Encompass Health Corp (EHC) - Q1 2026 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2026. Encompass Health Corporation is the nation's largest owner and operator of inpatient rehabilitation hospitals (IRFs), operating 174 facilities across 39 states and Puerto Rico as of the reporting date. The company operates primarily through a single reportable segment focused on inpatient rehabilitation services.
Key Financial Metrics
| Metric | Q1 2026 | Q1 2025 |
|---|---|---|
| Net Operating Revenues | $1,586.6 million | $1,455.4 million |
| Net Income (GAAP) | $248.2 million | $196.5 million |
| Net Income Attributable to Encompass Health | $194.5 million | $151.5 million |
| Diluted EPS (Attributable to EHC) | $1.93 | $1.48 |
| Adjusted EBITDA | $348.8 million | $313.6 million |
| Operating Cash Flow | $313.1 million | $288.6 million |
| Total Debt (Long-term + Current) | $2,573.8 million | $2,490.8 million |
| Cash and Cash Equivalents | $110.5 million | $72.2 million |
Liquidity: As of March 31, 2026, the company held $110.5 million in unrestricted cash and had approximately $726 million available under its revolving credit facility. The company is in compliance with its leverage ratio (4.50x) and interest coverage ratio (3.0x) covenants.
Material Changes vs. Prior Period
- Revenue Growth: Net operating revenues increased 9.0% year-over-year, driven by a 4.3% increase in discharges (67,763 vs. 64,985) and a 3.7% increase in net patient revenue per discharge ($22,633 vs. $21,816). Growth was attributed to volume expansion from new facilities and favorable pricing.
- Profitability: Net income attributable to Encompass Health rose 28.4% to $194.5 million. This increase was significantly bolstered by a $17.5 million pre-tax gain from the sale of the company's 50% interest in Gamma Knife Center and a $16.3 million after-tax gain from discontinued operations related to litigation settlement.
- Operating Expenses: Total operating expenses increased 8.1% to $1,285.0 million. Salaries and benefits rose 7.3% due to volume growth and cost increases, though they decreased as a percentage of revenue (51.6% vs. 52.4%) due to reduced contract labor usage.
- Capital Structure: On March 9, 2026, the company entered into a new credit agreement, refinancing its previous facility. The new agreement extends the maturity to 2031 and lowers the fee on the undrawn portion of the revolving loan commitment.
Outlook, Risks, and Management Commentary
- Guidance and Capital Expenditures: Management expects 2026 capital expenditures to range between $920 million and $995 million, with approximately $225 million to $240 million classified as nondiscretionary maintenance. The company projects cash tax payments for 2026 to be between $160 million and $190 million.
- Regulatory Environment: The company faces ongoing challenges regarding Medicare reimbursement. The Centers for Medicare & Medicaid Services (CMS) released a proposed rule for fiscal year 2027 projecting a net 2.4% market basket increase. Additionally, the Review Choice Demonstration (RCD) program has expanded to Texas and California, subjecting approximately 11.9% of the company's Medicare claims to pre-claim or post-payment review.
- Shareholder Returns: The company repurchased 0.7 million shares for $71.6 million during the quarter. Approximately $261 million remains under the current $500 million repurchase authorization. A quarterly dividend of $0.19 per share was declared.
- Risks: Key risks include potential reductions in Medicare reimbursement, staffing shortages driving labor costs, and the impact of regulatory audits (including qui tam lawsuits) which could lead to recoupments or penalties.
Investor Verification Checklist
- Non-GAAP Adjustments: Verify the impact of the $17.5 million Gamma Knife sale gain and the $16.3 million discontinued operations gain on reported earnings, as these are non-recurring items.
- Debt Refinancing Terms: Review the specific covenants and interest rate adjustments in the new 2026 Credit Agreement compared to the terminated 2022 agreement.
- RCD Program Impact: Monitor the affirmation rates and appeal outcomes for hospitals in the newly expanded Review Choice Demonstration states (Texas and California) to assess potential cash flow delays.
- Capital Expenditure Execution: Track the progress of the $920-$995 million capital budget, specifically the opening dates and cost overruns for the listed de novo projects (e.g., Concordville, Loganville, Norristown).
- Staffing Metrics: Observe the "Employees per Occupied Bed" (EPOB) metric and contract labor trends to gauge the sustainability of labor cost management amidst industry-wide shortages.