Encompass Health Corporation

05/01/2026 | Press release | Distributed by Public on 05/01/2026 13:29

Quarterly Report for Quarter Ending March 31, 2026 (Form 10-Q)

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, 2025, 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, 2025 filed on February 26, 2026 (collectively, the "2025 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" beginning 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, in Part II of this report and Part I of the 2025 Form 10-K.
Executive Overview
Our Business
We are the nation's largest owner and operator of inpatient rehabilitation hospitals ("IRFs") in terms of patients treated, revenues, and number of hospitals. We provide specialized rehabilitative treatment on an inpatient basis. We operate IRFs in 39 states and Puerto Rico, with concentrations in Florida and Texas. As of March 31, 2026, we operated 174 IRFs. For additional information about our business, see Part I, Item 1, Business, and Item 1A, Risk Factors, of the 2025 Form 10-K.
2026 Overview
During the three months ended March 31, 2026, Net operating revenues increased 9.0% over the same period of 2025 due primarily to volume growth and increased pricing. See "Results of Operations" section of this Item for additional volume and pricing information.
In our continued development and expansion efforts during the three months ended March 31, 2026, we:
•began operating our new 49-bed inpatient rehabilitation hospital in Irmo, South Carolina in March;
•expanded our capacity by adding 44 new beds to existing hospitals; and
•announced or continued the development of the following hospitals:
Expected open date Number of New Beds
2026 2027
De novo projects(1)
Concordville, Pennsylvania 2Q26 50 -
Loganville, Georgia(2)
2Q26 40 -
Norristown, Pennsylvania 3Q26 50 -
Bangor, Maine 4Q26 50 -
San Antonio, Texas 4Q26 50 -
Avondale, Arizona 4Q26 60 -
Wesley Chapel, Florida - 50
Apollo Beach, Florida - 50
St. George, Utah - 50
Fishers, Indiana - 50
Haslet, Texas - 50
Flowood, Mississippi - 50
Cookeville, Tennessee(2)
- 40
Remote and satellite hospitals (included in bed additions)(1)
Cleveland, Tennessee 4Q26 40 -
Other bed additions 150 - 200 150 - 200
(1) Opening dates are tentative
(2) Expected joint venture
We also continued our shareholder distributions during the three months ended March 31, 2026 through common stock repurchases and paying a quarterly cash dividend. For additional information see the "Liquidity and Capital Resources" section of this Item.
Business Outlook
We remain optimistic regarding the intermediate and long-term prospects 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 continue to grow for the foreseeable future. More specifically, the average age of our Medicare patients is approximately 77, and the population group for ages 75 and older is expected to grow at approximately 4% per year through 2030. 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, inpatient rehabilitation services.
We are committed to delivering high-quality, cost-effective 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. We also believe our competitive strengths discussed in Part I, Item 1, Business, "Competitive Strengths," of the 2025 Form 10-K, give us the ability to adapt and succeed in a healthcare industry facing regulatory uncertainty around attempts to improve outcomes and reduce costs.
The healthcare industry 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 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 until 2028. We continue to have a strong, well-capitalized balance sheet, including a substantial portfolio of owned real estate, and ample availability under our revolving credit facility, which along with the cash flows generated from operations should, we believe, provide sufficient support for our ability to adapt to changes in reimbursement, sustain our business model, and grow through new hospitals and bed additions. See also Part I, Item 1, Business, "Strategy and Strategic Priorities" and "Competitive Strengths" of the 2025 Form 10-K.
Key Challenges
Healthcare is a highly regulated industry facing many well-publicized regulatory and reimbursement challenges. 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 Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, "Executive Overview-Key Challenges" of the 2025 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. See Part I, Item 1, Business, "Regulation," and Item 1A, Risk Factors, "Reimbursement Risks" and "Other Regulatory Risks" of the 2025 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 in Medicare Reimbursement and Regulatory Requirements for Operating IRFs. On April 2, 2026, the Centers for Medicare & Medicaid Services ("CMS") released its notice of proposed rulemaking for fiscal year 2027 for IRFs (the "2027 Proposed IRF Rule") under the inpatient rehabilitation facility prospective payment system. The 2027 Proposed IRF Rule would implement a net 2.4% market basket increase (market basket update of 3.2% reduced by a productivity adjustment of 0.8%) effective for discharges between October 1, 2026 and September 30, 2027. The 2027 Proposed IRF Rule also includes changes that impact our hospital-by-hospital base rate for Medicare reimbursement. Such changes include, but are not limited to, revisions to the wage index, updates to outlier payments, and updates to the case-mix group relative weights and average lengths of stay values. Based on our analysis that utilizes the acuity of our patients annualized over a twelve-month period ended February 28, 2026, our experience with outlier payments over this same time frame, and other factors, we believe the 2027 Proposed IRF Rule would result in a net increase to our Medicare payment rates of approximately 2.4% effective October 1, 2026.
In August 2023, IRFs located in Alabama began participation in CMS's review choice demonstration ("RCD"), under which Medicare reimbursement claims are assessed for compliance with applicable coverage and clinical documentation requirements. On June 17, 2024, CMS expanded RCD to include IRFs located in Pennsylvania and billing to a certain Medicare Administrative Contractor ("MAC"). We do not bill to this MAC, so we are not subject to RCD in Pennsylvania at this time. In December 2025, CMS announced the expansion of RCD to Texas and California, effective March 2, 2026 and May 1, 2026, respectively. With the expansion to those two states, we expect 33 of our current inpatient rehabilitation hospitals (representing approximately 11.9% of our IRF Medicare claims) to be subject to RCD. After the initial four states, CMS intends to expand the demonstration to include additional cohorts of IRFs based on the MAC to which those IRFs submit claims. There are no details of that expansion at this time.
Under RCD, each participating IRF has an initial choice between pre-claim or post-payment review of 100% of Medicare claims submitted to demonstrate compliance with applicable requirements during the first six-month review period or cycle. Under the pre-claim review choice, services can 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, reviewed, and approved before the final claim is paid. If a certain percentage of the claims reviewed are found to be valid, the "affirmation rate," the IRF may then opt out of the 100% pre-claim review in the next cycle. The opt-out affirmation rate for each IRF under RCD is 80% or greater for the first cycle, 85% or greater for the second cycle, and 90% or greater for each cycle thereafter. In opting out, the IRF may elect spot prepayment reviews of samples consisting of 5% of total claims or selective post-payment review of a statistically valid random sample. To date, we have elected the pre-claim review option for each participating hospital, including those hospitals that met or exceeded the opt-out affirmation rate, in each cycle.
If the MAC determines a claim is not valid under the RCD pre-claim review, the IRF may still submit the claim for payment and appeal the denial. The affirmation rate for a cycle as determined by CMS does not include claims found to be valid on appeal. Therefore, the ultimate percentage of valid claims submitted under RCD depends on the resolution of all related appeals in the same CMS process applicable to non-RCD claims. That appeals process can extend for a significant period of time as discussed in Part 1, Item 1A, Risk Factors, of the 2025 Form 10-K. The affirmation rate for our hospitals in Alabama has varied over the four completed cycles. We believe the MAC for these hospitals has failed to affirm many claims over the course of RCD based on inconsistent and improper application of standards or requirements that, in some cases, directly conflict with the Medicare coverage criteria for IRFs. We have engaged, and will continue to engage, with the MAC and CMS to ensure the review process is consistent with existing rules, regulations and statutes. Additionally, we have appealed many of the claims not affirmed by the MAC. Given the inconsistent review process applied by the MAC associated with our Alabama hospitals across the previous cycles, we cannot predict the impact, if any, RCD may have on the collectability of our Medicare claims over the program's full breadth, including involvement of other MACs, and term and ultimately on our financial position, results of operations, and cash flows.
•Maintaining Strong Volume Growth. 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 reimbursement and admissions practices may deny access to care for, or 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 states with certificate of need laws. This approval may be withheld or take longer than expected. In the case of new-store volume growth, the addition of hospitals to our portfolio also may be difficult and take longer than expected.
•Recruiting and Retaining High-Quality Personnel. Recruiting and retaining qualified personnel, including management, for our inpatient hospitals remains a high priority for us. We attempt to maintain a comprehensive compensation and benefits package that allows us to be competitive in this challenging staffing environment while remaining consistent with our goal of providing high-quality, cost-effective care. Additionally, our operations have been affected and may in the future be affected by staffing shortages. In recent years, staffing shortages and competition have resulted in increased labor costs, including significant sign-on and shift bonuses, and increased use of contract labor. See Part I, Item 1A, Risk Factors, of the 2025 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 business. We have a proven track record of working through difficult operating environments, and we believe in our ability to overcome current and future challenges.
Results of Operations
Payor Mix
We derived consolidated Net operating revenues from the following payor sources:
Three Months Ended March 31,
2026 2025
Medicare 65.5 % 67.0 %
Medicare Advantage
16.2 % 16.5 %
Managed care
10.6 % 10.0 %
Medicaid 2.9 % 2.9 %
Other third-party payors 0.7 % 0.6 %
Workers' compensation 0.5 % 0.4 %
Patients 0.4 % 0.2 %
Other income 3.2 % 2.4 %
Total 100.0 % 100.0 %
For additional information regarding our payors, see the "Sources of Revenues" section of Item 1, Business, of the 2025 Form 10-K.
Our Results
Our consolidated results of operations were as follows:
Three Months Ended March 31, Percentage Change
2026 2025 2026 vs. 2025
(In Millions, Except Percentage Change)
Net operating revenues $ 1,586.6 $ 1,455.4 9.0 %
Operating expenses:
Salaries and benefits 818.1 762.3 7.3 %
Other operating expenses 241.9 217.5 11.2 %
Occupancy costs 15.2 14.9 2.0 %
Supplies 64.3 62.2 3.4 %
General and administrative expenses 58.2 52.3 11.3 %
Depreciation and amortization 87.3 79.2 10.2 %
Total operating expenses 1,285.0 1,188.4 8.1 %
Loss on early extinguishment of debt 0.2 - N/A
Interest expense and amortization of debt discounts and fees 31.8 31.8 - %
Other income (18.7) (2.5) 648.0 %
Equity in net income of nonconsolidated affiliates (0.4) (0.9) (55.6) %
Income from continuing operations before income tax expense 288.7 238.6 21.0 %
Provision for income tax expense 56.4 41.6 35.6 %
Income from continuing operations 232.3 197.0 17.9 %
Income (loss) from discontinued operations, net of tax 15.9 (0.5) (3,280.0) %
Net income 248.2 196.5 26.3 %
Less: Net income attributable to noncontrolling interests (53.7) (45.0) 19.3 %
Net income attributable to Encompass Health $ 194.5 $ 151.5 28.4 %
Operating Expenses as a % of Net Operating Revenues
Three Months Ended March 31,
2026 2025
Operating expenses:
Salaries and benefits
51.6 % 52.4 %
Other operating expenses
15.2 % 14.9 %
Occupancy costs
1.0 % 1.0 %
Supplies
4.1 % 4.3 %
General and administrative expenses
3.7 % 3.6 %
Depreciation and amortization
5.5 % 5.4 %
Total operating expenses
81.0 % 81.7 %
Additional information regarding our operating results is as follows:
Three Months Ended March 31, Percentage Change
2026 2025 2026 vs. 2025
(In Millions, Except Percentage Change)
Net operating revenues:
Inpatient
$ 1,533.7 $ 1,417.7 8.2 %
Other 52.9 37.7 40.3 %
Net operating revenues $ 1,586.6 $ 1,455.4 9.0 %
(Actual Amounts)
Discharges 67,763 64,985 4.3 %
Net patient revenue per discharge
$ 22,633 $ 21,816 3.7 %
Outpatient visits 21,935 19,955 9.9 %
Average length of stay (days) 12.1 12.2 (0.8) %
Occupancy % 78.7 % 78.8 % (0.1) %
# of licensed beds 11,541 11,159 3.4 %
Occupied beds 9,083 8,793 3.3 %
Full-time equivalents (FTEs) - internal 29,599 28,572 3.6 %
Contract labor FTEs 345 375 (8.0) %
Total FTEs* 29,944 28,947 3.4 %
Employees per occupied bed 3.30 3.29 0.3 %
* FTEs included in the above table represent our employees who participate in or support the operations of our hospitals and include FTEs 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 full-time equivalents from the utilization of contract labor, by the number of occupied beds during each period.
In the discussion that follows, we use "same-store" comparisons to explain the changes in certain performance metrics within our financial statements. We calculate same-store comparisons based on hospitals open throughout both the full current period and prior period presented. These comparisons include the financial results of market consolidation transactions and capacity expansions (including the addition of satellite and remote hospitals) in existing markets, as it is difficult to determine, with precision, the incremental impact of these transactions on our results of operations.
Net Operating Revenues
Our consolidated Net operating revenues increased during the three months ended March 31, 2026 compared to the same period of 2025 primarily due to increased volumes and favorable pricing. Discharge growth included a 1.6% increase in same-store discharges. Discharge growth from new stores during the three months ended March 31, 2026 compared to the same period of 2025 resulted from our joint ventures in Athens, Georgia (March 2025), Fort Myers, Florida (May 2025), and Amarillo, Texas (November 2025), as well as our wholly owned hospitals in Daytona Beach, Florida (July 2025), Danbury, Connecticut (September 2025), St. Petersburg, Florida (October 2025), Lake Worth, Florida (December 2025), and Irmo, South Carolina (March 2026). Growth in net patient revenue per discharge during the three months ended March 31, 2026 compared to the same period of 2025 primarily resulted from an increase in reimbursement rates, retroactive cost reporting adjustments, and patient mix.
The increase in other revenue during the three months ended March 31, 2026 included an increase of $15.3 million in Medicaid supplemental payments (partially offset by an increase of $9.7 million in provider tax expenses included in Other operating expenses). Medicaid supplemental payments represent amounts received under state directed and supplemental payment programs associated with Medicaid. For additional information, see Part I, Item 1, Business, "Medicaid Reimbursement," of the 2025 Form 10-K.
Salaries and Benefits
Salaries and benefits increased during the three months ended March 31, 2026 compared to the same period of 2025 primarily due to salary and benefit cost increases for our employees and increased patient volumes, including an increase in the number of full-time equivalents as a result of our development activities. Salaries and benefits decreased as a percent of Net operating revenues during the three months ended March 31, 2026 compared to the same period of 2025 primarily due to an increase in Medicaid supplemental payments and decreases in both contract labor and sign-on and shift bonuses.
Other Operating Expenses
Other operating expenses increased in terms of dollars and as a percent of Net operating revenues during the three months ended March 31, 2026 compared to the same period of 2025 primarily due to increased provider taxes and higher costs resulting from our development activities partially offset by lower legal costs.
General and Administrative Expenses
General and administrative expenses increased in terms of dollars and as a percent of Net operating revenues during the three months ended March 31, 2026 compared to the same period of 2025 primarily due to higher costs associated with our transition to a new enterprise resource planning system, Oracle Fusion, in 2025.
Depreciation and Amortization
Depreciation and amortization increased during the three months ended March 31, 2026 compared to the same period of 2025 due to our capital investments. See the "Executive Overview" section of this item for information related to our development activity. We expect Depreciation and amortization to increase going forward as a result of our recent and ongoing capital investments.
Other Income
Other income during the three months ended March 31, 2026 includes a $17.5 million gain as a result of the sale of our 50% membership interest in Gamma Knife Center at Barnes-Jewish Hospital, LLC ("Gamma Knife") to our existing joint venture partner, Barnes-Jewish Hospital, LLC, effective January 1, 2026. For additional information, see Note 1, Basis of Presentation, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report.
Income from Continuing Operations Before Income Tax Expense
Our pre-tax income from continuing operations increased during the three months ended March 31, 2026 compared to the same period of 2025 primarily due to the increase in Net operating revenues as discussed above.
Provision for Income Tax Expense
Our Provision for income tax expense increased during the three months ended March 31, 2026 compared to the same period of 2025 primarily due to higher Income from continuing operations before income tax expense.
We currently estimate our cash payments for income taxes to be approximately $160 million to $190 million, net of refunds, for 2026. These payments are expected to primarily result from federal and state income tax expenses based on estimates of taxable income for 2026.
In certain jurisdictions, we do not expect to generate sufficient income to use all available state net operating losses and foreign tax 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 and foreign tax laws and rates.
See Note 8, Income Taxes, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report and Note 14, Income Taxes, to the consolidated financial statements accompanying the 2025 Form 10-K.
Net Income Attributable to Noncontrolling Interests
The increase in Net income attributable to noncontrolling interests during the three months ended March 31, 2026 compared to the same period of 2025 resulted from increased profitability from certain existing joint venture hospitals.
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.
We have been disciplined in creating a capital structure that is flexible with no significant debt maturities until 2028. 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.
On March 9, 2026, we entered into a new credit agreement (the "2026 Credit Agreement"). In connection with the execution of the 2026 Credit Agreement, we paid off all outstanding amounts, and terminated the commitments under the Sixth Amended and Restated Credit Agreement, dated October 7, 2022 (the "2022 Credit Agreement"). During March 2026, we drew $250.0 million on the revolving credit facility under the 2026 Credit Agreement to repay in full and retire the remaining amounts outstanding under the 2022 Credit Agreement.
For additional information, see Note 4, Long-term Debt, to the accompanying condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report, and Note 8, Long-term Debt, to the consolidated financial statements accompanying the 2025 Form 10-K.
Current Liquidity
As of March 31, 2026, we had $110.5 million in Cash and cash equivalents. This amount excludes $52.9 million in Restricted cash and $146.3 million of restricted marketable securities ($37.1 million included in Other current assets and $109.2 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 3, Marketable Securities, to the accompanying condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report, and Note 3, Cash and Marketable Securities, to the consolidated financial statements accompanying the 2025 Form 10-K.
In addition to Cash and cash equivalents, as of March 31, 2026, we had approximately $726 million available to us under our revolving credit facility. Our credit agreement governs 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 March 31, 2026, the maximum leverage ratio requirement per our credit agreement was 4.50x 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 March 31, 2026, if we had drawn on the first day and maintained the maximum amount of outstanding draws under our revolving credit facility for that entire period, we would still be in compliance with the maximum leverage ratio and minimum interest coverage ratio requirements.
We do not face near-term refinancing risk, as the amounts outstanding under our credit agreement do not mature until 2031, and our bonds all mature in 2028 and beyond. See Note 4, Long-term Debt, to the accompanying condensed consolidated financial statements, for additional information related to our debt. Also, see the "Contractual Obligations" section below for information related to our contractual obligations as of March 31, 2026.
For a discussion of risks and uncertainties facing us see Item 1A, Risk Factors, under Part II, Other Information, of this report and Part I, Item 1A, Risk Factors, of the 2025 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 (in millions):
Three Months Ended March 31,
2026 2025
Net cash provided by operating activities $ 313.1 $ 288.6
Net cash used in investing activities (150.1) (158.5)
Net cash used in financing activities (102.5) (130.4)
Increase (decrease) in cash, cash equivalents, and restricted cash $ 60.5 $ (0.3)
Operating activities. The increase in Net cash provided by operating activities for the three months ended March 31, 2026 compared to the same period of 2025 primarily resulted from an increase in Net income which was driven by growth in Net operating revenues.
Investing activities. The decrease in Net cash used in investing activities during the three months ended March 31, 2026 compared to the same period of 2025 primarily resulted from increased Proceeds from sale of restricted investments partially offset by increased Purchases of restricted investments. Proceeds from sale of restricted investments during the three months ended March 31, 2026 includes $17.9 million resulting from the sale of our 50% membership interest in Gamma Knife. For additional information, see Note 1, Basis of Presentation, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report.
Financing activities. The decrease in Net cash used in financing activities during the three months ended March 31, 2026 compared to the same period of 2025 primarily resulted from higher net debt borrowings, partially offset by higher Repurchases of common stock, including fees and expenses and Distributions paid to noncontrolling interests of consolidated affiliates. For additional information on our net debt borrowings, see Note 4, Long-term Debt, to the accompanying condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report, and Note 8, Long-term Debt, to the consolidated financial statements accompanying the 2025 Form 10-K. For additional information related to our stock repurchases, see the "Authorizations for Returning Capital to Stakeholders" section below.
Contractual Obligations
Our consolidated contractual obligations as of March 31, 2026 are as follows (in millions):
Total Current Long-term
Long-term debt obligations:
Long-term debt, excluding finance lease obligations (a)
$ 2,065.6 $ 15.7 $ 2,049.9
Revolving credit facility 220.0 - 220.0
Interest on long-term debt (b)
384.2 109.8 274.4
Finance lease obligations (c)
399.5 47.9 351.6
Operating lease obligations (d)
294.4 39.5 254.9
Purchase obligations (e)
222.9 59.5 163.4
Total $ 3,586.6 $ 272.4 $ 3,314.2
(a) Included in long-term debt are amounts owed on our bonds payable and other notes payable. These borrowings are further explained in Note 4, Long-term Debt, accompanying the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report, and Note 8, Long-term Debt, to the consolidated financial statements accompanying the 2025 Form 10-K.
(b) Interest on our fixed rate debt is presented using the stated interest rate. Interest on our variable rate debt is estimated using the rate in effect as of March 31, 2026. Interest pertaining to our 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 operations.
(c) Amounts include interest portion of future minimum finance lease payments.
(d) We lease approximately 9% 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 6, Leases, to the consolidated financial statements accompanying the 2025 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 three months ended March 31, 2026, we made capital expenditures of approximately $162 million for property, equipment, and intangible assets. During 2026, we expect to spend approximately $920 million to $995 million for capital expenditures using cash on hand and borrowings under our revolving credit facility. Approximately $225 million to $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. At March 31, 2026, we have projects under construction which have an estimated additional cost to complete over the next two years of approximately $367 million. We expect to fund capital expenditures using cash on hand and borrowings under our revolving credit facility.
Authorizations for Returning Capital to Stakeholders
In October 2025 and February 2026, our board of directors declared cash dividends of $0.19 per share that were paid in January 2026 and April 2026, respectively. 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.
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 4, Long-term Debt, to the accompanying condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report, and Note 8, Long-term Debt, to the consolidated financial statements accompanying the 2025 Form 10-K.
In 2013, we announced our board of directors authorized the repurchase of up to $200 million of our common stock, which has been amended from time to time. Most recently, on July 24, 2024, our board approved resetting the aggregate common stock repurchase authorization to $500 million. As of March 31, 2026, approximately $261 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. During the three months ended March 31, 2026, we repurchased 0.7 million shares of our common stock in the open market for $71.6 million under this repurchase authorization using cash on hand. Future repurchases under this authorization generally are expected to be funded using a combination of cash on hand and availability under our $1 billion revolving credit facility. 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 4.50% Senior Notes due 2028, 4.75% Senior Notes due 2030, and 4.625% Senior Notes due 2031, (collectively, the "Senior Notes") are guaranteed by certain consolidated subsidiaries. These guarantees are full and unconditional and joint and several, subject to certain customary conditions for release. The Senior Notes are guaranteed on a senior, unsecured basis by all of our existing and future subsidiaries that guarantee borrowings under our credit agreement and other capital markets debt. The other subsidiaries of Encompass Health do not guarantee the Senior Notes (such subsidiaries are referred to as the "non-guarantor subsidiaries").
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.
Three Months Ended March 31, 2026
(In Millions)
Net operating revenues $ 998.9
Intercompany revenues generated from non-guarantor subsidiaries 30.2
Total net operating revenues $ 1,029.1
Operating expenses $ 848.6
Intercompany expenses incurred in transactions with non-guarantor subsidiaries 11.4
Total operating expenses $ 860.0
Income from continuing operations $ 119.0
Net income $ 134.9
Net income attributable to Encompass Health
$ 134.9
As of
March 31, 2026 		As of
December 31, 2025
(In Millions)
Total current assets $ 673.0 $ 604.3
Property and equipment, net
$ 2,911.3 $ 2,804.6
Goodwill
883.2 883.2
Other noncurrent assets 499.1 517.2
Total noncurrent assets $ 4,293.6 $ 4,205.0
Total current liabilities $ 658.4 $ 625.0
Long-term debt, net of current portion
$ 2,469.0 $ 2,383.7
Intercompany payable due to non-guarantor subsidiaries 7.6 3.9
Other noncurrent liabilities 328.9 328.3
Total noncurrent liabilities
$ 2,805.5 $ 2,715.9
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 cash provided by operating activities and 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 8, Long-term Debt, to the consolidated financial statements accompanying the 2025 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, repurchasing our common stock, 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 of 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 2025 Form 10-K.
Our Adjusted EBITDA was as follows (in millions):
Reconciliation of Net Cash Provided by Operating Activities to Adjusted EBITDA
Three Months Ended March 31,
2026 2025
Net cash provided by operating activities $ 313.1 $ 288.6
Interest expense and amortization of debt discounts and fees 31.8 31.8
Gain (loss) on investments, excluding impairments 16.2 (0.1)
Equity in net income of nonconsolidated affiliates 0.4 0.9
Net income attributable to noncontrolling interests in continuing operations (53.7) (45.0)
Amortization of debt-related items (2.4) (2.4)
Distributions from nonconsolidated affiliates (0.1) (0.5)
Current portion of income tax expense 47.9 32.8
Change in assets and liabilities 33.8 7.5
Cash (provided by) used in operating activities of discontinued operations (21.2) 0.7
Change in fair market value of marketable securities 0.2 (0.7)
Gain on sale of Gamma Knife (17.5) -
Other 0.3 -
Adjusted EBITDA $ 348.8 $ 313.6
Reconciliation of Net Income to Adjusted EBITDA
Three Months Ended March 31,
2026 2025
Net income $ 248.2 $ 196.5
(Income) loss from discontinued operations, net of tax, attributable to Encompass Health (15.9) 0.5
Net income attributable to noncontrolling interests included in continuing operations (53.7) (45.0)
Provision for income tax expense 56.4 41.6
Interest expense and amortization of debt discounts and fees 31.8 31.8
Depreciation and amortization 87.3 79.2
Loss on early extinguishment of debt 0.2 -
Loss on disposal or impairment of assets 0.3 0.2
Stock-based compensation 11.5 9.5
Change in fair market value of marketable securities 0.2 (0.7)
Gain on sale of Gamma Knife (17.5) -
Adjusted EBITDA $ 348.8 $ 313.6
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.
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