Encompass Health Corp

Condensed Consolidated Statements of Operations

Condensed Consolidated Statements of Comprehensive Income

Condensed Consolidated Balance Sheets

(1)Our consolidated assets as of March 31, 2026 and December 31, 2025 include total assets of variable interest entities of $206.0 million and $203.8 million, respectively, which cannot be used by us to settle the obligations of other entities. Our consolidated liabilities as of March 31, 2026 and December 31, 2025 include total liabilities of the variable interest entities of $45.8 million and $50.5 million, respectively. See Note 2, Variable Interest Entities.

Condensed Consolidated Statements of Shareholders’ Equity (Continued)

Condensed Consolidated Statements of Cash Flows

Condensed Consolidated Statements of Cash Flows (Continued)

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. We operate hospitals in 39 states and Puerto Rico, with concentrations in Florida and Texas. As of March 31, 2026, we operated 174 inpatient rehabilitation hospitals. We are the sole owner of 108 of these hospitals. We retain 50.0% to 97.5% ownership in the remaining 66 jointly owned hospitals.

On December 31, 2025, we entered into an agreement to sell 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, for $17.9 million effective January 1, 2026. We accounted for Gamma Knife as an equity method investment. As a result of this transaction, we recorded a $17.5 million pre-tax gain in Other income on our condensed consolidated statement of operations during the three months ended March 31, 2026. The $17.9 million proceeds are classified as an investing activity within our condensed consolidated statement of cash flows during the three months ended March 31, 2026.

The accompanying unaudited condensed consolidated financial statements of Encompass Health Corporation and Subsidiaries should be read in conjunction with the consolidated financial statements and accompanying notes contained in Encompass Health’s Annual Report on Form 10-K filed with the United States Securities and Exchange Commission on February 26, 2026 (the “2025 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, 2025 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. Certain prior year amounts may have been reclassified for comparative purposes to conform to the current-year financial statement presentation.

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):

See Note 1, Summary of Significant Accounting Policies, to the consolidated financial statements accompanying the 2025 Form 10-K for our policy related to Net operating revenues.

Assets and Liabilities in and Results of Discontinued Operations—

In January 2026, we reached an agreement with certain defendants involved in our ongoing litigation against former executive officers of our home health and hospice business, which was spun off on July 1, 2022. This agreement related to our claims for attorneys’ fees and mitigation damages previously awarded to us. In February 2026, we collected $21.9 million in full satisfaction of our claims. As a result, we recorded a $16.3 million after tax gain in Income (loss) from discontinued operations, net of tax, in the condensed consolidated statements of operations during the three months ended March 31, 2026.

Recent Accounting Pronouncements Not Yet Adopted—

In November 2024, the FASB issued ASU 2024-03, “Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses,” which requires disaggregation of certain expense captions into specified categories within the notes to the financial statements for both interim and annual reporting periods. ASU 2024-03 is effective for our annual periods beginning January 1, 2027 and interim periods beginning January 1, 2028. Early adoption is permitted. We are currently evaluating the requirements of this standard and any potential impact it may have on our condensed consolidated financial statements.

In September 2025, the FASB issued ASU 2025-06, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Targeted Improvements to the Accounting for Internal-Use Software,” which intends to modernize the guidance related to internal-use software costs to reflect current software development methods. ASU 2025-06 requires entities to begin capitalizing software costs when management authorizes and commits to funding the software project, and it is probable the project will be completed and the software will be used for its intended purpose. ASU 2025-06 is effective for our annual and interim periods beginning January 1, 2028. Early adoption is permitted. The guidance can be applied on a prospective basis, a modified basis for in-process projects, or on a retrospective basis. We are currently evaluating the requirements of this standard and any potential impact it may have on our condensed consolidated financial statements.

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

2. Variable Interest Entities

As of March 31, 2026 and December 31, 2025, we consolidated eight 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 March 31, 2026. 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):

3. Marketable Securities

Restricted marketable securities at both balance sheet dates represent restricted assets held at HCS, Ltd (“HCS”), our consolidated wholly owned offshore captive insurance company. HCS insures a substantial portion of Encompass Health’s professional liability, workers’ compensation, and other insurance claims. These funds are committed for payment of claims incurred, and the classification of these marketable securities as current or noncurrent depends on the classification of the corresponding claims liability. As of March 31, 2026, $37.1 million of restricted marketable securities are included in Other current assetsand $109.2 million of restricted marketable securities are included in Other long-term assets in our condensed consolidated balance sheet. As of December 31, 2025, $42.2 million of restricted marketable securities are included in Other current assets and $103.6 million are included in Other long-term assets in our condensed consolidated balance sheet.

During the three months ended March 31, 2026 and 2025, $(0.2) million and $0.7 million, respectively, of unrealized net (losses) gains were recognized in our condensed consolidated statements of operations on equity securities still held at the reporting date.

A summary of our debt securities as of March 31, 2026 is as follows (in millions):

During the three months ended March 31, 2026, we did not record any impairment charges related to our debt securities. We did not have any debt securities during the three months ended March 31, 2025.

Investing information related to our available-for-sale debt securities is as follows (in millions):

The contractual maturities of our available-for-sale debt securities as of March 31, 2026 are as follows (in millions):

4. Long-term Debt

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

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

On March 9, 2026 (the “Closing Date”), we entered into a credit agreement (the “2026 Credit Agreement”), by and among us, certain of our subsidiaries, as guarantors, Truist Bank, as administrative agent and collateral agent, and various other lenders. In connection with the execution of the 2026 Credit Agreement, we paid off all outstanding amounts, and terminated the commitments, as of the Closing Date, under the Sixth Amended and Restated Credit Agreement, dated October 7, 2022 (the “2022 Credit Agreement”), by and among us, certain of our subsidiaries, as guarantors, Barclays Bank PLC, as administrative agent and collateral agent (“Barclays”), and various other lenders. The terms of the 2026 Credit Agreement are substantially the same as the terms of the 2022 Credit Agreement, except that (i) the maturity date has been changed to March 9, 2031, (ii) the fee for the undrawn portion of the revolving loan commitment has been lowered byfive basis points, (iii) certain limitations on the ability of us and our subsidiaries to make investments, incur debt or liens, or make restricted payments have been relaxed, (iv) the 0.10% adjustment to interest payable on Term SOFR Borrowings has been eliminated, and (v) the swingline loan sublimit has been increased from $25 million to $40 million.

Our obligations under the 2026 Credit Agreement are secured by the current and future personal property of the Company and its subsidiary guarantors. Additionally, we terminated our existing collateral and guarantee agreement with Barclays and entered into the Collateral and Guarantee Agreement (the “2026 Collateral and Guarantee Agreement”), by and among the Company, certain of its subsidiaries, and Truist Bank, as collateral agent, which provides for similar terms in all material respects.

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. As of March 31, 2026, $220.0 million was drawn under the revolving credit facility with an interest rate of 4.9%. As of December 31, 2025, $130.0 million was drawn under the revolving credit facility with an interest rate of 5.9%.

5. Redeemable Noncontrolling Interests

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

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 income attributable to noncontrolling interests presented in the condensed consolidated statements of operations (in millions):

See also Note 6, Fair Value Measurements.

6. Fair Value Measurements

Our financial assets and liabilities that are measured at fair value on a recurring basis are as follows (in millions):

(1) The two valuation techniques are: market approach (M) and income approach (I).

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 months ended March 31, 2026 and 2025, we didnot record any material gains or losses related to these assets.

As discussed in Note 1, Summary of Significant Accounting Policies, “Fair Value Measurements,” to the consolidated financial statements accompanying the 2025 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):

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 2025 Form 10‑K.

7. Share-Based Payments

During the three months ended March 31, 2026, we issued a total of 0.4 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,0.1 million contain only a service condition, while the remainder contain a service and/or performance condition as well as a market condition for certain members of management. 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 three-year performance measurement period. Additionally, we granted 0.1 million stock options to members of our management team. The fair value of these awards and options was determined using the policies described in Note 1, Summary of Significant Accounting Policies, and Note 12, Share-Based Payments, to the consolidated financial statements accompanying the 2025 Form 10‑K.

8. Income Taxes

Our Provision for income tax expenseof $56.4 million for the three months ended March 31, 2026 primarily resulted from the application of our estimated effective blended federal and state income tax rate together with non-deductible executive compensation partially offset by tax benefits resulting from share-based compensation windfalls. Our Provision for income tax expenseof $41.6 million for the three months ended March 31, 2025 primarily resulted from the application of our estimated effective blended federal and state income tax rate primarily offset by tax benefits resulting from share-based compensation windfalls.

9. Earnings per Common Share

The following table sets forth the computation of basic and diluted earnings per common share (in millions, except per share amounts):

The following table sets forth the reconciliation between basic weighted average common shares outstanding and diluted weighted average common shares outstanding (in millions):

See Note 15, Earnings per Common Share, to the consolidated financial statements accompanying the 2025 Form 10‑K for additional information related to our common stock.

10. Contingencies and Other Commitments

We provide services in the highly regulated healthcare industry. Furthermore, operating inpatient rehabilitation hospitals requires significant staffing and involves intensive therapy for individuals suffering from significant physical or cognitive disabilities or injuries. 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.

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 aqui tam action may remain unaware of the existence of a sealed complaint or its specific claims 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 thatqui 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 undisclosedqui 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, and may in the future result in, Encompass Health refunding amounts to Medicare or other federal healthcare programs.

Other Commitments—

We are a party to service and other contracts in connection with conducting our business. Minimum amounts due under these agreements are $51.6 million for the remainder of 2026, $40.1 million in 2027, $36.3 million in 2028, $30.3 million in 2029, $27.4 million in 2030, and $37.2 million thereafter. These contracts primarily relate to software licensing and support and medical equipment.

11. Segment Reporting:

We manage our operations usingone operating segment which is also our reportable segment: inpatient rehabilitation. Our national network of inpatient rehabilitation hospitals provide specialized rehabilitative treatment on an inpatient basis. Our inpatient rehabilitation hospitals provide a higher level of rehabilitative care to patients who are recovering from conditions such as stroke and other neurological disorders, cardiac and pulmonary conditions, brain and spinal cord injuries, complex orthopedic conditions, and amputations.

The accounting policies of our reportable segment are the same as those described in Note 1, Summary of Significant Accounting Policies, to the consolidated financial statements accompanying the 2025 Form 10‑K. All revenues for our services are generated through external customers. See Note 1, Basis of Presentation, “Net Operating Revenues,” for the disaggregation of our revenues. Our chief operating decision maker (“CODM”) is the chief executive officer. Our CODM evaluates the performance and allocates resources based on adjusted earnings before interest, taxes, depreciation, and amortization (“Adjusted EBITDA”). Our CODM primarily considers forecast-to-budget variances and current year actuals to prior year actuals variances to assess performance and to help inform operating decisions, including allocating resources.

Selected financial information, including significant segment expenses, for our reportable segment is as follows (in millions):

(1)Includes interest and dividend income, investment gain or loss, and equity in net income of nonconsolidated affiliates.

Segment reconciliation (in millions):

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

Equity in net income of nonconsolidated affiliates and the Provision for income tax expense are reported on our condensed consolidated statements of operations. Segment assets are reported on our condensed consolidated balance sheets as Total assets. Segment capital expenditures are reported on our condensed consolidated statements of cash flows as Purchases of property, equipment, and intangible assets.