Enhabit, Inc.EHAB
Enhabit, Inc. Stock Compensation Disclosure
Stock-Based Payments
Prior to July 1, 2022, the Company’s employees and board of directors participated in Encompass’s various stock‑based plans. All stock-based payments to employees are recognized in the financial statements based on their estimated grant-date fair value and amortized on a straight-line basis over the applicable requisite service period. On July 1, 2022, all unvested Encompass restricted stock awards (“RSAs”), restricted stock units (“RSUs”), and stock options to purchase shares issued to Enhabit’s employees were canceled and replaced with restricted stock, restricted stock units, and options to purchase shares issued under the Enhabit 2022 Omnibus Performance Incentive Plan (the “2022 Plan”). This represented a modification (the “Modification”) of outstanding stock-based compensation awards.
Prior to the Separation, Encompass issued a total of 128,000 RSAs and RSUs to members of Enhabit’s management team. Approximately 47,000 of these awards contain only a service condition, while the remainder contain both a service and a performance condition. Additionally, Encompass granted approximately 22,000 stock options to a member of Enhabit’s management team. The fair value of these awards and options was determined using the policies described in Note 1, Summary of Significant Accounting Policies.
As a result of the Modification, all outstanding stock-based compensation of Encompass stock awarded to Enhabit employees were converted to Enhabit stock using a conversion rate that retained the fair value of the awards immediately prior to the Modification.
All performance-based RSUs were measured immediately prior to the Modification. The number of shares to be issued upon vesting was determined, and these awards were converted to restricted stock units of Enhabit that vest based upon a service condition. All service-based RSAs were converted to restricted stock awards of Enhabit that vest based upon a service condition. The outstanding options to purchase shares of Encompass stock were converted to options to purchase shares of Enhabit stock. There was no additional compensation cost as a result of the Modification.
In 2022 the Company adopted the Enhabit, Inc. 2022 Omnibus Performance Incentive Plan (the “2022 Plan”), under which employees and non-employee directors could be granted stock options, stock appreciation rights, stock awards, performance stock units (“PSUs”), restricted stock, dividend equivalents, RSUs, other stock-based awards and cash awards. This incentive plan provides for the issuance of up to an aggregate of 7 million shares of the Company's common stock in stock-based compensation awards. Awards granted under the plan vest over the awards’ requisite service periods, which are typically three years.
Stock Options
Under the 2022 Plan, one member of management was given the right to purchase shares of Enhabit common stock at a fixed grant price determined on the day the options were granted. The terms and conditions of the options, including exercise prices and the periods in which options are exercisable, are generally at the discretion of the Compensation & Human Capital Committee of Enhabit’s board of directors. However, no options are exercisable beyond ten years from the date of grant. Granted options vest over the awards’ requisite service periods, which are generally three years.
No stock options were granted during the year ended December 31, 2024. The grant date fair values of stock options granted during the years ended December 31, 2023 and 2022 were estimated at the grant date using the Black-Scholes option‑pricing model with the following weighted average assumptions:
Year Ended December 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Expected volatility | 53.0 | % | 28.3 | % | |||||||
| Risk-free interest rate | 4.1 | % | 1.7 | % | |||||||
| Expected life (years) | 6.0 | 7.8 | |||||||||
| Dividend yield | — | % | 1.9 | % | |||||||
The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, the Black-Scholes option-pricing model requires the input of highly subjective assumptions, including the expected stock price volatility. Prior to the Separation, volatility was calculated based on the historical volatility of Encompass’s common stock over the period commensurate with the expected term of the options. The risk-free interest rate was the implied daily yield currently available on U.S. Treasury issues with a remaining term closely approximating the expected term used as the input to the Black-Scholes option-pricing model. The expected term was estimated through an analysis of actual, historical post-vesting exercise, cancellation, and expiration behavior by Encompass employees and projected post-vesting activity of outstanding options. The dividend yield was estimated based on Encompass’s annual dividend rate and the Encompass stock price on the dividend payment dates. For options granted after the Separation, volatility was estimated using the historical value of Enhabit’s peer group for a period of time commensurate with the expected term of the options. The expected term was estimated using the simplified method outlined in the Securities and Exchange Commission’s Staff Accounting Bulletin 120. The dividend yield is zero. Enhabit recognizes forfeitures for all award types as they occur. Under the Black-Scholes option-pricing model, the weighted
average grant date fair value per share of employee stock options granted was $8.35 and $7.01 during the years ended December 31, 2023 and 2022, respectively.
A summary of stock option activity for the year ended December 31, 2024 is as follows:
| (shares in thousands) | Shares | Weighted Average Exercise Price per Share | Weighted Average Remaining Life (Years) | Aggregate Intrinsic Value (In Millions) | |||||||||||||||||||
| Outstanding, December 31, 2023 | 286.3 | $ | 24.44 | ||||||||||||||||||||
| Granted | — | — | |||||||||||||||||||||
| Expirations | — | — | |||||||||||||||||||||
| Outstanding, December 31, 2024 | 286.3 | 24.44 | 5.8 | — | |||||||||||||||||||
| Exercisable, December 31, 2024 | 225.4 | $ | 25.97 | 5.3 | $ | — | |||||||||||||||||
The Company recognized approximately $0.3 million, $0.4 million, and $0.3 million of compensation expense related to stock options for the years ended December 31, 2024, 2023, and 2022, respectively. As of December 31, 2024, there was $0.2 million of unrecognized compensation cost related to unvested stock options. This cost is expected to be recognized over a weighted average period of 13 months. No options were exercised during the years ended December 31, 2024, 2023, and 2022. The total fair value of stock options vested during the years ended December 31, 2024, 2023, and 2022 was $0.4 million, $0.3 million, and $0.8 million, respectively.
Restricted Stock Awards
A summary of RSA activity for the year ended December 31, 2024 is as follows:
(shares in thousands) | Shares | Weighted Average Grant Date Fair Value | |||||||||
| Nonvested shares at December 31, 2023 | 277.6 | $ | 24.12 | ||||||||
| Granted | — | — | |||||||||
| Vested | (71.8) | 26.40 | |||||||||
| Forfeited | (3.2) | 27.14 | |||||||||
| Nonvested shares at December 31, 2024 | 202.6 | $ | 23.26 | ||||||||
The Company recognized $2.1 million, $3.0 million, and $3.3 million of stock-based compensation related to RSAs for the years ended December 31, 2024, 2023, and 2022, respectively. As of December 31, 2024, there was $2.2 million of unrecognized compensation expense related to unvested RSAs. This cost is expected to be recognized over a weighted average period of 15 months. There were no RSAs granted in the year ended December 31, 2024. The weighted average grant-date fair value per share of RSAs granted was $22.74 during the year ended December 31, 2022. The total fair value of RSAs vested during the years ended December 31, 2024, 2023, and 2022 was $1.9 million, $4.2 million, and $1.3 million, respectively. All RSAs that vested prior to the Separation vested as shares of Encompass stock.
Restricted Stock Units
The RSUs granted in 2024 were service-based and performance-based awards. These awards generally vest over a three-year requisite service period. The fair value of the RSU was determined by the closing price of Enhabit’s common stock on the grant date for the free cash flow performance condition and the Monte Carlo simulation model for the total shareholder return performance condition. The performance-based RSUs will vest in an amount between zero and 200% of the target units granted based on two criteria, (i) total shareholder return over the three-year period ending December 31, 2026 as compared to a designated peer group, and (ii) free cash flow generated by the Company over a three-year period ending December 31, 2026. The total shareholder return performance condition represents 20% of the total 2024 performance-based RSU award, and the free cash flow performance condition represents 80% of the total 2024 performance-based RSU award.
A summary of RSU activity for the year ended December 31, 2024 is as follows:
| Service Based | Performance Based | ||||||||||||||||||||||
(shares in thousands) | Shares | Weighted Average Grant Date Fair Value | Shares | Weighted Average Grant Date Fair Value | |||||||||||||||||||
| Nonvested shares at December 31, 2023 | 750.7 | $ | 18.11 | 388.3 | $ | 17.24 | |||||||||||||||||
| Granted | 748.1 | 8.94 | 674.9 | 9.43 | |||||||||||||||||||
| Vested | (431.1) | 16.47 | — | — | |||||||||||||||||||
| Forfeited | (116.2) | 12.83 | (89.7) | 14.09 | |||||||||||||||||||
| Nonvested shares at December 31, 2024 | 951.5 | $ | 12.28 | 973.5 | $ | 12.12 | |||||||||||||||||
The Company recognized $8.3 million, $5.5 million, and $5.6 million of stock-based compensation related to RSUs for the years ended December 31, 2024, 2023, and 2022, respectively. As of December 31, 2024, there was $6.4 million of unrecognized compensation expense related to unvested service-based RSUs. This cost is expected to be recognized over a weighted average period of 23 months. As of December 31, 2024, there was $4.3 million of unrecognized compensation expense related to performance-based RSUs. This cost is expected to be recognized over a weighted average period of 20 months. The total compensation expense ultimately recognized for the performance-based RSUs will depend on the outcome of the free cash flow performance condition upon vesting of the award. The weighted average grant-date fair value per share of service-based RSUs granted was $12.84 and $22.12 during the years ended December 31, 2023, and 2022, respectively. The total fair value of service-based RSUs vested during the years ended December 31, 2024, 2023, and 2022 was $7.1 million, $4.1 million, and $3.8 million, respectively. All RSUs that vested prior to the Separation vested as shares of Encompass stock.
In addition to the stock-based compensation expenses disclosed above, there was also an allocation of expenses related to certain Encompass functions that resulted from stock-based compensation totaling $1.1 million for the year ended December 31, 2022.
Additionally, Enhabit has accrued $1.0 million of stock-based compensation for discretionary bonus awards with service inception dates in 2024 that will be granted in 2025. There is no unamortized expense associated with the awards.
The total tax benefit recognized for all stock-based compensation was $1.1 million, $0.9 million, and $1.8 million for the years ended December 31, 2024, 2023, and 2022, respectively.About Stock Compensation Disclosures
Stock-based compensation disclosures detail the equity awards granted to employees and executives — including stock options, restricted stock units (RSUs), and performance shares — along with the valuation methods and assumptions used to expense them. This section reveals the true cost of talent retention and the alignment between management incentives and shareholder interests.
Key signals: total unrecognized compensation expense and its expected recognition period signal future earnings headwinds from already-granted awards. For stock options, examine Black-Scholes assumptions — expected volatility, risk-free rate, and expected term — as understating any of these reduces reported compensation expense. Compare stock compensation expense as a percentage of revenue against peers to assess dilution cost. Watch vesting schedules for acceleration clauses tied to change-of-control events. Performance-based awards with undemanding targets may indicate weak governance. Add back stock compensation to operating cash flow to calculate a more conservative free cash flow figure.