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Encompass Health reported Q2 FY2026 revenue of $1.6 billion, up from $1.5 billion a year earlier. Its filing attributed the increase primarily to higher patient volumes and favorable pricing, with same-store discharges increasing as well. The company said higher reimbursement rates and patient mix lifted net patient revenue per discharge.
Diluted earnings per share rose to $1.54 from $1.39, according to Encompass Health. Its operating margin was 17.9%, compared with 17.8% a year earlier, while free cash flow fell to $62.3 million from $113.3 million. The filing said salaries and benefits rose in dollars with employee costs and patient volumes, but declined as a share of revenue.
For the subsequent quarter ended September 30, the company reported adjusted earnings per share of $1.52 against a consensus of $1.38. Revenue exceeded the consensus by 0.63%, although both reported revenue and the estimate rounded to $1.6 billion.
| Q2 FY2026 | Q2 FY2025 | Change | |
|---|---|---|---|
| Revenue | $1.6 billion | $1.5 billion | 9.58% |
| Diluted EPS | $1.54 | $1.39 | 10.8% |
| Gross margin | 100.0% | 100.0% | 0.0 percentage points |
| Operating margin | 17.9% | 17.8% | 0.1 percentage points |
| Free cash flow | $62.3 million | $113.3 million | −45.0% |
| Against the consensus | Reported | Consensus | Result |
|---|---|---|---|
| Adjusted EPS | $1.52 | $1.38 | Beat by 10.1% |
| Revenue | $1.6 billion | $1.6 billion | Beat by 0.63% |
Adjusted EPS is the figure the consensus estimates, not the GAAP EPS above.
What management said on the call
On the Q2 call, CEO Mark Tarr said demand for inpatient rehabilitation remained strong and the company was investing in more capacity. He said Encompass had opened hospitals in Pennsylvania and Georgia during the quarter and added beds at existing facilities.
Douglas Coltharp said pricing benefited in the first half primarily from higher patient acuity—the medical complexity of patients treated. Asked about acuity, he said caring for more medically complex patients could help referring hospitals free up beds, but cautioned that the pricing benefit might not continue through the second half.
Tarr linked participation in clinical staff development programs to lower turnover and reduced spending on premium labor. Coltharp said premium labor costs, including contract staff and sign-on and shift bonuses, declined to $25.0 million in Q2. He also said career-ladder participation could reduce the orientation hours associated with new hires.
On expansion, Tarr said North Carolina’s repeal of its certificate-of-need law for inpatient rehabilitation had prompted the company to assess markets across the state. Coltharp said Encompass could move faster on projects alone than by negotiating joint ventures at the outset, while later considering whether individual projects would benefit from a partner.
Asked about Medicare’s review process, Coltharp said the Texas rollout had gone well and California was above its target affirmation rate, with further improvement expected. He said some Pennsylvania hospitals could become subject to the program in 2027.
For the quarter ahead, Tarr estimated that the Medicare rehabilitation payment rule would increase net revenue per discharge for Medicare patients by approximately 2.30% beginning in October, based on the current patient mix. Coltharp said he expected growth in salaries, wages and benefits per employee to moderate the following year, but was not ready to quantify a level.
Guidance
Encompass Health raised its full-year 2026 revenue, adjusted EBITDA and adjusted earnings outlook after the third quarter. The company’s current adjusted earnings guidance is $6.23 to $6.37 per share from continuing operations, replacing the range it gave on the Q2 call.
| Metric | For | Guide | Previous guide | Change |
|---|---|---|---|---|
| EPS, non-GAAP | FY2026 | $6.23–$6.37 | $6.02–$6.25 | Raised |
| Operating expenses, Swb Per Fte Growth | FY2027 | Encompass Health expects growth in salaries, wages and benefits per full-time equivalent to moderate in FY2027. | — | — |
| Units, New Small Format Hospitals | FY2028 | Encompass Health intends to open close to a handful of small-format hospitals annually beginning in FY2028. | — | — |
| Units, New Hospitals | FY2029 | Encompass Health expects its annual hospital openings to move toward the high end of its target range beginning probably in FY2029. | — | — |
| EBITDA, Non Gaap Provider Tax Benefit | FY2026 | $10.0 million | — | New |
| Operating expenses growth, Swb Per Fte Growth | FY2026 | 3.50%–4.00% | — | New |
| Revenue growth, Medicare Revenue Per Discharge Growth | Q4 FY2026 | 2.30% | — | New |
| EBITDA, non-GAAP | FY2026 | $1.4 billion–$1.4 billion | — | New |
| Revenue | FY2026 | $6.4 billion–$6.5 billion | — | New |
| Dividend | Q4 FY2026 | $0.21 | — | New |
| Operating expenses, Preopening and Ramp Up | FY2026 | $18.0 million–$22.0 million | — | New |
| Units, Existing Hospital Beds | FY2026 | 100–150 | — | — |
| Units, New Hospital Beds | FY2026 | 250 | — | — |
| Units, New Hospitals | FY2026 | 5 | — | — |