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, 2022

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 99,788,465 shares of common stock outstanding, net of treasury shares, as of October 24, 2022.

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	18
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	33
Item 4.	Controls and Procedures	33
PART II	Other Information
Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 6.	Exhibits	35
	Exhibit Index

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, labor cost trends, 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, 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.

•The spin off of our home health and hospice business exposes us to a number of risks and uncertainties, including reduced business diversification; exposure to potential litigation; and inability to realize anticipated benefits from the separation, any of which could adversely affect our business, financial results or condition, or stock price.

•As a result of the spin off, we are highly concentrated in our primary line of business, particularly with respect to Medicare regulations and reimbursement.

•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 a public health crisis, such as limitations on elective procedures, vaccine mandates, shelter-in-place orders, new workplace regulations, facility closures and quarantines, could reduce volumes, lead to staffing shortages, increase staffing costs, and otherwise impair our ability to operate and provide care and, in the case of the COVID-19 pandemic, already have done so.

•Our inability to maintain infectious disease prevention and control efforts that are required and effectively minimize the spread 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.

•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

ii

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 proposed Inpatient Rehabilitation Facility Review Choice Demonstration, 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) 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, including those related to data privacy and security, anti-trust, and employment practices, 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, such as the CMS vaccine mandate, 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 staffing costs 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 provide a consistently high quality of care, including as represented in metrics published by Medicare, could decrease our revenues.

•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 inflation, any disruption, instability, or uncertainty related to armed conflict or an act of terrorism, a governmental impasse over approval of the United

iii

States federal budget or 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.

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,
	2022		2021		2022		2021
	(In Millions, Except Per Share Data)
Net operating revenues	$	1,089.5	$	1,010.8	$	3,211.3	$	2,972.4
Operating expenses:
Salaries and benefits	605.6		537.0		1,778.9		1,554.8
Other operating expenses	172.0		151.4		500.3		442.2
Occupancy costs	12.4		14.5		41.6		44.5
Supplies	51.1		46.7		148.2		136.0
General and administrative expenses	37.9		38.9		111.5		123.7
Depreciation and amortization	62.1		55.5		180.3		162.9
Total operating expenses	941.1		844.0		2,760.8		2,464.1
Loss on early extinguishment of debt	—		—		1.4		1.0
Interest expense and amortization of debt discounts and fees	38.2		39.9		138.2		124.3
Other expense (income)	3.6		(0.5)		13.6		(4.8)
Equity in net income of nonconsolidated affiliates	(0.7)		(0.9)		(2.6)		(2.5)
Income from continuing operations before income tax expense	107.3		128.3		299.9		390.3
Provision for income tax expense	21.8		26.2		68.2		79.4
Income from continuing operations	85.5		102.1		231.7		310.9
(Loss) income from discontinued operations, net of tax	(18.5)		24.6		16.7		90.6
Net and comprehensive income	67.0		126.7		248.4		401.5
Less: Net income attributable to noncontrolling interests included in continuing operations	(21.6)		(26.3)		(65.5)		(79.6)
Less: Net income attributable to noncontrolling interests included in discontinued operations	—		(0.4)		(1.3)		(1.3)
Less: Net and comprehensive income attributable to noncontrolling interests	(21.6)		(26.7)		(66.8)		(80.9)
Net and comprehensive income attributable to Encompass Health	$	45.4	$	100.0	$	181.6	$	320.6
Weighted average common shares outstanding:
Basic	99.2		99.0		99.2		99.0
Diluted	100.5		100.2		100.3		100.1
Earnings per common share:
Basic earnings per share attributable to Encompass Health common shareholders:
Continuing operations	$	0.64	$	0.76	$	1.67	$	2.32
Discontinued operations	(0.19)		0.24		0.15		0.90
Net income	$	0.45	$	1.00	$	1.82	$	3.22
Diluted earnings per share attributable to Encompass Health common shareholders:
Continuing operations	$	0.63	$	0.76	$	1.66	$	2.31
Discontinued operations	(0.18)		0.24		0.15		0.89
Net income	$	0.45	$	1.00	$	1.81	$	3.20
Amounts attributable to Encompass Health common shareholders:
Income from continuing operations	$	63.9	$	75.8	$	166.2	$	231.3
(Loss) income from discontinued operations, net of tax	(18.5)		24.2		15.4		89.3
Net income attributable to Encompass Health	$	45.4	$	100.0	$	181.6	$	320.6

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)

	September 30, 2022		December 31, 2021
	(In Millions)
Assets
Current assets:
Cash and cash equivalents	$	59.8	$	49.4
Restricted cash	44.3		62.5
Accounts receivable	500.1		515.8
Other current assets	129.6		114.9
Current assets of discontinued operations	—		178.8
Total current assets	733.8		921.4
Property and equipment, net	2,807.4		2,581.2
Operating lease right-of-use assets	195.7		193.7
Goodwill	1,247.4		1,237.0
Intangible assets, net	284.9		158.4
Other long-term assets	206.6		230.0
Noncurrent assets of discontinued operations	0.1		1,543.2
Total assets(1)	$	5,475.9	$	6,864.9
Liabilities and Shareholders’ Equity
Current liabilities:
Current portion of long-term debt	$	26.2	$	37.8
Current operating lease liabilities	22.7		23.5
Accounts payable	134.1		134.0
Accrued expenses and other current liabilities	421.6		421.1
Current liabilities of discontinued operations	0.1		132.4
Total current liabilities	604.7		748.8
Long-term debt, net of current portion	2,719.0		3,240.5
Long-term operating lease liabilities	183.3		179.6
Deferred income tax liabilities	46.7		23.3
Other long-term liabilities	174.0		172.7
Noncurrent liabilities of discontinued operations	0.4		100.8
	3,728.1		4,465.7
Commitments and contingencies
Redeemable noncontrolling interests	37.8		42.2
Shareholders’ equity:
Encompass Health shareholders’ equity	1,217.0		1,911.3
Noncontrolling interests	493.0		445.7
Total shareholders’ equity	1,710.0		2,357.0
Total liabilities(1) and shareholders’ equity	$	5,475.9	$	6,864.9

(1)Our consolidated assets as of September 30, 2022 and December 31, 2021 include total assets of variable interest entities of $207.7 million and $226.2 million, respectively, which cannot be used by us to settle the obligations of other entities. Our consolidated liabilities as of September 30, 2022 and December 31, 2021 include total liabilities of the variable interest entities of $35.4 million and $38.2 million, respectively. See Note 4, 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, 2022
	(In Millions)
	Encompass Health Common Shareholders
	Number of Common Shares Outstanding	Common Stock		Capital in Excess of Par Value		Accumulated Income		Treasury Stock		Noncontrolling Interests		Total
Balance at beginning of period	99.8	$	1.1	$	2,310.8	$	221.9	$	(530.8)	$	498.3	$	2,501.3
Net income	—	—		—		45.4		—		20.0		65.4
Dividends declared ($0.15 per share)	—	—		(11.2)		(3.9)		—		—		(15.1)
Stock-based compensation	—	—		7.3		—		—		—		7.3
Distributions declared	—	—		—		—		—		(27.4)		(27.4)
Capital contributions from consolidated affiliates	—	—		—		—		—		30.4		30.4
Spin off of Enhabit, Inc.	—	—		(602.1)		(221.9)		—		(28.4)		(852.4)
Other	—	—		5.7		0.1		(5.4)		0.1		0.5
Balance at end of period	99.8	$	1.1	$	1,710.5	$	41.6	$	(536.2)	$	493.0	$	1,710.0

	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

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, 2022
	(In Millions)
	Encompass Health Common Shareholders
	Number of Common Shares Outstanding	Common Stock		Capital in Excess of Par Value		Accumulated Income		Treasury Stock		Noncontrolling Interests		Total
Balance at beginning of period	99.5	$	1.1	$	2,289.6	$	141.8	$	(521.2)	$	445.7	$	2,357.0
Net income	—	—		—		181.6		—		61.8		243.4
Receipt of treasury stock	(0.1)	—		—		—		(7.7)		—		(7.7)
Dividends declared ($0.71 per share)	—	—		(11.2)		(60.0)		—		—		(71.2)
Stock-based compensation	—	—		23.6		—		—		—		23.6
Distributions declared	—	—		—		—		—		(72.8)		(72.8)
Capital contributions from consolidated affiliates	—	—		—		—		—		74.6		74.6
Spin off of Enhabit, Inc.	—	—		(602.1)		(221.9)		—		(28.4)		(852.4)
Other	0.4	—		10.6		0.1		(7.3)		12.1		15.5
Balance at end of period	99.8	$	1.1	$	1,710.5	$	41.6	$	(536.2)	$	493.0	$	1,710.0

	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

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,
	2022		2021
	(In Millions)
Cash flows from operating activities:
Net income	$	248.4	$	401.5
Income from discontinued operations, net of tax	(16.7)		(90.6)
Adjustments to reconcile net income to net cash provided by operating activities—
Depreciation and amortization	180.3		162.9
Loss on early extinguishment of debt	1.4		1.0
Equity in net income of nonconsolidated affiliates	(2.6)		(2.5)
Distributions from nonconsolidated affiliates	3.7		2.4
Stock-based compensation	21.1		19.6
Deferred tax (benefit) expense	(7.7)		1.6
Realized loss (gain) on sale of investments	16.5		(1.8)
Other, net	9.7		4.2
Change in assets and liabilities, net of acquisitions—
Accounts receivable	22.4		(10.9)
Other assets	5.0		(26.5)
Accounts payable	(0.3)		9.7
Accrued payroll	(9.3)		16.0
Accrued interest payable	(20.7)		(23.1)
Other liabilities	26.4		(5.0)
Net cash provided by operating activities of discontinued operations	56.0		133.5
Total adjustments	301.9		281.1
Net cash provided by operating activities	533.6		592.0
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired	—		(1.1)
Purchases of property and equipment	(374.9)		(332.3)
Additions to capitalized software costs	(7.5)		(11.9)
Purchase of restricted investments	(25.1)		(8.3)
Proceeds from disposal of assets	5.9		17.6
Other, net	(15.4)		(10.0)
Net cash used in investing activities of discontinued operations	(3.6)		(99.6)
Net cash used in investing activities	(420.6)		(445.6)
Cash flows from financing activities:
Principal payments on debt, including pre-payments	(345.3)		(210.9)
Borrowings on revolving credit facility	180.0		145.0
Payments on revolving credit facility	(340.0)		(55.0)
Principal payments under finance lease obligations	(14.3)		(13.0)
Debt amendment costs	(21.6)		—
Taxes paid on behalf of employees for shares withheld	(7.2)		(14.6)
Contributions from noncontrolling interests of consolidated affiliates	55.1		36.1
Dividends paid on common stock	(84.1)		(84.5)
Distributions paid to noncontrolling interests of consolidated affiliates	(68.2)		(76.2)
Other, net	0.3		(0.1)
Net cash provided by (used in) financing activities of discontinued operations	516.1		(9.2)
Net cash used in financing activities	(129.2)		(282.4)

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,
	2022		2021
	(In Millions)
Decrease in cash, cash equivalents, and restricted cash	(16.2)		(136.0)
Cash, cash equivalents, and restricted cash at beginning of period	120.3		310.9
Cash, cash equivalents, and restricted cash at end of period	$	104.1	$	174.9
Reconciliation of Cash, Cash Equivalents, and Restricted Cash
Cash and cash equivalents at beginning of period	$	49.4	$	185.6
Restricted cash at beginning of period	62.5		63.9
Restricted cash included in other long-term assets at beginning of period	0.4		21.5
Cash, cash equivalents, and restricted cash in discontinued operations at beginning of period	8.0		39.9
Cash, cash equivalents, and restricted cash at beginning of period	$	120.3	$	310.9
Cash and cash equivalents at end of period	$	59.8	$	65.7
Restricted cash at end of period	44.3		73.6
Restricted cash included in other long-term assets at end of period	—		4.2
Cash, cash equivalents, and restricted cash in discontinued operations at end of period	—		31.4
Cash, cash equivalents, and restricted cash at end of period	$	104.1	$	174.9
Supplemental schedule of noncash operating, investing and financing activities:
Property and equipment additions through finance leases	$	—	$	42.2
Accrued purchases of property and equipment	(1.2)		25.5
Operating lease additions and adjustments	23.1		17.0

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 (the “Company” or “Encompass Health”), incorporated in Delaware in 1984, including its subsidiaries, is a provider of inpatient rehabilitation services. Our national network of inpatient rehabilitation hospitals stretches across 36 states and Puerto Rico, with a concentration of hospitals in the eastern half of the United States and Texas. As of September 30, 2022, we operate 153 inpatient rehabilitation hospitals. We are the sole owner of 96 of these hospitals. We retain 50.0% to 97.5% ownership in the remaining 57 jointly owned hospitals. In addition, we manage two inpatient rehabilitation units through management contracts.

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 25, 2022 (the “2021 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, 2021 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 are as follows (in millions):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Medicare	$	711.2	$	649.3	$	2,091.7	$	1,914.3
Medicare Advantage	163.6		152.2		480.3		464.1
Managed care	126.1		123.1		381.0		350.3
Medicaid	47.7		41.9		137.0		122.7
Other third-party payors	9.5		10.6		29.0		33.7
Workers’ compensation	6.9		5.7		18.9		16.7
Patients	3.5		4.9		12.8		14.2
Other income	21.0		23.1		60.6		56.4
Total	$	1,089.5	$	1,010.8	$	3,211.3	$	2,972.4

See Note 1, Summary of Significant Accounting Policies, to the consolidated financial statements accompanying the 2021 Form 10-K for our policy related to Net operating revenues.

Recently Adopted Accounting Pronouncements—

We do not believe any 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.Separation of Home Health and Hospice Business

On July 1, 2022, we completed the previously announced separation of our home health and hospice business through the distribution (the “Distribution”) of all of the outstanding shares of common stock, par value $0.01 per share, of Enhabit, Inc. (“Enhabit”) to the stockholders of record of Encompass Health as of the close of business on June 24, 2022 (the “Record

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Encompass Health Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Date”). The Distribution was effective at 12:01 a.m., Eastern Time, on July 1, 2022. The Distribution was structured as a pro rata distribution of one share of Enhabit common stock for every two shares of Encompass Health common stock held of record as of the Record Date. No fractional shares were distributed. A cash payment was made in lieu of any fractional shares. As a result of the Distribution, Enhabit is now an independent public company and its common stock is listed under the symbol “EHAB” on the New York Stock Exchange (the “Separation”).

In accordance with applicable accounting guidance, the historical results of Enhabit have been presented as discontinued operations and, as such, have been excluded from continuing operations for all periods presented. Our presentation of discontinued operations excludes any allocation of general corporate and overhead costs as well as interest expense. Prior to July 1, 2022, we operated under two reporting segments. We now operate under a single reporting segment. In anticipation of the Separation, Enhabit transferred the “Encompass” trade name (net book value of $104.2 million) to us during the second quarter of 2022.

In connection with the Distribution, on June 30, 2022, we entered into several agreements with Enhabit that govern the relationship of the parties following the Distribution, including a Separation and Distribution Agreement, a Transition Services Agreement, a Tax Matters Agreement and an Employee Matters Agreement.

We will provide transition services to Enhabit predominately consisting of certain finance, information technology, human resources, employee benefits and other administrative services for a period of up to two years after the Distribution. For the three and nine months ended September 30, 2022, income related to these transition services of $1.1 million were reflected as reductions to General and administrative expenses in our condensed consolidated statements of comprehensive income.

The following table presents the results of operations of Enhabit as discontinued operations (in millions):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2022 (1)		2021		2022 (1)		2021
Net operating revenue	$	—	$	273.9	$	542.3	$	830.5
Operating expenses:
Salaries and benefits	—		193.0		376.4		570.7
Other operating expenses	—		22.2		47.6		66.9
Occupancy costs	—		5.4		11.0		15.7
Supplies	—		6.4		11.7		19.0
General and administrative expenses	19.8		5.0		54.8		13.0
Depreciation and amortization	—		9.4		16.7		27.9
Total operating expenses	19.8		241.4		518.2		713.2
Interest expense and amortization of debt discounts and fees	—		0.1		0.1		0.2
Other income	—		—		—		(1.6)
Equity in net income of nonconsolidated affiliates	—		(0.1)		—		(0.5)
(Loss) income from discontinued operations before income taxes	(19.8)		32.5		24.0		119.2
Provision for income tax (benefit) expense	(1.3)		7.9		7.3		28.6
(Loss) income from discontinued operations, net of tax	(18.5)		24.6		16.7		90.6
Less: Net income attributable to noncontrolling interests included in discontinued operations	—		(0.4)		(1.3)		(1.3)
Net income attributable to Encompass Health included in discontinued operations	$	(18.5)	$	24.2	$	15.4	$	89.3

(1) Reflects amounts through the July 1, 2022 Distribution date.

Transaction costs of $19.8 million and $52.3 million incurred during the three and nine months ended September 30, 2022, respectively, and $4.6 million and $9.6 million incurred during the three and nine months ended September 30, 2021, respectively, are included in general and administrative expenses in the table above and in (Loss) income from discontinued

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Encompass Health Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

operations, net of tax, in the condensed consolidated statements of comprehensive income. These charges primarily relate to third-party advisory, consulting, legal and professional services, that are associated with the Separation.

The following table presents the carrying amounts of the assets and liabilities of the discontinued operations of Enhabit (in millions):

	December 31, 2021
Assets
Current assets:
Cash and cash equivalents	$	5.4
Restricted cash	2.6
Accounts receivable	164.5
Other current assets	6.3
Total current assets of discontinued operations	178.8
Property and equipment, net	20.4
Operating lease right-of-use assets	48.4
Goodwill	1,190.9
Intangible assets, net	259.1
Other long-term assets	24.4
Total noncurrent assets of discontinued operations	1,543.2
Total assets of discontinued operations	$	1,722.0
Liabilities
Current liabilities:
Current portion of long-term debt	$	5.0
Current operating lease liabilities	14.9
Accounts payable	3.5
Accrued expenses and other current liabilities	109.0
Total current liabilities of discontinued operations	132.4
Long-term debt, net of current portion	3.5
Long-term operating lease liabilities	33.5
Deferred income tax liabilities	63.4
Other long-term liabilities	0.4
Total noncurrent liabilities of discontinued operations	100.8
Total liabilities of discontinued operations	$	233.2

See also Note 5, Long-term Debt.

3.Business Combinations

During the nine months ended September 30, 2022, we completed the following 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 August 2022, we acquired 60% of the operations of a 23-bed inpatient rehabilitation unit in Grand Forks, North Dakota when Altru Health System contributed those operations to our existing joint venture.

•In August 2022, we acquired 50% of the operations of a 22-bed inpatient rehabilitation unit in Moline, Illinois when Trinity Medical Center contributed those operations to our existing joint venture.

We accounted for these transactions under the acquisition method of accounting and reported the results of operations of the acquired hospitals from the respective dates of acquisition. Assets acquired were recorded at their estimated fair values as of the acquisition date. Estimated fair values were based on an income approach using discounted cash flow techniques for the

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Encompass Health Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

noncompete intangible assets. The aforementioned income method utilize management’s estimates of future operating results and cash flows discounted using a weighted-average cost of capital. 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 hospitals’ historical patient base and the benefits of being able to leverage operational efficiencies with favorable growth opportunities based on positive demographic trends in these markets. 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 dates were as follows (in millions):

Identifiable intangible assets:
Noncompete agreements (useful lives of 2 to 3 years)	$	0.3
Goodwill	10.4
Total assets acquired	$	10.7

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Fair value of assets acquired	$	0.3	$	0.6	$	0.3	$	1.4
Goodwill	10.4		5.3		10.4		8.8
Fair value of noncontrolling interest owned by joint venture partner	(10.7)		(5.9)		(10.7)		(9.1)
Net cash paid for acquisitions	$	—	$	—	$	—	$	1.1

Pro Forma Results of Operations

The following table summarizes the results of operations of the above mentioned acquisitions from the dates of acquisitions included in our consolidated results of operations and the unaudited pro forma results of operations of the combined entity had the dates of the acquisitions been January 1, 2021 (in millions):

	Net Operating Revenues		Net Income Attributable to Encompass Health
Acquired entities only: Actual from acquisition date to September 30, 2022	$	—	$	—
Combined entity: Supplemental pro forma from 07/01/22-9/30/22	1,090.4		45.4
Combined entity: Supplemental pro forma from 07/01/21-9/30/21	1,012.8		100.1
Combined entity: Supplemental pro forma from 01/01/22-9/30/22	3,216.1