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 September 30, 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 99,492,494 shares of common stock outstanding, net of treasury shares, as of October 21, 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	21
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	42
Item 4.	Controls and Procedures	42
PART II	Other Information
Item 1.	Legal Proceedings	43
Item 1A.	Risk Factors	43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44
Item 6.	Exhibits	44

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, our projected capital expenditures or our strategic review. 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, 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 of the home health and hospice business 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.

•If the strategic review results in our full separation from the home health and hospice business, our revenues will be concentrated in Medicare reimbursement for inpatient rehabilitative services.

•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, vaccine mandates, facility closures and quarantines, could reduce volumes, exacerbate staffing shortages, 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 September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
	(In Millions, Except Per Share Data)
Net operating revenues	$	1,284.8	$	1,173.9	$	3,802.9	$	3,430.0
Operating expenses:
Salaries and benefits	730.1		664.9		2,125.5		1,995.9
Other operating expenses	173.4		163.4		508.4		471.3
Occupancy costs	19.8		20.3		60.2		60.8
Supplies	53.2		52.5		155.1		148.8
General and administrative expenses	43.9		39.1		136.7		117.7
Depreciation and amortization	64.9		61.2		190.8		180.7
Government, class action, and related settlements	—		—		—		2.8
Total operating expenses	1,085.3		1,001.4		3,176.7		2,978.0
Loss on early extinguishment of debt	—		—		1.0		—
Interest expense and amortization of debt discounts and fees	39.9		49.0		124.5		138.0
Other income	(0.4)		(2.5)		(6.4)		(6.4)
Equity in net income of nonconsolidated affiliates	(0.9)		(1.0)		(2.9)		(2.5)
Income from continuing operations before income tax expense	160.9		127.0		510.0		322.9
Provision for income tax expense	34.1		26.9		108.1		65.8
Income from continuing operations	126.8		100.1		401.9		257.1
Loss from discontinued operations, net of tax	(0.1)		—		(0.4)		—
Net and comprehensive income	126.7		100.1		401.5		257.1
Less: Net and comprehensive income attributable to noncontrolling interests	(26.7)		(22.4)		(80.9)		(58.9)
Net and comprehensive income attributable to Encompass Health	$	100.0	$	77.7	$	320.6	$	198.2
Weighted average common shares outstanding:
Basic	99.0		98.7		99.0		98.5
Diluted	100.2		99.9		100.1		99.7
Earnings per common share:
Basic earnings per share attributable to Encompass Health common shareholders:
Continuing operations	$	1.01	$	0.78	$	3.22	$	2.01
Discontinued operations	—		—		—		—
Net income	$	1.01	$	0.78	$	3.22	$	2.01
Diluted earnings per share attributable to Encompass Health common shareholders:
Continuing operations	$	1.00	$	0.78	$	3.20	$	1.99
Discontinued operations	—		—		—		—
Net income	$	1.00	$	0.78	$	3.20	$	1.99
Amounts attributable to Encompass Health common shareholders:
Income from continuing operations	$	100.1	$	77.7	$	321.0	$	198.2
Loss from discontinued operations, net of tax	(0.1)		—		(0.4)		—
Net income attributable to Encompass Health	$	100.0	$	77.7	$	320.6	$	198.2

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)

	September 30, 2021		December 31, 2020
	(In Millions)
Assets
Current assets:
Cash and cash equivalents	$	94.8	$	224.0
Restricted cash	75.9		65.4
Accounts receivable	637.8		572.8
Other current assets	101.3		86.4
Total current assets	909.8		948.6
Property and equipment, net	2,467.9		2,206.6
Operating lease right-of-use assets	239.0		245.7
Goodwill	2,417.6		2,318.7
Intangible assets, net	424.3		431.3
Other long-term assets	263.1		295.0
Total assets(1)	$	6,721.7	$	6,445.9
Liabilities and Shareholders’ Equity
Current liabilities:
Current portion of long-term debt	$	65.9	$	38.3
Current operating lease liabilities	40.7		44.8
Accounts payable	149.4		115.0
Accrued expenses and other current liabilities	537.9		519.2
Total current liabilities	793.9		717.3
Long-term debt, net of current portion	3,142.0		3,250.6
Long-term operating lease liabilities	208.4		209.6
Deferred income tax liabilities	60.4		51.8
Other long-term liabilities	223.5		215.0
	4,428.2		4,444.3
Commitments and contingencies
Redeemable noncontrolling interests	32.5		31.6
Shareholders’ equity:
Encompass Health shareholders’ equity	1,842.7		1,588.0
Noncontrolling interests	418.3		382.0
Total shareholders’ equity	2,261.0		1,970.0
Total liabilities(1) and shareholders’ equity	$	6,721.7	$	6,445.9

(1)Our consolidated assets as of September 30, 2021 and December 31, 2020 include total assets of variable interest entities of $230.4 million and $221.2 million, respectively, which cannot be used by us to settle the obligations of other entities. Our consolidated liabilities as of September 30, 2021 and December 31, 2020 include total liabilities of the variable interest entities of $47.4 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 September 30, 2021
	(In Millions)
	Encompass Health Common Shareholders
	Number of Common Shares Outstanding	Common Stock		Capital in Excess of Par Value		Accumulated (Deficit) Income		Treasury Stock		Noncontrolling Interests		Total
Balance at beginning of period	99.5	$	1.1	$	2,300.6	$	(21.7)	$	(518.0)	$	414.1	$	2,176.1
Net income	—	—		—		100.0		—		24.5		124.5
Dividends declared ($0.28 per share)	—	—		(27.9)		—		—		—		(27.9)
Stock-based compensation	—	—		6.9		—		—		—		6.9
Distributions declared	—	—		—		—		—		(23.7)		(23.7)
Capital contributions from consolidated affiliates	—	—		—		—		—		5.8		5.8
Other	—	—		4.3		—		(2.6)		(2.4)		(0.7)
Balance at end of period	99.5	$	1.1	$	2,283.9	$	78.3	$	(520.6)	$	418.3	$	2,261.0

	Three Months Ended September 30, 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	99.4	$	1.1	$	2,362.4	$	(406.0)	$	(494.7)	$	368.6	$	1,831.4
Net income	—	—		—		77.7		—		20.2		97.9
Dividends declared ($0.28 per share)	—	—		(28.0)		—		—		—		(28.0)
Stock-based compensation	—	—		8.3		—		—		—		8.3
Distributions declared	—	—		—		—		—		(21.8)		(21.8)
Capital contributions from consolidated affiliates	—	—		—		—		—		7.8		7.8
Other	—	—		0.4		—		(0.4)		0.1		0.1
Balance at end of period	99.4	$	1.1	$	2,343.1	$	(328.3)	$	(495.1)	$	374.9	$	1,895.7

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 Shareholders’ Equity (Continued)

(Unaudited)

	Nine Months Ended September 30, 2021
	(In Millions)
	Encompass Health Common Shareholders
	Number of Common Shares Outstanding	Common Stock		Capital in Excess of Par Value		Accumulated (Deficit) Income		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	—	—		—		320.6		—		73.6		394.2
Receipt of treasury stock	(0.2)	—		—		—		(16.4)		—		(16.4)
Dividends declared ($0.84 per share)	—	—		(83.8)		—		—		—		(83.8)
Stock-based compensation	—	—		21.7		—		—		—		21.7
Distributions declared	—	—		—		—		—		(69.1)		(69.1)
Capital contributions from consolidated affiliates	—	—		—		—		—		47.6		47.6
Other	0.3	—		19.4		—		(6.8)		(15.8)		(3.2)
Balance at end of period	99.5	$	1.1	$	2,283.9	$	78.3	$	(520.6)	$	418.3	$	2,261.0

	Nine Months Ended September 30, 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	—	—		—		198.2		—		53.2		251.4
Receipt of treasury stock	(0.2)	—		—		—		(15.7)		—		(15.7)
Dividends declared ($0.84 per share)	—	—		(83.9)		—		—		—		(83.9)
Exchange of Holdings shares	0.6	—		27.1		—		19.2		—		46.3
Stock-based compensation	—	—		25.3		—		—		—		25.3
Distributions declared	—	—		—		—		—		(50.9)		(50.9)
Capital contributions from consolidated affiliates	—	—		—		—		—		32.5		32.5
Repurchases of common stock in the open market	(0.1)	—		—		—		(4.9)		—		(4.9)
Other	0.5	—		4.7		—		(1.4)		(0.8)		2.5
Balance at end of period	99.4	$	1.1	$	2,343.1	$	(328.3)	$	(495.1)	$	374.9	$	1,895.7

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)

	Nine Months Ended September 30,
	2021		2020
	(In Millions)
Cash flows from operating activities:
Net income	$	401.5	$	257.1
Loss from discontinued operations, net of tax	0.4		—
Adjustments to reconcile net income to net cash provided by operating activities—
Depreciation and amortization	190.8		180.7
Loss on early extinguishment of debt	1.0		—
Stock-based compensation	21.7		25.3
Deferred tax expense (benefit)	4.4		(5.7)
Other, net	(0.2)		15.5
Change in assets and liabilities, net of acquisitions—
Accounts receivable	(36.7)		(71.8)
Other assets	(27.0)		17.3
Accounts payable	8.8		10.3
Accrued payroll	30.0		86.7
Accrued interest payable	(23.0)		(0.2)
Other liabilities	20.9		(90.0)
Net cash used in operating activities of discontinued operations	(0.6)		(0.2)
Total adjustments	190.1		167.9
Net cash provided by operating activities	592.0		425.0
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired	(98.8)		(1.1)
Purchases of property and equipment	(336.3)		(256.2)
Additions to capitalized software costs	(13.0)		(5.7)
Proceeds from disposal of assets	18.5		0.1
Other, net	(16.0)		(1.9)
Net cash used in investing activities	(445.6)		(264.8)

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

5

Encompass Health Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Continued)

(Unaudited)

	Nine Months Ended September 30,
	2021		2020
	(In Millions)
Cash flows from financing activities:
Proceeds from bond issuance	—		592.5
Principal payments on debt, including pre-payments	(210.9)		(14.7)
Borrowings on revolving credit facility	110.0		330.0
Payments on revolving credit facility	(20.0)		(375.0)
Principal payments under finance lease obligations	(18.6)		(16.7)
Debt amendment and issuance costs	—		(13.5)
Taxes paid on behalf of employees for shares withheld	(16.4)		(15.7)
Contributions from consolidated affiliates	36.1		24.7
Dividends paid on common stock	(84.7)		(84.3)
Distributions paid to noncontrolling interests of consolidated affiliates	(77.8)		(52.9)
Repurchases of common stock, including fees and expenses	—		(4.9)
Purchase of equity interests in consolidated affiliates	—		(162.3)
Other, net	(0.1)		1.1
Net cash (used in) provided by financing activities	(282.4)		208.3
(Decrease) increase in cash, cash equivalents, and restricted cash	(136.0)		368.5
Cash, cash equivalents, and restricted cash at beginning of period	310.9		159.6
Cash, cash equivalents, and restricted cash at end of period	$	174.9	$	528.1
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	$	94.8	$	450.0
Restricted cash at end of period	75.9		57.2
Restricted cash included in other long-term assets at end of period	4.2		20.9
Cash, cash equivalents, and restricted cash at end of period	$	174.9	$	528.1
Supplemental schedule of noncash operating, investing and financing activities:
Property and equipment additions through finance leases	$	46.2	$	5.1
Accrued purchases of property and equipment	25.5		14.7
Operating lease additions	32.2		21.2

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 a leading provider of post-acute healthcare services, offering both facility-based and home-based patient services in 42 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. Certain prior-year amounts have been reclassified to conform to the current year presentation.

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 September 30,				Three Months Ended September 30,				Three Months Ended September 30,
	2021		2020		2021		2020		2021		2020
Medicare	$	649.4	$	592.4	$	224.2	$	228.6	$	873.6	$	821.0
Medicare Advantage	152.2		141.1		28.6		29.6		180.8		170.7
Managed care	123.1		95.9		17.0		12.4		140.1		108.3
Medicaid	41.9		38.4		3.7		3.3		45.6		41.7
Other third-party payors	10.6		10.8		—		—		10.6		10.8
Workers’ compensation	5.7		4.6		0.1		0.3		5.8		4.9
Patients	4.9		5.1		0.1		0.2		5.0		5.3
Other income	23.1		11.1		0.2		0.1		23.3		11.2
Total	$	1,010.9	$	899.4	$	273.9	$	274.5	$	1,284.8	$	1,173.9

7

Encompass Health Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

	Inpatient Rehabilitation				Home Health and Hospice				Consolidated
	Nine Months Ended September 30,				Nine Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020		2021		2020
Medicare	$	1,914.3	$	1,738.1	$	683.1	$	658.8	$	2,597.4	$	2,396.9
Medicare Advantage	464.1		418.2		86.5		88.3		550.6		506.5
Managed care	350.3		274.3		47.9		35.9		398.2		310.2
Medicaid	122.7		103.7		11.6		11.7		134.3		115.4
Other third-party payors	33.7		31.1		—		—		33.7		31.1
Workers’ compensation	16.7		15.7		0.2		0.8		16.9		16.5
Patients	14.2		14.8		0.6		0.9		14.8		15.7
Other income	56.4		37.2		0.6		0.5		57.0		37.7
Total	$	2,972.4	$	2,633.1	$	830.5	$	796.9	$	3,802.9	$	3,430.0

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.

2.Business Combinations

Inpatient Rehabilitation

During the nine months ended September 30, 2021, we completed the following inpatient rehabilitation acquisitions, none of which were individually material to our financial position, results of operations, or cash flows. Each acquisition was made to enhance our position and ability to provide inpatient rehabilitation services to patients in the applicable geographic areas.

•In April 2021, we acquired 51% of the operations of a 14-bed inpatient rehabilitation unit in San Angelo, Texas when Shannon Medical contributed those operations to our existing joint venture entity.

•In June 2021, we acquired 75% of the operations of a 16-bed inpatient rehabilitation unit in McKees Rocks, Pennsylvania through our existing joint venture with Heritage Valley Health System, Inc. The acquisition was funded using cash on hand.

•In July 2021, we acquired 65% of the operations of a 22-bed inpatient rehabilitation unit in Odessa, Texas when ECHD Ventures contributed those operations to our existing joint venture entity.

We accounted for these transactions under the acquisition method of accounting and reported the results of operations of the acquired hospitals from its respective date of acquisition. Assets acquired were recorded at their estimated fair values as of the acquisition date. Estimated fair values were based on various valuation methodologies including: an income approach using primarily discounted cash flow techniques for the noncompete intangible assets and an income approach utilizing the relief from royalty method for the trade name intangible asset. The aforementioned income methods utilize management’s estimates of future operating results and cash flows discounted using a weighted-average cost of capital that reflects market participant assumptions. The excess of the fair value of the consideration conveyed over the fair value of the assets acquired was recorded as goodwill. The goodwill reflects our expectations of our ability to gain access to and penetrate the acquired

8

Encompass Health Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

hospital’s historical patient base and the benefits of being able to leverage operational efficiencies with favorable growth opportunities based on positive demographic trends in this market. None of the goodwill recorded as a result from these transactions is deductible for federal income tax purposes.

The fair value of the assets acquired at the acquisition date were as follows (in millions):

Identifiable intangible assets:
Noncompete agreements (useful lives of 3 to 5 years)	$	1.0
Trade name (useful life of 20 years)	0.3
Goodwill	8.8
Other long-term assets	0.1
Total assets acquired	$	10.2

Information regarding the net cash paid for the inpatient rehabilitation acquisitions during each period presented is as follows (in millions):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Fair value of assets acquired	$	0.6	$	—	$	1.4	$	1.7
Goodwill	5.3		—		8.8		9.2
Fair value of noncontrolling interest owned by joint venture partner	(5.9)		—		(9.1)		(10.9)
Net cash paid for acquisitions	$	—	$	—	$	1.1	$	—

Home Health and Hospice

On June 1, 2021, we completed the acquisition of the home health and hospice assets of Frontier Home Health and Hospice (“Frontier”) in Alaska, Colorado, Montana, Washington, and Wyoming. The Frontier acquisition included the purchase of a 50% equity interest in the Heart of the Rockies Home Health joint venture and a 90% equity interest in the Hospice of Southwest Montana joint venture (inclusive of an additional 40% equity interest purchased for approximately $4 million). We consolidate both of these joint ventures. On the acquisition date, nine home health and eleven hospice locations became part of our national network of home health and hospice locations. This acquisition was made to expand our existing presence in Colorado and Wyoming and extend our services to Alaska, Montana and Washington. We funded this transaction using cash on hand and borrowings under our revolving credit facility.

We accounted for this transaction under the acquisition method of accounting and reported the results of operations of Frontier from its date of acquisition. Assets acquired, liabilities assumed, and noncontrolling interests were recorded at their estimated fair values as of the acquisition date. Estimated fair values were based on various valuation methodologies including: replacement cost and continued use methods for property and equipment; an income approach using primarily discounted cash flow techniques for the noncompete and license intangible assets; an income approach utilizing the relief-from-royalty method for the trade name intangible asset; an income approach utilizing the excess earnings method for the certificates of need; and present value of remaining lease payments for leases. The aforementioned income methods utilize management’s estimates of future operating results and cash flows discounted using a weighted average cost of capital that reflects market participant assumptions. For all other assets and liabilities, the fair value was assumed to represent carrying value due to their short maturities. The excess of the fair value of the consideration conveyed over the fair value of the net assets acquired was recorded as goodwill. All goodwill recorded reflects our expectations of favorable growth opportunities in the home health and hospice markets based on positive demographic trends. All of the goodwill recorded as a result of this transaction is deductible for federal income tax purposes.

The fair values recorded were based upon a preliminary valuation. Estimates and assumptions used in such valuation are subject to change, which could be significant, within the measurement period (up to one year from the acquisition date). We expect to continue to obtain information to assist us in determining the fair value of the net assets acquired at the acquisition date during the measurement period.

9

Encompass Health Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

The preliminary fair value of the assets acquired and liabilities assumed at the acquisition date were as follows (in millions):

Cash and cash equivalents	$	0.8
Accounts receivable, net	0.9
Prepaid expenses and other current assets	0.2
Property and equipment	0.1
Operating lease right-of-use-assets	0.9
Identifiable intangible assets:
Noncompete agreement (useful life of 5 years)	1.7
Trade name (useful life of