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,~~September 30, 2021


☐			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~~99,492,494 shares of common stock outstanding, net of treasury shares, as of ~~April 22,~~October 21, 2021.

TABLE OF CONTENTS

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.

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.~~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, ~~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;~~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.

•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.

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,					Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020					2021		2020		2021		2020
		(In Millions, Except Per Share Data)				(In Millions, Except Per Share Data)
Net operating revenues	Net operating revenues	$	1,230.4	$	1,182.0			Net operating revenues	$	1,284.8	$	1,173.9	$	3,802.9	$	3,430.0
Operating expenses:	Operating expenses:							Operating expenses:
Salaries and benefits	Salaries and benefits	687.2		679.1				Salaries and benefits	730.1		664.9		2,125.5		1,995.9
Other operating expenses	Other operating expenses	162.3		159.6				Other operating expenses	173.4		163.4		508.4		471.3
Occupancy costs	Occupancy costs	20.2		20.2				Occupancy costs	19.8		20.3		60.2		60.8
Supplies	Supplies	51.9		45.7				Supplies	53.2		52.5		155.1		148.8
General and administrative expenses	General and administrative expenses	38.6		35.6				General and administrative expenses	43.9		39.1		136.7		117.7
Depreciation and amortization	Depreciation and amortization	62.5		58.8				Depreciation and amortization	64.9		61.2		190.8		180.7
Government, class action, and related settlements	Government, class action, and related settlements	0		2.8				Government, class action, and related settlements	—		—		—		2.8

Total operating expenses	Total operating expenses	1,022.7		1,001.8				Total operating expenses	1,085.3		1,001.4		3,176.7		2,978.0

Loss on early extinguishment of debt								Loss on early extinguishment of debt	—		—		1.0		—
Interest expense and amortization of debt discounts and fees	Interest expense and amortization of debt discounts and fees	42.8		43.2				Interest expense and amortization of debt discounts and fees	39.9		49.0		124.5		138.0
Other (income) expense		(1.4)		1.9
Other income								Other income	(0.4)		(2.5)		(6.4)		(6.4)
Equity in net income of nonconsolidated affiliates	Equity in net income of nonconsolidated affiliates	(1.0)		(0.8)				Equity in net income of nonconsolidated affiliates	(0.9)		(1.0)		(2.9)		(2.5)
Income from continuing operations before income tax expense	Income from continuing operations before income tax expense	167.3		135.9				Income from continuing operations before income tax expense	160.9		127.0		510.0		322.9
Provision for income tax expense	Provision for income tax expense	34.5		27.1				Provision for income tax expense	34.1		26.9		108.1		65.8
Income from continuing operations	Income from continuing operations	132.8		108.8				Income from continuing operations	126.8		100.1		401.9		257.1
Loss from discontinued operations, net of tax	Loss from discontinued operations, net of tax	0		(0.1)				Loss from discontinued operations, net of tax	(0.1)		—		(0.4)		—
Net and comprehensive income	Net and comprehensive income	132.8		108.7				Net and comprehensive income	126.7		100.1		401.5		257.1
Less: Net and comprehensive income attributable to noncontrolling interests	Less: Net and comprehensive income attributable to noncontrolling interests	(25.5)		(21.7)				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	Net and comprehensive income attributable to Encompass Health	$	107.3	$	87.0			Net and comprehensive income attributable to Encompass Health	$	100.0	$	77.7	$	320.6	$	198.2

Weighted average common shares outstanding:	Weighted average common shares outstanding:							Weighted average common shares outstanding:
Basic	Basic	99.0		98.2				Basic	99.0		98.7		99.0		98.5
Diluted	Diluted	100.2		99.6				Diluted	100.2		99.9		100.1		99.7
Earnings per common share:	Earnings per common share:							Earnings per common share:
Basic earnings per share attributable to Encompass Health common shareholders:	Basic earnings per share attributable to Encompass Health common shareholders:							Basic earnings per share attributable to Encompass Health common shareholders:
Continuing operations	Continuing operations	$	1.08	$	0.88			Continuing operations	$	1.01	$	0.78	$	3.22	$	2.01
Discontinued operations	Discontinued operations	0		0				Discontinued operations	—		—		—		—
Net income	Net income	$	1.08	$	0.88			Net income	$	1.01	$	0.78	$	3.22	$	2.01
Diluted earnings per share attributable to Encompass Health common shareholders:	Diluted earnings per share attributable to Encompass Health common shareholders:							Diluted earnings per share attributable to Encompass Health common shareholders:
Continuing operations	Continuing operations	$	1.07	$	0.87			Continuing operations	$	1.00	$	0.78	$	3.20	$	1.99
Discontinued operations	Discontinued operations	0		0				Discontinued operations	—		—		—		—
Net income	Net income	$	1.07	$	0.87			Net income	$	1.00	$	0.78	$	3.20	$	1.99

Amounts attributable to Encompass Health common shareholders:	Amounts attributable to Encompass Health common shareholders:							Amounts attributable to Encompass Health common shareholders:
Income from continuing operations	Income from continuing operations	$	107.3	$	87.1			Income from continuing operations	$	100.1	$	77.7	$	321.0	$	198.2
Loss from discontinued operations, net of tax	Loss from discontinued operations, net of tax	0		(0.1)				Loss from discontinued operations, net of tax	(0.1)		—		(0.4)		—
Net income attributable to Encompass Health	Net income attributable to Encompass Health	$	107.3	$	87.0			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.

Encompass Health Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)


		March 31, 2021		December 31, 2020			September 30, 2021		December 31, 2020
		(In Millions)					(In Millions)
Assets	Assets					Assets
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	223.9	$	224.0	Cash and cash equivalents	$	94.8	$	224.0
Restricted cash	Restricted cash	62.2		65.4		Restricted cash	75.9		65.4
Accounts receivable	Accounts receivable	633.6		572.8		Accounts receivable	637.8		572.8
Other current assets	Other current assets	81.4		86.4		Other current assets	101.3		86.4
Total current assets	Total current assets	1,001.1		948.6		Total current assets	909.8		948.6
Property and equipment, net	Property and equipment, net	2,280.5		2,206.6		Property and equipment, net	2,467.9		2,206.6
Operating lease right-of-use assets	Operating lease right-of-use assets	248.3		245.7		Operating lease right-of-use assets	239.0		245.7
Goodwill	Goodwill	2,318.7		2,318.7		Goodwill	2,417.6		2,318.7
Intangible assets, net	Intangible assets, net	419.2		431.3		Intangible assets, net	424.3		431.3

Other long-term assets	Other long-term assets	274.4		295.0		Other long-term assets	263.1		295.0
Total assets(1)	Total assets(1)	$	6,542.2	$	6,445.9	Total assets(1)	$	6,721.7	$	6,445.9
Liabilities and Shareholders’ Equity	Liabilities and Shareholders’ Equity					Liabilities and Shareholders’ Equity
Current liabilities:	Current liabilities:					Current liabilities:
Current portion of long-term debt	Current portion of long-term debt	$	137.2	$	38.3	Current portion of long-term debt	$	65.9	$	38.3
Current operating lease liabilities	Current operating lease liabilities	44.2		44.8		Current operating lease liabilities	40.7		44.8
Accounts payable	Accounts payable	122.8		115.0		Accounts payable	149.4		115.0
Accrued expenses and other current liabilities	Accrued expenses and other current liabilities	508.0		519.2		Accrued expenses and other current liabilities	537.9		519.2
Total current liabilities	Total current liabilities	812.2		717.3		Total current liabilities	793.9		717.3
Long-term debt, net of current portion	Long-term debt, net of current portion	3,160.0		3,250.6		Long-term debt, net of current portion	3,142.0		3,250.6
Long-term operating lease liabilities	Long-term operating lease liabilities	214.2		209.6		Long-term operating lease liabilities	208.4		209.6
Deferred income tax liabilities	Deferred income tax liabilities	60.6		51.8		Deferred income tax liabilities	60.4		51.8
Other long-term liabilities	Other long-term liabilities	220.5		215.0		Other long-term liabilities	223.5		215.0
		4,467.5		4,444.3			4,428.2		4,444.3
Commitments and contingencies	Commitments and contingencies	0		0		Commitments and contingencies	0		0

Redeemable noncontrolling interests	Redeemable noncontrolling interests	31.7		31.6		Redeemable noncontrolling interests	32.5		31.6
Shareholders’ equity:	Shareholders’ equity:					Shareholders’ equity:
Encompass Health shareholders’ equity	Encompass Health shareholders’ equity	1,655.1		1,588.0		Encompass Health shareholders’ equity	1,842.7		1,588.0
Noncontrolling interests	Noncontrolling interests	387.9		382.0		Noncontrolling interests	418.3		382.0
Total shareholders’ equity	Total shareholders’ equity	2,043.0		1,970.0		Total shareholders’ equity	2,261.0		1,970.0
Total liabilities(1) and shareholders’ equity	Total liabilities(1) and shareholders’ equity	$	6,542.2	$	6,445.9	Total liabilities(1) and shareholders’ equity	$	6,721.7	$	6,445.9

(1)Our consolidated assets as of ~~March 31,~~September 30, 2021 and December 31, 2020 include total assets of variable interest entities of ~~$219.2~~$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 ~~March 31,~~September 30, 2021 and December 31, 2020 include total liabilities of the variable interest entities of ~~$44.6~~$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.

Encompass Health Corporation and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity

(Unaudited)


		Three Months Ended March 31, 2021											Three Months Ended September 30, 2021
		(In Millions)											(In Millions)
		Encompass Health Common Shareholders											Encompass Health Common Shareholders
		Number of Common Shares Outstanding	Common Stock		Capital in Excess of Par Value		Accumulated Deficit		Treasury Stock		Noncontrolling Interests			Total			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	Balance at beginning of period	99.4	$	1.1	$	2,326.6	$	(242.3)	$	(497.4)	$	382.0		$	1,970.0	Balance at beginning of period	99.5	$	1.1	$	2,300.6	$	(21.7)	$	(518.0)	$	414.1	$	2,176.1
Net income	Net income	—	—		—		107.3		—		23.1			130.4		Net income	—	—		—		100.0		—		24.5		124.5

Receipt of treasury stock		(0.2)	—		—		—		(15.6)		—			(15.6)

Dividends declared ($0.28 per share)	Dividends declared ($0.28 per share)	—	—		(27.8)		—		—		—			(27.8)		Dividends declared ($0.28 per share)	—	—		(27.9)		—		—		—		(27.9)

Stock-based compensation	Stock-based compensation	—	—		2.8		—		—		—			2.8		Stock-based compensation	—	—		6.9		—		—		—		6.9

Distributions declared	Distributions declared	—	—		—		—		—		(22.4)			(22.4)		Distributions declared	—	—		—		—		—		(23.7)		(23.7)
Capital contributions from consolidated affiliates	Capital contributions from consolidated affiliates	—	—		—		—		—		5.8			5.8		Capital contributions from consolidated affiliates	—	—		—		—		—		5.8		5.8

Other	Other	0.4	—		1.1		—		(0.7)		(0.6)			(0.2)		Other	—	—		4.3		—		(2.6)		(2.4)		(0.7)
Balance at end of period	Balance at end of period	99.6	$	1.1	$	2,302.7	$	(135.0)	$	(513.7)	$	387.9		$	2,043.0	Balance at end of period	99.5	$	1.1	$	2,283.9	$	78.3	$	(520.6)	$	418.3	$	2,261.0

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 — (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


	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.

Encompass Health Corporation and Subsidiaries

Condensed Consolidated Statements of ~~Cash Flows~~Shareholders’ Equity (Continued)

(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 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 (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 0 (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 0 330.0
Payments on revolving credit facility 0 (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 0 (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


	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.

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.

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.

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 3942 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 2 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					Inpatient Rehabilitation				Home Health and Hospice				Consolidated
		Three Months Ended March 31,				Three Months Ended March 31,				Three Months Ended March 31,					Three Months Ended September 30,				Three Months Ended September 30,				Three Months Ended September 30,
		2021		2020		2021		2020		2021		2020			2021		2020		2021		2020		2021		2020
Medicare	Medicare	$	614.5	$	641.9	$	223.9	$	226.2	$	838.4	$	868.1	Medicare	$	649.4	$	592.4	$	224.2	$	228.6	$	873.6	$	821.0
Medicare Advantage	Medicare Advantage	158.4		111.5		28.0		29.4		186.4		140.9		Medicare Advantage	152.2		141.1		28.6		29.6		180.8		170.7
Managed care	Managed care	112.2		90.2		14.3		12.1		126.5		102.3		Managed care	123.1		95.9		17.0		12.4		140.1		108.3
Medicaid	Medicaid	39.0		30.7		3.8		4.2		42.8		34.9		Medicaid	41.9		38.4		3.7		3.3		45.6		41.7
Other third-party payors	Other third-party payors	12.1		11.0		0		0		12.1		11.0		Other third-party payors	10.6		10.8		—		—		10.6		10.8
Workers’ compensation	Workers’ compensation	5.7		6.9		0.1		0.3		5.8		7.2		Workers’ compensation	5.7		4.6		0.1		0.3		5.8		4.9
Patients	Patients	4.9		5.5		0.2		0.4		5.1		5.9		Patients	4.9		5.1		0.1		0.2		5.0		5.3
Other income	Other income	13.1		11.5		0.2		0.2		13.3		11.7		Other income	23.1		11.1		0.2		0.1		23.3		11.2
Total	Total	$	959.9	$	909.2	$	270.5	$	272.8	$	1,230.4	$	1,182.0	Total	$	1,010.9	$	899.4	$	273.9	$	274.5	$	1,284.8	$	1,173.9

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

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, 9 home health and 11 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.

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 3 months)	0.2
Certificates of need (useful lives of 10 years)	3.1
Licenses (useful lives of 10 years)	4.8
Goodwill	90.1

Total assets acquired	102.8
Liabilities assumed:
Current operating lease liabilities	0.3
Accounts payable	0.2
Accrued payroll	0.8
Other current liabilities	0.7
Long-term operating lease liabilities	0.7

Total liabilities assumed	2.7
Noncontrolling interests	1.6
Net assets acquired	$	98.5

Information regarding the net cash paid for the home health and hospice 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, net of $0.8 million of cash acquired in 2021	$	—	$	—	$	11.9	$	0.1
Goodwill	—		—		90.1		1.0
Fair value of liabilities assumed	—		—		(2.7)		—
Fair value of noncontrolling interest owned by joint venture partner	—		—		(1.6)		—

Net cash paid for acquisitions	$	—	$	—	$	97.7	$	1.1

Encompass Health Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Pro Forma Results of Operations

The following table summarizes the results of operations of the above mentioned acquisitions from their respective dates of acquisition included in our consolidated results of operations and the unaudited pro forma results of operations of the combined entity had the date of the acquisitions been January 1, 2020 (in millions):


	Net Operating Revenues		Net (Loss) Income Attributable to Encompass Health
Acquired entities only: Actual from acquisition date to September 30, 2021
Inpatient Rehabilitation	$	—	$	—

Home Health and Hospice	11.6		(0.3)
Combined entity: Supplemental pro forma from 07/01/2021-09/30/2021	1,284.8		100.0
Combined entity: Supplemental pro forma from 07/01/2020-09/30/2020	1,186.8		78.4
Combined entity: Supplemental pro forma from 01/01/2021-09/30/2021	3,825.7		322.1
Combined entity: Supplemental pro forma from 01/01/2020-09/30/2020	3,468.7		200.4

The information presented above is for illustrative purposes only and is not necessarily indicative of results that would have been achieved if the acquisitions had occurred as of the beginning of our 2020 reporting period. See Note 2, Business Combinations, to the consolidated financial statements accompanying the 2020 Form 10‑K for information regarding acquisitions completed in 2020.

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,~~September 30, 2021 and December 31, 2020, we consolidated 10 and 9, respectively, 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%~~90.0% as of ~~March 31,~~September 30, 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			September 30, 2021		December 31, 2020
Assets	Assets					Assets
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	0.5	$	0.1	Cash and cash equivalents	$	0.3	$	0.1
Accounts receivable	Accounts receivable	33.7		33.1		Accounts receivable	35.3		33.1
Other current assets	Other current assets	8.5		8.6		Other current assets	10.4		8.6
Total current assets	Total current assets	42.7		41.8		Total current assets	46.0		41.8
Property and equipment, net	Property and equipment, net	118.7		121.1		Property and equipment, net	116.7		121.1
Operating lease right-of-use assets	Operating lease right-of-use assets	4.4		4.7		Operating lease right-of-use assets	3.6		4.7
Goodwill	Goodwill	19.2		19.2		Goodwill	29.4		19.2
Intangible assets, net	Intangible assets, net	3.1		3.3		Intangible assets, net	3.5		3.3
Other long-term assets	Other long-term assets	31.1		31.1		Other long-term assets	31.2		31.1
Total assets	Total assets	$	219.2	$	221.2	Total assets	$	230.4	$	221.2
Liabilities	Liabilities					Liabilities
Current liabilities:	Current liabilities:					Current liabilities:
Current portion of long-term debt	Current portion of long-term debt	$	0.9	$	0.9	Current portion of long-term debt	$	1.0	$	0.9
Current operating lease liabilities	Current operating lease liabilities	1.5		1.5		Current operating lease liabilities	1.5		1.5
Accounts payable	Accounts payable	5.9		6.1		Accounts payable	7.2		6.1
Accrued expenses and other current liabilities	Accrued expenses and other current liabilities	21.7		23.0		Accrued expenses and other current liabilities	24.3		23.0
Total current liabilities	Total current liabilities	30.0		31.5		Total current liabilities	34.0		31.5
Long-term debt, net of current portion	Long-term debt, net of current portion	9.4		9.6		Long-term debt, net of current portion	8.9		9.6
Long-term operating lease liabilities	Long-term operating lease liabilities	2.9		3.3		Long-term operating lease liabilities	2.1		3.3
Other long-term liabilities	Other long-term liabilities	2.3		2.4		Other long-term liabilities	2.4		2.4
Total liabilities	Total liabilities	$	44.6	$	46.8	Total liabilities	$	47.4	$	46.8

612

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			September 30, 2021		December 31, 2020
Credit Agreement—	Credit Agreement—					Credit Agreement—

Advances under revolving credit facility						Advances under revolving credit facility	$	90.0	$	—
Term loan facilities	Term loan facilities	$	248.3	$	251.6	Term loan facilities	241.8		251.6
Bonds payable—	Bonds payable—					Bonds payable—
5.125% Senior Notes due 2023	5.125% Senior Notes due 2023	298.3		298.1		5.125% Senior Notes due 2023	99.6		298.1
5.75% Senior Notes due 2025	5.75% Senior Notes due 2025	346.5		346.3		5.75% Senior Notes due 2025	346.8		346.3
4.50% Senior Notes due 2028	4.50% Senior Notes due 2028	785.5		785.0		4.50% Senior Notes due 2028	786.4		785.0
4.75% Senior Notes due 2030	4.75% Senior Notes due 2030	783.5		783.2		4.75% Senior Notes due 2030	784.3		783.2
4.625% Senior Notes due 2031	4.625% Senior Notes due 2031	393.3		393.2		4.625% Senior Notes due 2031	393.6		393.2
Other notes payable	Other notes payable	39.7		39.8		Other notes payable	49.7		39.8
Finance lease obligations	Finance lease obligations	402.1		391.7		Finance lease obligations	415.7		391.7
		3,297.2		3,288.9			3,207.9		3,288.9
Less: Current portion	Less: Current portion	(137.2)		(38.3)		Less: Current portion	(65.9)		(38.3)
Long-term debt, net of current portion	Long-term debt, net of current portion	$	3,160.0	$	3,250.6	Long-term debt, net of current portion	$	3,142.0	$	3,250.6

In ~~March~~both April and June 2021, we ~~issued notice for redemption of~~redeemed $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~~these optional ~~redemption was~~redemptions were made at a price of par. As a result of ~~this redemption,~~these redemptions, we ~~have classified approximately $100~~recorded an aggregate $1.0 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~~Loss on early extinguishment of debt in during the ~~second quarter of~~nine months ended September 30, 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,					Nine Months Ended September 30,
		2021		2020			2021		2020
Balance at beginning of period	Balance at beginning of period	$	31.6	$	239.6	Balance at beginning of period	$	31.6	$	239.6
Net income attributable to noncontrolling interests	Net income attributable to noncontrolling interests	2.4		2.0		Net income attributable to noncontrolling interests	7.3		5.7
Distributions declared	Distributions declared	(2.3)		(2.1)		Distributions declared	(7.0)		(5.8)
Contribution to joint venture	Contribution to joint venture	0		3.1		Contribution to joint venture	—		3.1

Purchase of redeemable noncontrolling interests	Purchase of redeemable noncontrolling interests	0		(162.3)		Purchase of redeemable noncontrolling interests	0.6		(162.3)
Exchange transaction	Exchange transaction	0		(46.3)		Exchange transaction	—		(46.3)

Balance at end of period	Balance at end of period	$	31.7	$	34.0	Balance at end of period	$	32.5	$	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,				Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020				2021		2020		2021		2020
Net income attributable to nonredeemable noncontrolling interests	Net income attributable to nonredeemable noncontrolling interests	$	23.1	$	19.7		Net income attributable to nonredeemable noncontrolling interests	$	24.5	$	20.2	$	73.6	$	53.2
Net income attributable to redeemable noncontrolling interests	Net income attributable to redeemable noncontrolling interests	2.4		2.0			Net income attributable to redeemable noncontrolling interests	2.2		2.2		7.3		5.7
Net income attributable to noncontrolling interests	Net income attributable to noncontrolling interests	$	25.5	$	21.7		Net income attributable to noncontrolling interests	$	26.7	$	22.4	$	80.9	$	58.9

713

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										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)
As of September 30, 2021											As of September 30, 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:	Other long-term assets:										Other long-term assets:
Equity securities	Equity securities	$	73.1	$	0	$	73.1	$	0	M	Equity securities	$	81.2	$	4.0	$	77.2	$	—	M

Redeemable noncontrolling interests	Redeemable noncontrolling interests	31.7		0		0		31.7		I	Redeemable noncontrolling interests	32.5		—		—		32.5		I
As of December 31, 2020	As of December 31, 2020										As of December 31, 2020
Other long-term assets:	Other long-term assets:										Other long-term assets:
Equity securities	Equity securities	$	72.6	$	0	$	72.6	$	0	M	Equity securities	$	72.6	$	—	$	72.6	$	—	M

Redeemable noncontrolling interests	Redeemable noncontrolling interests	31.6		0		0		31.6		I	Redeemable noncontrolling interests	31.6		—		—		31.6		I

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

Encompass Health Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

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 and nine months ended ~~March 31,~~September 30, 2021 and ~~March 31,~~ 2020, we did not record any material gains or losses related to these assets.

~~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					As of September 30, 2021				As of December 31, 2020
		Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value			Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Long-term debt:	Long-term debt:									Long-term debt:

Advances under revolving credit facility										Advances under revolving credit facility	$	90.0	$	90.0	$	—	$	—
Term loan facilities	Term loan facilities	$	248.3	$	249.8	$	251.6	$	253.1	Term loan facilities	241.8		243.0		251.6		253.1
5.125% Senior Notes due 2023	5.125% Senior Notes due 2023	298.3		300.8		298.1		302.6		5.125% Senior Notes due 2023	99.6		100.3		298.1		302.6
5.75% Senior Notes due 2025	5.75% Senior Notes due 2025	346.5		361.6		346.3		361.4		5.75% Senior Notes due 2025	346.8		358.8		346.3		361.4
4.50% Senior Notes due 2028	4.50% Senior Notes due 2028	785.5		820.2		785.0		840.0		4.50% Senior Notes due 2028	786.4		830.3		785.0		840.0
4.75% Senior Notes due 2030	4.75% Senior Notes due 2030	783.5		824.0		783.2		856.0		4.75% Senior Notes due 2030	784.3		842.3		783.2		856.0
4.625% Senior Notes due 2031	4.625% Senior Notes due 2031	393.3		415.0		393.2		424.9		4.625% Senior Notes due 2031	393.6		421.0		393.2		424.9
Other notes payable	Other notes payable	39.7		39.7		39.8		39.8		Other notes payable	49.7		49.7		39.8		39.8
Financial commitments:	Financial commitments:									Financial commitments:
Letters of credit	Letters of credit	0		37.7		0		36.7		Letters of credit	—		38.2		—		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~~nine months ended ~~March 31,~~September 30, 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.

Encompass Health Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

8.Income Taxes

Our Provision for income tax expense of ~~$34.5~~$34.1 million and ~~$27.1~~$26.9 million for the three months ended ~~March 31,~~September 30, 2021 and 2020, respectively, primarily resulted from the application of our estimated effective blended federal and state income tax rate. Our Provision for income tax expense of $108.1 million for the nine months ended September 30, 2021 primarily resulted from the application of our estimated effective blended federal and state income tax rate. Our Provision for income tax expense of $65.8 million for the nine months ended September 30, 2020 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.

~~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,				Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020				2021		2020		2021		2020
Basic:	Basic:						Basic:
Numerator:	Numerator:						Numerator:
Income from continuing operations	Income from continuing operations	$	132.8	$	108.8		Income from continuing operations	$	126.8	$	100.1	$	401.9	$	257.1
Less: Net income attributable to noncontrolling interests included in continuing operations	Less: Net income attributable to noncontrolling interests included in continuing operations	(25.5)		(21.7)			Less: Net income attributable to noncontrolling interests included in continuing operations	(26.7)		(22.4)		(80.9)		(58.9)
Less: Income allocated to participating securities	Less: Income allocated to participating securities	(0.5)		(0.3)			Less: Income allocated to participating securities	(0.4)		(0.3)		(1.4)		(0.7)

Income from continuing operations attributable to Encompass Health common shareholders	Income from continuing operations attributable to Encompass Health common shareholders	106.8		86.8			Income from continuing operations attributable to Encompass Health common shareholders	99.7		77.4		319.6		197.5
Loss from discontinued operations, net of tax, attributable to Encompass Health common shareholders	Loss from discontinued operations, net of tax, attributable to Encompass Health common shareholders	0		(0.1)			Loss from discontinued operations, net of tax, attributable to Encompass Health common shareholders	(0.1)		—		(0.4)		—

Net income attributable to Encompass Health common shareholders	Net income attributable to Encompass Health common shareholders	$	106.8	$	86.7		Net income attributable to Encompass Health common shareholders	$	99.6	$	77.4	$	319.2	$	197.5
Denominator:	Denominator:						Denominator:
Basic weighted average common shares outstanding	Basic weighted average common shares outstanding	99.0		98.2			Basic weighted average common shares outstanding	99.0		98.7		99.0		98.5
Basic earnings per share attributable to Encompass Health common shareholders:	Basic earnings per share attributable to Encompass Health common shareholders:						Basic earnings per share attributable to Encompass Health common shareholders:
Continuing operations	Continuing operations	$	1.08	$	0.88		Continuing operations	$	1.01	$	0.78	$	3.22	$	2.01
Discontinued operations	Discontinued operations	0		0			Discontinued operations	—		—		—		—
Net income	Net income	$	1.08	$	0.88		Net income	$	1.01	$	0.78	$	3.22	$	2.01

Diluted:	Diluted:						Diluted:
Numerator:	Numerator:						Numerator:
Income from continuing operations	Income from continuing operations	$	132.8	$	108.8		Income from continuing operations	$	126.8	$	100.1	$	401.9	$	257.1
Less: Net income attributable to noncontrolling interests included in continuing operations	Less: Net income attributable to noncontrolling interests included in continuing operations	(25.5)		(21.7)			Less: Net income attributable to noncontrolling interests included in continuing operations	(26.7)		(22.4)		(80.9)		(58.9)

Income from continuing operations attributable to Encompass Health common shareholders	Income from continuing operations attributable to Encompass Health common shareholders	107.3		87.1			Income from continuing operations attributable to Encompass Health common shareholders	100.1		77.7		321.0		198.2
Loss from discontinued operations, net of tax, attributable to Encompass Health common shareholders	Loss from discontinued operations, net of tax, attributable to Encompass Health common shareholders	0		(0.1)			Loss from discontinued operations, net of tax, attributable to Encompass Health common shareholders	(0.1)		—		(0.4)		—
Net income attributable to Encompass Health common shareholders	Net income attributable to Encompass Health common shareholders	$	107.3	$	87.0		Net income attributable to Encompass Health common shareholders	$	100.0	$	77.7	$	320.6	$	198.2
Denominator:	Denominator:						Denominator:
Diluted weighted average common shares outstanding	Diluted weighted average common shares outstanding	100.2		99.6			Diluted weighted average common shares outstanding	100.2		99.9		100.1		99.7
Diluted earnings per share attributable to Encompass Health common shareholders:	Diluted earnings per share attributable to Encompass Health common shareholders:						Diluted earnings per share attributable to Encompass Health common shareholders:
Continuing operations	Continuing operations	$	1.07	$	0.87		Continuing operations	$	1.00	$	0.78	$	3.20	$	1.99
Discontinued operations	Discontinued operations	0		0			Discontinued operations	—		—		—		—
Net income	Net income	$	1.07	$	0.87		Net income	$	1.00	$	0.78	$	3.20	$	1.99

Encompass Health Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

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,		Three Months Ended September 30,			Nine Months Ended September 30,
		2021	2020			2021	2020	2021	2020
Basic weighted average common shares outstanding	Basic weighted average common shares outstanding	99.0	98.2		Basic weighted average common shares outstanding	99.0	98.7	99.0	98.5

Restricted stock awards, dilutive stock options, and restricted stock units	Restricted stock awards, dilutive stock options, and restricted stock units	1.2	1.4		Restricted stock awards, dilutive stock options, and restricted stock units	1.2	1.2	1.1	1.2
Diluted weighted average common shares outstanding	Diluted weighted average common shares outstanding	100.2	99.6		Diluted weighted average common shares outstanding	100.2	99.9	100.1	99.7

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.

~~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~~alleged 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~~sought 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,June 9, 2021, 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~~all of the ~~current facts and circumstances as we understand them,~~plaintiff’s claims. The plaintiff did not appeal, so the ~~nature~~matter has concluded. The conclusion 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~~did not ~~possible to estimate an amount of loss, if~~have any ~~or range of possible loss that might result from an adverse judgment or settlement of this case.~~impact on our condensed consolidated financial statements.

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.

1117

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 2 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,~~September 30, 2021, we operate ~~138~~144 inpatient rehabilitation hospitals. We are the sole owner of 8691 of these hospitals. We retain 50.0% to 97.5% ownership in the remaining 5253 jointly owned hospitals. In addition, we manage 4 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,~~September 30, 2021, we provide home health services in ~~241~~249 locations and hospice services in 8295 locations across 3134 states with concentrations in the southern half of the United States. In addition, 1 of these home health ~~agencies~~locations operates as a joint venture which we account for using the equity method of accounting. We are the sole owner of ~~317~~335 of these locations. We retain 50.0% to ~~81.0%~~90.0% ownership in the remaining 69 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”).

1218

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		Inpatient Rehabilitation							Home Health and Hospice
		Three Months Ended March 31,					Three Months Ended March 31,						Three Months Ended September 30,		Nine Months Ended September 30,				Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020					2021		2020				2021		2020		2021		2020		2021		2020		2021		2020
Net operating revenues	Net operating revenues	$	959.9	$	909.2				$	270.5	$	272.8		Net operating revenues	$	1,010.9	$	899.4	$	2,972.4	$	2,633.1	$	273.9	$	274.5	$	830.5	$	796.9
Operating expenses:	Operating expenses:													Operating expenses:
Inpatient rehabilitation:	Inpatient rehabilitation:													Inpatient rehabilitation:
Salaries and benefits	Salaries and benefits	501.9		482.3					0		0			Salaries and benefits	537.1		475.0		1,554.9		1,408.7		—		—		—		—
Other operating expenses	Other operating expenses	140.0		134.7					0		0			Other operating expenses	156.2		135.5		443.7		394.5		—		—		—		—
Supplies	Supplies	45.2		39.6					0		0			Supplies	46.8		45.3		136.1		126.9		—		—		—		—
Occupancy costs	Occupancy costs	15.1		15.3					0		0			Occupancy costs	14.4		15.3		44.5		46.0		—		—		—		—
Home health and hospice:	Home health and hospice:													Home health and hospice:
Cost of service (excluding depreciation and amortization)	Cost of service (excluding depreciation and amortization)	0		0					118.1		130.9			Cost of service (excluding depreciation and amortization)	—		—		—		—		124.0		121.8		364.7		389.4
Support and overhead costs	Support and overhead costs	0		0					101.4		100.2			Support and overhead costs	—		—		—		—		103.2		100.7		307.7		299.2
		702.2		671.9					219.5		231.1				754.5		671.1		2,179.2		1,976.1		227.2		222.5		672.4		688.6
Other (income) expense		(1.5)		1.6					0		0
Other income														Other income	(0.7)		(2.1)		(4.5)		(3.9)		—		—		(1.6)		—
Equity in net income of nonconsolidated affiliates	Equity in net income of nonconsolidated affiliates	(0.8)		(0.6)					(0.2)		(0.2)			Equity in net income of nonconsolidated affiliates	(0.8)		(0.9)		(2.4)		(2.1)		(0.1)		(0.1)		(0.5)		(0.4)
Noncontrolling interests	Noncontrolling interests	25.1		20.8					0.4		0.9			Noncontrolling interests	26.3		22.1		79.6		58.0		0.4		0.3		1.3		0.9
Segment Adjusted EBITDA	Segment Adjusted EBITDA	$	234.9	$	215.5				$	50.8	$	41.0		Segment Adjusted EBITDA	$	231.6	$	209.2	$	720.5	$	605.0	$	46.4	$	51.8	$	158.9	$	107.8

Capital expenditures	Capital expenditures	$	99.8	$	83.3				$	0.9	$	1.5		Capital expenditures	$	127.4	$	90.4	$	347.6	$	262.6	$	1.9	$	0.5	$	5.0	$	2.6

Segment reconciliations (in millions):


		Three Months Ended March 31,				Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020				2021		2020		2021		2020
Total Segment Adjusted EBITDA	Total Segment Adjusted EBITDA	$	285.7	$	256.5		Total Segment Adjusted EBITDA	$	278.0	$	261.0	$	879.4	$	712.8
General and administrative expenses	General and administrative expenses	(38.6)		(35.6)			General and administrative expenses	(43.9)		(39.1)		(136.7)		(117.7)
Depreciation and amortization	Depreciation and amortization	(62.5)		(58.8)			Depreciation and amortization	(64.9)		(61.2)		(190.8)		(180.7)
Gain (loss) on disposal or impairment of assets	Gain (loss) on disposal or impairment of assets	0.1		(0.1)			Gain (loss) on disposal or impairment of assets	5.2		(7.5)		2.4		(10.6)
Government, class action, and related settlements	Government, class action, and related settlements	0		(2.8)			Government, class action, and related settlements	—		—		—		(2.8)

Loss on early extinguishment of debt							Loss on early extinguishment of debt	—		—		(1.0)		—
Interest expense and amortization of debt discounts and fees	Interest expense and amortization of debt discounts and fees	(42.8)		(43.2)			Interest expense and amortization of debt discounts and fees	(39.9)		(49.0)		(124.5)		(138.0)

Net income attributable to noncontrolling interests	Net income attributable to noncontrolling interests	25.5		21.7			Net income attributable to noncontrolling interests	26.7		22.4		80.9		58.9

Change in fair market value of equity securities	Change in fair market value of equity securities	(0.1)		(2.5)			Change in fair market value of equity securities	(0.3)		0.4		0.3		0.3
Gain on consolidation of joint venture formerly accounted for under the equity method of accounting	Gain on consolidation of joint venture formerly accounted for under the equity method of accounting	0		2.2			Gain on consolidation of joint venture formerly accounted for under the equity method of accounting	—		—		—		2.2
Payroll taxes on SARs exercise	Payroll taxes on SARs exercise	0		(1.5)			Payroll taxes on SARs exercise	—		—		—		(1.5)

Income from continuing operations before income tax expense	Income from continuing operations before income tax expense	$	167.3	$	135.9		Income from continuing operations before income tax expense	$	160.9	$	127.0	$	510.0	$	322.9

Encompass Health Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Additional detail regarding the revenues of our operating segments by service line follows (in millions):

~~Encompass Health Corporation and Subsidiaries~~

~~Notes to Condensed Consolidated Financial Statements~~


		Three Months Ended March 31,				Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020				2021		2020		2021		2020
Inpatient rehabilitation:	Inpatient rehabilitation:						Inpatient rehabilitation:
Inpatient	Inpatient	$	942.3	$	890.0		Inpatient	$	983.7	$	883.2	$	2,902.9	$	2,581.2
Outpatient and other	Outpatient and other	17.6		19.2			Outpatient and other	27.2		16.2		69.5		51.9
Total inpatient rehabilitation	Total inpatient rehabilitation	959.9		909.2			Total inpatient rehabilitation	1,010.9		899.4		2,972.4		2,633.1
Home health and hospice:	Home health and hospice:						Home health and hospice:
Home health	Home health	219.9		224.8			Home health	221.1		223.3		673.3		649.9
Hospice	Hospice	50.6		48.0			Hospice	52.8		51.2		157.2		147.0
Total home health and hospice	Total home health and hospice	270.5		272.8			Total home health and hospice	273.9		274.5		830.5		796.9
Total net operating revenues	Total net operating revenues	$	1,230.4	$	1,182.0		Total net operating revenues	$	1,284.8	$	1,173.9	$	3,802.9	$	3,430.0

1420

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) relates to Encompass Health Corporation and its subsidiaries and should be read in conjunction with our condensed consolidated financial statements included under Part I, Item 1, Financial Statements (Unaudited), of this report. In addition, the following MD&A should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2020, Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, Part I, Item 1, Business, and Item 1A, Risk Factors, included in our Annual Report on Form 10-K for the year ended December 31, 2020 filed on February 26, 2021 (collectively, the “2020 Form 10‑K”).

This MD&A is designed to provide the reader with information that will assist in understanding our condensed consolidated financial statements, the changes in certain key items in those financial statements from period to period, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our condensed consolidated financial statements. See “Cautionary ~~Statements~~Statement Regarding Forward-Looking Statements” on page ii of this report for a description of important factors that could cause actual results to differ from expected results. See also Item 1A, Risk Factors, of this report and to the 2020 Form 10‑K.

Executive Overview

Our Business

We are a leading provider of post-acute healthcare services, offering both facility-based and home-based patient care through our network of inpatient rehabilitation hospitals, home health agencies, and hospice agencies. As of ~~March 31,~~September 30, 2021, our national footprint includes 3942 states and Puerto Rico. As discussed in this Item, “Segment Results of Operations,” we manage our operations in two operating segments which are also our reportable segments: (1) inpatient rehabilitation and (2) home health and hospice. For additional information about our business, see Item 1, Business, of the 2020 Form 10‑K.

On December 9, 2020, we announced a formal process to explore strategic alternatives for our home health and hospice business. ~~A range~~We expect to effect a partial or full separation of ~~options~~our home health and hospice business into an independent public company via a carve-out IPO, spin-off, or split-off. We are ~~under consideration, including~~targeting such a transaction in the first half of 2022 and expect to announce a more precise timing and the form of the separation transaction in connection with our fourth quarter earnings release. While there can be no assurance that a transaction of this nature will be consummated, we have made significant progress on the various tasks necessary to complete a separation transaction and will further our state of readiness over the balance of this year.

We have previously indicated that we believe a full or partial separation of the home health and hospice business ~~from Encompass Health through an initial public offering, spin-off, merger, sale or other transaction. No timetable has been established for~~will enhance the ~~completion~~long-term success and value of the business. We have thoroughly evaluated a broad array of public and private transaction alternatives and believe effecting the separation via the formation of an independent public company is superior to the other alternatives considered. Among other considerations, this belief is based on the anticipated strategic ~~review.~~focus, future growth and value creating opportunities, execution risks, and tax efficiency resulting from such a transaction.

The onset of the COVID-19 Pandemic (the “pandemic”) in the United States resulted in significant changes to our operating environment. For discussion of the financial and operational impacts we experienced in 2020 as a result of the pandemic, see Item 1, Business, Item 1A, Risk Factors, and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Results of Operations” and “Segment Results of Operations” of the 2020 Form 10-K. For discussion of the financial and operational impacts we are experiencing in 2021 as a result of the pandemic, see “Key Challenges” below and the “Results of Operations” and “Segment Results of Operations” sections of this Item.

Inpatient Rehabilitation

We are the nation’s largest owner and operator of inpatient rehabilitation hospitals in terms of patients treated, revenues, and number of hospitals. We provide specialized rehabilitative treatment on predominantly an inpatient basis. We operate hospitals in 35 states and Puerto Rico, with concentrations in the eastern half of the United States and Texas. As of ~~March 31,~~September 30, 2021, we operate ~~138~~144 inpatient rehabilitation hospitals and manage four inpatient rehabilitation units through management contracts. Our inpatient rehabilitation segment represents approximately ~~78%~~79% of our Net operating revenues for the three months ended ~~March 31,~~September 30, 2021 and 78% for the nine months ended September 30, 2021.

Home Health and Hospice

Our home health business is the nation’s fourth largest provider of Medicare-certified skilled home health services in terms of revenues. Our home health services include a comprehensive range of Medicare-certified home nursing services to adult patients in need of care. Our hospice business is the nation’s eighth largest provider of Medicare-certified hospice services in terms of revenues. We provide hospice services to terminally ill patients and their families that address patients’ physical needs, including pain control and symptom management, and to provide emotional and spiritual support. As of ~~March 31,~~September 30, 2021, we provide home health services in ~~241~~249 locations and provide hospice services in 8295 locations across 3134 states, with concentrations in the southern half of the United States. In addition, one of these home health ~~agencies~~locations operates as a joint venture that we account for using the equity method of accounting. Our home health and hospice segment represents approximately ~~22%~~21% of our Net operating revenues for the three months ended ~~March 31,~~September 30, 2021 and 22% for the nine months ended September 30, 2021.

2021 Overview

During the three months ended ~~March 31,~~September 30, 2021, Net operating revenues increased ~~4.1%~~9.4% over the same period of 2020 due primarily to increased volumes and favorable pricing ~~partially offset by decreased~~in the inpatient rehabilitation segment. During the nine months ended September 30, 2021, Net operating revenues increased 10.9% over the same period of 2020 due primarily to increased volumes and favorable pricing in both segments. See “Results of Operations” and the “Segment Results of Operations” sections of this Item for additional volume and pricing information.

We have continued our development and expansion efforts in 2021. In our inpatient rehabilitation segment we:

•began operating our new 40-bed inpatient rehabilitation hospital in San Angelo, Texas with our joint venture partner Shannon Health in March 2021;

•began operating our new 50-bed inpatient rehabilitation hospital in North Tampa, Florida in April 2021;

•began operating our new 50-bed inpatient rehabilitation hospital in Cumming, Georgia in June 2021;

•began operating our new 40-bed inpatient rehabilitation hospital in Waco, Texas in August 2021;

•began operating our new 40-bed inpatient rehabilitation hospital in Shreveport, Louisiana in August 2021;

•began operating our new 40-bed inpatient rehabilitation hospital in Greenville, South Carolina in August 2021;

•began operating our new 40-bed inpatient rehabilitation hospital in Pensacola, Florida in September 2021;

•continued our capacity expansions by adding 1589 new beds to existing hospitals; and

•announced or continued the development of the following hospitals:


		Number of New Beds				Number of New Beds
		2021	2022	2023		2021	2022	2023	2024
De novos:	De novos:				De novos:
Cumming, Georgia		50	—
North Tampa, Florida*		50	—
Stockbridge, Georgia		50	—
Greenville, South Carolina		40	—
Pensacola, Florida		40	—
Shreveport, Louisiana		40	—
Waco, Texas		40	—
Henry County, Georgia*					Henry County, Georgia*	50	—
Libertyville, Illinois	Libertyville, Illinois	—	60	—	Libertyville, Illinois	—	60	—
St. Augustine, Florida	St. Augustine, Florida	—	40	—	St. Augustine, Florida	—	40	—
Lakeland, Florida	Lakeland, Florida	—	50	—	Lakeland, Florida	—	50	—
Clermont, Florida		—	50	—
Naples, Florida		—	50	—
Cape Coral, Florida	Cape Coral, Florida	—	40	—	Cape Coral, Florida	—	40	—
Jacksonville, Florida	Jacksonville, Florida	—	50	—	Jacksonville, Florida	—	50	—
Naples, Florida					Naples, Florida	—	50	—
Clermont, Florida					Clermont, Florida	—		50	—
Bowie, Maryland	Bowie, Maryland	—	60	—	Bowie, Maryland	—		60	—
Prosper, Texas					Prosper, Texas	—		40	—
Fitchburg, Wisconsin					Fitchburg, Wisconsin	—		40	—
Kissimmee, Florida	Kissimmee, Florida	—		50	Kissimmee, Florida	—		50	—
Prosper, Texas		—		40
Fort Mill, South Carolina	Fort Mill, South Carolina	—		39	Fort Mill, South Carolina	—		39	—
Palm Beach Gardens, Florida					Palm Beach Gardens, Florida	—			50
Lake Worth, Florida					Lake Worth, Florida	—			50
Joint ventures:	Joint ventures:				Joint ventures:
Shiloh, Illinois					Shiloh, Illinois	—	40	—
Grand Forks, North Dakota					Grand Forks, North Dakota	—	40	—
Moline, Illinois					Moline, Illinois	—	40	—
Eau Claire, Wisconsin					Eau Claire, Wisconsin	—	36	—
Owasso, Oklahoma					Owasso, Oklahoma	—		40	—
Knoxville, Tennessee	Knoxville, Tennessee	—	73	—	Knoxville, Tennessee	—		73	—
Shiloh, Illinois		—	40	—
Moline, Illinois		—	40	—
Owasso, Oklahoma		—	40	—
Columbus, Georgia***					Columbus, Georgia***	—		40	—
Louisville, Kentucky**					Louisville, Kentucky**	—		40	—
Atlanta, Georgia***					Atlanta, Georgia***	—			40

*~~We began operating this~~Opened in October 2021; **Announced in October 2021

***Piedmont Healthcare, our joint venture partner in these hospitals, assumed 50% ownership in our existing hospital in ~~April~~Newnan, Georgia during the second quarter of 2021.

We also continued our expansion efforts in our home health and hospice segment. ~~In April~~On June 1, 2021, we ~~announced we entered into a definitive agreement to purchase~~completed the acquisition of the home health and hospice assets of Frontier Home Health and Hospice (“Frontier”) in Alaska, Colorado, Montana, Washington, and Wyoming for a cash purchase price of ~~$95~~approximately $99 million. ~~At closing, 9~~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 11eleven hospice locations ~~will become~~became part of our national network of home health and hospice locations. This ~~transaction, which is subject~~acquisition was made to ~~customary closing conditions~~expand our existing presence in Colorado and ~~regulatory approvals, is expected~~Wyoming and extend our services to ~~close in the second quarter of 2021.~~Alaska, Montana and Washington. We ~~expect to fund~~funded this transaction ~~with~~using cash on hand and borrowings under our revolving credit facility. ~~In connection with~~For additional information regarding this transaction, see Note 2, Business Combinations, to the accompanying condensed consolidated financial statements. In addition to the Frontier acquisition, we ~~expect to realize an income tax benefit with an estimated present value of approximately $10 million.~~

began accepting patients at our new hospice locations in Las Cruces, New Mexico (May 2021) and Abilene, Texas (September 2021).

We continued our shareholder distributions during the ~~three~~nine months ended ~~March 31,~~September 30, 2021 by paying a quarterly cash dividend of $0.28 per share on our common stock in January, April, July and ~~April.~~October. On October 21, 2021, our board of directors declared a cash dividend of $0.28 per share, payable on January 18, 2022 to stockholders of record on January 3, 2022. For additional information see the “Liquidity and Capital Resources” section of this Item.

Business Outlook

Notwithstanding the current impacts from the pandemic, we remain optimistic regarding the intermediate and long-term prospects for ~~both of~~ our ~~business segments.~~business. Demographic trends, such as population aging, should continue to increase long-term demand for the services we provide. While we treat patients of all ages, most of our patients are 65 and older, and the number of Medicare enrollees is expected to grow approximately 3% per year for the foreseeable future. Even more specifically, the average age of our patients is approximately 76, and the population group ranging in ages from 75 to 79 is expected to grow at approximately 5% per year through 2026. We believe the demand for the services we provide will continue to increase as the U.S. population ages. We believe these factors align with our strengths in, and focus on, post-acute services. In addition, we believe we can address the demand for facility-based and home-based post-acute care services in markets where we currently do not have a presence by constructing or acquiring new hospitals and by acquiring or opening home health and hospice agencies in those fragmented industries.

We are a leading provider of post-acute healthcare services, offering both facility-based and home-based patient care through our network of inpatient rehabilitation hospitals, home health agencies, and hospice agencies. We are committed to delivering high-quality, cost-effective, integrated patient care. As the nation’s largest owner and operator of inpatient rehabilitation hospitals in terms of patients treated, revenues, and number of hospitals, we believe we differentiate ourselves from our competitors based on the quality of our clinical outcomes, our cost-effectiveness, our financial strength, and our extensive application of technology. As the fourth largest provider of Medicare-certified skilled home health services in terms of revenues, we believe we differentiate ourselves from our competitors by the application of a highly integrated technology platform, our ability to manage a variety of care pathways, and a proven track record of consummating and integrating acquisitions.

Although the healthcare industry is currently engaged in addressing the healthcare crisis caused by the pandemic, the industry also faces the prospect of ongoing efforts to transform the healthcare system to coordinated care delivery and payment models. The nature, timing and extent of that transformation remains uncertain, as the development and implementation of new care delivery and payment systems will require significant time and resources. Our short-term goal is to serve our communities and provide the best care possible during the pandemic. Our long-term goal is to position the Company in a prudent manner to be responsive to industry shifts. We have invested in our core business and created an infrastructure that enables us to provide high-quality care on a cost-effective basis. We have been disciplined in creating a capital structure that is flexible with no significant debt maturities prior to 2023. We continue to have a strong, well-capitalized balance sheet, including a substantial portfolio of owned real estate and significant availability under our revolving credit facility. For these and other reasons, we believe we will be able to adapt to changes in reimbursement, sustain our business model, and grow through acquisition and consolidation opportunities as they arise. See also Item 1, Business, “Competitive Strengths” and “Strategy and 2021 Strategic Priorities” of the 2020 Form 10‑K.

Key Challenges

Healthcare is a ~~highly-regulated~~highly regulated industry facing many well-publicized regulatory and reimbursement challenges. The Medicare reimbursement systems for both inpatient rehabilitation and home health have recently undergone significant changes. The future of many aspects of healthcare regulation remains uncertain. Successful healthcare providers are those able to adapt to changes in the regulatory and operating environments, build strategic relationships, and consistently provide high-quality, cost-effective care. We believe we have the necessary capabilities — change agility, strategic relationships, quality of patient outcomes, cost effectiveness, and ability to capitalize on growth opportunities — to adapt to and succeed in a dynamic, highly regulated industry, and we have a proven track record of doing so. For a detailed discussion of the challenges we face, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Executive Overview—Key Challenges” of the 2020 Form 10‑K.

As we continue to execute our business plan, the following are some of the challenges we face.

•Operating in a Highly Regulated Industry. We are required to comply with extensive and complex laws and regulations at the federal, state, and local government levels. More specifically, because Medicare comprises a significant portion of our Net operating revenues, failure to comply with the laws and regulations governing the Medicare program and related matters could materially and adversely affect us. These rules and regulations have affected, or could in the future affect, our business activities by having an impact on the reimbursement we receive for services provided or the costs of compliance, mandating new documentation standards, requiring additional

licensure or certification, regulating our relationships with physicians and other referral sources, regulating the use of our properties, and limiting our ability to enter new markets or add new capacity to existing hospitals and agencies. Ensuring continuous compliance with extensive laws and regulations is an operating requirement for all healthcare providers. See Item 1, Business, “Regulation,” Item 1A, Risk Factors, and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Executive Overview—Key

Challenges,” of the 2020 Form 10‑K for detailed discussions of the most important regulations we face and our programs intended to ensure we comply with those regulations.

•Changes to Our Operating Environment Resulting from the pandemic. In response to the public health emergency associated with the pandemic, Congress and the Centers for Medicare & Medicaid Services (“CMS”) adopted several statutory and regulatory measures intended to provide relief to healthcare providers in order to ensure patients would continue to have adequate access to care. On March 27, 2020, former President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the “CARES Act”), which suspended sequestration, an automatic 2% reduction of Medicare program payments for all healthcare providers, under the Budget Control Act of 2011 (the “2011 BCA”) for the period of May 1 through December 31, 2020. On December 27, 2020, the Consolidated Appropriations Act, 2021 (the “2021 Budget Act”) ~~was enacted into law, which~~ extended the sequestration suspension through March 31, 2021. On April 14, 2021, Congress further extended the sequestration suspension period ~~was extended~~ through December 31, ~~2021 by the enactment into law of An Act to Prevent Across-the-Board Direct Spending Cuts, and for Other Purposes.~~2021. During the ~~three~~nine months ended ~~March 31,~~September 30, 2021, ~~the impact of~~ the sequestration suspension onprovided additional revenues in our inpatient rehabilitation segment and home health and hospice ~~revenues was $12.5~~segment of approximately $46 million and ~~$4.2~~$14 million, respectively. For additional discussion, see the “Results of Operations” and “Segment Results of Operations” sections of this Item. The CARES Act, the 2021 Budget Act, and CMS regulatory actions include a number of other provisions affecting our reimbursement and operations in both segments. These provisions are discussed in Item 1, Business, “Sources of Revenue,” Item 1A, Risk Factors, and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Results of Operations” of the 2020 Form 10-K.

On August 21, 2020, CMS announced a new “phased-in approach” to the home health Review Choice Demonstration (“RCD”) due to the public health emergency and subsequently announced the delay of the phased-in participation of the RCD in Florida and North Carolina until June 30, 2021. As a result, North Carolina and Florida agencies may submit pre-claim review requests for billing periods beginning August 31, 2020.

•Changes to Our Operating Environment Resulting from Federal Regulatory and Legislative Actions. On ~~April 7,~~July 29, 2021, CMS released its Notice of ~~Proposed~~Final Rulemaking for Fiscal Year 2022 for inpatient rehabilitation facilities under the inpatient rehabilitation facility prospective payment system (the “2022 ~~Proposed~~Final IRF Rule”). The 2022 ~~Proposed~~Final IRF Rule ~~would~~will implement a net ~~2.2%~~1.9% market basket increase (market basket update of ~~2.4%~~2.6% reduced by a productivity adjustment of ~~0.2%~~0.7%) effective for discharges between October 1, 2021 and September 30, 2022. The 2022 ~~Proposed~~Final IRF Rule also includes changes that impact our hospital-by-hospital base rate for Medicare reimbursement. Such changes include, but are not limited to, revisions to the wage index and labor-related share values, updates to outlier payments and updates to the case-mix group relative weights and average lengths of stay values. The 2022 ~~Proposed~~Final IRF Rule ~~would~~will also add one new quality reporting measure and update the denominator of another measure. Based on our analysis, ~~that~~which utilizes, among other things, the acuity of our patients annualized over a six-month period ended ~~March 31,~~June 30, 2021, our experience with outlier payments over this same time frame, and other factors, we believe the 2022 ~~Proposed~~Final IRF Rule will result in a net increase to our Medicare payment rates of approximately ~~2.1%~~1.9% effective October 1, 2021.

On June 28, 2021, CMS released its Notice of Proposed Rulemaking for Calendar Year 2022 for home health agencies under the home health prospective payment system (the “2022 Proposed HH Rule”). The 2022 Proposed HH Rule would, among others, implement a net 1.7% market basket increase (market basket update of 2.4% reduced by 0.6% for a productivity adjustment and 0.1% for the phase-out of the rural payment add-on factor), update the case-mix weights and fixed dollar loss ratio for outlier payments, and include a low utilization payment adjustment (“LUPA”) add-on factor for the first skilled occupational therapy visit in LUPA periods. CMS did not propose to modify the current behavioral adjustment in CY 2022 while they continue to analyze home health payments to ensure budget neutrality under the new Patient-Driven Groupings Model (“PDGM”) payment system. CMS provided preliminary analysis indicating that an additional approximate 6% budget neutrality adjustment may be necessary in future years although stating that they believe that claims data could be affected by the pandemic and home health agencies adjusting to the new PDGM payment system that was effective in 2020. The 2022 Proposed HH Rule also would expand the Home Health Value-Based Purchasing (“HHVBP”) Model, beginning January 1, 2022, to all Medicare-certified home health agencies in the 50 States, territories, and District of Columbia (with a maximum payment adjustment, upward or downward of 5%). This rulemaking also proposes to end the original HHVBP Model one year early for the home health agencies in the nine original Model States. Based on our preliminary analysis, which utilizes, among other things, our patient mix annualized over a six-month period ended June 30, 2021, our specific geographic coverage area, and other factors, we believe the 2022 Proposed HH Rule will result in a net increase to our Medicare payment rates of approximately 2.2% to 2.7% effective for 30-day payment periods ending on or after January 1, 2022.

On July 16, 2021, CMS announced the full implementation of the home health Review Choice Demonstration will begin effective September 1, 2021 in North Carolina and Florida. CMS will discontinue exercising the existing phased-in approach for these two states.

As discussed above, the suspension of Medicare sequestration under the 2011 BCA is currently set to end December 31, 2021, which would result in an approximate 2% reduction in Medicare reimbursement otherwise due in 2022. Additional Medicare payment reductions are also possible under the Statutory Pay-As-You-Go Act of 2010 (“Statutory PAYGO”). Statutory PAYGO requires, among other things, that mandatory spending and revenue legislation not increase the federal budget deficit over a 5- or 10-year period. If the Office of Management and Budget (the “OMB”) finds there is a deficit, Statutory PAYGO requires OMB to order sequestration of Medicare. The Congressional Budget Office has estimated that the COVID-19 relief package enacted in March 2021, the American Rescue Plan Act of 2021, would result in a 4% reduction in fiscal year 2022 Medicare spending under Statutory PAYGO unless Congress acts to waive or otherwise avoid this sequestration.

•Maintaining Strong Volume Growth. In addition to the factors described in our 2020 Form 10‑K, we ~~continued to experience decreased volumes in both segments which we~~ believe ~~resulted from~~ a number of conditions related to the pandemic ~~which are expected~~negatively impacted volumes so far in 2021, predominately in the home health and hospice segment. While we continue to ~~continue~~see our volumes recover in our inpatient rehabilitation segment, as discussed in the “Results of Operations” ~~section~~and “Segment Results of Operations” sections of this ~~Item.~~Item, a current or future resurgence of COVID-19 infections could cause disruptions to our volume growth.

•Recruiting and Retaining High-Quality Personnel. See Item 1A, Risk Factors, of the 2020 Form 10‑K for a discussion of competition for staffing, shortages of qualified personnel, and other factors that may increase our labor ~~costs.~~costs and constrain our ability to take new patients. Additionally, our operations have been affected and may in the future be affected by staffing shortages where employees must self-quarantine due to exposure to COVID-19, or where employees are unavailable due to a lack of childcare or care for elderly ~~family.~~family, or due to competition within the local market. These factors have resulted in increased labor costs and increased use of contract labor.

We remain confident in the prospects of ~~both of~~ our business ~~segments~~ based on the increasing demands for the services we provide to an aging population. This confidence is further supported by our strong financial foundation and the substantial investments we have made in our businesses. We have a proven track record of working through difficult situations, and we believe in our ability to overcome current and future challenges.

Results of Operations

Payor Mix

We derived consolidated Net operating revenues from the following payor sources:


		Three Months Ended March 31,				Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020				2021		2020		2021		2020
Medicare	Medicare	68.1	%	73.4	%		Medicare	68.0	%	69.9	%	68.3	%	69.8	%
Medicare Advantage	Medicare Advantage	15.1	%	11.9	%		Medicare Advantage	14.1	%	14.5	%	14.5	%	14.8	%
Managed care	Managed care	10.3	%	8.7	%		Managed care	10.9	%	9.2	%	10.5	%	9.0	%
Medicaid	Medicaid	3.5	%	3.0	%		Medicaid	3.5	%	3.6	%	3.5	%	3.4	%
Other third-party payors	Other third-party payors	1.0	%	0.9	%		Other third-party payors	0.8	%	0.9	%	0.9	%	0.9	%
Workers’ compensation	Workers’ compensation	0.5	%	0.6	%		Workers’ compensation	0.5	%	0.4	%	0.4	%	0.5	%
Patients	Patients	0.4	%	0.5	%		Patients	0.4	%	0.5	%	0.4	%	0.5	%
Other income	Other income	1.1	%	1.0	%		Other income	1.8	%	1.0	%	1.5	%	1.1	%
Total	Total	100.0	%	100.0	%		Total	100.0	%	100.0	%	100.0	%	100.0	%

~~Medicare as a percentage of revenue decreased during the three months ended March 31, 2021 as compared to the same period of 2020 primarily due to the pandemic, as discussed below.~~ For ~~additional discussion~~information regarding our payors by segment, see the “Segment Results of Operations” section of this Item.

For additional information regarding our payors, see the “Sources of Revenues” section of Item 1, Business, of the 2020 Form 10‑K.

1926

Our Results

~~For the three months ended March 31, 2021 and 2020, our~~Our consolidated results of operations were as follows:


		Three Months Ended March 31,				Percentage Change			Three Months Ended September 30,				Percentage Change		Nine Months Ended September 30,				Percentage Change
		2021		2020		2021 vs. 2020					2021		2020		2021 vs. 2020		2021		2020		2021 vs. 2020
		(In Millions, Except Percentage Change)						(In Millions, Except Percentage Change)
Net operating revenues	Net operating revenues	$	1,230.4	$	1,182.0	4.1	%			Net operating revenues	$	1,284.8	$	1,173.9	9.4	%	$	3,802.9	$	3,430.0	10.9	%
Operating expenses:	Operating expenses:									Operating expenses:
Salaries and benefits	Salaries and benefits	687.2		679.1		1.2	%			Salaries and benefits	730.1		664.9		9.8	%	2,125.5		1,995.9		6.5	%
Other operating expenses	Other operating expenses	162.3		159.6		1.7	%			Other operating expenses	173.4		163.4		6.1	%	508.4		471.3		7.9	%
Occupancy costs	Occupancy costs	20.2		20.2		—	%			Occupancy costs	19.8		20.3		(2.5)	%	60.2		60.8		(1.0)	%
Supplies	Supplies	51.9		45.7		13.6	%			Supplies	53.2		52.5		1.3	%	155.1		148.8		4.2	%
General and administrative expenses	General and administrative expenses	38.6		35.6		8.4	%			General and administrative expenses	43.9		39.1		12.3	%	136.7		117.7		16.1	%
Depreciation and amortization	Depreciation and amortization	62.5		58.8		6.3	%			Depreciation and amortization	64.9		61.2		6.0	%	190.8		180.7		5.6	%
Government, class action, and related settlements	Government, class action, and related settlements	—		2.8		(100.0)	%			Government, class action, and related settlements	—		—		—	%	—		2.8		(100.0)	%

Total operating expenses	Total operating expenses	1,022.7		1,001.8		2.1	%			Total operating expenses	1,085.3		1,001.4		8.4	%	3,176.7		2,978.0		6.7	%

Loss on early extinguishment of debt										Loss on early extinguishment of debt	—		—		—	%	1.0		—		N/A
Interest expense and amortization of debt discounts and fees	Interest expense and amortization of debt discounts and fees	42.8		43.2		(0.9)	%			Interest expense and amortization of debt discounts and fees	39.9		49.0		(18.6)	%	124.5		138.0		(9.8)	%
Other (income) expense		(1.4)		1.9		(173.7)	%
Other income										Other income	(0.4)		(2.5)		(84.0)	%	(6.4)		(6.4)		—	%
Equity in net income of nonconsolidated affiliates	Equity in net income of nonconsolidated affiliates	(1.0)		(0.8)		25.0	%			Equity in net income of nonconsolidated affiliates	(0.9)		(1.0)		(10.0)	%	(2.9)		(2.5)		16.0	%
Income from continuing operations before income tax expense	Income from continuing operations before income tax expense	167.3		135.9		23.1	%			Income from continuing operations before income tax expense	160.9		127.0		26.7	%	510.0		322.9		57.9	%
Provision for income tax expense	Provision for income tax expense	34.5		27.1		27.3	%			Provision for income tax expense	34.1		26.9		26.8	%	108.1		65.8		64.3	%
Income from continuing operations	Income from continuing operations	132.8		108.8		22.1	%			Income from continuing operations	126.8		100.1		26.7	%	401.9		257.1		56.3	%
Loss from discontinued operations, net of tax	Loss from discontinued operations, net of tax	—		(0.1)		(100.0)	%			Loss from discontinued operations, net of tax	(0.1)		—		N/A		(0.4)		—		N/A
Net income	Net income	132.8		108.7		22.2	%			Net income	126.7		100.1		26.6	%	401.5		257.1		56.2	%
Less: Net income attributable to noncontrolling interests	Less: Net income attributable to noncontrolling interests	(25.5)		(21.7)		17.5	%			Less: Net income attributable to noncontrolling interests	(26.7)		(22.4)		19.2	%	(80.9)		(58.9)		37.4	%
Net income attributable to Encompass Health	Net income attributable to Encompass Health	$	107.3	$	87.0	23.3	%			Net income attributable to Encompass Health	$	100.0	$	77.7	28.7	%	$	320.6	$	198.2	61.8	%

Operating Expenses as a % of Net Operating Revenues


		Three Months Ended March 31,				Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020				2021		2020		2021		2020
Operating expenses:	Operating expenses:						Operating expenses:
Salaries and benefits	Salaries and benefits	55.9	%	57.5	%		Salaries and benefits	56.8	%	56.6	%	55.9	%	58.2	%
Other operating expenses	Other operating expenses	13.2	%	13.5	%		Other operating expenses	13.5	%	13.9	%	13.4	%	13.7	%
Occupancy costs	Occupancy costs	1.6	%	1.7	%		Occupancy costs	1.5	%	1.7	%	1.6	%	1.8	%
Supplies	Supplies	4.2	%	3.9	%		Supplies	4.1	%	4.5	%	4.1	%	4.3	%
General and administrative expenses	General and administrative expenses	3.1	%	3.0	%		General and administrative expenses	3.4	%	3.3	%	3.6	%	3.4	%
Depreciation and amortization	Depreciation and amortization	5.1	%	5.0	%		Depreciation and amortization	5.1	%	5.2	%	5.0	%	5.3	%
Government, class action, and related settlements	Government, class action, and related settlements	—	%	0.2	%		Government, class action, and related settlements	—	%	—	%	—	%	0.1	%

Total operating expenses	Total operating expenses	83.1	%	84.8	%		Total operating expenses	84.5	%	85.3	%	83.5	%	86.8	%

In the discussion that follows, we use “same-store” comparisons to explain the changes in certain performance metrics and line items within our financial statements. We calculate same-store comparisons based on hospitals and home health and hospice locations open throughout both the full current periods and prior periods presented. These comparisons include the financial results of market consolidation transactions in existing markets, as it is difficult to determine, with precision, the incremental impact of these transactions on our results of operations.

Net Operating Revenues

Our consolidated Net operating revenues increased during the three months ended ~~March 31,~~September 30, 2021 compared to the same period of 2020 primarily due to increased volumes and favorable pricing in the inpatient rehabilitation segment partially offset by ~~decreased~~a decline in home health volumes due to the resurgence of COVID-19 in the third quarter of 2021. Our consolidated Net operating revenues increased during the nine months ended September 30, 2021 compared to the same period of 2020 primarily due to increased volumes as we anniversaried the most significant impact of the pandemic. Pricing was also favorable in both ~~segments. Pricing~~segments during the nine months ended September 30, 2021 and included reimbursement rate increases and the suspension of ~~sequestration for both segments.~~sequestration. See additional discussion in the “Segment Results of Operations” section of this Item.

Beginning in mid-March 2020, we experienced decreased volumes in both segments which we believe resulted from a number of conditions related to the pandemic including: lower acute-care hospital censuses due to the deferral of elective surgeries and shelter-in-place orders, restrictive visitation policies in place at acute-care hospitals that severely limit access to patients and caregivers by our clinical rehabilitation liaisons and care transition coordinators, lock down of assisted living facilities, and heightened anxiety among patients and their family members regarding the risk of exposure to COVID-19 during acute-care and post-acute care treatment. ~~Certain~~Volumes in both segments reached a low point during the second quarter of ~~these conditions have continued into~~2020. For a discussion on current year-over-year volume growth, see the “Segment Results of Operations” section of this Item.

In August 2021, many of our markets experienced a resurgence in COVID-19 infection rates resulting in a ~~year-over-year decrease~~decline in volumes due to many of the same factors we experienced in ~~both segments.~~2020. The impact of the resurgence was more pronounced in our home health and hospice segment. See additional discussion in the “Segment Results of Operations” section of this Item.

Salaries and Benefits

Salaries and benefits increased during the three and nine months ended ~~March 31,~~September 30, 2021 compared to the same periods of 2020 primarily due to salary and benefit cost increases for our employees, the ramping up of new stores, and increased contract labor to meet higher patient volumes.

Salaries and benefits as a percent of Net operating revenues increased during the three months ended September 30, 2021 compared to the same period of 2020 primarily due to ~~salary~~ increases ~~for our employees~~in clinician compensation and contract labor to meet higher patient volumes and address industry-wide staffing challenges, and the ramping up of new stores partially offset by ~~the home health and hospice clinician compensation model changes implemented~~improved labor productivity which contributed to lower employees per occupied bed (as defined in ~~May 2020 and improved clinician labor management in both segments.~~“Segment Results of Operations” of this Item).

Salaries and benefits as a percent of Net operating revenues decreased during the ~~three~~nine months ended ~~March 31,~~September 30, 2021 compared to the same period of 2020 primarily due to ~~revenue growth,~~the increase in Net operating revenues as discussed above, improved labor ~~management~~productivity which contributed to lower employees per occupied bed, ~~(as defined~~the additional paid-time-off awarded to employees in ~~“Segment Results”~~the second quarter of ~~this Item),~~2020 as discussed below, and the home health and hospice clinician compensation model changes ~~discussed above.~~implemented in May 2020. See additional discussion in the “Segment Results of Operations” section of this Item.

In April 2020, we implemented a program for eligible frontline employees to earn additional paid-time-off in recognition of their outstanding efforts responding to the pandemic. We accrued approximately $43 million in salary and benefits expense in the second quarter of 2020 in connection with this award (approximately $29 million in the inpatient rehabilitation segment; approximately $14 million in the home health and hospice segment).

Salaries and benefits are expected to increase in the fourth quarter of 2021 due to an approximate 2.75% merit increase provided to our nonmanagement hospital employees effective in October 2021.

Other Operating Expenses

As a percent of Net operating revenues, Other operating expenses decreased during the three and nine months ended ~~March 31,~~September 30, 2021 compared to the same periods of 2020 primarily due to the increase in Net operating revenues as discussed above.

Supplies

As a percent of Net operating revenues, Supplies decreased during the three months ended September 30, 2021 compared to the same period of 2020 primarily due to lower utilization and cost of medical supplies. As a percent of Net operating revenues, Supplies decreased during the nine months ended September 30, 2021 compared to the same period of 2020 primarily due to the increase in Net operating revenues as discussed above.

~~Supplies~~

~~Supplies~~ increased in terms of dollars and as a percent of revenue during the three months ended March 31, 2021 compared to the same period of 2020 primarily due to increased utilization and cost of medical supplies, including personal protective equipment (“PPE”), due to the pandemic. We expect to continue to see increased utilization and cost of medical supplies in 2021.

General and Administrative Expenses

General and administrative expenses increased in terms of dollars and as a percent of revenue during the three and nine months ended ~~March 31,~~September 30, 2021 compared to the same ~~period~~periods of 2020primarily due to the ~~$3.5 million year-over-year change~~costs associated with the strategic alternatives review for the home health and hospice business in ~~the mark-to-market adjustment on our non-qualified 401(k) liability~~2021 and higher costs associated with incentive compensation. See the “Executive Overview” section of this Item, for additional information on the strategic alternatives review.

Depreciation and Amortization

Depreciation and amortization increased during the three and nine months ended ~~March 31,~~September 30, 2021 compared to the same ~~period~~periods of 2020 due to our capital investments. We expect Depreciation and amortization to increase going forward as a result of our recent and ongoing capital investments.

~~Other (Income)~~ InterestExpenseand Amortization of DebtDiscounts and Fees

~~Other (income)~~

The decrease in Interest expense and amortization of debt discounts and fees ~~increased~~ during the three and nine months ended ~~March 31,~~September 30, 2021 compared to the same periods of 2020 primarily resulted from the November 2020 redemption of our 5.75% Senior Notes due 2024 and the April and June 2021 redemptions of our 5.125% Senior Notes due 2023 partially offset by the issuance of our 4.625% Senior Notes due 2031 in October 2020. The decrease during the nine months ended September 30, 2021 compared to the same period of 2020 ~~primarily~~was also partially offset by the May 2020 issuance of our 4.50% Senior Notes due 2028 and our 4.75% Senior Notes due 2030. For additional information, see Note 4, Long-term Debt, to the ~~$3.5 million year-over-year change~~accompanying condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report, and Note 10, Long-term Debt, to the ~~mark-to-market adjustment on our non-qualified 401(k) liability (offsetting impact in~~ consolidated financial statements accompanying the 2020 Form 10-K.

~~General and administrative expenses~~).

Income from Continuing Operations Before Income Tax Expense

Our pre-tax income from continuing operations increased during the three and nine months ended ~~March 31,~~September 30, 2021 compared to the same ~~period~~periods of 2020 primarily due to the increase in Net operating revenues as discussed above.

Provision for Income Tax Expense

Our Provision for income tax expense increased during the three and nine months ended ~~March 31,~~September 30, 2021 compared to the same ~~period~~periods of 2020 primarily due to higher Income from continuing operations before income tax expense.

We currently estimate our cash payments for income taxes to be approximately ~~$100~~$125 million to ~~$130~~$140 million, net of refunds, for 2021. These payments are expected to primarily result from federal and state income tax expenses based on estimates of taxable income for 2021.

In certain jurisdictions, we do not expect to generate sufficient income to use all of the available state net operating losses and other credits prior to their expiration. This determination is based on our evaluation of all available evidence in these jurisdictions including results of operations during the preceding three years, our forecast of future earnings, and prudent tax planning strategies. It is possible we may be required to increase or decrease our valuation allowance at some future time if our forecast of future earnings varies from actual results on a consolidated basis or in the applicable tax jurisdiction, if the timing of future tax deductions differs from our expectations, or pursuant to changes in state tax laws and rates.

We recognize the financial statement effects of uncertain tax positions when it is more likely than not, based on the technical merits, a position will be sustained upon examination by and resolution with the taxing authorities. Total remaining unrecognized tax benefits were ~~$0.2 million~~immaterial as of ~~March 31,~~September 30, 2021 and December 31, 2020.

See Note 8, Income Taxes, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report and Note 16, Income Taxes, to the consolidated financial statements accompanying the 2020 Form 10‑K.

Net Income Attributable to Noncontrolling Interests

The increase in Net ~~Income Attributable~~income attributable to ~~Noncontrolling Interests~~noncontrolling interests during the three and nine months ended ~~March 31,~~September 30, 2021

compared to the same ~~period~~periods of 2020 resulted from ~~new joint ventures and~~ increased profitability of our existing joint ~~ventures.~~ventures due to the impact of the pandemic on 2020.

Segment Results of Operations

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. For additional information regarding our business segments, including a detailed description of the services we provide, financial data for each segment, and a reconciliation of total segment Adjusted EBITDA to income from continuing operations before income tax expense, see Note 11, Segment Reporting, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report.

Inpatient Rehabilitation

Our inpatient rehabilitation segment derived its Net operating revenues from the following payor sources:


		Three Months Ended March 31,				Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020				2021		2020		2021		2020
Medicare	Medicare	63.9	%	70.5	%		Medicare	64.2	%	65.8	%	64.4	%	66.0	%
Medicare Advantage	Medicare Advantage	16.5	%	12.3	%		Medicare Advantage	15.1	%	15.7	%	15.6	%	15.9	%
Managed care	Managed care	11.7	%	9.9	%		Managed care	12.2	%	10.7	%	11.8	%	10.4	%
Medicaid	Medicaid	4.1	%	3.4	%		Medicaid	4.1	%	4.3	%	4.1	%	3.9	%
Other third-party payors	Other third-party payors	1.3	%	1.2	%		Other third-party payors	1.0	%	1.2	%	1.1	%	1.2	%
Workers’ compensation	Workers’ compensation	0.6	%	0.8	%		Workers’ compensation	0.6	%	0.5	%	0.6	%	0.6	%
Patients	Patients	0.5	%	0.6	%		Patients	0.5	%	0.6	%	0.5	%	0.6	%
Other income	Other income	1.4	%	1.3	%		Other income	2.3	%	1.2	%	1.9	%	1.4	%
Total	Total	100.0	%	100.0	%		Total	100.0	%	100.0	%	100.0	%	100.0	%

2230

Additional information regarding our inpatient rehabilitation segment’s operating results ~~for the three months ended March 31, 2021 and 2020~~ is as follows:


		Three Months Ended March 31,						Percentage Change			Three Months Ended September 30,				Percentage Change		Nine Months Ended September 30,				Percentage Change
		2021			2020			2021 vs. 2020					2021		2020		2021 vs. 2020		2021		2020		2021 vs. 2020
		(In Millions, Except Percentage Change)								(In Millions, Except Percentage Change)
Net operating revenues:	Net operating revenues:											Net operating revenues:
Inpatient	Inpatient	$	942.3		$	890.0		5.9	%			Inpatient	$	983.7	$	883.2	11.4	%	$	2,902.9	$	2,581.2	12.5	%
Outpatient and other	Outpatient and other	17.6			19.2			(8.3)	%			Outpatient and other	27.2		16.2		67.9	%	69.5		51.9		33.9	%
Inpatient rehabilitation segment revenues	Inpatient rehabilitation segment revenues	959.9			909.2			5.6	%			Inpatient rehabilitation segment revenues	1,010.9		899.4		12.4	%	2,972.4		2,633.1		12.9	%
Operating expenses:	Operating expenses:											Operating expenses:
Salaries and benefits	Salaries and benefits	501.9			482.3			4.1	%			Salaries and benefits	537.1		475.0		13.1	%	1,554.9		1,408.7		10.4	%
Other operating expenses	Other operating expenses	140.0			134.7			3.9	%			Other operating expenses	156.2		135.5		15.3	%	443.7		394.5		12.5	%
Supplies	Supplies	45.2			39.6			14.1	%			Supplies	46.8		45.3		3.3	%	136.1		126.9		7.2	%
Occupancy costs	Occupancy costs	15.1			15.3			(1.3)	%			Occupancy costs	14.4		15.3		(5.9)	%	44.5		46.0		(3.3)	%
Other (income) expense		(1.5)			1.6			(193.8)	%
Other income												Other income	(0.7)		(2.1)		(66.7)	%	(4.5)		(3.9)		15.4	%
Equity in net income of nonconsolidated affiliates	Equity in net income of nonconsolidated affiliates	(0.8)			(0.6)			33.3	%			Equity in net income of nonconsolidated affiliates	(0.8)		(0.9)		(11.1)	%	(2.4)		(2.1)		14.3	%
Noncontrolling interests	Noncontrolling interests	25.1			20.8			20.7	%			Noncontrolling interests	26.3		22.1		19.0	%	79.6		58.0		37.2	%
Segment Adjusted EBITDA	Segment Adjusted EBITDA	$	234.9		$	215.5		9.0	%			Segment Adjusted EBITDA	$	231.6	$	209.2	10.7	%	$	720.5	$	605.0	19.1	%

		(Actual Amounts)								(Actual Amounts)
Discharges	Discharges	47,187			47,750			(1.2)	%			Discharges	49,983		45,962		8.7	%	146,662		135,394		8.3	%
Net patient revenue per discharge	Net patient revenue per discharge	$	19,969		$	18,639		7.1	%			Net patient revenue per discharge	$	19,681	$	19,216	2.4	%	$	19,793	$	19,064	3.8	%
Outpatient visits	Outpatient visits	40,194			69,743			(42.4)	%			Outpatient visits	38,904		51,968		(25.1)	%	123,118		137,471		(10.4)	%
Average length of stay (days)	Average length of stay (days)	13.0			12.7			2.4	%			Average length of stay (days)	12.8		13.0		(1.5)	%	12.8		13.0		(1.5)	%
Occupancy %	Occupancy %	71.4		%	71.3		%	0.1	%			Occupancy %	70.6 %		68.8 %		2.6	%	70.0 %		67.8 %		3.2	%
# of licensed beds	# of licensed beds	9,560			9,322			2.6	%			# of licensed beds	9,846		9,437		4.3	%	9,846		9,437		4.3	%
Full-time equivalents*	Full-time equivalents*	22,383			22,318			0.3	%			Full-time equivalents*	23,054		22,147		4.1	%	22,657		21,758		4.1	%
Employees per occupied bed	Employees per occupied bed	3.31			3.38			(2.1)	%			Employees per occupied bed	3.37		3.44		(2.0)	%	3.33		3.42		(2.6)	%

* Full-time equivalents included in the above table represent our employees who participate in or support the operations of our hospitals and exclude an estimate of full-time equivalents related to contract labor.

We actively manage the productive portion of our Salaries and benefits utilizing certain metrics, including employees per occupied bed, or “EPOB.” This metric is determined by dividing the number of full-time equivalents, including an estimate of full-time equivalents from the utilization of contract labor, by the number of occupied beds during each period. The number of occupied beds is determined by multiplying the number of licensed beds by our occupancy percentage.

Operating Expenses as a % of Net Operating Revenues


		Three Months Ended March 31,				Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020				2021		2020		2021		2020
Operating expenses:	Operating expenses:						Operating expenses:
Salaries and benefits	Salaries and benefits	52.3	%	53.0	%		Salaries and benefits	53.1	%	52.8	%	52.3	%	53.5	%
Other operating expenses	Other operating expenses	14.6	%	14.8	%		Other operating expenses	15.5	%	15.1	%	14.9	%	15.0	%
Supplies	Supplies	4.7	%	4.4	%		Supplies	4.6	%	5.0	%	4.6	%	4.8	%
Occupancy costs	Occupancy costs	1.6	%	1.7	%		Occupancy costs	1.4	%	1.7	%	1.5	%	1.7	%
Total operating expenses	Total operating expenses	73.2	%	73.9	%		Total operating expenses	74.6	%	74.6	%	73.3	%	75.0	%

2331

Net Operating Revenues

Inpatient revenue increased during the three months ended ~~March 31,~~September 30, 2021 compared to the same period of 2020 primarily due to increased volumes and favorable ~~pricing partially offset by decreased volumes.~~pricing. Discharge growth ~~from new stores of 1.0%~~included a 6.7% increase in same-store discharges. New-store discharge growth during the three months ended March 31, 2021 resulted from our joint venture in Coralville, Iowa (June 2020) and wholly owned hospitals in Murrieta, California (February 2020), Sioux Falls, South Dakota (June 2020), and Toledo, Ohio (November 2020). Same-store discharges declined 2.2% during the three months ended March 31,September 30, 2021 compared to the same period of 2020 ~~primarily due to the pandemic. Discharge growth was impacted by COVID-related limitations on elective procedures~~resulted from our joint venture in San Angelo, Texas (March 2021), as well as wholly owned hospitals in Toledo, Ohio (November 2020), North Tampa, Florida (April 2021), Cumming, Georgia (June 2021), Waco, Texas (August 2021), Shreveport, Louisiana (August 2021), Greenville, South Carolina (August 2021), and ~~capacity and staffing constraints at certain of our hospitals.~~Pensacola, Florida (September 2021). Growth in net patient revenue per discharge during the three months ended ~~March 31,~~September 30, 2021 compared to the same period of 2020 primarily resulted from ~~a higher acuity patient mix,~~ an increase in reimbursement rates and higher patient acuity.

Inpatient revenue increased during the nine months ended September 30, 2021 compared to the same period of 2020 primarily due to increased volumes and favorable pricing. Discharge growth from new stores resulted from the same factors as discussed above for the third quarter of 2021 as well as our joint venture in Coralville, Iowa (June 2020) and our wholly owned hospitals in Murrieta, California (February 2020) and Sioux Falls, South Dakota (June 2020). Growth in net patient revenue per discharge for the nine months ended September 30, 2021 compared to the same period of 2020 resulted from the same factors as discussed above for the third quarter of 2020 as well as the suspension of sequestration.

~~See~~The increase in outpatient and other revenue during the three and nine months ended September 30, 2021 included an increase of $11.3 million in provider tax revenues (offset by $9.3 million of provider tax expenses included in Other operating expenses).

For information regarding the joint ventures discussed above, see Note 2, Business Combinations, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report and Note 2, Business Combinations, to the consolidated financial statements accompanying the 2020 Form 10‑~~K for information regarding the joint venture discussed above.~~K.

Adjusted EBITDA

The increase in Adjusted EBITDA during the three months ended ~~March 31,~~September 30, 2021 compared to the same period of 2020 primarily resulted from the increase in net patient revenue as discussed above. Salaries and benefits as a percent of revenues increased during the three months ended September 30, 2021 compared to the same period of 2020 primarily due to higher sign-on and shift bonuses plus contract labor to meet increased patient volumes. This ratio also increased due to the ramping up of new stores and was partially offset by improved labor productivity which contributed to lower employees per occupied bed. Supplies as a percent of revenues decreased during the three months ended September 30, 2021 compared to the same period of 2020 primarily due to lower utilization and cost of medical supplies.

The increase in Adjusted EBITDA during the nine months ended September 30, 2021 compared to the same period of 2020 primarily resulted from the increase in net patient revenue as discussed above. Salaries and benefits as a percent of revenues decreased during the ~~three~~nine months ended ~~March 31,~~September 30, 2021 compared to the same period of 2020 primarily due to revenue growth, ~~and~~ improved labor ~~management~~productivity which contributed to lower employees per occupied ~~bed.~~bed, and the additional paid-time-off awarded to employees in the second quarter of 2020 in response to the pandemic as discussed above. Supplies ~~increased~~ as a percent of ~~revenue primarily due to increased purchase and use of medical supplies in March~~revenues decreased during the nine months ended September 30, 2021 ~~due~~compared to the ~~pandemic.~~ ~~Other (income) expense~~ ~~within the segment increased $3.5 million~~same period of 2020 primarily due to the ~~year-over-year change in the mark-to-market adjustment on our nonqualified 401(k) liability, which is offset~~increase in ~~General and administrative expenses.~~Net operating revenues as discussed above.

Home Health and Hospice

Our home health and hospice segment derived its Net operating revenues from the following payor sources:


		Three Months Ended March 31,				Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020				2021		2020		2021		2020
Medicare	Medicare	82.7	%	83.0	%		Medicare	81.9	%	83.3	%	82.2	%	82.6	%
Medicare Advantage	Medicare Advantage	10.4	%	10.8	%		Medicare Advantage	10.4	%	10.8	%	10.4	%	11.1	%
Managed care	Managed care	5.3	%	4.4	%		Managed care	6.2	%	4.5	%	5.8	%	4.5	%
Medicaid	Medicaid	1.4	%	1.5	%		Medicaid	1.4	%	1.2	%	1.4	%	1.5	%

Workers’ compensation	Workers’ compensation	—	%	0.1	%		Workers’ compensation	—	%	0.1	%	—	%	0.1	%
Patients	Patients	0.1	%	0.1	%		Patients	—	%	0.1	%	0.1	%	0.1	%
Other income	Other income	0.1	%	0.1	%		Other income	0.1	%	—	%	0.1	%	0.1	%
Total	Total	100.0	%	100.0	%		Total	100.0	%	100.0	%	100.0	%	100.0	%

2433

Additional information regarding our home health and hospice segment’s operating results ~~for the three months ended March 31, 2021 and 2020~~ is as follows:


		Three Months Ended March 31,				Percentage Change			Three Months Ended September 30,				Percentage Change		Nine Months Ended September 30,				Percentage Change
		2021		2020		2021 vs. 2020					2021		2020		2021 vs. 2020		2021		2020		2021 vs. 2020
		(In Millions, Except Percentage Change)						(In Millions, Except Percentage Change)
Net operating revenues:	Net operating revenues:									Net operating revenues:
Home health	Home health	$	219.9	$	224.8	(2.2)	%			Home health	$	221.1	$	223.3	(1.0)	%	$	673.3	$	649.9	3.6	%
Hospice	Hospice	50.6		48.0		5.4	%			Hospice	52.8		51.2		3.1	%	157.2		147.0		6.9	%
Home health and hospice segment revenues	Home health and hospice segment revenues	270.5		272.8		(0.8)	%			Home health and hospice segment revenues	273.9		274.5		(0.2)	%	830.5		796.9		4.2	%
Operating expenses:	Operating expenses:									Operating expenses:
Cost of services (excluding depreciation and amortization)	Cost of services (excluding depreciation and amortization)	118.1		130.9		(9.8)	%			Cost of services (excluding depreciation and amortization)	124.0		121.8		1.8	%	364.7		389.4		(6.3)	%
Support and overhead costs	Support and overhead costs	101.4		100.2		1.2	%			Support and overhead costs	103.2		100.7		2.5	%	307.7		299.2		2.8	%

Other income										Other income	—		—		—	%	(1.6)		—		N/A
Equity in net income of nonconsolidated affiliates	Equity in net income of nonconsolidated affiliates	(0.2)		(0.2)		—	%			Equity in net income of nonconsolidated affiliates	(0.1)		(0.1)		—	%	(0.5)		(0.4)		25.0	%
Noncontrolling interests	Noncontrolling interests	0.4		0.9		(55.6)	%			Noncontrolling interests	0.4		0.3		33.3	%	1.3		0.9		44.4	%
Segment Adjusted EBITDA	Segment Adjusted EBITDA	$	50.8	$	41.0	23.9	%			Segment Adjusted EBITDA	$	46.4	$	51.8	(10.4)	%	$	158.9	$	107.8	47.4	%

		(Actual Amounts)						(Actual Amounts)
Home health:	Home health:									Home health:
Total admissions	Total admissions	50,799		52,754		(3.7)	%			Total admissions	48,412		48,838		(0.9)	%	149,809		145,716		2.8	%
Episodic admissions	Episodic admissions	40,215		42,476		(5.3)	%			Episodic admissions	37,577		40,765		(7.8)	%	117,449		118,082		(0.5)	%
Total recertifications	Total recertifications	31,902		29,463		8.3	%			Total recertifications	32,942		33,786		(2.5)	%	98,638		95,201		3.6	%
Episodic recertifications	Episodic recertifications	28,083		26,553		5.8	%			Episodic recertifications	27,742		29,830		(7.0)	%	84,121		84,711		(0.7)	%
Episodes	Episodes	66,435		68,652		(3.2)	%			Episodes	66,065		68,261		(3.2)	%	200,339		197,067		1.7	%
Total starts of care	Total starts of care	82,701		82,217		0.6	%			Total starts of care	81,354		82,624		(1.5)	%	248,447		240,917		3.1	%
Revenue per episode	Revenue per episode	$	2,923	$	2,909	0.5	%			Revenue per episode	$	2,916	$	2,910	0.2	%	$	2,936	$	2,913	0.8	%
Episodic visits per episode	Episodic visits per episode	15.8		16.3		(3.1)	%			Episodic visits per episode	15.0		16.4		(8.5)	%	15.5		16.7		(7.2)	%
Total visits	Total visits	1,239,073		1,306,230		(5.1)	%			Total visits	1,213,370		1,300,866		(6.7)	%	3,749,793		3,857,642		(2.8)	%
Cost per visit	Cost per visit	$	77	$	81	(4.9)	%			Cost per visit	$	82	$	75	9.3	%	$	78	$	81	(3.7)	%
Hospice:	Hospice:									Hospice:
Admissions	Admissions	3,330		2,986		11.5	%			Admissions	3,262		3,354		(2.7)	%	9,890		9,530		3.8	%
Patient days	Patient days	334,400		334,545		—	%			Patient days	352,691		346,019		1.9	%	1,038,969		1,017,071		2.2	%
Average daily census	Average daily census	3,716		3,676		1.1	%			Average daily census	3,834		3,761		1.9	%	3,806		3,712		2.5	%
Revenue per day	Revenue per day	$	151	$	144	4.9	%			Revenue per day	$	150	$	148	1.4	%	$	151	$	144	4.9	%

Operating Expenses as a % of Net Operating Revenues


		Three Months Ended March 31,				Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020				2021		2020		2021		2020
Operating expenses:	Operating expenses:						Operating expenses:
Cost of services (excluding depreciation and amortization)	Cost of services (excluding depreciation and amortization)	43.7	%	48.0	%		Cost of services (excluding depreciation and amortization)	45.3	%	44.4	%	43.9	%	48.9	%
Support and overhead costs	Support and overhead costs	37.5	%	36.7	%		Support and overhead costs	37.7	%	36.7	%	37.0	%	37.5	%
Total operating expenses	Total operating expenses	81.1	%	84.7	%		Total operating expenses	82.9	%	81.1	%	81.0	%	86.4	%

Net Operating Revenues

~~Total starts of care (total admissions plus total recertifications) were up 0.6%~~Home health revenue declined during the three months ended ~~March 31,~~September 30, 2021 compared to the same period of 2020 due to ~~increases~~decreased episodic admissions largely offset by the continued growth in ~~recertifications and~~ non-episodic ~~admissions. Non-episodic~~ admissions, ~~increased 3% year over year~~ primarily due to ~~the new~~our national contract with United Healthcare. Total ~~home health admissions~~starts of care declined during the three months ended ~~March~~September 30, 2021 compared to the same period of 2020 primarily due to staffing constraints, continued lower occupancy levels at senior living facilities, and limited elective procedures. Revenue per episode growth during the three months ended September 30, 2021 compared to the same period of 2020 primarily resulted from an increase in reimbursement rates offset by the mix between early and late payment periods resulting from the decline in episodic admissions during the third quarter of 2021.

Revenue growth during the nine months ended September 31, 2021 compared to the same period of 2020 primarily was driven by increased volumes. Total starts of care increased during the nine months ended September 30, 2021 compared to the same period of 2020 primarily due to the recovery of volumes during the second quarter of 2021 and increased non-episodic admissions and recertifications as a result of ~~episodic admissions decreasing 22% from patients residing in senior living facilities, 35% from patients discharging from skilled nursing~~

facilities, and 18% from patients receiving elective procedures in acute care hospitals. The combined impact of these declines represented a loss of approximately 3,700 admissions, or a 880 basis points negative impact on the episodic growth rate for the three months ended March 31, 2021. During the three months ended March 31, 2021, the segment averaged 250 home health employees per day on COVID-related quarantine, which further impacted its ability to accept referrals.

national contract with United Healthcare. The increase in revenue per episode during the ~~three~~nine months ended ~~March 31,~~September 30, 2021 compared to the same period of 2020 resulted from an increase in reimbursement rates and the suspension of sequestration partially offset by the ~~impact~~mix between early and late payment periods resulting from the decline in episodic admissions during the third quarter of ~~the timing of completed episodes. Revenue per episode~~2021.

Adjusted EBITDA

The decrease in Adjusted EBITDA during the three months ended ~~March 31, 2020 benefited from the reversal of a $1.6 million reserve for a Zone Program Integrity Contractor audit.~~

~~Hospice same-store admissions growth of 11.4% yielded a 5.4% increase in hospice revenue during the three months ended March 31,~~September 30, 2021 compared to the same period of ~~2020. Hospice~~2020 resulted from higher Cost of services as a percent of revenue ~~growth was impacted by~~related to industry-wide staffing challenges. Cost of services increased as a ~~decrease in length~~percent of ~~stay~~revenues for the three months ended September 30, 2021 compared to the same period of 2020 primarily due to higher cost per visit resulting from ~~a change in patient mix.~~lower clinician productivity associated with recent hires, market rate increases for nurses, and increased contract labor.

~~Adjusted EBITDA~~

The increase in Adjusted EBITDA during the ~~three~~nine months ended ~~March 31,~~September 30, 2021 compared to the same period of 2020 resulted from a decrease in Cost of services as a percent of revenue. Cost of services decreased as a percent of revenues for the ~~three~~nine months ended ~~March 31,~~September 30, 2021 compared to the same period of 2020 primarily due to lower cost per visit supported by ~~changes in~~ the clinician compensation model changes implemented in May 2020. Adjusted EBITDA during the nine months ended September 30, 2020 included the additional paid time-off awarded to employees in response to the pandemic as ~~well as effective management of overall productivity of full-time staff.~~discussed above.

Liquidity and Capital Resources

Our primary sources of liquidity are cash on hand, cash flows from operations, and borrowings under our revolving credit facility.

The objectives of our capital structure strategy are to ensure we maintain adequate liquidity and flexibility. Pursuing and achieving those objectives allow us to support the execution of our operating and strategic plans and weather temporary disruptions in the capital markets and general business environment. Maintaining adequate liquidity is a function of our unrestricted Cash and cash equivalents and our available borrowing capacity. Maintaining flexibility in our capital structure is a function of, among other things, the amount of debt maturities in any given year, the options for debt prepayments without onerous penalties, and limiting restrictive terms and maintenance covenants in our debt agreements.

Consistent with these objectives, in ~~March~~both April and June 2021, we ~~issued notice for redemption of~~redeemed $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~~these optional ~~redemption was~~redemptions were made at a price of par. As a result of ~~this redemption,~~these redemptions, we ~~have classified approximately $100~~recorded an aggregate $1.0 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~~Loss on early extinguishment of debt in during the ~~second quarter of~~nine months ended September 30, 2021.

We have been disciplined in creating a capital structure that is flexible with no significant debt maturities prior to 2023. We continue to have a strong, well-capitalized balance sheet, including a substantial portfolio of owned real estate, and we have significant availability under our revolving credit facility. We continue to generate cash flows from operations and we have significant flexibility with how we choose to invest our cash and return capital to shareholders.

For additional information, see Note 4, Long-term Debt, to the accompanying condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report, and Note 10, Long-term Debt, to the consolidated financial statements accompanying the 2020 Form 10‑K.

Current Liquidity

As of ~~March 31,~~September 30, 2021, we had ~~$223.9~~$94.8 million in Cash and cash equivalents. This amount excludes ~~$72.4~~$80.1 million in restricted cash ($~~62.2~~75.9 million included in Restricted cash and ~~$10.2~~$4.2 million included in Other long-term assets in our condensed consolidated balance sheet) and ~~$73.1~~$81.2 million of restricted marketable securities (included in Other long-term assets in our condensed consolidated balance sheet). Our restricted assets pertain primarily to obligations associated with our captive insurance company, as well as obligations we have under agreements with joint venture partners. See Note 4, Cash and Marketable Securities, to the consolidated financial statements accompanying the 2020 Form 10‑K.

In addition to Cash and cash equivalents, as of ~~March 31,~~September 30, 2021, we had approximately ~~$962~~$872 million available to us under our revolving credit facility. Our credit agreement governs the substantial majority of our senior secured borrowing

capacity and contains a leverage ratio and an interest coverage ratio as financial covenants. Our leverage ratio is defined in our credit agreement as the ratio of consolidated total debt (less up to $300 million of cash on hand) to Adjusted EBITDA for the trailing four quarters. In calculating the leverage ratio under our credit agreement, we are permitted to use pro forma Adjusted EBITDA, the calculation of which includes historical income statement items and pro forma adjustments resulting from (1) the dispositions and repayments or incurrence of debt and (2) the investments, acquisitions, mergers, amalgamations, consolidations and operational changes from acquisitions to the extent such items or effects are not yet reflected in our trailing four-quarter financial statements. Our interest coverage ratio is defined in our credit agreement as the ratio of Adjusted EBITDA to consolidated interest expense, excluding the amortization of financing fees, for the trailing four quarters. As of ~~March 31,~~September 30, 2021, the maximum leverage ratio requirement per our credit agreement was ~~6.50x~~5.5x and the minimum interest coverage ratio requirement was 2.0x, and we were in compliance with these covenants. Based on Adjusted EBITDA for the trailing four quarters and the interest rate in effect under our credit agreement during the three-month period ended ~~March 31,~~September 30, 2021, if we had drawn on the first day and maintained the maximum amount of outstanding draws under our revolving credit facility for that entire period, we would still be in compliance with the maximum leverage ratio and minimum interest coverage ratio requirements.

We do not face near-term refinancing risk, as the amounts outstanding under our credit agreement do not mature until 2024, and our bonds all mature in 2023 and beyond. See the “Contractual Obligations” section below for information related to our contractual obligations as of ~~March 31,~~September 30, 2021.

For a discussion of risks and uncertainties facing us see Item 1A, Risk Factors, under Part II, Other Information, of this report and Item 1A, Risk Factors, of the 2020 Form 10‑K.

Sources and Uses of Cash

The following table shows the cash flows provided by or used in operating, investing, and financing activities ~~for the three months ended March 31, 2021 and 2020~~ (in millions):


		Three Months Ended March 31,					Nine Months Ended September 30,
		2021		2020			2021		2020
Net cash provided by operating activities	Net cash provided by operating activities	$	158.5	$	29.3	Net cash provided by operating activities	$	592.0	$	425.0
Net cash used in investing activities	Net cash used in investing activities	(95.6)		(83.0)		Net cash used in investing activities	(445.6)		(264.8)
Net cash (used in) provided by financing activities	Net cash (used in) provided by financing activities	(77.5)		71.1		Net cash (used in) provided by financing activities	(282.4)		208.3
(Decrease) increase in cash, cash equivalents, and restricted cash	(Decrease) increase in cash, cash equivalents, and restricted cash	$	(14.6)	$	17.4	(Decrease) increase in cash, cash equivalents, and restricted cash	$	(136.0)	$	368.5

Operating activities.The increase in Net cash provided by operating activities for the ~~three~~nine months ended ~~March 31,~~September 30, 2021 compared to the same period of 2020 primarily resulted from the approximate $101 million payment to management investors of our home health and hospice segment for vested stock appreciation rights during the first quarter of 2020 ~~for vested stock appreciation rights.~~and lower revenues during 2020 resulting from the pandemic. For additional information, see Note 7, S~~hare-Based~~Share-Based Payments, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report.

Investing activities. The increase in Net cash used in investing activities during the ~~three~~nine months ended ~~March 31,~~September 30, 2021 compared to the same period of 2020 primarily resulted from the acquisition of Frontier during the second quarter of 2021 and an increase in purchases of property and equipment. For additional information regarding Frontier, see Note 2, Business Combinations, to the accompanying condensed consolidated financial statements.

Financing activities. The increase in Net cash used in financing activities during the ~~three~~nine months ended ~~March 31,~~September 30, 2021 ~~compared~~compared to the same period of 2020 primarily resulted from the ~~2020 net borrowings on~~two partial redemptions of our ~~revolving credit facility offset by cash used for~~2023 Notes during the second quarter of 2021 and the purchase of equity interests held by the home health and hospice management team during the first quarter of 2020 offset by the proceeds received from the additional offering of our 4.50% Senior Notes due 2028 and of our existing 4.75% Senior Notes due 2030 during the second quarter of 2020. For additional information, see Note 5, Redeemable Noncontrolling Interests, to the accompanying condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report and Note 10, Long-term Debt, to the consolidated financial statements accompanying the 2020 Form 10‑K.

Contractual Obligations

Our consolidated contractual obligations as of ~~March 31,~~September 30, 2021 are as follows (in millions):


		Total		April 1 through December 31, 2021		2022 - 2023		2024 - 2025		2026 and thereafter			Total		October 1 through December 31, 2021		2022 - 2023		2024 - 2025		2026 and thereafter
Long-term debt obligations:	Long-term debt obligations:											Long-term debt obligations:
Long-term debt, excluding revolving credit facility and finance lease obligations (a)	Long-term debt, excluding revolving credit facility and finance lease obligations (a)	$	2,895.1	$	110.3	$	240.4	$	582.1	$	1,962.3	Long-term debt, excluding revolving credit facility and finance lease obligations (a)	$	2,702.2	$	3.6	$	139.2	$	582.7	$	1,976.7

Revolving credit facility												Revolving credit facility	90.0		—		—		90.0		—
Interest on long-term debt (b)	Interest on long-term debt (b)	897.7		98.0		250.6		224.9		324.2		Interest on long-term debt (b)	835.2		31.7		249.1		228.3		326.1
Finance lease obligations (c)	Finance lease obligations (c)	645.0		40.4		101.3		100.9		402.4		Finance lease obligations (c)	642.8		36.2		103.7		101.2		401.7
Operating lease obligations (d)	Operating lease obligations (d)	340.2		44.5		95.8		67.2		132.7		Operating lease obligations (d)	325.0		12.3		103.4		73.6		135.7
Purchase obligations (e)	Purchase obligations (e)	110.8		40.6		43.0		17.9		9.3		Purchase obligations (e)	125.4		14.8		60.8		27.9		21.9
Other long-term liabilities (f)(g)	Other long-term liabilities (f)(g)	3.3		0.3		0.4		0.4		2.2		Other long-term liabilities (f)(g)	3.2		0.1		0.5		0.5		2.1
Total	Total	$	4,892.1	$	334.1	$	731.5	$	993.4	$	2,833.1	Total	$	4,723.8	$	98.7	$	656.7	$	1,104.2	$	2,864.2

(a) Included in long-term debt are amounts owed on our bonds payable and other notes payable. These borrowings are further explained in Note 4, Long-term Debt, accompanying the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report, and Note 10, Long-term Debt, to the consolidated financial statements accompanying the 2020 Form 10‑K.

(b) Interest on our fixed rate debt is presented using the stated interest rate. Interest expense on our variable rate debt is estimated using the rate in effect as of ~~March 31,~~September 30, 2021. Interest pertaining to our credit agreement and bonds is included to their respective ultimate maturity dates. Interest related to finance lease obligations is excluded from this line. Amounts exclude amortization of debt discounts, amortization of loan fees, or fees for lines of credit that would be included in interest expense in our consolidated statements of comprehensive income.

(d) Our inpatient rehabilitation segment leases approximately ~~12%~~11% of its hospitals as well as other property and equipment under operating leases in the normal course of business. Our home health and hospice segment leases relatively small office spaces in the localities it serves, space for its corporate office, and other equipment under operating leases in the normal course of business. Amounts include interest portion of future minimum operating lease payments. For more information, see Note 7, Leases, to the consolidated financial statements accompanying the 2020 Form 10‑K.

(e) Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding on Encompass Health and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancelable without penalty. Our purchase obligations primarily relate to software licensing and support and medical equipment. Purchase obligations are not recognized in our condensed consolidated balance sheet.

(f) Because their future cash outflows are uncertain, the following noncurrent liabilities are excluded from the table above: general liability, professional liability, and workers' compensation risks, noncurrent amounts related to ~~third-party~~third-

party billing audits, and deferred income taxes. For more information, see Note 11, Self-Insured Risks, Note 16, Income Taxes, and Note 18, Contingencies and Other Commitments, to the consolidated financial statements accompanying the 2020 Form 10‑K and Note 8, Income Taxes, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report.

(g) The table above does not include Redeemable noncontrolling interests of ~~$31.7~~$32.5 million because of the uncertainty surrounding the timing and amounts of any related cash outflows. See Note 5, Redeemable Noncontrolling Interests, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report.

Our capital expenditures include costs associated with our hospital refresh program, de novo projects, capacity expansions, technology initiatives, and building and equipment upgrades and purchases. During the ~~three~~nine months ended ~~March 31,~~September 30, 2021, we made capital expenditures of approximately ~~$101~~$353 million for property and equipment, capitalized software, and other intangible assets. During 2021, we expect to spend approximately ~~$580~~$530 million to ~~$665~~$580 million for capital expenditures. Approximately ~~$165~~$140 million to ~~$195~~$150 million of this budgeted amount is considered nondiscretionary expenditures, which we may refer to in other filings as “maintenance” expenditures. In addition, we expect to spend approximately ~~$50 million to~~ $100 million on home health and hospice acquisitions during ~~2021.~~2021, inclusive of the Frontier acquisition discussed in the “Executive Overview” section of this Item. Actual amounts spent will be dependent upon the timing of development projects and acquisition opportunities for our home health and hospice business.

Authorizations for Returning Capital to Stakeholders

In October 2020, February 2021, May 2021, and ~~February~~July 2021, our board of directors declared cash dividends of $0.28 per share that were paid in January 2021, ~~and~~ April 2021, July 2021, and October 2021, respectively. On October 21, 2021, our board of directors declared a cash dividend of $0.28 per share, payable on January 18, 2022 to stockholders of record on January 3, 2022. We expect quarterly dividends to be paid in January, April, July, and October. However, the actual declaration of any future cash dividends, and the setting of record and payment dates as well as the per share amounts, will be at the discretion of our board of directors after consideration of various factors, including our capital position and alternative uses of funds. Cash dividends are expected to be funded using cash flows from operations, cash on hand, and availability under our revolving credit facility.

~~On February 14, 2014, our board of directors approved an increase in our existing common stock repurchase authorization from $200 million to $250 million.~~ On July 24, 2018, our board approved resetting the aggregate common stock repurchase authorization to $250 million. As of ~~March 31,~~September 30, 2021, approximately $198 million remained under this authorization. The repurchase authorization does not require the repurchase of a specific number of shares, has an indefinite term, and is subject to termination at any time by our board of directors. Subject to certain terms and conditions, including a maximum price per share and compliance with federal and state securities and other laws, the repurchases may be made from time to time in open market transactions, privately negotiated transactions, or other transactions, including trades under a plan established in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. For additional information, see Part II, Item 2, Unregistered Sales of Equity Securities and Use of Proceeds, of this report.

Supplemental Guarantor Financial Information

Our indebtedness under our credit agreement and the 5.125% Senior Notes due 2023, 5.75% Senior Notes due 2025, 4.50% Senior Notes due 2028, 4.75% Senior Notes due 2030, and 4.625% Senior Notes due 2031 (collectively, the “Senior Notes”) are guaranteed by certain consolidated subsidiaries. These guarantees are full and unconditional and joint and several, subject to certain customary conditions for release. The Senior Notes are guaranteed on a senior, unsecured basis by all of our existing and future subsidiaries that guarantee borrowings under our credit agreement and other capital markets debt. The other subsidiaries of Encompass Health do not guarantee the Senior Notes (such subsidiaries are referred to as the “non-guarantor subsidiaries”).

The terms of our credit agreement allow us to declare and pay cash dividends on our common stock so long as: (1) we are not in default under our credit agreement, and (2) either (a) our senior secured leverage ratio (as defined in our credit agreement) remains less than or equal to 2x and our leverage ratio (as defined in our credit agreement) remains less than or equal to 4.50x or (b) there is capacity under the Available Amount as defined in the credit agreement. The terms of our Senior Notes indenture allow us to declare and pay cash dividends on our common stock so long as (1) we are not in default, (2) the consolidated coverage ratio (as defined in the indenture) exceeds 2x or we are otherwise allowed under the indenture to incur debt, and (3) we have capacity under the indenture’s restricted payments covenant to declare and pay dividends. See Note 4, Long-term Debt, to the accompanying condensed consolidated financial statements included in Part I, Item 1, Financial

Statements (Unaudited), of this report, and Note 10, Long-term Debt, to the consolidated financial statements accompanying the 2020 Form 10‑K.

Summarized financial information is presented below for Encompass Health, the parent company, and the subsidiary guarantors on a combined basis after elimination of intercompany transactions and balances among Encompass Health and the subsidiary guarantors and does not include investments in and equity in the earnings of non-guarantor subsidiaries. Amounts for prior periods have been revised to reflect the status of guarantors and non-guarantors as of ~~March 31,~~September 30, 2021.

Three Months Ended March 31, 2021 For the Year Ended December 31, 2020
(In Millions)
Net operating revenues $ 894.8 $ 3,387.1
Intercompany revenues generated from non-guarantor subsidiaries 4.9 19.9
Total net operating revenues $ 899.7 $ 3,407.0
Operating expenses $ 759.8 $ 2,976.0
Intercompany expenses incurred in transactions with non-guarantor subsidiaries 7.6 30.3
Total operating expenses $ 767.4 $ 3,006.3
Income from continuing operations $ 70.6 $ 166.2
Net income $ 70.6 $ 166.2
Net income attributable to Encompass Health $ 70.6 $ 165.7


	Nine Months Ended September 30, 2021
	(In Millions)
Net operating revenues	$	2,739.7
Intercompany revenues generated from non-guarantor subsidiaries	14.3
Total net operating revenues	$	2,754.0

Operating expenses	$	2,338.6
Intercompany expenses incurred in transactions with non-guarantor subsidiaries	23.4
Total operating expenses	$	2,362.0

Income from continuing operations	$	208.1
Net income	$	207.8
Net income attributable to Encompass Health	$	207.8


		As of March 31, 2021		As of December 31, 2020			As of September 30, 2021		As of December 31, 2020
		(In Millions)					(In Millions)
Total current assets	Total current assets	$	767.4	$	716.5	Total current assets	$	688.8	$	712.4

Property and equipment, net	Property and equipment, net	$	1,648.3	$	1,593.9	Property and equipment, net	$	1,791.3	$	1,574.6
Goodwill	Goodwill	1,973.6		1,973.6		Goodwill	2,048.1		1,973.6

Intercompany receivable due from non-guarantor subsidiaries	Intercompany receivable due from non-guarantor subsidiaries	157.8		152.4		Intercompany receivable due from non-guarantor subsidiaries	122.3		147.8
Other noncurrent assets	Other noncurrent assets	679.9		701.4		Other noncurrent assets	670.5		701.2
Total noncurrent assets	Total noncurrent assets	$	4,459.6	$	4,421.3	Total noncurrent assets	$	4,632.2	$	4,397.2

Total current liabilities	Total current liabilities	$	679.5	$	580.8	Total current liabilities	$	673.7	$	579.3

Long-term debt, net of current portion	Long-term debt, net of current portion	$	3,106.9	$	3,213.1	Long-term debt, net of current portion	$	3,091.5	$	3,213.1
Other noncurrent liabilities	Other noncurrent liabilities	251.7		253.9		Other noncurrent liabilities	307.9		306.3
Total noncurrent liabilities	Total noncurrent liabilities	$	3,358.6	$	3,467.0	Total noncurrent liabilities	$	3,399.4	$	3,519.4

Adjusted EBITDA

Management believes Adjusted EBITDA as defined in our credit agreement is a measure of our ability to service our debt and our ability to make capital expenditures. We reconcile Adjusted EBITDA to Net income and to Net cash provided by operating activities.

We use Adjusted EBITDA on a consolidated basis as a liquidity measure. We believe this financial measure on a consolidated basis is important in analyzing our liquidity because it is the key component of certain material covenants contained within our credit agreement, which is discussed in more detail in Note 10, Long-term Debt, to the consolidated financial statements accompanying the 2020 Form 10‑K. These covenants are material terms of the credit agreement. Noncompliance with these financial covenants under our credit agreement—our interest coverage ratio and our leverage ratio—could result in our lenders requiring us to immediately repay all amounts borrowed. If we anticipated a potential covenant violation, we would seek relief from our lenders, which would have some cost to us, and such relief might be on terms less

favorable to us than those in our existing credit agreement. In addition, if we cannot satisfy these financial covenants, we would be prohibited under our credit agreement from engaging in certain activities, such as incurring additional indebtedness, paying common stock dividends, making certain payments, and acquiring and disposing of assets. Consequently, Adjusted EBITDA is critical to our assessment of our liquidity.

In general terms, the credit agreement definition of Adjusted EBITDA, therein referred to as “Adjusted Consolidated

EBITDA,” allows us to add back to consolidated Net income interest expense, income taxes, and depreciation and amortization and then add back to consolidated Net income (1) all unusual or nonrecurring items reducing consolidated Net income (of which only up to $10 million in a year may be cash expenditures), (2) any losses from discontinued operations, (3) non-ordinary course fees, costs and expenses incurred with respect to any litigation or settlement, (4) share-based compensation expense, (5) costs and expenses associated with changes in the fair value of marketable securities, (6) costs and expenses associated with the issuance or prepayment debt and acquisitions, and (7) any restructuring charges not in excess of 20% of Adjusted Consolidated EBITDA. We also subtract from consolidated Net income all unusual or nonrecurring items to the extent they increase consolidated Net income.

Under the credit agreement, the Adjusted EBITDA calculation does not require us to deduct net income attributable to noncontrolling interests or gains on fair value adjustments of hedging and equity instruments, disposal of assets, and development activities. It also does not allow us to add back losses on fair value adjustments of hedging instruments or unusual or nonrecurring cash expenditures in excess of $10 million. These items and amounts, in addition to the items falling within the credit agreement’s “unusual or nonrecurring” classification, may occur in future periods, but can vary significantly from period to period and may not directly relate to, or be indicative of, our ongoing liquidity or operating performance. Accordingly, the Adjusted EBITDA calculation presented here includes adjustments for them.

Adjusted EBITDA is not a measure of financial performance under generally accepted accounting principles in the United States of America, and the items excluded from Adjusted EBITDA are significant components in understanding and assessing financial performance. Therefore, Adjusted EBITDA should not be considered a substitute for Net income or cash flows from operating, investing, or financing activities. Because Adjusted EBITDA is not a measurement determined in accordance with GAAP and is thus susceptible to varying calculations, Adjusted EBITDA, as presented, may not be comparable to other similarly titled measures of other companies. Revenues and expenses are measured in accordance with the policies and procedures described in Note 1, Summary of Significant Accounting Policies, to the consolidated financial statements accompanying the 2020 Form 10‑K.

Our Adjusted EBITDA ~~for the three months ended March 31, 2021 and 2020~~ was as follows (in millions):

Reconciliation of Net Income to Adjusted EBITDA

Three Months Ended March 31,
2021 2020
Net income $ 132.8 $ 108.7
Loss from discontinued operations, net of tax, attributable to Encompass Health — 0.1
Net income attributable to noncontrolling interests (25.5) (21.7)
Provision for income tax expense 34.5 27.1
Interest expense and amortization of debt discounts and fees 42.8 43.2
Government, class action, and related settlements — 2.8
(Gain) loss on disposal of assets (0.1) 0.1
Depreciation and amortization 62.5 58.8
Stock-based compensation expense 2.8 7.1
Costs associated with the strategic alternatives review 0.9 —
Gain on consolidation of joint venture formerly accounted for under the equity method of accounting — (2.2)
Change in fair market value of equity securities 0.1 2.5
Payroll taxes on SARs exercise — 1.5
Adjusted EBITDA $ 250.8 $ 228.0


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Net income	$	126.7	$	100.1	$	401.5	$	257.1
Loss from discontinued operations, net of tax, attributable to Encompass Health	0.1		—		0.4		—
Net income attributable to noncontrolling interests	(26.7)		(22.4)		(80.9)		(58.9)
Provision for income tax expense	34.1		26.9		108.1		65.8
Interest expense and amortization of debt discounts and fees	39.9		49.0		124.5		138.0

Government, class action, and related settlements	—		—		—		2.8
(Gain) loss on disposal or impairment of assets	(5.2)		7.5		(2.4)		10.6
Depreciation and amortization	64.9		61.2		190.8		180.7
Loss on early extinguishment of debt	—		—		1.0		—
Stock-based compensation expense	6.9		8.3		21.7		25.3
Costs associated with the strategic alternatives review	4.6		—		9.6		—
Costs associated with the Frontier acquisition	—		—		1.3		—
Gain on consolidation of joint venture formerly accounted for under the equity method of accounting	—		—		—		(2.2)

Change in fair market value of equity securities	0.3		(0.4)		(0.3)		(0.3)

Payroll taxes on SARs exercise	—		—		—		1.5
Adjusted EBITDA	$	245.6	$	230.2	$	775.3	$	620.4

Reconciliation of Net Cash Provided by Operating Activities to Adjusted EBITDA


		Three Months Ended March 31,					Nine Months Ended September 30,
		2021		2020			2021		2020
Net cash provided by operating activities	Net cash provided by operating activities	$	158.5	$	29.3	Net cash provided by operating activities	$	592.0	$	425.0

Interest expense and amortization of debt discounts and fees	Interest expense and amortization of debt discounts and fees	42.8		43.2		Interest expense and amortization of debt discounts and fees	124.5		138.0
Equity in net income of nonconsolidated affiliates	Equity in net income of nonconsolidated affiliates	1.0		0.8		Equity in net income of nonconsolidated affiliates	2.9		2.5
Net income attributable to noncontrolling interests in continuing operations	Net income attributable to noncontrolling interests in continuing operations	(25.5)		(21.7)		Net income attributable to noncontrolling interests in continuing operations	(80.9)		(58.9)
Amortization of debt-related items	Amortization of debt-related items	(2.0)		(1.4)		Amortization of debt-related items	(5.8)		(5.1)
Distributions from nonconsolidated affiliates	Distributions from nonconsolidated affiliates	(1.0)		(1.0)		Distributions from nonconsolidated affiliates	(2.7)		(2.8)
Current portion of income tax expense	Current portion of income tax expense	25.8		25.7		Current portion of income tax expense	103.7		71.5
Change in assets and liabilities	Change in assets and liabilities	50.3		154.4		Change in assets and liabilities	27.0		47.7
Cash used in operating activities of discontinued operations	Cash used in operating activities of discontinued operations	—		0.1		Cash used in operating activities of discontinued operations	0.6		0.2
Costs associated with the strategic alternatives review	Costs associated with the strategic alternatives review	0.9		—		Costs associated with the strategic alternatives review	9.6		—
Costs associated with the Frontier acquisition						Costs associated with the Frontier acquisition	1.3		—

Change in fair market value of equity securities	Change in fair market value of equity securities	0.1		2.5		Change in fair market value of equity securities	(0.3)		(0.3)
Payroll taxes on SARs exercise	Payroll taxes on SARs exercise	—		1.5		Payroll taxes on SARs exercise	—		1.5
Other	Other	(0.1)		(5.4)		Other	3.4		1.1
Adjusted EBITDA	Adjusted EBITDA	$	250.8	$	228.0	Adjusted EBITDA	$	775.3	$	620.4

For additional information see the “Results of Operations” and “Segment Results of Operations” sections of this Item.

Recent Accounting Pronouncements

For information regarding recent accounting pronouncements, see Note 1, Basis of Presentation, to our condensed consolidated financial statements included under Part I, Item 1, Financial Statements (Unaudited), of this report.

Item 3.Quantitative and Qualitative Disclosures about Market Risk

Our primary exposure to market risk is to changes in interest rates on our variable rate long-term debt. We use sensitivity analysis models to evaluate the impact of interest rate changes on our variable rate debt. As of ~~March 31,~~September 30, 2021, our primary variable rate debt outstanding related to ~~$248.3~~$90.0 million in advances under our revolving credit facility and $241.8 million under our term loan facilities. Assuming outstanding balances were to remain the same, a 1% increase in interest rates would result in an incremental negative cash flow of approximately ~~$2.1~~$2.9 million over the next 12 months, while a 1% decrease in interest rates would result in an incremental positive cash flow of approximately $0.3 million over the next 12 months.

See Note 4, Long-term Debt, and Note 6, Fair Value Measurements, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report, for additional information regarding our long-term debt.

Item 4.Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, an evaluation was carried out by our management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended. Based on our evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Control Over Financial Reporting

There have been no changes in our Internal Control over Financial Reporting during the quarter ended ~~March 31,~~September 30, 2021 that have a material effect on our Internal Control over Financial Reporting.

3242

PART II. OTHER INFORMATION

Item 1.Legal Proceedings

We provide services in the highly regulated healthcare industry. In the ordinary course of our business, we are a party to various legal actions, proceedings, and claims as well as regulatory and other governmental audits and investigations. These matters could potentially subject us to sanctions, damages, recoupments, fines, and other penalties. Some of these matters have been material to us in the past, and others in the future may, either individually or in the aggregate, be material and adverse to our business, financial position, results of operations, and ~~liquidity. We do~~liquidity.

On October 26, 2021, we filed suit in the district court of Dallas County, Texas against April K. Anthony, a former executive officer in our home health and hospice segment (“HH&H”), for breach of her contractual noncompete, nonsolicitation, and nondisclosure obligations to us and for trade secret misappropriation. Ms. Anthony’s senior management agreement, dated October 7, 2019, provides, among other things, that she shall not ~~believe~~(i) directly or indirectly engage in the provision of home health or hospice services in any state in which we are operating for a period one year following her departure, (ii) directly or indirectly induce or attempt to induce any of our ~~pending~~ ~~legal proceedings are material~~employees to leave our employ or in any way interfere with the relationship between us ~~but there can be no assurance~~and any employee for a period of two years following her departure, or (iii) disclose to any unauthorized person or directly or indirectly use for her own account any information, observations and data concerning our ~~assessment will not change based~~business and affairs. Ms. Anthony resigned from her position with HH&H on ~~future developments.~~

June 18, 2021. In September 2021, we learned of evidence that Ms. Anthony during her tenure with us had engaged in, and was continuing to engage in, solicitation of certain HH&H employees to join a competing home health and hospice venture. In this suit, we seek injunctions from the court ordering Ms. Anthony to comply with her senior management agreement, including its noncompete, nonsolicitation, and nondisclosure covenants, and to cease and desist all activities in furtherance of violations of those covenants.

Additionally, the False Claims Act (the “FCA”) allows private citizens, called “relators,” to institute civil proceedings on behalf of the United States alleging violations of the FCA. These lawsuits, also known as “qui tam” actions, are common in the healthcare industry and 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. 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 prevented by existing law or court order from discussing or disclosing the filing of such suits. Therefore, from time to time, we may be party to one or more undisclosed qui tam cases brought pursuant to the FCA.

Information relating to certain legal proceedings in which we are involved is included in Note 10, Contingencies and Other Commitments, to the condensed consolidated financial statements contained in Part I, Item 1, Financial Statements (Unaudited), of this report and should be read in conjunction with the related disclosure previously reported in our Quarterly Reports on Form 10-Q for the quarters ended June 30, 2021 and March 31, 2021 and our Annual Report on Form 10‑K for the year ended December 31, 2020 (the “2020 Form 10‑K”).

Item 1A.Risk Factors

There have been no material changes from the risk factors disclosed in Part I, Item 1A, Risk Factors, of the 2020 Form 10-K. However, certain information in those risk factors has been updated by the discussion in the “Executive Overview—Key Challenges” section of Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of this report, which section is incorporated by reference herein.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of Equity Securities

The following table summarizes our repurchases of equity securities during the three months ended ~~March 31,~~September 30, 2021:

Period
Total Number of Shares (or Units) Purchased(1)
Average Price Paid per Share (or Unit) ($) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Maximum Number (or Approximate Dollar Value) of Shares That May Yet Be Purchased Under the Plans or Programs(2)
January 1, through January 31, 2021 138,780 $ 82.69 — $ 198,053,924
February 1, through February 28, 2021 48,735 80.42 — 198,053,924
March 1, through March 31, 2021 2,618

79.94 — 198,053,924
Total 190,133 82.07 —


Period	Total Number of Shares (or Units) Purchased(1)	Average Price Paid per Share (or Unit) ($)		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares That May Yet Be Purchased Under the Plans or Programs(2)
July 1, through July 31, 2021	238	$	80.01	—	$	198,053,924
August 1, through August 31, 2021	—	—		—	198,053,924
September 1, through September 30, 2021	—	—		—	198,053,924
Total	238	80.01		—

(1)Except as noted in the following sentence, the number of shares reported in this column includes the shares purchased under the plan or program, if any, as reported in the third column of this table and the shares tendered by employees as payments of the tax liabilities incident to the vesting of previously awarded shares of restricted stock and the exercise price and tax liability incident to the net settlement of an option exercise. In ~~January, 226~~July, 238 shares were purchased pursuant to our Directors’ Deferred Stock Investment Plan. This plan is a nonqualified deferral plan allowing non-employee directors to make advance elections to defer a fixed percentage of their director fees. The plan administrator acquires the shares in the open market which are then held in a rabbi trust. The plan also provides that dividends paid on the shares held for the accounts of the directors will be reinvested in shares of our common stock which will also be

held in the trust. The directors’ rights to all shares in the trust are nonforfeitable, but the shares are only released to the directors after departure from our board.

(2) On October 28, 2013, we announced our board of directors authorized the repurchase of up to $200 million of our common stock. On February 14, 2014, our board approved an increase in this common stock repurchase authorization from $200 million to $250 million. On July 24, 2018, our board approved resetting the aggregate common stock repurchase authorization to $250 million. The repurchase authorization does not require the repurchase of a specific number of shares, has an indefinite term, and is subject to termination at any time by our board of directors. Subject to certain terms and conditions, including a maximum price per share and compliance with federal and state securities and other laws, the repurchases may be made from time to time in open market transactions, privately negotiated transactions, or other transactions, including trades under a plan established in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended.

Item 6.Exhibits

See the Exhibit Index immediately following the signature page of this report.

3444

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.


			ENCOMPASS HEALTH CORPORATION

			By:			/s/ Douglas E. Coltharp
						Douglas E. Coltharp
						Executive Vice President and Chief Financial Officer

			Date:			~~May 4,~~November 2, 2021

3545

EXHIBIT INDEX

The exhibits required by Regulation S-K are set forth in the following list and are filed by attachment to this report unless otherwise noted.

No.

Description

3.1.1

Amended and Restated Certificate of Incorporation of Encompass Health Corporation, effective as of January 1, 2018 (incorporated by reference to Exhibit 3.1 to Encompass Health’s Current Report on Form 8-K filed on October 25, 2017).

3.1.2

Certificate of Designations of 6.50% Series A Convertible Perpetual Preferred Stock, as filed with the Secretary of State of the State of Delaware on March 7, 2006 (incorporated by reference to Exhibit 3.1 to Encompass Health’s Current Report on Form 8-K filed on March 9, 2006).

3.2

Amended and Restated Bylaws of Encompass Health Corporation, effective as of January 1, 2018 (incorporated by reference to Exhibit 3.2 to Encompass Health’s Current Report on Form 8-K filed on October 25, 2017).

~~10.1~~

Description of the Encompass Health Corporation Senior Management Bonus and Long-Term Incentive Plans (incorporated by reference to the section captioned “Executive Compensation – Compensation Discussion and Analysis – Elements of Executive Compensation” in Encompass Health’s Definitive Proxy Statement on Schedule 14A filed on March 26, 2021).+

~~10.2~~

Description of the annual compensation arrangement for non-employee directors of Encompass Health Corporation (incorporated by reference to the section captioned “Corporate Governance and Board Structure – Compensation of Directors” in Encompass Health’s Definitive Proxy Statement on Schedule 14A, filed on March 26, 2021).+

List of Subsidiary Guarantors.

31.1

Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101

Sections of the Encompass Health Corporation Quarterly Report on Form 10-Q for the quarter ended ~~March 31,~~September 30, 2021, formatted in XBRL (eXtensible Business Reporting Language), submitted in the following files:

101.INS

XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

~~+ Management contract or compensatory plan or arrangement.~~


		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	1521
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	3242
Item 4.	Controls and Procedures	3242

PART II	Other Information

Item 1.	Legal Proceedings	3343
Item 1A.	Risk Factors	3343
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3344
Item 6.	Exhibits	3444


	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		—		(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


	Three Months Ended March 31, 2021		For the Year Ended December 31, 2020
	(In Millions)
Net operating revenues	$	894.8	$	3,387.1
Intercompany revenues generated from non-guarantor subsidiaries	4.9		19.9
Total net operating revenues	$	899.7	$	3,407.0

Operating expenses	$	759.8	$	2,976.0
Intercompany expenses incurred in transactions with non-guarantor subsidiaries	7.6		30.3
Total operating expenses	$	767.4	$	3,006.3

Income from continuing operations	$	70.6	$	166.2
Net income	$	70.6	$	166.2
Net income attributable to Encompass Health	$	70.6	$	165.7