Separation of Home Health and Hospice Business

9 Months Ended

Sep. 30, 2022

Discontinued Operations and Disposal Groups [Abstract]

Separation of Home Health and Hospice Business

Separation of Home Health and Hospice BusinessOn July 1, 2022, we completed the previously announced separation of our home health and hospice business through the distribution (the “Distribution”) of all of the outstanding shares of common stock, par value $0.01 per share, of Enhabit, Inc. (“Enhabit”) to the stockholders of record of Encompass Health as of the close of business on June 24, 2022 (the “Record

Date”). The Distribution was effective at 12:01 a.m., Eastern Time, on July 1, 2022. The Distribution was structured as a pro rata distribution of one share of Enhabit common stock for every two shares of Encompass Health common stock held of record as of the Record Date. No fractional shares were distributed. A cash payment was made in lieu of any fractional shares. As a result of the Distribution, Enhabit is now an independent public company and its common stock is listed under the symbol “EHAB” on the New York Stock Exchange (the “Separation”).

In accordance with applicable accounting guidance, the historical results of Enhabit have been presented as discontinued operations and, as such, have been excluded from continuing operations for all periods presented. Our presentation of discontinued operations excludes any allocation of general corporate and overhead costs as well as interest expense. Prior to July 1, 2022, we operated under two reporting segments. We now operate under a single reporting segment. In anticipation of the Separation, Enhabit transferred the “Encompass” trade name (net book value of $104.2 million) to us during the second quarter of 2022.

In connection with the Distribution, on June 30, 2022, we entered into several agreements with Enhabit that govern the relationship of the parties following the Distribution, including a Separation and Distribution Agreement, a Transition Services Agreement, a Tax Matters Agreement and an Employee Matters Agreement.

We will provide transition services to Enhabit predominately consisting of certain finance, information technology, human resources, employee benefits and other administrative services for a period of up to two years after the Distribution. For the three and nine months ended September 30, 2022, income related to these transition services of $1.1 million were reflected as reductions to General and administrative expenses in our condensed consolidated statements of comprehensive income.

The following table presents the results of operations of Enhabit as discontinued operations (in millions):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022 (1)		2021		2022 (1)		2021
Net operating revenue	$	—	$	273.9	$	542.3	$	830.5
Operating expenses:
Salaries and benefits	—		193.0		376.4		570.7
Other operating expenses	—		22.2		47.6		66.9
Occupancy costs	—		5.4		11.0		15.7
Supplies	—		6.4		11.7		19.0
General and administrative expenses	19.8		5.0		54.8		13.0
Depreciation and amortization	—		9.4		16.7		27.9
Total operating expenses	19.8		241.4		518.2		713.2
Interest expense and amortization of debt discounts and fees	—		0.1		0.1		0.2
Other income	—		—		—		(1.6)
Equity in net income of nonconsolidated affiliates	—		(0.1)		—		(0.5)
(Loss) income from discontinued operations before income taxes	(19.8)		32.5		24.0		119.2
Provision for income tax (benefit) expense	(1.3)		7.9		7.3		28.6
(Loss) income from discontinued operations, net of tax	(18.5)		24.6		16.7		90.6
Less: Net income attributable to noncontrolling interests included in discontinued operations	—		(0.4)		(1.3)		(1.3)
Net income attributable to Encompass Health included in discontinued operations	$	(18.5)	$	24.2	$	15.4	$	89.3

(1) Reflects amounts through the July 1, 2022 Distribution date.

Transaction costs of $19.8 million and $52.3 million incurred during the three and nine months ended September 30, 2022, respectively, and $4.6 million and $9.6 million incurred during the three and nine months ended September 30, 2021, respectively, are included in general and administrative expenses in the table above and in (Loss) income from discontinued

operations, net of tax, in the condensed consolidated statements of comprehensive income. These charges primarily relate to third-party advisory, consulting, legal and professional services, that are associated with the Separation.

The following table presents the carrying amounts of the assets and liabilities of the discontinued operations of Enhabit (in millions):


	December 31, 2021
Assets
Current assets:
Cash and cash equivalents	$	5.4
Restricted cash	2.6
Accounts receivable	164.5
Other current assets	6.3
Total current assets of discontinued operations	178.8
Property and equipment, net	20.4
Operating lease right-of-use assets	48.4
Goodwill	1,190.9
Intangible assets, net	259.1
Other long-term assets	24.4
Total noncurrent assets of discontinued operations	1,543.2
Total assets of discontinued operations	$	1,722.0
Liabilities
Current liabilities:
Current portion of long-term debt	$	5.0
Current operating lease liabilities	14.9
Accounts payable	3.5
Accrued expenses and other current liabilities	109.0
Total current liabilities of discontinued operations	132.4
Long-term debt, net of current portion	3.5
Long-term operating lease liabilities	33.5
Deferred income tax liabilities	63.4
Other long-term liabilities	0.4
Total noncurrent liabilities of discontinued operations	100.8
Total liabilities of discontinued operations	$	233.2