The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") relates toEncompass 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 endedDecember 31, 2020 , Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, Part I, Item 1, Business, and Item 1A, Risk Factors, included in our Annual Report on Form 10-K for the year endedDecember 31, 2020 filed onFebruary 26, 2021 (collectively, the "2020 Form 10K"). 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 for a description of important factors that could cause actual results to differ from expected results. See also Item 1A, Risk Factors, of this report and to the 2020 Form 10K. Executive Overview Our Business We are a leading provider of post-acute healthcare services, offering both facility-based and home-based patient care through our network of inpatient rehabilitation hospitals, home health agencies, and hospice agencies. As ofSeptember 30, 2021 , our national footprint includes 42 states andPuerto Rico . As discussed in this Item, "Segment Results of Operations," we manage our operations in two operating segments which are also our reportable segments: (1) inpatient rehabilitation and (2) home health and hospice. For additional information about our business, see Item 1, Business, of the 2020 Form 10K. OnDecember 9, 2020 , we announced a formal process to explore strategic alternatives for our home health and hospice business. We expect to effect a partial or full separation of our home health and hospice business into an independent public company via a carve-out IPO, spin-off, or split-off. We are targeting such a transaction in the first half of 2022 and expect to announce a more precise timing and the form of the separation transaction in connection with our fourth quarter earnings release. While there can be no assurance that a transaction of this nature will be consummated, we have made significant progress on the various tasks necessary to complete a separation transaction and will further our state of readiness over the balance of this year. We have previously indicated that we believe a full or partial separation of the home health and hospice business will enhance the long-term success and value of the business. We have thoroughly evaluated a broad array of public and private transaction alternatives and believe effecting the separation via the formation of an independent public company is superior to the other alternatives considered. Among other considerations, this belief is based on the anticipated strategic focus, future growth and value creating opportunities, execution risks, and tax efficiency resulting from such a transaction. The onset of the COVID-19 Pandemic (the "pandemic") inthe United States resulted in significant changes to our operating environment. For discussion of the financial and operational impacts we experienced in 2020 as a result of the pandemic, see Item 1, Business, Item 1A, Risk Factors, and Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, "Results of Operations" and "Segment Results of Operations" of the 2020 Form 10-K. For discussion of the financial and operational impacts we are experiencing in 2021 as a result of the pandemic, see "Key Challenges" below and the "Results of Operations" and "Segment Results of Operations" sections of this Item. Inpatient Rehabilitation We are the nation's largest owner and operator of inpatient rehabilitation hospitals in terms of patients treated, revenues, and number of hospitals. We provide specialized rehabilitative treatment on predominantly an inpatient basis. We operate hospitals in 35 states andPuerto Rico , with concentrations in the eastern half ofthe United States andTexas . As ofSeptember 30, 2021 , we operate 144 inpatient rehabilitation hospitals and manage four inpatient rehabilitation units through management contracts. Our inpatient rehabilitation segment represents approximately 79% of our Net operating revenues for the three months endedSeptember 30, 2021 and 78% for the nine months endedSeptember 30, 2021 . 21 --------------------------------------------------------------------------------Home Health and Hospice Our home health business is the nation's fourth largest provider of Medicare-certified skilled home health services in terms of revenues. Our home health services include a comprehensive range of Medicare-certified home nursing services to adult patients in need of care. Our hospice business is the nation's eighth largest provider of Medicare-certified hospice services in terms of revenues. We provide hospice services to terminally ill patients and their families that address patients' physical needs, including pain control and symptom management, and to provide emotional and spiritual support. As ofSeptember 30, 2021 , we provide home health services in 249 locations and provide hospice services in 95 locations across 34 states, with concentrations in the southern half ofthe United States . In addition, one of these home health locations operates as a joint venture that we account for using the equity method of accounting. Our home health and hospice segment represents approximately 21% of our Net operating revenues for the three months endedSeptember 30, 2021 and 22% for the nine months endedSeptember 30, 2021 . 2021 Overview During the three months endedSeptember 30, 2021 , Net operating revenues increased 9.4% over the same period of 2020 due primarily to increased volumes and favorable pricing in the inpatient rehabilitation segment. During the nine months endedSeptember 30, 2021 , Net operating revenues increased 10.9% over the same period of 2020 due primarily to increased volumes and favorable pricing in both segments. See "Results of Operations" and the "Segment Results of Operations" sections of this Item for additional volume and pricing information. We have continued our development and expansion efforts in 2021. In our inpatient rehabilitation segment we: •began operating our new 40-bed inpatient rehabilitation hospital inSan Angelo, Texas with our joint venture partnerShannon Health inMarch 2021 ; •began operating our new 50-bed inpatient rehabilitation hospital inNorth Tampa, Florida inApril 2021 ; •began operating our new 50-bed inpatient rehabilitation hospital inCumming, Georgia inJune 2021 ; •began operating our new 40-bed inpatient rehabilitation hospital inWaco, Texas inAugust 2021 ; •began operating our new 40-bed inpatient rehabilitation hospital inShreveport, Louisiana inAugust 2021 ; •began operating our new 40-bed inpatient rehabilitation hospital inGreenville, South Carolina inAugust 2021 ; •began operating our new 40-bed inpatient rehabilitation hospital inPensacola, Florida inSeptember 2021 ; •continued our capacity expansions by adding 89 new beds to existing hospitals; and 22 --------------------------------------------------------------------------------
•announced or continued the development of the following hospitals:
Number of New Beds 2021 2022 2023 2024 De novos: Henry County, Georgia* 50 - - - Libertyville, Illinois - 60 - - St. Augustine, Florida - 40 - - Lakeland, Florida - 50 - - Cape Coral, Florida - 40 - - Jacksonville, Florida - 50 - - Naples, Florida - 50 - - Clermont, Florida - - 50 - Bowie, Maryland - - 60 - Prosper, Texas - - 40 - Fitchburg, Wisconsin - - 40 - Kissimmee, Florida - - 50 - Fort Mill, South Carolina - - 39 - Palm Beach Gardens, Florida - - - 50 Lake Worth, Florida - - - 50 Joint ventures: Shiloh, Illinois - 40 - - Grand Forks, North Dakota - 40 - - Moline, Illinois - 40 - - Eau Claire, Wisconsin - 36 - - Owasso, Oklahoma - - 40 - Knoxville, Tennessee - - 73 - Columbus, Georgia*** - - 40 - Louisville, Kentucky** - - 40 - Atlanta, Georgia*** - - - 40 *Opened inOctober 2021 ; **Announced inOctober 2021 ***Piedmont Healthcare , our joint venture partner in these hospitals, assumed 50% ownership in our existing hospital inNewnan, Georgia during the second quarter of 2021. We also continued our expansion efforts in our home health and hospice segment. OnJune 1, 2021 , we completed the acquisition of the home health and hospice assets ofFrontier Home Health and Hospice ("Frontier") inAlaska ,Colorado ,Montana ,Washington , andWyoming for a cash purchase price of approximately$99 million . The Frontier acquisition included the purchase of a 50% equity interest in the Heart of theRockies Home Health joint venture and a 90% equity interest in theHospice of Southwest Montana joint venture (inclusive of an additional 40% equity interest purchased for approximately$4 million ). We consolidate both of these joint ventures. On the acquisition date, nine home health and eleven hospice locations became part of our national network of home health and hospice locations. This acquisition was made to expand our existing presence inColorado andWyoming and extend our services toAlaska ,Montana andWashington . We funded this transaction using cash on hand and borrowings under our revolving credit facility. For additional information regarding this transaction, see Note 2, Business Combinations, to the accompanying condensed consolidated financial statements. In addition to the Frontier acquisition, we began accepting patients at our new hospice locations inLas Cruces, New Mexico (May 2021 ) andAbilene, Texas (September 2021 ). We continued our shareholder distributions during the nine months endedSeptember 30, 2021 by paying a quarterly cash dividend of$0.28 per share on our common stock in January, April, July and October. OnOctober 21, 2021 , our board of directors declared a cash dividend of$0.28 per share, payable onJanuary 18, 2022 to stockholders of record onJanuary 3, 2022 . For additional information see the "Liquidity and Capital Resources" section of this Item. 23 -------------------------------------------------------------------------------- Business Outlook Notwithstanding the current impacts from the pandemic, we remain optimistic regarding the intermediate and long-term prospects for 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. Even more specifically, the average age of our patients is approximately 76, and the population group ranging in ages from 75 to 79 is expected to grow at approximately 5% per year through 2026. We believe the demand for the services we provide will continue to increase as theU.S. population ages. We believe these factors align with our strengths in, and focus on, post-acute services. In addition, we believe we can address the demand for facility-based and home-based post-acute care services in markets where we currently do not have a presence by constructing or acquiring new hospitals and by acquiring or opening home health and hospice agencies in those fragmented industries. We are a leading provider of post-acute healthcare services, offering both facility-based and home-based patient care through our network of inpatient rehabilitation hospitals, home health agencies, and hospice agencies. We are committed to delivering high-quality, cost-effective, integrated patient care. As the nation's largest owner and operator of inpatient rehabilitation hospitals in terms of patients treated, revenues, and number of hospitals, we believe we differentiate ourselves from our competitors based on the quality of our clinical outcomes, our cost-effectiveness, our financial strength, and our extensive application of technology. As the fourth largest provider of Medicare-certified skilled home health services in terms of revenues, we believe we differentiate ourselves from our competitors by the application of a highly integrated technology platform, our ability to manage a variety of care pathways, and a proven track record of consummating and integrating acquisitions. Although the healthcare industry is currently engaged in addressing the healthcare crisis caused by the pandemic, the industry also faces the prospect of ongoing efforts to transform the healthcare system to coordinated care delivery and payment models. The nature, timing and extent of that transformation remains uncertain, as the development and implementation of new care delivery and payment systems will require significant time and resources. Our short-term goal is to serve our communities and provide the best care possible during the pandemic. Our long-term goal is to position the Company in a prudent manner to be responsive to industry shifts. We have invested in our core business and created an infrastructure that enables us to provide high-quality care on a cost-effective basis. We have been disciplined in creating a capital structure that is flexible with no significant debt maturities prior to 2023. We continue to have a strong, well-capitalized balance sheet, including a substantial portfolio of owned real estate and significant availability under our revolving credit facility. For these and other reasons, we believe we will be able to adapt to changes in reimbursement, sustain our business model, and grow through acquisition and consolidation opportunities as they arise. See also Item 1, Business, "Competitive Strengths" and "Strategy and 2021 Strategic Priorities" of the 2020 Form 10K. Key Challenges Healthcare is a highly regulated industry facing many well-publicized regulatory and reimbursement challenges. The Medicare reimbursement systems for both inpatient rehabilitation and home health have recently undergone significant changes. The future of many aspects of healthcare regulation remains uncertain. Successful healthcare providers are those able to adapt to changes in the regulatory and operating environments, build strategic relationships, and consistently provide high-quality, cost-effective care. We believe we have the necessary capabilities - change agility, strategic relationships, quality of patient outcomes, cost effectiveness, and ability to capitalize on growth opportunities - to adapt to and succeed in a dynamic, highly regulated industry, and we have a proven track record of doing so. For a detailed discussion of the challenges we face, see Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, "Executive Overview-Key Challenges" of the 2020 Form 10K. As we continue to execute our business plan, the following are some of the challenges we face. •Operating in a Highly Regulated Industry. We are required to comply with extensive and complex laws and regulations at the federal, state, and local government levels. More specifically, because Medicare comprises a significant portion of our Net operating revenues, failure to comply with the laws and regulations governing the Medicare program and related matters could materially and adversely affect us. These rules and regulations have affected, or could in the future affect, our business activities by having an impact on the reimbursement we receive for services provided or the costs of compliance, mandating new documentation standards, requiring additional licensure or certification, regulating our relationships with physicians and other referral sources, regulating the use of our properties, and limiting our ability to enter new markets or add new capacity to existing hospitals and agencies. Ensuring continuous compliance with extensive laws and regulations is an operating requirement for all healthcare providers. See Item 1, Business, "Regulation," Item 1A, Risk Factors, and Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, "Executive Overview-Key 24 -------------------------------------------------------------------------------- Challenges," of the 2020 Form 10K for detailed discussions of the most important regulations we face and our programs intended to ensure we comply with those regulations. •Changes to Our Operating Environment Resulting from the pandemic. In response to the public health emergency associated with the pandemic,Congress and theCenters 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. OnMarch 27, 2020 , formerPresident Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the "CARES Act"), which suspended sequestration, an automatic 2% reduction of Medicare program payments for all healthcare providers, under the Budget Control Act of 2011 (the "2011 BCA") for the period ofMay 1 through December 31, 2020 . OnDecember 27, 2020 , the Consolidated Appropriations Act, 2021 (the "2021 Budget Act") extended the sequestration suspension throughMarch 31, 2021 . OnApril 14, 2021 ,Congress further extended the sequestration suspension period throughDecember 31, 2021 . During the nine months endedSeptember 30, 2021 , the sequestration suspension provided additional revenues in our inpatient rehabilitation segment and home health and hospice segment of approximately$46 million and$14 million , respectively. For additional discussion, see the "Results of Operations" and "Segment Results of Operations" sections of this Item. The CARES Act, the 2021 Budget Act, and CMS regulatory actions include a number of other provisions affecting our reimbursement and operations in both segments. These provisions are discussed in Item 1, Business, "Sources of Revenue," Item 1A, Risk Factors, and Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, "Results of Operations" of the 2020 Form 10-K. •Changes to Our Operating Environment Resulting from Federal Regulatory and Legislative Actions. OnJuly 29, 2021 , CMS released its Notice of Final Rulemaking for Fiscal Year 2022 for inpatient rehabilitation facilities under the inpatient rehabilitation facility prospective payment system (the "2022 Final IRF Rule"). The 2022 Final IRF Rule will implement a net 1.9% market basket increase (market basket update of 2.6% reduced by a productivity adjustment of 0.7%) effective for discharges betweenOctober 1, 2021 andSeptember 30, 2022 . The 2022 Final IRF Rule also includes changes that impact our hospital-by-hospital base rate for Medicare reimbursement. Such changes include, but are not limited to, revisions to the wage index and labor-related share values, updates to outlier payments and updates to the case-mix group relative weights and average lengths of stay values. The 2022 Final IRF Rule will also add one new quality reporting measure and update the denominator of another measure. Based on our analysis, which utilizes, among other things, the acuity of our patients annualized over a six-month period endedJune 30, 2021 , our experience with outlier payments over this same time frame, and other factors, we believe the 2022 Final IRF Rule will result in a net increase to our Medicare payment rates of approximately 1.9% effectiveOctober 1, 2021 . OnJune 28, 2021 , CMS released its Notice of Proposed Rulemaking for Calendar Year 2022 for home health agencies under the home health prospective payment system (the "2022 Proposed HH Rule"). The 2022 Proposed HH Rule would, among others, implement a net 1.7% market basket increase (market basket update of 2.4% reduced by 0.6% for a productivity adjustment and 0.1% for the phase-out of the rural payment add-on factor), update the case-mix weights and fixed dollar loss ratio for outlier payments, and include a low utilization payment adjustment ("LUPA") add-on factor for the first skilled occupational therapy visit in LUPA periods. CMS did not propose to modify the current behavioral adjustment in CY 2022 while they continue to analyze home health payments to ensure budget neutrality under the new Patient-Driven Groupings Model ("PDGM") payment system. CMS provided preliminary analysis indicating that an additional approximate 6% budget neutrality adjustment may be necessary in future years although stating that they believe that claims data could be affected by the pandemic and home health agencies adjusting to the new PDGM payment system that was effective in 2020. The 2022 Proposed HH Rule also would expand the Home Health Value-Based Purchasing ("HHVBP") Model, beginningJanuary 1, 2022 , to all Medicare-certified home health agencies in the 50 States, territories, andDistrict of Columbia (with a maximum payment adjustment, upward or downward of 5%). This rulemaking also proposes to end the original HHVBP Model one year early for the home health agencies in the nine original Model States. Based on our preliminary analysis, which utilizes, among other things, our patient mix annualized over a six-month period endedJune 30, 2021 , our specific geographic coverage area, and other factors, we believe the 2022 Proposed HH Rule will result in a net increase to our Medicare payment rates of approximately 2.2% to 2.7% effective for 30-day payment periods ending on or afterJanuary 1, 2022 . 25 -------------------------------------------------------------------------------- OnJuly 16, 2021 , CMS announced the full implementation of the home health Review Choice Demonstration will begin effectiveSeptember 1, 2021 inNorth Carolina andFlorida . CMS will discontinue exercising the existing phased-in approach for these two states. As discussed above, the suspension of Medicare sequestration under the 2011 BCA is currently set to endDecember 31, 2021 , which would result in an approximate 2% reduction in Medicare reimbursement otherwise due in 2022. Additional Medicare payment reductions are also possible under the Statutory Pay-As-You-Go Act of 2010 ("Statutory PAYGO"). Statutory PAYGO requires, among other things, that mandatory spending and revenue legislation not increase the federal budget deficit over a 5- or 10-year period. If theOffice of Management and Budget (the "OMB") finds there is a deficit, Statutory PAYGO requires OMB to order sequestration of Medicare. TheCongressional Budget Office has estimated that the COVID-19 relief package enacted inMarch 2021 , the American Rescue Plan Act of 2021, would result in a 4% reduction in fiscal year 2022 Medicare spending under Statutory PAYGO unlessCongress acts to waive or otherwise avoid this sequestration. •Maintaining Strong Volume Growth. In addition to the factors described in our 2020 Form 10K, we believe a number of conditions related to the pandemic negatively impacted volumes so far in 2021, predominately in the home health and hospice segment. While we continue to see our volumes recover in our inpatient rehabilitation segment, as discussed in the "Results of Operations" and "Segment Results of Operations" sections of this Item, a current or future resurgence of COVID-19 infections could cause disruptions to our volume growth. •Recruiting and Retaining High-Quality Personnel. See Item 1A, Risk Factors, of the 2020 Form 10K for a 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. 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, where employees are unavailable due to a lack of childcare or care for elderly family, or due to competition within the local market. These factors have resulted in increased labor costs and increased use of contract labor. We remain confident in the prospects of 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. We have a proven track record of working through difficult situations, and we believe in our ability to overcome current and future challenges. Results of Operations Payor Mix We derived consolidated Net operating revenues from the following payor sources: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Medicare 68.0 % 69.9 % 68.3 % 69.8 % Medicare Advantage 14.1 % 14.5 % 14.5 % 14.8 % Managed care 10.9 % 9.2 % 10.5 % 9.0 % Medicaid 3.5 % 3.6 % 3.5 % 3.4 % Other third-party payors 0.8 % 0.9 % 0.9 % 0.9 % Workers' compensation 0.5 % 0.4 % 0.4 % 0.5 % Patients 0.4 % 0.5 % 0.4 % 0.5 % Other income 1.8 % 1.0 % 1.5 % 1.1 % Total 100.0 % 100.0 % 100.0 % 100.0 % For information regarding our payors by segment, see the "Segment Results of Operations" section of this Item. For additional information regarding our payors, see the "Sources of Revenues" section of Item 1, Business, of the 2020 Form 10K. 26 -------------------------------------------------------------------------------- Our Results Our consolidated results of operations were as follows: Three Months Ended September 30, Percentage Change Nine Months Ended September 30, Percentage Change 2021 2020 2021 vs. 2020 2021 2020 2021 vs. 2020 (In Millions, Except Percentage Change) Net operating revenues$ 1,284.8 $ 1,173.9 9.4 %$ 3,802.9 $ 3,430.0 10.9 % Operating expenses: Salaries and benefits 730.1 664.9 9.8 % 2,125.5 1,995.9 6.5 % Other operating expenses 173.4 163.4 6.1 % 508.4 471.3 7.9 % Occupancy costs 19.8 20.3 (2.5) % 60.2 60.8 (1.0) % Supplies 53.2 52.5 1.3 % 155.1 148.8 4.2 % General and administrative expenses 43.9 39.1 12.3 % 136.7 117.7 16.1 % Depreciation and amortization 64.9 61.2 6.0 % 190.8 180.7 5.6 % Government, class action, and related settlements - - - % - 2.8 (100.0) % Total operating expenses 1,085.3 1,001.4 8.4 % 3,176.7 2,978.0 6.7 % Loss on early extinguishment of debt - - - % 1.0 -
N/A
Interest expense and amortization of debt discounts and fees 39.9 49.0 (18.6) % 124.5 138.0 (9.8) % Other income (0.4) (2.5) (84.0) % (6.4) (6.4) - % Equity in net income of nonconsolidated affiliates (0.9) (1.0) (10.0) % (2.9) (2.5) 16.0 % Income from continuing operations before income tax expense 160.9 127.0 26.7 % 510.0 322.9 57.9 % Provision for income tax expense 34.1 26.9 26.8 % 108.1 65.8 64.3 % Income from continuing operations 126.8 100.1 26.7 % 401.9 257.1 56.3 % Loss from discontinued operations, net of tax (0.1) - N/A (0.4) - N/A Net income 126.7 100.1 26.6 % 401.5 257.1 56.2 % Less: Net income attributable to noncontrolling interests (26.7) (22.4) 19.2 % (80.9) (58.9) 37.4 % Net income attributable to Encompass Health$ 100.0 $ 77.7 28.7 %$ 320.6 $ 198.2 61.8 % Operating Expenses as a % of Net Operating Revenues Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Operating expenses: Salaries and benefits 56.8 % 56.6 % 55.9 % 58.2 % Other operating expenses 13.5 % 13.9 % 13.4 % 13.7 % Occupancy costs 1.5 % 1.7 % 1.6 % 1.8 % Supplies 4.1 % 4.5 % 4.1 % 4.3 % General and administrative expenses 3.4 % 3.3 % 3.6 % 3.4 % Depreciation and amortization 5.1 % 5.2 % 5.0 % 5.3 % Government, class action, and related settlements - % - % - % 0.1 % Total operating expenses 84.5 % 85.3 % 83.5 % 86.8 % 27
-------------------------------------------------------------------------------- In the discussion that follows, we use "same-store" comparisons to explain the changes in certain performance metrics and line items within our financial statements. We calculate same-store comparisons based on hospitals and home health and hospice locations open throughout both the full current periods and prior periods presented. These comparisons include the financial results of market consolidation transactions in existing markets, as it is difficult to determine, with precision, the incremental impact of these transactions on our results of operations. Net Operating Revenues Our consolidated Net operating revenues increased during the three months endedSeptember 30, 2021 compared to the same period of 2020 primarily due to increased volumes and favorable pricing in the inpatient rehabilitation segment partially offset by a decline in home health volumes due to the resurgence of COVID-19 in the third quarter of 2021. Our consolidated Net operating revenues increased during the nine months endedSeptember 30, 2021 compared to the same period of 2020 primarily due to increased volumes as we anniversaried the most significant impact of the pandemic. Pricing was also favorable in both segments during the nine months endedSeptember 30, 2021 and included reimbursement rate increases and the suspension of sequestration. See additional discussion in the "Segment Results of Operations" section of this Item. Beginning inmid-March 2020 , we experienced decreased volumes in both segments which we believe resulted from a number of conditions related to the pandemic including: lower acute-care hospital censuses due to the deferral of elective surgeries and shelter-in-place orders, restrictive visitation policies in place at acute-care hospitals that severely limit access to patients and caregivers by our clinical rehabilitation liaisons and care transition coordinators, lock down of assisted living facilities, and heightened anxiety among patients and their family members regarding the risk of exposure to COVID-19 during acute-care and post-acute care treatment. Volumes in both segments reached a low point during the second quarter of 2020. For a discussion on current year-over-year volume growth, see the "Segment Results of Operations" section of this Item. InAugust 2021 , many of our markets experienced a resurgence in COVID-19 infection rates resulting in a decline in volumes due to many of the same factors we experienced in 2020. The impact of the resurgence was more pronounced in our home health and hospice segment. See additional discussion in the "Segment Results of Operations" section of this Item. Salaries and Benefits Salaries and benefits increased during the three and nine months endedSeptember 30, 2021 compared to the same periods of 2020 primarily due to salary and benefit cost increases for our employees, the ramping up of new stores, and increased contract labor to meet higher patient volumes. Salaries and benefits as a percent of Net operating revenues increased during the three months endedSeptember 30, 2021 compared to the same period of 2020 primarily due to increases in clinician compensation and contract labor to meet higher patient volumes and address industry-wide staffing challenges, and the ramping up of new stores partially offset by improved labor productivity which contributed to lower employees per occupied bed (as defined in "Segment Results of Operations" of this Item). Salaries and benefits as a percent of Net operating revenues decreased during the nine months endedSeptember 30, 2021 compared to the same period of 2020 primarily due to the increase in Net operating revenues as discussed above, improved labor productivity which contributed to lower employees per occupied bed, the additional paid-time-off awarded to employees in the second quarter of 2020 as discussed below, and the home health and hospice clinician compensation model changes implemented inMay 2020 . See additional discussion in the "Segment Results of Operations" section of this Item. InApril 2020 , we implemented a program for eligible frontline employees to earn additional paid-time-off in recognition of their outstanding efforts responding to the pandemic. We accrued approximately$43 million in salary and benefits expense in the second quarter of 2020 in connection with this award (approximately$29 million in the inpatient rehabilitation segment; approximately$14 million in the home health and hospice segment). Salaries and benefits are expected to increase in the fourth quarter of 2021 due to an approximate 2.75% merit increase provided to our nonmanagement hospital employees effective inOctober 2021 . Other Operating Expenses As a percent of Net operating revenues, Other operating expenses decreased during the three and nine months endedSeptember 30, 2021 compared to the same periods of 2020 primarily due to the increase in Net operating revenues as discussed above. 28 --------------------------------------------------------------------------------
Supplies
As a percent of Net operating revenues, Supplies decreased during the three months endedSeptember 30, 2021 compared to the same period of 2020 primarily due to lower utilization and cost of medical supplies. As a percent of Net operating revenues, Supplies decreased during the nine months endedSeptember 30, 2021 compared to the same period of 2020 primarily due to the increase in Net operating revenues as discussed above. General and Administrative Expenses General and administrative expenses increased in terms of dollars and as a percent of revenue during the three and nine months endedSeptember 30, 2021 compared to the same periods of 2020 primarily due to the costs associated with the strategic alternatives review for the home health and hospice business in 2021 and higher costs associated with incentive compensation. See the "Executive Overview" section of this Item, for additional information on the strategic alternatives review. Depreciation and Amortization Depreciation and amortization increased during the three and nine months endedSeptember 30, 2021 compared to the same periods of 2020 due to our capital investments. We expect Depreciation and amortization to increase going forward as a result of our recent and ongoing capital investments. Interest Expense and Amortization of Debt Discounts and Fees The decrease in Interest expense and amortization of debt discounts and fees during the three and nine months endedSeptember 30, 2021 compared to the same periods of 2020 primarily resulted from theNovember 2020 redemption of our 5.75% Senior Notes due 2024 and the April andJune 2021 redemptions of our 5.125% Senior Notes due 2023 partially offset by the issuance of our 4.625% Senior Notes due 2031 inOctober 2020 . The decrease during the nine months endedSeptember 30, 2021 compared to the same period of 2020 was also partially offset by theMay 2020 issuance of our 4.50% Senior Notes due 2028 and our 4.75% Senior Notes due 2030. For additional information, see Note 4, Long-term Debt, to the accompanying condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report, and Note 10, Long-term Debt, to the consolidated financial statements accompanying the 2020 Form 10-K. Income from Continuing Operations Before Income Tax Expense Our pre-tax income from continuing operations increased during the three and nine months endedSeptember 30, 2021 compared to the same periods of 2020 primarily due to the increase in Net operating revenues as discussed above. Provision for Income Tax Expense Our Provision for income tax expense increased during the three and nine months endedSeptember 30, 2021 compared to the same periods of 2020 primarily due to higher Income from continuing operations before income tax expense. We currently estimate our cash payments for income taxes to be approximately$125 million to$140 million , net of refunds, for 2021. These payments are expected to primarily result from federal and state income tax expenses based on estimates of taxable income for 2021. In certain jurisdictions, we do not expect to generate sufficient income to use all of the available state net operating losses and other credits prior to their expiration. This determination is based on our evaluation of all available evidence in these jurisdictions including results of operations during the preceding three years, our forecast of future earnings, and prudent tax planning strategies. It is possible we may be required to increase or decrease our valuation allowance at some future time if our forecast of future earnings varies from actual results on a consolidated basis or in the applicable tax jurisdiction, if the timing of future tax deductions differs from our expectations, or pursuant to changes in state tax laws and rates. We recognize the financial statement effects of uncertain tax positions when it is more likely than not, based on the technical merits, a position will be sustained upon examination by and resolution with the taxing authorities. Total remaining unrecognized tax benefits were immaterial as ofSeptember 30, 2021 andDecember 31, 2020 . See Note 8, Income Taxes, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report and Note 16, Income Taxes, to the consolidated financial statements accompanying the 2020 Form 10K. 29 -------------------------------------------------------------------------------- Net Income Attributable to Noncontrolling Interests The increase in Net income attributable to noncontrolling interests during the three and nine months endedSeptember 30, 2021 compared to the same periods of 2020 resulted from increased profitability of our existing joint ventures due to the impact of the pandemic on 2020. Segment Results of Operations Our internal financial reporting and management structure is focused on the major types of services provided byEncompass Health . We manage our operations using two operating segments which are also our reportable segments: (1) inpatient rehabilitation and (2) home health and hospice. For additional information regarding our business segments, including a detailed description of the services we provide, financial data for each segment, and a reconciliation of total segment Adjusted EBITDA to income from continuing operations before income tax expense, see Note 11, Segment Reporting, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report. Inpatient Rehabilitation Our inpatient rehabilitation segment derived its Net operating revenues from the following payor sources: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Medicare 64.2 % 65.8 % 64.4 % 66.0 % Medicare Advantage 15.1 % 15.7 % 15.6 % 15.9 % Managed care 12.2 % 10.7 % 11.8 % 10.4 % Medicaid 4.1 % 4.3 % 4.1 % 3.9 % Other third-party payors 1.0 % 1.2 % 1.1 % 1.2 % Workers' compensation 0.6 % 0.5 % 0.6 % 0.6 % Patients 0.5 % 0.6 % 0.5 % 0.6 % Other income 2.3 % 1.2 % 1.9 % 1.4 % Total 100.0 % 100.0 % 100.0 % 100.0 % 30
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Additional information regarding our inpatient rehabilitation segment's operating results is as follows:
Three Months Ended September 30, Percentage Change Nine Months Ended September 30, Percentage Change 2021 2020 2021 vs. 2020 2021 2020 2021 vs. 2020 (In Millions, Except Percentage Change) Net operating revenues: Inpatient $ 983.7 $ 883.2 11.4 %$ 2,902.9 $ 2,581.2 12.5 % Outpatient and other 27.2 16.2 67.9 % 69.5 51.9 33.9 % Inpatient rehabilitation segment revenues 1,010.9 899.4 12.4 % 2,972.4 2,633.1 12.9 % Operating expenses: Salaries and benefits 537.1 475.0 13.1 % 1,554.9 1,408.7 10.4 % Other operating expenses 156.2 135.5 15.3 % 443.7 394.5 12.5 % Supplies 46.8 45.3 3.3 % 136.1 126.9 7.2 % Occupancy costs 14.4 15.3 (5.9) % 44.5 46.0 (3.3) % Other income (0.7) (2.1) (66.7) % (4.5) (3.9) 15.4 % Equity in net income of nonconsolidated affiliates (0.8) (0.9) (11.1) % (2.4) (2.1) 14.3 % Noncontrolling interests 26.3 22.1 19.0 % 79.6 58.0 37.2 % Segment Adjusted EBITDA $ 231.6 $ 209.2 10.7 % $ 720.5 $ 605.0 19.1 % (Actual Amounts) Discharges 49,983 45,962 8.7 % 146,662 135,394 8.3 % Net patient revenue per discharge$ 19,681 $ 19,216 2.4 %$ 19,793 $ 19,064 3.8 % Outpatient visits 38,904 51,968 (25.1) % 123,118 137,471 (10.4) % Average length of stay (days) 12.8 13.0 (1.5) % 12.8 13.0 (1.5) % Occupancy % 70.6 % 68.8 % 2.6 % 70.0 % 67.8 % 3.2 % # of licensed beds 9,846 9,437 4.3 % 9,846 9,437 4.3 % Full-time equivalents* 23,054 22,147 4.1 % 22,657 21,758 4.1 % Employees per occupied bed 3.37 3.44 (2.0) % 3.33 3.42 (2.6) % * Full-time equivalents included in the above table represent our employees who participate in or support the operations of our hospitals and exclude an estimate of full-time equivalents related to contract labor. We actively manage the productive portion of our Salaries and benefits utilizing certain metrics, including employees per occupied bed, or "EPOB." This metric is determined by dividing the number of full-time equivalents, including an estimate of full-time equivalents from the utilization of contract labor, by the number of occupied beds during each period. The number of occupied beds is determined by multiplying the number of licensed beds by our occupancy percentage. Operating Expenses as a % of Net Operating Revenues Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Operating expenses: Salaries and benefits 53.1 % 52.8 % 52.3 % 53.5 % Other operating expenses 15.5 % 15.1 % 14.9 % 15.0 % Supplies 4.6 % 5.0 % 4.6 % 4.8 % Occupancy costs 1.4 % 1.7 % 1.5 % 1.7 % Total operating expenses 74.6 % 74.6 % 73.3 % 75.0 % 31
-------------------------------------------------------------------------------- Net Operating Revenues Inpatient revenue increased during the three months endedSeptember 30, 2021 compared to the same period of 2020 primarily due to increased volumes and favorable pricing. Discharge growth included a 6.7% increase in same-store discharges. New-store discharge growth during the three months endedSeptember 30, 2021 compared to the same period of 2020 resulted from our joint venture inSan Angelo, Texas (March 2021 ), as well as wholly owned hospitals inToledo, Ohio (November 2020 ),North Tampa, Florida (April 2021 ),Cumming, Georgia (June 2021 ),Waco, Texas (August 2021 ),Shreveport, Louisiana (August 2021 ),Greenville, South Carolina (August 2021 ), andPensacola, Florida (September 2021 ). Growth in net patient revenue per discharge during the three months endedSeptember 30, 2021 compared to the same period of 2020 primarily resulted from an increase in reimbursement rates and higher patient acuity. Inpatient revenue increased during the nine months endedSeptember 30, 2021 compared to the same period of 2020 primarily due to increased volumes and favorable pricing. Discharge growth from new stores resulted from the same factors as discussed above for the third quarter of 2021 as well as our joint venture inCoralville, Iowa (June 2020 ) and our wholly owned hospitals inMurrieta, California (February 2020 ) andSioux Falls, South Dakota (June 2020 ). Growth in net patient revenue per discharge for the nine months endedSeptember 30, 2021 compared to the same period of 2020 resulted from the same factors as discussed above for the third quarter of 2020 as well as the suspension of sequestration. The increase in outpatient and other revenue during the three and nine months endedSeptember 30, 2021 included an increase of$11.3 million in provider tax revenues (offset by$9.3 million of provider tax expenses included in Other operating expenses). For information regarding the joint ventures discussed above, see Note 2, Business Combinations, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report and Note 2, Business Combinations, to the consolidated financial statements accompanying the 2020 Form 10K. Adjusted EBITDA The increase in Adjusted EBITDA during the three months endedSeptember 30, 2021 compared to the same period of 2020 primarily resulted from the increase in net patient revenue as discussed above. Salaries and benefits as a percent of revenues increased during the three months endedSeptember 30, 2021 compared to the same period of 2020 primarily due to higher sign-on and shift bonuses plus contract labor to meet increased patient volumes. This ratio also increased due to the ramping up of new stores and was partially offset by improved labor productivity which contributed to lower employees per occupied bed. Supplies as a percent of revenues decreased during the three months endedSeptember 30, 2021 compared to the same period of 2020 primarily due to lower utilization and cost of medical supplies. The increase in Adjusted EBITDA during the nine months endedSeptember 30, 2021 compared to the same period of 2020 primarily resulted from the increase in net patient revenue as discussed above. Salaries and benefits as a percent of revenues decreased during the nine months endedSeptember 30, 2021 compared to the same period of 2020 primarily due to revenue growth, improved labor productivity which contributed to lower employees per occupied bed, and the additional paid-time-off awarded to employees in the second quarter of 2020 in response to the pandemic as discussed above. Supplies as a percent of revenues decreased during the nine months endedSeptember 30, 2021 compared to the same period of 2020 primarily due to the increase in Net operating revenues as discussed above. 32 --------------------------------------------------------------------------------Home Health and Hospice Our home health and hospice segment derived its Net operating revenues from the following payor sources: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Medicare 81.9 % 83.3 % 82.2 % 82.6 % Medicare Advantage 10.4 % 10.8 % 10.4 % 11.1 % Managed care 6.2 % 4.5 % 5.8 % 4.5 % Medicaid 1.4 % 1.2 % 1.4 % 1.5 % Workers' compensation - % 0.1 % - % 0.1 % Patients - % 0.1 % 0.1 % 0.1 % Other income 0.1 % - % 0.1 % 0.1 % Total 100.0 % 100.0 % 100.0 % 100.0 % 33
-------------------------------------------------------------------------------- Additional information regarding our home health and hospice segment's operating results is as follows: Three Months Ended September 30, Percentage Change Nine Months Ended September 30, Percentage Change 2021 2020 2021 vs. 2020 2021 2020 2021 vs. 2020 (In Millions, Except Percentage Change) Net operating revenues: Home health $ 221.1$ 223.3 (1.0) %$ 673.3 $ 649.9 3.6 % Hospice 52.8 51.2 3.1 % 157.2 147.0 6.9 % Home health and hospice segment revenues 273.9 274.5 (0.2) % 830.5 796.9 4.2 % Operating expenses: Cost of services (excluding depreciation and amortization) 124.0 121.8 1.8 % 364.7 389.4 (6.3) % Support and overhead costs 103.2 100.7 2.5 % 307.7 299.2 2.8 % Other income - - - % (1.6) - N/A Equity in net income of nonconsolidated affiliates (0.1) (0.1) - % (0.5) (0.4) 25.0 % Noncontrolling interests 0.4 0.3 33.3 % 1.3 0.9 44.4 % Segment Adjusted EBITDA $ 46.4$ 51.8 (10.4) %$ 158.9 $ 107.8 47.4 % (Actual Amounts) Home health: Total admissions 48,412 48,838 (0.9) % 149,809 145,716 2.8 % Episodic admissions 37,577 40,765 (7.8) % 117,449 118,082 (0.5) % Total recertifications 32,942 33,786 (2.5) % 98,638 95,201 3.6 % Episodic recertifications 27,742 29,830 (7.0) % 84,121 84,711 (0.7) % Episodes 66,065 68,261 (3.2) % 200,339 197,067 1.7 % Total starts of care 81,354 82,624 (1.5) % 248,447 240,917 3.1 % Revenue per episode $ 2,916$ 2,910 0.2 %$ 2,936 $ 2,913 0.8 % Episodic visits per episode 15.0 16.4 (8.5) % 15.5 16.7 (7.2) % Total visits 1,213,370 1,300,866 (6.7) % 3,749,793 3,857,642 (2.8) % Cost per visit $ 82$ 75 9.3 %$ 78 $ 81 (3.7) % Hospice: Admissions 3,262 3,354 (2.7) % 9,890 9,530 3.8 % Patient days 352,691 346,019 1.9 % 1,038,969 1,017,071 2.2 % Average daily census 3,834 3,761 1.9 % 3,806 3,712 2.5 % Revenue per day $ 150$ 148 1.4 %$ 151 $ 144 4.9 % Operating Expenses as a % of Net Operating Revenues Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Operating expenses: Cost of services (excluding depreciation and amortization) 45.3 % 44.4 % 43.9 % 48.9 % Support and overhead costs 37.7 % 36.7 % 37.0 % 37.5 % Total operating expenses 82.9 % 81.1 % 81.0 % 86.4 % 34
-------------------------------------------------------------------------------- Net Operating Revenues Home health revenue declined during the three months endedSeptember 30, 2021 compared to the same period of 2020 due to decreased episodic admissions largely offset by the continued growth in non-episodic admissions, primarily due to our national contract withUnited Healthcare . Total starts of care declined during the three months endedSeptember 30, 2021 compared to the same period of 2020 primarily due to staffing constraints, continued lower occupancy levels at senior living facilities, and limited elective procedures. Revenue per episode growth during the three months endedSeptember 30, 2021 compared to the same period of 2020 primarily resulted from an increase in reimbursement rates offset by the mix between early and late payment periods resulting from the decline in episodic admissions during the third quarter of 2021. Revenue growth during the nine months endedSeptember 31, 2021 compared to the same period of 2020 primarily was driven by increased volumes. Total starts of care increased during the nine months endedSeptember 30, 2021 compared to the same period of 2020 primarily due to the recovery of volumes during the second quarter of 2021 and increased non-episodic admissions and recertifications as a result of the national contract withUnited Healthcare . The increase in revenue per episode during the nine months endedSeptember 30, 2021 compared to the same period of 2020 resulted from an increase in reimbursement rates and the suspension of sequestration partially offset by the mix between early and late payment periods resulting from the decline in episodic admissions during the third quarter of 2021. Adjusted EBITDA The decrease in Adjusted EBITDA during the three months endedSeptember 30, 2021 compared to the same period of 2020 resulted from higher Cost of services as a percent of revenue related to industry-wide staffing challenges. Cost of services increased as a percent of revenues for the three months endedSeptember 30, 2021 compared to the same period of 2020 primarily due to higher cost per visit resulting from lower clinician productivity associated with recent hires, market rate increases for nurses, and increased contract labor. The increase in Adjusted EBITDA during the nine months endedSeptember 30, 2021 compared to the same period of 2020 resulted from a decrease in Cost of services as a percent of revenue. Cost of services decreased as a percent of revenues for the nine months endedSeptember 30, 2021 compared to the same period of 2020 primarily due to lower cost per visit supported by the clinician compensation model changes implemented inMay 2020 . Adjusted EBITDA during the nine months endedSeptember 30, 2020 included the additional paid time-off awarded to employees in response to the pandemic as discussed above. Liquidity and Capital Resources Our primary sources of liquidity are cash on hand, cash flows from operations, and borrowings under our revolving credit facility. The objectives of our capital structure strategy are to ensure we maintain adequate liquidity and flexibility. Pursuing and achieving those objectives allow us to support the execution of our operating and strategic plans and weather temporary disruptions in the capital markets and general business environment. Maintaining adequate liquidity is a function of our unrestricted Cash and cash equivalents and our available borrowing capacity. Maintaining flexibility in our capital structure is a function of, among other things, the amount of debt maturities in any given year, the options for debt prepayments without onerous penalties, and limiting restrictive terms and maintenance covenants in our debt agreements. Consistent with these objectives, in both April andJune 2021 , we redeemed$100 million in outstanding principal amount of the 5.125% Senior Notes due 2023 (the "2023 Notes") using cash on hand and capacity under our revolving credit facility. Pursuant to the terms of the 2023 Notes, these optional redemptions were made at a price of par. As a result of these redemptions, we recorded an aggregate$1.0 million Loss on early extinguishment of debt during the nine months endedSeptember 30, 2021 . We have been disciplined in creating a capital structure that is flexible with no significant debt maturities prior to 2023. We continue to have a strong, well-capitalized balance sheet, including a substantial portfolio of owned real estate, and we have significant availability under our revolving credit facility. We continue to generate cash flows from operations and we have significant flexibility with how we choose to invest our cash and return capital to shareholders. For additional information, see Note 4, Long-term Debt, to the accompanying condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report, and Note 10, Long-term Debt, to the consolidated financial statements accompanying the 2020 Form 10K. 35 -------------------------------------------------------------------------------- Current Liquidity As ofSeptember 30, 2021 , we had$94.8 million in Cash and cash equivalents. This amount excludes$80.1 million in restricted cash ($75.9 million included in Restricted cash and$4.2 million included in Other long-term assets in our condensed consolidated balance sheet) and$81.2 million of restricted marketable securities (included in Other long-term assets in our condensed consolidated balance sheet). Our restricted assets pertain primarily to obligations associated with our captive insurance company, as well as obligations we have under agreements with joint venture partners. See Note 4,Cash and Marketable Securities , to the consolidated financial statements accompanying the 2020 Form 10K. In addition to Cash and cash equivalents, as ofSeptember 30, 2021 , we had approximately$872 million available to us under our revolving credit facility. Our credit agreement governs the substantial majority of our senior secured borrowing capacity and contains a leverage ratio and an interest coverage ratio as financial covenants. Our leverage ratio is defined in our credit agreement as the ratio of consolidated total debt (less up to$300 million of cash on hand) to Adjusted EBITDA for the trailing four quarters. In calculating the leverage ratio under our credit agreement, we are permitted to use pro forma Adjusted EBITDA, the calculation of which includes historical income statement items and pro forma adjustments resulting from (1) the dispositions and repayments or incurrence of debt and (2) the investments, acquisitions, mergers, amalgamations, consolidations and operational changes from acquisitions to the extent such items or effects are not yet reflected in our trailing four-quarter financial statements. Our interest coverage ratio is defined in our credit agreement as the ratio of Adjusted EBITDA to consolidated interest expense, excluding the amortization of financing fees, for the trailing four quarters. As ofSeptember 30, 2021 , the maximum leverage ratio requirement per our credit agreement was 5.5x and the minimum interest coverage ratio requirement was 2.0x, and we were in compliance with these covenants. Based on Adjusted EBITDA for the trailing four quarters and the interest rate in effect under our credit agreement during the three-month period endedSeptember 30, 2021 , if we had drawn on the first day and maintained the maximum amount of outstanding draws under our revolving credit facility for that entire period, we would still be in compliance with the maximum leverage ratio and minimum interest coverage ratio requirements. We do not face near-term refinancing risk, as the amounts outstanding under our credit agreement do not mature until 2024, and our bonds all mature in 2023 and beyond. See the "Contractual Obligations" section below for information related to our contractual obligations as ofSeptember 30, 2021 . For a discussion of risks and uncertainties facing us see Item 1A, Risk Factors, under Part II, Other Information, of this report and Item 1A, Risk Factors, of the 2020 Form 10K. Sources and Uses of Cash The following table shows the cash flows provided by or used in operating, investing, and financing activities (in millions):
Nine Months Ended
2021 2020 Net cash provided by operating activities$ 592.0 $ 425.0 Net cash used in investing activities (445.6) (264.8) Net cash (used in) provided by financing activities (282.4) 208.3
(Decrease) increase in cash, cash equivalents, and restricted cash
Operating activities. The increase in Net cash provided by operating activities for the nine months endedSeptember 30, 2021 compared to the same period of 2020 primarily resulted from the approximate$101 million payment to management investors of our home health and hospice segment for vested stock appreciation rights during the first quarter of 2020 and lower revenues during 2020 resulting from the pandemic. For additional information, see Note 7, Share-Based Payments, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report. Investing activities. The increase in Net cash used in investing activities during the nine months endedSeptember 30, 2021 compared to the same period of 2020 primarily resulted from the acquisition of Frontier during the second quarter of 2021 and an increase in purchases of property and equipment. For additional information regarding Frontier, see Note 2, Business Combinations, to the accompanying condensed consolidated financial statements. 36 -------------------------------------------------------------------------------- Financing activities. The increase in Net cash used in financing activities during the nine months endedSeptember 30, 2021 compared to the same period of 2020 primarily resulted from the two partial redemptions of our 2023 Notes during the second quarter of 2021 and the purchase of equity interests held by the home health and hospice management team during the first quarter of 2020 offset by the proceeds received from the additional offering of our 4.50% Senior Notes due 2028 and of our existing 4.75% Senior Notes due 2030 during the second quarter of 2020. For additional information, see Note 5, Redeemable Noncontrolling Interests, to the accompanying condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report and Note 10, Long-term Debt, to the consolidated financial statements accompanying the 2020 Form 10K. Contractual Obligations Our consolidated contractual obligations as ofSeptember 30, 2021 are as follows (in millions): October 1 through 2026 and Total December 31, 2021 2022 - 2023 2024 - 2025 thereafter Long-term debt obligations: Long-term debt, excluding revolving credit facility and finance lease obligations (a)$ 2,702.2 $ 3.6
90.0 - - 90.0 - Interest on long-term debt (b) 835.2 31.7 249.1 228.3 326.1 Finance lease obligations (c) 642.8 36.2 103.7 101.2 401.7 Operating lease obligations (d) 325.0 12.3 103.4 73.6 135.7 Purchase obligations (e) 125.4 14.8 60.8 27.9 21.9 Other long-term liabilities (f)(g) 3.2 0.1 0.5 0.5 2.1 Total$ 4,723.8 $ 98.7$ 656.7 $ 1,104.2 $ 2,864.2 (a) Included in long-term debt are amounts owed on our bonds payable and other notes payable. These borrowings are further explained in Note 4, Long-term Debt, accompanying the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report, and Note 10, Long-term Debt, to the consolidated financial statements accompanying the 2020 Form 10K. (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 ofSeptember 30, 2021 . Interest pertaining to our credit agreement and bonds is included to their respective ultimate maturity dates. Interest related to finance lease obligations is excluded from this line. Amounts exclude amortization of debt discounts, amortization of loan fees, or fees for lines of credit that would be included in interest expense in our consolidated statements of comprehensive income. (c) Amounts include interest portion of future minimum finance lease payments. (d) Our inpatient rehabilitation segment leases approximately 11% of its hospitals as well as other property and equipment under operating leases in the normal course of business. Our home health and hospice segment leases relatively small office spaces in the localities it serves, space for its corporate office, and other equipment under operating leases in the normal course of business. Amounts include interest portion of future minimum operating lease payments. For more information, see Note 7, Leases, to the consolidated financial statements accompanying the 2020 Form 10K. (e) Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding onEncompass Health and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancelable without penalty. Our purchase obligations primarily relate to software licensing and support and medical equipment. Purchase obligations are not recognized in our condensed consolidated balance sheet. (f) Because their future cash outflows are uncertain, the following noncurrent liabilities are excluded from the table above: general liability, professional liability, and workers' compensation risks, noncurrent amounts related to third- 37 -------------------------------------------------------------------------------- party billing audits, and deferred income taxes. For more information, see Note 11, Self-Insured Risks, Note 16, Income Taxes, and Note 18, Contingencies and Other Commitments, to the consolidated financial statements accompanying the 2020 Form 10K and Note 8, Income Taxes, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report. (g) The table above does not include Redeemable noncontrolling interests of$32.5 million because of the uncertainty surrounding the timing and amounts of any related cash outflows. See Note 5, Redeemable Noncontrolling Interests, to the condensed consolidated financial statements included in Part I, Item 1, Financial Statements (Unaudited), of this report. Our capital expenditures include costs associated with our hospital refresh program, de novo projects, capacity expansions, technology initiatives, and building and equipment upgrades and purchases. During the nine months endedSeptember 30, 2021 , we made capital expenditures of approximately$353 million for property and equipment, capitalized software, and other intangible assets. During 2021, we expect to spend approximately$530 million to$580 million for capital expenditures. Approximately$140 million to$150 million of this budgeted amount is considered nondiscretionary expenditures, which we may refer to in other filings as "maintenance" expenditures. In addition, we expect to spend approximately$100 million on home health and hospice acquisitions during 2021, inclusive of the Frontier acquisition discussed in the "Executive Overview" section of this Item. Actual amounts spent will be dependent upon the timing of development projects and acquisition opportunities for our home health and hospice business. Authorizations forReturning Capital to Stakeholders InOctober 2020 ,February 2021 ,May 2021 , andJuly 2021 , our board of directors declared cash dividends of$0.28 per share that were paid inJanuary 2021 ,April 2021 ,July 2021 , andOctober 2021 , respectively. OnOctober 21, 2021 , our board of directors declared a cash dividend of$0.28 per share, payable onJanuary 18, 2022 to stockholders of record onJanuary 3, 2022 . We expect quarterly dividends to be paid in January, April, July, and October. However, the actual declaration of any future cash dividends, and the setting of record and payment dates as well as the per share amounts, will be at the discretion of our board of directors after consideration of various factors, including our capital position and alternative uses of funds. Cash dividends are expected to be funded using cash flows from operations, cash on hand, and availability under our revolving credit facility. OnJuly 24, 2018 , our board approved resetting the aggregate common stock repurchase authorization to$250 million . As ofSeptember 30, 2021 , approximately$198 million remained under this authorization. The repurchase authorization does not require the repurchase of a specific number of shares, has an indefinite term, and is subject to termination at any time by our board of directors. Subject to certain terms and conditions, including a maximum price per share and compliance with federal and state securities and other laws, the repurchases may be made from time to time in open market transactions, privately negotiated transactions, or other transactions, including trades under a plan established in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. For additional information, see Part II, Item 2, Unregistered Sales ofEquity Securities and Use of Proceeds, of this report. Supplemental Guarantor Financial Information Our indebtedness under our credit agreement and the 5.125% Senior Notes due 2023, 5.75% Senior Notes due 2025, 4.50% Senior Notes due 2028, 4.75% Senior Notes due 2030, and 4.625% Senior Notes due 2031 (collectively, the "Senior Notes") are guaranteed by certain consolidated subsidiaries. These guarantees are full and unconditional and joint and several, subject to certain customary conditions for release. The Senior Notes are guaranteed on a senior, unsecured basis by all of our existing and future subsidiaries that guarantee borrowings under our credit agreement and other capital markets debt. The other subsidiaries ofEncompass Health do not guarantee the Senior Notes (such subsidiaries are referred to as the "non-guarantor subsidiaries"). The terms of our credit agreement allow us to declare and pay cash dividends on our common stock so long as: (1) we are not in default under our credit agreement, and (2) either (a) our senior secured leverage ratio (as defined in our credit agreement) remains less than or equal to 2x and our leverage ratio (as defined in our credit agreement) remains less than or equal to 4.50x or (b) there is capacity under the Available Amount as defined in the credit agreement. The terms of our Senior Notes indenture allow us to declare and pay cash dividends on our common stock so long as (1) we are not in default, (2) the consolidated coverage ratio (as defined in the indenture) exceeds 2x or we are otherwise allowed under the indenture to incur debt, and (3) we have capacity under the indenture's restricted payments covenant to declare and pay dividends. See Note 4, Long-term Debt, to the accompanying condensed consolidated financial statements included in Part I, Item 1, Financial 38 -------------------------------------------------------------------------------- Statements (Unaudited), of this report, and Note 10, Long-term Debt, to the consolidated financial statements accompanying the 2020 Form 10K. Summarized financial information is presented below forEncompass Health , the parent company, and the subsidiary guarantors on a combined basis after elimination of intercompany transactions and balances amongEncompass 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 ofSeptember 30, 2021 . Nine Months Ended September 30, 2021 (In Millions) Net operating revenues $ 2,739.7 Intercompany revenues generated from non-guarantor subsidiaries 14.3 Total net operating revenues $ 2,754.0 Operating expenses $ 2,338.6 Intercompany expenses incurred in transactions with non-guarantor subsidiaries 23.4 Total operating expenses $ 2,362.0 Income from continuing operations $
208.1
Net income $
207.8
Net income attributable to Encompass Health $ 207.8 As of As of September 30, 2021 December 31, 2020 (In Millions) Total current assets $ 688.8 $ 712.4 Property and equipment, net $ 1,791.3 $ 1,574.6 Goodwill 2,048.1 1,973.6 Intercompany receivable due from non-guarantor subsidiaries 122.3 147.8 Other noncurrent assets 670.5 701.2 Total noncurrent assets $ 4,632.2 $ 4,397.2 Total current liabilities $ 673.7 $ 579.3 Long-term debt, net of current portion $ 3,091.5 $ 3,213.1 Other noncurrent liabilities 307.9 306.3 Total noncurrent liabilities $
3,399.4 $ 3,519.4
Adjusted EBITDA Management believes Adjusted EBITDA as defined in our credit agreement is a measure of our ability to service our debt and our ability to make capital expenditures. We reconcile Adjusted EBITDA to Net income and to Net cash provided by operating activities. We use Adjusted EBITDA on a consolidated basis as a liquidity measure. We believe this financial measure on a consolidated basis is important in analyzing our liquidity because it is the key component of certain material covenants contained within our credit agreement, which is discussed in more detail in Note 10, Long-term Debt, to the consolidated financial statements accompanying the 2020 Form 10K. 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 39 -------------------------------------------------------------------------------- favorable to us than those in our existing credit agreement. In addition, if we cannot satisfy these financial covenants, we would be prohibited under our credit agreement from engaging in certain activities, such as incurring additional indebtedness, paying common stock dividends, making certain payments, and acquiring and disposing of assets. Consequently, Adjusted EBITDA is critical to our assessment of our liquidity. In general terms, the credit agreement definition of Adjusted EBITDA, therein referred to as "Adjusted Consolidated EBITDA," allows us to add back to consolidated Net income interest expense, income taxes, and depreciation and amortization and then add back to consolidated Net income (1) all unusual or nonrecurring items reducing consolidated Net income (of which only up to$10 million in a year may be cash expenditures), (2) any losses from discontinued operations, (3) non-ordinary course fees, costs and expenses incurred with respect to any litigation or settlement, (4) share-based compensation expense, (5) costs and expenses associated with changes in the fair value of marketable securities, (6) costs and expenses associated with the issuance or prepayment debt and acquisitions, and (7) any restructuring charges not in excess of 20% of Adjusted Consolidated EBITDA. We also subtract from consolidated Net income all unusual or nonrecurring items to the extent they increase consolidated Net income. Under the credit agreement, the Adjusted EBITDA calculation does not require us to deduct net income attributable to noncontrolling interests or gains on fair value adjustments of hedging and equity instruments, disposal of assets, and development activities. It also does not allow us to add back losses on fair value adjustments of hedging instruments or unusual or nonrecurring cash expenditures in excess of$10 million . These items and amounts, in addition to the items falling within the credit agreement's "unusual or nonrecurring" classification, may occur in future periods, but can vary significantly from period to period and may not directly relate to, or be indicative of, our ongoing liquidity or operating performance. Accordingly, the Adjusted EBITDA calculation presented here includes adjustments for them. Adjusted EBITDA is not a measure of financial performance under generally accepted accounting principles inthe United States of America , and the items excluded from Adjusted EBITDA are significant components in understanding and assessing financial performance. Therefore, Adjusted EBITDA should not be considered a substitute for Net income or cash flows from operating, investing, or financing activities. Because Adjusted EBITDA is not a measurement determined in accordance with GAAP and is thus susceptible to varying calculations, Adjusted EBITDA, as presented, may not be comparable to other similarly titled measures of other companies. Revenues and expenses are measured in accordance with the policies and procedures described in Note 1, Summary of Significant Accounting Policies, to the consolidated financial statements accompanying the 2020 Form 10K. 40 --------------------------------------------------------------------------------
Our Adjusted EBITDA was as follows (in millions):
Reconciliation of Net Income to Adjusted EBITDA Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Net income$ 126.7 $ 100.1 $ 401.5 $ 257.1 Loss from discontinued operations, net of tax, attributable to Encompass Health 0.1 - 0.4 - Net income attributable to noncontrolling interests (26.7) (22.4) (80.9) (58.9) Provision for income tax expense 34.1 26.9 108.1 65.8 Interest expense and amortization of debt discounts and fees 39.9 49.0 124.5 138.0 Government, class action, and related settlements - - - 2.8 (Gain) loss on disposal or impairment of assets (5.2) 7.5 (2.4) 10.6 Depreciation and amortization 64.9 61.2 190.8 180.7 Loss on early extinguishment of debt - - 1.0 - Stock-based compensation expense 6.9 8.3 21.7 25.3 Costs associated with the strategic alternatives review 4.6 - 9.6 - Costs associated with the Frontier acquisition - - 1.3 - Gain on consolidation of joint venture formerly accounted for under the equity method of accounting - - - (2.2) Change in fair market value of equity securities 0.3 (0.4) (0.3) (0.3) Payroll taxes on SARs exercise - - - 1.5 Adjusted EBITDA$ 245.6 $ 230.2 $ 775.3 $ 620.4
Reconciliation of Net Cash Provided by Operating Activities to Adjusted EBITDA
Nine Months Ended
2021 2020 Net cash provided by operating activities $
592.0
Interest expense and amortization of debt discounts and fees 124.5 138.0 Equity in net income of nonconsolidated affiliates 2.9 2.5
Net income attributable to noncontrolling interests in continuing operations
(80.9) (58.9) Amortization of debt-related items (5.8) (5.1) Distributions from nonconsolidated affiliates (2.7) (2.8) Current portion of income tax expense 103.7 71.5 Change in assets and liabilities 27.0 47.7 Cash used in operating activities of discontinued operations 0.6 0.2 Costs associated with the strategic alternatives review 9.6 - Costs associated with the Frontier acquisition 1.3 - Change in fair market value of equity securities (0.3) (0.3) Payroll taxes on SARs exercise - 1.5 Other 3.4 1.1 Adjusted EBITDA$ 775.3 $ 620.4
For additional information see the "Results of Operations" and "Segment Results of Operations" sections of this Item.
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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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