Segment Reporting

9 Months Ended

Sep. 30, 2019

Our internal financial reporting and management structure is focused on the major types of services provided by Encompass Health. We manage our operations using two operating segments which are also our reportable segments: (1) inpatient rehabilitation and (2) home health and hospice. These reportable operating segments are consistent with information used by our chief executive officer, who is our chief operating decision maker, to assess performance and allocate resources. The following is a brief description of our reportable segments:

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Inpatient Rehabilitation - Our national network of inpatient rehabilitation hospitals stretches across 33 states and Puerto Rico, with a concentration of hospitals in the eastern half of the United States and Texas. As of September 30, 2019, we operate 133 inpatient rehabilitation hospitals. We are the sole owner of 86 of these hospitals. We retain 50.0% to 97.5% ownership in the remaining 47 jointly owned hospitals. In addition, we manage four inpatient rehabilitation units through management contracts. We provide specialized rehabilitative treatment on both an inpatient and outpatient 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.

•

Home Health and Hospice - As of September 30, 2019, we provide home health services in 245 locations and hospice services in 82 locations across 31 states with concentrations in the Southeast and Texas. In addition, two of these agencies operate as joint ventures which we account for using the equity method of accounting. We are the sole owner of 319 of these locations. We retain 50.0% to 81.0% ownership in the remaining eight jointly owned locations. Our home health services include a comprehensive range of Medicare-certified home nursing services to adult patients in need of care. These services include, among others, skilled nursing, physical, occupational, and speech therapy, medical social work, and home health aide services. Our hospice services include in-home services to terminally ill patients and their families to address patients’ physical needs, including pain control and symptom management, and to provide emotional and spiritual support.

The accounting policies of our reportable segments are the same as those described in Note 1, Basis of Presentation, “Leases” to these condensed consolidated financial statements and Note 1, Summary of Significant Accounting Policies, to the consolidated financial statements accompanying the 2018 Form 10‑K. All revenues for our services are generated from external customers. See Note 1, Basis of Presentation, “Net Operating Revenues,” for the disaggregation of our revenues. No corporate overhead is allocated to either of our reportable segments. Our chief operating decision maker evaluates the performance of our

segments and allocates resources to them based on adjusted earnings before interest, taxes, depreciation, and amortization (“Segment Adjusted EBITDA”).

Selected financial information for our reportable segments is as follows (in millions):



	Inpatient Rehabilitation												Home Health and Hospice
	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018			2019			2018			2019			2018
Net operating revenues	$	872.3		$	825.6		$	2,616.3		$	2,500.5		$	289.3		$	242.0		$	804.3		$	680.8
Operating expenses:
Inpatient rehabilitation:
Salaries and benefits	459.1			423.6			1,347.7			1,264.3			—			—			—			—
Other operating expenses	131.3			124.3			386.1			374.1			—			—			—			—
Supplies	37.0			33.6			109.3			104.2			—			—			—			—
Occupancy costs	17.0			15.9			49.1			47.4			—			—			—			—
Home health and hospice:
Cost of services sold (excluding depreciation and amortization)	—			—			—			—			136.4			114.6			372.8			322.3
Support and overhead costs	—			—			—			—			99.6			82.4			278.1			235.2
	644.4			597.4			1,892.2			1,790.0			236.0			197.0			650.9			557.5
Other income	(1.8		)	(1.8		)	(6.5		)	(3.5		)	—			—			—			(0.5		)
Equity in net income of nonconsolidated affiliates	(1.0		)	(1.9		)	(4.5		)	(5.5		)	(0.2		)	(0.2		)	(1.0		)	(0.9		)
Noncontrolling interests	20.1			19.0			60.6			59.3			2.7			2.0			8.2			6.4
Segment Adjusted EBITDA	$	210.6		$	212.9		$	674.5		$	660.2		$	50.8		$	43.2		$	146.2		$	118.3

Capital expenditures	$	103.6		$	64.5		$	266.0		$	181.1		$	3.1		$	1.7		$	11.1		$	7.7



	Inpatient Rehabilitation		Home Health and Hospice		Encompass Health Consolidated
As of September 30, 2019
Total assets	$	4,796.9	$	1,623.4	$	6,386.8
Investments in and advances to nonconsolidated affiliates	2.7		5.3		8.0
As of December 31, 2018
Total assets	$	3,900.9	$	1,314.6	$	5,175.0
Investments in and advances to nonconsolidated affiliates	9.5		2.7		12.2

Segment reconciliations (in millions):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Total segment Adjusted EBITDA	$	261.4		$	256.1		$	820.7		$	778.5
General and administrative expenses	(52.5		)	(49.9		)	(183.0		)	(165.9		)
Depreciation and amortization	(55.1		)	(51.2		)	(160.3		)	(146.8		)
(Loss) gain on disposal of assets	(0.9		)	1.0			(3.3		)	(2.2		)
Loss on early extinguishment of debt	—			—			(2.3		)	—
Interest expense and amortization of debt discounts and fees	(40.3		)	(37.3		)	(115.2		)	(110.6		)
Net income attributable to noncontrolling interests	21.9			20.7			64.5			63.5
SARs mark-to-market impact on noncontrolling interests	0.9			0.3			4.3			2.2
Change in fair market value of equity securities	—			(0.1		)	1.2			(1.1		)
Gain on consolidation of Yuma	19.2			—			19.2			—
Payroll taxes on SARs exercise	(0.8		)	—			(1.0		)	—
Income from continuing operations before income tax expense	$	153.8		$	139.6		$	444.8		$	417.6



	September 30, 2019			December 31, 2018
Total assets for reportable segments	$	6,420.3		$	5,215.5
Reclassification of deferred income tax liabilities to net deferred income tax assets	(33.5		)	(40.5		)
Total consolidated assets	$	6,386.8		$	5,175.0

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



	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Inpatient rehabilitation:
Inpatient	$	850.6	$	798.4	$	2,550.0	$	2,425.1
Outpatient and other	21.7		27.2		66.3		75.4
Total inpatient rehabilitation	872.3		825.6		2,616.3		2,500.5
Home health and hospice:
Home health	238.9		209.2		681.1		599.3
Hospice	50.4		32.8		123.2		81.5
Total home health and hospice	289.3		242.0		804.3		680.8
Total net operating revenues	$	1,161.6	$	1,067.6	$	3,420.6	$	3,181.3