	$	0.1
Accounts receivable	33.7		33.1
Other current assets	8.5		8.6
Total current assets	42.7		41.8
Property and equipment, net	118.7		121.1
Operating lease right-of-use assets	4.4		4.7
Goodwill	19.2		19.2
Intangible assets, net	3.1		3.3
Other long-term assets	31.1		31.1
Total assets	$	219.2	$	221.2
Liabilities
Current liabilities:
Current portion of long-term debt	$	0.9	$	0.9
Current operating lease liabilities	1.5		1.5
Accounts payable	5.9		6.1
Accrued expenses and other current liabilities	21.7		23.0
Total current liabilities	30.0		31.5
Long-term debt, net of current portion	9.4		9.6
Long-term operating lease liabilities	2.9		3.3
Other long-term liabilities	2.3		2.4
Total liabilities	$	44.6	$	46.8

6

Encompass Health Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

4.Long-term Debt

Our long-term debt outstanding consists of the following (in millions):

	March 31, 2021		December 31, 2020
Credit Agreement—
Term loan facilities	$	248.3	$	251.6
Bonds payable—
5.125% Senior Notes due 2023	298.3		298.1
5.75% Senior Notes due 2025	346.5		346.3
4.50% Senior Notes due 2028	785.5		785.0
4.75% Senior Notes due 2030	783.5		783.2
4.625% Senior Notes due 2031	393.3		393.2
Other notes payable	39.7		39.8
Finance lease obligations	402.1		391.7
	3,297.2		3,288.9
Less: Current portion	(137.2)		(38.3)
Long-term debt, net of current portion	$	3,160.0	$	3,250.6

In March 2021, we issued notice for redemption of $100 million in outstanding principal amount of the 5.125% Senior Notes due 2023 (the “2023 Notes”). We completed this redemption on April 5, 2021 using cash on hand and capacity under our revolving credit facility. Pursuant to the terms of the 2023 Notes, this optional redemption was made at a price of par. As a result of this redemption, we have classified approximately $100 million of the 2023 Notes as current in our accompanying March 31, 2021 condensed consolidated balance sheet, and we expect to record an approximate $0.6 million loss on early extinguishment of debt in the second quarter of 2021.

5.Redeemable Noncontrolling Interests

The following is a summary of the activity related to our Redeemable noncontrolling interests (in millions):

	Three Months Ended March 31,
	2021		2020
Balance at beginning of period	$	31.6	$	239.6
Net income attributable to noncontrolling interests	2.4		2.0
Distributions declared	(2.3)		(2.1)
Contribution to joint venture	—		3.1
Purchase of redeemable noncontrolling interests	—		(162.3)
Exchange transaction	—		(46.3)
Balance at end of period	$	31.7	$	34.0

The following table reconciles the net income attributable to nonredeemable Noncontrolling interests, as recorded in the shareholders’ equity section of the condensed consolidated balance sheets, and the net income attributable to Redeemable noncontrolling interests, as recorded in the mezzanine section of the condensed consolidated balance sheets, to the Net and comprehensive income attributable to noncontrolling interests presented in the condensed consolidated statements of comprehensive income (in millions):

	Three Months Ended March 31,
	2021		2020
Net income attributable to nonredeemable noncontrolling interests	$	23.1	$	19.7
Net income attributable to redeemable noncontrolling interests	2.4		2.0
Net income attributable to noncontrolling interests	$	25.5	$	21.7

7

Encompass Health Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

On December 31, 2014, we acquired 83.3% of our home health and hospice business when we purchased EHHI Holdings, Inc. (“EHHI”). In the acquisition, we acquired all of the issued and outstanding equity interests of EHHI, other than equity interests contributed to Encompass Health Home Health Holdings, Inc. (“Holdings”), a subsidiary of Encompass Health and an indirect parent of EHHI, by certain sellers in exchange for shares of common stock of Holdings. Those sellers were members of EHHI management, and they contributed a portion of their shares of common stock of EHHI, valued at approximately $64 million on the acquisition date, in exchange for approximately 16.7% of the outstanding shares of common stock of Holdings. At any time after December 31, 2017, each management investor had the right (but not the obligation) to have his or her shares of Holdings stock repurchased by Encompass Health for a cash purchase price per share equal to the fair value. In January 2020, we received exercise notices, representing approximately 4.3% of the outstanding shares of the common stock of Holdings. On February 18, 2020, Encompass Health settled the acquisition of those shares upon payment of approximately $162 million in cash. Upon settlement of these exercises, approximately $46 million of the shares of Holdings held by two management investors remained outstanding.

On February 20, 2020, Encompass Health entered into exchange agreements (each, an “Exchange Agreement”) with these two management investors, pursuant to which they had the right to exchange all of the remaining shares of Holdings held by them for shares of common stock of Encompass Health (the “EHC Shares”). Each of the Exchange Agreements provided that the management investor must deliver a written exchange notice (an “Exchange Notice”) to Encompass Health in order to exchange his or her remaining shares of Holdings for EHC Shares. Each Exchange Agreement further provided that the number of EHC Shares to be delivered to the management investor was to be determined by dividing the fair value of the shares of Holdings held by the management investor on the date of the Exchange Agreement by the last reported sales price of Encompass Health’s common stock on the New York Stock Exchange (the “NYSE”) on the date of delivery of the Exchange Notice.

On February 20, 2020, Encompass Health received an Exchange Notice from each of the management investors. Based on the last sales price of Encompass Health’s common stock on the NYSE on February 20, 2020, Encompass Health delivered an aggregate 560,957 EHC Shares to the management investors. The total number of EHC Shares issued pursuant to the exchange agreements on March 6, 2020 represented less than 0.6% of the outstanding shares of Encompass Health common stock. Encompass Health issued the EHC Shares from its treasury shares. Encompass Health now owns 100% of Holdings and EHHI.

See also Note 6, Fair Value Measurements.

6.Fair Value Measurements

Our financial assets and liabilities that are measured at fair value on a recurring basis are as follows (in millions):

			Fair Value Measurements at Reporting Date Using
As of March 31, 2021	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Valuation Technique (1)
Other long-term assets:
Equity securities	$	73.1	$	—	$	73.1	$	—	M
Redeemable noncontrolling interests	31.7		—		—		31.7		I
As of December 31, 2020
Other long-term assets:
Equity securities	$	72.6	$	—	$	72.6	$	—	M
Redeemable noncontrolling interests	31.6		—		—		31.6		I

(1) The three valuation techniques are: market approach (M), cost approach (C), and income approach (I).

There are assets and liabilities that are not required to be measured at fair value on a recurring basis. However, these assets may be recorded at fair value as a result of impairment charges or other adjustments made to the carrying value of the applicable assets. During the three months ended March 31, 2021 and March 31, 2020, we did not record any material gains or losses related to these assets.

8

Encompass Health Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

As discussed in Note 1, Summary of Significant Accounting Policies, “Fair Value Measurements,” to the consolidated financial statements accompanying the 2020 Form 10‑K, the carrying value equals fair value for our financial instruments that are not included in the table below and are classified as current in our condensed consolidated balance sheets. The carrying amounts and estimated fair values for all of our other financial instruments are presented in the following table (in millions):

	As of March 31, 2021				As of December 31, 2020
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Long-term debt:
Term loan facilities	$	248.3	$	249.8	$	251.6	$	253.1
5.125% Senior Notes due 2023	298.3		300.8		298.1		302.6
5.75% Senior Notes due 2025	346.5		361.6		346.3		361.4
4.50% Senior Notes due 2028	785.5		820.2		785.0		840.0
4.75% Senior Notes due 2030	783.5		824.0		783.2		856.0
4.625% Senior Notes due 2031	393.3		415.0		393.2		424.9
Other notes payable	39.7		39.7		39.8		39.8
Financial commitments:
Letters of credit	—		37.7		—		36.7

Fair values for our long-term debt and financial commitments are determined using inputs, including quoted prices in nonactive markets, that are observable either directly or indirectly, or Level 2 inputs within the fair value hierarchy. See Note 1, Summary of Significant Accounting Policies, “Fair Value Measurements,” to the consolidated financial statements accompanying the 2020 Form 10‑K.

7.Share-Based Payments

During the three months ended March 31, 2021, we issued a total of 0.5 million restricted stock awards to members of our management team and our board of directors. Approximately 0.2 million of these awards contain only a service condition, while the remainder contain both a service and a performance condition. For the awards that include a performance condition, the number of shares that will ultimately be granted to employees may vary based on the Company’s performance during the applicable two year performance measurement period. Additionally, we granted 0.1 million stock options to members of our management team. The fair value of these awards and options was determined using the policies described in Note 1, Summary of Significant Accounting Policies, and Note 14, Share-Based Payments, to the consolidated financial statements accompanying the 2020 Form 10‑K.

In conjunction with the EHHI acquisition discussed in Note 5, Redeemable Noncontrolling Interests, we granted stock appreciation rights (“SARs”) based on Holdings common stock to certain members of EHHI management at closing. In January 2020, members of the management team exercised the remaining SARs, and in February 2020, we settled those awards upon payment of approximately $101 million in cash.

For additional information, see Note 14, Share-Based Payments, to the consolidated financial statements accompanying the 2020 Form 10‑K.

8.Income Taxes

Our Provision for income tax expense of $34.5 million and $27.1 million for the three months ended March 31, 2021 and 2020, respectively, primarily resulted from the application of our estimated effective blended federal and state income tax rate offset by tax benefits resulting from share-based compensation windfalls.

9

Encompass Health Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

9.Earnings per Common Share

The following table sets forth the computation of basic and diluted earnings per common share (in millions, except per share amounts):

	Three Months Ended March 31,
	2021		2020
Basic:
Numerator:
Income from continuing operations	$	132.8	$	108.8
Less: Net income attributable to noncontrolling interests included in continuing operations	(25.5)		(21.7)
Less: Income allocated to participating securities	(0.5)		(0.3)
Income from continuing operations attributable to Encompass Health common shareholders	106.8		86.8
Loss from discontinued operations, net of tax, attributable to Encompass Health common shareholders	—		(0.1)
Net income attributable to Encompass Health common shareholders	$	106.8	$	86.7
Denominator:
Basic weighted average common shares outstanding	99.0		98.2
Basic earnings per share attributable to Encompass Health common shareholders:
Continuing operations	$	1.08	$	0.88
Discontinued operations	—		—
Net income	$	1.08	$	0.88
Diluted:
Numerator:
Income from continuing operations	$	132.8	$	108.8
Less: Net income attributable to noncontrolling interests included in continuing operations	(25.5)		(21.7)
Income from continuing operations attributable to Encompass Health common shareholders	107.3		87.1
Loss from discontinued operations, net of tax, attributable to Encompass Health common shareholders	—		(0.1)
Net income attributable to Encompass Health common shareholders	$	107.3	$	87.0
Denominator:
Diluted weighted average common shares outstanding	100.2		99.6
Diluted earnings per share attributable to Encompass Health common shareholders:
Continuing operations	$	1.07	$	0.87
Discontinued operations	—		—
Net income	$	1.07	$	0.87

The following table sets forth the reconciliation between basic weighted average common shares outstanding and diluted weighted average common shares outstanding (in millions):

	Three Months Ended March 31,
	2021	2020
Basic weighted average common shares outstanding	99.0	98.2
Restricted stock awards, dilutive stock options, and restricted stock units	1.2	1.4
Diluted weighted average common shares outstanding	100.2	99.6

See Note 17, Earnings per Common Share, to the consolidated financial statements accompanying the 2020 Form 10‑K for additional information related to our common stock.

10

Encompass Health Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

10.Contingencies and Other Commitments

We operate in a highly regulated industry in which healthcare providers are routinely subject to litigation. As a result, various lawsuits, claims, and legal and regulatory proceedings have been and can be expected to be instituted or asserted against us. The resolution of any such lawsuits, claims, or legal and regulatory proceedings could materially and adversely affect our financial position, results of operations, and cash flows in a given period.

Nichols Litigation—

We were named as a defendant in a lawsuit filed March 28, 2003 by several individual stockholders in the Circuit Court of Jefferson County, Alabama, captioned Nichols v. HealthSouth Corp. In July 2019, we entered into settlement agreements with all but one plaintiff and paid those settling plaintiffs an aggregate amount of cash less than $0.1 million. The remaining plaintiff alleges that we, some of our former officers, and our former investment bank engaged in a scheme to overstate and misrepresent our earnings and financial position. The plaintiff is seeking compensatory and punitive damages.

This case was stayed in the circuit court on August 8, 2005. However, the complaint has been amended from time to time, including to request certification as a class action. Additionally, one of the former officers named as a defendant has repeatedly attempted to remove the case to federal district court. We filed our latest motion to remand the case back to state court on January 10, 2013. On September 27, 2013, the federal court remanded the case back to state court. On December 10, 2014, we filed a motion to dismiss on the grounds the plaintiffs lacked standing because their claims were derivative in nature, and the claims were time-barred by the statute of limitations. On May 26, 2016, the trial court granted our motion to dismiss. On appeal, the Supreme Court of Alabama reversed the trial court’s dismissal on March 23, 2018. On April 6, 2018, we filed an application for rehearing with the Alabama Supreme Court. On March 22, 2019, the Alabama Supreme Court denied our application for rehearing and remanded the case to the trial court for further proceedings. The court has not yet set a date for the trial to begin. On March 2, 2020, we filed a motion for summary judgment, which the trial court denied on June 17, 2020. On March 12, 2021 the Alabama Supreme Court directed the trial court to vacate its order that served as the basis for the denial of our motion for summary judgement. On April 7, 2021, we filed a renewed motion for summary judgment, the hearing for which has been scheduled on May 13, 2021.

We intend to vigorously defend ourselves in this case against the sole remaining plaintiff. Based on the stage of litigation, review of the current facts and circumstances as we understand them, the nature of the underlying claim, the results of the proceedings to date, and the nature and scope of the defense we continue to mount, we do not believe an adverse judgment or settlement is probable in this matter, and it is also not possible to estimate an amount of loss, if any, or range of possible loss that might result from an adverse judgment or settlement of this case.

Other Matters—

The False Claims Act allows private citizens, called “relators,” to institute civil proceedings on behalf of the United States alleging violations of the False Claims Act. These lawsuits, also known as “whistleblower” or “qui tam” actions, can involve significant monetary damages, fines, attorneys’ fees and the award of bounties to the relators who successfully prosecute or bring these suits to the government. Qui tam cases are sealed at the time of filing, which means knowledge of the information contained in the complaint typically is limited to the relator, the federal government, and the presiding court. The defendant in a qui tam action may remain unaware of the existence of a sealed complaint for years. While the complaint is under seal, the government reviews the merits of the case and may conduct a broad investigation and seek discovery from the defendant and other parties before deciding whether to intervene in the case and take the lead on litigating the claims. The court lifts the seal when the government makes its decision on whether to intervene. If the government decides not to intervene, the relator may elect to continue to pursue the lawsuit individually on behalf of the government. It is possible that qui tam lawsuits have been filed against us, which suits remain under seal, or that we are unaware of such filings or precluded by existing law or court order from discussing or disclosing the filing of such suits. We may be subject to liability under one or more undisclosed qui tam cases brought pursuant to the False Claims Act.

It is our obligation as a participant in Medicare and other federal healthcare programs to routinely conduct audits and reviews of the accuracy of our billing systems and other regulatory compliance matters. As a result of these reviews, we have made, and will continue to make, disclosures to the United States Department of Health and Human Services Office of Inspector General and the Centers for Medicare & Medicaid Services relating to amounts we suspect represent over-payments from these programs, whether due to inaccurate billing or otherwise. Some of these disclosures have resulted in, or may result in, Encompass Health refunding amounts to Medicare or other federal healthcare programs.

11

Encompass Health Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

11.Segment Reporting

Our internal financial reporting and management structure is focused on the major types of services provided by Encompass Health. We manage our operations using two operating segments which are also our reportable segments: (1) inpatient rehabilitation and (2) home health and hospice. These reportable operating segments are consistent with information used by our chief executive officer, who is our chief operating decision maker, to assess performance and allocate resources. The following is a brief description of our reportable segments:

•Inpatient Rehabilitation - Our national network of inpatient rehabilitation hospitals stretches across 35 states and Puerto Rico, with a concentration of hospitals in the eastern half of the United States and Texas. As of March 31, 2021, we operate 138 inpatient rehabilitation hospitals. We are the sole owner of 86 of these hospitals. We retain 50.0% to 97.5% ownership in the remaining 52 jointly owned hospitals. In addition, we manage four inpatient rehabilitation units through management contracts. We provide specialized rehabilitative treatment on both an inpatient and outpatient basis. Our inpatient rehabilitation hospitals provide a higher level of rehabilitative care to patients who are recovering from conditions such as stroke and other neurological disorders, cardiac and pulmonary conditions, brain and spinal cord injuries, complex orthopedic conditions, and amputations.

•Home Health and Hospice - As of March 31, 2021, we provide home health services in 241 locations and hospice services in 82 locations across 31 states with concentrations in the southern half of the United States. In addition, one of these home health agencies operates as a joint venture which we account for using the equity method of accounting. We are the sole owner of 317 of these locations. We retain 50.0% to 81.0% ownership in the remaining six jointly owned locations. Our home health services include a comprehensive range of Medicare-certified home nursing services to adult patients in need of care. These services include, among others, skilled nursing, physical, occupational, and speech therapy, medical social work, and home health aide services. Our hospice services include in-home services to terminally ill patients and their families to address patients’ physical needs, including pain control and symptom management, and to provide emotional and spiritual support.

    The accounting policies of our reportable segments are the same as those described in Note 1, Summary of Significant Accounting Policies, to the consolidated financial statements accompanying the 2020 Form 10‑K. All revenues for our services are generated through external customers. See Note 1, Basis of Presentation, “Net Operating Revenues,” for the disaggregation of our revenues. No corporate overhead is allocated to either of our reportable segments. Our chief operating decision maker evaluates the performance of our segments and allocates resources to them based on adjusted earnings before interest, taxes, depreciation, and amortization (“Segment Adjusted EBITDA”).

12

Encompass Health Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Selected financial information for our reportable segments is as follows (in millions):

	Inpatient Rehabilitation				Home Health and Hospice
	Three Months Ended March 31,				Three Months Ended March 31,
	2021		2020		2021		2020
Net operating revenues	$	959.9	$	909.2	$	270.5	$	272.8
Operating expenses:
Inpatient rehabilitation:
Salaries and benefits	501.9		482.3		—		—
Other operating expenses	140.0		134.7		—		—
Supplies	45.2		39.6		—		—
Occupancy costs	15.1		15.3		—		—
Home health and hospice:
Cost of service (excluding depreciation and amortization)	—		—		118.1		130.9
Support and overhead costs	—		—		101.4		100.2
	702.2		671.9		219.5		231.1
Other (income) expense	(1.5)		1.6		—		—
Equity in net income of nonconsolidated affiliates	(0.8)		(0.6)		(0.2)		(0.2)
Noncontrolling interests	25.1		20.8		0.4		0.9
Segment Adjusted EBITDA	$	234.9	$	215.5	$	50.8	$	41.0
Capital expenditures	$	99.8	$	83.3	$	0.9	$	1.5

Segment reconciliations (in millions):

	Three Months Ended March 31,
	2021		2020
Total Segment Adjusted EBITDA	$	285.7	$	256.5
General and administrative expenses	(38.6)		(35.6)
Depreciation and amortization	(62.5)		(58.8)
Gain (loss) on disposal or impairment of assets	0.1		(0.1)
Government, class action, and related settlements	—		(2.8)
Interest expense and amortization of debt discounts and fees	(42.8)		(43.2)
Net income attributable to noncontrolling interests	25.5		21.7
Change in fair market value of equity securities	(0.1)		(2.5)