UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

______________________________

FORM 10-Q


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

For the quarterly period ended ~~September 30, 2022~~March 31, 2023


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

Commission File Number 001-10315

______________________________

Encompass Health Corporation

(Exact name of Registrant as specified in its Charter)


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

9001 Liberty Parkway

Birmingham, Alabama 35242

(Address of Principal Executive Offices)

(205) 967-7116

(Registrant’s telephone number)

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


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

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

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

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

Large accelerated filer

☒

Accelerated filer

☐

Non-Accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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

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

The registrant had ~~99,788,465~~100,235,748 shares of common stock outstanding, net of treasury shares, as of ~~October 24, 2022.~~April 20, 2023.

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, changes to Medicare reimbursement and other healthcare laws and regulations from time to time, our business strategy, labor cost trends, our dividend and stock repurchase strategies, our financial plans, our growth plans, our future financial performance, our projected business results, or our projected capital expenditures. In some cases, the reader can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “targets,” “potential,” or “continue” or the negative of these terms or other comparable terminology. Such forward-looking statements are necessarily estimates based upon current information and involve a number of risks and uncertainties, many of which are beyond our control. Any forward-looking statement is based on information current as of the date of this report and speaks only as of the date on which such statement is made. Actual events or results may differ materially from the results anticipated in these forward-looking statements as a result of a variety of factors. While it is impossible to identify all such factors, the factors described below could cause, and in the case of the COVID-19 pandemic has already caused, actual results to differ materially from those estimated by us.

•Each of the factors discussed in Item 1A, Risk Factors, of our Annual Report on Form 10-K for the year ended December 31, ~~2021,~~2022, as well as uncertainties and factors, if any, discussed elsewhere in this Form 10-Q, including in the “Executive Overview—Key Challenges” section of Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our other filings from time to time with the SEC, or in materials incorporated therein by reference.

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

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

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

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

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

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

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

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

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

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

•Delays and other substantive and procedural deficiencies in the administrative appeals process associated with denied Medicare reimbursement claims, including from various Medicare audit programs, could delay or reduce

our reimbursement for services previously provided, including through recoupment from other claims due to us from Medicare.

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

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

•Changes in the rules and regulations of the healthcare industry at either or both of the federal and state levels, including those contemplated now and in the future as part of national healthcare reform and deficit reduction (such as the proposed Inpatient Rehabilitation Facility Review Choice Demonstration, the re-basing of payment systems, the introduction of site neutral payments or case-mix weightings across post-acute settings, and other payment system reforms) could decrease revenues and increase the costs of complying with the rules and regulations.

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

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

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

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

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

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

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

•Competitive pressures in the healthcare industry, including from other providers that may be participating in integrated delivery payment arrangements in which we do not participate, and our response to those pressures could adversely affect our revenues or other financial results.

•Our inability to provide a consistently high quality of care, including as represented in metrics published by Medicare, could decrease our revenues.

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

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

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

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

•General conditions in the economy and capital markets, including inflation, any disruption, instability, or uncertainty related to armed conflict or an act of terrorism, a governmental impasse over approval of the United

iii

States federal budget or an increase to the debt ceiling, an international trade war, or a sovereign debt crisis could adversely affect our financial results or condition, including access to the capital markets.

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

PART I. FINANCIAL INFORMATION

Item 1.Financial Statements (Unaudited)

Encompass Health Corporation and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2022		2021		2022		2021			2023		2022
		(In Millions, Except Per Share Data)									(In Millions, Except Per Share Data)
Net operating revenues	Net operating revenues	$	1,089.5	$	1,010.8	$	3,211.3	$	2,972.4	Net operating revenues	$	1,160.4	$	1,059.3
Operating expenses:	Operating expenses:									Operating expenses:
Salaries and benefits	Salaries and benefits	605.6		537.0		1,778.9		1,554.8		Salaries and benefits	629.0		587.4
Other operating expenses	Other operating expenses	172.0		151.4		500.3		442.2		Other operating expenses	177.9		159.0
Occupancy costs	Occupancy costs	12.4		14.5		41.6		44.5		Occupancy costs	13.8		15.4
Supplies	Supplies	51.1		46.7		148.2		136.0		Supplies	53.8		49.8
General and administrative expenses	General and administrative expenses	37.9		38.9		111.5		123.7		General and administrative expenses	43.4		37.4
Depreciation and amortization	Depreciation and amortization	62.1		55.5		180.3		162.9		Depreciation and amortization	63.9		57.7

Total operating expenses	Total operating expenses	941.1		844.0		2,760.8		2,464.1		Total operating expenses	981.8		906.7
Loss on early extinguishment of debt	Loss on early extinguishment of debt	—		—		1.4		1.0		Loss on early extinguishment of debt	—		0.3
Interest expense and amortization of debt discounts and fees	Interest expense and amortization of debt discounts and fees	38.2		39.9		138.2		124.3		Interest expense and amortization of debt discounts and fees	36.4		39.6
Other expense (income)		3.6		(0.5)		13.6		(4.8)
Other (income) expense										Other (income) expense	(3.6)		3.6
Equity in net income of nonconsolidated affiliates	Equity in net income of nonconsolidated affiliates	(0.7)		(0.9)		(2.6)		(2.5)		Equity in net income of nonconsolidated affiliates	(0.4)		(0.9)
Income from continuing operations before income tax expense	Income from continuing operations before income tax expense	107.3		128.3		299.9		390.3		Income from continuing operations before income tax expense	146.2		110.0
Provision for income tax expense	Provision for income tax expense	21.8		26.2		68.2		79.4		Provision for income tax expense	31.9		23.6
Income from continuing operations	Income from continuing operations	85.5		102.1		231.7		310.9		Income from continuing operations	114.3		86.4
(Loss) income from discontinued operations, net of tax	(Loss) income from discontinued operations, net of tax	(18.5)		24.6		16.7		90.6		(Loss) income from discontinued operations, net of tax	(1.0)		23.7
Net and comprehensive income	Net and comprehensive income	67.0		126.7		248.4		401.5		Net and comprehensive income	113.3		110.1
Less: Net income attributable to noncontrolling interests included in continuing operations	Less: Net income attributable to noncontrolling interests included in continuing operations	(21.6)		(26.3)		(65.5)		(79.6)		Less: Net income attributable to noncontrolling interests included in continuing operations	(25.6)		(22.0)
Less: Net income attributable to noncontrolling interests included in discontinued operations	Less: Net income attributable to noncontrolling interests included in discontinued operations	—		(0.4)		(1.3)		(1.3)		Less: Net income attributable to noncontrolling interests included in discontinued operations	—		(0.6)
Less: Net and comprehensive income attributable to noncontrolling interests	Less: Net and comprehensive income attributable to noncontrolling interests	(21.6)		(26.7)		(66.8)		(80.9)		Less: Net and comprehensive income attributable to noncontrolling interests	(25.6)		(22.6)
Net and comprehensive income attributable to Encompass Health	Net and comprehensive income attributable to Encompass Health	$	45.4	$	100.0	$	181.6	$	320.6	Net and comprehensive income attributable to Encompass Health	$	87.7	$	87.5

Weighted average common shares outstanding:	Weighted average common shares outstanding:									Weighted average common shares outstanding:
Basic	Basic	99.2		99.0		99.2		99.0		Basic	99.4		99.2
Diluted	Diluted	100.5		100.2		100.3		100.1		Diluted	100.9		100.2
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	$	0.64	$	0.76	$	1.67	$	2.32	Continuing operations	$	0.89	$	0.65
Discontinued operations	Discontinued operations	(0.19)		0.24		0.15		0.90		Discontinued operations	(0.01)		0.23
Net income	Net income	$	0.45	$	1.00	$	1.82	$	3.22	Net income	$	0.88	$	0.88
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	$	0.63	$	0.76	$	1.66	$	2.31	Continuing operations	$	0.88	$	0.64
Discontinued operations	Discontinued operations	(0.18)		0.24		0.15		0.89		Discontinued operations	(0.01)		0.23
Net income	Net income	$	0.45	$	1.00	$	1.81	$	3.20	Net income	$	0.87	$	0.87

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	$	63.9	$	75.8	$	166.2	$	231.3	Income from continuing operations	$	88.7	$	64.4
(Loss) income from discontinued operations, net of tax	(Loss) income from discontinued operations, net of tax	(18.5)		24.2		15.4		89.3		(Loss) income from discontinued operations, net of tax	(1.0)		23.1
Net income attributable to Encompass Health	Net income attributable to Encompass Health	$	45.4	$	100.0	$	181.6	$	320.6	Net income attributable to Encompass Health	$	87.7	$	87.5

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)


		September 30, 2022		December 31, 2021			March 31, 2023		December 31, 2022
		(In Millions)					(In Millions)
Assets	Assets					Assets
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	59.8	$	49.4	Cash and cash equivalents	$	85.0	$	21.8
Restricted cash	Restricted cash	44.3		62.5		Restricted cash	34.3		31.6
Accounts receivable	Accounts receivable	500.1		515.8		Accounts receivable	514.5		536.8
Other current assets	Other current assets	129.6		114.9		Other current assets	127.9		127.0
Current assets of discontinued operations		—		178.8

Total current assets	Total current assets	733.8		921.4		Total current assets	761.7		717.2
Property and equipment, net	Property and equipment, net	2,807.4		2,581.2		Property and equipment, net	2,988.3		2,939.2
Operating lease right-of-use assets	Operating lease right-of-use assets	195.7		193.7		Operating lease right-of-use assets	212.7		212.5
Goodwill	Goodwill	1,247.4		1,237.0		Goodwill	1,270.7		1,263.2
Intangible assets, net	Intangible assets, net	284.9		158.4		Intangible assets, net	287.2		282.3

Other long-term assets	Other long-term assets	206.6		230.0		Other long-term assets	226.7		222.1
Noncurrent assets of discontinued operations		0.1		1,543.2

Total assets(1)	Total assets(1)	$	5,475.9	$	6,864.9	Total assets(1)	$	5,747.3	$	5,636.5
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	$	26.2	$	37.8	Current portion of long-term debt	$	26.0	$	25.2
Current operating lease liabilities	Current operating lease liabilities	22.7		23.5		Current operating lease liabilities	26.3		25.6
Accounts payable	Accounts payable	134.1		134.0		Accounts payable	141.1		132.9
Accrued medical insurance						Accrued medical insurance	31.8		25.0
Accrued expenses and other current liabilities	Accrued expenses and other current liabilities	421.6		421.1		Accrued expenses and other current liabilities	366.9		367.2
Current liabilities of discontinued operations		0.1		132.4

Total current liabilities	Total current liabilities	604.7		748.8		Total current liabilities	592.1		575.9
Long-term debt, net of current portion	Long-term debt, net of current portion	2,719.0		3,240.5		Long-term debt, net of current portion	2,722.5		2,741.8
Long-term operating lease liabilities	Long-term operating lease liabilities	183.3		179.6		Long-term operating lease liabilities	199.2		199.7
Deferred income tax liabilities	Deferred income tax liabilities	46.7		23.3		Deferred income tax liabilities	87.0		83.0
Other long-term liabilities	Other long-term liabilities	174.0		172.7		Other long-term liabilities	183.3		174.2
Noncurrent liabilities of discontinued operations		0.4		100.8

		3,728.1		4,465.7			3,784.1		3,774.6
Commitments and contingencies	Commitments and contingencies					Commitments and contingencies

Redeemable noncontrolling interests	Redeemable noncontrolling interests	37.8		42.2		Redeemable noncontrolling interests	37.5		35.6
Shareholders’ equity:	Shareholders’ equity:					Shareholders’ equity:
Encompass Health shareholders’ equity	Encompass Health shareholders’ equity	1,217.0		1,911.3		Encompass Health shareholders’ equity	1,383.5		1,310.3
Noncontrolling interests	Noncontrolling interests	493.0		445.7		Noncontrolling interests	542.2		516.0
Total shareholders’ equity	Total shareholders’ equity	1,710.0		2,357.0		Total shareholders’ equity	1,925.7		1,826.3
Total liabilities(1) and shareholders’ equity	Total liabilities(1) and shareholders’ equity	$	5,475.9	$	6,864.9	Total liabilities(1) and shareholders’ equity	$	5,747.3	$	5,636.5

(1)Our consolidated assets as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 include total assets of variable interest entities of ~~$207.7~~$203.2 million and ~~$226.2~~$207.8 million, respectively, which cannot be used by us to settle the obligations of other entities. Our consolidated liabilities as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 include total liabilities of the variable interest entities of ~~$35.4~~$44.1 million and ~~$38.2~~$47.9 million, respectively. See Note 4, 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 September 30, 2022											Three Months Ended March 31, 2023
		(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 Income		Treasury Stock		Noncontrolling Interests			Total			Number of Common Shares Outstanding	Common Stock		Capital in Excess of Par Value		Accumulated Income		Treasury Stock		Noncontrolling Interests		Total
Balance at beginning of period	Balance at beginning of period	99.8	$	1.1	$	2,310.8	$	221.9	$	(530.8)	$	498.3		$	2,501.3	Balance at beginning of period	99.8	$	1.1	$	1,730.2	$	115.7	$	(536.7)	$	516.0	$	1,826.3
Net income	Net income	—	—		—		45.4		—		20.0			65.4		Net income	—	—		—		87.7		—		23.5		111.2

Receipt of treasury stock																Receipt of treasury stock	(0.1)	—		—		—		(7.7)		—		(7.7)
Dividends declared ($0.15 per share)	Dividends declared ($0.15 per share)	—	—		(11.2)		(3.9)		—		—			(15.1)		Dividends declared ($0.15 per share)	—	—		—		(15.1)		—		—		(15.1)

Stock-based compensation	Stock-based compensation	—	—		7.3		—		—		—			7.3		Stock-based compensation	—	—		7.9		—		—		—		7.9

Distributions declared	Distributions declared	—	—		—		—		—		(27.4)			(27.4)		Distributions declared	—	—		—		—		—		(31.2)		(31.2)
Capital contributions from consolidated affiliates	Capital contributions from consolidated affiliates	—	—		—		—		—		30.4			30.4		Capital contributions from consolidated affiliates	—	—		—		—		—		33.9		33.9

Spin off of Enhabit, Inc.		—	—		(602.1)		(221.9)		—		(28.4)			(852.4)

Other	Other	—	—		5.7		0.1		(5.4)		0.1			0.5		Other	0.5	0.1		1.0		—		(0.7)		—		0.4
Balance at end of period	Balance at end of period	99.8	$	1.1	$	1,710.5	$	41.6	$	(536.2)	$	493.0		$	1,710.0	Balance at end of period	100.2	$	1.2	$	1,739.1	$	188.3	$	(545.1)	$	542.2	$	1,925.7


		Three Months Ended September 30, 2021											Three Months Ended March 31, 2022
		(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) Income		Treasury Stock		Noncontrolling Interests			Total			Number of Common Shares Outstanding	Common Stock		Capital in Excess of Par Value		Accumulated Income		Treasury Stock		Noncontrolling Interests		Total
Balance at beginning of period	Balance at beginning of period	99.5	$	1.1	$	2,300.6	$	(21.7)	$	(518.0)	$	414.1		$	2,176.1	Balance at beginning of period	99.5	$	1.1	$	2,289.6	$	141.8	$	(521.2)	$	445.7	$	2,357.0
Net income	Net income	—	—		—		100.0		—		24.5			124.5		Net income	—	—		—		87.5		—		20.7		108.2

Receipt of treasury stock																Receipt of treasury stock	(0.1)	—		—		—		(7.6)		—		(7.6)
Dividends declared ($0.28 per share)	Dividends declared ($0.28 per share)	—	—		(27.9)		—		—		—			(27.9)		Dividends declared ($0.28 per share)	—	—		—		(28.1)		—		—		(28.1)

Stock-based compensation	Stock-based compensation	—	—		6.9		—		—		—			6.9		Stock-based compensation	—	—		7.5		—		—		—		7.5

Distributions declared	Distributions declared	—	—		—		—		—		(23.7)			(23.7)		Distributions declared	—	—		—		—		—		(24.9)		(24.9)
Capital contributions from consolidated affiliates	Capital contributions from consolidated affiliates	—	—		—		—		—		5.8			5.8		Capital contributions from consolidated affiliates	—	—		—		—		—		21.4		21.4

Other	Other	—	—		4.3		—		(2.6)		(2.4)			(0.7)		Other	0.4	—		4.0		—		(1.1)		12.0		14.9
Balance at end of period	Balance at end of period	99.5	$	1.1	$	2,283.9	$	78.3	$	(520.6)	$	418.3		$	2,261.0	Balance at end of period	99.8	$	1.1	$	2,301.1	$	201.2	$	(529.9)	$	474.9	$	2,448.4

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 (Continued)~~Cash Flows

(Unaudited)

Nine Months Ended September 30, 2022
(In Millions)
Encompass Health Common Shareholders
Number of Common
Shares Outstanding Common Stock Capital in Excess of
Par Value Accumulated Income Treasury Stock Noncontrolling
Interests Total
Balance at beginning of period 99.5 $ 1.1 $ 2,289.6 $ 141.8 $ (521.2) $ 445.7 $ 2,357.0
Net income — — — 181.6 — 61.8 243.4
Receipt of treasury stock (0.1) — — — (7.7) — (7.7)
Dividends declared ($0.71 per share) — — (11.2) (60.0) — — (71.2)
Stock-based compensation — — 23.6 — — — 23.6
Distributions declared — — — — — (72.8) (72.8)
Capital contributions from consolidated affiliates — — — — — 74.6 74.6
Spin off of Enhabit, Inc. — — (602.1) (221.9) — (28.4) (852.4)
Other 0.4 — 10.6 0.1 (7.3) 12.1 15.5
Balance at end of period 99.8 $ 1.1 $ 1,710.5 $ 41.6 $ (536.2) $ 493.0 $ 1,710.0

Nine Months Ended September 30, 2021
(In Millions)
Encompass Health Common Shareholders
Number of Common Shares Outstanding Common Stock Capital in Excess of Par Value Accumulated (Deficit) Income Treasury Stock Noncontrolling Interests Total
Balance at beginning of period 99.4 $ 1.1 $ 2,326.6 $ (242.3) $ (497.4) $ 382.0 $ 1,970.0
Net income — — — 320.6 — 73.6 394.2
Receipt of treasury stock (0.2) — — — (16.4) — (16.4)
Dividends declared ($0.84 per share) — — (83.8) — — — (83.8)
Stock-based compensation — — 21.7 — — — 21.7
Distributions declared — — — — — (69.1) (69.1)
Capital contributions from consolidated affiliates — — — — — 47.6 47.6
Other 0.3 — 19.4 — (6.8) (15.8) (3.2)
Balance at end of period 99.5 $ 1.1 $ 2,283.9 $ 78.3 $ (520.6) $ 418.3 $ 2,261.0


	Three Months Ended March 31,
	2023		2022
	(In Millions)
Cash flows from operating activities:
Net income	$	113.3	$	110.1
Loss (income) from discontinued operations, net of tax	1.0		(23.7)
Adjustments to reconcile net income to net cash provided by operating activities—

Depreciation and amortization	63.9		57.7



Stock-based compensation	7.9		6.1
Deferred tax expense	4.0		2.3


Other, net	1.2		8.0
Change in assets and liabilities, net of acquisitions—
Accounts receivable	23.7		7.5
Other assets	(3.7)		13.6
Accounts payable	1.2		9.4


Other liabilities	16.7		(8.5)
Net cash (used in) provided by operating activities of discontinued operations	(1.3)		36.4
Total adjustments	113.6		132.5
Net cash provided by operating activities	227.9		218.9
Cash flows from investing activities:

Purchases of property and equipment	(96.6)		(112.9)



Other, net	(7.4)		(8.8)
Net cash used in investing activities of discontinued operations	—		(1.4)
Net cash used in investing activities	(104.0)		(123.1)




Cash flows from financing activities:


Principal payments on debt, including pre-payments	(0.6)		(103.9)
Borrowings on revolving credit facility	30.0		130.0
Payments on revolving credit facility	(45.0)		(25.0)

Debt amendment costs	—		(20.0)
Taxes paid on behalf of employees for shares withheld	(7.7)		(7.2)
Contributions from noncontrolling interests of consolidated affiliates	17.0		14.0
Dividends paid on common stock	(15.6)		(28.5)
Distributions paid to noncontrolling interests of consolidated affiliates	(31.8)		(20.8)


Other, net	(4.3)		(4.6)
Net cash provided by financing activities of discontinued operations	—		5.1
Net cash used in financing activities	(58.0)		(60.9)





Increase in cash, cash equivalents, and restricted cash	65.9		34.9
Cash, cash equivalents, and restricted cash at beginning of period	53.4		120.3
Cash, cash equivalents, and restricted cash at end of period	$	119.3	$	155.2

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

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

Encompass Health Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Continued)

(Unaudited)


		Nine Months Ended September 30,					Three Months Ended March 31,
		2022		2021			2023		2022
		(In Millions)
Decrease in cash, cash equivalents, and restricted cash		(16.2)		(136.0)
Cash, cash equivalents, and restricted cash at beginning of period		120.3		310.9
Cash, cash equivalents, and restricted cash at end of period		$	104.1	$	174.9
							(In Millions)
Reconciliation of Cash, Cash Equivalents, and Restricted Cash	Reconciliation of Cash, Cash Equivalents, and Restricted Cash					Reconciliation of Cash, Cash Equivalents, and Restricted Cash
Cash and cash equivalents at beginning of period	Cash and cash equivalents at beginning of period	$	49.4	$	185.6	Cash and cash equivalents at beginning of period	$	21.8	$	49.4
Restricted cash at beginning of period	Restricted cash at beginning of period	62.5		63.9		Restricted cash at beginning of period	31.6		62.5
Restricted cash included in other long-term assets at beginning of period	Restricted cash included in other long-term assets at beginning of period	0.4		21.5		Restricted cash included in other long-term assets at beginning of period	—		0.4
Cash, cash equivalents, and restricted cash in discontinued operations at beginning of period	Cash, cash equivalents, and restricted cash in discontinued operations at beginning of period	8.0		39.9		Cash, cash equivalents, and restricted cash in discontinued operations at beginning of period	—		8.0
Cash, cash equivalents, and restricted cash at beginning of period	Cash, cash equivalents, and restricted cash at beginning of period	$	120.3	$	310.9	Cash, cash equivalents, and restricted cash at beginning of period	$	53.4	$	120.3

Cash and cash equivalents at end of period	Cash and cash equivalents at end of period	$	59.8	$	65.7	Cash and cash equivalents at end of period	$	85.0	$	76.6
Restricted cash at end of period	Restricted cash at end of period	44.3		73.6		Restricted cash at end of period	34.3		57.3
Restricted cash included in other long-term assets at end of period		—		4.2

Cash, cash equivalents, and restricted cash in discontinued operations at end of period	Cash, cash equivalents, and restricted cash in discontinued operations at end of period	—		31.4		Cash, cash equivalents, and restricted cash in discontinued operations at end of period	—		21.3
Cash, cash equivalents, and restricted cash at end of period	Cash, cash equivalents, and restricted cash at end of period	$	104.1	$	174.9	Cash, cash equivalents, and restricted cash at end of period	$	119.3	$	155.2

Supplemental schedule of noncash operating, investing and financing activities:
Property and equipment additions through finance leases		$	—	$	42.2
Accrued purchases of property and equipment		(1.2)		25.5
Operating lease additions and adjustments		23.1		17.0
Supplemental schedule of noncash financing activity:						Supplemental schedule of noncash financing activity:

Joint venture contributions						Joint venture contributions	$	16.9	$	—

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 (the “Company” or “Encompass Health”), incorporated in Delaware in 1984, including its subsidiaries, is a provider of inpatient rehabilitation services. Our national network of inpatient rehabilitation hospitals stretches across 3637 states and Puerto Rico, with ~~a concentration~~concentrations of hospitals in the eastern half of the United States and Texas. As of ~~September 30, 2022,~~March 31, 2023, we operate ~~153~~156 inpatient rehabilitation hospitals. We are the sole owner of 9695 of these hospitals. We retain 50.0% to 97.5% ownership in the remaining 5761 jointly owned hospitals. ~~In addition, we manage two inpatient rehabilitation units through management contracts.~~

The accompanying unaudited condensed consolidated financial statements of Encompass Health Corporation and Subsidiaries should be read in conjunction with the consolidated financial statements and accompanying notes contained in Encompass Health’s Annual Report on Form 10-K filed with the United States Securities and Exchange Commission on February ~~25, 2022~~27, 2023 (the ~~“2021~~“2022 Form 10‑K”). The unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the SEC applicable to interim financial information. Certain information and note disclosures included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been omitted in these interim statements, as allowed by such SEC rules and regulations. The condensed consolidated balance sheet as of December 31, ~~2021~~2022 has been derived from audited financial statements, but it does not include all disclosures required by GAAP. However, we believe the disclosures are adequate to make the information presented not misleading.

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

Net Operating Revenues—

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


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2022		2021		2022		2021			2023		2022
Medicare	Medicare	$	711.2	$	649.3	$	2,091.7	$	1,914.3	Medicare	$	757.7	$	689.9
Medicare Advantage	Medicare Advantage	163.6		152.2		480.3		464.1		Medicare Advantage	186.2		156.0
Managed care	Managed care	126.1		123.1		381.0		350.3		Managed care	127.1		131.5
Medicaid	Medicaid	47.7		41.9		137.0		122.7		Medicaid	47.4		41.7
Other third-party payors	Other third-party payors	9.5		10.6		29.0		33.7		Other third-party payors	10.9		10.1
Workers’ compensation	Workers’ compensation	6.9		5.7		18.9		16.7		Workers’ compensation	5.7		6.1
Patients	Patients	3.5		4.9		12.8		14.2		Patients	2.7		5.2
Other income	Other income	21.0		23.1		60.6		56.4		Other income	22.7		18.8
Total	Total	$	1,089.5	$	1,010.8	$	3,211.3	$	2,972.4	Total	$	1,160.4	$	1,059.3

See Note 1, Summary of Significant Accounting Policies, to the consolidated financial statements accompanying the ~~2021~~2022 Form 10-K for our policy related to Net operating revenues.

Recently Adopted Accounting Pronouncements—

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

2.~~Separation~~Spin Off of Home Health and Hospice Business

~~Encompass Health Corporation and Subsidiaries~~

~~Notes to Condensed Consolidated Financial Statements~~

Date”). The ~~Distribution~~Spin Off was effective at 12:01 a.m., Eastern Time, on July 1, 2022. The ~~Distribution~~Spin Off was structured as a pro rata distribution of one share of Enhabit common stock for every two shares of Encompass Health common stock held of record as

Encompass Health Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

of the Record Date. No fractional shares were distributed. A cash payment was made in lieu of any fractional shares. As a result of the ~~Distribution,~~Spin Off, Enhabit is now an independent public company and its common stock is listed under the symbol “EHAB” on the New York Stock ~~Exchange (the “Separation”).~~Exchange.

In accordance with applicable accounting guidance, the historical results of Enhabit have been presented as discontinued operations and, as such, have been excluded from continuing operations for ~~all periods presented.~~the three months ended March 31, 2022. Our presentation of discontinued operations excludes any allocation of general corporate and overhead costs as well as interest expense. Prior to July 1, 2022, we operated under two reporting segments. We now operate under a single reporting segment. ~~In anticipation of the Separation, Enhabit transferred the “Encompass” trade name (net book value of $104.2 million) to us during the second quarter of 2022.~~

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

We will provide transition services to Enhabit predominately consisting of certain finance, information technology, human resources, employee benefits and other administrative services for a period of up to two years after the ~~Distribution.~~Spin Off. For the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, income related to these transition services of ~~$1.1~~$1.0 million were reflected as reductions to General and administrative expenses in our condensed consolidated statements of comprehensive income.

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

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

~~(1)~~ ~~Reflects amounts through the July 1,~~



	Three Months Ended March 31, 2022 ~~Distribution date.~~
Net operating revenue	$	274.3
Operating expenses:
Salaries and benefits	188.6
Other operating expenses	23.1
Occupancy costs	5.5
Supplies	6.3
General and administrative expenses	11.0
Depreciation and amortization	8.5
Total operating expenses	243.0
Interest expense and amortization of debt discounts and fees	0.1


Income from discontinued operations before income taxes	31.2
Provision for income tax expense	7.5
Income from discontinued operations, net of tax	23.7
Less: Net income attributable to noncontrolling interests included in discontinued operations	(0.6)
Net income attributable to Encompass Health included in discontinued operations	$	23.1

Transaction costs of ~~$19.8 million and $52.3 million incurred during the three and nine months ended September 30, 2022, respectively, and $4.6 million and~~ $9.6 million incurred during the three ~~and nine~~ months ended ~~September 30, 2021, respectively,~~March 31, 2022, are included in general and administrative expenses in the table above and in (Loss) income from discontinued

~~Encompass Health Corporation and Subsidiaries~~

~~Notes to Condensed Consolidated Financial Statements~~

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

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


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

See ~~also~~ Note 5,2, ~~Long-term Debt.~~Spin Off of Home Health and Hospice Business, to the consolidated financial statements accompanying the 2022 Form 10‑K for additional information.

3.Business Combinations

During the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, we completed the following acquisitions, none of which were individually material to our financial position, results of operations, or cash flows. Each acquisition was made to enhance our position and ability to provide inpatient rehabilitation services to patients in the applicable geographic areas.

•In ~~August 2022,~~March 2023, we acquired ~~60%~~50% of the operations of a ~~23-bed~~24-bed inpatient rehabilitation unit in ~~Grand Forks, North Dakota~~Eau Claire, Wisconsin when ~~Altru~~Hospital Sisters Health System contributed those operations to our existing joint venture.

Encompass Health Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

•In ~~August 2022,~~March 2023, we acquired 50% of the operations of a ~~22-bed~~48-bed inpatient rehabilitation unit in ~~Moline, Illinois~~Knoxville, Tennessee when ~~Trinity Medical Center~~Covenant Health contributed those operations to our existing joint venture.

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

~~Encompass Health Corporation and Subsidiaries~~

~~Notes to Condensed Consolidated Financial Statements~~

noncompete intangible ~~assets.~~assets; an income approach utilizing the relief from royalty method for the trade name intangible assets; and an income approach utilizing the excess earnings method for the certificate of need intangible asset. The aforementioned income ~~method~~methods utilize management’s estimates of future operating results and cash flows discounted using a weighted-average cost of capital. The excess of the fair value of the consideration conveyed over the fair value of the assets acquired was recorded as goodwill. The goodwill reflects our expectations of our ability to gain access to and penetrate the acquired hospitals’ historical patient base and the benefits of being able to leverage operational efficiencies with favorable growth opportunities based on positive demographic trends in these markets. ~~None of the~~The goodwill recorded as a result ~~from~~of these transactions that is deductible for federal income tax ~~purposes.~~purposes is $2.1 million.

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







Property and equipment, net	$	0.1
Identifiable intangible assets:
Noncompete agreements (useful lives of ~~2 to~~ 3 years)	$		~~0.3~~0.5
Trade names (useful lives of 20 years)	1.8
Certificate of need (useful life of 20 years)	7.0

Goodwill	~~10.4~~7.5

Total assets acquired	$	~~10.7~~16.9

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


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2022		2021		2022		2021			2023		2022
Fair value of assets acquired	Fair value of assets acquired	$	0.3	$	0.6	$	0.3	$	1.4	Fair value of assets acquired	$	9.4	$	—
Goodwill	Goodwill	10.4		5.3		10.4		8.8		Goodwill	7.5		—

Fair value of noncontrolling interest owned by joint venture partner	Fair value of noncontrolling interest owned by joint venture partner	(10.7)		(5.9)		(10.7)		(9.1)		Fair value of noncontrolling interest owned by joint venture partner	(16.9)		—

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

Pro Forma Results of Operations

The following table summarizes the results of operations of the above mentioned acquisitions from the dates of acquisitions included in our consolidated results of operations and the unaudited pro forma results of operations of the combined entity had the dates of the acquisitions been January 1, ~~2021~~2022 (in millions):

Net Operating Revenues Net Income Attributable to Encompass Health
Acquired entities only: Actual from acquisition date to September 30, 2022 $ — $ —
Combined entity: Supplemental pro forma from 07/01/22-9/30/22 1,090.4 45.4
Combined entity: Supplemental pro forma from 07/01/21-9/30/21 1,012.8 100.1
Combined entity: Supplemental pro forma from 01/01/22-9/30/22 3,216.1 181.8
Combined entity: Supplemental pro forma from 01/01/21-9/30/21 2,978.3 320.9


	Net Operating Revenues		Net Income Attributable to Encompass Health
Acquired entities only: Actual from acquisition date to March 31, 2023	$	—	$	—
Combined entity: Supplemental pro forma from 01/01/23-3/31/23	1,163.7		87.8
Combined entity: Supplemental pro forma from 01/01/22-3/31/22	1,063.9		87.8

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 ~~2021~~2022 reporting period. See Note 2,3, Business Combinations, to the consolidated financial statements accompanying the ~~2021~~2022 Form 10‑K for information regarding acquisitions completed in ~~2021.~~2022.

108

Encompass Health Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

4.Variable Interest Entities

As of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, we consolidated eight ~~and ten, 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% as of ~~September 30, 2022.~~March 31, 2023. 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 sheets, are as follows (in millions):


		September 30, 2022		December 31, 2021			March 31, 2023		December 31, 2022
Assets	Assets					Assets
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	0.2	$	—	Cash and cash equivalents	$	0.4	$	0.2
Accounts receivable	Accounts receivable	31.0		33.6		Accounts receivable	30.7		34.0
Other current assets	Other current assets	7.1		5.9		Other current assets	8.7		6.7
Current assets of discontinued operations		—		4.5

Total current assets	Total current assets	38.3		44.0		Total current assets	39.8		40.9
Property and equipment, net	Property and equipment, net	118.6		116.3		Property and equipment, net	126.0		129.0
Operating lease right-of-use assets	Operating lease right-of-use assets	2.1		3.2		Operating lease right-of-use assets	1.4		1.7
Goodwill	Goodwill	15.9		15.9		Goodwill	15.9		15.9
Intangible assets, net	Intangible assets, net	1.7		2.0		Intangible assets, net	1.4		1.5
Other long-term assets	Other long-term assets	31.1		31.1		Other long-term assets	18.7		18.8
Long-term assets of discontinued operations		—		13.7

Total assets	Total assets	$	207.7	$	226.2	Total assets	$	203.2	$	207.8
Liabilities	Liabilities					Liabilities
Current liabilities:	Current liabilities:					Current liabilities:
Current portion of long-term debt	Current portion of long-term debt	$	1.0	$	1.0	Current portion of long-term debt	$	0.8	$	0.8
Current operating lease liabilities	Current operating lease liabilities	0.8		1.5		Current operating lease liabilities	—		0.4
Accounts payable	Accounts payable	5.5		5.9		Accounts payable	5.7		7.0
Accrued expenses and other current liabilities	Accrued expenses and other current liabilities	18.9		19.0		Accrued expenses and other current liabilities	22.0		23.9
Current liabilities of discontinued operations		—		0.4

Total current liabilities	Total current liabilities	26.2		27.8		Total current liabilities	28.5		32.1
Long-term debt, net of current portion	Long-term debt, net of current portion	7.8		8.6		Long-term debt, net of current portion	14.3		14.5
Long-term operating lease liabilities	Long-term operating lease liabilities	1.4		1.8		Long-term operating lease liabilities	1.3		1.3

Total liabilities	Total liabilities	$	35.4	$	38.2	Total liabilities	$	44.1	$	47.9

119

Encompass Health Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

5.Long-term Debt

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


		September 30, 2022		December 31, 2021			March 31, 2023		December 31, 2022
Credit Agreement—	Credit Agreement—					Credit Agreement—
Advances under revolving credit facility	Advances under revolving credit facility	$	40.0	$	200.0	Advances under revolving credit facility	$	40.0	$	55.0
Term loan facilities		—		238.5

Bonds payable—	Bonds payable—					Bonds payable—
5.125% Senior Notes due 2023		—		99.6

5.75% Senior Notes due 2025	5.75% Senior Notes due 2025	347.6		347.0		5.75% Senior Notes due 2025	347.9		347.7
4.50% Senior Notes due 2028	4.50% Senior Notes due 2028	781.0		786.8		4.50% Senior Notes due 2028	782.6		781.8
4.75% Senior Notes due 2030	4.75% Senior Notes due 2030	778.4		784.7		4.75% Senior Notes due 2030	779.6		779.0
4.625% Senior Notes due 2031	4.625% Senior Notes due 2031	390.4		393.7		4.625% Senior Notes due 2031	390.8		390.6
Other notes payable	Other notes payable	41.7		47.7		Other notes payable	52.5		53.1
Finance lease obligations	Finance lease obligations	366.1		380.3		Finance lease obligations	355.1		359.8
		2,745.2		3,278.3			2,748.5		2,767.0
Less: Current portion	Less: Current portion	(26.2)		(37.8)		Less: Current portion	(26.0)		(25.2)
Long-term debt, net of current portion	Long-term debt, net of current portion	$	2,719.0	$	3,240.5	Long-term debt, net of current portion	$	2,722.5	$	2,741.8

The following chart shows scheduled principal payments due on long-term debt for the next five years and thereafter (in millions):


		Face Amount		Net Amount			Face Amount		Net Amount
October 1 through December 31, 2022		$	5.1	$	5.1
2023		27.1		27.1
April 1 through December 31, 2023						April 1 through December 31, 2023	$	20.2	$	20.2
2024	2024	80.7		80.7		2024	39.2		39.2
2025	2025	384.1		381.6		2025	381.5		379.4
2026	2026	29.9		29.9		2026	27.6		27.6
2027	2027	44.2		44.2		2027	81.6		81.6
2028						2028	830.1		812.7
Thereafter	Thereafter	2,226.8		2,176.6		Thereafter	1,417.4		1,387.8
Total	Total	$	2,797.9	$	2,745.2	Total	$	2,797.6	$	2,748.5

On December 9, 2021, we announced the commencement of a consent solicitation of holders of our 5.75% Senior Notes due 2025, 4.50% Senior Notes due 2028 (the “2028 Notes”), 4.75% Senior Notes due 2030 (the “2030 Notes”), and 4.625% Senior Notes due 2031 (the “2031 Notes” and collectively the “Senior Notes”) for the adoption of certain amendments to an indenture (the “Base Indenture”) dated as of December 1, 2009, as supplemented by each Senior Notes’ respective supplemental indenture (together with the Base Indenture, the “Indenture”), which provided us with greater flexibility in effecting the ~~spin off~~Spin Off discussed in Note 2, ~~Separation~~Spin Off of Home Health and Hospice Business. Each Indenture ~~contains~~contained restrictive covenants that, among other things, ~~limit~~limited our ability and the ability of certain of our subsidiaries to make certain asset dispositions, investments, and distributions to holders of our capital stock. The amendments to the Indentures ~~permit~~permitted us, subject to the leverage ratio condition set forth below, to distribute to our equity holders in one or more transactions (a “Distribution”) some or all of the common stock of a subsidiary that holds substantially all of the assets of our home health and hospice business. We may make any such distribution so long as the Leverage Ratio (as defined in each Indenture) is no more than 3.5 to 1.0 on a pro forma basis after giving effect thereto. The amendments also ~~reduce~~reduced the capacity under our restricted payments builder basket under each existing Indenture for the 2028 Notes, 2030 Notes, and 2031 Notes by $200 million and ~~amends~~amended the definition of “Consolidated Net Income” to allow us to exclude from Consolidated Net Income (a component of the Leverage Ratio) any fees, expenses or charges related to any Distribution and the solicitation of consents from the holders of the Senior Notes. In December 2021 and January 2022, we received the requisite consents for the adoption of these amendments. Under the terms of the amendments, we agreed to pay the holders of the Senior Notes a total of $40.5 million, excluding fees. We paid $20.0 million and $20.5 million in January and June 2022, respectively.

~~Encompass Health Corporation and Subsidiaries~~

~~Notes to Condensed Consolidated Financial Statements~~

In March 2022, we redeemed the remaining $100 million in outstanding principal amount of the 5.125% Senior Notes due 2023 (the “2023 Notes”) using capacity under our revolving credit facility. Pursuant to the terms of the 2023 Notes, this

Encompass Health Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

optional redemption was made at a price of par. As a result of this redemption, we recorded a $0.3 million Loss on early extinguishment of debt during the three months ended March 31, 2022.

In June 2022, Encompass Health entered into the Second Amendment to Fifth Amended and Restated Credit Agreement, by and among Encompass Health, certain of its subsidiaries, as guarantors, Barclays Bank PLC, as administrative agent and collateral agent and various other lenders, which provided a consent to the Enhabit Credit Facilities (as defined below) and related matters and modified certain terms of Encompass Health’s Fifth Amended and Restated Credit Agreement, dated as of November 25, 2019 (the “2019 Credit Agreement,” and, as amended, the “Credit Agreement”). Capitalized terms used, but not otherwise defined, in the following bullet points are defined in the Credit Agreement. The amendment includes the following modifications:

•Amendment of definition of “Consolidated Net Income” to exclude from the calculation thereof, at Encompass Health’s option, net income or loss from disposed, abandoned, transferred, closed or discontinued operations until such disposition, abandonment, transfer, closure of discontinuance of operations shall have been consummated.

•Addition of Section 1.08, “SpinCo Credit Facilities Transactions,” to provide that the Loan Documents will not prevent the consummation of the SpinCo Credit Facilities Transactions and that the SpinCo Credit Facilities Transactions will not give rise to any Default or constitute a utilization of any basket under any Loan Document.

•~~Amendment of Section 2.11(e) to provide that a Prepayment Notice may be conditioned upon the effectiveness of other credit facilities, indentures or similar agreements or other transactions.~~

•Addition of Section 5.18, “SpinCo Distribution,” to provide that within three (3) Business Days following the incurrence of indebtedness under the SpinCo Credit Facilities, Encompass will have consummated the SpinCo Distribution in compliance with the Restricted Payments covenants of the Credit Agreement, and following the consummation of the SpinCo Distribution, no obligors in respect of the SpinCo Credit Facilities will be Restricted Subsidiaries.

•Amendment of the definition of “Senior Notes” to include Encompass’ 4.625% Senior Notes due 2031 and the definition of “Consolidated Total Indebtedness” to exclude Indebtedness under any Senior Note for which an irrevocable notice of redemption has been issued in connection with or incidental to any SpinCo Distribution.

~~All other material terms of the existing credit agreement remain the same and are described in Note 10,~~ ~~Long-term Debt,~~ to the consolidated financial statements accompanying the 2021 Form 10-K. Encompass Health’s obligations under the Credit Agreement are secured by the current and future personal property of Encompass Health and its subsidiary guarantors, which, in general, are Encompass Health’s wholly-owned subsidiaries.

On June 30, 2022, Enhabit distributed $566.6 million to Encompass Health who used it to fully repay both the $250 million outstanding balance of the Encompass Health revolving credit facility and approximately $236 million of the Encompass Health term loan. As a result of this repayment, we recorded a $1.1 million ~~Loss on early extinguishment of debt~~ ~~during the three months ended June 30, 2022.~~

~~In October 2022, Encompass Health entered into the Sixth Amended and Restated Credit Agreement primarily to extend the maturity date to October 7, 2027.~~

~~Encompass Health Corporation and Subsidiaries~~

~~Notes to Condensed Consolidated Financial Statements~~

6.Redeemable Noncontrolling Interests

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


		Nine Months Ended September 30,					Three Months Ended March 31,
		2022		2021			2023		2022
Balance at beginning of period	Balance at beginning of period	$	42.2	$	31.6	Balance at beginning of period	$	35.6	$	42.2
Net income attributable to noncontrolling interests	Net income attributable to noncontrolling interests	5.0		7.3		Net income attributable to noncontrolling interests	2.1		1.9
Distributions declared	Distributions declared	(4.3)		(7.0)		Distributions declared	(0.2)		(0.9)

Purchase of redeemable noncontrolling interests		—		0.6
Spin off of Enhabit, Inc.		(5.1)		—

Balance at end of period	Balance at end of period	$	37.8	$	32.5	Balance at end of period	$	37.5	$	43.2

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 September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2022		2021		2022		2021			2023		2022
Net income attributable to nonredeemable noncontrolling interests	Net income attributable to nonredeemable noncontrolling interests	$	20.0	$	24.5	$	61.8	$	73.6	Net income attributable to nonredeemable noncontrolling interests	$	23.5	$	20.7
Net income attributable to redeemable noncontrolling interests	Net income attributable to redeemable noncontrolling interests	1.6		2.2		5.0		7.3		Net income attributable to redeemable noncontrolling interests	2.1		1.9
Net income attributable to noncontrolling interests	Net income attributable to noncontrolling interests	$	21.6	$	26.7	$	66.8	$	80.9	Net income attributable to noncontrolling interests	$	25.6	$	22.6

See also Note 7, Fair Value Measurements.

7.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 September 30, 2022		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 March 31, 2023											As of March 31, 2023	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)

Equity securities (2)	Equity securities (2)	$	98.5	$	3.5	$	95.0	$	—	M	Equity securities (2)	$	111.6	$	3.8	$	107.8	$	—	M

Redeemable noncontrolling interests	Redeemable noncontrolling interests	37.8		—		—		37.8		I	Redeemable noncontrolling interests	37.5		—		—		37.5		I
As of December 31, 2021
As of December 31, 2022											As of December 31, 2022

Equity securities (2)	Equity securities (2)	$	82.2	$	4.1	$	78.1	$	—	M	Equity securities (2)	$	110.0	$	3.7	$	106.3	$	—	M

Redeemable noncontrolling interests	Redeemable noncontrolling interests	42.2		—		—		42.2		I	Redeemable noncontrolling interests	35.6		—		—		35.6		I

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

(2) As of ~~September 30, 2022, $28.5~~March 31, 2023, $29.5 million are included in Other current assets and ~~$70.0~~$82.1 million are included in Other long-term assets in the condensed consolidated balance sheet. As of December 31, ~~2021, $82.2~~2022, $30.9 million are included in Other current assets and $79.1 million are included in Other long-term assets in the condensed consolidated balance sheet.

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 ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ 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 ~~2021~~2022 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 September 30, 2022				As of December 31, 2021					As of March 31, 2023				As of December 31, 2022
		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	$	40.0	$	40.0	$	200.0	$	200.0	Advances under revolving credit facility	$	40.0	$	40.0	$	55.0	$	55.0
Term loan facilities		—		—		238.5		239.6
5.125% Senior Notes due 2023		—		—		99.6		100.2

5.75% Senior Notes due 2025	5.75% Senior Notes due 2025	347.6		347.4		347.0		357.9		5.75% Senior Notes due 2025	347.9		348.6		347.7		347.7
4.50% Senior Notes due 2028	4.50% Senior Notes due 2028	781.0		690.6		786.8		823.0		4.50% Senior Notes due 2028	782.6		746.9		781.8		726.7
4.75% Senior Notes due 2030	4.75% Senior Notes due 2030	778.4		667.5		784.7		824.0		4.75% Senior Notes due 2030	779.6		728.3		779.0		703.7
4.625% Senior Notes due 2031	4.625% Senior Notes due 2031	390.4		317.4		393.7		407.0		4.625% Senior Notes due 2031	390.8		352.2		390.6		342.2
Other notes payable	Other notes payable	41.7		41.7		47.7		47.7		Other notes payable	52.5		52.5		53.1		53.1
Financial commitments:	Financial commitments:									Financial commitments:
Letters of credit	Letters of credit	—		32.7		—		38.2		Letters of credit	—		33.6		—		32.7

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 ~~2021~~2022 Form 10‑K.

8.Share-Based Payments

During the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, we issued a total of ~~0.9~~0.6 million restricted stock awards to members of our management team and our board of directors. Of the restricted stock awards issued to members of our management team, ~~0.2~~0.3 million contain only a service condition, while the remainder contain ~~both~~ a service performance and ~~a performance~~market condition. For the awards that include a performance and market 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 and the applicable three year market condition measurement period. Additionally, we granted ~~0.2~~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 ~~2021~~2022 Form 10‑K.

9.Income Taxes

Our Provision for income tax expense of ~~$21.8~~$31.9 million and $23.6 million for the three months ended ~~September 30,~~March 31, 2023 and March 31, 2022, respectively, primarily resulted from the application of our estimated effective blended federal and state income tax ~~rate as well as state rate and apportionment changes offset by the release of a portion of an uncertain tax position related to the separation of our home health and hospice business.~~

~~Our~~ ~~Provision for income tax expense~~ of $68.2 million for the nine months ended September 30, 2022 primarily resulted from the application of our estimated effective blended federal and state income tax rate as well as the establishment of an uncertain tax position related to the separation of our home health and hospice business.

~~Our~~ ~~Provision for income tax expense~~ ~~of $26.2 million for the three 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 $79.4 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 offset by tax benefits resulting from share-based compensation windfalls.

1512

Encompass Health Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

10.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 September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2022		2021		2022		2021			2023		2022
Basic:	Basic:									Basic:
Numerator:	Numerator:									Numerator:
Income from continuing operations	Income from continuing operations	$	85.5	$	102.1	$	231.7	$	310.9	Income from continuing operations	$	114.3	$	86.4
Less: Net income attributable to noncontrolling interests included in continuing operations	Less: Net income attributable to noncontrolling interests included in continuing operations	(21.6)		(26.3)		(65.5)		(79.6)		Less: Net income attributable to noncontrolling interests included in continuing operations	(25.6)		(22.0)
Less: Income from continuing operations allocated to participating securities	Less: Income from continuing operations allocated to participating securities	(0.3)		(0.3)		(0.6)		(0.9)		Less: Income from continuing operations allocated to participating securities	(0.6)		(0.2)

Income from continuing operations attributable to Encompass Health common shareholders	Income from continuing operations attributable to Encompass Health common shareholders	63.6		75.5		165.6		230.4		Income from continuing operations attributable to Encompass Health common shareholders	88.1		64.2
(Loss) income from discontinued operations, net of tax	(Loss) income from discontinued operations, net of tax	(18.5)		24.6		16.7		90.6		(Loss) income from discontinued operations, net of tax	(1.0)		23.7
Less: Net income attributable to noncontrolling interests included in discontinued operations	Less: Net income attributable to noncontrolling interests included in discontinued operations	—		(0.4)		(1.3)		(1.3)		Less: Net income attributable to noncontrolling interests included in discontinued operations	—		(0.6)
Less: Income from discontinued operations allocated to participating securities	Less: Income from discontinued operations allocated to participating securities	—		(0.1)		(0.1)		(0.5)		Less: Income from discontinued operations allocated to participating securities	—		(0.1)
(Loss) income from discontinued operations attributable to Encompass Health common shareholders	(Loss) income from discontinued operations attributable to Encompass Health common shareholders	(18.5)		24.1		15.3		88.8		(Loss) income from discontinued operations attributable to Encompass Health common shareholders	(1.0)		23.0
Net income attributable to Encompass Health common shareholders	Net income attributable to Encompass Health common shareholders	$	45.1	$	99.6	$	180.9	$	319.2	Net income attributable to Encompass Health common shareholders	$	87.1	$	87.2
Denominator:	Denominator:									Denominator:
Basic weighted average common shares outstanding	Basic weighted average common shares outstanding	99.2		99.0		99.2		99.0		Basic weighted average common shares outstanding	99.4		99.2
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	$	0.64	$	0.76	$	1.67	$	2.32	Continuing operations	$	0.89	$	0.65
Discontinued operations	Discontinued operations	(0.19)		0.24		0.15		0.90		Discontinued operations	(0.01)		0.23
Net income	Net income	$	0.45	$	1.00	$	1.82	$	3.22	Net income	$	0.88	$	0.88

Diluted:	Diluted:									Diluted:
Numerator:	Numerator:									Numerator:
Income from continuing operations	Income from continuing operations	$	85.5	$	102.1	$	231.7	$	310.9	Income from continuing operations	$	114.3	$	86.4
Less: Net income attributable to noncontrolling interests included in continuing operations	Less: Net income attributable to noncontrolling interests included in continuing operations	(21.6)		(26.3)		(65.5)		(79.6)		Less: Net income attributable to noncontrolling interests included in continuing operations	(25.6)		(22.0)

Income from continuing operations attributable to Encompass Health common shareholders	Income from continuing operations attributable to Encompass Health common shareholders	63.9		75.8		166.2		231.3		Income from continuing operations attributable to Encompass Health common shareholders	88.7		64.4
(Loss) income from discontinued operations, net of tax	(Loss) income from discontinued operations, net of tax	(18.5)		24.6		16.7		90.6		(Loss) income from discontinued operations, net of tax	(1.0)		23.7
Less: Net income attributable to noncontrolling interests included in discontinued operations	Less: Net income attributable to noncontrolling interests included in discontinued operations	—		(0.4)		(1.3)		(1.3)		Less: Net income attributable to noncontrolling interests included in discontinued operations	—		(0.6)
(Loss) income from discontinued operations attributable to Encompass Health common shareholders	(Loss) income from discontinued operations attributable to Encompass Health common shareholders	(18.5)		24.2		15.4		89.3		(Loss) income from discontinued operations attributable to Encompass Health common shareholders	(1.0)		23.1
Net income attributable to Encompass Health common shareholders	Net income attributable to Encompass Health common shareholders	$	45.4	$	100.0	$	181.6	$	320.6	Net income attributable to Encompass Health common shareholders	$	87.7	$	87.5
Denominator:	Denominator:									Denominator:
Diluted weighted average common shares outstanding	Diluted weighted average common shares outstanding	100.5		100.2		100.3		100.1		Diluted weighted average common shares outstanding	100.9		100.2
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	$	0.63	$	0.76	$	1.66	$	2.31	Continuing operations	$	0.88	$	0.64
Discontinued operations	Discontinued operations	(0.18)		0.24		0.15		0.89		Discontinued operations	(0.01)		0.23
Net income	Net income	$	0.45	$	1.00	$	1.81	$	3.20	Net income	$	0.87	$	0.87

1613

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 September 30,		Nine Months Ended September 30,			Three Months Ended March 31,
		2022	2021	2022	2021		2023	2022
Basic weighted average common shares outstanding	Basic weighted average common shares outstanding	99.2	99.0	99.2	99.0	Basic weighted average common shares outstanding	99.4	99.2

Restricted stock awards, dilutive stock options, and restricted stock units	Restricted stock awards, dilutive stock options, and restricted stock units	1.3	1.2	1.1	1.1	Restricted stock awards, dilutive stock options, and restricted stock units	1.5	1.0
Diluted weighted average common shares outstanding	Diluted weighted average common shares outstanding	100.5	100.2	100.3	100.1	Diluted weighted average common shares outstanding	100.9	100.2

See Note 17, Earnings per Common Share, to the consolidated financial statements accompanying the ~~2021~~2022 Form 10‑K for additional information related to our common stock.

11.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.

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.

1714

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, ~~2021,~~2022, 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, ~~2021~~2022 filed on February ~~25, 2022~~27, 2023 (collectively, the ~~“2021~~“2022 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 Statement Regarding Forward-Looking Statements” on page ii of this report, which is incorporated herein by reference 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 ~~2021~~2022 Form 10‑K.

Executive Overview

Our Business

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 3637 states and Puerto Rico, with concentrations in the eastern half of the United States and Texas. As of ~~September 30, 2022,~~March 31, 2023, we operate ~~153~~156 inpatient rehabilitation ~~hospitals and manage two inpatient rehabilitation units through management contracts.For~~hospitals. For additional information about our business, see Item 1, Business, ~~of the 2021 Form 10‑K.~~

~~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 have experienced 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 ~~2021~~2022 Form 10-K. For discussion of the financial and operational impacts we are experiencing in 2022 as a result of the pandemic, see “Key Challenges” below and the “Results of Operations” section of this Item.10‑K.

~~Separation~~Spin Off of Home Health and Hospice Business

On July 1, 2022, we completed the previously announced separation of our home health and hospice business through the distribution (the ~~“Distribution”~~“Spin Off”) of all of the outstanding shares of common stock, par value $0.01 per share, of Enhabit, Inc. (“Enhabit”) to the stockholders of record of Encompass Health as of the close of business on June 24, 2022 (the “Record Date”). The ~~Distribution~~Spin Off was effective at 12:01 a.m., Eastern Time, on July 1, 2022. The ~~Distribution~~Spin Off was structured as a pro rata distribution of one share of Enhabit common stock for every two shares of Encompass Health common stock held of record as of the Record Date. No fractional shares were distributed. A cash payment was made in lieu of any fractional shares. As a result of the ~~Distribution,~~Spin Off, Enhabit is now an independent public company and its common stock is listed under the symbol “EHAB” on the New York Stock ~~Exchange (the “Separation”).~~Exchange.

In accordance with applicable accounting guidance, the historical results of Enhabit have been presented as discontinued operations and, as such, have been excluded from continuing operations for all periods presented. Our presentation of discontinued operations excludes any allocation of general corporate and overhead costs as well as interest expense. Prior to July 1, 2022, we operated under two reporting segments. We now operate under a single reporting segment. For additional information see Note 2, ~~Separation~~Spin Off of Home Health and Hospice Business, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report.

Hospice Business, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report.

~~2022~~

2023 Overview

During the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, Net operating revenues increased ~~7.8% and 8.0%~~9.5% over the same ~~periods~~period of ~~2021~~2022 due primarily to volume growth. See “Results of Operations” section of this Item for additional volume ~~and pricing~~ information.

We continued our development and expansion efforts in ~~2022.~~2023. We:

•began operating our new ~~40-bed~~51-bed inpatient rehabilitation hospital and 22-bed hospital-in-hospital unit in ~~Shiloh, Illinois~~Knoxville, Tennessee with our joint venture partner ~~BJC HealthCare~~Covenant Health in ~~February 2022;~~March 2023;

•began operating our new 36-bed inpatient rehabilitation hospital in Eau Claire, Wisconsin with our joint venture partner Hospital Sisters Health System in March 2023;

•began operating our new 40-bed inpatient rehabilitation hospital in ~~St. Augustine, Florida in March 2022;~~

•~~began operating our new 60-bed inpatient rehabilitation hospital in Libertyville, Illinois in March 2022;~~

•~~began operating our new 50-bed inpatient rehabilitation hospital in Lakeland, Florida in May 2022;~~

•~~began operating our new 40-bed inpatient rehabilitation hospital in Cape Coral, Florida~~Owasso, Oklahoma with our joint venture partner ~~Lee Healthcare Holdings, LLC~~Ascension St. John in ~~June 2022;~~

•~~began operating our new 50-bed inpatient rehabilitation hospital in Jacksonville, Florida in June 2022;~~

•~~began operating our new 40-bed inpatient rehabilitation hospital in Grand Forks, North Dakota with our joint venture partner Altru in August 2022;~~

•~~began operating our new 40-bed inpatient rehabilitation hospital in Moline, Illinois with our joint venture partner UnityPoint Health – Trinity in August 2022;~~

•~~began operating our new 50-bed inpatient rehabilitation hospital in Naples, Florida in September 2022;~~March 2023;

•continued our capacity expansions by adding 875 new beds to existing hospitals; and

•announced or continued the development of the following hospitals:


	Number of New Beds
~~Expected Opening~~	2023	2024(2)	2025(2)
~~Eau Claire, Wisconsin~~2026~~(1)~~(2)	36	—	—
~~Owasso, Oklahoma(1)~~	40	—	—
Clermont, Florida(3)	50	—	—
~~Knoxville, Tennessee(1)~~	73	—	—
Bowie, Maryland	60	—	—	—
Prosper, Texas	40	—	—	—
Columbus, Georgia(1)	40	—	—	—
Fitchburg, Wisconsin	—	56	—	—
Atlanta, Georgia(1)	—	40	—	—
Kissimmee, Florida	—	50	—	—
Fort Mill, South Carolina	—	39	—
~~Atlanta, Georgia(1)~~	—	40	—
Louisville, Kentucky(1)	—	40	—	—
Johnston, Rhode Island	—	50	—	—
Houston, Texas	—	6061	—	—
Lake Worth, Florida	—	—	50	—
Fort Myers, Florida(1)	—	—	60	—
Norristown, Pennsylvania	—	—	50	—
Wildwood, Florida	—	—	50	—
Athens, Georgia(1)	—	—	40	—
St. Petersburg, Florida	—	—	50	—
Daytona Beach, Florida	—	—	50	—
Palm Beach Gardens, Florida	—	—	—	50
Amarillo, Texas	—	—	—	40
Strongsville, Ohio	—	—	—	40
~~Norristown, Pennsylvania~~Danbury, Connecticut	—	—	50
~~Wildwood, Florida~~	—	—	50
~~Athens, Georgia(1)~~	—	—	40
~~St. Petersburg, Florida~~	—	—	50

(1) Expected joint ~~venture~~venture;

(2) Opening dates are tentative

(3) Opened in April 2023

We also continued our shareholder ~~distributions. In October 2021, February 2022, and May 2022, our board~~distributions during the three months ended March 31, 2023 by paying a quarterly cash dividend of ~~directors declared cash dividends of $0.28~~$0.15 per share ~~that were paid~~on our common stock in January ~~2022, April 2022,~~ and ~~July 2022, respectively. In July 2022, our board of directors declared~~declaring a cash dividend of $0.15 per share in February that was paid ~~on October 17, 2022. On October 19, 2022, our board of directors declared a cash dividend of $0.15 per share, payable on January 17, 2023 to stockholders of record on January 3, 2023.~~in April. For additional information see the “Liquidity and Capital Resources” section of this Item.

Business Outlook

~~Notwithstanding the current impacts from the pandemic, we~~We remain highly optimistic regarding the intermediate and long-term prospects ~~for~~of our 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, reaching approximately 73 million people over the age of 65 by 2030. ~~Even more~~More specifically, the average age of our Medicare 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~~inpatient rehabilitation services. ~~In addition, we believe we can address the demand for facility-based post-acute care services in markets where we currently do not have a presence by constructing or acquiring new hospitals.~~

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, among other things, the quality of our clinical outcomes, our cost-effectiveness, our financial strength, and our extensive application of technology.

~~Although~~ We also believe our competitive strengths discussed in Item 1, Business, “Competitive Strengths,” of the 2022 Form 10-K, give us the ability to adapt and succeed in a healthcare industry ~~is currently engaged in addressing the~~facing regulatory uncertainty around attempts to improve outcomes and reduce costs.

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 2025. We continue to have a strong, well-capitalized balance sheet, including a substantial portfolio of owned real estate, and ~~significant~~ample availability under our revolving credit ~~facility. For these and other reasons,~~facility, which along with the cash flows generated from operations should, we believe, ~~we will be able~~provide sufficient support for our ability to adapt to changes in reimbursement, sustain our business model, and grow through ~~acquisition~~de novo and ~~consolidation opportunities as they arise.~~bed additions. See also Item 1, Business, “Competitive Strengths” and “Strategy and ~~2022~~2023 Strategic Priorities” of the ~~2021~~2022 Form 10‑K.

Key Challenges

Healthcare is a highly regulated industry facing many well-publicized regulatory and reimbursement challenges. Medicare reimbursement for inpatient rehabilitation facilities (“IRFs”) has recently undergone significant changes. The future of many aspects of healthcare regulation generally and Medicare reimbursement specifically remains uncertain. Successful healthcare providers are those able to adapt to changes in the regulatory and operating environments, build strategic relationships across the healthcare continuum, 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 ~~2021~~2022 Form 10‑K.

As we continue to execute our business plan, the following are some of the key 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, including anti-kickback and anti-fraud requirements, 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. 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, “Reimbursement Risks” and ~~Item 7,~~ ~~Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Executive Overview—Key Challenges,”~~“Other Regulatory Risks” of the ~~2021~~2022 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. Since the beginning of the pandemic,~~Reimbursement claims made by healthcare providers, ~~have experienced staffing and supply shortages and associated cost increases. In response~~including inpatient rehabilitation hospitals, are subject to ~~the public health emergency associated with the pandemic, Congress and the~~audit from time to time by governmental payors, such as 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

state Medicaid programs, their agents, such as the ~~Coronavirus Aid, Relief, and Economic Security Act of 2020 (the “CARES Act”), which suspended sequestration, an automatic 2% reduction of~~ Medicare ~~program payments~~Administrative Contractors that act as fiscal intermediaries for all ~~healthcare~~Medicare billings, other auditors contracted by CMS, and private insurance carriers, as well as the United States Department of Health and Human Services Office of Inspector General. These audits as well as the ordinary course claim reviews of our billings result in payment denials, including recoupment of previously paid claims from current accounts receivable. Healthcare providers ~~for~~can challenge any denials through an administrative appeals process that can be extremely lengthy, taking several years. During the ~~period~~first quarter of ~~May 1~~2023, a Supplemental Medical Review Contractor initiated a review of claims from March 2020 through December ~~31, 2020. The sequestration suspension was extended a number~~2020 totaling approximately $21 million. We have received initial results representing approximately $9 million in claims and approximately 78% of ~~times. Sequestration resumed as~~these have been approved. For additional details of April 1, 2022, but was only a 1% payment reduction through June 30, 2022. On July 1, 2022, the full 2% Medicare payment reduction resumed. During the nine months ended September 30, 2022, the sequestration suspension provided additional revenues of approximately $24 million. The CARES Act and CMS regulatory actions include a number of other provisions affecting our ~~reimbursement and operations in both segments. These provisions are discussed in~~claim reviews, see Item 1, Business, “Sources of ~~Revenue,~~Revenues,” Item 1A, Risk Factors, “Reimbursement Risks,” and ~~Item 7,~~Note 1, ~~Management’s Discussion and Analysis~~Summary of ~~Financial Condition and Results of Operations~~Significant Accounting Policies, ~~“Results of Operations”~~“Net Operating Revenues” and “Accounts Receivable,” of the ~~2021~~2022 Form 10-K.

•Changes ~~to Our~~in Medicare Reimbursement and Regulatory Requirements for Operating ~~Environment Resulting from Federal Regulatory and Legislative Actions~~IRFs. On ~~July 27, 2022,~~April 3, 2023, CMS released its notice of ~~final~~proposed rulemaking for fiscal year ~~2023~~2024 for IRFs (the ~~“2023 Final IRF~~“2024 Proposed Rule”) under the inpatient rehabilitation facility prospective payment ~~system (the “IRF-PPS”).~~system. The ~~2023 Final IRF~~2024 Proposed Rule will implement a net ~~3.9%~~3.0% market basket increase (market basket update of ~~4.2%~~3.2% reduced by a productivity adjustment of ~~0.3%~~0.2%) effective for discharges between October 1, ~~2022~~2023 and September 30, ~~2023.~~2024. The ~~2023 Final IRF~~2024 Proposed 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, updates to outlier payments, ~~and~~ updates to the case-mix group relative weights and average lengths of stay ~~values.~~values, and modifications of the IRF Quality Reporting Program. Based on our analysis that utilizes, among other things, the acuity of our patients annualized over a twelve-month period ended ~~June 30, 2022,~~February 28, 2023, our experience with outlier payments over this same time frame, and other factors, we believe the ~~2023 Final IRF~~2024 Proposed Rule will result in a net increase to our Medicare payment rates of approximately ~~4.0%~~2.9% effective October 1, ~~2022.~~2023.

The proposed rulemaking for fiscal year 2023 for the IRF-PPS included a request for comment on a potential change that could be included in future rulemaking. Based on a recent United States Department of Health and Human Services Office of Inspector General (“HHS-OIG”) report, CMS is considering whether to modify the IRF “transfer” payment policy to reduce reimbursement for early discharges to home health, similar to how early discharges to acute care hospitals, skilled nursing facilities, long-term acute care hospitals, or another IRF, are currently treated under the IRF-PPS. HHS-OIG estimated that its recommended change to the policy could reduce total IRF industry reimbursements by approximately 6% based on 2017 and 2018 data. In the 2023 Final IRF Rule, CMS acknowledged industry comments on the policy and noted those comments would be taken under advisement for future rulemaking.

On December 14, 2020, CMS announced the proposal of a five-year review choice demonstration (“RCD”) for inpatient rehabilitation services. CMS plans to implement the demonstration in Alabama, and then expand to Pennsylvania, Texas, and California. The timing of this demonstration is not known. We operate 46 hospitals (representing approximately 33% of our IRF Medicare claims) in those four states. After the initial four states, CMS intends to expand the demonstration to include additional IRFs based on the Medicare Administrative Contractor to which those IRFs submit claims. Under the demonstration, participating IRFs would have an initial choice between pre-claim or post-payment review of 100% of claims submitted to demonstrate compliance with applicable Medicare coverage and clinical documentation requirements. Under the pre-claim review choice, services could begin prior to the submission of the review request and continue while the decision is being made. The pre-claim review request with required documentation must be submitted and reviewed before the final claim is submitted for payment. Under the post-payment review choice, IRFs would provide services, submit all claims for payment following their normal processes, and then submit required documentation for medical review. If after six months of being in the demonstration, 90% or more of its claims are found to be valid, the IRF may then opt out of the RCD review, except for spot reviews of samples consisting of 5% of total claims. The IRF RCD would not create new documentation requirements. A number of key details on this proposal have yet to be released, and it is not clear how or when this demonstration will be implemented.

•Maintaining Strong Volume Growth. ~~As described~~Various factors, including competition and increasing regulatory and administrative burdens, may impact our ability to maintain and grow our hospital volumes. In any particular market, we may encounter competition from local or national entities with longer operating histories or other competitive advantages, such as acute-care hospitals who provide post-acute services similar to ours or other post-acute providers with relationships with referring acute-care hospitals or physicians. Aggressive payment review practices by Medicare contractors, aggressive enforcement of regulatory policies by government agencies, and restrictive or burdensome rules, regulations or statutes governing admissions practices may lead us to not accept patients who would be appropriate for and would benefit from the services we provide. In addition, from time to time, we must get regulatory approval to expand our services and locations in ~~our 2021 Form 10‑K, we believe a number~~states with certificate of ~~conditions related to~~need laws. This approval may be withheld or take longer than expected. In the ~~pandemic negatively impacted volumes in 2021. While we continue to see our volumes recover, as discussed in~~case of new-store volume growth, the ~~“Results~~addition of ~~Operations” section of this Item, a current or future resurgence of COVID-19 infections could cause disruptions~~hospitals to our ~~volume growth.~~portfolio also may be difficult and take longer than expected.

•Recruiting and Retaining High-Quality Personnel. ~~See Item 1A,~~ ~~Risk Factors, of the 2021 Form 10‑K for a discussion of competition for staffing, shortages of~~Recruiting and retaining qualified personnel, including management, for our inpatient hospitals remain a high priority for us. We attempt to maintain a comprehensive compensation and ~~other factors~~benefits package that ~~may increase~~allows us to remain competitive in this challenging staffing environment while remaining consistent with our ~~labor costs and constrain our ability to take new patients.~~goal of being a high-quality, cost-effective provider of post-acute services. 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,~~an infectious disease, where employees are unavailable due to a lack of childcare or care for elderly family, or ~~due to~~where competition ~~within the local~~creates a nursing shortage in a given market. These factors have resulted in increased labor costs, including significant sign-on and shift bonuses, and increased use of contract labor as discussed in the “Results of Operations” section of this Item. See Item 1A, Risk Factors, of the 2022 Form 10‑K for further discussion of competition for staffing, shortages of qualified personnel, and other factors that may increase our labor costs and constrain our ability to take new patients.

We remain confident in the prospects of our business 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.~~business. We have a proven track record of working through difficult situations, and we believe in our ability to overcome current and future challenges.

2218

Results of Operations

Payor Mix

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


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2022		2021		2022		2021			2023		2022
Medicare	Medicare	65.3	%	64.2	%	65.0	%	64.4	%	Medicare	65.3	%	65.1	%
Medicare Advantage	Medicare Advantage	15.0	%	15.1	%	15.0	%	15.6	%	Medicare Advantage	16.0	%	14.7	%
Managed care	Managed care	11.6	%	12.2	%	11.9	%	11.8	%	Managed care	11.0	%	12.4	%
Medicaid	Medicaid	4.4	%	4.1	%	4.3	%	4.1	%	Medicaid	4.1	%	3.9	%
Other third-party payors	Other third-party payors	0.9	%	1.0	%	0.9	%	1.1	%	Other third-party payors	0.9	%	1.0	%
Workers’ compensation	Workers’ compensation	0.6	%	0.6	%	0.6	%	0.6	%	Workers’ compensation	0.5	%	0.6	%
Patients	Patients	0.3	%	0.5	%	0.4	%	0.5	%	Patients	0.2	%	0.5	%
Other income	Other income	1.9	%	2.3	%	1.9	%	1.9	%	Other income	2.0	%	1.8	%
Total	Total	100.0	%	100.0	%	100.0	%	100.0	%	Total	100.0	%	100.0	%

For additional information regarding our payors, see the “Sources of Revenues” section of Item 1, Business, of the ~~2021~~2022 Form 10‑K.

2319

Our Results

Our consolidated results of operations were as follows:

Three Months Ended September 30, Percentage Change Nine Months Ended September 30, Percentage Change
2022 2021 2022 vs. 2021 2022 2021 2022 vs. 2021
(In Millions, Except Percentage Change)
Net operating revenues $ 1,089.5 $ 1,010.8 7.8 % $ 3,211.3 $ 2,972.4 8.0 %
Operating expenses:
Salaries and benefits 605.6 537.0 12.8 % 1,778.9 1,554.8 14.4 %
Other operating expenses 172.0 151.4 13.6 % 500.3 442.2 13.1 %
Occupancy costs 12.4 14.5 (14.5) % 41.6 44.5 (6.5) %
Supplies 51.1 46.7 9.4 % 148.2 136.0 9.0 %
General and administrative expenses 37.9 38.9 (2.6) % 111.5 123.7 (9.9) %
Depreciation and amortization 62.1 55.5 11.9 % 180.3 162.9 10.7 %
Total operating expenses 941.1 844.0 11.5 % 2,760.8 2,464.1 12.0 %
Loss on early extinguishment of debt — — — % 1.4 1.0 40.0 %
Interest expense and amortization of debt discounts and fees 38.2 39.9 (4.3) % 138.2 124.3 11.2 %
Other expense (income) 3.6 (0.5) (820.0) % 13.6 (4.8) (383.3) %
Equity in net income of nonconsolidated affiliates (0.7) (0.9) (22.2) % (2.6) (2.5) 4.0 %
Income from continuing operations before income tax expense 107.3 128.3 (16.4) % 299.9 390.3 (23.2) %
Provision for income tax expense 21.8 26.2 (16.8) % 68.2 79.4 (14.1) %
Income from continuing operations 85.5 102.1 (16.3) % 231.7 310.9 (25.5) %
(Loss) income from discontinued operations, net of tax (18.5) 24.6 (175.2) % 16.7 90.6 (81.6) %
Net income 67.0 126.7 (47.1) % 248.4 401.5 (38.1) %
Less: Net income attributable to noncontrolling interests included in continuing operations (21.6) (26.3) (17.9) % (65.5) (79.6) (17.7) %
Less: Net income attributable to noncontrolling interests included in discontinued operations — (0.4) (100.0) % (1.3) (1.3) — %
Less: Net and comprehensive income attributable to noncontrolling interests (21.6) (26.7) (19.1) % (66.8) (80.9) (17.4) %
Net income attributable to Encompass Health $ 45.4 $ 100.0 (54.6) % $ 181.6 $ 320.6 (43.4) %


	Three Months Ended March 31,				Percentage Change
	2023		2022		2023 vs. 2022
	(In Millions, Except Percentage Change)
Net operating revenues	$	1,160.4	$	1,059.3	9.5	%
Operating expenses:
Salaries and benefits	629.0		587.4		7.1	%
Other operating expenses	177.9		159.0		11.9	%
Occupancy costs	13.8		15.4		(10.4)	%
Supplies	53.8		49.8		8.0	%
General and administrative expenses	43.4		37.4		16.0	%
Depreciation and amortization	63.9		57.7		10.7	%


Total operating expenses	981.8		906.7		8.3	%
Loss on early extinguishment of debt	—		0.3		—	%
Interest expense and amortization of debt discounts and fees	36.4		39.6		(8.1)	%
Other (income) expense	(3.6)		3.6		(200.0)	%
Equity in net income of nonconsolidated affiliates	(0.4)		(0.9)		(55.6)	%
Income from continuing operations before income tax expense	146.2		110.0		32.9	%
Provision for income tax expense	31.9		23.6		35.2	%
Income from continuing operations	114.3		86.4		32.3	%
(Loss) income from discontinued operations, net of tax	(1.0)		23.7		(104.2)	%
Net income	113.3		110.1		2.9	%
Less: Net income attributable to noncontrolling interests included in continuing operations	(25.6)		(22.0)		16.4	%
Less: Net income attributable to noncontrolling interests included in discontinued operations	—		(0.6)		(100.0)	%
Less: Net and comprehensive income attributable to noncontrolling interests	(25.6)		(22.6)		13.3	%
Net income attributable to Encompass Health	$	87.7	$	87.5	0.2	%

Operating Expenses as a % of Net Operating Revenues


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2022		2021		2022		2021			2023		2022
Operating expenses:	Operating expenses:									Operating expenses:
Salaries and benefits	Salaries and benefits	55.6	%	53.1	%	55.4	%	52.3	%	Salaries and benefits	54.2	%	55.5	%
Other operating expenses	Other operating expenses	15.8	%	15.0	%	15.6	%	14.9	%	Other operating expenses	15.3	%	15.0	%
Occupancy costs	Occupancy costs	1.1	%	1.4	%	1.3	%	1.5	%	Occupancy costs	1.2	%	1.5	%
Supplies	Supplies	4.7	%	4.6	%	4.6	%	4.6	%	Supplies	4.6	%	4.7	%
General and administrative expenses	General and administrative expenses	3.5	%	3.8	%	3.5	%	4.2	%	General and administrative expenses	3.7	%	3.5	%
Depreciation and amortization	Depreciation and amortization	5.7	%	5.5	%	5.6	%	5.5	%	Depreciation and amortization	5.5	%	5.4	%

Total operating expenses	Total operating expenses	86.4	%	83.5	%	86.0	%	82.9	%	Total operating expenses	84.6	%	85.6	%

Additional information regarding our operating results is as follows:


		Three Months Ended September 30,				Percentage Change		Nine Months Ended September 30,				Percentage Change			Three Months Ended March 31,				Percentage Change
		2022		2021		2022 vs. 2021		2022		2021		2022 vs. 2021			2023		2022		2023 vs. 2022
		(In Millions, Except Percentage Change)													(In Millions, Except Percentage Change)
Net operating revenues:	Net operating revenues:													Net operating revenues:
Inpatient	Inpatient	$	1,064.6	$	983.7	8.2	%	$	3,138.6	$	2,902.9	8.1	%	Inpatient	$	1,134.2	$	1,036.2	9.5	%
Outpatient and other	Outpatient and other	24.9		27.1		(8.1)	%	72.7		69.5		4.6	%	Outpatient and other	26.2		23.1		13.4	%
Net operating revenues	Net operating revenues	$	1,089.5	$	1,010.8	7.8	%	$	3,211.3	$	2,972.4	8.0	%	Net operating revenues	$	1,160.4	$	1,059.3	9.5	%
		(Actual Amounts)													(Actual Amounts)
Discharges	Discharges	53,743		49,983		7.5	%	156,416		146,662		6.7	%	Discharges	55,557		50,771		9.4	%
Net patient revenue per discharge	Net patient revenue per discharge	$	19,809	$	19,681	0.7	%	$	20,066	$	19,793	1.4	%	Net patient revenue per discharge	$	20,415	$	20,409	—	%
Outpatient visits	Outpatient visits	34,348		38,904		(11.7)	%	105,506		123,118		(14.3)	%	Outpatient visits	31,852		35,229		(9.6)	%
Average length of stay (days)	Average length of stay (days)	12.7		12.8		(0.8)	%	12.8		12.8		—	%	Average length of stay (days)	12.5		13.0		(3.8)	%
Occupancy %	Occupancy %	71.4 %		70.6 %		1.1	%	70.6 %		70.0 %		0.9	%	Occupancy %	73.4 %		73.1 %		0.4	%
# of licensed beds	# of licensed beds	10,356		9,846		5.2	%	10,356		9,846		5.2	%	# of licensed beds	10,510		10,028		4.8	%
Full-time equivalents*	Full-time equivalents*	24,580		23,054		6.6	%	23,847		22,657		5.3	%	Full-time equivalents*	25,122		23,313		7.8	%
Employees per occupied bed	Employees per occupied bed	3.39		3.37		0.6	%	3.34		3.33		0.3	%	Employees per occupied bed	3.32		3.28		1.2	%

* 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~~include 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.

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 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

~~Inpatient revenue~~Our consolidated Net operating revenues increased during the three months ended ~~September 30, 2022~~March 31, 2023 compared to the same period of ~~2021~~2022 primarily due to increased volumes. Discharge growth included a ~~4.1%~~5.9% increase in same-store discharges. Discharge growth

from new stores during the three months ended ~~September 30, 2022~~March 31, 2023 compared to the same period of ~~2021~~2022 resulted from our joint ventures in ~~Henry County, Georgia (October 2021),~~ Shiloh, Illinois (February 2022), Cape Coral, Florida (June 2022), Moline, Illinois (August 2022), ~~and~~ Grand Forks, North Dakota (August 2022), Naples, Florida (September 2022), Eau Claire, Wisconsin (March 2023), Knoxville, Tennessee (March 2023), and Owasso, Oklahoma (March 2023) as well as wholly owned hospitals in ~~Waco, Texas (August 2021), Shreveport, Louisiana (August 2021), Greenville, South Carolina (August 2021), Pensacola, Florida (September 2021),~~ St. Augustine, Florida (March 2022), Libertyville, Illinois (March 2022), Lakeland, Florida (May 2022), and Jacksonville, Florida (June 2022). ~~Growth in net~~Net patient revenue per discharge during the three months ended ~~September 30, 2022~~March 31, 2023 was essentially flat compared to the same period of ~~2021~~2022 primarily ~~resulted from~~due to an increase in reimbursement rates offset by the resumption of sequestration on April 1, ~~2022.~~

~~Growth~~2022, change in ~~revenues, discharges,~~patient mix, and ~~net patient revenue per discharge for~~ the ~~nine~~annual update to the Supplemental Security Income percentage. Revenue reserves increased during the three months ended September 30, 2022 were impacted primarily by the same factors as discussed above for the third quarter of 2022. Discharge growth included a 2.9% increase in same-store discharges. Discharge growth from new stores during the nine months ended September 30, 2022March 31, 2023 compared to the same period of ~~2021 also resulted from~~2022 primarily due to higher pre- and post-payment claims reviews in 2023. For additional details of our ~~joint venture in San Angelo, Texas (March 2021) as well as wholly owned hospitals in North Tampa, Florida (April 2021)~~claim reviews, see Item 1, Business, “Sources of Revenues,” Item 1A, Risk Factors, “Reimbursement Risks,” and ~~Cumming, Georgia (June 2021).~~Note 1, Summary of Significant Accounting Policies, “Net Operating Revenues” and “Accounts Receivable,” of the 2022 Form 10-K.

Salaries and Benefits

Salaries and benefits increased during the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 compared to the same ~~periods~~period of ~~2021~~2022 primarily due to salary and benefit cost increases for our employees and the ramping up of new stores. Salaries and benefits decreased as a percent of Net operating revenues during the three months ended March 31, 2023 compared to the same period

of 2022 primarily due to ~~increases~~decreases in both contract labor and ~~clinician compensation, including~~sign-on and shift bonuses. Total contract labor plus sign-on and shift bonuses ~~to meet higher patient volumes and paid time off usage ($49.0~~decreased $26.0 million ~~and $168.9~~from $63.0 million during the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 ~~respectively, compared~~ to ~~approximately $33.3~~$37.0 million ~~and $82.9 million in~~during the ~~same periods of 2021, respectively), and the ramp up of new stores.~~

three months ended March 31, 2023.

Other Operating Expenses

Other operating expenses increased in terms of dollars and as a percent of revenue during the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 compared to the same ~~periods~~period of ~~2021~~2022 primarily due to increased provider taxes of approximately $6 million and higher costs associated with ~~travel,~~ recruiting, repairs and maintenance, and utilities.

General and Administrative Expenses

General and administrative expenses ~~decreased~~increased in terms of dollars and as a percent of revenue during the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 compared to the same ~~periods~~period of ~~2021~~2022 primarily due to the mark-to-market adjustments on the non-qualified 401k plan and higher incentive compensation costs partially offset by approximately $1 million ofrelated to our transition services ~~revenue, and lower incentive compensation.~~agreement with Enhabit. For additional information of the transition services agreement with Enhabit, see Note 2, ~~Separation~~Spin Off of Home Health and Hospice Business, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report.

Depreciation and Amortization

Depreciation and amortization increased during the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 compared to the same ~~periods~~period of ~~2021~~2022 due to our capital investments. We expect Depreciation and amortization to increase going forward as a result of our recent and ongoing capital investments.

Interest Expense and Amortization of Debt Discounts and Fees

The ~~increase~~decrease in Interest expense and amortization of debt discounts and fees during the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 compared to the same period of ~~2021~~2022 primarily resulted from ~~the $20.5 million consent solicitation fee paid in June 2022 partially offset by~~ the March 2022 redemption of the remaining $100 million in outstanding principal amount of the 5.125% Senior Notes due 2023 ~~(the “2023 Notes”).~~and the extinguishment of the term loan facilities. For additional information, see Note 5, Long-term Debt, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this ~~report.~~report, and Note 10, Long-term Debt, to the consolidated financial statements accompanying the 2022 Form 10-K.

Income from Continuing Operations Before Income Tax Expense

Our pre-tax income from continuing operations ~~decreased~~increased during the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 compared to the same ~~periods~~period of ~~2021~~2022 primarily due to the increase in ~~Salaries and benefits~~Net operating revenues as discussed above.

Provision for Income Tax Expense

Our Provision for income tax expense~~decreased~~ increased during the three months ended ~~September 30, 2022~~March 31, 2023 compared to the same period of ~~2021~~2022 primarily due to ~~lower~~higher Income from continuing operations before income tax ~~expense~~ ~~and the release of a portion of an uncertain tax position related to the separation of our home health and hospice business, partially offset by state rate and apportionment changes.~~

~~Our~~ ~~Provision for income tax expense~~ ~~decreased during the nine months ended September 30, 2022 compared to the same period of 2021 primarily due to lower~~ ~~Income from continuing operations before income tax expense,~~ ~~partially offset by the establishment of an uncertain tax position related to the separation of our home health and hospice business.~~expense.

We currently estimate our cash payments for income taxes to be approximately ~~$50~~$85 million to ~~$60~~$100 million, net of refunds, for ~~2022.~~2023. These payments are expected to primarily result from federal and state income tax expenses based on estimates of taxable income for ~~2022.~~2023.

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.

See Note 9, 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 ~~2021~~2022 Form 10‑K.

Net Income Attributable to Noncontrolling Interests

The ~~decrease~~increase in Net income attributable to noncontrolling interests during the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 compared to the same ~~periods~~period of ~~2021~~2022 resulted from increased profitability from certain existing joint venture hospitals partially offset by the ramp up of new joint venture de novo ~~locations and decreased profitability from certain existing joint venture hospitals.~~locations.

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 2022, we redeemed the remaining $100 million in outstanding principal amount of the 2023 Notes using capacity under our revolving credit facility. Pursuant to the terms of the 2023 Notes, this optional redemption was made at a price of par. As a result of this redemption, we recorded a $0.3 million ~~Loss on early extinguishment of debt~~ ~~during the three months ended March 31, 2022.~~

~~In June 2022, we amended our credit agreement primarily in preparation for the separation of the home health and hospice business. The modifications are described in Note 5,~~ ~~Long-term Debt, to the accompanying condensed consolidated financial statements included in Part I, Item 1,~~ ~~Financial Statements (Unaudited)~~, of this report. On June 30, 2022, Enhabit distributed $566.6 million to Encompass Health who used it to fully repay both the $250 million outstanding balance of the Encompass Health revolving credit facility and approximately $236 million of the Encompass Health term loan. As a result of this repayment, we recorded a $1.1 million ~~Loss on early extinguishment of debt~~ ~~during the three months ended June 30, 2022. In October 2022, Encompass Health entered into the Sixth Amended and Restated Credit Agreement primarily to extend the maturity date to October 7, 2027.~~

We have been disciplined in creating a capital structure that is flexible with no significant debt maturities prior to 2025. 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 strong 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 5, 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 ~~2021~~2022 Form 10‑K.

Current Liquidity

As of ~~September 30, 2022,~~March 31, 2023, we had ~~$59.8~~$85.0 million in Cash and cash equivalents. This amount excludes ~~$44.3~~$34.3 million in Restricted cash and ~~$98.5~~$111.6 million of restricted marketable securities ($~~28.5~~29.5 million included in Other current assets and ~~$70.0~~$82.1 million 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 4,5, Cash and Marketable Securities, to the consolidated financial statements accompanying the ~~2021~~2022 Form 10‑K.

In addition to Cash and cash equivalents, as of ~~September 30, 2022,~~March 31, 2023, we had approximately ~~$927~~$926 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 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, subject to certain limitations, resulting from (1) dispositions and repayments or incurrence of debt and (2) investments, acquisitions, mergers, amalgamations, consolidations and other operational changes 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 ~~September 30, 2022,~~March 31, 2023, the maximum leverage ratio requirement per our credit agreement was 4.75x and the minimum interest coverage ratio requirement was 3.0x, 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 ~~September 30, 2022,~~March 31, 2023, 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.

distributions to holders of our capital stock. The amendments to the Indentures ~~permit~~permitted us, subject to the leverage ratio condition set forth below, to distribute to our equity holders in one or more transactions (a “Distribution”) some or all of the common stock of a subsidiary that holds substantially all of the assets of our home health and hospice business. We may make any such distribution so long as the Leverage Ratio (as defined in each Indenture) is no more than 3.5 to 1.0 on a pro forma basis after giving effect thereto. The amendments also ~~reduce~~reduced the capacity under our restricted payments builder basket under each existing Indenture for the 2028 Notes, 2030 Notes, and 2031 Notes by $200 million and ~~amends~~amended the definition of “Consolidated Net Income” to allow us to exclude from Consolidated Net Income (a component of the Leverage Ratio) any fees, expenses or charges related to any Distribution and the solicitation of consents from the holders of the Notes. In December 2021 and January 2022, we received the requisite consents for the adoption of these amendments. Under the terms of the amendments, we agreed to pay the holders of the Notes a total of $40.5 million, excluding fees. We paid $20.0 million and $20.5 million in January and June 2022, respectively.

We do not face near-term refinancing risk, as the amounts outstanding under our credit agreement do not mature until 2027, and our bonds all mature in 2025 and beyond. See the “Contractual Obligations” section below for information related to our contractual obligations as of ~~September 30, 2022.~~March 31, 2023.

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 ~~2021~~2022 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 of continuing operations (in millions):


		Nine Months Ended September 30,					Three Months Ended March 31,
		2022		2021			2023		2022
Net cash provided by operating activities	Net cash provided by operating activities	$	477.6	$	458.5	Net cash provided by operating activities	$	229.2	$	182.5
Net cash used in investing activities	Net cash used in investing activities	(417.0)		(346.0)		Net cash used in investing activities	(104.0)		(121.7)
Net cash used in financing activities	Net cash used in financing activities	(645.3)		(273.2)		Net cash used in financing activities	(58.0)		(66.0)
Decrease in cash, cash equivalents, and restricted cash		$	(584.7)	$	(160.7)
Increase (decrease) in cash, cash equivalents, and restricted cash						Increase (decrease) in cash, cash equivalents, and restricted cash	$	67.2	$	(5.2)

Operating activities. The increase in Net cash provided by operating activities of continuing operations for the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 compared to the same period of ~~2021~~2022 primarily resulted from improved collection of accounts receivable.

Investing activities. The ~~increase~~decrease in Net cash used in investing activities of continuing operations during the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 compared to the same period of ~~2021~~2022 primarily resulted from ~~higher payments related to our capital investments.~~decreased purchases of property and equipment.

Financing activities. The ~~increase~~decrease in Net cash used in financing activities of continuing operations during the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 compared to the same period of ~~2021~~2022 primarily resulted from ~~higher~~lower dividends paid on commons stock and net debt ~~payments in 2022.~~payments. For additional information on debt ~~borrowings and~~ payments, see Note 5, Long-term Debt, to the accompanying condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report.

Contractual Obligations

Our consolidated contractual obligations as of ~~September 30, 2022~~March 31, 2023 are as follows (in millions):


		Total		Current		Long-term			Total		Current		Long-term
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)	$	2,339.1	$	5.4	$	2,333.7	Long-term debt, excluding revolving credit facility and finance lease obligations (a)	$	2,353.4	$	5.9	$	2,347.5
Revolving credit facility	Revolving credit facility	40.0		—		40.0		Revolving credit facility	40.0		—		40.0
Interest on long-term debt (b)	Interest on long-term debt (b)	698.6		117.7		580.9		Interest on long-term debt (b)	651.7		119.1		532.6
Finance lease obligations (c)	Finance lease obligations (c)	563.5		48.6		514.9		Finance lease obligations (c)	539.6		45.9		493.7
Operating lease obligations (d)	Operating lease obligations (d)	276.3		36.8		239.5		Operating lease obligations (d)	301.3		39.2		262.1
Purchase obligations (e)	Purchase obligations (e)	88.4		27.7		60.7		Purchase obligations (e)	127.9		28.9		99.0
Total	Total	$	4,005.9	$	236.2	$	3,769.7	Total	$	4,013.9	$	239.0	$	3,774.9

(a) Included in long-term debt are amounts owed on our bonds payable and other notes payable. These borrowings are further explained in Note 5, 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 ~~2021~~2022 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 ~~September 30, 2022.~~March 31, 2023. 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 condensed consolidated statements of comprehensive income.

(d) We lease approximately 8%10% of our hospitals as well as other property and 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 7,8, Leases, to the consolidated financial statements accompanying the ~~2021~~2022 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.

Our capital expenditures include costs associated with our hospital renovation program, de novo projects, capacity expansions, technology initiatives, and building and equipment upgrades and purchases. During the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, we made capital expenditures of approximately ~~$390~~$100 million for property and equipment, capitalized software, and other intangible assets. During ~~2022,~~2023, we expect to spend approximately ~~$537~~$565 million to ~~$582~~$605 million for capital expenditures using cash on hand and borrowings under our revolving credit facility. Approximately ~~$195~~$230 million to ~~$215~~$240 million of this budgeted amount is considered nondiscretionary expenditures, which we may refer to in other filings as “maintenance” expenditures. Actual amounts spent will be dependent upon the timing of development projects.

Authorizations for Returning Capital to Stakeholders

In October ~~2021, February~~ 2022 and ~~May 2022,~~February 2023, our board of directors declared cash dividends of ~~$0.28~~$0.15 per share that were paid in January ~~2022,~~2023 and April ~~2022, and July 2022~~2023, respectively. In July 2022, our board of directors declared a cash dividend of $0.15 per share that was paid on October 17, 2022. On October 19, 2022, our board of directors declared a cash dividend of $0.15 per share, payable on January 17, 2023 to stockholders of record on January 3, 2023. 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 July 24, 2018, our board approved resetting the aggregate common stock repurchase authorization to $250 million. As of ~~September 30, 2022,~~March 31, 2023, 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 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 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 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) our leverage ratio remains in compliance with the leverage ratio covenant and there is capacity under the Available Amount as defined in the credit agreement. The terms of our 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 5, 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 ~~2021~~2022 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 September 30, 2022. The subsidiaries associated with our home health and hospice business (collectively, the “HH&H Subsidiaries”) were guarantors as of June 30, 2022. On July 1, 2022, we completed the previously announced separation of our home health and hospice business through the distribution (the “Distribution”) of all of the outstanding shares of common stock of Enhabit, Inc. to Encompass Health stockholders. The Distribution was effective at 12:01 a.m., Eastern Time, on July 1, 2022, at which time the HH&H Subsidiaries were released from their guarantees of our indebtedness.


	~~Nine~~Three Months Ended ~~September 30, 2022~~March 31, 2023
	(In Millions)
Net operating revenues	$	~~2,128.4~~743.2
Intercompany revenues generated from non-guarantor subsidiaries	~~15.1~~21.8
Total net operating revenues	$	~~2,143.5~~765.0

Operating expenses	$	~~1,856.0~~646.2
Intercompany expenses incurred in transactions with non-guarantor subsidiaries	~~23.9~~8.4
Total operating expenses	$	~~1,879.9~~654.6

Income from continuing operations	$	~~83.0~~55.9
Net income	$	~~44.8~~54.9
Net income attributable to Encompass Health	$	~~44.1~~54.9

As of
September 30, 2022 As of
December 31, 2021
(In Millions)
Total current assets $ 515.0 $ 501.1
Property and equipment, net $ 1,981.0 $ 1,852.3
Goodwill 902.6 902.6
Intercompany receivable due from non-guarantor subsidiaries 174.4 28.1
Other noncurrent assets 479.8 337.1
Total noncurrent assets $ 3,537.8 $ 3,120.1
Total current liabilities $ 484.3 $ 491.8
Long-term debt, net of current portion $ 2,673.4 $ 3,191.0
Other noncurrent liabilities 277.5 237.4
Total noncurrent liabilities $ 2,950.9 $ 3,428.4


	As of March 31, 2023		As of December 31, 2022
	(In Millions)
Total current assets	$	508.4	$	466.3

Property and equipment, net	$	2,001.0	$	1,975.0
Goodwill	902.6		902.6
Intercompany receivable due from non-guarantor subsidiaries	239.2		254.9
Other noncurrent assets	496.8		508.2
Total noncurrent assets	$	3,639.6	$	3,640.7

Total current liabilities	$	445.3	$	437.8

Long-term debt, net of current portion	$	2,653.1	$	2,670.6
Other noncurrent liabilities	349.0		349.7
Total noncurrent liabilities	$	3,002.1	$	3,020.3

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 activitiesand to Net income.

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 ~~2021~~2022 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 and certain pro forma cost savings and synergies related to transactions and initiatives, which in the aggregate are not in excess of 25% 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 ~~2021~~2022 Form 10‑K.

Our Adjusted EBITDA was as follows (in millions):

Reconciliation of Net ~~Income to Adjusted EBITDA~~

Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Net income $ 67.0 $ 126.7 $ 248.4 $ 401.5
Loss (income) from discontinued operations, net of tax, attributable to Encompass Health 18.5 (24.6) (16.7) (90.6)
Net income attributable to noncontrolling interests included in continuing operations (21.6) (26.3) (65.5) (79.6)
Provision for income tax expense 21.8 26.2 68.2 79.4
Interest expense and amortization of debt discounts and fees 38.2 39.9 138.2 124.3
(Gain) loss on disposal or impairment of assets (1.1) (5.0) 2.4 (1.7)
Depreciation and amortization 62.1 55.5 180.3 162.9
Loss on early extinguishment of debt — — 1.4 1.0
Stock-based compensation 7.3 6.6 21.1 19.6
Change in fair market value of equity securities 3.1 0.3 8.8 (0.3)
Adjusted EBITDA $ 195.3 $ 199.3 $ 586.6 $ 616.5

~~Reconciliation of Net~~ Cash Provided by Operating Activities to Adjusted EBITDA


		Nine Months Ended September 30,					Three Months Ended March 31,
		2022		2021			2023		2022
Net cash provided by operating activities	Net cash provided by operating activities	$	533.6	$	592.0	Net cash provided by operating activities	$	227.9	$	218.9

Interest expense and amortization of debt discounts and fees	Interest expense and amortization of debt discounts and fees	138.2		124.3		Interest expense and amortization of debt discounts and fees	36.4		39.6
(Loss) gain on sale of investments, excluding impairments		(16.5)		1.8
Gain (loss) on sale of investments, excluding impairments						Gain (loss) on sale of investments, excluding impairments	1.7		(4.6)
Equity in net income of nonconsolidated affiliates	Equity in net income of nonconsolidated affiliates	2.6		2.5		Equity in net income of nonconsolidated affiliates	0.4		0.9
Net income attributable to noncontrolling interests in continuing operations	Net income attributable to noncontrolling interests in continuing operations	(65.5)		(79.6)		Net income attributable to noncontrolling interests in continuing operations	(25.6)		(22.0)
Amortization of debt-related items	Amortization of debt-related items	(7.4)		(5.8)		Amortization of debt-related items	(2.3)		(2.3)
Distributions from nonconsolidated affiliates	Distributions from nonconsolidated affiliates	(3.7)		(2.4)		Distributions from nonconsolidated affiliates	(0.1)		(1.0)
Current portion of income tax expense	Current portion of income tax expense	75.9		77.8		Current portion of income tax expense	27.9		21.3
Change in assets and liabilities	Change in assets and liabilities	(23.5)		39.8		Change in assets and liabilities	(37.9)		(22.0)
Cash provided by operating activities of discontinued operations	Cash provided by operating activities of discontinued operations	(56.0)		(133.5)		Cash provided by operating activities of discontinued operations	1.3		(36.4)

Change in fair market value of equity securities	Change in fair market value of equity securities	8.8		(0.3)		Change in fair market value of equity securities	(0.5)		2.5

Other	Other	0.1		(0.1)		Other	(0.2)		—
Adjusted EBITDA	Adjusted EBITDA	$	586.6	$	616.5	Adjusted EBITDA	$	229.0	$	194.9

Reconciliation of Net Income to Adjusted EBITDA


	Three Months Ended March 31,
	2023		2022
Net income	$	113.3	$	110.1
Loss (income) from discontinued operations, net of tax, attributable to Encompass Health	1.0		(23.7)
Net income attributable to noncontrolling interests included in continuing operations	(25.6)		(22.0)
Provision for income tax expense	31.9		23.6
Interest expense and amortization of debt discounts and fees	36.4		39.6


Loss on disposal or impairment of assets	0.7		0.7
Depreciation and amortization	63.9		57.7
Loss on early extinguishment of debt	—		0.3
Stock-based compensation	7.9		6.1




Change in fair market value of equity securities	(0.5)		2.5


Adjusted EBITDA	$	229.0	$	194.9

For additional information see the “Results of Operations” section 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 ~~September 30, 2022,~~March 31, 2023, our primary variable rate debt outstanding related to $40.0 million in advances under our revolving credit facility. Assuming outstanding balances were to remain the same, a 1% increase in interest rates would result in an incremental negative cash flow of approximately $0.4 million over the next 12 months, while a 1% decrease in interest rates would result in an incremental positive cash flow of approximately $0.4 million over the next 12 months.

See also Note 5, Long-term Debt, and Note 7, 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 ~~September 30, 2022~~March 31, 2023 that have a material effect on our Internal Control over Financial Reporting.

3329

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.

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 11, 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 Annual Report on Form 10‑K for the year ended December 31, ~~2021~~2022 (the ~~“2021~~“2022 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 ~~2021~~2022 Form 10-K, except that business risks specifically and solely associated with the home health and hospice business, not including the risks of the spin off transaction itself, are no longer applicable to us following the spin off our home health and hospice business, Enhabit, Inc., as an independent, publicly traded company on July 1, 2022.10-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.

3430

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 ~~September 30, 2022:~~March 31, 2023:

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, 2022 282 $ 47.60 — $ 198,053,924
August 1 through August 31, 2022 1,616 50.72 — 198,053,924
September 1 through
September 30, 2022 149

50.31 — 198,053,924
Total 2,047 50.26 —


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, 2023	69,729	$	59.83	—	$	198,053,924
February 1 through February 28, 2023	56,505	$	60.74	—	198,053,924
March 1 through March 31, 2023	2,040	$	54.10	—	198,053,924
Total	128,274	60.14		—

(1)Except as noted in the following sentence, the number of shares reported in this column represents 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. ~~The~~In January, 687 shares ~~reported for August~~ 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.

3531

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:			~~November 2, 2022~~May 3, 2023

3632

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

~~Sixth~~Encompass Health Corporation Fifth Amended and Restated Credit Agreement, dated October 7, 2022, by and among Encompass Health Corporation, certain of its subsidiaries, Barclays Bank PLC, as administrative agent and collateral agent, and various other lendersChange in Control Benefits Plan (incorporated by reference to Exhibit ~~10.1~~10.3 to Encompass Health’s ~~Current~~Annual Report on Form ~~8-K~~10-K filed on ~~October 13, 2022)~~February 27, 2023).

10.2

First Amendment to the Encompass Health Corporation Nonqualified Retirement Plan (incorporated by reference to Exhibit 10.8.2 to Encompass Health’s Annual Report on Form 10-K filed on February 27, 2023).

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 ~~September 30, 2022,~~March 31, 2023, 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)


		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	1815
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	3329
Item 4.	Controls and Procedures	3329

PART II	Other Information

Item 1.	Legal Proceedings	3430
Item 1A.	Risk Factors	3430
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3531
Item 6.	Exhibits	3531
	Exhibit Index


	Nine Months Ended September 30, 2022
	(In Millions)
	Encompass Health Common Shareholders
	Number of Common Shares Outstanding	Common Stock		Capital in Excess of Par Value		Accumulated Income		Treasury Stock		Noncontrolling Interests		Total
Balance at beginning of period	99.5	$	1.1	$	2,289.6	$	141.8	$	(521.2)	$	445.7	$	2,357.0
Net income	—	—		—		181.6		—		61.8		243.4
Receipt of treasury stock	(0.1)	—		—		—		(7.7)		—		(7.7)
Dividends declared ($0.71 per share)	—	—		(11.2)		(60.0)		—		—		(71.2)

Stock-based compensation	—	—		23.6		—		—		—		23.6


Distributions declared	—	—		—		—		—		(72.8)		(72.8)
Capital contributions from consolidated affiliates	—	—		—		—		—		74.6		74.6




Spin off of Enhabit, Inc.	—	—		(602.1)		(221.9)		—		(28.4)		(852.4)
Other	0.4	—		10.6		0.1		(7.3)		12.1		15.5
Balance at end of period	99.8	$	1.1	$	1,710.5	$	41.6	$	(536.2)	$	493.0	$	1,710.0


	Nine Months Ended September 30, 2021
	(In Millions)
	Encompass Health Common Shareholders
	Number of Common Shares Outstanding	Common Stock		Capital in Excess of Par Value		Accumulated (Deficit) Income		Treasury Stock		Noncontrolling Interests		Total
Balance at beginning of period	99.4	$	1.1	$	2,326.6	$	(242.3)	$	(497.4)	$	382.0	$	1,970.0
Net income	—	—		—		320.6		—		73.6		394.2

Receipt of treasury stock	(0.2)	—		—		—		(16.4)		—		(16.4)
Dividends declared ($0.84 per share)	—	—		(83.8)		—		—		—		(83.8)

Stock-based compensation	—	—		21.7		—		—		—		21.7


Distributions declared	—	—		—		—		—		(69.1)		(69.1)
Capital contributions from consolidated affiliates	—	—		—		—		—		47.6		47.6




Other	0.3	—		19.4		—		(6.8)		(15.8)		(3.2)
Balance at end of period	99.5	$	1.1	$	2,283.9	$	78.3	$	(520.6)	$	418.3	$	2,261.0


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


	As of September 30, 2022		As of December 31, 2021
	(In Millions)
Total current assets	$	515.0	$	501.1

Property and equipment, net	$	1,981.0	$	1,852.3
Goodwill	902.6		902.6
Intercompany receivable due from non-guarantor subsidiaries	174.4		28.1
Other noncurrent assets	479.8		337.1
Total noncurrent assets	$	3,537.8	$	3,120.1

Total current liabilities	$	484.3	$	491.8

Long-term debt, net of current portion	$	2,673.4	$	3,191.0
Other noncurrent liabilities	277.5		237.4
Total noncurrent liabilities	$	2,950.9	$	3,428.4