UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
xQuarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 20162017
oOR
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
o | TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period Fromtransition period from to .
Commission File Number: 001 – 34465file numbers: 001-34465 and 001 – 31441001-31441
SELECT MEDICAL HOLDINGS CORPORATION
SELECT MEDICAL CORPORATION
(Exact name of Registrant as specified in its charter)Charter)
Delaware |
| 20-1764048 |
(State or Other Jurisdiction of | (I.R.S. |
4714 Gettysburg Road, P.O. Box 2034
Mechanicsburg, PennsylvaniaPA 17055
(Address of principal executive officesPrincipal Executive Offices and zipZip code)
(717) 972-1100
(Registrants’ telephone number, including area code)
Indicate by check mark whether the Registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods as such Registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. YESYes x NONo o
Indicate by check mark whether the Registrants have submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrants were required to submit and post such files). YESYes x NONo o
Indicate by check mark whether the registrant,Registrant, Select Medical Holdings Corporation, is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x |
| Accelerated filer o |
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Non-accelerated filer o | Smaller reporting company o | |
(Do not check if a smaller reporting company) |
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If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant,Registrant, Select Medical Corporation, is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o |
| Accelerated filer o |
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Non-accelerated filer x | Smaller reporting company o | |
(Do not check if a smaller reporting company) |
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If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the Registrants are shell companies (as defined in Rule 12b-2 of the Exchange Act). YESYes o NONo x
As of October 31, 2016,2017, Select Medical Holdings Corporation had outstanding 132,329,220133,824,559 shares of common stock.
This Form 10-Q is a combined quarterly report being filed separately by two Registrants: Select Medical Holdings Corporation and Select Medical Corporation. Unless the context indicates otherwise, any reference in this report to “Holdings” refers to Select Medical Holdings Corporation and any reference to “Select” refers to Select Medical Corporation, the wholly owned operating subsidiary of Holdings, and any of Select’s subsidiaries. Any reference to “Concentra” refers to Concentra Inc., the indirect operating subsidiary of Concentra Group Holdings, LLC (“Concentra Group Holdings”), and its subsidiaries. References to the “Company,” “we,” “us”“us,” and “our” refer collectively to Holdings, Select, and Concentra Group Holdings and its subsidiaries.
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| Condensed consolidated statements of changes in equity and income | 6 | |
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
(unaudited)
(in thousands, except share and per share amounts)
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| Select Medical Holdings Corporation |
| Select Medical Corporation |
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| Select Medical Holdings Corporation |
| Select Medical Corporation |
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| December 31, |
| September 30, |
| December 31, |
| September 30, |
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| December 31, |
| September 30, |
| December 31, |
| September 30, |
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| 2015 |
| 2016 |
| 2015 |
| 2016 |
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| 2016 |
| 2017 |
| 2016 |
| 2017 |
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ASSETS |
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Current Assets: |
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Cash and cash equivalents |
| $ | 14,435 |
| $ | 68,223 |
| $ | 14,435 |
| $ | 68,223 |
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| $ | 99,029 |
| $ | 107,300 |
| $ | 99,029 |
| $ | 107,300 |
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Accounts receivable, net of allowance for doubtful accounts of $61,133 and $61,084 at 2015 and 2016, respectively |
| 603,558 |
| 592,711 |
| 603,558 |
| 592,711 |
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Current deferred tax asset |
| 28,688 |
| 50,647 |
| 28,688 |
| 50,647 |
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Accounts receivable, net of allowance for doubtful accounts of $63,787 and $70,574 at 2016 and 2017, respectively |
| 573,752 |
| 716,426 |
| 573,752 |
| 716,426 |
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Prepaid income taxes |
| 16,694 |
| 11,474 |
| 16,694 |
| 11,474 |
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| 12,423 |
| — |
| 12,423 |
| — |
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Other current assets |
| 85,779 |
| 82,680 |
| 85,779 |
| 82,680 |
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| 77,699 |
| 80,324 |
| 77,699 |
| 80,324 |
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Total Current Assets |
| 749,154 |
| 805,735 |
| 749,154 |
| 805,735 |
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| 762,903 |
| 904,050 |
| 762,903 |
| 904,050 |
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Property and equipment, net |
| 864,124 |
| 863,485 |
| 864,124 |
| 863,485 |
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| 892,217 |
| 946,063 |
| 892,217 |
| 946,063 |
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Goodwill |
| 2,314,624 |
| 2,674,623 |
| 2,314,624 |
| 2,674,623 |
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| 2,751,000 |
| 2,767,896 |
| 2,751,000 |
| 2,767,896 |
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Other identifiable intangibles, net |
| 318,675 |
| 338,220 |
| 318,675 |
| 338,220 |
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Identifiable intangible assets, net |
| 340,562 |
| 331,036 |
| 340,562 |
| 331,036 |
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Other assets |
| 142,101 |
| 163,342 |
| 142,101 |
| 163,342 |
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| 173,944 |
| 174,762 |
| 173,944 |
| 174,762 |
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Total Assets |
| $ | 4,388,678 |
| $ | 4,845,405 |
| $ | 4,388,678 |
| $ | 4,845,405 |
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| $ | 4,920,626 |
| $ | 5,123,807 |
| $ | 4,920,626 |
| $ | 5,123,807 |
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LIABILITIES AND EQUITY |
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Current Liabilities: |
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Bank overdrafts |
| $ | 28,615 |
| $ | 20,151 |
| $ | 28,615 |
| $ | 20,151 |
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Overdrafts |
| $ | 39,362 |
| $ | 18,923 |
| $ | 39,362 |
| $ | 18,923 |
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Current portion of long-term debt and notes payable |
| 225,166 |
| 12,690 |
| 225,166 |
| 12,690 |
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| 13,656 |
| 37,560 |
| 13,656 |
| 37,560 |
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Accounts payable |
| 137,409 |
| 114,181 |
| 137,409 |
| 114,181 |
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| 126,558 |
| 133,321 |
| 126,558 |
| 133,321 |
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Accrued payroll |
| 120,989 |
| 138,090 |
| 120,989 |
| 138,090 |
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| 146,397 |
| 139,402 |
| 146,397 |
| 139,402 |
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Accrued vacation |
| 73,977 |
| 78,776 |
| 73,977 |
| 78,776 |
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| 83,261 |
| 89,171 |
| 83,261 |
| 89,171 |
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Accrued interest |
| 9,401 |
| 32,964 |
| 9,401 |
| 32,964 |
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| 22,325 |
| 30,998 |
| 22,325 |
| 30,998 |
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Accrued other |
| 133,728 |
| 142,431 |
| 133,728 |
| 142,431 |
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| 140,076 |
| 143,443 |
| 140,076 |
| 143,443 |
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Due to third party payors |
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| 11,065 |
| — |
| 11,065 |
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Income taxes payable |
| — |
| 6,718 |
| — |
| 6,718 |
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Total Current Liabilities |
| 729,285 |
| 550,348 |
| 729,285 |
| 550,348 |
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| 571,635 |
| 599,536 |
| 571,635 |
| 599,536 |
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Long-term debt, net of current portion |
| 2,160,730 |
| 2,642,115 |
| 2,160,730 |
| 2,642,115 |
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| 2,685,333 |
| 2,752,742 |
| 2,685,333 |
| 2,752,742 |
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Non-current deferred tax liability |
| 218,705 |
| 210,000 |
| 218,705 |
| 210,000 |
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| 199,078 |
| 191,441 |
| 199,078 |
| 191,441 |
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Other non-current liabilities |
| 133,220 |
| 136,527 |
| 133,220 |
| 136,527 |
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| 136,520 |
| 138,118 |
| 136,520 |
| 138,118 |
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Total Liabilities |
| 3,241,940 |
| 3,538,990 |
| 3,241,940 |
| 3,538,990 |
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| 3,592,566 |
| 3,681,837 |
| 3,592,566 |
| 3,681,837 |
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Commitments and contingencies (Note 11) |
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Commitments and contingencies (Note 8) |
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Redeemable non-controlling interests |
| 238,221 |
| 246,429 |
| 238,221 |
| 246,429 |
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| 422,159 |
| 621,515 |
| 422,159 |
| 621,515 |
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Stockholders’ Equity: |
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Common stock of Holdings, $0.001 par value, 700,000,000 shares authorized, 131,282,798 and 132,395,317 shares issued and outstanding at 2015 and 2016, respectively |
| 131 |
| 132 |
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Common stock of Holdings, $0.001 par value, 700,000,000 shares authorized, 132,596,758 and 133,884,963 shares issued and outstanding at 2016 and 2017, respectively |
| 132 |
| 133 |
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Common stock of Select, $0.01 par value, 100 shares issued and outstanding |
| — |
| — |
| 0 |
| 0 |
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| — |
| 0 |
| 0 |
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Capital in excess of par |
| 424,506 |
| 440,316 |
| 904,375 |
| 921,069 |
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| 443,908 |
| 459,004 |
| 925,111 |
| 942,142 |
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Retained earnings (accumulated deficit) |
| 434,616 |
| 528,593 |
| (45,122 | ) | 47,972 |
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| 371,685 |
| 262,505 |
| (109,386 | ) | (220,500 | ) | ||||||||
Total Select Medical Holdings Corporation and Select Medical Corporation Stockholders’ Equity |
| 859,253 |
| 969,041 |
| 859,253 |
| 969,041 |
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| 815,725 |
| 721,642 |
| 815,725 |
| 721,642 |
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Non-controlling interest |
| 49,264 |
| 90,945 |
| 49,264 |
| 90,945 |
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Non-controlling interests |
| 90,176 |
| 98,813 |
| 90,176 |
| 98,813 |
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Total Equity |
| 908,517 |
| 1,059,986 |
| 908,517 |
| 1,059,986 |
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| 905,901 |
| 820,455 |
| 905,901 |
| 820,455 |
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Total Liabilities and Equity |
| $ | 4,388,678 |
| $ | 4,845,405 |
| $ | 4,388,678 |
| $ | 4,845,405 |
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| $ | 4,920,626 |
| $ | 5,123,807 |
| $ | 4,920,626 |
| $ | 5,123,807 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
Condensed Consolidated Statements of Operations
(unaudited)
(in thousands, except per share amounts)
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| Select Medical Holdings Corporation |
| Select Medical Corporation |
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| Select Medical Holdings Corporation |
| Select Medical Corporation |
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| For the Three Months Ended September 30, |
| For the Three Months Ended September 30, |
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| For the Three Months Ended September 30, |
| For the Three Months Ended September 30, |
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| 2015 |
| 2016 |
| 2015 |
| 2016 |
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| 2016 |
| 2017 |
| 2016 |
| 2017 |
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Net operating revenues |
| $ | 1,021,123 |
| $ | 1,053,795 |
| $ | 1,021,123 |
| $ | 1,053,795 |
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| $ | 1,053,795 |
| $ | 1,097,166 |
| $ | 1,053,795 |
| $ | 1,097,166 |
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Costs and expenses: |
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Cost of services |
| 900,949 |
| 915,703 |
| 900,949 |
| 915,703 |
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| 915,703 |
| 938,910 |
| 915,703 |
| 938,910 |
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General and administrative |
| 22,201 |
| 27,088 |
| 22,201 |
| 27,088 |
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| 27,088 |
| 27,065 |
| 27,088 |
| 27,065 |
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Bad debt expense |
| 18,287 |
| 17,677 |
| 18,287 |
| 17,677 |
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| 17,677 |
| 20,321 |
| 17,677 |
| 20,321 |
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Depreciation and amortization |
| 31,472 |
| 37,165 |
| 31,472 |
| 37,165 |
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| 37,165 |
| 38,772 |
| 37,165 |
| 38,772 |
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Total costs and expenses |
| 972,909 |
| 997,633 |
| 972,909 |
| 997,633 |
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| 997,633 |
| 1,025,068 |
| 997,633 |
| 1,025,068 |
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Income from operations |
| 48,214 |
| 56,162 |
| 48,214 |
| 56,162 |
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| 56,162 |
| 72,098 |
| 56,162 |
| 72,098 |
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Other income and expense: |
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Loss on early retirement of debt |
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| (10,853 | ) | — |
| (10,853 | ) |
| (10,853 | ) | — |
| (10,853 | ) | — |
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Equity in earnings of unconsolidated subsidiaries |
| 6,348 |
| 5,268 |
| 6,348 |
| 5,268 |
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| 5,268 |
| 4,431 |
| 5,268 |
| 4,431 |
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Non-operating gain (loss) |
| 29,647 |
| (1,028 | ) | 29,647 |
| (1,028 | ) | |||||||||||||||||
Non-operating loss |
| (1,028 | ) | — |
| (1,028 | ) | — |
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Interest expense |
| (33,052 | ) | (44,482 | ) | (33,052 | ) | (44,482 | ) |
| (44,482 | ) | (37,688 | ) | (44,482 | ) | (37,688 | ) | ||||||||
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Income before income taxes |
| 51,157 |
| 5,067 |
| 51,157 |
| 5,067 |
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| 5,067 |
| 38,841 |
| 5,067 |
| 38,841 |
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Income tax expense |
| 18,347 |
| 1,075 |
| 18,347 |
| 1,075 |
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| 1,075 |
| 14,017 |
| 1,075 |
| 14,017 |
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Net income |
| 32,810 |
| 3,992 |
| 32,810 |
| 3,992 |
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| 3,992 |
| 24,824 |
| 3,992 |
| 24,824 |
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Less: Net income (loss) attributable to non-controlling interests |
| 3,404 |
| (2,479 | ) | 3,404 |
| (2,479 | ) |
| (2,479 | ) | 6,362 |
| (2,479 | ) | 6,362 |
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Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation |
| $ | 29,406 |
| $ | 6,471 |
| $ | 29,406 |
| $ | 6,471 |
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| $ | 6,471 |
| $ | 18,462 |
| $ | 6,471 |
| $ | 18,462 |
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Income per common share: |
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Basic |
| $ | 0.22 |
| $ | 0.05 |
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| $ | 0.05 |
| $ | 0.14 |
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Diluted |
| $ | 0.22 |
| $ | 0.05 |
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| $ | 0.05 |
| $ | 0.14 |
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Weighted average shares outstanding: |
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Basic |
| 127,386 |
| 127,848 |
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| 127,848 |
| 129,142 |
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Diluted |
| 127,649 |
| 127,989 |
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| 127,989 |
| 129,322 |
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|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Condensed Consolidated Statements of Operations
(unaudited)
(in thousands, except per share amounts)
|
| Select Medical Holdings Corporation |
| Select Medical Corporation |
|
| Select Medical Holdings Corporation |
| Select Medical Corporation |
| ||||||||||||||||
|
| For the Nine Months Ended September 30, |
| For the Nine Months Ended September 30, |
|
| For the Nine Months Ended September 30, |
| For the Nine Months Ended September 30, |
| ||||||||||||||||
|
| 2015 |
| 2016 |
| 2015 |
| 2016 |
|
| 2016 |
| 2017 |
| 2016 |
| 2017 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Net operating revenues |
| $ | 2,703,531 |
| $ | 3,239,756 |
| $ | 2,703,531 |
| $ | 3,239,756 |
|
| $ | 3,239,756 |
| $ | 3,329,202 |
| $ | 3,239,756 |
| $ | 3,329,202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Cost of services |
| 2,309,213 |
| 2,754,950 |
| 2,309,213 |
| 2,754,950 |
|
| 2,754,950 |
| 2,787,497 |
| 2,754,950 |
| 2,787,497 |
| ||||||||
General and administrative |
| 67,917 |
| 81,226 |
| 67,917 |
| 81,226 |
|
| 81,226 |
| 83,415 |
| 81,226 |
| 83,415 |
| ||||||||
Bad debt expense |
| 43,243 |
| 51,591 |
| 43,243 |
| 51,591 |
|
| 51,591 |
| 59,120 |
| 51,591 |
| 59,120 |
| ||||||||
Depreciation and amortization |
| 70,668 |
| 107,887 |
| 70,668 |
| 107,887 |
|
| 107,887 |
| 119,644 |
| 107,887 |
| 119,644 |
| ||||||||
Total costs and expenses |
| 2,491,041 |
| 2,995,654 |
| 2,491,041 |
| 2,995,654 |
|
| 2,995,654 |
| 3,049,676 |
| 2,995,654 |
| 3,049,676 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Income from operations |
| 212,490 |
| 244,102 |
| 212,490 |
| 244,102 |
|
| 244,102 |
| 279,526 |
| 244,102 |
| 279,526 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Other income and expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Loss on early retirement of debt |
| — |
| (11,626 | ) | — |
| (11,626 | ) |
| (11,626 | ) | (19,719 | ) | (11,626 | ) | (19,719 | ) | ||||||||
Equity in earnings of unconsolidated subsidiaries |
| 12,788 |
| 14,466 |
| 12,788 |
| 14,466 |
|
| 14,466 |
| 15,618 |
| 14,466 |
| 15,618 |
| ||||||||
Non-operating gain |
| 29,647 |
| 37,094 |
| 29,647 |
| 37,094 |
| |||||||||||||||||
Non-operating gain (loss) |
| 37,094 |
| (49 | ) | 37,094 |
| (49 | ) | |||||||||||||||||
Interest expense |
| (79,728 | ) | (127,662 | ) | (79,728 | ) | (127,662 | ) |
| (127,662 | ) | (116,196 | ) | (127,662 | ) | (116,196 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Income before income taxes |
| 175,197 |
| 156,374 |
| 175,197 |
| 156,374 |
|
| 156,374 |
| 159,180 |
| 156,374 |
| 159,180 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Income tax expense |
| 65,048 |
| 51,585 |
| 65,048 |
| 51,585 |
|
| 51,585 |
| 59,593 |
| 51,585 |
| 59,593 |
| ||||||||
Net income |
| 110,149 |
| 104,789 |
| 110,149 |
| 104,789 |
|
| 104,789 |
| 99,587 |
| 104,789 |
| 99,587 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Less: Net income attributable to non-controlling interests |
| 8,740 |
| 9,550 |
| 8,740 |
| 9,550 |
|
| 9,550 |
| 23,200 |
| 9,550 |
| 23,200 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation |
| $ | 101,409 |
| $ | 95,239 |
| $ | 101,409 |
| $ | 95,239 |
|
| $ | 95,239 |
| $ | 76,387 |
| $ | 95,239 |
| $ | 76,387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Income per common share: |
|
|
|
|
|
|
|
|
| |||||||||||||||||
Basic |
| $ | 0.77 |
| $ | 0.72 |
|
|
|
|
|
| $ | 0.72 |
| $ | 0.57 |
|
|
|
|
| ||||
Diluted |
| $ | 0.77 |
| $ | 0.72 |
|
|
|
|
|
| $ | 0.72 |
| $ | 0.57 |
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Dividends paid per share |
| $ | 0.10 |
| $ | — |
|
|
|
|
| |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Basic |
| 127,541 |
| 127,659 |
|
|
|
|
|
| 127,659 |
| 128,745 |
|
|
|
|
| ||||||||
Diluted |
| 127,844 |
| 127,804 |
|
|
|
|
|
| 127,804 |
| 128,916 |
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Condensed Consolidated StatementStatements of Changes in Equity and Income
(unaudited)
(in thousands)
|
|
|
|
|
| Select Medical Holdings Corporation Stockholders |
| Non- |
| ||||||||||||
|
| Comprehensive Income |
| Total |
| Common Stock |
| Common Stock Par |
| Capital in Excess |
| Retained Earnings |
| controlling |
| ||||||
Balance at December 31, 2015 |
|
|
| $ | 908,517 |
| 131,283 |
| $ | 131 |
| $ | 424,506 |
| $ | 434,616 |
| $ | 49,264 |
| |
Net income |
| $ | 93,037 |
| 93,037 |
|
|
|
|
|
|
| 95,239 |
| (2,202 | ) | |||||
Net income - attributable to redeemable non-controlling interests |
| 11,752 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total comprehensive income |
| $ | 104,789 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Issuance and vesting of restricted stock |
|
|
| 12,344 |
| 1,089 |
| 1 |
| 12,343 |
|
|
|
|
| ||||||
Tax benefit from stock based awards |
|
|
| 514 |
|
|
|
|
| 514 |
|
|
|
|
| ||||||
Repurchase of common shares |
|
|
| (1,939 | ) | (155 | ) | 0 |
| (883 | ) | (1,056 | ) |
|
| ||||||
Stock option expense |
|
|
| 4 |
|
|
|
|
| 4 |
|
|
|
|
| ||||||
Exercise of stock options |
|
|
| 1,488 |
| 178 |
| 0 |
| 1,488 |
|
|
|
|
| ||||||
Non-controlling interests acquired in business combination |
|
|
| 2,514 |
|
|
|
|
|
|
|
|
| 2,514 |
| ||||||
Distributions to non-controlling interests |
|
|
| (6,939 | ) |
|
|
|
|
|
|
|
| (6,939 | ) | ||||||
Issuance of non-controlling interests |
|
|
| 50,178 |
|
|
|
|
| 2,377 |
|
|
| 47,801 |
| ||||||
Purchase of redeemable non-controlling interests |
|
|
| 466 |
|
|
|
|
|
|
| 466 |
|
|
| ||||||
Other |
|
|
| (198 | ) |
|
|
|
| (33 | ) | (672 | ) | 507 |
| ||||||
Balance at September 30, 2016 |
|
|
| $ | 1,059,986 |
| 132,395 |
| $ | 132 |
| $ | 440,316 |
| $ | 528,593 |
| $ | 90,945 |
|
|
|
|
|
| Select Medical Holdings Corporation Stockholders |
|
|
|
|
| |||||||||||||||
|
| Redeemable |
|
| Common |
| Common |
| Capital in |
| Retained |
| Total |
| Non-controlling |
| Total |
| |||||||
Balance at December 31, 2016 |
| $ | 422,159 |
|
| 132,597 |
| $ | 132 |
| $ | 443,908 |
| $ | 371,685 |
| $ | 815,725 |
| $ | 90,176 |
| $ | 905,901 |
|
Net income attributable to Select Medical Holdings Corporation |
|
|
|
|
|
|
|
|
|
| 76,387 |
| 76,387 |
|
|
| 76,387 |
| |||||||
Net income attributable to non-controlling interests |
| 18,519 |
|
|
|
|
|
|
|
|
|
| — |
| 4,681 |
| 4,681 |
| |||||||
Issuance and vesting of restricted stock |
|
|
|
| 1,323 |
| 1 |
| 13,445 |
|
|
| 13,446 |
|
|
| 13,446 |
| |||||||
Repurchase of common shares |
|
|
|
| (220 | ) | 0 |
| (1,934 | ) | (1,669 | ) | (3,603 | ) |
|
| (3,603 | ) | |||||||
Exercise of stock options |
|
|
|
| 185 |
| 0 |
| 1,634 |
|
|
| 1,634 |
|
|
| 1,634 |
| |||||||
Issuance of non-controlling interests |
|
|
|
|
|
|
|
| 1,951 |
|
|
| 1,951 |
| 8,944 |
| 10,895 |
| |||||||
Purchase of non-controlling interests |
| (127 | ) |
|
|
|
|
|
|
| 7 |
| 7 |
|
|
| 7 |
| |||||||
Distributions to non-controlling interests |
| (4,003 | ) |
|
|
|
|
|
|
|
|
| — |
| (5,153 | ) | (5,153 | ) | |||||||
Redemption adjustment on non-controlling interests |
| 184,294 |
|
|
|
|
|
|
|
| (184,294 | ) | (184,294 | ) |
|
| (184,294 | ) | |||||||
Other |
| 673 |
|
|
|
|
|
|
|
| 389 |
| 389 |
| 165 |
| 554 |
| |||||||
Balance at September 30, 2017 |
| $ | 621,515 |
|
| 133,885 |
| $ | 133 |
| $ | 459,004 |
| $ | 262,505 |
| $ | 721,642 |
| $ | 98,813 |
| $ | 820,455 |
|
|
|
|
|
|
| Select Medical Corporation Stockholders |
| Non- |
| ||||||||||||
|
| Comprehensive Income |
| Total |
| Common Stock |
| Common Stock Par |
| Capital in Excess |
| Retained Earnings |
| controlling |
| ||||||
Balance at December 31, 2015 |
|
|
| $ | 908,517 |
| 0 |
| $ | 0 |
| $ | 904,375 |
| $ | (45,122 | ) | $ | 49,264 |
| |
Net income |
| $ | 93,037 |
| 93,037 |
|
|
|
|
|
|
| 95,239 |
| (2,202 | ) | |||||
Net income - attributable to redeemable non-controlling interests |
| 11,752 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total comprehensive income |
| $ | 104,789 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Additional investment by Holdings |
|
|
| 1,488 |
|
|
|
|
| 1,488 |
|
|
|
|
| ||||||
Dividends declared and paid to Holdings |
|
|
| (1,939 | ) |
|
|
|
|
|
| (1,939 | ) |
|
| ||||||
Contribution related to restricted stock awards and stock option issuances by Holdings |
|
|
| 12,348 |
|
|
|
|
| 12,348 |
|
|
|
|
| ||||||
Tax benefit from stock based awards |
|
|
| 514 |
|
|
|
|
| 514 |
|
|
|
|
| ||||||
Non-controlling interests acquired in business combination |
|
|
| 2,514 |
|
|
|
|
|
|
|
|
| 2,514 |
| ||||||
Distributions to non-controlling interests |
|
|
| (6,939 | ) |
|
|
|
|
|
|
|
| (6,939 | ) | ||||||
Issuance of non-controlling interests |
|
|
| 50,178 |
|
|
|
|
| 2,377 |
|
|
| 47,801 |
| ||||||
Purchase of redeemable non-controlling interests |
|
|
| 466 |
|
|
|
|
|
|
| 466 |
|
|
| ||||||
Other |
|
|
| (198 | ) |
|
|
|
| (33 | ) | (672 | ) | 507 |
| ||||||
Balance at September 30, 2016 |
|
|
| $ | 1,059,986 |
| 0 |
| $ | 0 |
| $ | 921,069 |
| $ | 47,972 |
| $ | 90,945 |
|
|
|
|
|
| Select Medical Corporation Stockholders |
|
|
|
|
| |||||||||||||||
|
| Redeemable |
|
| Common |
| Common |
| Capital in |
| Retained |
| Total |
| Non-controlling |
| Total |
| |||||||
Balance at December 31, 2016 |
| $ | 422,159 |
|
| 0 |
| $ | 0 |
| $ | 925,111 |
| $ | (109,386 | ) | $ | 815,725 |
| $ | 90,176 |
| $ | 905,901 |
|
Net income attributable to Select Medical Corporation |
|
|
|
|
|
|
|
|
|
| 76,387 |
| 76,387 |
|
|
| 76,387 |
| |||||||
Net income attributable to non-controlling interests |
| 18,519 |
|
|
|
|
|
|
|
|
|
| — |
| 4,681 |
| 4,681 |
| |||||||
Additional investment by Holdings |
|
|
|
|
|
|
|
| 1,634 |
|
|
| 1,634 |
|
|
| 1,634 |
| |||||||
Dividends declared and paid to Holdings |
|
|
|
|
|
|
|
|
|
| (3,603 | ) | (3,603 | ) |
|
| (3,603 | ) | |||||||
Contribution related to restricted stock awards and stock option issuances by Holdings |
|
|
|
|
|
|
|
| 13,446 |
|
|
| 13,446 |
|
|
| 13,446 |
| |||||||
Issuance of non-controlling interests |
|
|
|
|
|
|
|
| 1,951 |
|
|
| 1,951 |
| 8,944 |
| 10,895 |
| |||||||
Purchase of non-controlling interests |
| (127 | ) |
|
|
|
|
|
|
| 7 |
| 7 |
|
|
| 7 |
| |||||||
Distributions to non-controlling interests |
| (4,003 | ) |
|
|
|
|
|
|
|
|
| — |
| (5,153 | ) | (5,153 | ) | |||||||
Redemption adjustment on non-controlling interests |
| 184,294 |
|
|
|
|
|
|
|
| (184,294 | ) | (184,294 | ) |
|
| (184,294 | ) | |||||||
Other |
| 673 |
|
|
|
|
|
|
|
| 389 |
| 389 |
| 165 |
| 554 |
| |||||||
Balance at September 30, 2017 |
| $ | 621,515 |
|
| 0 |
| $ | 0 |
| $ | 942,142 |
| $ | (220,500 | ) | $ | 721,642 |
| $ | 98,813 |
| $ | 820,455 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Condensed Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
|
| Select Medical Holdings Corporation |
| Select Medical Corporation |
|
| Select Medical Holdings Corporation |
| Select Medical Corporation |
| ||||||||||||||||
|
| For the Nine Months Ended September 30, |
| For the Nine Months Ended September 30, |
|
| For the Nine Months Ended September 30, |
| For the Nine Months Ended September 30, |
| ||||||||||||||||
|
| 2015 |
| 2016 |
| 2015 |
| 2016 |
|
| 2016 |
| 2017 |
| 2016 |
| 2017 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Net income |
| $ | 110,149 |
| $ | 104,789 |
| $ | 110,149 |
| $ | 104,789 |
|
| $ | 104,789 |
| $ | 99,587 |
| $ | 104,789 |
| $ | 99,587 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Distributions from unconsolidated subsidiaries |
| 11,814 |
| 16,145 |
| 11,814 |
| 16,145 |
|
| 16,145 |
| 14,542 |
| 16,145 |
| 14,542 |
| ||||||||
Depreciation and amortization |
| 70,668 |
| 107,887 |
| 70,668 |
| 107,887 |
|
| 107,887 |
| 119,644 |
| 107,887 |
| 119,644 |
| ||||||||
Amortization of leasehold interests |
| — |
| 457 |
| — |
| 457 |
| |||||||||||||||||
Provision for bad debts |
| 43,243 |
| 51,591 |
| 43,243 |
| 51,591 |
|
| 51,591 |
| 59,120 |
| 51,591 |
| 59,120 |
| ||||||||
Equity in earnings of unconsolidated subsidiaries |
| (12,788 | ) | (14,466 | ) | (12,788 | ) | (14,466 | ) |
| (14,466 | ) | (15,618 | ) | (14,466 | ) | (15,618 | ) | ||||||||
Loss on early retirement of debt |
| — |
| 11,626 |
| — |
| 11,626 |
| |||||||||||||||||
Loss on disposal of assets |
| — |
| 282 |
| — |
| 282 |
| |||||||||||||||||
Gain on sale of assets and businesses |
| (1,264 | ) | (42,192 | ) | (1,264 | ) | (42,192 | ) | |||||||||||||||||
Loss on extinguishment of debt |
| 11,626 |
| 6,527 |
| 11,626 |
| 6,527 |
| |||||||||||||||||
Gain on sale or disposal of assets and businesses |
| (41,910 | ) | (9,499 | ) | (41,910 | ) | (9,499 | ) | |||||||||||||||||
Gain on sale of equity investment |
| (29,647 | ) | (241 | ) | (29,647 | ) | (241 | ) |
| (241 | ) | — |
| (241 | ) | — |
| ||||||||
Impairment of equity investment |
| — |
| 5,339 |
| — |
| 5,339 |
|
| 5,339 |
| — |
| 5,339 |
| — |
| ||||||||
Stock compensation expense |
| 9,244 |
| 12,924 |
| 9,244 |
| 12,924 |
|
| 12,924 |
| 14,227 |
| 12,924 |
| 14,227 |
| ||||||||
Amortization of debt discount, premium and issuance costs |
| 6,746 |
| 11,845 |
| 6,746 |
| 11,845 |
|
| 11,845 |
| 8,546 |
| 11,845 |
| 8,546 |
| ||||||||
Deferred income taxes |
| (6,925 | ) | (13,088 | ) | (6,925 | ) | (13,088 | ) |
| (13,088 | ) | (6,126 | ) | (13,088 | ) | (6,126 | ) | ||||||||
Changes in operating assets and liabilities, net of effects from acquisition of businesses: |
|
|
|
|
|
|
|
|
| |||||||||||||||||
Changes in operating assets and liabilities, net of effects of business combinations: |
|
|
|
|
|
|
|
|
| |||||||||||||||||
Accounts receivable |
| (48,778 | ) | (40,776 | ) | (48,778 | ) | (40,776 | ) |
| (40,776 | ) | (201,514 | ) | (40,776 | ) | (201,514 | ) | ||||||||
Other current assets |
| (4,580 | ) | 12,094 |
| (4,580 | ) | 12,094 |
|
| 12,094 |
| (2,677 | ) | 12,094 |
| (2,677 | ) | ||||||||
Other assets |
| 4,540 |
| 4,689 |
| 4,540 |
| 4,689 |
|
| 5,146 |
| 1,407 |
| 5,146 |
| 1,407 |
| ||||||||
Accounts payable |
| 3,047 |
| (17,752 | ) | 3,047 |
| (17,752 | ) |
| (17,752 | ) | 3,913 |
| (17,752 | ) | 3,913 |
| ||||||||
Accrued expenses |
| 32,716 |
| 52,996 |
| 32,716 |
| 52,996 |
|
| 52,996 |
| 18,752 |
| 52,996 |
| 18,752 |
| ||||||||
Due to third party payors |
| — |
| 11,065 |
| — |
| 11,065 |
|
| 11,065 |
| — |
| 11,065 |
| — |
| ||||||||
Income taxes |
| 15,246 |
| 5,033 |
| 15,246 |
| 5,033 |
|
| 5,547 |
| 19,141 |
| 5,547 |
| 19,141 |
| ||||||||
Net cash provided by operating activities |
| 203,431 |
| 280,247 |
| 203,431 |
| 280,247 |
|
| 280,761 |
| 129,972 |
| 280,761 |
| 129,972 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Business combinations, net of cash acquired |
| (414,231 | ) | (19,371 | ) | (414,231 | ) | (19,371 | ) | |||||||||||||||||
Purchases of property and equipment |
| (113,992 | ) | (118,260 | ) | (113,992 | ) | (118,260 | ) |
| (118,260 | ) | (173,800 | ) | (118,260 | ) | (173,800 | ) | ||||||||
Proceeds from sale of assets and businesses |
| 1,542 |
| 71,388 |
| 1,542 |
| 71,388 |
| |||||||||||||||||
Investment in businesses |
| (1,703 | ) | (3,140 | ) | (1,703 | ) | (3,140 | ) |
| (3,140 | ) | (11,374 | ) | (3,140 | ) | (11,374 | ) | ||||||||
Proceeds from sale of equity investment |
| 33,096 |
| 1,241 |
| 33,096 |
| 1,241 |
| |||||||||||||||||
Acquisition of businesses, net of cash acquired |
| (1,049,872 | ) | (414,231 | ) | (1,049,872 | ) | (414,231 | ) | |||||||||||||||||
Proceeds from sale of assets, businesses, and equity investment |
| 72,629 |
| 34,555 |
| 72,629 |
| 34,555 |
| |||||||||||||||||
Net cash used in investing activities |
| (1,130,929 | ) | (463,002 | ) | (1,130,929 | ) | (463,002 | ) |
| (463,002 | ) | (169,990 | ) | (463,002 | ) | (169,990 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Borrowings on revolving facilities |
| 840,000 |
| 420,000 |
| 840,000 |
| 420,000 |
|
| 420,000 |
| 805,000 |
| 420,000 |
| 805,000 |
| ||||||||
Payments on revolving facilities |
| (675,000 | ) | (545,000 | ) | (675,000 | ) | (545,000 | ) |
| (545,000 | ) | (705,000 | ) | (545,000 | ) | (705,000 | ) | ||||||||
Net proceeds from term loans |
| 623,575 |
| 795,344 |
| 623,575 |
| 795,344 |
| |||||||||||||||||
Proceeds from term loans |
| 795,344 |
| 1,139,487 |
| 795,344 |
| 1,139,487 |
| |||||||||||||||||
Payments on term loans |
| (26,884 | ) | (434,842 | ) | (26,884 | ) | (434,842 | ) |
| (434,842 | ) | (1,176,567 | ) | (434,842 | ) | (1,176,567 | ) | ||||||||
Revolving facility debt issuance costs |
| — |
| (4,392 | ) | — |
| (4,392 | ) | |||||||||||||||||
Borrowings of other debt |
| 11,041 |
| 23,801 |
| 11,041 |
| 23,801 |
|
| 23,801 |
| 27,571 |
| 23,801 |
| 27,571 |
| ||||||||
Principal payments on other debt |
| (13,167 | ) | (15,477 | ) | (13,167 | ) | (15,477 | ) |
| (15,477 | ) | (15,112 | ) | (15,477 | ) | (15,112 | ) | ||||||||
Dividends paid to common stockholders |
| (13,129 | ) | — |
| — |
| — |
| |||||||||||||||||
Repurchase of common stock |
| (1,939 | ) | (3,603 | ) | — |
| — |
| |||||||||||||||||
Dividends paid to Holdings |
| — |
| — |
| (26,751 | ) | (1,939 | ) |
| — |
| — |
| (1,939 | ) | (3,603 | ) | ||||||||
Repurchase of common stock |
| (13,622 | ) | (1,939 | ) | — |
| — |
| |||||||||||||||||
Proceeds from issuance of common stock |
| 1,604 |
| 1,488 |
| — |
| — |
| |||||||||||||||||
Proceeds from exercise of stock options |
| 1,488 |
| 1,634 |
| — |
| — |
| |||||||||||||||||
Equity investment by Holdings |
| — |
| — |
| 1,604 |
| 1,488 |
|
| — |
| — |
| 1,488 |
| 1,634 |
| ||||||||
Proceeds from issuance of non-controlling interest |
| 217,065 |
| 11,846 |
| 217,065 |
| 11,846 |
| |||||||||||||||||
Proceeds from (repayments of) bank overdrafts |
| 2,353 |
| (8,464 | ) | 2,353 |
| (8,464 | ) | |||||||||||||||||
Tax benefit from stock based awards |
| 383 |
| 514 |
| 383 |
| 514 |
| |||||||||||||||||
Repayments of overdrafts |
| (8,464 | ) | (20,439 | ) | (8,464 | ) | (20,439 | ) | |||||||||||||||||
Proceeds from issuance of non-controlling interests |
| 11,846 |
| 8,986 |
| 11,846 |
| 8,986 |
| |||||||||||||||||
Purchase of non-controlling interests |
| — |
| (1,530 | ) | — |
| (1,530 | ) |
| (1,530 | ) | (120 | ) | (1,530 | ) | (120 | ) | ||||||||
Distributions to non-controlling interests |
| (7,440 | ) | (9,198 | ) | (7,440 | ) | (9,198 | ) |
| (9,198 | ) | (9,156 | ) | (9,198 | ) | (9,156 | ) | ||||||||
Net cash provided by financing activities |
| 946,779 |
| 236,543 |
| 946,779 |
| 236,543 |
|
| 236,029 |
| 48,289 |
| 236,029 |
| 48,289 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Net increase in cash and cash equivalents |
| 19,281 |
| 53,788 |
| 19,281 |
| 53,788 |
|
| 53,788 |
| 8,271 |
| 53,788 |
| 8,271 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Cash and cash equivalents at beginning of period |
| 3,354 |
| 14,435 |
| 3,354 |
| 14,435 |
|
| 14,435 |
| 99,029 |
| 14,435 |
| 99,029 |
| ||||||||
Cash and cash equivalents at end of period |
| $ | 22,635 |
| $ | 68,223 |
| $ | 22,635 |
| $ | 68,223 |
|
| $ | 68,223 |
| $ | 107,300 |
| $ | 68,223 |
| $ | 107,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Supplemental Cash Flow Information |
|
|
|
|
|
|
|
|
| |||||||||||||||||
Supplemental Information |
|
|
|
|
|
|
|
|
| |||||||||||||||||
Cash paid for interest |
| $ | 59,937 |
| $ | 92,928 |
| $ | 59,937 |
| $ | 92,928 |
|
| $ | 92,928 |
| $ | 101,341 |
| $ | 92,928 |
| $ | 101,341 |
|
Cash paid for taxes |
| $ | 55,905 |
| $ | 59,937 |
| $ | 55,905 |
| $ | 59,937 |
|
| $ | 59,937 |
| $ | 46,553 |
| $ | 59,937 |
| $ | 46,553 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
The unaudited condensed consolidated financial statements of Select Medical Holdings Corporation (“Holdings”) andinclude the accounts of its wholly owned subsidiary, Select Medical Corporation (“Select”). Holdings conducts substantially all of its business through Select and its subsidiaries. Holdings and Select and its subsidiaries are collectively referred to as the “Company.” The unaudited condensed consolidated financial statements of the Company as of September 30, 2016,2017, and for the three and nine month periods ended September 30, 20152016 and 2016,2017, have been prepared in accordance withpursuant to the rules and regulations of the Securities Exchange Commission (the “SEC”) for interim reporting and accounting principles generally accepted accounting principlesin the United States of America (“GAAP”). Accordingly, certain information and disclosures required by GAAP, which are normally included in the notes to consolidated financial statements, have been condensed or omitted pursuant to those rules and regulations, although the Company believes the disclosure is adequate to make the information presented not misleading. In the opinion of management, such information contains all adjustments, which are normal and recurring in nature, necessary for a fair statement of the financial position, results of operations and cash flow for such periods. All significant intercompany transactions and balances have been eliminated.
The results of operations for the three and nine months ended September 30, 20162017 are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2016. Holdings and Select and their subsidiaries are collectively referred to as the “Company.” The condensed consolidated financial statements of Holdings include the accounts of its wholly owned subsidiary, Select. Holdings conducts substantially all of its business through Select and its subsidiaries.
Certain information and disclosures normally included in the notes to consolidated financial statements have been condensed or omitted consistent with the rules and regulations of the Securities and Exchange Commission (the “SEC”), although the Company believes the disclosure is adequate to make the information presented not misleading. The accompanying2017. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 20152016 contained in the Company’s Annual Report on Form 10-K filed with the SEC on February 26, 2016.23, 2017.
2. Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, andincluding disclosure of contingent assets and liabilities,contingencies, at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.
Recent Accounting Pronouncements
In August 2016,January 2017, the Financial Accounting Standards Board (the “FASB”(“FASB”) issued Accounting Standards Update (“ASU”) 2016-152017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business, Statementwhich clarifies the definition of Cash Flowsa business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. ASU 2017-01 states that if substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the transaction should be accounted for as an asset acquisition. In addition, the ASU clarifies the requirements for a set of activities to be considered a business and narrows the definition of an output. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. ASU 2017-01 will be applied prospectively and is effective for annual periods beginning after December 15, 2017. Early adoption is permitted.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 230)740), ClassificationIntra-Entity Transfers of Certain Cash ReceiptsAssets Other Than Inventory. Current GAAP prohibits the recognition of current and Cash Payments, which addressesdeferred income taxes for an intra-entity asset transfer until the diversity in practice in how certain cash receipts and cash payments are presented and classified inasset has been sold to an outside party. The ASU requires an entity to recognize the statementincome tax consequences of cash flows.an intra-entity transfer of an asset other than inventory when the transfer occurs. The standard will be effective for fiscal years beginning after December 15, 2017. The Company is currently evaluatingplans to adopt the standard to determine the impact it will have on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation, which simplifies various aspects of accounting for share-based payments to employees. The areas for simplification involve several aspectsguidance effective January 1, 2018. Adoption of the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The standardguidance will be applied on a modified retrospective approach through a cumulative effect adjustment to retained earnings as of the effective for fiscal years beginning after December 15, 2016.date. The Company is currently evaluating the standard to determine the impact it will have on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases. This ASU includes a lessee accounting model that recognizes two types of leases; finance and operating. This ASU requires that a lessee recognize on the balance sheet assets and liabilities for all leases with lease terms of more than twelve months. Lessees willneed to recognize almost all leases on the balance sheet as a right-of-use asset and a lease liability. For income statement purposes, the FASB retained the dual model, requiring leases to be classified as either operating or finance. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will depend on its classification as a finance or operating lease. For short-term leases of twelve months or less, lessees are permitted to make an accounting election by class of underlying asset not to recognize right-of-use assets or lease liabilities. If the alternative is elected, lease expense would be recognized generally on the straight-line basis over the respective lease term.
The amendments in ASU 2016-02 will take effect for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Earlier application is permitted as of the beginning of an interim or annual reporting period. A modified retrospective approach is required for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. The Company is currently evaluating the standard to determine the impact it will have on its consolidated financial statements.
In November 2015,Upon adoption, the FASB issued ASU No. 2015-17, Balance Sheet ClassificationCompany will recognize significant assets and liabilities on the consolidated balance sheets as a result of Deferred Taxes, which changes the presentationoperating lease obligations of deferred income taxes. The intent is to simplify the presentationCompany. Operating lease expense will still be recognized as rent expense on a straight-line basis over the respective lease terms in the consolidated statements of deferred income taxes through the requirement that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The revised guidance is effective for annual fiscal periods beginning after December 15, 2016. Early adoption is permitted. operations.
The Company is currently evaluatingwill implement the new standard beginning January 1, 2019. The Company’s implementation efforts are focused on designing accounting processes, disclosure processes, and internal controls in order to determineaccount for its leases under the impact it will have on its consolidated financial statements.new standard.
In May 2014, March 2016, April 2016, and AprilDecember 2016, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, ASU 2016-08, Revenue from Contracts with Customers, Principal versus Agent Considerations, ASU 2016-10, Revenue from Contracts with Customers, Identifying Performance Obligations and Licensing, and ASU 2016-12, Revenue from Contracts with Customers, Narrow Scope Improvements and Practical Expedients, and ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customer (collectively “the standards”), respectively, which supersede most of the current revenue recognition requirements. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. New disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers are also required. The original standards were effective for fiscal years beginning after December 15, 2016; however, in July 2015, the FASB approved a one-year deferral of these standards, with a new effective date for fiscal years beginning after December 15, 2017. The standards require the selection of a modified retrospective or cumulative effect transition method for retrospective application. The Company is currently evaluating the standards to determine the impact they will have on its consolidated financial statements.method.
The Company will implement the new standard beginning January 1, 2018 using the retrospective transition method. Adoption of the new standard will result in material changes to the presentation of net operating revenues and bad debt expense in the consolidated statements of operations, but the presentation of the amount of income from operations and net income is not expected to materially change upon adoption of the new standards. The principal change is how the new standard requires healthcare providers to estimate the amount of variable consideration to be included in the transaction price up to an amount which is probable that a significant reversal will not occur. The most common form of variable consideration the Company experiences are amounts for services provided that are ultimately not realizable from a customer. Under the current standards, the Company’s estimate for unrealizable amounts was recorded to bad debt expense. Under the new standards, the Company’s estimate for unrealizable amounts will be recognized as a constraint to revenue and will be reflected as an allowance. Substantially all of the bad debt expense as of September 30, 2016 and September 30, 2017 will be reclassified as an allowance when the Company retrospectively applies the guidance in the standards on January 1, 2018.
The Company’s remaining implementation efforts are focused principally on refining the accounting processes, disclosure processes, and internal controls.
Recently Adopted Accounting Pronouncements
In April and AugustNovember 2015, the FASB issued ASU 2015-03 and ASU 2015-15, each titledNo. 2015-17, Interest- ImputationBalance Sheet Classification of InterestDeferred Taxes, to simplifywhich changed the presentation of debt issuance costs.deferred income taxes. The standard requires debt issuance costschanged the presentation of deferred income taxes through the requirement that all deferred tax liabilities and assets be presentedclassified as noncurrent in the balance sheet as a direct deduction from the carrying valueclassified statement of the debt liability. The FASB clarified that debt issuance costs related to line-of-credit arrangements can be presented as an asset and amortized over the term of the arrangement.financial position. The Company adopted the standard on January 1, 2017. The consolidated balance sheet at the beginningDecember 31, 2016 has been retrospectively adjusted. Adoption of the first quarter of 2016. Thenew standard impacted the Company’s previously reported results as follows:
|
| December 31, 2016 |
| ||||
|
| As Reported |
| As Adjusted |
| ||
|
| (in thousands) |
| ||||
Current deferred tax asset |
| $ | 45,165 |
| $ | — |
|
Total current assets |
| 808,068 |
| 762,903 |
| ||
Other assets |
| 152,548 |
| 173,944 |
| ||
Total assets |
| 4,944,395 |
| 4,920,626 |
| ||
|
|
|
|
|
| ||
Non-current deferred tax liability |
| 222,847 |
| 199,078 |
| ||
Total liabilities |
| 3,616,335 |
| 3,592,566 |
| ||
Total liabilities and equity |
| 4,944,395 |
| 4,920,626 |
| ||
Reclassifications
Certain reclassifications have been made to prior year amounts in order to conform to current year presentation. As discussed above, the condensed consolidated balance sheet as ofat December 31, 2015 was retrospectively conformed2016 has been changed in order to reflectconform to the
current year balance sheet presentation for the adoption of the standard and approximately $38.0 millionASU No. 2015-17, Balance Sheet Classification of unamortized debt issuance costs were reclassified to be a direct reduction of debt, rather than a component of other assets.Deferred Taxes.
3. AcquisitionsAcquisitions
Physiotherapy Acquisition
On March 4, 2016, Select acquired 100% of the issued and outstanding equity securities of Physiotherapy Associates Holdings, Inc. (“Physiotherapy”) for $406.3 million, net of $12.3 million of cash acquired. Select financed
For the acquisition using a combination of cash on hand and proceeds from an incremental term loan facility under the Select credit facilities, as defined below (see Note 7 for more details). During the nine months ended September 30, 2016, $3.2 million of Physiotherapy acquisition, costs were recognized in general and administrative expense.
Physiotherapy is a national provider of outpatient physical rehabilitation care offering a wide range of services, including general orthopedics, spinal care and neurological rehabilitation, as well as orthotics and prosthetics services.
The Physiotherapy acquisition is being accounted for under the provisions of Accounting Standards Codification (“ASC”) 805, Business Combinations. The Company has prepared a preliminary allocation ofallocated the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values. Thevalue in accordance with the provisions of Accounting Standards Codification (“ASC”) 805, Business Combinations. During the quarter ended March 31, 2017, the Company is infinalized the process of completing its assessment of fair values for identifiable tangible and intangible assets, and liabilities assumed; therefore, the values set forth below are subject to adjustment during the measurement period for such activities as estimating useful lives of long-lived assets and finite lived intangibles and completing assessment of fair values by obtaining appraisals. The amount of these potential adjustments could be significant. The Company expects to complete its purchase price allocation activities by December 31, 2016.allocation.
The following table summarizesreconciles the preliminary allocation of the purchase priceconsideration given for identifiable net assets and goodwill acquired to the fair value of identifiable assetsnet cash paid for the acquired and liabilities assumed, in accordance with the acquisition method of accountingbusiness (in thousands):
Cash and cash equivalents |
| $ | 12,340 |
|
| $ | 12,340 |
|
Identifiable tangible assets, excluding cash and cash equivalents |
| 92,981 |
|
| 87,832 |
| ||
Identifiable intangible assets |
| 32,484 |
|
| 32,484 |
| ||
Goodwill |
| 319,145 |
|
| 343,187 |
| ||
Total assets |
| 456,950 |
|
| 475,843 |
| ||
Total liabilities |
| 35,792 |
|
| 54,685 |
| ||
Acquired non-controlling interests |
| 2,514 |
|
| 2,514 |
| ||
Net assets acquired |
| 418,644 |
|
| 418,644 |
| ||
Less: Cash and cash equivalents acquired |
| (12,340 | ) |
| (12,340 | ) | ||
Net cash paid |
| $ | 406,304 |
|
| $ | 406,304 |
|
Goodwill of $319.1$343.2 million has been recognized in the transaction,business combination, representing the excess of the purchase priceconsideration given over the fair value of the tangible and intangibleidentifiable net assets acquired and liabilities assumed.acquired. The factors considered in determining thevalue of goodwill that resultedis derived from the Physiotherapy purchase price included Physiotherapy’s future earnings potential and the value of theits assembled workforce. The goodwillGoodwill has been allocatedassigned to the outpatient rehabilitation segmentreporting unit and is not deductible for tax purposes. However, prior to its acquisition by the Company, Physiotherapy completed certain acquisitions that resulted in tax deductible goodwill with an estimated value of $8.8 million, that is deductible for tax purposes, which the Company will deduct through 2030.
Due to the integrated natureintegration of Physiotherapy into our outpatient rehabilitation operations, it is not practicable to separately identify net revenue and earnings of Physiotherapy on a stand-alone basis.
Concentra Acquisition
On June 1, 2015, MJ Acquisition Corporation, a joint venture that Select created with Welsh, Carson, Anderson & Stowe XII, L.P., consummated the acquisition of Concentra, Inc. (“Concentra”), the indirect operating subsidiary of Concentra Group Holdings, LLC, and its subsidiaries. Pursuant to the terms of the stock purchase agreement, dated as of March 22, 2015, by and among MJ Acquisition Corporation, Concentra and Humana Inc., MJ Acquisition Corporation acquired 100% of the issued and outstanding equity securities of Concentra from Humana, Inc. for $1,047.2 million, net of $3.8 million of cash acquired.
During the year ended December 31, 2015, the Company finalized the purchase price allocation to identifiable intangible assets, fixed assets, non-controlling interests, and certain pre-acquisition contingencies. During the quarter ended June 30, 2016, the Company completed the accounting for certain deferred tax matters.
The following table summarizes the allocation of the purchase price to the fair value of identifiable assets acquired and liabilities assumed, in accordance with the acquisition method of accounting (in thousands):
Cash and cash equivalents |
| $ | 3,772 |
|
Identifiable tangible assets, excluding cash and cash equivalents |
| 406,926 |
| |
Identifiable intangible assets |
| 254,990 |
| |
Goodwill |
| 651,152 |
| |
Total assets |
| 1,316,840 |
| |
Total liabilities |
| 248,797 |
| |
Acquired non-controlling interests |
| 17,084 |
| |
Net assets acquired |
| 1,050,959 |
| |
Less: Cash and cash equivalents acquired |
| (3,772 | ) | |
Net cash paid |
| $ | 1,047,187 |
|
Goodwill of $651.2 million was recognized in the transaction, representing the excess of the purchase price over the value of the tangible and intangible assets acquired and liabilities assumed. The factors considered in determining the goodwill that resulted from the Concentra purchase price included Concentra’s future earnings potential and the value of Concentra’s assembled workforce. The goodwill is allocated to the Concentra segment and is not deductible for tax purposes. However, prior to its acquisition by MJ Acquisition Corporation, Concentra completed certain acquisitions that resulted in goodwill with an estimated value of $23.9 million that is deductible for tax purposes, which the Company will deduct through 2025.
For the three months ended September 30, 2016, Concentra contributed net revenue of $258.5 million and net income of approximately $0.9 million, which are reflected in the Company’s consolidated statements of operations. For the nine months ended September 30, 2016, Concentra contributed net revenue of $764.3 million and net income of approximately $7.9 million, which are reflected in the Company’s consolidated statements of operations.
Pro Forma Results
The following pro forma unaudited results of operations have been prepared assuming the acquisitionsacquisition of Concentra and Physiotherapy occurred on January 1, 2014 and 2015, respectively.2015. These results are not necessarily indicative of results of future operations nor of the results that would have actually occurred had the acquisitionsacquisition been consummated on the aforementioned dates.date. The Company’s results of operations for the three months ended September 30, 2016 and for the three and nine months ended September 30, 2017 include both Concentra and Physiotherapy for the entire period and there areperiod. There were no pro forma adjustments;adjustments during these periods; therefore, no pro forma information is presented for the period.presented.
|
| For the Three Months |
| For the Nine Months |
| |||||
|
| 2015 |
| 2015 |
| 2016 |
| |||
|
| (in thousands, except per share amounts) |
| |||||||
Net revenue |
| $ | 1,099,857 |
| $ | 3,350,131 |
| $ | 3,293,286 |
|
Net income attributable to Holdings |
| 26,277 |
| 88,502 |
| 93,407 |
| |||
Income per common share: |
|
|
|
|
|
|
| |||
Basic |
| $ | 0.20 |
| $ | 0.67 |
| $ | 0.71 |
|
Diluted |
| $ | 0.20 |
| $ | 0.67 |
| $ | 0.71 |
|
|
| Nine Months Ended |
| |
|
| (in thousands, except per |
| |
Net revenue |
| $ | 3,293,286 |
|
Net income attributable to Holdings |
| 93,418 |
| |
Income per common share: |
|
|
| |
Basic |
| $ | 0.71 |
|
Diluted |
| $ | 0.71 |
|
The pro forma financial information is based on the preliminary allocation of the purchase price of the Physiotherapy acquisition, and is therefore subject to adjustment upon finalizing the purchase price allocation, as described above, during the measurement period.
The net income tax impact was calculated at a statutory rate, as if Concentra and Physiotherapy had been subsidiariesa subsidiary of the Company as of January 1, 2014 and 2015, respectively.
Pro forma results for the nine months ended September 30, 2015 were adjusted to include $3.2 million of Physiotherapy acquisition costs and exclude $4.7 million of Concentra acquisition costs.2015. Pro forma results for the nine months ended September 30, 2016 were adjusted to exclude approximately $3.2 million of Physiotherapy acquisition costs.
Other Acquisitions
In addition to the acquisition of Physiotherapy, theThe Company completed other acquisitions consisting of hospital, clinic,within our specialty hospitals, outpatient rehabilitation, and center businessesConcentra segments during the nine months ended September 30, 2016.2017. The specialty hospital transactions were conductedCompany provided total consideration of $21.7 million, consisting principally through eitherof $19.4 million of cash and the exchange of nonmonetary assets or issuance of equitynon-controlling interests. Assets transferred and equity interests issued for these acquisitions consisted of $7.6 million in cash payments, net of cash received, $17.7 million for specialty hospitals exchanged, and issuance of $38.3 million of equity interests. The specialty hospital exchange transaction resulted in a non-operating gain totaling $6.5 million due, in part, to a bargain purchase because the fair values of the identifiable assets received in the exchange transaction exceeded the fair values of the transferred hospitals. The assets received in these acquisitions consisted principally of cash, realaccounts receivable, property and equipment, identifiable intangible assets, and goodwill, of which $46.2$0.8 million, $0.9$1.8 million, and $4.1$14.5 million of goodwill was recognized in our specialty hospital,hospitals, outpatient rehabilitation, and Concentra reporting units, respectively.
4. Sale of BusinessesIntangible Assets and Liabilities
Goodwill
The Company recognized non-operating gains totaling $42.1 millionfollowing table shows changes in the carrying amounts of goodwill by reporting unit for the nine months ended September 30, 2016, principally as the result2017:
|
| Specialty |
| Outpatient |
| Concentra |
| Total |
| ||||
|
| (in thousands) |
| ||||||||||
Balance as of December 31, 2016 |
| $ | 1,447,406 |
| $ | 643,557 |
| $ | 660,037 |
| $ | 2,751,000 |
|
Acquired |
| 797 |
| 1,768 |
| 14,505 |
| 17,070 |
| ||||
Measurement period adjustment |
| (342 | ) | 168 |
| — |
| (174 | ) | ||||
Balance as of September 30, 2017 |
| $ | 1,447,861 |
| $ | 645,493 |
| $ | 674,542 |
| $ | 2,767,896 |
|
See Note 3 for details of the sale of its contract therapy businesses for $65.0 million, resulting in a non-operating gain of $33.9 million. Additionally,goodwill acquired during the Company sold nine outpatient rehabilitation clinics to an entity in which the Company holds a non-controlling interest, resulting in a non-operating gain of $1.7 million.period.
5.Equity Investment Events
During the nine months ended September 30, 2016, an entity in which the Company owned a non-controlling interest was sold, which resulted in a non-operating loss of $5.1 million.
6.Identifiable Intangible Assets and Liabilities
The following table provides the gross carrying amounts, accumulated amortization, and net carrying value ofamounts for the Company’s goodwill and identifiable intangible assets consist of the following:and liabilities:
|
| December 31, |
| September 30, |
|
| December 31, 2016 |
| September 30, 2017 |
| ||||||||||||||||
|
| (in thousands) |
|
| Gross |
| Accumulated |
| Net |
| Gross |
| Accumulated |
| Net |
| ||||||||||
Goodwill |
| $ | 2,314,624 |
| $ | 2,674,623 |
| |||||||||||||||||||
Identifiable intangibles—Indefinite lived assets: |
|
|
|
|
| |||||||||||||||||||||
|
| (in thousands) |
| |||||||||||||||||||||||
Indefinite-lived assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Trademarks |
| 162,609 |
| 166,698 |
|
| $ | 166,698 |
| $ | — |
| $ | 166,698 |
| $ | 166,698 |
| $ | — |
| $ | 166,698 |
| ||
Certificates of need |
| 13,022 |
| 13,070 |
|
| 17,026 |
| — |
| 17,026 |
| 19,166 |
| — |
| 19,166 |
| ||||||||
Accreditations |
| 2,045 |
| 2,045 |
|
| 2,235 |
| — |
| 2,235 |
| 1,965 |
| — |
| 1,965 |
| ||||||||
Identifiable intangibles—Finite lived assets: |
|
|
|
|
| |||||||||||||||||||||
Finite-lived assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Customer relationships |
| 132,751 |
| 122,095 |
|
| 142,198 |
| (23,185 | ) | 119,013 |
| 143,953 |
| (34,482 | ) | 109,471 |
| ||||||||
Favorable leasehold interests |
| 8,248 |
| 11,227 |
|
| 13,089 |
| (2,317 | ) | 10,772 |
| 13,295 |
| (3,745 | ) | 9,550 |
| ||||||||
Non-compete agreements |
| — |
| 23,085 |
|
| 26,655 |
| (1,837 | ) | 24,818 |
| 27,555 |
| (3,369 | ) | 24,186 |
| ||||||||
Total identifiable intangibles |
| $ | 2,633,299 |
| $ | 3,012,843 |
| |||||||||||||||||||
Total identifiable intangible assets |
| $ | 367,901 |
| $ | (27,339 | ) | $ | 340,562 |
| $ | 372,632 |
| $ | (41,596 | ) | $ | 331,036 |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Finite-lived liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Unfavorable leasehold interests |
| $ | 5,139 |
| $ | (1,410 | ) | $ | 3,729 |
| $ | 5,343 |
| $ | (2,529 | ) | $ | 2,814 |
|
The Company’s customer relationships and non-compete agreement assetsagreements amortize over their estimated useful lives. Amortization expense was $4.1 million and $3.0$4.4 million for the three months ended September 30, 2016 and 2015,2017, respectively. Amortization expense was $12.2 million and $4.4$13.1 million for the nine months ended September 30, 2016 and 2015, respectively. Estimated amortization expense of the Company’s customer relationships and non-compete agreements for each of the five succeeding years is $16.3 million.
In addition, the Company has recognized unfavorable leasehold interests which are recorded as liabilities. The net carrying value of unfavorable leasehold interests was $4.0 million and $3.0 million as of September 30, 2016 and December 31, 2015,2017, respectively.
The Company’s favorable leasehold assets and unfavorable leasehold liabilitiesinterests are amortized to rent expense over the remaining term of their respective leases to reflect a market rent per period based upon the market conditions present at the acquisition date. The net effectCompany’s unfavorable leasehold interests are not separately presented on the condensed consolidated balance sheets but are included as a component of this amortization increased rent expense by $0.2 million for the three months ended September 30, 2016accrued other and $0.5 million for the nine months ended September 30, 2016.other non-current liabilities.
The Company’s accreditations and trademarks have renewal terms. Theterms and the costs to renew these intangiblesintangible assets are expensed as incurred. At September 30, 2016,2017, the accreditations and trademarks have a weighted average time until next renewal of 1.5 years and 3.12.1 years, respectively.
The changes in the carrying amount of goodwill for the Company’s reportable segments for the nine months ended September 30, 2016 are as follows:
|
| Specialty |
| Outpatient |
| Concentra |
| Total |
| ||||
|
| (in thousands) |
| ||||||||||
Balance as of December 31, 2015 |
| $ | 1,357,379 |
| $ | 306,595 |
| $ | 650,650 |
| $ | 2,314,624 |
|
Acquired |
| 46,205 |
| 358,153 |
| 4,115 |
| 408,473 |
| ||||
Measurement period adjustment |
| — |
| (38,148 | ) | 4,825 |
| (33,323 | ) | ||||
Disposed |
| (6,758 | ) | (8,393 | ) | — |
| (15,151 | ) | ||||
Balance as of September 30, 2016 |
| $ | 1,396,826 |
| $ | 618,207 |
| $ | 659,590 |
| $ | 2,674,623 |
|
See Note 3 for details of the goodwill acquired during the period.
7. Indebtedness5.Long-Term Debt and Notes Payable
For purposes of this indebtedness footnote, references to Select exclude Concentra because the Concentra credit facilities are non-recourse to Holdings and Select.
The componentsCompany’s long-term debt and notes payable as of September 30, 2017 are as follows (in thousands):
|
| Principal |
| Unamortized |
| Unamortized |
| Carrying |
|
| Fair |
| |||||
Select: |
|
|
|
|
|
|
|
|
|
|
|
| |||||
6.375% senior notes |
| $ | 710,000 |
| $ | 835 |
| $ | (7,032 | ) | $ | 703,803 |
|
| $ | 731,300 |
|
Credit facilities: |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Revolving facility |
| 320,000 |
| — |
| — |
| 320,000 |
|
| 294,400 |
| |||||
Term loan |
| 1,144,250 |
| (12,962 | ) | (13,019 | ) | 1,118,269 |
|
| 1,158,553 |
| |||||
Other |
| 35,184 |
| — |
| — |
| 35,184 |
|
| 35,184 |
| |||||
Total Select debt |
| 2,209,434 |
| (12,127 | ) | (20,051 | ) | 2,177,256 |
|
| 2,219,437 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Concentra: |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Credit facilities: |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Term loan |
| 619,175 |
| (2,385 | ) | (11,268 | ) | 605,522 |
|
| 620,917 |
| |||||
Other |
| 7,524 |
| — |
| — |
| 7,524 |
|
| 7,524 |
| |||||
Total Concentra debt |
| 626,699 |
| (2,385 | ) | (11,268 | ) | 613,046 |
|
| 628,441 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total debt |
| $ | 2,836,133 |
| $ | (14,512 | ) | $ | (31,319 | ) | $ | 2,790,302 |
|
| $ | 2,847,878 |
|
Principal maturities of the Company’s long-term debt and notes payable are shown in the following tables:approximately as follows (in thousands):
|
| December 31, |
| September 30, |
| ||
|
| (in thousands) |
| ||||
Select 6.375% senior notes(1) |
| $ | 700,867 |
| $ | 702,124 |
|
Select credit facilities: |
|
|
|
|
| ||
Select revolving facility |
| 295,000 |
| 175,000 |
| ||
Select term loans(2) |
| 743,071 |
| 1,121,655 |
| ||
Other—Select |
| 11,987 |
| 22,802 |
| ||
Total Select debt |
| 1,750,925 |
| 2,021,581 |
| ||
Less: Select current maturities |
| 222,905 |
| 7,268 |
| ||
Select long-term debt maturities |
| $ | 1,528,020 |
| $ | 2,014,313 |
|
|
|
|
|
|
| ||
Concentra credit facilities: |
|
|
|
|
| ||
Concentra revolving facility |
| $ | 5,000 |
| $ | — |
|
Concentra term loans(3) |
| 624,659 |
| 627,262 |
| ||
Other—Concentra |
| 5,312 |
| 5,962 |
| ||
Total Concentra debt |
| 634,971 |
| 633,224 |
| ||
Less: Concentra current maturities |
| 2,261 |
| 5,422 |
| ||
Concentra long-term debt maturities |
| $ | 632,710 |
| $ | 627,802 |
|
|
|
|
|
|
| ||
Total current maturities |
| $ | 225,166 |
| $ | 12,690 |
|
Total long-term debt maturities |
| 2,160,730 |
| 2,642,115 |
| ||
Total debt |
| $ | 2,385,896 |
| $ | 2,654,805 |
|
(1) Includes unamortized premium of $1.2 million and $1.1 million at December 31, 2015 and September 30, 2016, respectively. Includes unamortized debt issuance costs of $10.4 million and $8.9 million at December 31, 2015 and September 30, 2016, respectively.
|
| 2017 |
| 2018 |
| 2019 |
| 2020 |
| 2021 |
| Thereafter |
| Total |
| |||||||
Select: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
6.375% senior notes |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 710,000 |
| $ | — |
| $ | 710,000 |
|
Credit facilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Revolving facility |
| — |
| — |
| — |
| — |
| — |
| 320,000 |
| 320,000 |
| |||||||
Term loan |
| 2,875 |
| 11,500 |
| 11,500 |
| 11,500 |
| 11,500 |
| 1,095,375 |
| 1,144,250 |
| |||||||
Other |
| 17,828 |
| 5,437 |
| 11,827 |
| 68 |
| 14 |
| 10 |
| 35,184 |
| |||||||
Total Select debt |
| 20,703 |
| 16,937 |
| 23,327 |
| 11,568 |
| 721,514 |
| 1,415,385 |
| 2,209,434 |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Concentra: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Credit facilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Term loan |
| — |
| — |
| — |
| 3,016 |
| 6,520 |
| 609,639 |
| 619,175 |
| |||||||
Other |
| 657 |
| 2,843 |
| 144 |
| 161 |
| 160 |
| 3,559 |
|
| 7,524 |
| ||||||
Total Concentra debt |
| 657 |
| 2,843 |
| 144 |
| 3,177 |
| 6,680 |
| 613,198 |
| 626,699 |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Total debt |
| $ | 21,360 |
| $ | 19,780 |
| $ | 23,471 |
| $ | 14,745 |
| $ | 728,194 |
| $ | 2,028,583 |
| $ | 2,836,133 |
|
(2) Includes unamortized discounts of $2.8 million and $12.9 million at December 31, 2015 and September 30, 2016, respectively. Includes unamortized debt issuance costs of $7.4 million and $14.8 million at December 31, 2015 and September 30, 2016, respectively.
(3) Includes unamortized discounts of $2.9 million at both December 31, 2015 and September 30, 2016. Includes unamortized debt issuance costs of $20.2 million and $13.7 million at December 31, 2015 and September 30, 2016, respectively.
Maturities of Long-Term Debt and Notes Payable
Maturities of theThe Company’s long-term debt for the period from October 1, 2016 throughand notes payable as of December 31, 2016 and the years after 2016 are approximately as follows:follows (in thousands):
|
| Select |
| Concentra |
| Total |
| |||
|
| (in thousands) |
| |||||||
October 1, 2016 — December 31, 2016 |
| $ | 4,236 |
| $ | 2,160 |
| $ | 6,396 |
|
2017 |
| 16,731 |
| 7,890 |
| 24,621 |
| |||
2018 |
| 706,426 |
| 6,617 |
| 713,043 |
| |||
2019 |
| 18,084 |
| 6,636 |
| 24,720 |
| |||
2020 |
| 6,303 |
| 6,656 |
| 12,959 |
| |||
2021 and beyond |
| 1,305,337 |
| 619,873 |
| 1,925,210 |
| |||
Total principal |
| 2,057,117 |
| 649,832 |
| 2,706,949 |
| |||
Unamortized discounts and premiums |
| (11,811 | ) | (2,905 | ) | (14,716 | ) | |||
Unamortized debt issuance costs |
| (23,725 | ) | (13,703 | ) | (37,428 | ) | |||
Total |
| $ | 2,021,581 |
| $ | 633,224 |
| $ | 2,654,805 |
|
|
| Principal |
| Unamortized |
| Unamortized |
| Carrying |
|
| Fair |
| |||||
Select: |
|
|
|
|
|
|
|
|
|
|
|
| |||||
6.375% senior notes |
| $ | 710,000 |
| $ | 1,006 |
| $ | (8,461 | ) | $ | 702,545 |
|
| $ | 710,000 |
|
Credit facilities: |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Revolving facility |
| 220,000 |
| — |
| — |
| 220,000 |
|
| 204,600 |
| |||||
Term loans |
| 1,147,751 |
| (11,967 | ) | (13,581 | ) | 1,122,203 |
|
| 1,165,860 |
| |||||
Other |
| 22,688 |
| — |
| — |
| 22,688 |
|
| 22,688 |
| |||||
Total Select debt |
| 2,100,439 |
| (10,961 | ) | (22,042 | ) | 2,067,436 |
|
| 2,103,148 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Concentra: |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Credit facilities: |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Term loan |
| 642,239 |
| (2,773 | ) | (13,091 | ) | 626,375 |
|
| 644,648 |
| |||||
Other |
| 5,178 |
| — |
| — |
| 5,178 |
|
| 5,178 |
| |||||
Total Concentra debt |
| 647,417 |
| (2,773 | ) | (13,091 | ) | 631,553 |
|
| 649,826 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total debt |
| $ | 2,747,856 |
| $ | (13,734 | ) | $ | (35,133 | ) | $ | 2,698,989 |
|
| $ | 2,752,974 |
|
Excess Cash Flow PaymentSelect Credit Facilities
On March 2, 2016,6, 2017, Select entered into a new senior secured credit agreement (the “Select credit agreement”) that provides for $1.6 billion in senior secured credit facilities comprising a $1.15 billion, seven-year term loan (the “Select term loan”) and a $450.0 million, five-year revolving credit facility (the “Select revolving facility” and together with the Select term loan, the “Select credit facilities”), including a $75.0 million sublimit for the issuance of standby letters of credit.
Select used borrowings under the Select credit facilities to: (i) repay in full the series E tranche B term loans due June 1, 2018, the series F tranche B term loans due March 31, 2021, and the revolving facility maturing March 1, 2018 under its then existing credit facilities; and (ii) pay fees and expenses in connection with the refinancing, which resulted in $6.5 million of debt extinguishment losses and $13.2 million of debt modification losses during the first quarter of 2017.
Borrowings under the Select credit facilities bear interest at a rate equal to: (i) in the case of the Select term loan, Adjusted LIBO (as defined in the Select credit agreement) plus 3.50% (subject to an Adjusted LIBO floor of 1.00%), or Alternate Base Rate (as defined in the Select credit agreement) plus 2.50% (subject to an Alternate Base Rate floor of 2.00%); and (ii) in the case of the Select revolving facility, Adjusted LIBO plus a percentage ranging from 3.00% to 3.25% or Alternate Base Rate plus a percentage ranging from 2.00% to 2.25%, in each case based on Select’s leverage ratio.
The Select term loan amortizes in equal quarterly installments in amounts equal to 0.25% of the aggregate original principal amount of the Select term loan commencing on June 30, 2017. The balance of the Select term loan will be payable on March 8, 2024; however, if the Select 6.375% senior notes, which are due June 1, 2021, are outstanding on March 1, 2021, the maturity date for the Select term loan will become March 1, 2021. The Select revolving facility will be payable on March 8, 2022; however, if the Select 6.375% senior notes are outstanding on February 1, 2021, the maturity date for the Select revolving facility will become February 1, 2021.
Select will be required to prepay borrowings under the Select credit facilities with (i) 100% of the net cash proceeds received from non-ordinary course asset sales or other dispositions, or as a result of a casualty or condemnation, subject to reinvestment provisions and other customary carveouts and, to the extent required, the payment of certain indebtedness secured by liens having priority over the debt under the Select credit facilities or subject to a first lien intercreditor agreement, (ii) 100% of the net cash proceeds received from the issuance of debt obligations other than certain permitted debt obligations, and (iii) 50% of excess cash flow (as defined in the Select credit agreement) if Select’s leverage ratio is greater than 4.50 to 1.00 and 25% of excess cash flow if Select’s leverage ratio is less than or equal to 4.50 to 1.00 and greater than 4.00 to 1.00, in each case, reduced by the aggregate amount of term loans, revolving loans and certain other debt optionally prepaid during the applicable fiscal year. Select will not be required to prepay borrowings with excess cash flow if Select’s leverage ratio is less than or equal to 4.00 to 1.00.
The Select revolving facility requires Select to maintain a leverage ratio (as defined in the Select credit agreement), which is tested quarterly, not to exceed 6.25 to 1.00. After March 31, 2019, the leverage ratio must not exceed 6.00 to 1.00. Failure to comply with this covenant would result in an event of default under the Select revolving facility and, absent a waiver or an amendment from the revolving lenders, preclude Select from making further borrowings under the Select revolving facility and permit the revolving lenders to accelerate all outstanding borrowings under the Select revolving facility. The termination of the Select revolving facility commitments and the acceleration of amounts outstanding thereunder would constitute an event of default with respect to the Select term loan. As of September 30, 2017, Select’s leverage ratio was 5.82 to 1.00.
The Select credit facilities also contain a number of other affirmative and restrictive covenants, including limitations on mergers, consolidations and dissolutions; sales of assets; investments and acquisitions; indebtedness; liens; affiliate transactions; and dividends and restricted payments. The Select credit facilities contain events of default for non-payment of principal and interest when due (subject, as to interest, to a grace period), cross-default and cross-acceleration provisions and an event of default that would be triggered by a change of control.
Borrowings under the Select credit facilities are guaranteed by Holdings and substantially all of Select’s current domestic subsidiaries and will be guaranteed by substantially all of Select’s future domestic subsidiaries and secured by substantially all of Select’s existing and future property and assets and by a pledge of Select’s capital stock, the capital stock of Select’s domestic subsidiaries and up to 65% of the capital stock of Select’s foreign subsidiaries held directly by Select or a domestic subsidiary.
Excess Cash Flow Payment
On March 1, 2017, Concentra made a principal prepayment of $10.2$23.1 million associated with itsthe Concentra first lien term loans (the “Select term loans”) in accordance with the provision in the SelectConcentra credit facilities that requires mandatory prepayments of term loans as a result of annual excess cash flow, as defined in the SelectConcentra credit facilities.
Select Credit Facilities
On March 4, 2016, Select entered into an Additional Credit Extension Amendment (the “Additional Credit Extension Amendment”) to Select’s senior secured credit facility with JPMorgan Chase Bank, N.A., as administrative agent, collateral agent and lender, and the additional lenders named therein (the “Select credit facilities”). The Additional Credit Extension Amendment (i) provided for the lenders named therein to make available an aggregate of $625.0 million of Series F Tranche B Term Loans, (ii) extended the financial covenants through March 3, 2021, (iii) added a 1.00% prepayment premium for prepayments made with new term loans on or prior to March 4, 2017 if such new term loans have a lower yield than the Series F Tranche B Term Loans, and (iv) made certain other technical amendments to the Select credit facilities. The Series F Tranche B Term Loans bear interest at a rate per annum equal to the Adjusted LIBO Rate (as defined in the Select credit facilities, subject to an Adjusted LIBO Rate floor of 1.00%) plus 5.00% for Eurodollar Loans or the Alternate Base Rate (as defined in the Select credit facilities) plus 4.00% for Alternate Base Rate Loans (as defined in the Select credit facilities). Select is required to make principal payments on the Series F Tranche B Term Loans in quarterly installments on the last day of each of March, June, September and December, beginning June 30, 2016, in amounts equal to 0.25% of the aggregate principal amount of the Series F Tranche B Term Loans outstanding as of the date of the Additional Credit Extension Amendment. The balance of the
Series F Tranche B Term Loans is payable on March 3, 2021. Except as specifically set forth in the Additional Credit Extension Amendment, the terms and conditions of the Series F Tranche B Term Loans are identical to the terms of the outstanding Series E Term B Loans under the Select credit facilities and the other loan documents to which Select is party.
Select used the proceeds of the Series F Tranche B Term Loans to (i) refinance in full the Series D Tranche B Term Loans due December 20, 2016, (ii) consummate the acquisition of Physiotherapy, and (iii) pay fees and expenses incurred in connection with the acquisition of Physiotherapy, the refinancing, and the Additional Credit Extension Amendment.
As a result of the Additional Credit Extension Amendment relating to the Series F Tranche B Term Loans, the interest rate payable on the Series E Tranche B Term Loans was increased from Adjusted LIBO plus 4.00% (subject to an Adjusted LIBO rate floor of 1.00%), or Alternative Base Rate plus 3.00%, to Adjusted LIBO plus 5.00% (subject to an Adjusted LIBO rate floor of 1.00%), or Alternative Base Rate plus 4.00%.
During the nine months ended September 30, 2016, the Company recognized a loss on early retirement of debt of $0.8 million relating to the repayment of the Series D Tranche B Term Loans under the Select credit facilities.
Concentra Credit Facilities
On September 26, 2016, Concentra entered into Amendment No. 1 (the “Concentra Credit Agreement Amendment”) to its first lien credit agreement (the “Concentra first lien credit agreement”) dated June 1, 2015. The Concentra first lien credit agreement initially provided for $500.0 million in first lien credit facilities composed of $450.0 million, seven-year term loans (“Concentra first lien term loan”) and a $50.0 million, five-year revolving credit facility (“Concentra revolving facility”).
The Concentra Credit Agreement Amendment provided an additional $200.0 million of first lien term loans due June 1, 2022, the proceeds of which were used to prepay in full Concentra’s second lien term loan due June 1, 2023; and also amended certain restrictive covenants to give Concentra greater operational flexibility.
The Concentra first lien term loan continues to bear interest at a rate equal to Adjusted LIBO (as defined in the Concentra first lien credit agreement) plus 3.00% (subject to an Adjusted LIBO floor of 1.00%), or Alternate Base Rate (as defined in the Concentra first lien credit agreement) plus 2.00% (subject to an Alternate Base Rate floor of 2.00%). The Concentra first lien term loan amortizes in equal quarterly installments of $1.6 million through March 31, 2022, with the remaining unamortized aggregate principal due on the maturity date.
The reacquisition price of the second lien term loans was $202.0 million. The premium plus the expensing of unamortized deferred financing costs and original issuance discount resulted in a loss on early retirement of debt of $10.9 million during the three months ended September 30, 2016.
8. Fair Value
Financial instruments include cash and cash equivalents, notes payable, and long-term debt. The carrying amount of cash and cash equivalents approximates fair value because of the short-term maturity of these instruments.
|
| December 31, 2015 |
| September 30, 2016 |
| ||||||||||||||
|
| Face |
| Carrying |
| Fair |
| Face |
| Carrying |
| Fair |
| ||||||
|
| (in thousands) |
| ||||||||||||||||
Select 6.375% senior notes(1) |
| $ | 710,000 |
| $ | 700,867 |
| $ | 623,948 |
| $ | 710,000 |
| $ | 702,124 |
| $ | 698,853 |
|
Select credit facilities(2) |
| 1,048,277 |
| 1,038,071 |
| 1,023,616 |
| 1,324,315 |
| 1,296,655 |
| 1,318,943 |
| ||||||
Concentra credit facilities(3) |
| 652,750 |
| 629,659 |
| 645,392 |
| 643,870 |
| 627,262 |
| 642,260 |
| ||||||
(1) The carrying value includes unamortized premium of $1.2 million and $1.1 million at December 31, 2015 and September 30, 2016, respectively, and unamortized debt issuance costs of $10.4 million and $8.9 million at December 31, 2015 and September 30, 2016, respectively.
(2) The carrying value includes unamortized discounts of $2.8 million and $12.9 million at December 31, 2015 and September 30, 2016, respectively, and unamortized debt issuance costs of $7.4 million and $14.8 million at December 31, 2015 and September 30, 2016, respectively.
(3) The carrying value includes unamortized discounts of $2.9 million at both December 31, 2015 and September 30, 2016 and unamortized debt issuance costs of $20.2 million and $13.7 million at December 31, 2015 and September 30, 2016, respectively.
The fair value of the Select credit facilities and the Concentra credit facilities was based on quoted market prices for this debt in the syndicated loan market. The fair value of Select’s 6.375% senior notes debt was based on quoted market prices.
The Company considers the inputs in the valuation process to be Level 2 in the fair value hierarchy.hierarchy for Select’s 6.375% senior notes and for its credit facilities. Level 2 in the fair value hierarchy is defined as inputs that are observable for the asset or liability, either directly or indirectly, which includes quoted prices for identical assets or liabilities in markets that are not active.
The fair values of the Select credit facilities and the Concentra credit facilities were based on quoted market prices for this debt in the syndicated loan market. The fair value of Select’s 6.375% senior notes was based on quoted market prices. The carrying amount of other debt, principally short-term notes payable, approximates fair value.
9. 6. Segment Information
The Company’s reportable segments consist of: (i) specialty hospitals, (ii) outpatient rehabilitation, and (iii) Concentra. Other activities include the Company’s corporate shared services and certain other non-consolidating joint ventures and minority investments in other healthcare related businesses. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance of the segments based on Adjusted EBITDA. Adjusted EBITDA is defined as earnings excluding interest, income taxes, depreciation and amortization, gain (loss) on early retirement of debt, stock compensation expense, Concentra acquisition costs, Physiotherapy acquisition costs, non-operating gain (loss), and equity in earnings (losses) of unconsolidated subsidiaries.
The following tables summarize selected financial data for the Company’s reportable segments. The segment results of Holdings are identical to those of Select.
|
| Three Months Ended September 30, 2015 |
| |||||||||||||
|
| Specialty |
| Outpatient |
| Concentra |
| Other |
| Total |
| |||||
|
| (in thousands) |
| |||||||||||||
Net operating revenues |
| $ | 562,328 |
| $ | 199,593 |
| $ | 258,969 |
| $ | 233 |
| $ | 1,021,123 |
|
Adjusted EBITDA |
| 53,656 |
| 23,807 |
| 25,584 |
| (18,536 | ) | 84,511 |
| |||||
Total assets |
| 2,333,049 |
| 541,435 |
| 1,332,975 |
| 106,946 |
| 4,314,405 |
| |||||
Capital expenditures |
| 27,494 |
| 4,023 |
| 9,640 |
| 3,923 |
| 45,080 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
| Three Months Ended September 30, 2016 |
| |||||||||||||
|
| Specialty |
| Outpatient |
| Concentra |
| Other |
| Total |
| |||||
|
| (in thousands) |
| |||||||||||||
Net operating revenues |
| $ | 544,491 |
| $ | 250,710 |
| $ | 258,507 |
| $ | 87 |
| $ | 1,053,795 |
|
Adjusted EBITDA |
| 48,264 |
| 31,995 |
| 40,888 |
| (23,070 | ) | 98,077 |
| |||||
Total assets |
| 2,461,751 |
| 977,431 |
| 1,327,438 |
| 78,785 |
| 4,845,405 |
| |||||
Capital expenditures |
| 24,378 |
| 6,234 |
| 2,720 |
| 4,670 |
| 38,002 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
| Nine Months Ended September 30, 2015 |
| |||||||||||||
|
| Specialty |
| Outpatient |
| Concentra(2) |
| Other |
| Total |
| |||||
|
| (in thousands) |
| |||||||||||||
Net operating revenues |
| $ | 1,753,445 |
| $ | 603,831 |
| $ | 345,798 |
| $ | 457 |
| $ | 2,703,531 |
|
Adjusted EBITDA |
| 241,575 |
| 74,662 |
| 36,783 |
| (54,672 | ) | 298,348 |
| |||||
Total assets |
| 2,333,049 |
| 541,435 |
| 1,332,975 |
| 106,946 |
| 4,314,405 |
| |||||
Capital expenditures |
| 81,329 |
| 11,048 |
| 13,494 |
| 8,121 |
| 113,992 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
| Nine Months Ended September 30, 2016 |
| |||||||||||||
|
| Specialty |
| Outpatient |
| Concentra |
| Other |
| Total |
| |||||
|
| (in thousands) |
| |||||||||||||
Net operating revenues |
| $ | 1,729,261 |
| $ | 745,720 |
| $ | 764,252 |
| $ | 523 |
| $ | 3,239,756 |
|
Adjusted EBITDA |
| 217,759 |
| 99,006 |
| 118,080 |
| (66,696 | ) | 368,149 |
| |||||
Total assets |
| 2,461,751 |
| 977,431 |
| 1,327,438 |
| 78,785 |
| 4,845,405 |
| |||||
Capital expenditures |
| 79,366 |
| 15,032 |
| 10,647 |
| 13,215 |
| 118,260 |
|
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| ||||||||
|
| 2016 |
| 2017 |
| 2016 |
| 2017 |
| ||||
|
| (in thousands) |
| ||||||||||
Net operating revenues: |
|
|
|
|
|
|
|
|
| ||||
Specialty hospitals |
| $ | 544,491 |
| $ | 585,288 |
| $ | 1,729,261 |
| $ | 1,785,035 |
|
Outpatient rehabilitation(1) |
| 250,710 |
| 250,527 |
| 745,720 |
| 764,450 |
| ||||
Concentra |
| 258,507 |
| 261,295 |
| 764,252 |
| 779,030 |
| ||||
Other |
| 87 |
| 56 |
| 523 |
| 687 |
| ||||
Total Company |
| $ | 1,053,795 |
| $ | 1,097,166 |
| $ | 3,239,756 |
| $ | 3,329,202 |
|
|
|
|
|
|
|
|
|
|
| ||||
Adjusted EBITDA: |
|
|
|
|
|
|
|
|
| ||||
Specialty hospitals |
| $ | 48,264 |
| $ | 69,454 |
| $ | 217,759 |
| $ | 256,291 |
|
Outpatient rehabilitation(1) |
| 31,995 |
| 29,298 |
| 99,006 |
| 102,575 |
| ||||
Concentra |
| 40,888 |
| 40,003 |
| 118,080 |
| 125,656 |
| ||||
Other |
| (23,070 | ) | (22,928 | ) | (66,696 | ) | (71,125 | ) | ||||
Total Company |
| $ | 98,077 |
| $ | 115,827 |
| $ | 368,149 |
| $ | 413,397 |
|
|
|
|
|
|
|
|
|
|
| ||||
Total assets:(2) |
|
|
|
|
|
|
|
|
| ||||
Specialty hospitals |
| $ | 2,469,060 |
| $ | 2,748,761 |
| $ | 2,469,060 |
| $ | 2,748,761 |
|
Outpatient rehabilitation |
| 955,359 |
| 945,765 |
| 955,359 |
| 945,765 |
| ||||
Concentra |
| 1,318,866 |
| 1,332,012 |
| 1,318,866 |
| 1,332,012 |
| ||||
Other |
| 73,992 |
| 97,269 |
| 73,992 |
| 97,269 |
| ||||
Total Company |
| $ | 4,817,277 |
| $ | 5,123,807 |
| $ | 4,817,277 |
| $ | 5,123,807 |
|
|
|
|
|
|
|
|
|
|
| ||||
Purchases of property and equipment, net: |
|
|
|
|
|
|
|
|
| ||||
Specialty hospitals |
| $ | 24,378 |
| $ | 37,376 |
| $ | 79,366 |
| $ | 106,424 |
|
Outpatient rehabilitation(1) |
| 6,234 |
| 6,496 |
| 15,032 |
| 19,370 |
| ||||
Concentra |
| 2,720 |
| 5,369 |
| 10,647 |
| 21,656 |
| ||||
Other |
| 4,670 |
| 19,257 |
| 13,215 |
| 26,350 |
| ||||
Total Company |
| $ | 38,002 |
| $ | 68,498 |
| $ | 118,260 |
| $ | 173,800 |
|
A reconciliation of Adjusted EBITDA to income before income taxes is as follows:
|
| Three Months Ended September 30, 2015 |
|
| Three Months Ended September 30, 2016 |
| ||||||||||||||||||||||||||
|
| Specialty |
| Outpatient |
| Concentra |
| Other |
| Total |
|
| Specialty |
| Outpatient |
| Concentra |
| Other |
| Total |
| ||||||||||
|
| (in thousands) |
|
| (in thousands) |
| ||||||||||||||||||||||||||
Adjusted EBITDA |
| $ | 53,656 |
| $ | 23,807 |
| $ | 25,584 |
| $ | (18,536 | ) |
|
|
| $ | 48,264 |
| $ | 31,995 |
| $ | 40,888 |
| $ | (23,070 | ) |
|
| ||
Depreciation and amortization |
| (13,782 | ) | (3,247 | ) | (13,316 | ) | (1,127 | ) |
|
|
| (14,317 | ) | (6,159 | ) | (15,278 | ) | (1,411 | ) |
|
| ||||||||||
Stock compensation expense |
| — |
| — |
| (811 | ) | (4,014 | ) |
|
|
| — |
| — |
| (193 | ) | (4,557 | ) |
|
| ||||||||||
Income (loss) from operations |
| $ | 39,874 |
| $ | 20,560 |
| $ | 11,457 |
| $ | (23,677 | ) | $ | 48,214 |
|
| $ | 33,947 |
| $ | 25,836 |
| $ | 25,417 |
| $ | (29,038 | ) | $ | 56,162 |
|
Non-operating gain |
|
|
|
|
|
|
|
|
| 29,647 |
| |||||||||||||||||||||
Loss on early retirement of debt |
|
|
|
|
|
|
|
|
| (10,853 | ) | |||||||||||||||||||||
Equity in earnings of unconsolidated subsidiaries |
|
|
|
|
|
|
|
|
| 6,348 |
|
|
|
|
|
|
|
|
|
| 5,268 |
| ||||||||||
Non-operating loss |
|
|
|
|
|
|
|
|
| (1,028 | ) | |||||||||||||||||||||
Interest expense |
|
|
|
|
|
|
|
|
| (33,052 | ) |
|
|
|
|
|
|
|
|
| (44,482 | ) | ||||||||||
Income before income taxes |
|
|
|
|
|
|
|
|
| $ | 51,157 |
|
|
|
|
|
|
|
|
|
| $ | 5,067 |
| ||||||||
|
|
|
| |||||||||||||||||||||||||||||
|
| Three Months Ended September 30, 2016 |
| |||||||||||||||||||||||||||||
|
| Specialty |
| Outpatient |
| Concentra |
| Other |
| Total |
| |||||||||||||||||||||
|
| (in thousands) |
| |||||||||||||||||||||||||||||
Adjusted EBITDA |
| $ | 48,264 |
| $ | 31,995 |
| $ | 40,888 |
| $ | (23,070 | ) |
|
| |||||||||||||||||
Depreciation and amortization |
| (14,317 | ) | (6,159 | ) | (15,278 | ) | (1,411 | ) |
|
| |||||||||||||||||||||
Stock compensation expense |
| — |
| — |
| (193 | ) | (4,557 | ) |
|
| |||||||||||||||||||||
Income (loss) from operations |
| $ | 33,947 |
| $ | 25,836 |
| $ | 25,417 |
| $ | (29,038 | ) | $ | 56,162 |
| ||||||||||||||||
Non-operating loss |
|
|
|
|
|
|
|
|
| (1,028 | ) | |||||||||||||||||||||
Loss on early retirement of debt |
|
|
|
|
|
|
|
|
| (10,853 | ) | |||||||||||||||||||||
Equity in earnings of unconsolidated subsidiaries |
|
|
|
|
|
|
|
|
| 5,268 |
| |||||||||||||||||||||
Interest expense |
|
|
|
|
|
|
|
|
| (44,482 | ) | |||||||||||||||||||||
Income before income taxes |
|
|
|
|
|
|
|
|
| $ | 5,067 |
| ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
|
| Nine Months Ended September 30, 2015 |
| |||||||||||||||||||||||||||||
|
| Specialty |
| Outpatient |
| Concentra(2) |
| Other |
| Total |
| |||||||||||||||||||||
|
| (in thousands) |
| |||||||||||||||||||||||||||||
Adjusted EBITDA |
| $ | 241,575 |
| $ | 74,662 |
| $ | 36,783 |
| $ | (54,672 | ) |
|
| |||||||||||||||||
Depreciation and amortization |
| (40,409 | ) | (9,564 | ) | (17,510 | ) | (3,185 | ) |
|
| |||||||||||||||||||||
Stock compensation expense |
| — |
| — |
| (811 | ) | (9,664 | ) |
|
| |||||||||||||||||||||
Concentra acquisition costs |
| — |
| — |
| (4,715 | ) | — |
|
|
| |||||||||||||||||||||
Income (loss) from operations |
| $ | 201,166 |
| $ | 65,098 |
| $ | 13,747 |
| $ | (67,521 | ) | $ | 212,490 |
| ||||||||||||||||
Non-operating gain |
|
|
|
|
|
|
|
|
| 29,647 |
| |||||||||||||||||||||
Equity in earnings of unconsolidated subsidiaries |
|
|
|
|
|
|
|
|
| 12,788 |
| |||||||||||||||||||||
Interest expense |
|
|
|
|
|
|
|
|
| (79,728 | ) | |||||||||||||||||||||
Income before income taxes |
|
|
|
|
|
|
|
|
| $ | 175,197 |
|
|
| Nine Months Ended September 30, 2016 |
|
| Three Months Ended September 30, 2017 |
| ||||||||||||||||||||||||||
|
| Specialty |
| Outpatient |
| Concentra |
| Other |
| Total |
|
| Specialty |
| Outpatient |
| Concentra |
| Other |
| Total |
| ||||||||||
|
| (in thousands) |
|
| (in thousands) |
| ||||||||||||||||||||||||||
Adjusted EBITDA |
| $ | 217,759 |
| $ | 99,006 |
| $ | 118,080 |
| $ | (66,696 | ) |
|
|
| $ | 69,454 |
| $ | 29,298 |
| $ | 40,003 |
| $ | (22,928 | ) |
|
| ||
Depreciation and amortization |
| (42,022 | ) | (16,397 | ) | (45,570 | ) | (3,898 | ) |
|
|
| (15,437 | ) | (5,964 | ) | (15,014 | ) | (2,357 | ) |
|
| ||||||||||
Stock compensation expense |
| — |
| — |
| (577 | ) | (12,347 | ) |
|
|
| — |
| — |
| (212 | ) | (4,745 | ) |
|
| ||||||||||
Physiotherapy acquisition costs |
| — |
| — |
| — |
| (3,236 | ) |
|
| |||||||||||||||||||||
Income (loss) from operations |
| $ | 175,737 |
| $ | 82,609 |
| $ | 71,933 |
| $ | (86,177 | ) | $ | 244,102 |
|
| $ | 54,017 |
| $ | 23,334 |
| $ | 24,777 |
| $ | (30,030 | ) | $ | 72,098 |
|
Non-operating gain |
|
|
|
|
|
|
|
|
| 37,094 |
| |||||||||||||||||||||
Loss on early retirement of debt |
|
|
|
|
|
|
|
|
| (11,626 | ) | |||||||||||||||||||||
Equity in earnings of unconsolidated subsidiaries |
|
|
|
|
|
|
|
|
| 14,466 |
|
|
|
|
|
|
|
|
|
| 4,431 |
| ||||||||||
Interest expense |
|
|
|
|
|
|
|
|
| (127,662 | ) |
|
|
|
|
|
|
|
|
| (37,688 | ) | ||||||||||
Income before income taxes |
|
|
|
|
|
|
|
|
| $ | 156,374 |
|
|
|
|
|
|
|
|
|
| $ | 38,841 |
|
|
| Nine Months Ended September 30, 2016 |
| |||||||||||||
|
| Specialty |
| Outpatient |
| Concentra |
| Other |
| Total |
| |||||
|
| (in thousands) |
| |||||||||||||
Adjusted EBITDA |
| $ | 217,759 |
| $ | 99,006 |
| $ | 118,080 |
| $ | (66,696 | ) |
|
| |
Depreciation and amortization |
| (42,022 | ) | (16,397 | ) | (45,570 | ) | (3,898 | ) |
|
| |||||
Stock compensation expense |
| — |
| — |
| (577 | ) | (12,347 | ) |
|
| |||||
Physiotherapy acquisition costs |
| — |
| — |
| — |
| (3,236 | ) |
|
| |||||
Income (loss) from operations |
| $ | 175,737 |
| $ | 82,609 |
| $ | 71,933 |
| $ | (86,177 | ) | $ | 244,102 |
|
Loss on early retirement of debt |
|
|
|
|
|
|
|
|
| (11,626 | ) | |||||
Equity in earnings of unconsolidated subsidiaries |
|
|
|
|
|
|
|
|
| 14,466 |
| |||||
Non-operating gain |
|
|
|
|
|
|
|
|
| 37,094 |
| |||||
Interest expense |
|
|
|
|
|
|
|
|
| (127,662 | ) | |||||
Income before income taxes |
|
|
|
|
|
|
|
|
| $ | 156,374 |
|
|
| Nine Months Ended September 30, 2017 |
| |||||||||||||
|
| Specialty |
| Outpatient |
| Concentra |
| Other |
| Total |
| |||||
|
| (in thousands) |
| |||||||||||||
Adjusted EBITDA |
| $ | 256,291 |
| $ | 102,575 |
| $ | 125,656 |
| $ | (71,125 | ) |
|
| |
Depreciation and amortization |
| (49,391 | ) | (18,182 | ) | (46,566 | ) | (5,505 | ) |
|
| |||||
Stock compensation expense |
| — |
| — |
| (782 | ) | (13,445 | ) |
|
| |||||
Income (loss) from operations |
| $ | 206,900 |
| $ | 84,393 |
| $ | 78,308 |
| $ | (90,075 | ) | $ | 279,526 |
|
Loss on early retirement of debt |
|
|
|
|
|
|
|
|
| (19,719 | ) | |||||
Equity in earnings of unconsolidated subsidiaries |
|
|
|
|
|
|
|
|
| 15,618 |
| |||||
Non-operating loss |
|
|
|
|
|
|
|
|
| (49 | ) | |||||
Interest expense |
|
|
|
|
|
|
|
|
| (116,196 | ) | |||||
Income before income taxes |
|
|
|
|
|
|
|
|
| $ | 159,180 |
|
(1) The outpatient rehabilitation segment includes the operating results of the Company’s contract therapy businesses through March 31, 2016 and Physiotherapy beginning March 4, 2016.
(2) The selected financial data forReflects the Company’s Concentra segment for the periods presented beginsretrospective adoption of ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. Total assets as of June 1, 2015, which isSeptember 30, 2016 were retrospectively conformed to reflect the dateadoption of the Concentra acquisition was consummated.standard, resulting in a reduction to total assets of $28.1 million.
10.7. Income per Common Share
Holdings applies the two-class method for calculating and presenting income per common share. The two-class method is an earnings allocation formula that determines earnings per share for each class of stock participation rights in undistributed earnings.
The following table sets forth for the periods indicated the calculation of income per common share in Holdings’ condensed consolidated statements of operations and the differences between basic weighted average shares outstanding and diluted weighted average shares outstanding used to compute basic and diluted incomeearnings per common share, respectively:respectively.
|
| For the Three Months Ended |
| For the Nine Months Ended |
| ||||||||
|
| 2015 |
| 2016 |
| 2015 |
| 2016 |
| ||||
|
| (in thousands, except per share amounts) |
| ||||||||||
Numerator: |
|
|
|
|
|
|
|
|
| ||||
Net income attributable to Select Medical Holdings Corporation |
| $ | 29,406 |
| $ | 6,471 |
| $ | 101,409 |
| $ | 95,239 |
|
Less: Earnings allocated to unvested restricted stockholders |
| 923 |
| 209 |
| 2,925 |
| 2,852 |
| ||||
Net income available to common stockholders |
| $ | 28,483 |
| $ | 6,262 |
| $ | 98,484 |
| $ | 92,387 |
|
|
|
|
|
|
|
|
|
|
| ||||
Denominator: |
|
|
|
|
|
|
|
|
| ||||
Weighted average shares — basic |
| 127,386 |
| 127,848 |
| 127,541 |
| 127,659 |
| ||||
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
| ||||
Stock options |
| 263 |
| 141 |
| 303 |
| 145 |
| ||||
Weighted average shares — diluted |
| 127,649 |
| 127,989 |
| 127,844 |
| 127,804 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Basic income per common share |
| $ | 0.22 |
| $ | 0.05 |
| $ | 0.77 |
| $ | 0.72 |
|
Diluted income per common share |
| $ | 0.22 |
| $ | 0.05 |
| $ | 0.77 |
| $ | 0.72 |
|
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| 2016 |
| 2017 |
| 2016 |
| 2017 |
| ||||
|
| (in thousands, except per share amounts) |
| ||||||||||
Numerator: |
|
|
|
|
|
|
|
|
| ||||
Net income attributable to Select Medical Holdings Corporation |
| $ | 6,471 |
| $ | 18,462 |
| $ | 95,239 |
| $ | 76,387 |
|
Less: Earnings allocated to unvested restricted stockholders |
| 209 |
| 608 |
| 2,852 |
| 2,464 |
| ||||
Net income available to common stockholders |
| $ | 6,262 |
| $ | 17,854 |
| $ | 92,387 |
| $ | 73,923 |
|
|
|
|
|
|
|
|
|
|
| ||||
Denominator: |
|
|
|
|
|
|
|
|
| ||||
Weighted average shares—basic |
| 127,848 |
| 129,142 |
| 127,659 |
| 128,745 |
| ||||
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
| ||||
Stock options |
| 141 |
| 180 |
| 145 |
| 171 |
| ||||
Weighted average shares—diluted |
| 127,989 |
| 129,322 |
| 127,804 |
| 128,916 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Basic income per common share: |
| $ | 0.05 |
| $ | 0.14 |
| $ | 0.72 |
| $ | 0.57 |
|
Diluted income per common share: |
| $ | 0.05 |
| $ | 0.14 |
| $ | 0.72 |
| $ | 0.57 |
|
11.8. Commitments and Contingencies
Litigation
The Company is a party to various legal actions, proceedings, and claims (some of which are not insured), and regulatory and other governmental audits and investigations in the ordinary course of its business. The Company cannot predict the ultimate outcome of pending litigation, proceedings, and regulatory and other governmental audits and investigations. These matters could potentially subject the Company to sanctions, damages, recoupments, fines, and other penalties. The Department of Justice, Centers for Medicare & Medicaid Services (“CMS”), or other federal and state enforcement and regulatory agencies may conduct additional investigations related to the Company’s businesses in the future that may, either individually or in the aggregate, have a material adverse effect on the Company’s business, financial position, results of operations, and liquidity.
To address claims arising out of the Company’s operations, the Company maintains professional malpractice liability insurance and general liability insurance, subject to self-insured retention of $2.0 million per medical incident for professional liability claims and $2.0 million per occurrence for general liability claims. The Company also maintains umbrella liability insurance covering claims which, due to their nature or amount, are not covered by or not fully covered by the Company’s other insurance policies. These insurance policies also do not generally cover punitive damages and are subject to various deductibles and policy limits. Significant legal actions, as well as the cost and possible lack of available insurance, could subject the Company to substantial uninsured liabilities. In the Company’s opinion, the outcome of these actions, individually or in the aggregate, will not have a material adverse effect on its financial position, results of operations or cash flows.
Healthcare providers are subject to lawsuits under the qui tam provisions of the federal False Claims Act. Qui tam lawsuits typically remain under seal (hence, usually unknown to the defendant) for some time while the government decides whether or not to intervene on behalf of a private qui tam plaintiff (known as a relator) and take the lead in the litigation. These lawsuits can involve significant monetary damages and penalties and award bounties to private plaintiffs who successfully bring the suits. The Company is and has been a defendant in these cases in the past, and may be named as a defendant in similar cases from time to time in the future.
Evansville Litigation.
On October 19, 2015, the plaintiff-relators filed a Second Amended Complaint in United States of America, ex rel. Tracy Conroy, Pamela Schenk and Lisa Wilson v. Select Medical Corporation, Select Specialty Hospital—Evansville, LLC (‘‘SSH-Evansville’’(“SSH-Evansville”), Select Employment Services, Inc., and Dr. Richard Sloan. The case is a civil action filed in the United States District Court for the Southern District of Indiana by private plaintiff-relators on behalf of the United States under the federal False Claims Act. The plaintiff-relators are the former CEO and two former case managers at SSH-Evansville, and the defendants currently include the Company, SSH-Evansville, a subsidiary of the Company serving as common paymaster for its employees, and a physician who practices at SSH-Evansville. The plaintiff-relators allege that from 2006 until April 2012, SSH-Evansville discharged patients too early or held patients too long, improperly discharged patients to and readmitted them from short stay hospitals, up-coded diagnoses at admission, and admitted patients for whom long-term acute care was not medically necessary. They also allege that the defendants engaged in retaliation in violation of federal and state law. The Second Amended Complaint replacesreplaced a prior complaint that was filed under seal on September 28, 2012 and served on the Company on February 15, 2013, after a federal magistrate judge unsealed it on January 8, 2013. All deadlines in the case had been stayed after the seal was lifted in order to allow the government time to complete its investigation and to decide whether or not to intervene. On June 19, 2015, the U.S.United States Department of Justice notified the District Court of its decision not to intervene in the case, and the District Court thereafter approved a case management plan imposing certain deadlines.case.
In December 2015, the defendants filed a Motion to Dismiss the Second Amended Complaint on multiple grounds. One basis forgrounds, including that the Motion to Dismiss wasaction is disallowed by the False Claims Act’s public disclosure bar, which disqualifies qui tam actions that are based on fraud already publicly disclosed through enumerated sources, unless the relator is an original source. The Affordable Care Act, enacted on March 23, 2010, altered the public disclosure bar language of the False Claims Act by, among other things, giving the United States the right to oppose dismissal of a case based on the public disclosure bar. In their Motion to Dismiss, the defendants contended that the public disclosure bar applies because substantially the same conduct as the plaintiff-relators have alleged had previously been publicly disclosed, including in a New York Times articlesource, and a prior qui tam case. A second basis for the defendants’ Motion to Dismiss was that the plaintiff-relators did not plead their claims with sufficient particularity, as required by the Federal Rules of Civil Procedure.
Then, based on the Affordable Care Act’s changes to the public disclosure bar language of the False Claims Act,Thereafter, the United States filed a notice asserting a veto of the defendants’ use of the public disclosure bar for claims arising from conduct from and after March 23, 2010. The defendants filed briefs challenging the United States’ contention that the2010, which was based on certain statutory changes gives it an unfettered right to veto the applicability of the public disclosure bar.bar language included in the Affordable Care Act. On September 30, 2016, the District Court partially granted and partially denied the defendants’ Motion to Dismiss. It ruled that the plaintiff-relators alleged substantially the same conduct as had been publicly disclosed and that the plaintiff relators are not original sources, so that the public disclosure bar requires dismissal of all non-retaliation claims arising from conduct before March 23, 2010. The District Court also ruled that the statutory changes to the public disclosure bar gave the United States the power to veto its applicability to claims arising from conduct on and after March 23, 2010, and therefore did not dismiss those claims based on the public disclosure bar. However, the District Court ruled that the plaintiff-relators did not
plead certain of their claims relating to interrupted stay manipulation and premature discharging of patients with the requisite particularity, and dismissed those claims. The District Court declined to dismiss the plaintiff-relators’plaintiff relators’ claims arising from conduct from and after March 23, 2010 relating to delayed discharging of patients and upcodingup-coding and the plaintiff-relators’plaintiff relators’ retaliation claims.
On October 17, 2016, The plaintiff-relators then proposed a case management plan seeking nationwide discovery involving all of the Company’s LTCHs for the period from March 23, 2010 through the present, which the defendants filed a Motion seeking certification to file an interlocutory appeal with the United States Court of Appeals for the Seventh Circuit of the District Court’s ruling that the United States’ has the power to veto the application of the public disclosure bar to the defendants’ conduct from and after March 23, 2010.have opposed. The Company intends to vigorously defend this action, but at this time the Company is unable to predict the timing and outcome of this matter.
Knoxville Litigation.
On July 13, 2015, the federalUnited States District Court for the Eastern District of Tennessee unsealed a qui tam Complaint in Armes v. Garman, et al, No. 3:14-cv-00172-TAV-CCS, which named as defendants Select, Select Specialty Hospital—Knoxville, Inc. (‘‘SSH-Knoxville’’(“SSH-Knoxville”), Select Specialty Hospital—North Knoxville, Inc. and ten current or former employees of these facilities. The Complaint was unsealed after the United States and the State of Tennessee notified the court on July 13, 2015 that each had decided not to intervene in the case. The Complaint is a civil action that was filed under seal on April 29, 2014 by a respiratory therapist formerly employed at SSH-Knoxville. The Complaint alleges violations of the federal False Claims Act and the Tennessee Medicaid False Claims Act based on extending patient stays to increase reimbursement and to increase average length of stay; artificially prolonging the lives of patients to increase Medicare reimbursements and decrease inspections; admitting patients who do not require medically necessary care; performing unnecessary procedures and services; and delaying performance of procedures to increase billing. The Complaint was served on some of the defendants during October 2015.
In November 2015, the defendants filed a Motion to Dismiss the Complaint on multiple grounds. The defendants first argued that False Claims Act’s first-to-file bar required dismissal of plaintiff-relator’s claims. Under the first-to-file bar, if a qui tam case is pending, no person may bring a related action based on the facts underlying the first action. The defendants asserted that the plaintiff-relator’s claims were based on the same underlying facts as were asserted in the Evansville litigation, discussed above. The defendants also argued that the plaintiff-relator’s claims must be dismissed under the public disclosure bar, and because the plaintiff-relator did not plead his claims with sufficient particularity.
In June 2016, the District Court granted the defendants’ Motion to Dismiss and dismissed with prejudice the plaintiff-relator’s lawsuit in its entirety. The District Court ruled that the first-to-file bar precludes all but one of the plaintiff-relator’s claims, and that the remaining claim must also be dismissed because the plaintiff-relator failed to plead it with sufficient particularity. In July 2016, the plaintiff-relator filed a Notice of Appeal to the United States Court of Appeals for the Sixth Circuit. Then, on October 11, 2016, the plaintiff-relator filed a Motion to Remand the case to the District Court for further proceedings, arguing that the September 30, 2016 decision in the Evansville litigation, discussed above, undermines the basis for the District Court’s dismissal. After the Court of Appeals denied the Motion to Remand, the plaintiff-relator then sought an indicative ruling from the District Court that it would vacate its prior dismissal ruling and allow plaintiff-relator to supplement his Complaint, which the defendants have opposed. The case has been fully briefed and argued in the Court of Appeals. The Company intends to vigorously defend this action, but at this time the Company is unable to predict the timing and outcome of this matter.
Construction CommitmentsWilmington Litigation
On January 19, 2017, the United States District Court for the District of Delaware unsealed a qui tam Complaint in United States of America and State of Delaware ex rel. Theresa Kelly v. Select Specialty Hospital—Wilmington, Inc. (“SSH-Wilmington”), Select Specialty Hospitals, Inc., Select Employment Services, Inc., Select Medical Corporation, and Crystal Cheek, No. 16-347-LPS. The Complaint was initially filed under seal on May 12, 2016 by a former chief nursing officer at SSH-Wilmington and was unsealed after the United States filed a Notice of Election to Decline Intervention on January 13, 2017. The corporate defendants were served on March 6, 2017. In the complaint, the plaintiff-relator alleges that the Select defendants and an individual defendant, who is a former health information manager at SSH-Wilmington, violated the False Claims Act and the Delaware False Claims and Reporting Act based on allegedly falsifying medical practitioner signatures on medical records and failing to properly examine the credentials of medical practitioners at SSH-Wilmington. In response to the Select defendants’ motion to dismiss the Complaint, on May 17, 2017 the plaintiff-relator filed an Amended Complaint asserting the same causes of action. The Select defendants filed a Motion to Dismiss the Amended Complaint, which is now pending, based on numerous grounds, including that the Amended Complaint did not plead any alleged fraud with sufficient particularity, failed to plead that the alleged fraud was material to the government’s payment decision, failed to plead sufficient facts to establish that the Select defendants knowingly submitted false claims or records, and failed to allege any reverse false claim.
On March 24, 2017, the plaintiff-relator initiated a second action by filing a Complaint in the Superior Court of the State of Delaware in Theresa Kelly v. Select Medical Corporation, Select Employment Services, Inc., and SSH-Wilmington, C.A. No. N17C-03-293 CLS. The Delaware Complaint alleges that the defendants retaliated against her in violation of the Delaware Whistleblowers’ Protection Act for reporting the same alleged violations that are the subject of the federal Amended Complaint. The defendants filed a motion to dismiss, or alternatively to stay, the Delaware Complaint based on the pending federal Amended Complaint and the failure to allege facts to support a violation of the Delaware Whistleblowers’ Protection Act. The motion is currently pending.
The Company intends to vigorously defend these actions, but at this time the Company is unable to predict the timing and outcome of this matter.
Contract Therapy Subpoena
On May 18, 2017, the Company received a subpoena from the U.S. Attorney’s Office for the District of New Jersey seeking various documents principally relating to the Company’s contract therapy division, which contracted to furnish rehabilitation therapy services to residents of skilled nursing facilities (“SNFs”) and other providers. The Company operated its contract therapy division through a subsidiary until March 31, 2016, when the Company sold the stock of the subsidiary. The subpoena seeks documents that appear to be aimed at assessing whether therapy services were furnished and billed in compliance with Medicare SNF billing requirements, including whether therapy services were coded at inappropriate levels and whether excessive or unnecessary therapy was furnished to justify coding at higher paying levels. The Company does not know whether the subpoena has been issued in connection with a qui tam lawsuit or in connection with possible civil, criminal or administrative proceedings by the government. The Company is producing documents in response to the subpoena and intends to fully cooperate with this investigation. At this time, the Company is unable to predict the timing and outcome of this matter.
Northern District of Alabama Investigation
On October 30, 2017, the Company was contacted by the U.S. Attorney’s Office for the Northern District of Alabama to request cooperation in connection with an investigation that may involve Medicare billing compliance at certain of the Company’s Physiotherapy outpatient rehabilitation clinics. The Company intends to cooperate with this investigation. At this time, the Company is unable to predict the timing and outcome of this matter.
9. Subsequent Event
At September 30, 2016,On October 23, 2017, Select announced that Concentra Group Holdings entered into an Equity Purchase and Contribution Agreement (the “Purchase Agreement”) dated October 22, 2017 with Concentra, Concentra Group Holdings Parent, LLC (“Group Holdings Parent”), U.S. HealthWorks, Inc. (“U.S. HealthWorks”), and Dignity Health Holdings Company (“DHHC”). Pursuant to the Company hadterms of the Purchase Agreement, Concentra will acquire the issued and outstanding commitmentsshares of stock of U.S. HealthWorks, an occupational medicine and urgent care service provider.
In connection with the closing of the transaction, it is expected that Concentra Group Holdings will redeem certain of its outstanding equity interests from existing minority equity holders and subsequently, Concentra Group Holdings and a wholly owned subsidiary of Group Holdings Parent will merge, with Concentra Group Holdings surviving the merger and becoming a wholly owned subsidiary of Group Holdings Parent. As a result of the merger, the equity interests of Concentra Group Holdings outstanding after the redemption described above will be exchanged for membership interests in Group Holdings Parent.
The transaction values U.S. HealthWorks at $753.0 million, subject to certain customary adjustments for working capital, cash, debt, transaction expenses and other items in accordance with the terms of the Purchase Agreement. DHHC, a subsidiary of Dignity Health, will be issued a 20% equity interest in Group Holdings Parent, which is valued at $238.0 million. The remainder of the purchase price will be paid in cash. Select will retain a majority voting interest in Group Holdings Parent following the closing of the transaction.
Concentra expects to finance the transaction and related expenses using a proposed $555.0 million senior secured incremental term facility under construction contracts relatedits existing credit facility and a proposed $240.0 million second lien term facility, for which JP Morgan Chase, N.A. has provided Concentra with a debt commitment letter.
The transaction, which is expected to new construction, improvements and renovations atclose in the Company’s long term acute care properties, inpatient rehabilitation facilities, and Concentra centers totaling approximately $16.2 million.first quarter of 2018, is subject to a number of closing conditions, including clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.
12.10. Condensed Consolidating Financial Information for Subsidiary Guarantors and Non-Guarantor Subsidiaries under Select’s 6.375% Senior Notes
Select’s 6.375% senior notes are fully and unconditionally and jointly and severally guaranteed, except for customary limitations, on a senior basis by all of Select’s wholly owned subsidiaries (the ‘‘“Subsidiary Guarantors”). The Subsidiary Guarantors’’) which isGuarantors are defined as a subsidiarysubsidiaries where Select, or a subsidiary of Select, holds all of the outstanding ownership interests. Certain of Select’s subsidiaries did not guarantee the 6.375% senior notes (the ‘‘Non-Guarantor Subsidiaries,’’ including“Non-Guarantor Subsidiaries” and Concentra Group Holdings and its subsidiaries, which were designated as Non-Guarantor subsidiaries by Select’s board of directors at the closing of the Concentra acquisition, the ‘‘Non-Guarantor Concentra’’“Non-Guarantor Concentra”).
Select conducts a significant portion of its business through its subsidiaries. Presented below is condensed consolidating financial information for Select, the Subsidiary Guarantors, the Non-Guarantor Subsidiaries, and Non-Guarantor Concentra at December 31, 20152016 and September 30, 20162017 and for the three and nine months ended September 30, 20152016 and 2016.2017.
The equity method has been used by Select with respect to investments in subsidiaries. The equity method has been used by Subsidiary Guarantors with respect to investments in Non-Guarantor Subsidiaries. Separate financial statements for Subsidiary Guarantors are not presented.
Certain reclassifications have been made to prior reported amounts in order to conform to the current year guarantor structure.
Select Medical Corporation
Condensed Consolidating Balance Sheet
September 30, 20162017
(unaudited)
|
| Select (Parent |
| Subsidiary |
| Non-Guarantor |
| Non-Guarantor |
| Eliminations |
| Consolidated |
|
| Select (Parent |
| Subsidiary |
| Non-Guarantor |
| Non-Guarantor |
| Consolidating |
| Consolidated |
| ||||||||||||
|
| (in thousands) |
|
| (in thousands) |
| ||||||||||||||||||||||||||||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Current Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Cash and cash equivalents |
| $ | 71 |
| $ | 4,692 |
| $ | 4,140 |
| $ | 59,320 |
| $ | — |
| $ | 68,223 |
|
| $ | 73 |
| $ | 6,359 |
| $ | 4,548 |
| $ | 96,320 |
| $ | — |
| $ | 107,300 |
|
Accounts receivable, net |
| — |
| 385,135 |
| 91,629 |
| 120,516 |
| (4,569 | )(e) | 592,711 |
|
| — |
| 468,370 |
| 120,463 |
| 127,593 |
| — |
| 716,426 |
| ||||||||||||
Current deferred tax asset |
| 13,208 |
| 23,273 |
| 4,023 |
| 10,143 |
| — |
| 50,647 |
| |||||||||||||||||||||||||
Intercompany receivables |
| — |
| 2,177,863 |
| 175,638 |
| — |
| (2,353,501 | )(a) | — |
|
| — |
| 1,488,527 |
| 36,784 |
| — |
| (1,525,311 | )(a) | — |
| ||||||||||||
Prepaid income taxes |
| 5,076 |
| — |
| — |
| 6,398 |
| — |
| 11,474 |
|
| 2,882 |
| — |
| — |
| — |
| (2,882 | )(f) | — |
| ||||||||||||
Other current assets |
| 11,674 |
| 34,134 |
| 11,784 |
| 25,088 |
| — |
| 82,680 |
|
| 10,937 |
| 30,142 |
| 16,814 |
| 22,431 |
| — |
| 80,324 |
| ||||||||||||
Total Current Assets |
| 30,029 |
| 2,625,097 |
| 287,214 |
| 221,465 |
| (2,358,070 | ) | 805,735 |
|
| 13,892 |
| 1,993,398 |
| 178,609 |
| 246,344 |
| (1,528,193 | ) | 904,050 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Property and equipment, net |
| 45,241 |
| 580,519 |
| 45,701 |
| 192,024 |
| — |
| 863,485 |
|
| 50,736 |
| 646,672 |
| 75,315 |
| 173,340 |
| — |
| 946,063 |
| ||||||||||||
Investment in affiliates |
| 4,587,985 |
| 90,815 |
| — |
| — |
| (4,678,800 | )(b) (c) | — |
|
| 4,421,777 |
| 116,370 |
| — |
| — |
| (4,538,147 | )(b)(c) | — |
| ||||||||||||
Goodwill |
| — |
| 2,015,033 |
| — |
| 659,590 |
| — |
| 2,674,623 |
|
| — |
| 2,093,354 |
| — |
| 674,542 |
| — |
| 2,767,896 |
| ||||||||||||
Other identifiable intangibles, net |
| — |
| 103,511 |
| — |
| 234,709 |
| — |
| 338,220 |
| |||||||||||||||||||||||||
Non-current deferred tax asset |
| 15,215 |
| — |
| — |
| — |
| (15,215 | )(d) | — |
| |||||||||||||||||||||||||
Identifiable intangible assets, net |
| — |
| 104,570 |
| 4,824 |
| 221,642 |
| — |
| 331,036 |
| |||||||||||||||||||||||||
Other assets |
| 7,723 |
| 81,266 |
| 54,703 |
| 19,650 |
| — |
| 163,342 |
|
| 42,852 |
| 101,285 |
| 36,285 |
| 16,144 |
| (21,804 | )(e) | 174,762 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Total Assets |
| $ | 4,686,193 |
| $ | 5,496,241 |
| $ | 387,618 |
| $ | 1,327,438 |
| $ | (7,052,085 | ) | $ | 4,845,405 |
|
| $ | 4,529,257 |
| $ | 5,055,649 |
| $ | 295,033 |
| $ | 1,332,012 |
| $ | (6,088,144 | ) | $ | 5,123,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Liabilities and Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Current Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Bank overdrafts |
| $ | 20,151 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 20,151 |
| |||||||||||||||||||
Overdrafts |
| $ | 18,923 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 18,923 |
| |||||||||||||||||||
Current portion of long-term debt and notes payable |
| 4,836 |
| 469 |
| 1,963 |
| 5,422 |
| — |
| 12,690 |
|
| 30,838 |
| 773 |
| 2,483 |
| 3,466 |
| — |
| 37,560 |
| ||||||||||||
Accounts payable |
| 10,206 |
| 72,890 |
| 17,329 |
| 13,756 |
| — |
| 114,181 |
|
| 13,066 |
| 82,662 |
| 24,196 |
| 13,397 |
| — |
| 133,321 |
| ||||||||||||
Intercompany payables |
| 2,177,863 |
| 175,638 |
| — |
| — |
| (2,353,501 | )(a) | — |
|
| 1,488,527 |
| 36,784 |
| — |
| — |
| (1,525,311 | )(a) | — |
| ||||||||||||
Accrued payroll |
| 13,877 |
| 75,189 |
| 11,502 |
| 37,522 |
| — |
| 138,090 |
|
| 11,186 |
| 86,257 |
| 3,931 |
| 38,028 |
| — |
| 139,402 |
| ||||||||||||
Accrued vacation |
| 3,286 |
| 46,583 |
| 15,809 |
| 13,098 |
| — |
| 78,776 |
|
| 3,848 |
| 55,949 |
| 12,040 |
| 17,334 |
| — |
| 89,171 |
| ||||||||||||
Accrued interest |
| 31,387 |
| 4 |
| 4 |
| 1,569 |
| — |
| 32,964 |
|
| 28,763 |
| 7 |
| — |
| 2,228 |
| — |
| 30,998 |
| ||||||||||||
Accrued other |
| 44,347 |
| 55,704 |
| 9,671 |
| 32,709 |
| — |
| 142,431 |
|
| 40,075 |
| 59,088 |
| 12,183 |
| 32,097 |
| — |
| 143,443 |
| ||||||||||||
Due to third party payors |
| — |
| 15,634 |
| — |
| — |
| (4,569 | )(e) | 11,065 |
| |||||||||||||||||||||||||
Income taxes payable |
| — |
| — |
| — |
| 9,600 |
| (2,882 | )(f) | 6,718 |
| |||||||||||||||||||||||||
Total Current Liabilities |
| 2,305,953 |
| 442,111 |
| 56,278 |
| 104,076 |
| (2,358,070 | ) | 550,348 |
|
| 1,635,226 |
| 321,520 |
| 54,833 |
| 116,150 |
| (1,528,193 | ) | 599,536 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Long-term debt, net of current portion |
| 2,004,106 |
| 599 |
| 9,607 |
| 627,803 |
| — |
| 2,642,115 |
|
| 2,133,355 |
| 243 |
| 9,564 |
| 609,580 |
| — |
| 2,752,742 |
| ||||||||||||
Subordinate debt |
| (641,466 | ) | 524,292 |
| 117,174 |
| — |
| — |
| — |
| |||||||||||||||||||||||||
Non-current deferred tax liability |
| — |
| 110,989 |
| 9,852 |
| 104,374 |
| (15,215 | )(d) | 210,000 |
|
| — |
| 131,902 |
| 767 |
| 80,576 |
| (21,804 | )(e) | 191,441 |
| ||||||||||||
Other non-current liabilities |
| 48,559 |
| 51,248 |
| 4,563 |
| 32,157 |
| — |
| 136,527 |
|
| 39,034 |
| 55,572 |
| 8,039 |
| 35,473 |
| — |
| 138,118 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Total Liabilities |
| 3,717,152 |
| 1,129,239 |
| 197,474 |
| 868,410 |
| (2,373,285 | ) | 3,538,990 |
|
| 3,807,615 |
| 509,237 |
| 73,203 |
| 841,779 |
| (1,549,997 | ) | 3,681,837 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Redeemable non-controlling interests |
| — |
| — |
| 10,639 |
| 235,790 |
| — |
| 246,429 |
|
| — |
| — |
| — |
| 14,641 |
| 606,874 | (d) | 621,515 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Stockholder’s Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Common stock |
| 0 |
| — |
| — |
| — |
| — |
| 0 |
|
| 0 |
| — |
| — |
| — |
| — |
| 0 |
| ||||||||||||
Capital in excess of par |
| 921,069 |
| — |
| — |
| — |
| — |
| 921,069 |
|
| 942,142 |
| — |
| — |
| — |
| — |
| 942,142 |
| ||||||||||||
Retained earnings (accumulated deficit) |
| 47,972 |
| 1,290,294 |
| (37,700 | ) | 1,730 |
| (1,254,324 | )(c) | 47,972 |
|
| (220,500 | ) | 1,328,453 |
| (40,068 | ) | 34,338 |
| (1,322,723 | )(c)(d) | (220,500 | ) | ||||||||||||
Subsidiary investment |
| — |
| 3,076,708 |
| 129,833 |
| 217,935 |
| (3,424,476 | )(b) | — |
|
| — |
| 3,217,959 |
| 261,898 |
| 437,568 |
| (3,917,425 | )(b)(d) | — |
| ||||||||||||
Total Select Medical Corporation Stockholder’s Equity |
| 969,041 |
| 4,367,002 |
| 92,133 |
| 219,665 |
| (4,678,800 | ) | 969,041 |
|
| 721,642 |
| 4,546,412 |
| 221,830 |
| 471,906 |
| (5,240,148 | ) | 721,642 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Non-controlling interest |
| — |
| — |
| 87,372 |
| 3,573 |
| — |
| 90,945 |
| |||||||||||||||||||||||||
Non-controlling interests |
| — |
| — |
| — |
| 3,686 |
| 95,127 | (d) | 98,813 |
| |||||||||||||||||||||||||
Total Equity |
| 969,041 |
| 4,367,002 |
| 179,505 |
| 223,238 |
| (4,678,800 | ) | 1,059,986 |
|
| 721,642 |
| 4,546,412 |
| 221,830 |
| 475,592 |
| (5,145,021 | ) | 820,455 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Total Liabilities and Equity |
| $ | 4,686,193 |
| $ | 5,496,241 |
| $ | 387,618 |
| $ | 1,327,438 |
| $ | (7,052,085 | ) | $ | 4,845,405 |
|
| $ | 4,529,257 |
| $ | 5,055,649 |
| $ | 295,033 |
| $ | 1,332,012 |
| $ | (6,088,144 | ) | $ | 5,123,807 |
|
(a) Elimination of intercompany.intercompany balances.
(b) Elimination of investments in consolidated subsidiaries.
(c) Elimination of investments in consolidated subsidiaries’ earnings.
(d) Reclass Reclassification of equity attributable to non-controlling interests.
(e) Reclassification of non-current deferred tax asset to report net non-current deferred tax liability in consolidation.
(e) Reclass(f) Reclassification of accounts receivable, netprepaid income taxes to report a net dueincome taxes payable in consolidation.
Select Medical Corporation
Condensed Consolidating Statement of Operations
For the Three Months Ended September 30, 2017
(unaudited)
|
| Select (Parent |
| Subsidiary |
| Non-Guarantor |
| Non-Guarantor |
| Consolidating |
| Consolidated |
| ||||||
|
| (in thousands) |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net operating revenues |
| $ | 56 |
| $ | 661,676 |
| $ | 174,139 |
| $ | 261,295 |
| $ | — |
| $ | 1,097,166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Cost of services |
| 667 |
| 570,564 |
| 151,609 |
| 216,070 |
| — |
| 938,910 |
| ||||||
General and administrative |
| 27,028 |
| 37 |
| — |
| — |
| — |
| 27,065 |
| ||||||
Bad debt expense |
| — |
| 10,879 |
| 4,008 |
| 5,434 |
| — |
| 20,321 |
| ||||||
Depreciation and amortization |
| 2,355 |
| 17,982 |
| 3,421 |
| 15,014 |
| — |
| 38,772 |
| ||||||
Total costs and expenses |
| 30,050 |
| 599,462 |
| 159,038 |
| 236,518 |
| — |
| 1,025,068 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Income (loss) from operations |
| (29,994 | ) | 62,214 |
| 15,101 |
| 24,777 |
| — |
| 72,098 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Other income and expense: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Intercompany interest and royalty fees |
| 7,864 |
| (4,194 | ) | (3,670 | ) | — |
| — |
| — |
| ||||||
Intercompany management fees |
| 51,241 |
| (41,048 | ) | (10,193 | ) | — |
| — |
| — |
| ||||||
Equity in earnings of unconsolidated subsidiaries |
| — |
| 4,416 |
| 15 |
| — |
| — |
| 4,431 |
| ||||||
Interest income (expense) |
| (30,239 | ) | 270 |
| (20 | ) | (7,699 | ) | — |
| (37,688 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Income (loss) before income taxes |
| (1,128 | ) | 21,658 |
| 1,233 |
| 17,078 |
| — |
| 38,841 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Income tax expense (benefit) |
| (1,032 | ) | 8,377 |
| 330 |
| 6,342 |
| — |
| 14,017 |
| ||||||
Equity in earnings of consolidated subsidiaries |
| 18,558 |
| 399 |
| — |
| — |
| (18,957 | )(a) | — |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
| 18,462 |
| 13,680 |
| 903 |
| 10,736 |
| (18,957 | ) | 24,824 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Less: Net income attributable to non-controlling interests |
| — |
| — |
| 383 |
| 5,979 |
| — |
| 6,362 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income attributable to Select Medical Corporation |
| $ | 18,462 |
| $ | 13,680 |
| $ | 520 |
| $ | 4,757 |
| $ | (18,957 | ) | $ | 18,462 |
|
(a) Elimination of equity in earnings of consolidated subsidiaries.
Select Medical Corporation
Condensed Consolidating Statement of Operations
For the Nine Months Ended September 30, 2017
(unaudited)
|
| Select (Parent |
| Subsidiary Guarantors |
| Non-Guarantor |
| Non-Guarantor |
| Consolidating |
| Consolidated |
| ||||||
|
| (in thousands) |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net operating revenues |
| $ | 687 |
| $ | 2,038,955 |
| $ | 510,530 |
| $ | 779,030 |
| $ | — |
| $ | 3,329,202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Cost of services |
| 1,843 |
| 1,713,091 |
| 434,130 |
| 638,433 |
| — |
| 2,787,497 |
| ||||||
General and administrative |
| 83,291 |
| 124 |
| — |
| — |
| — |
| 83,415 |
| ||||||
Bad debt expense |
| — |
| 32,456 |
| 10,941 |
| 15,723 |
| — |
| 59,120 |
| ||||||
Depreciation and amortization |
| 5,503 |
| 57,471 |
| 10,104 |
| 46,566 |
| — |
| 119,644 |
| ||||||
Total costs and expenses |
| 90,637 |
| 1,803,142 |
| 455,175 |
| 700,722 |
| — |
| 3,049,676 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Income (loss) from operations |
| (89,950 | ) | 235,813 |
| 55,355 |
| 78,308 |
| — |
| 279,526 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Other income and expense: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Intercompany interest and royalty fees |
| 24,760 |
| (13,586 | ) | (11,174 | ) | — |
| — |
| — |
| ||||||
Intercompany management fees |
| 176,443 |
| (147,117 | ) | (29,326 | ) | — |
| — |
| — |
| ||||||
Loss on early retirement of debt |
| (19,719 | ) | — |
| — |
| — |
| — |
| (19,719 | ) | ||||||
Equity in earnings of unconsolidated subsidiaries |
| — |
| 15,555 |
| 63 |
| — |
| — |
| 15,618 |
| ||||||
Non-operating loss |
| — |
| (49 | ) | — |
| — |
| — |
| (49 | ) | ||||||
Interest income (expense) |
| (93,725 | ) | 269 |
| (104 | ) | (22,636 | ) | — |
| (116,196 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Income (loss) before income taxes |
| (2,191 | ) | 90,885 |
| 14,814 |
| 55,672 |
| — |
| 159,180 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Income tax expense (benefit) |
| (3,230 | ) | 41,620 |
| 943 |
| 20,260 |
| — |
| 59,593 |
| ||||||
Equity in earnings of consolidated subsidiaries |
| 75,348 |
| 10,174 |
| — |
| — |
| (85,522 | )(a) | — |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
| 76,387 |
| 59,439 |
| 13,871 |
| 35,412 |
| (85,522 | ) | 99,587 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Less: Net income attributable to non-controlling interests |
| — |
| — |
| 3,627 |
| 19,573 |
| — |
| 23,200 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income attributable to Select Medical Corporation |
| $ | 76,387 |
| $ | 59,439 |
| $ | 10,244 |
| $ | 15,839 |
| $ | (85,522 | ) | $ | 76,387 |
|
(a) Elimination of equity in earnings of consolidated subsidiaries.
Select Medical Corporation
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2017
(unaudited)
|
| Select (Parent |
| Subsidiary |
| Non-Guarantor |
| Non-Guarantor Concentra |
| Consolidating |
| Consolidated |
| ||||||
|
| (in thousands) |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
| $ | 76,387 |
| $ | 59,439 |
| $ | 13,871 |
| $ | 35,412 |
| $ | (85,522 | )(a) | $ | 99,587 |
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Distributions from unconsolidated subsidiaries |
| — |
| 14,493 |
| 49 |
| — |
| — |
| 14,542 |
| ||||||
Depreciation and amortization |
| 5,503 |
| 57,471 |
| 10,104 |
| 46,566 |
| — |
| 119,644 |
| ||||||
Provision for bad debts |
| — |
| 32,456 |
| 10,941 |
| 15,723 |
| — |
| 59,120 |
| ||||||
Equity in earnings of unconsolidated subsidiaries |
| — |
| (15,555 | ) | (63 | ) | — |
| — |
| (15,618 | ) | ||||||
Equity in earnings of consolidated subsidiaries |
| (75,348 | ) | (10,174 | ) | — |
| — |
| 85,522 | (a) | — |
| ||||||
Loss on extinguishment of debt |
| 6,527 |
| — |
| — |
| — |
| — |
| 6,527 |
| ||||||
Loss (gain) on sale or disposal of assets and businesses |
| (8 | ) | (4,824 | ) | (4,687 | ) | 20 |
| — |
| (9,499 | ) | ||||||
Stock compensation expense |
| 13,445 |
| — |
| — |
| 782 |
| — |
| 14,227 |
| ||||||
Amortization of debt discount, premium and issuance costs |
| 6,113 |
| — |
| — |
| 2,433 |
| — |
| 8,546 |
| ||||||
Deferred income taxes |
| 5,014 |
| — |
| — |
| (11,140 | ) | — |
| (6,126 | ) | ||||||
Changes in operating assets and liabilities, net of effects of business combinations: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Accounts receivable |
| — |
| (137,255 | ) | (33,634 | ) | (30,625 | ) | — |
| (201,514 | ) | ||||||
Other current assets |
| 1,016 |
| 3,816 |
| (6,731 | ) | (778 | ) | — |
| (2,677 | ) | ||||||
Other assets |
| 1,633 |
| (3,709 | ) | 3,044 |
| 439 |
| — |
| 1,407 |
| ||||||
Accounts payable |
| 2,375 |
| (616 | ) | 1,373 |
| 781 |
| — |
| 3,913 |
| ||||||
Accrued expenses |
| 164 |
| (2,075 | ) | 11,181 |
| 9,482 |
| — |
| 18,752 |
| ||||||
Income taxes |
| 3,776 |
| — |
| — |
| 15,365 |
| — |
| 19,141 |
| ||||||
Net cash provided by (used in) operating activities |
| 46,597 |
| (6,533 | ) | 5,448 |
| 84,460 |
| — |
| 129,972 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Business combinations, net of cash acquired |
| — |
| (3,356 | ) | (295 | ) | (15,720 | ) | — |
| (19,371 | ) | ||||||
Purchases of property and equipment |
| (26,350 | ) | (102,150 | ) | (23,644 | ) | (21,656 | ) | — |
| (173,800 | ) | ||||||
Investment in businesses |
| — |
| (11,374 | ) | — |
| — |
| — |
| (11,374 | ) | ||||||
Proceeds from sale of assets and businesses |
| 8 |
| 15,007 |
| 19,537 |
| 3 |
| — |
| 34,555 |
| ||||||
Net cash used in investing activities |
| (26,342 | ) | (101,873 | ) | (4,402 | ) | (37,373 | ) | — |
| (169,990 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Borrowings on revolving facilities |
| 805,000 |
| — |
| — |
| — |
| — |
| 805,000 |
| ||||||
Payments on revolving facilities |
| (705,000 | ) | — |
| — |
| — |
| — |
| (705,000 | ) | ||||||
Proceeds from term loans |
| 1,139,487 |
| — |
| — |
| — |
| — |
| 1,139,487 |
| ||||||
Payments on term loans |
| (1,153,502 | ) | — |
| — |
| (23,065 | ) | — |
| (1,176,567 | ) | ||||||
Revolving facility debt issuance costs |
| (4,392 | ) | — |
| — |
| — |
| — |
| (4,392 | ) | ||||||
Borrowings of other debt |
| 21,572 |
| — |
| 3,232 |
| 2,767 |
| — |
| 27,571 |
| ||||||
Principal payments on other debt |
| (10,122 | ) | (306 | ) | (2,150 | ) | (2,534 | ) | — |
| (15,112 | ) | ||||||
Dividends paid to Holdings |
| (3,603 | ) | — |
| — |
| — |
| — |
| (3,603 | ) | ||||||
Equity investment by Holdings |
| 1,634 |
| — |
| — |
| — |
| — |
| 1,634 |
| ||||||
Intercompany |
| (101,888 | ) | 108,724 |
| (6,836 | ) | — |
| — |
| — |
| ||||||
Proceeds from issuance of non-controlling interests |
| — |
| — |
| 8,986 |
| — |
| — |
| 8,986 |
| ||||||
Repayments of overdrafts |
| (20,439 | ) | — |
| — |
| — |
| — |
| (20,439 | ) | ||||||
Purchase of non-controlling interests |
| — |
| (120 | ) | — |
| — |
| — |
| (120 | ) | ||||||
Distributions to non-controlling interests |
| — |
| — |
| (4,786 | ) | (4,370 | ) | — |
| (9,156 | ) | ||||||
Net cash provided by (used in) financing activities |
| (31,253 | ) | 108,298 |
| (1,554 | ) | (27,202 | ) | — |
| 48,289 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net increase (decrease) in cash and cash equivalents |
| (10,998 | ) | (108 | ) | (508 | ) | 19,885 |
| — |
| 8,271 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Cash and cash equivalents at beginning of period |
| 11,071 |
| 6,467 |
| 5,056 |
| 76,435 |
| — |
| 99,029 |
| ||||||
Cash and cash equivalents at end of period |
| $ | 73 |
| $ | 6,359 |
| $ | 4,548 |
| $ | 96,320 |
| $ | — |
| $ | 107,300 |
|
(a) Elimination of equity in earnings of consolidated subsidiaries.
Select Medical Corporation
Condensed Consolidating Balance Sheet
December 31, 2016
(unaudited)
|
| Select (Parent |
| Subsidiary |
| Non-Guarantor |
| Non-Guarantor |
| Consolidating |
| Consolidated |
| ||||||
|
| (in thousands) |
| ||||||||||||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Current Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Cash and cash equivalents |
| $ | 11,071 |
| $ | 6,467 |
| $ | 5,056 |
| $ | 76,435 |
| $ | — |
| $ | 99,029 |
|
Accounts receivable, net |
| — |
| 363,470 |
| 97,770 |
| 112,512 |
| — |
| 573,752 |
| ||||||
Intercompany receivables |
| — |
| 1,573,960 |
| 25,578 |
| — |
| (1,599,538 | )(a) | — |
| ||||||
Prepaid income taxes |
| 6,658 |
| — |
| — |
| 5,765 |
| — |
| 12,423 |
| ||||||
Other current assets |
| 11,953 |
| 33,958 |
| 10,269 |
| 21,519 |
| — |
| 77,699 |
| ||||||
Total Current Assets |
| 29,682 |
| 1,977,855 |
| 138,673 |
| 216,231 |
| (1,599,538 | ) | 762,903 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Property and equipment, net |
| 48,697 |
| 603,408 |
| 50,869 |
| 189,243 |
| — |
| 892,217 |
| ||||||
Investment in affiliates |
| 4,493,684 |
| 89,288 |
| — |
| — |
| (4,582,972 | )(b)(c) | — |
| ||||||
Goodwill |
| — |
| 2,090,963 |
| — |
| 660,037 |
| — |
| 2,751,000 |
| ||||||
Identifiable intangible assets, net |
| — |
| 106,439 |
| 2,693 |
| 231,430 |
| — |
| 340,562 |
| ||||||
Other assets |
| 45,636 |
| 84,803 |
| 53,954 |
| 16,235 |
| (26,684 | )(e) | 173,944 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total Assets |
| $ | 4,617,699 |
| $ | 4,952,756 |
| $ | 246,189 |
| $ | 1,313,176 |
| $ | (6,209,194 | ) | $ | 4,920,626 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Liabilities and Equity |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Current Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Overdrafts |
| $ | 39,362 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 39,362 |
|
Current portion of long-term debt and notes payable |
| 7,227 |
| 445 |
| 1,324 |
| 4,660 |
| — |
| 13,656 |
| ||||||
Accounts payable |
| 10,775 |
| 78,608 |
| 22,397 |
| 14,778 |
| — |
| 126,558 |
| ||||||
Intercompany payables |
| 1,573,960 |
| 25,578 |
| — |
| — |
| (1,599,538 | )(a) | — |
| ||||||
Accrued payroll |
| 16,963 |
| 92,216 |
| 4,246 |
| 32,972 |
| — |
| 146,397 |
| ||||||
Accrued vacation |
| 3,440 |
| 55,486 |
| 10,668 |
| 13,667 |
| — |
| 83,261 |
| ||||||
Accrued interest |
| 20,114 |
| — |
| — |
| 2,211 |
| — |
| 22,325 |
| ||||||
Accrued other |
| 39,155 |
| 62,384 |
| 4,639 |
| 33,898 |
| — |
| 140,076 |
| ||||||
Total Current Liabilities |
| 1,710,996 |
| 314,717 |
| 43,274 |
| 102,186 |
| (1,599,538 | ) | 571,635 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Long-term debt, net of current portion |
| 2,048,154 |
| 601 |
| 9,685 |
| 626,893 |
| — |
| 2,685,333 |
| ||||||
Non-current deferred tax liability |
| — |
| 133,852 |
| 596 |
| 91,314 |
| (26,684 | )(e) | 199,078 |
| ||||||
Other non-current liabilities |
| 42,824 |
| 53,537 |
| 5,727 |
| 34,432 |
| — |
| 136,520 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total Liabilities |
| 3,801,974 |
| 502,707 |
| 59,282 |
| 854,825 |
| (1,626,222 | ) | 3,592,566 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Redeemable non-controlling interests |
| — |
| — |
| — |
| 15,493 |
| 406,666 | (d) | 422,159 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Stockholder’s Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Common stock |
| 0 |
| — |
| — |
| — |
| — |
| 0 |
| ||||||
Capital in excess of par |
| 925,111 |
| — |
| — |
| — |
| — |
| 925,111 |
| ||||||
Retained earnings (accumulated deficit) |
| (109,386 | ) | 1,269,009 |
| (32,826 | ) | 2,723 |
| (1,238,906 | )(c)(d) | (109,386 | ) | ||||||
Subsidiary investment |
| — |
| 3,181,040 |
| 219,733 |
| 436,786 |
| (3,837,559 | )(b)(d) | — |
| ||||||
Total Select Medical Corporation Stockholder’s Equity |
| 815,725 |
| 4,450,049 |
| 186,907 |
| 439,509 |
| (5,076,465 | ) | 815,725 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Non-controlling interests |
| — |
| — |
| — |
| 3,349 |
| 86,827 | (d) | 90,176 |
| ||||||
Total Equity |
| 815,725 |
| 4,450,049 |
| 186,907 |
| 442,858 |
| (4,989,638 | ) | 905,901 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total Liabilities and Equity |
| $ | 4,617,699 |
| $ | 4,952,756 |
| $ | 246,189 |
| $ | 1,313,176 |
| $ | (6,209,194 | ) | $ | 4,920,626 |
|
(a) Elimination of intercompany balances.
(b) Elimination of investments in consolidated subsidiaries.
(c) Elimination of investments in consolidated subsidiaries’ earnings.
(d) Reclassification of equity attributable to third party payornon-controlling interests.
(e) Reclassification of non-current deferred tax asset to report net non-current deferred tax liability in consolidation.
Select Medical Corporation
Condensed Consolidating Statement of Operations
For the Three Months Ended September 30, 2016
(unaudited)
|
| Select (Parent |
| Subsidiary |
| Non-Guarantor |
| Non-Guarantor |
| Eliminations |
| Consolidated |
|
| Select (Parent |
| Subsidiary |
| Non-Guarantor |
| Non-Guarantor |
| Consolidating |
| Consolidated |
| ||||||||||||
|
| (in thousands) |
|
| (in thousands) |
| ||||||||||||||||||||||||||||||||
Net operating revenues |
| $ | 85 |
| $ | 654,966 |
| $ | 140,237 |
| $ | 258,507 |
| $ | — |
| $ | 1,053,795 |
|
| $ | 85 |
| $ | 655,663 |
| $ | 139,540 |
| $ | 258,507 |
| $ | — |
| $ | 1,053,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Cost of services |
| 626 |
| 540,053 |
| 162,594 |
| 212,430 |
| — |
| 915,703 |
|
| 626 |
| 569,167 |
| 133,480 |
| 212,430 |
| — |
| 915,703 |
| ||||||||||||
General and administrative |
| 26,967 |
| 121 |
| — |
| — |
| — |
| 27,088 |
|
| 26,967 |
| 121 |
| — |
| — |
| — |
| 27,088 |
| ||||||||||||
Bad debt expense |
| — |
| 9,671 |
| 2,624 |
| 5,382 |
| — |
| 17,677 |
|
| — |
| 9,662 |
| 2,633 |
| 5,382 |
| — |
| 17,677 |
| ||||||||||||
Depreciation and amortization |
| 1,411 |
| 17,363 |
| 3,113 |
| 15,278 |
| — |
| 37,165 |
|
| 1,411 |
| 17,335 |
| 3,141 |
| 15,278 |
| — |
| 37,165 |
| ||||||||||||
Total costs and expenses |
| 29,004 |
| 567,208 |
| 168,331 |
| 233,090 |
| — |
| 997,633 |
|
| 29,004 |
| 596,285 |
| 139,254 |
| 233,090 |
| — |
| 997,633 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Income (loss) from operations |
| (28,919 | ) | 87,758 |
| (28,094 | ) | 25,417 |
| — |
| 56,162 |
|
| (28,919 | ) | 59,378 |
| 286 |
| 25,417 |
| — |
| 56,162 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Other income and expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Intercompany interest and royalty fees |
| (1,613 | ) | (26,871 | ) | 28,484 |
| — |
| — |
| — |
|
| 8,458 |
| (4,884 | ) | (3,574 | ) | — |
| — |
| — |
| ||||||||||||
Intercompany management fees |
| 33,693 |
| (25,728 | ) | (7,965 | ) | — |
| — |
| — |
|
| 33,693 |
| (25,880 | ) | (7,813 | ) | — |
| — |
| — |
| ||||||||||||
Loss on early retirement of debt |
| — |
| — |
| — |
| (10,853 | ) | — |
| (10,853 | ) |
| — |
| — |
| — |
| (10,853 | ) | — |
| (10,853 | ) | ||||||||||||
Equity in earnings of unconsolidated subsidiaries |
| — |
| 5,238 |
| 30 |
| — |
| — |
| 5,268 |
|
| — |
| 5,238 |
| 30 |
| — |
| — |
| 5,268 |
| ||||||||||||
Non-operating gain (loss) |
| (6,963 | ) | 5,935 |
| — |
| — |
| — |
| (1,028 | ) |
| (6,963 | ) | 5,935 |
| — |
| — |
| — |
| (1,028 | ) | ||||||||||||
Interest expense |
| (24,353 | ) | (8,013 | ) | (1,952 | ) | (10,164 | ) | — |
| (44,482 | ) | |||||||||||||||||||||||||
Interest income (expense) |
| (34,424 | ) | 137 |
| (31 | ) | (10,164 | ) | — |
| (44,482 | ) | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Income (loss) from operations before income taxes |
| (28,155 | ) | 38,319 |
| (9,497 | ) | 4,400 |
| — |
| 5,067 |
| |||||||||||||||||||||||||
Income (loss) before income taxes |
| (28,155 | ) | 39,924 |
| (11,102 | ) | 4,400 |
| — |
| 5,067 |
| |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Income tax expense (benefit) |
| 5,701 |
| (7,365 | ) | 1,565 |
| 1,174 |
| — |
| 1,075 |
|
| 5,701 |
| (7,284 | ) | 1,484 |
| 1,174 |
| — |
| 1,075 |
| ||||||||||||
Equity in earnings of subsidiaries |
| 40,327 |
| (6,347 | ) | — |
| — |
| (33,980 | )(a) | — |
| |||||||||||||||||||||||||
Equity in earnings (losses) of consolidated subsidiaries |
| 40,327 |
| (7,877 | ) | — |
| — |
| (32,450 | )(a) | — |
| |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Net income (loss) |
| 6,471 |
| 39,337 |
| (11,062 | ) | 3,226 |
| (33,980 | ) | 3,992 |
|
| 6,471 |
| 39,331 |
| (12,586 | ) | 3,226 |
| (32,450 | ) | 3,992 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Less: Net income (loss) attributable to non-controlling interests |
| — |
| — |
| (4,810 | ) | 2,331 |
| — |
| (2,479 | ) |
| — |
| (6 | ) | (4,804 | ) | 2,331 |
| — |
| (2,479 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Net income (loss) attributable to Select Medical Corporation |
| $ | 6,471 |
| $ | 39,337 |
| $ | (6,252 | ) | $ | 895 |
| $ | (33,980 | ) | $ | 6,471 |
|
| $ | 6,471 |
| $ | 39,337 |
| $ | (7,782 | ) | $ | 895 |
| $ | (32,450 | ) | $ | 6,471 |
|
(a) Elimination of equity in earnings of consolidated subsidiaries.
Select Medical Corporation
Condensed Consolidating Statement of Operations
For the Nine Months Ended September 30, 2016
(unaudited)
|
| Select (Parent |
| Subsidiary |
| Non-Guarantor |
| Non-Guarantor |
| Eliminations |
| Consolidated |
|
| Select (Parent |
| Subsidiary |
| Non-Guarantor |
| Non-Guarantor |
| Consolidating |
| Consolidated |
| ||||||||||||
|
| (in thousands) |
|
| (in thousands) |
| ||||||||||||||||||||||||||||||||
Net operating revenues |
| $ | 522 |
| $ | 2,086,884 |
| $ | 388,098 |
| $ | 764,252 |
| $ | — |
| $ | 3,239,756 |
|
| $ | 522 |
| $ | 2,095,102 |
| $ | 379,880 |
| $ | 764,252 |
| $ | — |
| $ | 3,239,756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Cost of services |
| 1,576 |
| 1,689,064 |
| 431,796 |
| 632,514 |
| — |
| 2,754,950 |
|
| 1,576 |
| 1,780,606 |
| 340,254 |
| 632,514 |
| — |
| 2,754,950 |
| ||||||||||||
General and administrative |
| 81,198 |
| 28 |
| — |
| — |
| — |
| 81,226 |
|
| 81,198 |
| 28 |
| — |
| — |
| — |
| 81,226 |
| ||||||||||||
Bad debt expense |
| — |
| 30,634 |
| 6,722 |
| 14,235 |
| — |
| 51,591 |
|
| — |
| 30,665 |
| 6,691 |
| 14,235 |
| — |
| 51,591 |
| ||||||||||||
Depreciation and amortization |
| 3,898 |
| 49,744 |
| 8,675 |
| 45,570 |
| — |
| 107,887 |
|
| 3,898 |
| 49,983 |
| 8,436 |
| 45,570 |
| — |
| 107,887 |
| ||||||||||||
Total costs and expenses |
| 86,672 |
| 1,769,470 |
| 447,193 |
| 692,319 |
| — |
| 2,995,654 |
|
| 86,672 |
| 1,861,282 |
| 355,381 |
| 692,319 |
| — |
| 2,995,654 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Income (loss) from operations |
| (86,150 | ) | 317,414 |
| (59,095 | ) | 71,933 |
| — |
| 244,102 |
|
| (86,150 | ) | 233,820 |
| 24,499 |
| 71,933 |
| — |
| 244,102 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Other income and expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Intercompany interest and royalty fees |
| (4,203 | ) | (76,817 | ) | 81,020 |
| — |
| — |
| — |
|
| 22,793 |
| (12,314 | ) | (10,479 | ) | — |
| — |
| — |
| ||||||||||||
Intercompany management fees |
| 127,832 |
| (107,532 | ) | (20,300 | ) | — |
| — |
| — |
|
| 127,832 |
| (108,007 | ) | (19,825 | ) | — |
| — |
| — |
| ||||||||||||
Loss on early retirement of debt |
| (773 | ) | — |
| — |
| (10,853 | ) | — |
| (11,626 | ) |
| (773 | ) | — |
| — |
| (10,853 | ) | — |
| (11,626 | ) | ||||||||||||
Equity in earnings of unconsolidated subsidiaries |
| — |
| 14,384 |
| 82 |
| — |
| — |
| 14,466 |
|
| — |
| 14,384 |
| 82 |
| — |
| — |
| 14,466 |
| ||||||||||||
Non-operating gain |
| 33,932 |
| 3,162 |
| — |
| — |
| — |
| 37,094 |
|
| 33,932 |
| 3,162 |
| — |
| — |
| — |
| 37,094 |
| ||||||||||||
Interest expense |
| (70,243 | ) | (21,332 | ) | (5,442 | ) | (30,645 | ) | — |
| (127,662 | ) | |||||||||||||||||||||||||
Interest income (expense) |
| (97,239 | ) | 293 |
| (71 | ) | (30,645 | ) | — |
| (127,662 | ) | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Income (loss) from operations before income taxes |
| 395 |
| 129,279 |
| (3,735 | ) | 30,435 |
| — |
| 156,374 |
| |||||||||||||||||||||||||
Income (loss) before income taxes |
| 395 |
| 131,338 |
| (5,794 | ) | 30,435 |
| — |
| 156,374 |
| |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Income tax expense |
| 13,840 |
| 24,620 |
| 2,172 |
| 10,953 |
| — |
| 51,585 |
|
| 13,840 |
| 24,701 |
| 2,091 |
| 10,953 |
| — |
| 51,585 |
| ||||||||||||
Equity in earnings of subsidiaries |
| 108,684 |
| (4,053 | ) | — |
| — |
| (104,631 | )(a) | — |
| |||||||||||||||||||||||||
Equity in earnings (losses) of consolidated subsidiaries |
| 108,684 |
| (6,004 | ) | — |
| — |
| (102,680 | )(a) | — |
| |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Net income (loss) |
| 95,239 |
| 100,606 |
| (5,907 | ) | 19,482 |
| (104,631 | ) | 104,789 |
|
| 95,239 |
| 100,633 |
| (7,885 | ) | 19,482 |
| (102,680 | ) | 104,789 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Less: Net income (loss) attributable to non-controlling interests |
| — |
| — |
| (2,082 | ) | 11,632 |
| — |
| 9,550 |
|
| — |
| 27 |
| (2,109 | ) | 11,632 |
| — |
| 9,550 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Net income (loss) attributable to Select Medical Corporation |
| $ | 95,239 |
| $ | 100,606 |
| $ | (3,825 | ) | $ | 7,850 |
| $ | (104,631 | ) | $ | 95,239 |
|
| $ | 95,239 |
| $ | 100,606 |
| $ | (5,776 | ) | $ | 7,850 |
| $ | (102,680 | ) | $ | 95,239 |
|
(a) Elimination of equity in earnings of consolidated subsidiaries.
Select Medical Corporation
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2016
(unaudited)
|
| Select (Parent |
| Subsidiary |
| Non-Guarantor |
| Non-Guarantor |
| Eliminations |
| Consolidated |
|
| Select (Parent |
| Subsidiary |
| Non-Guarantor |
| Non-Guarantor |
| Consolidating |
| Consolidated |
| ||||||||||||
|
| (in thousands) |
|
| (in thousands) |
| ||||||||||||||||||||||||||||||||
Operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Net income (loss) |
| $ | 95,239 |
| $ | 100,606 |
| $ | (5,907 | ) | $ | 19,482 |
| $ | (104,631 | )(a) | $ | 104,789 |
| |||||||||||||||||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Net income |
| $ | 95,239 |
| $ | 100,633 |
| $ | (7,885 | ) | $ | 19,482 |
| $ | (102,680 | )(a) | $ | 104,789 |
| |||||||||||||||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Distributions from unconsolidated subsidiaries |
| — |
| 70 |
| 16,075 |
| — |
| — |
| 16,145 |
|
| — |
| 16,075 |
| 70 |
| — |
| — |
| 16,145 |
| ||||||||||||
Depreciation and amortization |
| 3,898 |
| 49,744 |
| 8,675 |
| 45,570 |
| — |
| 107,887 |
|
| 3,898 |
| 49,983 |
| 8,436 |
| 45,570 |
| — |
| 107,887 |
| ||||||||||||
Amortization of leasehold interests |
| — |
| 58 |
| — |
| 399 |
| — |
| 457 |
| |||||||||||||||||||||||||
Provision for bad debts |
| — |
| 30,634 |
| 6,722 |
| 14,235 |
| — |
| 51,591 |
|
| — |
| 30,665 |
| 6,691 |
| 14,235 |
| — |
| 51,591 |
| ||||||||||||
Equity in earnings of unconsolidated subsidiaries |
| — |
| (14,384 | ) | (82 | ) | — |
| — |
| (14,466 | ) |
| — |
| (14,384 | ) | (82 | ) | — |
| — |
| (14,466 | ) | ||||||||||||
Loss on early retirement of debt |
| 773 |
| — |
| — |
| 10,853 |
| — |
| 11,626 |
| |||||||||||||||||||||||||
Loss (gain) on disposal of assets |
| 225 |
| (107 | ) | 185 |
| (21 | ) | — |
| 282 |
| |||||||||||||||||||||||||
Gain on sale of assets and businesses |
| (33,932 | ) | (8,260 | ) | — |
| — |
| — |
| (42,192 | ) | |||||||||||||||||||||||||
Gain on sale of equity method investment |
| — |
| (241 | ) | — |
| — |
| — |
| (241 | ) | |||||||||||||||||||||||||
Impairment on equity investment |
| — |
| 5,339 |
| — |
| — |
| — |
| 5,339 |
| |||||||||||||||||||||||||
Equity in earnings of consolidated subsidiaries |
| (108,684 | ) | 6,004 |
| — |
| — |
| 102,680 | (a) | — |
| |||||||||||||||||||||||||
Loss on extinguishment of debt |
| 773 |
| — |
| — |
| 10,853 |
| — |
| 11,626 |
| |||||||||||||||||||||||||
Loss (gain) on sale or disposal of assets and businesses |
| (33,707 | ) | (8,367 | ) | 185 |
| (21 | ) | — |
| (41,910 | ) | |||||||||||||||||||||||||
Gain on sale of equity investment |
| — |
| (241 | ) | — |
| — |
| — |
| (241 | ) | |||||||||||||||||||||||||
Impairment of equity investment |
| — |
| 5,339 |
| — |
| — |
| — |
| 5,339 |
| |||||||||||||||||||||||||
Stock compensation expense |
| 12,347 |
| — |
| — |
| 577 |
| — |
| 12,924 |
|
| 12,347 |
| — |
| — |
| 577 |
| — |
| 12,924 |
| ||||||||||||
Amortization of debt discount, premium and issuance costs |
| 9,289 |
| — |
| — |
| 2,556 |
| — |
| 11,845 |
|
| 9,289 |
| — |
| — |
| 2,556 |
| — |
| 11,845 |
| ||||||||||||
Deferred income taxes |
| (902 | ) | — |
| — |
| (12,186 | ) | — |
| (13,088 | ) |
| (902 | ) | — |
| — |
| (12,186 | ) | — |
| (13,088 | ) | ||||||||||||
Changes in operating assets and liabilities, net of effects from acquisition of businesses: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Equity in earnings of subsidiaries |
| (108,684 | ) | 4,053 |
| — |
| — |
| 104,631 | (a) | — |
| |||||||||||||||||||||||||
Changes in operating assets and liabilities, net of effects of business combinations: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Accounts receivable |
| — |
| 3,772 |
| (25,450 | ) | (19,098 | ) | — |
| (40,776 | ) |
| — |
| 6,288 |
| (27,966 | ) | (19,098 | ) | — |
| (40,776 | ) | ||||||||||||
Other current assets |
| (1,153 | ) | 9,685 |
| (6,053 | ) | 9,615 |
| — |
| 12,094 |
|
| (1,153 | ) | 9,745 |
| (6,113 | ) | 9,615 |
| — |
| 12,094 |
| ||||||||||||
Other assets |
| (3,881 | ) | 53,125 |
| (54,044 | ) | 9,489 |
| — |
| 4,689 |
|
| (3,881 | ) | 53,100 |
| (53,961 | ) | 9,888 |
| — |
| 5,146 |
| ||||||||||||
Accounts payable |
| (239 | ) | (22,374 | ) | 332 |
| 4,529 |
| — |
| (17,752 | ) |
| (239 | ) | (22,529 | ) | 487 |
| 4,529 |
| — |
| (17,752 | ) | ||||||||||||
Accrued expenses |
| 19,692 |
| 22,231 |
| 13,606 |
| (2,533 | ) | — |
| 52,996 |
|
| 19,692 |
| 36,051 |
| (214 | ) | (2,533 | ) | — |
| 52,996 |
| ||||||||||||
Due to third party payors |
| — |
| 15,634 |
| (4,569 | ) | — |
| — |
| 11,065 |
|
| — |
| 15,019 |
| (3,954 | ) | — |
| — |
| 11,065 |
| ||||||||||||
Income taxes |
| 2,716 |
| — |
| — |
| 2,317 |
| — |
| 5,033 |
|
| 3,230 |
| — |
| — |
| 2,317 |
| — |
| 5,547 |
| ||||||||||||
Net cash provided by (used in) operating activities |
| (4,612 | ) | 249,585 |
| (50,510 | ) | 85,784 |
| — |
| 280,247 |
|
| (4,098 | ) | 283,381 |
| (84,306 | ) | 85,784 |
| — |
| 280,761 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Business combinations, net of cash acquired |
| (406,305 | ) | (3,523 | ) | — |
| (4,403 | ) | — |
| (414,231 | ) | |||||||||||||||||||||||||
Purchases of property and equipment |
| (13,315 | ) | (58,441 | ) | (35,857 | ) | (10,647 | ) | — |
| (118,260 | ) |
| (13,315 | ) | (68,609 | ) | (25,689 | ) | (10,647 | ) | — |
| (118,260 | ) | ||||||||||||
Proceeds from sale of assets and businesses |
| 63,418 |
| 7,964 |
| 6 |
| — |
| — |
| 71,388 |
| |||||||||||||||||||||||||
Investment in businesses |
| — |
| (3,140 | ) | — |
| — |
| — |
| (3,140 | ) |
| — |
| (3,140 | ) | — |
| — |
| — |
| (3,140 | ) | ||||||||||||
Proceeds from sale of equity investment |
| — |
| 1,241 |
| — |
| — |
| — |
| 1,241 |
| |||||||||||||||||||||||||
Acquisition of businesses, net of cash acquired |
| (406,305 | ) | (3,523 | ) | — |
| (4,403 | ) | — |
| (414,231 | ) | |||||||||||||||||||||||||
Proceeds from sale of assets, businesses, and equity investment |
| 63,418 |
| 9,205 |
| 6 |
| — |
| — |
| 72,629 |
| |||||||||||||||||||||||||
Net cash used in investing activities |
| (356,202 | ) | (55,899 | ) | (35,851 | ) | (15,050 | ) | — |
| (463,002 | ) |
| (356,202 | ) | (66,067 | ) | (25,683 | ) | (15,050 | ) | — |
| (463,002 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Borrowings on revolving facilities |
| 420,000 |
| — |
| — |
| — |
| — |
| 420,000 |
|
| 420,000 |
| — |
| — |
| — |
| — |
| 420,000 |
| ||||||||||||
Payments on revolving facilities |
| (540,000 | ) | — |
| — |
| (5,000 | ) | — |
| (545,000 | ) |
| (540,000 | ) | — |
| — |
| (5,000 | ) | — |
| (545,000 | ) | ||||||||||||
Net proceeds from term loans |
| 600,127 |
| — |
| — |
| 195,217 |
| — |
| 795,344 |
| |||||||||||||||||||||||||
Proceeds from term loans |
| 600,127 |
| — |
| — |
| 195,217 |
| — |
| 795,344 |
| |||||||||||||||||||||||||
Payments on term loans |
| (228,962 | ) | — |
| — |
| (205,880 | ) | — |
| (434,842 | ) |
| (228,962 | ) | — |
| — |
| (205,880 | ) | — |
| (434,842 | ) | ||||||||||||
Borrowings of other debt |
| 8,748 |
| — |
| 12,237 |
| 2,816 |
| — |
| 23,801 |
|
| 8,748 |
| — |
| 12,237 |
| 2,816 |
| — |
| 23,801 |
| ||||||||||||
Principal payments on other debt |
| (10,971 | ) | (528 | ) | (1,813 | ) | (2,165 | ) | — |
| (15,477 | ) |
| (10,971 | ) | (528 | ) | (1,813 | ) | (2,165 | ) | — |
| (15,477 | ) | ||||||||||||
Dividends paid to Holdings |
| (1,939 | ) | — |
| — |
| — |
| — |
| (1,939 | ) |
| (1,939 | ) | — |
| — |
| — |
| — |
| (1,939 | ) | ||||||||||||
Equity investment by Holdings |
| 1,488 |
| — |
| — |
| — |
| — |
| 1,488 |
|
| 1,488 |
| — |
| — |
| — |
| — |
| 1,488 |
| ||||||||||||
Intercompany |
| 116,274 |
| (190,878 | ) | 74,604 |
| — |
| — |
| — |
|
| 116,274 |
| (214,053 | ) | 97,779 |
| — |
| — |
| — |
| ||||||||||||
Proceeds from issuance of non-controlling interest |
| — |
| — |
| 11,846 |
| — |
| — |
| 11,846 |
| |||||||||||||||||||||||||
Repayments of bank overdrafts |
| (8,464 | ) | — |
| — |
| — |
| — |
| (8,464 | ) | |||||||||||||||||||||||||
Tax benefit from stock based awards |
| 514 |
| — |
| — |
| — |
| — |
| 514 |
| |||||||||||||||||||||||||
Proceeds from issuance of non-controlling interests |
| — |
| — |
| 11,846 |
| — |
| — |
| 11,846 |
| |||||||||||||||||||||||||
Repayments of overdrafts |
| (8,464 | ) | — |
| — |
| — |
| — |
| (8,464 | ) | |||||||||||||||||||||||||
Purchase of non-controlling interests |
| — |
| (1,294 | ) | (236 | ) | — |
| — |
| (1,530 | ) |
| — |
| (1,530 | ) | — |
| — |
| — |
| (1,530 | ) | ||||||||||||
Distributions to non-controlling interests |
| — |
| — |
| (6,762 | ) | (2,436 | ) | — |
| (9,198 | ) |
| — |
| (217 | ) | (6,545 | ) | (2,436 | ) | — |
| (9,198 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Net cash provided by (used in) financing activities |
| 356,815 |
| (192,700 | ) | 89,876 |
| (17,448 | ) | — |
| 236,543 |
|
| 356,301 |
| (216,328 | ) | 113,504 |
| (17,448 | ) | — |
| 236,029 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Net increase (decrease) in cash and cash equivalents |
| (3,999 | ) | 986 |
| 3,515 |
| 53,286 |
| — |
| 53,788 |
|
| (3,999 | ) | 986 |
| 3,515 |
| 53,286 |
| — |
| 53,788 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Cash and cash equivalents at beginning of period |
| 4,070 |
| 3,706 |
| 625 |
| 6,034 |
|
|
| 14,435 |
|
| 4,070 |
| 3,706 |
| 625 |
| 6,034 |
| — |
| 14,435 |
| ||||||||||||
Cash and cash equivalents at end of period |
| $ | 71 |
| $ | 4,692 |
| $ | 4,140 |
| $ | 59,320 |
| $ | — |
| $ | 68,223 |
|
| $ | 71 |
| $ | 4,692 |
| $ | 4,140 |
| $ | 59,320 |
| $ | — |
| $ | 68,223 |
|
(a) Elimination of equity in earnings of consolidated subsidiaries.
Select Medical Corporation
Condensed Consolidating Balance Sheet
December 31, 2015
|
| Select (Parent |
| Subsidiary |
| Non-Guarantor |
| Non-Guarantor |
| Eliminations |
| Consolidated |
| ||||||
|
| (in thousands) |
| ||||||||||||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Current Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Cash and cash equivalents |
| $ | 4,070 |
| $ | 3,706 |
| $ | 625 |
| $ | 6,034 |
| $ | — |
| $ | 14,435 |
|
Accounts receivable, net |
| — |
| 419,554 |
| 68,332 |
| 115,672 |
| — |
| 603,558 |
| ||||||
Current deferred tax asset |
| 11,556 |
| 6,733 |
| 4,761 |
| 5,638 |
| — |
| 28,688 |
| ||||||
Intercompany receivables |
| — |
| 1,974,229 |
| 127,373 |
| — |
| (2,101,602 | )(a) | — |
| ||||||
Prepaid income taxes |
| 7,979 |
| — |
| — |
| 8,715 |
| — |
| 16,694 |
| ||||||
Other current assets |
| 10,521 |
| 34,887 |
| 5,731 |
| 34,640 |
| — |
| 85,779 |
| ||||||
Total Current Assets |
| 34,126 |
| 2,439,109 |
| 206,822 |
| 170,699 |
| (2,101,602 | ) | 749,154 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Property and equipment, net |
| 38,872 |
| 548,820 |
| 61,126 |
| 215,306 |
| — |
| 864,124 |
| ||||||
Investment in affiliates |
| 4,111,682 |
| 66,015 |
| — |
| — |
| (4,177,697 | )(b) (c) | — |
| ||||||
Goodwill |
| — |
| 1,663,974 |
| — |
| 650,650 |
| — |
| 2,314,624 |
| ||||||
Other identifiable intangibles, net |
| — |
| 72,776 |
| — |
| 245,899 |
| — |
| 318,675 |
| ||||||
Non-current deferred tax asset |
| 12,297 |
| — |
| — |
| — |
| (12,297 | )(d) | — |
| ||||||
Other assets |
| 3,842 |
| 108,524 |
| 659 |
| 29,076 |
| — |
| 142,101 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total Assets |
| $ | 4,200,819 |
| $ | 4,899,218 |
| $ | 268,607 |
| $ | 1,311,630 |
| $ | (6,291,596 | ) | $ | 4,388,678 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Liabilities and Equity |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Current Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Bank overdrafts |
| $ | 28,615 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 28,615 |
|
Current portion of long-term debt and notes payable |
| 221,769 |
| 197 |
| 939 |
| 2,261 |
| — |
| 225,166 |
| ||||||
Accounts payable |
| 10,445 |
| 101,156 |
| 16,997 |
| 8,811 |
| — |
| 137,409 |
| ||||||
Intercompany payables |
| 1,974,229 |
| 127,373 |
| — |
| — |
| (2,101,602 | )(a) | — |
| ||||||
Accrued payroll |
| 22,970 |
| 66,908 |
| 3,916 |
| 27,195 |
| — |
| 120,989 |
| ||||||
Accrued vacation |
| 6,406 |
| 50,254 |
| 9,363 |
| 7,954 |
| — |
| 73,977 |
| ||||||
Accrued interest |
| 6,315 |
| 3 |
| — |
| 3,083 |
| — |
| 9,401 |
| ||||||
Accrued other |
| 38,883 |
| 42,939 |
| 9,866 |
| 42,040 |
| — |
| 133,728 |
| ||||||
Total Current Liabilities |
| 2,309,632 |
| 388,830 |
| 41,081 |
| 91,344 |
| (2,101,602 | ) | 729,285 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Long-term debt, net of current portion |
| 984,744 |
| 452,417 |
| 90,860 |
| 632,709 |
| — |
| 2,160,730 |
| ||||||
Non-current deferred tax liability |
| — |
| 114,394 |
| 9,239 |
| 107,369 |
| (12,297 | )(d) | 218,705 |
| ||||||
Other non-current liabilities |
| 47,190 |
| 41,904 |
| 4,798 |
| 39,328 |
| — |
| 133,220 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
| �� | ||||||
Total Liabilities |
| 3,341,566 |
| 997,545 |
| 145,978 |
| 870,750 |
| (2,113,899 | ) | 3,241,940 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Redeemable non-controlling interests |
| — |
| 870 |
| 11,224 |
| 226,127 |
| — |
| 238,221 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Stockholder’s Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Common stock |
| 0 |
| — |
| — |
| — |
| — |
| 0 |
| ||||||
Capital in excess of par |
| 904,375 |
| — |
| — |
| — |
| — |
| 904,375 |
| ||||||
Retained earnings (accumulated deficit) |
| (45,122 | ) | 1,189,688 |
| (8,932 | ) | (6,120 | ) | (1,174,636 | )(c) | (45,122 | ) | ||||||
Subsidiary investment |
| — |
| 2,711,115 |
| 74,011 |
| 217,935 |
| (3,003,061 | )(b) | — |
| ||||||
Total Select Medical Corporation Stockholder’s Equity |
| 859,253 |
| 3,900,803 |
| 65,079 |
| 211,815 |
| (4,177,697 | ) | 859,253 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Non-controlling interest |
| — |
| — |
| 46,326 |
| 2,938 |
| — |
| 49,264 |
| ||||||
Total Equity |
| 859,253 |
| 3,900,803 |
| 111,405 |
| 214,753 |
| (4,177,697 | ) | 908,517 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total Liabilities and Equity |
| $ | 4,200,819 |
| $ | 4,899,218 |
| $ | 268,607 |
| $ | 1,311,630 |
| $ | (6,291,596 | ) | $ | 4,388,678 |
|
(a) Elimination of intercompany.
(b) Elimination of investments in consolidated subsidiaries.
(c) Elimination of investments in consolidated subsidiaries’ earnings.
(d) Reclass of non-current deferred tax asset to report net non-current deferred tax liability in consolidation.
Select Medical Corporation
Condensed Consolidating Statement of Operations
For the Three Months Ended September 30, 2015
(unaudited)
|
| Select (Parent |
| Subsidiary |
| Non-Guarantor |
| Non-Guarantor |
| Eliminations |
| Consolidated |
| ||||||
|
| (in thousands) |
| ||||||||||||||||
Net operating revenues |
| $ | 233 |
| $ | 644,458 |
| $ | 117,463 |
| $ | 258,969 |
| $ | — |
| $ | 1,021,123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Cost of services |
| 581 |
| 568,272 |
| 102,400 |
| 229,696 |
| — |
| 900,949 |
| ||||||
General and administrative |
| 22,169 |
| 32 |
| — |
| — |
| — |
| 22,201 |
| ||||||
Bad debt expense |
| — |
| 12,002 |
| 1,785 |
| 4,500 |
| — |
| 18,287 |
| ||||||
Depreciation and amortization |
| 1,128 |
| 14,338 |
| 2,690 |
| 13,316 |
| — |
| 31,472 |
| ||||||
Total costs and expenses |
| 23,878 |
| 594,644 |
| 106,875 |
| 247,512 |
| — |
| 972,909 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Income (loss) from operations |
| (23,645 | ) | 49,814 |
| 10,588 |
| 11,457 |
| — |
| 48,214 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Other income and expense: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Intercompany interest and royalty fees |
| (355 | ) | 347 |
| 8 |
| — |
| — |
| — |
| ||||||
Intercompany management fees |
| (1,967 | ) | 7,955 |
| (5,988 | ) | — |
| — |
| — |
| ||||||
Non-operating gain |
| — |
| 29,647 |
| — |
| — |
| — |
| 29,647 |
| ||||||
Equity in earnings of unconsolidated subsidiaries |
| — |
| 6,319 |
| 29 |
| — |
| — |
| 6,348 |
| ||||||
Interest expense |
| (15,029 | ) | (6,091 | ) | (1,577 | ) | (10,355 | ) | — |
| (33,052 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Income (loss) from operations before income taxes |
| (40,996 | ) | 87,991 |
| 3,060 |
| 1,102 |
| — |
| 51,157 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Income tax expense (benefit) |
| (13,708 | ) | 32,841 |
| (346 | ) | (440 | ) | — |
| 18,347 |
| ||||||
Equity in earnings of subsidiaries |
| 56,694 |
| 1,226 |
| — |
| — |
| (57,920 | )(a) | — |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
| 29,406 |
| 56,376 |
| 3,406 |
| 1,542 |
| (57,920 | ) | 32,810 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Less: Net income attributable to non-controlling interests |
| — |
| 10 |
| 2,121 |
| 1,273 |
| — |
| 3,404 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income attributable to Select Medical Corporation |
| $ | 29,406 |
| $ | 56,366 |
| $ | 1,285 |
| $ | 269 |
| $ | (57,920 | ) | $ | 29,406 |
|
(a) Elimination of equity in earnings of subsidiaries.
Select Medical Corporation
Condensed Consolidating Statement of Operations
For the Nine Months Ended September 30, 2015
(unaudited)
|
| Select (Parent |
| Subsidiary |
| Non-Guarantor |
| Non-Guarantor |
| Eliminations |
| Consolidated |
| ||||||
|
| (in thousands) |
| ||||||||||||||||
Net operating revenues |
| $ | 457 |
| $ | 1,994,703 |
| $ | 362,573 |
| $ | 345,798 |
| $ | — |
| $ | 2,703,531 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Cost of services |
| 1,591 |
| 1,693,968 |
| 309,206 |
| 304,448 |
| — |
| 2,309,213 |
| ||||||
General and administrative |
| 63,387 |
| (185 | ) | — |
| 4,715 |
| — |
| 67,917 |
| ||||||
Bad debt expense |
| — |
| 30,737 |
| 7,128 |
| 5,378 |
| — |
| 43,243 |
| ||||||
Depreciation and amortization |
| 3,186 |
| 42,020 |
| 7,952 |
| 17,510 |
| — |
| 70,668 |
| ||||||
Total costs and expenses |
| 68,164 |
| 1,766,540 |
| 324,286 |
| 332,051 |
| — |
| 2,491,041 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Income (loss) from operations |
| (67,707 | ) | 228,163 |
| 38,287 |
| 13,747 |
| — |
| 212,490 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Other income and expense: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Intercompany interest and royalty fees |
| (952 | ) | 933 |
| 19 |
| — |
| — |
| — |
| ||||||
Intercompany management fees |
| 37,320 |
| (18,911 | ) | (18,409 | ) | — |
| — |
| — |
| ||||||
Non-operating gain |
| — |
| 29,647 |
| — |
| — |
| — |
| 29,647 |
| ||||||
Equity in earnings of unconsolidated subsidiaries |
| — |
| 12,718 |
| 70 |
| — |
| — |
| 12,788 |
| ||||||
Interest expense |
| (43,210 | ) | (18,177 | ) | (4,617 | ) | (13,724 | ) | — |
| (79,728 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Income (loss) from operations before income taxes |
| (74,549 | ) | 234,373 |
| 15,350 |
| 23 |
| — |
| 175,197 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Income tax expense (benefit) |
| (25,644 | ) | 93,461 |
| (1,634 | ) | (1,135 | ) | — |
| 65,048 |
| ||||||
Equity in earnings of subsidiaries |
| 150,314 |
| 9,536 |
| — |
| — |
| (159,850 | )(a) | — |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
| 101,409 |
| 150,448 |
| 16,984 |
| 1,158 |
| (159,850 | ) | 110,149 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Less: Net income attributable to non-controlling interests |
| — |
| 41 |
| 7,402 |
| 1,297 |
| — |
| 8,740 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income (loss) attributable to Select Medical Corporation |
| $ | 101,409 |
| $ | 150,407 |
| $ | 9,582 |
| $ | (139 | ) | $ | (159,850 | ) | $ | 101,409 |
|
(a) Elimination of equity in earnings of subsidiaries.
Select Medical Corporation
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2015
(unaudited)
|
| Select (Parent |
| Subsidiary |
| Non-Guarantor |
| Non-Guarantor |
| Eliminations |
| Consolidated |
| ||||||
|
| (in thousands) |
| ||||||||||||||||
Operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
| $ | 101,409 |
| $ | 150,448 |
| $ | 16,984 |
| $ | 1,158 |
| $ | (159,850 | )(a) | $ | 110,149 |
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Distributions from unconsolidated subsidiaries |
| — |
| 11,737 |
| 77 |
| — |
| — |
| 11,814 |
| ||||||
Depreciation and amortization |
| 3,186 |
| 42,020 |
| 7,952 |
| 17,510 |
| — |
| 70,668 |
| ||||||
Provision for bad debts |
| — |
| 30,737 |
| 7,128 |
| 5,378 |
| — |
| 43,243 |
| ||||||
Equity in earnings of unconsolidated subsidiaires |
| — |
| (12,718 | ) | (70 | ) | — |
| — |
| (12,788 | ) | ||||||
Gain on sale of assets and businesses |
| — |
| (1,257 | ) | (6 | ) | (1 | ) | — |
| (1,264 | ) | ||||||
Gain on sale of equity investment |
| — |
| (29,647 | ) | — |
| — |
| — |
| (29,647 | ) | ||||||
Stock compensation expense |
| 8,433 |
| — |
| — |
| 811 |
| — |
| 9,244 |
| ||||||
Amortization of debt discount, premium and issuance costs |
| 5,500 |
| — |
| — |
| 1,246 |
| — |
| 6,746 |
| ||||||
Deferred income taxes |
| (6,925 | ) | — |
| — |
| — |
| — |
| (6,925 | ) | ||||||
Changes in operating assets and liabilities, net of effects from acquisition of businesses: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Equity in earnings of subsidiaries |
| (150,314 | ) | (9,536 | ) | — |
| — |
| 159,850 | (a) | — |
| ||||||
Accounts receivable |
| — |
| (35,725 | ) | (6,085 | ) | (6,968 | ) | — |
| (48,778 | ) | ||||||
Other current assets |
| (2,090 | ) | (2,006 | ) | (12 | ) | (472 | ) | — |
| (4,580 | ) | ||||||
Other assets |
| 5,833 |
| (1,546 | ) | 253 |
| — |
| — |
| 4,540 |
| ||||||
Accounts payable |
| (572 | ) | 8,139 |
| (2,011 | ) | (2,509 | ) | — |
| 3,047 |
| ||||||
Accrued expenses |
| 12,541 |
| 15,433 |
| 2,713 |
| 2,029 |
| — |
| 32,716 |
| ||||||
Income taxes |
| 18,410 |
| — |
| — |
| (3,164 | ) | — |
| 15,246 |
| ||||||
Net cash provided by (used in) operating activities |
| (4,589 | ) | 166,079 |
| 26,923 |
| 15,018 |
| — |
| 203,431 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Purchases of property and equipment |
| (8,119 | ) | (87,070 | ) | (5,309 | ) | (13,494 | ) | — |
| (113,992 | ) | ||||||
Proceeds from sale of assets |
| — |
| 1,519 |
| 9 |
| 14 |
| — |
| 1,542 |
| ||||||
Investment in businesses |
| — |
| (826 | ) | (877 | ) | — |
| — |
| (1,703 | ) | ||||||
Proceeds from sale of equity investment |
| — |
| 33,096 |
| — |
| — |
| — |
| 33,096 |
| ||||||
Acquisition of businesses, net of cash acquired |
| — |
| — |
| (2,686 | ) | (1,047,186 | ) | — |
| (1,049,872 | ) | ||||||
Net cash used in investing activities |
| (8,119 | ) | (53,281 | ) | (8,863 | ) | (1,060,666 | ) | — |
| (1,130,929 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Borrowings on revolving facilities |
| 830,000 |
| — |
| — |
| 10,000 |
| — |
| 840,000 |
| ||||||
Payments on revolving facilities |
| (665,000 | ) | — |
| — |
| (10,000 | ) | — |
| (675,000 | ) | ||||||
Net proceeds from term loans |
| — |
| — |
| — |
| 623,575 |
| — |
| 623,575 |
| ||||||
Payments on term loans |
| (26,884 | ) | — |
| — |
| — |
| — |
| (26,884 | ) | ||||||
Borrowings of other debt |
| 6,486 |
| — |
| 1,547 |
| 3,008 |
| — |
| 11,041 |
| ||||||
Principal payments on other debt |
| (8,800 | ) | (1,313 | ) | (796 | ) | (2,258 | ) | — |
| (13,167 | ) | ||||||
Dividends paid to Holdings |
| (26,751 | ) | — |
| — |
| — |
| — |
| (26,751 | ) | ||||||
Equity investment by Holdings |
| 1,604 |
| — |
| — |
| — |
| — |
| 1,604 |
| ||||||
Proceeds from issuance of non-controlling interests |
| — |
| — |
| — |
| 217,065 |
| — |
| 217,065 |
| ||||||
Proceeds from bank overdrafts |
| 2,353 |
| — |
| — |
| — |
| — |
| 2,353 |
| ||||||
Tax benefit from stock based awards |
| 383 |
| — |
| — |
| — |
| — |
| 383 |
| ||||||
Intercompany |
| (95,683 | ) | (109,796 | ) | (12,456 | ) | 217,935 |
| — |
| — |
| ||||||
Distributions to non-controlling interests |
| — |
| — |
| (6,470 | ) | (970 | ) | — |
| (7,440 | ) | ||||||
Net cash provided by (used in) financing activities |
| 17,708 |
| (111,109 | ) | (18,175 | ) | 1,058,355 |
| — |
| 946,779 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net increase (decrease) in cash and cash equivalents |
| 5,000 |
| 1,689 |
| (115 | ) | 12,707 |
| — |
| 19,281 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Cash and cash equivalents at beginning of period |
| 70 |
| 2,454 |
| 830 |
| — |
| — |
| 3,354 |
| ||||||
Cash and cash equivalents at end of period |
| $ | 5,070 |
| $ | 4,143 |
| $ | 715 |
| $ | 12,707 |
| $ | — |
| $ | 22,635 |
|
(a) Elimination of equity in earnings of consolidated subsidiaries.
ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read this discussion together with our unaudited condensed consolidated financial statements and accompanying notes.
Forward-Looking Statements
This report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements include statements preceded by, followed by or that include the words “may,” “could,” “would,” “should,” “believe,” “expect,” “anticipate,” “plan,” “target,” “estimate,” “project,” “intend”“intend,” and similar expressions. These statements include, among others, statements regarding our expected business outlook, anticipated financial and operating results, our business strategy and means to implement our strategy, our objectives, the amount and timing of capital expenditures, the likelihood of our success in expanding our business, financing plans, budgets, working capital needs, and sources of liquidity.
Forward-looking statements are only predictions and are not guarantees of performance. These statements are based on our management’s beliefs and assumptions, which in turn are based on currently available information. Important assumptions relating to the forward-looking statements include, among others, assumptions regarding our services, the expansion of our services, competitive conditions, and general economic conditions. These assumptions could prove inaccurate. Forward-looking statements also involve known and unknown risks and uncertainties, which could cause actual results to differ materially from those contained in any forward-looking statement. Many of these factors are beyond our ability to control or predict. Such factors include, but are not limited to, the following:
· changes in government reimbursement for our services due to the implementation of healthcare reform legislation, deficit reduction measures, and/or new payment policies (including, for example, the expiration of the moratorium limiting the full application of the 25 Percent Rule that would reduce our Medicare payments for those patients admitted to a long term acute care hospital from a referring hospital in excess of an applicable percentage admissions threshold) may result in a reduction in net operating revenues, an increase in costs, and a reduction in profitability;
· the impact of the Bipartisan Budget Act of 2013 (“BBA(the “BBA of 2013”), which establishes newestablished payment limits for Medicare patients who do not meet specified criteria, may result in a reduction in net operating revenues and profitability of our long term acute care hospitals (“LTCHs”);
· the failure of our specialty hospitals to maintain their Medicare certifications may cause our net operating revenues and profitability to decline;
· the failure of our facilities operated as “hospitals within hospitals” to qualify as hospitals separate from their host hospitals may cause our net operating revenues and profitability to decline;
· a government investigation or assertion that we have violated applicable regulations may result in sanctions or reputational harm and increased costs;
· acquisitions or joint ventures may prove difficult or unsuccessful, use significant resources, or expose us to unforeseen liabilities;
· our plans and expectations related to the Concentra and Physiotherapy acquisitionspending acquisition of U.S. HealthWorks and our inabilityability to realize anticipated synergies;
· private third-party payors for our services may undertake future cost containment initiativesadopt payment policies that could limit our future net operating revenues and profitability;
· the failure to maintain established relationships with the physicians in the areas we serve could reduce our net operating revenues and profitability;
· shortages in qualified nurses, therapists, physicians, or other licensed providers could increase our operating costs significantly or limit our ability to staff our facilities;
· competition may limit our ability to grow and result in a decrease in our net operating revenues and profitability;
· the loss of key members of our management team could significantly disrupt our operations;
· the effect of claims asserted against us could subject us to substantial uninsured liabilities; and
· other factors discussed from time to time in our filings with the SEC, including factors discussed under the section entitled,heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 20152016, as such risk factors may be updated from time to time in our periodic filings with the SEC.
Except as required by applicable law, including the securities laws of the United States and the rules and regulations of the SEC, we are under no obligation to publicly update or revise any forward-looking statements, whether as a result of any new information, future events, or otherwise. You should not place undue reliance on our forward-looking statements. Although we believe that the expectations reflected in forward-looking statements are reasonable, we cannot guarantee future results or performance.
Investors should also be aware that while we do, from time to time, communicate with securities analysts, it is against our policy to disclose to securities analysts any material non-public information or other confidential commercial information. Accordingly, stockholders should not assume that we agree with any statement or report issued by any securities analyst irrespective of the content of the statement or report. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of the Company.
Overview
We began operations in 1997 and, we believe that webased on number of facilities, are one of the largest operators of specialty hospitals, and outpatient rehabilitation clinics, and occupational medicine centers in the United States based on number of facilities. On March 4, 2016, we acquired Physiotherapy, a national provider of outpatient physical rehabilitation care, which operated 574 clinics nationwide.States. As of September 30, 2016,2017, we had operations in 46 states and the District of Columbia. As of September 30, 2017, we operated 123 specialty hospitals in 2728 states and 1,6031,604 outpatient rehabilitation clinics in 37 states and the District of Columbia. Concentra, which is operated through a joint venture subsidiary, provides occupational medicine, consumer health, physical therapy, and veteran’s healthcare services throughout the United States. As of September 30, 2016, Concentra operated 301312 medical centers in 38 states.states as of September 30, 2017. Concentra also provides contract services at employer worksites and operates Department of Veterans Affairs community-based outpatient clinics, (‘‘CBOCs”). On March 31, 2016, we sold our contract therapy businesses. As of September 30, 2016, we had operations in 46 states and the District of Columbia.or “CBOCs.”
We manage our Company through three business segments: specialty hospitals, outpatient rehabilitation, and the Concentra segment.Concentra. We had net operating revenues of $3,239.8$3,329.2 million for the nine months ended September 30, 2016.2017. Of this total, we earned approximately 53%54% of our net operating revenues from our specialty hospitals segment, approximately 23% from our outpatient rehabilitation segment, and approximately 24%23% from our Concentra segment. Our specialty hospitals segment consists of hospitals designed to serve the needs of long term acute care patients and hospitals designed to serve patients that require intensive medical rehabilitation care. Patients are typically admitted to our specialty hospitals from general acute care hospitals. These patients have specialized needs, andwith serious and often complex medical conditions such as respiratory failure, neuromuscular disorders, traumatic brain and spinal cord injuries, strokes, non-healing wounds, cardiac disorders, renal disorders, and cancer.conditions. Our outpatient rehabilitation segment consists of clinics that provide physical, occupational, and speech rehabilitation services. Our outpatient rehabilitation patients are typically diagnosed with musculoskeletal impairments that restrict their ability to perform normal activities of daily living. Our Concentra segment consists of medical centers and contract services provided at employer worksites and Department of Veterans Affairs CBOCs that deliver occupational medicine, consumer health, physical therapy, and veteran’s healthcare, and consumer health services.
Non-GAAP Measure
We believe that the presentation of Adjusted EBITDA income (loss) (“Adjusted EBITDA”) is important to investors because Adjusted EBITDA is commonly used as an analytical indicator of performance by investors within the healthcare industry. Adjusted EBITDA is used by management to evaluate financial performance and determine resource allocation for each of our operating units.segments. Adjusted EBITDA is not a measure of financial performance under accounting principles generally accepted accounting principlesin the United States of America (“GAAP”). Items excluded from Adjusted EBITDA are significant components in understanding and assessing financial performance. Adjusted EBITDA should not be considered in isolation or as an alternative to, or substitute for, net income, income from operations, cash flows generated by operations, investing or financing activities, or other financial statement data presented in the consolidated financial statements as indicators of financial performance or liquidity. Because Adjusted EBITDA is not a measurement determined in accordance with GAAP and is thus susceptible to varying calculations, Adjusted EBITDA as presented may not be comparable to other similarly titled measures of other companies.
We define Adjusted EBITDA as earnings excluding interest, income taxes, depreciation and amortization, gain (loss) on early retirement of debt, stock compensation expense, Concentra acquisition costs, Physiotherapy acquisition costs, non-operating gain (loss), and equity in earnings (losses) of unconsolidated subsidiaries. We will refer to Adjusted EBITDA throughout the remainder of Management’s Discussion and Analysis of Financial Condition and Results of Operations. You should refer to the following
The table which
below reconciles the relationship of net income and income from operations to Adjusted EBITDA wheneverand should be referenced when we refer todiscuss Adjusted EBITDA:EBITDA.
Non-GAAP Measure Reconciliation
|
| Three Months Ended |
| Nine Months Ended |
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| ||||||||||||||||
|
| 2015 |
| 2016 |
| 2015 |
| 2016 |
|
| 2016 |
| 2017 |
| 2016 |
| 2017 |
| ||||||||
|
| (in thousands) |
|
| (in thousands) |
| ||||||||||||||||||||
Net income |
| $ | 32,810 |
| $ | 3,992 |
| $ | 110,149 |
| $ | 104,789 |
|
| $ | 3,992 |
| $ | 24,824 |
| $ | 104,789 |
| $ | 99,587 |
|
Income tax expense |
| 18,347 |
| 1,075 |
| 65,048 |
| 51,585 |
|
| 1,075 |
| 14,017 |
| 51,585 |
| 59,593 |
| ||||||||
Interest expense |
| 33,052 |
| 44,482 |
| 79,728 |
| 127,662 |
|
| 44,482 |
| 37,688 |
| 127,662 |
| 116,196 |
| ||||||||
Non-operating loss (gain) |
| (29,647 | ) | 1,028 |
| (29,647 | ) | (37,094 | ) |
| 1,028 |
| — |
| (37,094 | ) | 49 |
| ||||||||
Equity in earnings of unconsolidated subsidiaries |
| (6,348 | ) | (5,268 | ) | (12,788 | ) | (14,466 | ) |
| (5,268 | ) | (4,431 | ) | (14,466 | ) | (15,618 | ) | ||||||||
Loss on early retirement of debt |
| — |
| 10,853 |
| — |
| 11,626 |
|
| 10,853 |
| — |
| 11,626 |
| 19,719 |
| ||||||||
Income from operations |
| $ | 48,214 |
| $ | 56,162 |
| $ | 212,490 |
| $ | 244,102 |
|
| 56,162 |
| 72,098 |
| 244,102 |
| 279,526 |
| ||||
Stock compensation expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Included in general and administrative |
| 3,433 |
| 3,932 |
| 8,073 |
| 10,771 |
|
| 3,932 |
| 4,079 |
| 10,771 |
| 11,603 |
| ||||||||
Included in cost of services |
| 1,392 |
| 818 |
| 2,402 |
| 2,153 |
|
| 818 |
| 878 |
| 2,153 |
| 2,624 |
| ||||||||
Depreciation and amortization |
| 31,472 |
| 37,165 |
| 70,668 |
| 107,887 |
|
| 37,165 |
| 38,772 |
| 107,887 |
| 119,644 |
| ||||||||
Physiotherapy acquisition costs |
| — |
| — |
| — |
| 3,236 |
|
| — |
| — |
| 3,236 |
| — |
| ||||||||
Concentra acquisition costs |
| — |
| — |
| 4,715 |
| — |
| |||||||||||||||||
Adjusted EBITDA |
| $ | 84,511 |
| $ | 98,077 |
| $ | 298,348 |
| $ | 368,149 |
|
| $ | 98,077 |
| $ | 115,827 |
| $ | 368,149 |
| $ | 413,397 |
|
Summary Financial Results
Consolidated Operating Results for the Three Months Ended September 30, 20162017
For the three months ended September 30, 2016,2017, our net operating revenues increased 3.2%4.1% to $1,053.8$1,097.2 million, compared to $1,021.1$1,053.8 million for the three months ended September 30, 2015. We had income2016. Income from operations ofincreased 28.4% to $72.1 million for the three months ended September 30, 2017, compared to $56.2 million for the three months ended September 30, 2016, compared2016. Net income increased to $48.2$24.8 million for the three months ended September 30, 2015. Net income was2017, compared to $4.0 million for the three months ended September 30, 2016. Net income for the three months ended September 30, 2016 which includes a pre-tax non-operating loss of $1.0 million andincluded a pre-tax loss on early retirement of debt of $10.9 million and a pre-tax non-operating loss of $1.0 million. Net income was $32.8Our Adjusted EBITDA increased 18.1% to $115.8 million for the three months ended September 30, 2015, which includes a pre-tax non-operating gain of $29.6 million. Our Adjusted EBITDA for the three months ended September 30, 2016 increased 16.1%2017, compared to $98.1 million, compared to $84.5 million for the three months ended September 30, 2015, and our2016. Our Adjusted EBITDA margin was 10.6% for the three months ended September 30, 2017, compared to 9.3% for the three months ended September 30, 2016, compared to 8.3% for the three months ended September 30, 2015.2016.
Consolidated Operating Results for the Nine Months Ended September 30, 20162017
For the nine months ended September 30, 2016,2017, our net operating revenues increased 19.8%2.8% to $3,239.8$3,329.2 million, compared to $2,703.5$3,239.8 million for the nine months ended September 30, 2015. We had income2016. Income from operations ofincreased 14.5% to $279.5 million for the nine months ended September 30, 2017, compared to $244.1 million for the nine months ended September 30, 2016, compared to $212.52016. Net income was $99.6 million for the nine months ended September 30, 2015.2017, which includes pre-tax losses on early retirement of debt of $19.7 million. Net income was $104.8 million for the nine months ended September 30, 2016, which includes aincluded pre-tax non-operating gaingains of $37.1 million and a pre-tax losslosses on early retirement of debt of $11.6 million. Net income was $110.1Our Adjusted EBITDA increased 12.3% to $413.4 million for the nine months ended September 30, 2015, which includes a pre-tax non-operating gain of $29.6 million. Our Adjusted EBITDA2017, compared to $368.1 million for the nine months ended September 30, 2016 increased 23.4% to $368.1 million, compared to $298.3 million2016. Our Adjusted EBITDA margin was 12.4% for the nine months ended
September 30, 2015, and our Adjusted EBITDA margin was2017, compared to 11.4% for the nine months ended September 30, 2016, compared to 11.0% for the nine months ended September 30, 2015.2016.
Medicare ReimbursementImplementation of LTCH Services — Patient Criteria
As discussed below under “Regulatory Changes — Medicare Reimbursement of LTCH Services — Patient Criteria,” our LTCHs transitioned to new Medicare regulations, which establish newestablished payment limits for Medicare patients discharged from an LTCH who do not meet specified patient criteria, beganbeginning October 1, 2015. Since completing our transition to be phasedthe new LTCH Medicare patient criteria regulations during the third quarter of 2016, we have experienced an increase in toadmissions of patients eligible for the full LTCH-PPS standard reimbursement rate.
The table below illustrates the trends of our case mix index and occupancy percentages during the periods in which our LTCHs became subject to the new patient criteria requirements.
|
| 2015 |
| 2016 |
| 2017 |
| ||||||
|
| Occupancy |
| Case Mix |
| Occupancy |
| Case Mix |
| Occupancy |
| Case Mix |
|
Three months ended: |
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31 |
| 71 | % | 1.22 |
| 71 | % | 1.24 |
| 68 | % | 1.28 |
|
June 30 |
| 70 | % | 1.21 |
| 67 | % | 1.27 |
| 66 | % | 1.28 |
|
September 30 |
| 70 | % | 1.18 |
| 61 | % | 1.26 |
| 65 | % | 1.27 |
|
December 31 |
| 70 | % | 1.21 |
| 63 | % | 1.26 |
|
|
|
|
|
(1) Case mix index, which is calculated as the sum of all diagnostic-related group weights for the period divided by the sum of discharges for the same period, is reflective of the level of patient-acuity in our LTCHs.
From 2015 to 2017, our case mix index has increased, which is reflective of the fourthhigher-acuity patients we are now admitting under patient criteria. This has resulted in increases in our net revenue per patient day due to higher reimbursement rates for these cases. Our LTCH occupancy percentage reached its lowest level during the third quarter of 2015. As of September 30, 2016, which is the first quarter in which all of our LTCHs are now operatingoperated under the new Medicare payment rules.
New Specialty Hospitals
Select’s development of new specialty hospitals can result in start-up costs exceeding net operating revenues, if any, causing Adjusted EBITDA losses during the start-up period. Adjusted EBITDA losses for start-up hospitals were $9.0 million for the three months ended September 30, 2016, compared to $3.1 million for the three months ended September 30, 2015. Adjusted EBITDA losses for start-up hospitals were $19.4 million for the nine months ended September 30, 2016, compared to $11.9 million for the nine months ended September 30, 2015.
Significant Events
Physiotherapy AcquisitionRefinancing
On March 4, 2016,6, 2017, Select consummated the acquisition of 100% of the issued and outstanding equity securities of Physiotherapy. Select financed the acquisition usingentered into a combination of cash on handnew senior secured credit agreement that provides for $1.6 billion in senior secured credit facilities comprising a $1.15 billion, seven-year term loan and a portion$450.0 million, five-year revolving credit facility, including a $75.0 million sublimit for the issuance of the proceeds from the Series F Tranche B Term Loansstandby letters of credit. Select used borrowings under the new Select credit facilities as discussed below. Acquisition costs of $3.2 million were recognized as part of generalto: (i) repay the series E tranche B term loans due June 1, 2018, the series F tranche B term loans due March 31, 2021, and administrative expense on the consolidated statements of operations.revolving facility maturing March 1, 2018 under Select’s 2011 senior secured credit facility; and (ii) pay fees and expenses in connection with the refinancing.
SalePending Acquisition of Businesses
The Company recognized a non-operating gain of $42.1 million for the nine months ended September 30, 2016. The Company sold its contract therapy businesses for $65.0 million, resulting in a non-operating gain of $33.9 million. The Company also transferred five specialty hospitals in an exchange transaction and sold nine outpatient rehabilitation clinics, to a non-consolidating subsidiary, which resulted in non-operating gains of $6.5 million and $1.7 million, respectively.
IndebtednessU.S. HealthWorks
On September 26, 2016,October 23, 2017, Select announced that Concentra Group Holdings entered into thea Purchase Agreement dated October 22, 2017 with Concentra, Credit Agreement AmendmentGroup Holdings Parent, U.S. HealthWorks, and DHHC. Pursuant to the terms of the Purchase Agreement, Concentra first lienwill acquire the issued and outstanding shares of stock of U.S. HealthWorks, an occupational medicine and urgent care service provider.
In connection with the closing of the transaction, it is expected that Concentra Group Holdings will redeem certain of its outstanding equity interests from existing minority equity holders and subsequently, Concentra Group Holdings and a wholly owned subsidiary of Group Holdings Parent will merge, with Concentra Group Holdings surviving the merger and becoming a wholly owned subsidiary of Group Holdings Parent. As a result of the merger, the equity interests of Concentra Group Holdings outstanding after the redemption described above will be exchanged for membership interests in Group Holdings Parent.
The transaction values U.S. HealthWorks at $753.0 million, subject to certain customary adjustments for working capital, cash, debt, transaction expenses and other items in accordance with the terms of the Purchase Agreement. DHHC, a subsidiary of Dignity Health, will be issued a 20% equity interest in Group Holdings Parent, which is valued at $238.0 million. The remainder of the purchase price will be paid in cash. Select will retain a majority voting interest in Group Holdings Parent following the closing of the transaction.
Concentra expects to finance the transaction and related expenses using a proposed $555.0 million senior secured incremental term facility under its existing credit agreement. The amended agreement provided an additional $200.0facility and a proposed $240.0 million of first lien term loans due June 1, 2022, the net proceeds of which, together with cash on hand, were used to prepay in full Concentra’s second lien term loan due June 1, 2023. The reacquisition price of the second lien term loans was $202.0 million, and the prepayment resulted infacility, for which JP Morgan Chase, N.A. has provided Concentra with a loss on early retirement of debt of $10.9 million during the three months ended September 30, 2016.commitment letter.
On March 4, 2016, Select entered into an additional credit extension amendmentThe transaction, which is expected to close in the Select credit facilities, which among other changes, provided forfirst quarter of 2018, is subject to a number of closing conditions, including clearance under the lenders named therein to make available an aggregateHart-Scott-Rodino Antitrust Improvements Act of $625.0 million of Series F Tranche B Term Loans. Select used the proceeds of the Series F Tranche B Term1976, as amended.
Loans and cash on hand to (i) refinance in full the Series D Tranche B Term Loans due December 20, 2016, (ii) consummate the acquisition of Physiotherapy, and (iii) pay fees and expenses incurred in connection with the transactions. During the nine months ended September 30, 2016, we recognized a loss on early retirement of debt of $0.8 million.
Regulatory Changes
Our Annual Report on Form 10-K for the year ended December 31, 2015,2016, filed with the SEC on February 26, 2016,23, 2017, contains a detailed discussion of the regulations that affect our business in Part I — Business — Government Regulations. The following is a discussion of recentsome of the more significant healthcare regulatory changes that have affected our results of operationsfinancial performance in 2015the periods covered by this report or are likely to affect our financial performance and 2016 or may have an effect on our future results of operations.financial condition in the future. The information below should be read in conjunction with the more detailed discussion of regulations contained in our Form 10-K.
Medicare Reimbursement
The Medicare program reimburses healthcare providers for services furnished to Medicare beneficiaries, which are generally persons age 65 and older, those who are chronically disabled, and those suffering from end stage renal disease. The program is governed by the Social Security Act of 1965 and is administered primarily by the Department of Health and Human Services and CMS. Net operating revenues generated directly from the Medicare program represented approximately 30% of our consolidated net operating revenues for both the nine months ended September 30, 20162017 and 37% of our consolidated net operating revenues for the year ended December 31, 2015. The principal causes of the decrease in Medicare net operating revenues as a percentage of our total net operating revenues are the acquisitions of Concentra on June 1, 2015, and Physiotherapy on March 4, 2016, which both have a significantly lower relative percentage of Medicare net operating revenues as compared to our historical business prior to the acquisitions. Since the percentage of net operating revenues generated directly from the Medicare program have been historically higher in our specialty hospitals segment as compared to our outpatient rehabilitation and Concentra segments, we anticipate that the percentage of net operating revenues generated directly from the Medicare program will continue to decrease to the extent growth in our outpatient rehabilitation and Concentra segments outpaces growth in our specialty hospitals segment.2016.
The Medicare program reimburses our LTCHs, inpatient rehabilitation facilities (“IRFs”) and outpatient rehabilitation providers, using different payment methodologies.
The Medicare Access and CHIP Reauthorization Act of 2015, enacted on April 16, 2015, reforms Medicare payment policy for services paid under the Medicare physician fee schedule, including our outpatient rehabilitation services. The law repeals the sustainable growth rate (the ‘‘SGR’’) formula effective January 1, 2015, and establishes a new payment framework consisting of specified updates to the Medicare physician fee schedule, a new Merit-Based Incentive Payment System (‘‘MIPS’’), and incentives for participation in alternative payment models (‘‘APMs’’). To finance these provisions, the Medicare Access and CHIP Reauthorization Act of 2015 reduces market basket updates for post-acute care providers, including LTCHs and IRFs, among other Medicare payment cuts. As noted below, the law sets the annual prospective payment system update for fiscal year 2018 at 1% for LTCHs and IRFs, as well as skilled nursing facilities, home health agencies, and hospices. The law also extends the exceptions process for outpatient therapy caps through December 31, 2017.
Medicare Reimbursement of LTCH Services
There have been significant regulatory changes affecting LTCHs that have affected our net operating revenues and, in some cases, caused us to change our operating models and strategies. We have been subject to regulatory changes that occur through the rulemaking procedures of CMS. All Medicare payments to our LTCHs are made in accordance with long-termthe long term care hospital prospective payment system (“LTCH-PPS”). Proposed rules specifically related to LTCHs are generally published in April or May, finalized in August, and effective on October 1st of each year.
The following is a summary of significant changes to the Medicare prospective payment system for LTCHs which have affected our results of operations, as well as proposed policy and payment rate changes thatfinancial performance in the periods covered by this report or may affect our future results of operations.financial performance and financial condition in the future.
Fiscal Year 2015.2016 On August 22, 2014, CMS published the final rule updating policies and payment rates for LTCH-PPS for fiscal year 2015 (affecting discharges and cost reporting periods beginning on or after October 1, 2014 through September 30, 2015). The standard federal rate was set at $41,044, an increase from the standard federal rate applicable during fiscal year 2014 of $40,607. The update to the standard federal rate for fiscal year 2015 included a market basket increase of 2.9%, less a productivity adjustment of 0.5%, less a reduction of 0.2% mandated by the Affordable Care Act (“ACA”), and less a budget neutrality adjustment of 1.266%. The fixed-loss amount for high cost outlier cases was set at $14,972, an increase from the fixed-loss amount in the 2014 fiscal year of $13,314.
Fiscal Year 2016. On August 17, 2015, CMS published the final rule updating policies and payment rates for the LTCH-PPS for fiscal year 2016 (affecting discharges and cost reporting periods beginning on or after October 1, 2015 through September 30, 2016). The standard federal rate was set at $41,763, an increase from the standard federal rate applicable during fiscal year 2015 of $41,044. The update to the standard federal rate for fiscal year 2016 includesincluded a market basket increase of 2.4%, less a productivity adjustment of 0.5%, and less a reduction of 0.2% mandated by the ACA.Affordable Care Act (“ACA”). The fixed-lossfixed loss amount for high cost outlier cases paid under LTCH-PPS was set at $16,423, an increase from the fixed-lossfixed loss amount in the 2015 fiscal year of $14,972. The fixed-lossfixed loss amount for high cost outlier cases paid under the site-neutralsite neutral payment rate described below was set at $22,538.
Fiscal Year 2017.2017. On August 22, 2016, CMS published the final rule updating policies and payment rates for the LTCH-PPS for fiscal year 2017 (affecting discharges and cost reporting periods beginning on or after October 1, 2016 through September 30, 2017). The standard federal rate was set at $42,476, an increase from the standard federal rate applicable during fiscal year 2016 of $41,763. The update to the standard federal rate for fiscal year 2017 includesincluded a market basket increase of 2.8%, less a productivity adjustment of 0.3%, and less a reduction of 0.75% mandated by the ACA. The fixed-loss amount for high cost outlier cases paid under LTCH-PPS was set at $21,943, an increase from the fixed-loss amount in the 2016 fiscal year of $16,423. The fixed-loss amount for high cost outlier cases paid under the site-neutral payment rate was set at $23,570,$23,573, an increase from the fixed-loss amount in the 2016 fiscal year of $22,538.
Medicare Market Basket AdjustmentsFiscal Year 2018
The ACA instituted a market basket. On August 14, 2017, CMS published the final rule updating policies and payment adjustment to LTCHs. In fiscal years 2017 through 2019,rates for the market basket update will be reduced by 0.75%. The Medicare Access and CHIP Reauthorization Act of 2015 sets the annual updateLTCH-PPS for fiscal year 2018 at 1% after taking into account the market basket payment reduction of 0.75% mandated by the ACA. The ACA specifically allows these market basket reductions to result in less than a 0% payment update(affecting discharges and payment rates that are less than the prior year. For fiscal year 2017, CMS is rebasing the LTCH-specific market basket by replacing the 2009-based LTCH-specific market basket
with a 2013-based LTCH-specific market basket that is based on Medicare cost report data from cost reporting periods beginning on or after October 1, 20122017 through September 30, 2018). Certain errors in the final rule were corrected in a final rule published October 4, 2017. The standard federal rate was set at $41,415, a decrease from the standard federal rate applicable during fiscal year 2017 of $42,476. The update to the standard federal rate for fiscal year 2018 included a market basket increase of 2.7%, less a productivity adjustment of 0.6%, and before October 1, 2013.less a reduction of 0.75% mandated by the ACA. As noted below, the update to the standard federal rate for fiscal year 2018 is impacted further by the Medicare Access and CHIP Reauthorization Act of 2015, which limits the update for fiscal year 2018 to 1.0%. The fixed-loss amount for high cost outlier cases paid under LTCH-PPS was set at $27,381, an increase from the fixed-loss amount in the 2017 fiscal year of $21,943. The fixed-loss amount for high cost outlier cases paid under the site-neutral payment rate was set at $26,537, an increase from the fixed-loss amount in the 2017 fiscal year of $23,573.
Patient Criteria
The BBA of 2013, enacted December 26, 2013, establishes new payment limitsa dual-rate LTCH-PPS for Medicare patients discharged from an LTCH who do not meet specified criteria.LTCH. Specifically, for Medicare patients discharged in cost reporting periods beginning on or after October 1, 2015, LTCHs will be reimbursed underat the LTCH-PPS standard federal payment rate only if, immediately preceding the patient’s LTCH admission, the patient was discharged from a general“subsection (d) hospital” (generally, a short-term acute care hospital paid under IPPSthe inpatient prospective payment system, or “IPPS”) and either the patient’s stay included at least three days in an intensive care unit (ICU) or coronary care unit (CCU) at the subsection (d) hospital, or the patient iswas assigned to a Medicare severity diagnosis-related group (“MS-LTC-DRG”) for LTCHs (“MS-LTC-DRG”) for cases receiving at least 96 hours of ventilator services in the LTCH. In addition, to be paid underat the LTCH-PPS standard federal payment rate, the patient’s discharge from the LTCH may not include a principal diagnosis relating to psychiatric or rehabilitation services. For any Medicare patient who does not meet the newthese criteria, the LTCH will be paid a lower “site-neutral”“site neutral” payment rate, which will be the lower of (1) the inpatient prospective payment system (“IPPS”)of: (i) IPPS comparable per-diemper diem payment rate capped at the Medicare severity diagnosis-related group (“MS-DRG”) includingpayment rate plus any outlier payments,payments; or (2)(ii) 100 percent of the estimated costs for services.
The BBA of 2013 provides for a transition to the site-neutral payment rate for those patients not paid under LTCH-PPS.at the LTCH-PPS standard federal payment rate. During the transition period (cost(applicable to hospital cost reporting periods beginning on or after October 1, 2015 throughand on or before September 30, 2017), a blended rate will be paid for Medicare patients not meeting the new criteria. The blended rate will comprise halfcriteria that is equal to 50% of the site-neutral payment rate amount and half50% of the LTCH-PPSstandard federal payment rate.rate amount. For discharges in cost reporting periods beginning on or after October 1, 2017, only the site-neutral payment rate will apply for Medicare patients not meeting the new criteria.
In addition, for cost reporting periods beginning on or after October 1, 2019, qualifying discharges from an LTCH will continue to be paid at the LTCH-PPS standard federal payment rate, unless the number of discharges for which payment is made under the site-neutral payment rate is greater than 50% of the total number of discharges from the LTCH.LTCH for that period. If the number of discharges for which payment is made under the site-neutral payment rate is greater than 50%, then beginning in the next cost reporting period all discharges from the LTCH will be reimbursed at the site-neutral payment rate. The BBA of 2013 requires CMS to establish a process for an LTCH subject to only the site-neutral payment rate to re-qualifybe reinstated for payment under the dual-rate LTCH-PPS.
Payment adjustments, including the interrupted stay policy and the 25 Percent Rule (discussed below), apply to LTCH discharges regardless of whether the case is paid at the LTCH-PPSstandard federal payment rate or the site-neutral payment rate. However, short stay outlier payment adjustments do not apply to cases paid at the site-neutral payment rate after the transition period. Beginning in fiscal year 2016,rate. CMS calculates the annual recalibration of the MS-LTC-DRG relative payment weighting factors using only data from LTCH discharges that meet the criteria for exclusion from the site-neutral payment rate. In addition, beginning in fiscal year 2016, CMS applies the IPPS fixed-loss amount for high cost outliers to site-neutral cases, rather than the LTCH PPSLTCH-PPS fixed-loss amount. CMS calculates the LTCH-PPS fixed-loss amount using only data from cases paid at the LTCH-PPS payment rate, excluding cases paid at the site-neutral rate.
EachMedicare Market Basket Adjustments
The ACA instituted a market basket payment adjustment to LTCHs. In fiscal years 2018 and 2019, the market basket update will be reduced by 0.75%. The Medicare Access and CHIP Reauthorization Act of our LTCHs has their own unique2015 sets the annual cost reporting period. Asupdate for fiscal year 2018 at 1% after taking into account the market basket payment reduction of 0.75% mandated by the ACA. The ACA specifically allows these market basket reductions to result in less than a result,0% payment update and payment rates that are less than the new payment limits became effective for each LTCH at different points in time over the twelve month period that began on October 1, 2015. As of September 30, 2016, all of our LTCHs were operating under the new payment rules.prior year.
25 Percent Rule
The “25 Percent Rule” is a downward payment adjustment that applies if the percentage of Medicare patients discharged from LTCHs who were admitted from a referring hospital (regardless of whether the LTCH or LTCH satellite is co-located with the referring hospital) exceeds the applicable percentage admissions threshold during a particular cost reporting period. As more fully describedFor Medicare patients above the applicable percentage admissions threshold, the LTCH is reimbursed at a rate equivalent to that under “Business—Government Regulations,” various legislation has limitedgeneral acute care hospital IPPS, which is generally lower than LTCH-PPS rates. Cases that reach outlier status in the referring hospital do not count toward the admissions threshold and are paid under LTCH-PPS.
Current law, as amended by the 21st Century Cures Act, precludes CMS from applying the 25 Percent Rule for freestanding LTCHs to cost reporting years beginning before July 1, 2016 and for discharges occurring on or deferredafter October 1, 2016 and before October 1, 2017. In addition, current law applies higher percentage admissions thresholds under the full application25 Percent Rule for most hospitals within hospitals (“HIHs”) for cost reporting years beginning before July 1, 2016 and effective for discharges occurring on or after October 1, 2016 and before October 1, 2017. For freestanding LTCHs the percentage admissions threshold is suspended during the relief periods. For HIHs the percentage admissions threshold is raised from 25% to 50% during the relief periods. In the special case of rural LTCHs, LTCHs co-located with an urban single hospital, or LTCHs co-located with a Metropolitan Statistical Area (“MSA”) dominant hospital the referral percentage was raised from 50% to 75%. Grandfathered HIHs are exempt from the 25 Percent Rule regulations.
For fiscal year 2018, CMS adopted a regulatory moratorium on the implementation of the 25 Percent Rule. Each of our LTCHs has their own unique annual cost reporting period. As a result, the new payment limits will become effective for each of our LTCHs at different periods of time, commencing on or after July 1, 2016. In the third quarter 2016, 6 of our LTCHs became subject to the new payment limits. During the fourth quarter of 2016, and the first, second, and third quarters of 2017, 14, 36, 16, and 31 of our LTCHs will become subject to the new payment limits, respectively. The effect on our net operating revenues for the third quarter of 2016 was immaterial. We expect the effect on our net operating revenues in the fourth quarter of 2016 to be immaterial. We currently project that our net operating revenue for 2017 may be adversely affected by approximately $12.0 million if we are unable to mitigate the effects of the new payment limits.
For discharges that occurred prior to October 1, 2016, the 25 Percent Rule payment adjustments are found in two Medicare regulations, one that applies to Medicare patients admitted from a co-located referring hospital and one that applies to Medicare patients admitted from a referring hospital not co-located with the LTCH. After October 1, 2016, a single consolidated 25 Percent Rule applies to all LTCH discharges that occur in the LTCH’s cost reporting period that begins after the statutory moratoria on the full implementation of the 25 Percent Rule expires. The moratorium on the full application of the 25 Percent Rule applicable to co-located hospitals expired beginning with LTCH cost reporting periods beginning on or after July 1, 2016, while the moratorium on the full application of the 25 Percent Rule applicable to LTCHs not co-located with a referring hospital expired beginning with LTCH cost reporting periods beginningoccurring on or after October 1, 2016. Consequently,2018. After the expiration of the regulatory moratorium, our LTCHs that are subject to both Medicare regulations(whether freestanding, HIH or satellite) will continue to be subject to a downward payment adjustment for any Medicare patients who were admitted from a co-located or a non-co-located hospital and that exceed the moratoriumapplicable percentage admissions threshold of all Medicare patients discharged from the LTCH during the cost reporting period. These regulatory changes will have an adverse financial impact on the full applicationnet operating revenues and profitability of the 25 Percent Rule applicable to co-locatedmany of these hospitals until their cost reports beginningfor discharges on or after October 1, 2016.2018.
Short Stay Outlier Policy
CMS established a different payment methodology for Medicare patients with a length of stay less than or equal to five-sixths of the geometric average length of stay for that particular MS-LTC-DRG, referred to as a short stay outlier, or “SSO.” SSO cases are paid based on the lesser of (i) 100% of the average cost of the case, (ii) 120% of the MS-LTC-DRG specific per diem amount multiplied by the patient’s length of stay, (iii) the full MS-LTC-DRG payment, or (iv) a per diem rate derived from blending 120% of the MS-LTC-DRG specific per diem amount with a per diem rate based on the general acute care hospital IPPS.
For fiscal year 2018, CMS adopted changes to the SSO policy such that all SSO cases discharged on or after October 1, 2017 are paid based on a per diem rate derived from blending 120% of the MS-LTC-DRG specific per diem amount with a per diem rate based on the general acute care hospital IPPS. Under this policy, as the single consolidated 25 Percent Rule, CMS calculateslength of stay of a SSO case increases, the percentage of LTCH discharges referred from any hospitalthe per diem payment amounts based on a provider number basis only. An LTCH’sthe full MS-LTCH-DRG standard federal payment rate increases and the percentage of Medicare discharges from all locations of a given referring hospital would be determined during settlement of a cost report by dividing the LTCH’s total number of Medicare discharges in the cost reporting period (basedpayment based on the CMS Certification Number (CCN) on the claims) that were admitted directly from a given referring hospital (again determined by the CCN on the referring hospital’s claims) by the LTCH’s total number of Medicare discharges in the cost reporting period. LTCH discharges that reach high cost outlier status at the referring hospital are not subject to the 25 Percent Rule payment adjustment (that is, such discharges would only be included in an LTCH’s total Medicare discharges and would not count as having been admitted from that referring hospital), and to the extent the LTCH is exclusively located in an MSA-dominant area or rural area, the LTCH would have an increased applicable threshold under proposed special treatment for exclusively MSA-dominant or exclusively rural LTCHs.IPPS comparable amount decreases.
Moratorium on New LTCHs, LTCH Satellite Facilities and LTCH Bedsbeds
The Medicare, Medicaid, SCHIP Extension Act of 2007 imposedCurrent law imposes a moratorium on the establishment and classification of new LTCHs, LTCH satellite facilities and LTCH beds in existing LTCHs or satellite facilities subject to certain exceptions through December 28, 2012. The BBA of 2013, as amended by the PAMA, reinstated the moratorium on the establishment and classification of new LTCHs or LTCH satellite facilities, and on the increase of LTCH beds in existing LTCHs or satellite facilities beginning April 1, 2014 through
September 30, 2017 with certain2017. There are three exceptions to the moratorium for projects that are applicable to the establishment and classification of new LTCHs or LTCH satellite facilitieswere under development prior towhen the moratorium began on April 1, 2014. Only one exception needs to exist for the moratorium not to apply.
Medicare Reimbursement of Inpatient Rehabilitation Facility Services
The following is a summary of significant changes to the Medicare prospective payment system for IRFsinpatient rehabilitation facilities (“IRFs”) which have affected our results of operations duringfinancial performance in the periods presented incovered by this report as well as the policies and payment rates for fiscal year 2016 whichor may affect our patient dischargesfinancial performance and cost reporting periods beginning on or after October 1, 2015.financial condition in the future. Medicare payments to our IRFs are made in accordance with the inpatient rehabilitation facility prospective payment system (“IRF-PPS”).
Fiscal Year 2015.2016 On August 6, 2014, CMS published the final rule updating policies and payment rates for IRF-PPS for fiscal year 2015 (affecting discharges and cost reporting periods beginning on or after October 1, 2014 through September 30, 2015). The standard payment conversion factor for discharges for fiscal year 2015 was set at $15,198, an increase from the standard payment conversion factor applicable during fiscal year 2014 of $14,846. The update to the standard payment conversion factor for fiscal year 2015 included a market basket increase of 2.9%, less a productivity adjustment of 0.5%, and less a reduction of 0.2% mandated by the ACA. CMS decreased the outlier threshold amount for fiscal year 2015 to $8,848 from $9,272 established in the final rule for fiscal year 2014.
Fiscal Year 2016. On August 6, 2015, CMS published the final rule updating policies and payment rates for the IRF-PPS for fiscal year 2016 (affecting discharges and cost reporting periods beginning on or after October 1, 2015 through September 30, 2016). The standard payment conversion factor for discharges for fiscal year 2016 was set at $15,478, an increase from the standard payment conversion factor applicable during fiscal year 2015 of $15,198. The update to the standard payment conversion factor for fiscal year 2016 includesincluded a market basket increase of 2.4%, less a productivity adjustment of 0.5%, and less a reduction of 0.2% mandated by the ACA. CMS decreased the outlier threshold amount for fiscal year 2016 to $8,658 from $8,848 established in the final rule for fiscal year 2015.
Fiscal Year 2017.2017. On August 5, 2016, CMS published the final rule updating policies and payment rates for the IRF-PPS for fiscal year 2017 (affecting discharges and cost reporting periods beginning on or after October 1, 2016 through September 30, 2017). The standard payment conversion factor for discharges for fiscal year 2017 was set at $15,708, an increase from the standard payment conversion factor applicable during fiscal year 2016 of $15,478. The update to the standard payment conversion factor for fiscal year 2017 includesincluded a market basket increase of 2.7%, less a productivity adjustment of 0.3%, and less a reduction of 0.75% mandated by the ACA. CMS decreased the outlier threshold amount for fiscal year 2017 to $7,984 from $8,658 established in the final rule for fiscal year 2016.
Fiscal Year 2018. On August 3, 2017, CMS published the final rule updating policies and payment rates for the IRF-PPS for fiscal year 2018 (affecting discharges and cost reporting periods beginning on or after October 1, 2017 through September 30, 2018). The standard payment conversion factor for discharges for fiscal year 2018 was set at $15,838, an increase from the standard payment conversion factor applicable during fiscal year 2017 of $15,708. The update to the standard payment conversion factor for fiscal year 2018 included a market basket increase of 2.6%, less a productivity adjustment of 0.6%, and less a reduction of 0.75% mandated by the ACA. As noted below, the standard payment conversion factor for fiscal year 2018 is impacted further by the Medicare Access and CHIP Reauthorization Act of 2015, which limits the update for fiscal year 2018 to 1.0%. CMS increased the outlier threshold amount for fiscal year 2018 to $8,679 from $7,984 established in the final rule for fiscal year 2017.
Medicare Market Basket Adjustments
The ACA instituted a market basket payment adjustment for IRFs. In fiscal years 2017 through2018 and 2019, the market basket update will be reduced by 0.75%. The Medicare Access and CHIP Reauthorization Act of 2015 sets the annual update for fiscal year 2018 at 1% after taking into account the market basket payment reduction of 0.75% mandated by the ACA. The ACA specifically allows these market basket reductions to result in less than a 0% payment update and payment rates that are less than the prior year.
Patient Classification Criteria
In order to qualify as an IRF a hospital must demonstrate that during its most recent twelve month cost reporting period it served an inpatient population of whom at least 60% required intensive rehabilitation services for one or more of 13 conditions specified by regulation. Compliance with the 60% rule is demonstrated through either medical review or the “presumptive” method, in which a patient’s diagnosis codes are compared to a “presumptive compliance” list. For fiscal year 2018, CMS revised the 60% rule’s presumptive methodology by (i) including certain International Classification of Diseases, Tenth Revision, Clinical Modification (“ICD-10-CM”) diagnosis codes for patients with traumatic brain injury and hip fracture conditions; and (ii) revising the presumptive methodology list for major multiple trauma by counting IRF cases that contain two or more of the ICD-10-CM codes from three major multiple trauma lists in the specified combinations.
Medicare Reimbursement of Outpatient Rehabilitation Services
The Medicare program reimburses outpatient rehabilitation providers based on the Medicare physician fee schedule. Historically, the Medicare physician fee schedule rates have updated annually based on the SGR formula. The SGR formula has resulted in automatic reductions in rates every year since 2002; however, for
each year through March 31, 2015, CMS or Congress has taken action to prevent the SGR formula reductions. The Medicare Access and CHIP Reauthorization Act of 2015 repeals the SGR formula effective for services provided on or after January 1, 2015, and establishes a new payment framework consisting of specified updates to the Medicare physician fee schedule, a new MIPS, and APMs. For services provided between January 1, 2015 and June 30, 2015, a 0% payment update was applied to the Medicare physician fee schedule payment rates. For services provided between July 1, 2015 and December 31, 2015, a 0.5% update was applied to the fee schedule payment rates. For services provided in 20162017 through 2019, a 0.5% update will be applied each year to the fee schedule payment rates, subject to MIPSan adjustment beginning in 2019.2019 under the Merit-Based Incentive Payment System (“MIPS”). For services provided in 2020 through 2025, a 0.0% percent update will be applied each year to the fee schedule payment rates, subject to adjustments under MIPS and APM adjustments. Finally, inthe alternative payment models (“APMs”). In 2026 and subsequent years eligible professionals participating in APMs that meet certain criteria would receive annual updates of 0.75%, while all other professionals would receive annual updates of 0.25%.
The Medicare Access and CHIP Reauthorization Act of 2015 requires thatBeginning in 2019, payments under the fee schedule be adjusted starting in 2019are subject to adjustment based on performance in MIPS, which will consolidate the three existing incentive programs focusedmeasures performance based on certain quality metrics, resource use, and meaningful use of electronic health records. The law requires the Secretary of Health and Human Services to establishUnder the MIPS requirements under which a provider’s performance is assessed according to established performance standards and used to determine an adjustment factor that is then applied to the professional’s payment for a year. Each year from 2019-20242019 through 2024 professionals who receive a significant share of their revenues through an APM (such as accountable care organizations or bundled payment arrangements) that involves risk of financial losses and a quality measurement component will receive a 5% bonus. The bonus payment for APM participation is intended to encourage participation and testing of new APMs and promotesto promote the alignment of incentives across payors. The specifics of the MIPS and APM adjustments beginning in 2019 and 2020, respectively, will be subject to future notice and comment rule-making. For the year ended December 31, 2015, we received approximately 11% of our outpatient rehabilitation net operating revenues from Medicare.
Operating Statistics
The following tables settable sets forth operating statistics for each of our operating segments for each of the periods presented. The operating statistics reflect data for the period of time we managed these operations:
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| 2015 |
| 2016 |
| 2015 |
| 2016 |
| ||||
Specialty Hospitals Data(1): |
|
|
|
|
|
|
|
|
| ||||
Number of hospitals owned - start of period |
| 119 |
| 116 |
| 120 |
| 118 |
| ||||
Number of hospitals acquired |
| — |
| 1 |
| 1 |
| 4 |
| ||||
Number of hospital start-ups |
| — |
| 1 |
| 1 |
| 2 |
| ||||
Number of hospitals closed/sold |
| (1 | ) | (3 | ) | (4 | ) | (9 | ) | ||||
Number of hospitals owned - end of period |
| 118 |
| 115 |
| 118 |
| 115 |
| ||||
Number of hospitals managed - end of period |
| 9 |
| 8 |
| 9 |
| 8 |
| ||||
Total number of hospitals (all) - end of period |
| 127 |
| 123 |
| 127 |
| 123 |
| ||||
Long term acute care hospitals |
| 110 |
| 104 |
| 110 |
| 104 |
| ||||
Rehabilitation hospitals |
| 17 |
| 19 |
| 17 |
| 19 |
| ||||
Available licensed beds (2) |
| 5,150 |
| 5,208 |
| 5,150 |
| 5,208 |
| ||||
Admissions (2) |
| 13,927 |
| 12,586 |
| 42,352 |
| 39,541 |
| ||||
Patient days (2) |
| 338,412 |
| 296,202 |
| 1,034,166 |
| 951,292 |
| ||||
Average length of stay (days) (2) |
| 24 |
| 24 |
| 24 |
| 24 |
| ||||
Net revenue per patient day (2)(3) |
| $ | 1,522 |
| $ | 1,642 |
| $ | 1,563 |
| $ | 1,651 |
|
Occupancy rate (2) |
| 71 | % | 62 | % | 72 | % | 67 | % | ||||
Percent patient days - Medicare (2) |
| 59 | % | 53 | % | 60 | % | 55 | % | ||||
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| 2015 |
| 2016 |
| 2015 |
| 2016 |
| ||||
Outpatient Rehabilitation Data: |
|
|
|
|
|
|
|
|
| ||||
Number of clinics owned - start of period |
| 881 |
| 1,435 |
| 880 |
| 896 |
| ||||
Number of clinics acquired |
| — |
| 3 |
| 7 |
| 546 |
| ||||
Number of clinic start-ups |
| 11 |
| 7 |
| 19 |
| 20 |
| ||||
Number of clinics closed/sold |
| (2 | ) | (8 | ) | (16 | ) | (25 | ) | ||||
Number of clinics owned - end of period |
| 890 |
| 1,437 |
| 890 |
| 1,437 |
| ||||
Number of clinics managed - end of period |
| 143 |
| 166 |
| 143 |
| 166 |
| ||||
Total number of clinics (all) - end of period |
| 1,033 |
| 1,603 |
| 1,033 |
| 1,603 |
| ||||
Number of visits (2) |
| 1,306,637 |
| 2,052,678 |
| 3,879,409 |
| 5,751,562 |
| ||||
Net revenue per visit (2)(4) |
| $ | 103 |
| $ | 102 |
| $ | 103 |
| $ | 102 |
|
(Operating statistics by business segment and related footnotes are continued next page)
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| 2015 |
| 2016 |
| 2015 |
| 2016 |
| ||||
Concentra Data: |
|
|
|
|
|
|
|
|
| ||||
Number of centers owned - start of period |
| 300 |
| 301 |
| — |
| 300 |
| ||||
Number of centers acquired |
| — |
| 1 |
| 300 |
| 3 |
| ||||
Number of centers start-ups |
| — |
| — |
| — |
| — |
| ||||
Number of centers closed/sold |
| — |
| (1 | ) | — |
| (2 | ) | ||||
Total number of centers - end of period |
| 300 |
| 301 |
| 300 |
| 301 |
| ||||
Number of visits (5) |
| 1,980,496 |
| 1,906,242 |
| 2,654,330 |
| 5,642,305 |
| ||||
Net revenue per visit (5)(6) |
| $ | 114 |
| $ | 119 |
| $ | 114 |
| $ | 118 |
|
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| ||||||||
|
| 2016 |
| 2017 |
| 2016 |
| 2017 |
| ||||
Specialty hospitals data:(1) |
|
|
|
|
|
|
|
|
| ||||
Number of hospitals owned—start of period |
| 116 |
| 114 |
| 118 |
| 115 |
| ||||
Number of hospitals acquired |
| 1 |
| — |
| 4 |
| 1 |
| ||||
Number of hospital start-ups |
| 1 |
| 2 |
| 2 |
| 2 |
| ||||
Number of hospitals closed/sold |
| (3 | ) | (2 | ) | (9 | ) | (4 | ) | ||||
Number of hospitals owned—end of period |
| 115 |
| 114 |
| 115 |
| 114 |
| ||||
Number of hospitals managed—end of period |
| 8 |
| 9 |
| 8 |
| 9 |
| ||||
Total number of hospitals (all)—end of period |
| 123 |
| 123 |
| 123 |
| 123 |
| ||||
Long term acute care hospitals |
| 104 |
| 101 |
| 104 |
| 101 |
| ||||
Rehabilitation hospitals |
| 19 |
| 22 |
| 19 |
| 22 |
| ||||
Available licensed beds(2) |
| 5,208 |
| 5,189 |
| 5,208 |
| 5,189 |
| ||||
Admissions(2) |
| 12,586 |
| 13,728 |
| 39,541 |
| 41,314 |
| ||||
Patient days(2) |
| 296,202 |
| 316,170 |
| 951,292 |
| 950,419 |
| ||||
Average length of stay (days)(2) |
| 24 |
| 23 |
| 24 |
| 23 |
| ||||
Net revenue per patient day(2)(3) |
| $ | 1,642 |
| $ | 1,676 |
| $ | 1,651 |
| $ | 1,707 |
|
Occupancy rate(2) |
| 62 | % | 66 | % | 67 | % | 67 | % | ||||
Percent patient days—Medicare(2) |
| 53 | % | 53 | % | 55 | % | 54 | % | ||||
|
|
|
|
|
|
|
|
|
| ||||
Outpatient rehabilitation data: |
|
|
|
|
|
|
|
|
| ||||
Number of clinics owned—start of period |
| 1,435 |
| 1,441 |
| 896 |
| 1,445 |
| ||||
Number of clinics acquired |
| 3 |
| 4 |
| 546 |
| 5 |
| ||||
Number of clinic start-ups |
| 7 |
| 3 |
| 20 |
| 17 |
| ||||
Number of clinics closed/sold |
| (8 | ) | (13 | ) | (25 | ) | (32 | ) | ||||
Number of clinics owned—end of period |
| 1,437 |
| 1,435 |
| 1,437 |
| 1,435 |
| ||||
Number of clinics managed—end of period |
| 166 |
| 169 |
| 166 |
| 169 |
| ||||
Total number of clinics (all)—end of period |
| 1,603 |
| 1,604 |
| 1,603 |
| 1,604 |
| ||||
Number of visits(2) |
| 2,052,678 |
| 1,986,213 |
| 5,751,562 |
| 6,168,763 |
| ||||
Net revenue per visit(2)(4) |
| $ | 102 |
| $ | 104 |
| $ | 102 |
| $ | 103 |
|
|
|
|
|
|
|
|
|
|
| ||||
Concentra data: |
|
|
|
|
|
|
|
|
| ||||
Number of centers owned—start of period |
| 301 |
| 315 |
| 300 |
| 300 |
| ||||
Number of centers acquired |
| 1 |
| — |
| 3 |
| 11 |
| ||||
Number of center start-ups |
| — |
| — |
| — |
| 4 |
| ||||
Number of centers closed/sold |
| (1 | ) | (3 | ) | (2 | ) | (3 | ) | ||||
Number of centers owned—end of period |
| 301 |
| 312 |
| 301 |
| 312 |
| ||||
Number of visits(5) |
| 1,906,242 |
| 1,979,481 |
| 5,642,305 |
| 5,848,551 |
| ||||
Net revenue per visit(5)(6) |
| $ | 119 |
| $ | 116 |
| $ | 118 |
| $ | 117 |
|
(1) Specialty hospitals consist of LTCHs and IRFs.
(2) Data excludes specialty hospitals and outpatient clinics managed by the Company.
(3) Net revenue per patient day is calculated by dividing specialty hospitals direct patient service revenues by the total number of patient days.
(4) Net revenue per visit is calculated by dividing outpatient rehabilitation clinic direct patient service revenue by the total number of visits and excludesvisits. For purposes of this computation, outpatient rehabilitation direct patient service clinic revenue does not include managed clinics or contract therapy revenue for all periods presented.
revenue.
(5) Data excludes onsite clinics and CBOCs.
(6) Net revenue per visit is calculated by dividing center direct patient service revenue by the total number of center visits.
Results of Operations
The following table outlines selected operating data as a percentage of net operating revenues for the periods indicated:
|
| Three Months Ended |
| Nine Months Ended |
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| ||||||||
|
| 2015 |
| 2016 |
| 2015 |
| 2016 |
|
| 2016 |
| 2017 |
| 2016 |
| 2017 |
|
Net operating revenues |
| 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
| 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
Cost of services(1) |
| 88.2 |
| 86.9 |
| 85.4 |
| 85.0 |
| |||||||||
Cost of services(1) |
| 86.9 |
| 85.6 |
| 85.0 |
| 83.7 |
| |||||||||
General and administrative |
| 2.2 |
| 2.6 |
| 2.5 |
| 2.5 |
|
| 2.6 |
| 2.5 |
| 2.5 |
| 2.5 |
|
Bad debt expense |
| 1.8 |
| 1.7 |
| 1.6 |
| 1.6 |
|
| 1.7 |
| 1.9 |
| 1.6 |
| 1.8 |
|
Depreciation and amortization |
| 3.1 |
| 3.5 |
| 2.6 |
| 3.4 |
|
| 3.5 |
| 3.4 |
| 3.4 |
| 3.6 |
|
Income from operations |
| 4.7 |
| 5.3 |
| 7.9 |
| 7.5 |
|
| 5.3 |
| 6.6 |
| 7.5 |
| 8.4 |
|
Loss on early retirement of debt |
| — |
| (1.0 | ) | — |
| (0.4 | ) |
| (1.0 | ) | — |
| (0.4 | ) | (0.6 | ) |
Equity in earnings of unconsolidated subsidiaries |
| 0.6 |
| 0.5 |
| 0.5 |
| 0.5 |
|
| 0.5 |
| 0.3 |
| 0.5 |
| 0.5 |
|
Non-operating gain (loss) |
| 2.9 |
| (0.1 | ) | 1.1 |
| 1.1 |
|
| (0.1 | ) | — |
| 1.1 |
| (0.0 | ) |
Interest expense |
| (3.2 | ) | (4.2 | ) | (3.0 | ) | (3.9 | ) |
| (4.2 | ) | (3.4 | ) | (3.9 | ) | (3.5 | ) |
Income before income taxes |
| 5.0 |
| 0.5 |
| 6.5 |
| 4.8 |
|
| 0.5 |
| 3.5 |
| 4.8 |
| 4.8 |
|
Income tax expense |
| 1.8 |
| 0.1 |
| 2.4 |
| 1.6 |
|
| 0.1 |
| 1.2 |
| 1.6 |
| 1.8 |
|
Net income |
| 3.2 |
| 0.4 |
| 4.1 |
| 3.2 |
|
| 0.4 |
| 2.3 |
| 3.2 |
| 3.0 |
|
Net income (loss) attributable to non-controlling interests |
| 0.3 |
| (0.2 | ) | 0.3 |
| 0.3 |
|
| (0.2 | ) | 0.6 |
| 0.3 |
| 0.7 |
|
Net income attributable to Holdings and Select |
| 2.9 | % | 0.6 | % | 3.8 | % | 2.9 | % |
| 0.6 | % | 1.7 | % | 2.9 | % | 2.3 | % |
(1) Cost of services includes salaries, wages and benefits, operating supplies, lease and rent expense and other operating costs.
The following tables summarizetable summarizes selected financial data by business segment for the periods indicated:
|
| For the Three Months Ended |
| For the Nine Months Ended |
| ||||||||||||
|
| 2015 |
| 2016 |
| % Change |
| 2015 |
| 2016 |
| % Change |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Specialty hospitals |
| $ | 562,328 |
| $ | 544,491 |
| (3.2 | )% | $ | 1,753,445 |
| $ | 1,729,261 |
| (1.4 | )% |
Outpatient rehabilitation(1) |
| 199,593 |
| 250,710 |
| 25.6 |
| 603,831 |
| 745,720 |
| 23.5 |
| ||||
Concentra(2) |
| 258,969 |
| 258,507 |
| (0.2 | ) | 345,798 |
| 764,252 |
| N/M |
| ||||
Other(3) |
| 233 |
| 87 |
| (62.7 | ) | 457 |
| 523 |
| 14.4 |
| ||||
Total company |
| $ | 1,021,123 |
| $ | 1,053,795 |
| 3.2 | % | $ | 2,703,531 |
| $ | 3,239,756 |
| 19.8 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Income (loss) from operations: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Specialty hospitals |
| $ | 39,874 |
| $ | 33,947 |
| (14.9 | )% | $ | 201,166 |
| $ | 175,737 |
| (12.6 | )% |
Outpatient rehabilitation(1) |
| 20,560 |
| 25,836 |
| 25.7 |
| 65,098 |
| 82,609 |
| 26.9 |
| ||||
Concentra(2) |
| 11,457 |
| 25,417 |
| 121.8 |
| 13,747 |
| 71,933 |
| N/M |
| ||||
Other(3) |
| (23,677 | ) | (29,038 | ) | (22.6 | ) | (67,521 | ) | (86,177 | ) | (27.6 | ) | ||||
Total company |
| $ | 48,214 |
| $ | 56,162 |
| 16.5 | % | $ | 212,490 |
| $ | 244,102 |
| 14.9 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Adjusted EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Specialty hospitals |
| $ | 53,656 |
| $ | 48,264 |
| (10.0 | )% | $ | 241,575 |
| $ | 217,759 |
| (9.9 | )% |
Outpatient rehabilitation(1) |
| 23,807 |
| 31,995 |
| 34.4 |
| 74,662 |
| 99,006 |
| 32.6 |
| ||||
Concentra(2) |
| 25,584 |
| 40,888 |
| 59.8 |
| 36,783 |
| 118,080 |
| N/M |
| ||||
Other(3) |
| (18,536 | ) | (23,070 | ) | (24.5 | ) | (54,672 | ) | (66,696 | ) | (22.0 | ) | ||||
Total company |
| $ | 84,511 |
| $ | 98,077 |
| 16.1 | % | $ | 298,348 |
| $ | 368,149 |
| 23.4 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Adjusted EBITDA margin: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Specialty hospitals |
| 9.5 | % | 8.9 | % |
|
| 13.8 | % | 12.6 | % |
|
| ||||
Outpatient rehabilitation(1) |
| 11.9 |
| 12.8 |
|
|
| 12.4 |
| 13.3 |
|
|
| ||||
Concentra(2) |
| 9.9 |
| 15.8 |
|
|
| 10.6 |
| 15.5 |
|
|
| ||||
Other(3) |
| N/M |
| N/M |
|
|
| N/M |
| N/M |
|
|
| ||||
Total company |
| 8.3 | % | 9.3 | % |
|
| 11.0 | % | 11.4 | % |
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Purchases of property and equipment: |
|
|
|
|
|
|
|
|
|
|
| ||||||
Specialty hospitals |
| $ | 27,494 |
| $ | 24,378 |
|
|
| $ | 81,329 |
| $ | 79,366 |
|
|
|
Outpatient rehabilitation(1) |
| 4,023 |
| 6,234 |
|
|
| 11,048 |
| 15,032 |
|
|
| ||||
Concentra(2) |
| 9,640 |
| 2,720 |
|
|
| 13,494 |
| 10,647 |
|
|
| ||||
Other(3) |
| 3,923 |
| 4,670 |
|
|
| 8,121 |
| 13,215 |
|
|
| ||||
Total company |
| $ | 45,080 |
| $ | 38,002 |
|
|
| $ | 113,992 |
| $ | 118,260 |
|
|
|
(Selected financial data by business segment and related footnotes are continued next page)
|
| As of September 30, |
| ||||
|
| 2015 |
| 2016 |
| ||
|
| (in thousands) |
| ||||
Total assets: |
|
|
|
|
| ||
Specialty hospitals |
| $ | 2,333,049 |
| $ | 2,461,751 |
|
Outpatient rehabilitation |
| 541,435 |
| 977,431 |
| ||
Concentra(2) |
| 1,332,975 |
| 1,327,438 |
| ||
Other(3) |
| 106,946 |
| 78,785 |
| ||
Total company |
| $ | 4,314,405 |
| $ | 4,845,405 |
|
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| ||||||||||||
|
| 2016 |
| 2017 |
| % Change |
| 2016 |
| 2017 |
| % Change |
| ||||
|
| (in thousands) |
| ||||||||||||||
Net operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Specialty hospitals |
| $ | 544,491 |
| $ | 585,288 |
| 7.5 | % | $ | 1,729,261 |
| $ | 1,785,035 |
| 3.2 | % |
Outpatient rehabilitation(1) |
| 250,710 |
| 250,527 |
| (0.1 | ) | 745,720 |
| 764,450 |
| 2.5 |
| ||||
Concentra |
| 258,507 |
| 261,295 |
| 1.1 |
| 764,252 |
| 779,030 |
| 1.9 |
| ||||
Other(2) |
| 87 |
| 56 |
| N/M |
| 523 |
| 687 |
| N/M |
| ||||
Total Company |
| $ | 1,053,795 |
| $ | 1,097,166 |
| 4.1 | % | $ | 3,239,756 |
| $ | 3,329,202 |
| 2.8 | % |
Income (loss) from operations: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Specialty hospitals |
| $ | 33,947 |
| $ | 54,017 |
| 59.1 | % | $ | 175,737 |
| $ | 206,900 |
| 17.7 | % |
Outpatient rehabilitation(1) |
| 25,836 |
| 23,334 |
| (9.7 | ) | 82,609 |
| 84,393 |
| 2.2 |
| ||||
Concentra |
| 25,417 |
| 24,777 |
| (2.5 | ) | 71,933 |
| 78,308 |
| 8.9 |
| ||||
Other(2) |
| (29,038 | ) | (30,030 | ) | (3.4 | ) | (86,177 | ) | (90,075 | ) | (4.5 | ) | ||||
Total Company |
| $ | 56,162 |
| $ | 72,098 |
| 28.4 | % | $ | 244,102 |
| $ | 279,526 |
| 14.5 | % |
Adjusted EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Specialty hospitals |
| $ | 48,264 |
| $ | 69,454 |
| 43.9 | % | $ | 217,759 |
| $ | 256,291 |
| 17.7 | % |
Outpatient rehabilitation(1) |
| 31,995 |
| 29,298 |
| (8.4 | ) | 99,006 |
| 102,575 |
| 3.6 |
| ||||
Concentra |
| 40,888 |
| 40,003 |
| (2.2 | ) | 118,080 |
| 125,656 |
| 6.4 |
| ||||
Other(2) |
| (23,070 | ) | (22,928 | ) | 0.6 |
| (66,696 | ) | (71,125 | ) | (6.6 | ) | ||||
Total Company |
| $ | 98,077 |
| $ | 115,827 |
| 18.1 | % | $ | 368,149 |
| $ | 413,397 |
| 12.3 | % |
Adjusted EBITDA margins: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Specialty hospitals |
| 8.9 | % | 11.9 | % |
|
| 12.6 | % | 14.4 | % |
|
| ||||
Outpatient rehabilitation(1) |
| 12.8 |
| 11.7 |
|
|
| 13.3 |
| 13.4 |
|
|
| ||||
Concentra |
| 15.8 |
| 15.3 |
|
|
| 15.5 |
| 16.1 |
|
|
| ||||
Other(2) |
| N/M |
| N/M |
|
|
| N/M |
| N/M |
|
|
| ||||
Total Company |
| 9.3 | % | 10.6 | % |
|
| 11.4 | % | 12.4 | % |
|
| ||||
Total assets:(3) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Specialty hospitals |
| $ | 2,469,060 |
| $ | 2,748,761 |
|
|
| $ | 2,469,060 |
| $ | 2,748,761 |
|
|
|
Outpatient rehabilitation |
| 955,359 |
| 945,765 |
|
|
| 955,359 |
| 945,765 |
|
|
| ||||
Concentra |
| 1,318,866 |
| 1,332,012 |
|
|
| 1,318,866 |
| 1,332,012 |
|
|
| ||||
Other(2) |
| 73,992 |
| 97,269 |
|
|
| 73,992 |
| 97,269 |
|
|
| ||||
Total Company |
| $ | 4,817,277 |
| $ | 5,123,807 |
|
|
| $ | 4,817,277 |
| $ | 5,123,807 |
|
|
|
Purchases of property and equipment, net: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Specialty hospitals |
| $ | 24,378 |
| $ | 37,376 |
|
|
| $ | 79,366 |
| $ | 106,424 |
|
|
|
Outpatient rehabilitation(1) |
| 6,234 |
| 6,496 |
|
|
| 15,032 |
| 19,370 |
|
|
| ||||
Concentra |
| 2,720 |
| 5,369 |
|
|
| 10,647 |
| 21,656 |
|
|
| ||||
Other(2) |
| 4,670 |
| 19,257 |
|
|
| 13,215 |
| 26,350 |
|
|
| ||||
Total Company |
| $ | 38,002 |
| $ | 68,498 |
|
|
| $ | 118,260 |
| $ | 173,800 |
|
|
|
N/M — M—Not Meaningful
Meaningful.
(1) The outpatient rehabilitation segment includes the operating results of our contract therapy businesses through March 31, 2016 and Physiotherapy beginning March 4, 2016.
(2) Concentra’s operating results are consolidated with Select’s effective June 1, 2015.
(3) Other includes our corporate services and certain other non-consolidating joint ventures and minority investments in other healthcare related businessesbusinesses.
(3) Reflects the retrospective adoption of ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. Total assets as of September 30, 2016 were retrospectively conformed to reflect the adoption of the standard, resulting in a reduction to total assets of $28.1 million.
Three Months Ended September 30, 2016,2017 Compared to Three Months Ended September 30, 20152016
In the following, we discuss our results of operations related to net operating revenues, operating expenses, Adjusted EBITDA, depreciation and amortization, income from operations, loss on early retirement of debt, equity in earnings of unconsolidated subsidiaries, non-operating gain (loss), interest expense, income taxes, and net income (loss) attributable to non-controlling interest,interests, which, in each case, are the same for Holdings and Select.
Net Operating Revenues
Our net operating revenues increased by 3.2%4.1% to $1,053.8$1,097.2 million for the three months ended September 30, 2016,2017, compared to $1,021.1$1,053.8 million for the three months ended September 30, 2015, principally due to the acquisition of Physiotherapy on March 4, 2016.
Specialty Hospitals Segment.. Our specialty hospitals segment net Net operating revenues declined 3.2%increased 7.5% to $585.3 million for the three months ended September 30, 2017, compared to $544.5 million for the three months ended September 30, 2016 comparedfor our specialty hospitals segment. The increase in net operating revenues is principally due to $562.3 millionseveral new inpatient rehabilitation facilities which commenced operations during 2016 and 2017 and an increase in patient volumes at our LTCHs. Our patient days increased 6.7% to 316,170 days for the three months ended September 30, 2015. The primary reason for this decrease was a decline in our patient days which decreased 12.5%2017, compared to 296,202 days for the three months ended September 30, 2016, compared2016. The average net revenue per patient day for our specialty hospitals increased 2.1% to 338,412 days$1,676 for the three months ended September 30, 2015. As discussed above under “Regulatory Changes — Medicare Reimbursement of LTCH Services — Patient Criteria,” new Medicare regulations, which establish new payment limits for Medicare patients discharged from an LTCH who do not meet specified patient criteria, began to be phased in to our LTCHs in the fourth quarter of 2015. We experienced fewer Medicare patient days during the three months ended September 30, 2016 due to changes we implemented at our LTCHs operating under the new Medicare patient criteria regulations, and specialty hospital closures and sales. This decrease in patient days was offset in part by increases in our Medicare net revenue per patient day. Our average net revenue per patient day for all of our specialty hospitals increased 7.9%2017, compared to $1,642 for the three months ended September 30, 2016, compared to $1,5222016.
Outpatient Rehabilitation Segment. Net operating revenues were $250.5 million for the three months ended September 30, 2015, principally as a result of increases in our Medicare net revenue per patient day. The increase in our Medicare net revenue per patient day resulted primarily from the increase in patient acuity at LTCHs now operating under the Medicare patient criteria
regulations. Our occupancy percentage declined to 62% for the three months ended September 30, 2016,2017, compared to 71% for the three months ended September 30, 2015.
Outpatient Rehabilitation. Our outpatient rehabilitation segment net operating revenues increased 25.6% to $250.7 million for the three months ended September 30, 2016 compared to $199.6 million for three months ended September 30, 2015. This increase resulted from growth in our outpatient rehabilitation segment. The decrease in net operating revenues was principally due to a decline in visits within areas affected by Hurricanes Harvey and Irma, which caused an estimated $2.9 million decrease in net operating revenues. Additionally, we experienced a decline in visits at Physiotherapy clinics offset in part by the salewithin some of our contract therapy businesses. Patientmarkets. We had 1,986,213 visits in our outpatient clinics were 2,052,678 for the three months ended September 30, 2016,2017, compared to 1,306,6372,052,678 visits for the three months ended September 30, 2015. This2016. The decline in net operating revenues attributable to lower patient volumes was offset in part by an increase resulted principally from our newly acquired outpatient rehabilitation clinics, as well as growth in our existing owned outpatient rehabilitation clinics.net revenue per visit. Net revenue per visit in our owned outpatient rehabilitation clinics wasincreased 2.0% to $104 for the three months ended September 30, 2017, compared to $102 for the three months ended September 30, 2016, compared2016.
Concentra Segment. Net operating revenues increased 1.1% to $103$261.3 million for the three months ended September 30, 2015.
Concentra Segment. Net operating revenues were2017, compared to $258.5 million for the three months ended September 30, 2016 comparedfor our Concentra segment. The increase in net operating revenues was principally due to $259.0an increase in visits from newly acquired and developed medical centers, offset in part by a decline in visits within areas affected by Hurricanes Harvey and Irma, which caused an estimated $1.2 million decrease in net operating revenues. Visits in our centers increased 3.8% to 1,979,481 visits for the three months ended September 30, 2015. Net revenue per visit was $119 and2017, compared to 1,906,242 visits were 1,906,242 in the centers for the three months ended September 30, 2016, compared2016. The growth in visits primarily related to netan increase in employer services visits. Net revenue per visit of $114 and 1,980,496 visits in the centerswas $116 for the three months ended September 30, 2015. This2017, compared to $119 for the three months ended September 30, 2016. The decrease in visits was primarily driven by declines in consumer health and employer services. Visits related to workers compensation services were comparable in both periods. The decline in consumer health visits has resulted from our decision to emphasize our efforts on workers compensation services. The increase innet revenue per visit wasis principally due to an increaseincreased proportion of employer service visits, which yield lower per visit for workers compensation services.rates.
Operating Expenses
Our operating expenses include our cost of services, general and administrative expense, and bad debt expense. Our operating expenses increasedwere $986.3 million, or 90.0% of net operating revenues, for the three months ended September 30, 2017, compared to $960.5 million, or 91.1% of net operating revenues, for the three months ended September 30, 2016, compared to $941.4 million, or 92.2% of net operating revenues, for the three months ended September 30, 2015. The increase in operating expenses is principally due to the acquisition of Physiotherapy on March 4, 2016. Our cost of services, a major component of which is labor expense, was $938.9 million, or 85.6% of net operating revenues, for the three months ended September 30, 2017, compared to $915.7 million, or 86.9% of net operating revenues, for the three months ended September 30, 2016,2016. The decrease in our operating expenses relative to our net operating revenues is principally due to the improved operating performance of our acquired and start-up specialty hospitals. Facility rent expense, a component of cost of services, was $57.9 million for the three months ended September 30, 2017, compared to $900.9$58.5 million for the three months ended September 30, 2016. General and administrative expenses were $27.1 million for both the three months ended September 30, 2017 and 2016. General and administrative expenses as a percentage of net operating revenues were 2.5% for the three months ended September 30, 2017, compared to 2.6% for the three months ended September 30, 2016. Our bad debt expense was $20.3 million, or 88.2%1.9% of net operating revenues, for the three months ended September 30, 2015. The decrease in cost of services as a percentage of net operating revenues resulted principally from a decrease in expenses relative to revenues at our Concentra segment as a result of cost saving initiatives we have implemented. Facility rent expense, a component of cost of services, was $58.5 million for the three months ended September 30, 2016,2017, compared to $47.1 million for the three months ended September 30, 2015. General and administrative expenses were $27.1 million for the three months ended September 30, 2016, compared to $22.2 million for the three months ended September 30, 2015. Our bad debt expense was $17.7$17.7 million, or 1.7% of net operating revenues, for the three months ended September 30, 2016, compared to $18.3 million, or 1.8% of net operating revenues, for the three months ended September 30, 2015.2016. The increase in bad debt expense occurred principally in our specialty hospitals segment.
Adjusted EBITDA
Specialty Hospitals. Hospitals Segment.Adjusted EBITDA increased 43.9% to $69.5 million for our specialty hospitals wasthe three months ended September 30, 2017, compared to $48.3 million for the three months ended September 30, 2016 compared to $53.7 millionfor our specialty hospitals segment. Our Adjusted EBITDA margin for the specialty hospitals segment was 11.9% for the three months ended September 30, 2015. Our Adjusted EBITDA margin for the segment was2017, compared to 8.9% for the three months ended September 30, 2016, compared to 9.5% for the three months ended September 30, 2015.2016. The reductionincreases in Adjusted EBITDA and Adjusted EBITDA margin for our specialty hospitals segment was principally attributable towere primarily driven by the improved operating performance of our LTCHs and reductions in Adjusted EBITDA losses resulting fromin our start-up specialty hospitals. Adjusted EBITDA losses in our start-up specialty hospitals Adjusted EBITDA losses on newly acquired specialty hospitals, and specialty hospital closures. Start-up specialty hospitals incurred $9.0 million of Adjusted
EBITDA losses in the three months ended September 30, 2016, compared to $3.1were $1.5 million for the three months ended September 30, 2015, as discussed under “Summary Financial Results” above.2017, compared to $9.0 million for the three months ended September 30, 2016.
Outpatient Rehabilitation. Rehabilitation Segment.Adjusted EBITDA was $29.3 million for our outpatient rehabilitation segment increased 34.4%the three months ended September 30, 2017, compared to $32.0 million for the three months ended September 30, 2016 compared to $23.8 million for the three months ended September 30, 2015. The increase in Adjusted EBITDA for our outpatient rehabilitation segment was principally attributable to clinics acquired during the year.segment. Our Adjusted EBITDA margin for the outpatient rehabilitation segment was 11.7% for the three months ended September 30, 2017, compared to 12.8% for the three months ended September 30, 2016, compared to 11.9% for the three months ended September 30, 2015.2016. The margin increasedecrease in Adjusted EBITDA was principally due to the salea decline in visits within areas affected by Hurricanes Harvey and Irma, as discussed above under “Net Operating Revenues.” Additionally, we experienced a decline in visits at Physiotherapy clinics within some of our contract therapy businesses, which historically operated at lowermarkets. The decline in our Adjusted EBITDA margins.margin for our outpatient rehabilitation segment was the result of higher labor expenses relative to our net operating revenues within markets which have experienced a decline in patient volumes.
Concentra Segment. Adjusted EBITDA was $40.0 million for our Concentra segment wasthe three months ended September 30, 2017, compared to $40.9 million for the three months ended September 30, 2016 compared to $25.6 million for the three months ended September 30, 2015.our Concentra segment. Our Adjusted EBITDA margin for the Concentra segment was 15.3% for the three months ended September 30, 2017, compared to 15.8% for the three months ended September 30, 2016, compared2016. The decrease in Adjusted EBITDA was principally due to 9.9%a decline in visits within areas affected by Hurricanes Harvey and Irma, as discussed above under “Net Operating Revenues.”
Other. The Adjusted EBITDA loss was $22.9 million for the three months ended September 30, 2015. The increases in Adjusted EBITDA and Adjusted EBITDA margins were principally due2017, compared to cost reductions we have implemented.
Other. an Adjusted EBITDA loss wasof $23.1 million for the three months ended September 30, 2016, compared to an Adjusted EBITDA loss of $18.5 million for the three months ended September 30, 2015.2016.
Depreciation and Amortization
For the three months ended September 30, 2016, depreciationDepreciation and amortization expense was $37.2 million, compared to $31.5$38.8 million for the three months ended September 30, 2015.2017, compared to $37.2 million for the three months ended September 30, 2016. The increase was principally due to the acquisitions of Concentra on June 1, 2015 and Physiotherapy on March 4, 2016.new inpatient rehabilitation facilities operating in our specialty hospitals segment.
Income from Operations
For the three months ended September 30, 2016,2017, we had income from operations of $56.2$72.1 million, compared to $48.2$56.2 million for the three months ended September 30, 2015.2016. The increase wasin income from operations resulted principally due tofrom the cost saving initiatives inimproved operating performance of our Concentra segment and the acquisition of Physiotherapy on March 4, 2016.specialty hospitals segment.
Loss on Early Retirement of Debt
On September 26, 2016, Concentra prepaid the second lien term loan under the Concentra credit facilities. The premium plus the expensing of unamortized deferred financing costs and original issuance discount resultedfacilities, resulting in a loss on early retirement of debt of approximately $10.9 million during the three months ended September 30, 2016.million. The loss on early retirement of debt consisted of a prepayment premium, unamortized debt issuance costs, and unamortized original issue discounts.
Equity in Earnings of Unconsolidated Subsidiaries
For the three months ended September 30, 2016,2017, we had equity in earnings of unconsolidated subsidiaries of $5.3$4.4 million, compared to equity in earnings of unconsolidated subsidiaries of $6.3$5.3 million for the three months ended September 30, 2015.2016. The decrease in our equity in earnings of unconsolidated subsidiaries wasresulted principally due to the sale of afrom losses incurred by start-up companycompanies in which we ownedown a non-controlling interest.
Non-Operating Gain (Loss)
For the three months ended September 30, 2016, we had a non-operating loss of $1.0 million. For the three months ended September 30, 2015, we had a non-operating gain of $29.6 million on the sale of an equity investment. The equity investment was a start-up company investment in which we owned a non-controllingminority interest.
Interest Expense
Interest expense was $37.7 million for the three months ended September 30, 2017, compared to $44.5 million for the three months ended September 30, 2016, compared to $33.1 million for the three months ended September 30, 2015.2016. The increasedecrease in interest expense was principally the result of increasesdecreases in our indebtedness used to finance the acquisition of Physiotherapy on March 4, 2016, and increases in our interest
rates associated with amendmentsthe refinancing of Select’sthe Select credit facilities induring the fourth quarter of 2015ended March 31, 2017 and the firstConcentra credit facilities during the quarter ofended September 30, 2016.
Income Taxes
We recorded income tax expense of $14.0 million for the three months ended September 30, 2017, which represented an effective tax rate of 36.1%. We recorded income tax expense of $1.1 million for the three months ended September 30, 2016, which represented an effective tax rate of 21.2%. We recorded income tax expense of $18.3 million for the three months ended September 30, 2015, which represented an effective tax rate of 35.9%.
Our quarterly effective income tax rate is derived from our full year estimated effective income tax rate and can be impacted by discrete items specific to a particular quarter and quarterly changes in our full year tax provision estimate.
Non-controllingNet Income (Loss) Attributable to Non-Controlling Interests
Net income attributable to non-controlling interests was $6.4 million for the three months ended September 30, 2017, compared to net losses attributable to non-controlling interests wereof $2.5 million for the three months ended September 30, 2016, compared to net income attributable to non-controlling interests of $3.4 million for the three months ended September 30, 2015.2016. The decreaseincrease is principally due to losses at start-upincreases in net income of our joint venture subsidiary, Concentra, and the improved operating performance of joint venture inpatient rehabilitation facilities operating within our specialty hospitals as discussed under “Summary Financial Results” above. These amounts represent the minority owner’s share of income and losses for these consolidated entities.segment.
Nine Months Ended September 30, 20162017 Compared to Nine Months Ended September 30, 20152016
In the following, we discuss our results of operations related to net operating revenues, operating expenses, Adjusted EBITDA, depreciation and amortization, income from operations, loss on early retirement of debt, equity in earnings of unconsolidated subsidiaries, non-operating gain, (loss), interest expense, income taxes, and net income attributable to non-controlling interest,interests, which, in each case, are the same for Holdings and Select.
Net Operating Revenues
Our net operating revenues increased by 19.8%2.8% to $3,239.8$3,329.2 million for the nine months ended September 30, 2016,2017, compared to $2,703.5$3,239.8 million for the nine months ended September 30, 2015, principally due to the acquisitions of Concentra on June 1, 2015 and Physiotherapy on March 4, 2016.
Specialty Hospitals Segment.. Our specialty hospitals segment net Net operating revenues declined 1.4%increased 3.2% to $1,785.0 million for the nine months ended September 30, 2017, compared to $1,729.3 million for the nine months ended September 30, 2016 comparedfor our specialty hospitals segment. The increase in net operating revenues is principally due to $1,753.4 millionseveral new inpatient rehabilitation facilities which commenced operations during 2016 and 2017. The average net revenue per patient day for our specialty hospitals increased 3.4% to $1,707 for the nine months ended September 30, 2015. The primary reason2017, compared to $1,651 for this decrease was a decline in ourthe nine months ended September 30, 2016. For the nine months ended September 30, 2017, we had 950,419 patient days, which decreased
8.0%compared to 951,292 days for the nine months ended September 30, 2016, compared2016. The decrease in patient days is principally due to 1,034,166 daysclosed specialty hospitals.
Outpatient Rehabilitation Segment. Net operating revenues increased 2.5% to $764.5 million for the nine months ended September 30, 2015. As discussed above under “Regulatory Changes — Medicare Reimbursement of LTCH Services — Patient Criteria,” new Medicare regulations, which establish new payment limits for Medicare patients discharged from an LTCH who do not meet specified patient criteria, began to be phased in to our LTCHs in the fourth quarter of 2015. We experienced fewer Medicare patient days due to changes we implemented at LTCHs operating under the new Medicare patient criteria regulations, and specialty hospital closures and sales. This decrease in patient days was offset in part by increases in our Medicare net revenue per patient day. Our average net revenue per patient day for all of our specialty hospitals increased 5.6% to $1,651 for the nine months ended September 30, 2016,2017, compared to $1,563 for the nine months ended September 30, 2015, principally as a result of increases in our Medicare net revenue per patient day. The increase in our Medicare net revenue per patient day resulted primarily from the increase in patient acuity at LTCHs now operating under the Medicare patient criteria regulations. Our occupancy percentage declined to 67% for the nine months ended September 30, 2016, compared to 72% for the nine months ended September 30, 2015.
Outpatient Rehabilitation. Our outpatient rehabilitation segment net operating revenues increased 23.5% to $745.7 million for the nine months ended September 30, 2016 comparedfor our outpatient rehabilitation segment. The increase in net operating revenues was principally due to $603.8 million for nine months ended September 30, 2015. This increase was duethe acquisition of Physiotherapy on March 4, 2016, which contributed to the overall growth in our visits. Additionally, we experienced an increase in visits resulting principally from our newly acquired outpatient rehabilitation clinics and growth in our existing owned outpatient rehabilitation clinics. Netnet revenue per visit in our owned outpatient rehabilitation clinics was $102visit. Visits increased 7.3% to 6,168,763 for the nine months ended September 30, 2016,2017, compared to 5,751,562 visits for the nine months ended September 30, 2016. Net revenue per visit increased 1.0% to $103 for the nine months ended September 30, 2015.2017, compared to $102 for the nine months ended September 30, 2016. The increase in net operating revenues was offset in part by the sale of our contract therapy businesses on March 31, 2016.
Concentra SegmentSegment.. Net operating revenues wereincreased 1.9% to $779.0 million for the nine months ended September 30, 2017, compared to $764.3 million for the nine months ended September 30, 2016 comparedfor our Concentra segment. The increase in net operating revenues was principally due to $345.8 millionan increase in visits from newly acquired and developed medical centers. Visits in our centers increased 3.7% to 5,848,551 for the nine months ended September 30, 2015, which includes results beginning June 1, 2015. Net revenue per visit was $118 and2017, compared to 5,642,305 visits were 5,642,305 in the centers for the nine months ended September 30, 2016, compared2016. The growth in visits principally related to netan increase in employer services visits. Net revenue per visit of $114 and 2,654,330 visits in the centerswas $117 for the nine months ended September 30, 2015,2017, compared to $118 for the nine months ended September 30, 2016. The decrease in net revenue per visit is principally due to an increased proportion of employer service visits, which includes results beginning June 1, 2015.yield lower per visit rates.
Operating Expenses
Our operating expenses include our cost of services, general and administrative expense, and bad debt expense. Our operating expenses increasedwere $2,930.0 million, or 88.0% of net operating revenues, for the nine months ended September 30, 2017, compared to $2,887.8 million, or 89.1% of net operating revenues, for the nine months ended September 30, 2016, compared to $2,420.4 million, or 89.5% of net operating revenues, for the nine months ended September 30, 2015. The increase in operating expenses is principally due to the acquisitions of Concentra on June 1, 2015 and Physiotherapy on March 4, 2016. Our cost of services, a major component of which is labor expense, was $2,787.5 million, or 83.7% of net operating revenues, for the nine months ended September 30, 2017, compared to $2,755.0 million, or 85.0% of net operating revenues, for the nine months ended September 30, 2016, compared2016. The decrease in our operating expenses relative to $2,309.2 million, or 85.4% ofour net operating revenues foris principally due to the nine months ended September 30, 2015. The decrease inimproved operating performance of our acquired and start-up specialty hospitals, specialty hospitals closures, and cost of services as a percentage of net operating revenues resulted principally from Concentra and an increase in expenses relative to revenues at our specialty hospitals.reductions achieved by Concentra. Facility rent expense, a component of cost of services, was $171.7 million for the nine months ended September 30, 2017, compared to $167.5 million for the nine months ended September 30, 2016, compared to $118.22016. General and administrative expenses were $83.4 million for the nine months ended September 30, 2015. General and administrative expenses were2017, compared to $81.2 million for the nine months ended September 30, 2016, which included $3.2 million of Physiotherapy acquisition costs, compared to $67.9 million for the nine months ended September 30, 2015, which included $4.7 million of Concentra acquisition costs. General and administrative expenses as a percentage of net operating revenues were 2.5% for both the nine months ended September 30, 20162017 and September 30, 2015. Our general and administrative function includes our shared services activities which have grown and expanded as a result of our significant business acquisitions.2016. Our bad debt expense was $59.1 million, or 1.8% of net operating revenues, for the nine months ended September 30, 2017, compared to $51.6 million, or 1.6% of net operating revenues, for the nine months ended September 30, 2016, compared to $43.2 million, or 1.6%2016. The increase was principally the result of net operating revenues, for the nine months ended September 30, 2015.increases in bad debt expense in our specialty hospitals and Concentra segments.
Adjusted EBITDA
Specialty Hospitals. Hospitals Segment.Adjusted EBITDA increased 17.7% to $256.3 million for our specialty hospitals wasthe nine months ended September 30, 2017, compared to $217.8 million for the nine months ended September 30, 2016 compared to $241.6 million for the nine months ended September 30, 2015.our specialty hospitals segment. Our Adjusted EBITDA margin for the segment was 14.4% for the nine months ended September 30, 2017, compared to 12.6% for the nine months ended September 30, 2016, compared to 13.8% for the nine months ended September 30, 2015.2016. The reductionincreases in Adjusted EBITDA and Adjusted EBITDA margin for our specialty hospitals segment was principally attributable towere primarily driven by the improved operating performance of our LTCHs, reductions in Adjusted EBITDA losses resulting fromin our start-up specialty hospitals, and the closure of specialty hospitals which had generated Adjusted EBITDA losses of newly acquired specialty hospitals, and specialty hospital closures. Start-up specialty hospitals incurred $19.4 million of Adjusted EBITDA losses induring the nine months ended September 30, 2016, compared to $11.92016. Adjusted EBITDA losses in our start-up specialty hospitals were $4.7 million for the nine months ended September 30, 2015, as discussed under “Summary Financial Results” above. We also experienced a decline in Adjusted EBITDA in our LTCHs as a result of a decrease in patient days as discussed above under “Net Operating Revenues.”2017, compared to $19.4 million for the nine months ended September 30, 2016.
Outpatient Rehabilitation. Rehabilitation Segment.Adjusted EBITDA increased 3.6% to $102.6 million for our outpatient rehabilitation segment increased 32.6%the nine months ended September 30, 2017, compared to $99.0 million for the nine months ended September 30, 2016 compared to $74.7 million for the nine months ended September 30, 2015. Thisour outpatient rehabilitation segment. The increase in Adjusted EBITDA was principally due to the acquisition of Physiotherapy on March 4, 2016.growth in visits and an increase in net revenue per visit, as discussed above under “Net Operating Revenues.” Our Adjusted EBITDA margin for the outpatient rehabilitation segment was 13.4% for the nine months ended September 30, 2017, compared to 13.3% for the nine months ended September 30, 2016, compared to 12.4% for the nine months ended September 30, 2015.2016. The increase in Adjusted EBITDA margin was principally due to the sale of our contract therapy businesses on March 31, 2016, which historically operated at lower Adjusted EBITDA margins.margins than our outpatient rehabilitation clinics.
Concentra Segment. Adjusted EBITDA increased 6.4% to $125.7 million for our Concentra segment wasthe nine months ended September 30, 2017, compared to $118.1 million for the nine months ended September 30, 2016 compared to $36.8 million for the nine months ended September 30, 2015, which includes results beginning June 1, 2015.our Concentra segment. Our Adjusted EBITDA margin for the Concentra segment was 16.1% for the nine months ended September 30, 2017, compared to 15.5% for the nine months ended September 30, 2016, compared to 10.6% for the nine months ended September 30, 2015.2016. The increases in Adjusted EBITDA and Adjusted EBITDA margins for our Concentra segment were principally due tothe result of cost reductions we have implemented.achieved.
Other. The Adjusted EBITDA loss was $71.1 million for the nine months ended September 30, 2017, compared to an Adjusted EBITDA loss of $66.7 million for the nine months ended September 30, 2016, compared to an2016. The increase in our Adjusted EBITDA loss of $54.7 million for the nine months ended September 30, 2015.was due to an increase in general and administrative costs, which encompass our corporate shared service activities.
Depreciation and Amortization
For the nine months ended September 30, 2016, depreciationDepreciation and amortization expense was $107.9 million, compared to $70.7$119.6 million for the nine months ended September 30, 2015.2017, compared to $107.9 million for the nine months ended September 30, 2016. The increase was principally due to the acquisitions of Concentra on June 1, 2015, and Physiotherapy on March 4, 2016.new inpatient rehabilitation facilities operating in our specialty hospitals segment.
Income from Operations
For the nine months ended September 30, 2016,2017, we had income from operations of $244.1$279.5 million, compared to $212.5$244.1 million for the nine months ended September 30, 2015.2016. The increase wasin income from operations resulted principally due tofrom the acquisitionsimproved operating performance of our specialty hospitals and Concentra on June 1, 2015, and Physiotherapy on March 4, 2016.segments.
Loss on Early Retirement of Debt
On March 4, 2016,6, 2017, we prepaid the Series D Tranche B Term Loans under the Selectrefinanced Select’s senior secured credit facilities which resulted in losses on early retirement of debt of $19.7 million during the recognitionnine months ended September 30, 2017.
On March 4, 2016, we refinanced a portion of approximatelyour term loans under Select’s 2011 senior secured credit facility which resulted in a $0.8 million loss on early retirement of debt.debt of $0.8 million. On September 26, 2016, Concentra prepaid the second lien term loan under the Concentra credit facilities. The
premium plus the expensing of unamortized deferred financing costs and original issuance discount resultedfacilities, resulting in a loss on early retirement of debt of approximately $10.9 million.
Equity in Earnings of Unconsolidated Subsidiaries
For the nine months ended September 30, 2016,2017, we had equity in earnings of unconsolidated subsidiaries of $14.5$15.6 million, compared to equity in earnings of unconsolidated subsidiaries of $12.8$14.5 million for the nine months ended September 30, 2015.2016. The increase in our equity in earnings of unconsolidated subsidiaries resulted principally from increased earnings associated with severalimproved performance of ourthe inpatient rehabilitation joint venturesbusinesses in which we ownhave a non-controllingminority interest.
Non-Operating Gain
The CompanyWe recognized a non-operating gain of $42.1$37.1 million during the nine months ended September 30, 2016. The non-operating gain was principally due to the sale of our contract therapy businesses on March 31, 2016, as well as the sale of nine outpatient rehabilitation clinics to a non-consolidating subsidiary and the sale of five specialty hospitals in an exchange transaction during the quarter ended June 30, 2016.
Interest Expense
Interest expense was $116.2 million for the nine months ended September 30, 2017, compared to $127.7 million for the nine months ended September 30, 2016. The Company sold its contract therapy businesses for $65.0 million, resulting in a non-operating gain of $33.9 million. The Company also transferred five specialty hospitals in an exchange transaction and sold nine outpatient rehabilitation clinics, to a non-consolidating subsidiary, which resulted in non-operating gains of $6.5 million and $1.7 million, respectively, as discussed above under “Significant Events.” Additionally, during the nine months ended September 30, 2016, an entity in which the Company owned a non-controlling interest was sold, which resulted in a non-operating loss of $5.1 million.
For the nine months ended September 30, 2015, we had a non-operating gain of $29.6 million on the sale of an equity investment. The equity investment was a start-up company investment in which we owned a non-controlling interest.
Interest Expense
Interest expense was $127.7 million for the nine months ended September 30, 2016, compared to $79.7 million for the nine months ended September 30, 2015. The increasedecrease in interest expense was principally the result of increases in our indebtedness used to finance the acquisitions of Concentra on June 1, 2015 and Physiotherapy on March 4, 2016, and increasesdecreases in our interest rates associated with amendmentsthe refinancing of Select’sthe Select credit facilities induring the fourth quarter of 2015ended March 31, 2017 and the firstConcentra credit facilities during the quarter ofended September 30, 2016.
Income Taxes
We recorded income tax expense of $51.6$59.6 million for the nine months ended September 30, 2017, which represented an effective tax rate of 37.4% We recorded income tax expense of $51.6 million for the nine months ended September 30, 2016, which represented an effective tax rate of 33.0%. We recorded income tax expense of $65.0 million for the nine months ended September 30, 2015, which represented an effective tax rate of 37.1%.
Our effective income tax rate is derived from our full year estimated effective income tax rate and can be impacted by discrete items specific to a particular quarter and quarterly changes in our full year tax provision estimate. On March 31, 2016, we sold our contract therapy businesses. For tax purposes, the sale was treated as a discrete tax event particular to the first quarter of 2016. Our tax basis in our contract therapy businesses exceeded our selling price. Asprice; as a result, we had no tax expense from the sale. Additionally, duringDuring the nine monthsquarter ended SeptemberJune 30, 2016, we exchanged five specialty hospitals in a hospital swap transaction. For tax purposes, the exchange was treated as a discrete tax event particular to the second quarter of 2016.hospitals. Our tax basis in the five specialty hospitals was less than our book basis, and resultedresulting in a tax gain exceeding our book gain. The lower effective tax rate for the nine months ended September 30, 2016 resulted from the net effects of the two discrete tax events discussed above.
Net Income Attributable to Non-Controlling Interests
Non-controllingNet income attributable to non-controlling interests in consolidated earnings were $9.6was $23.2 million for the nine months ended September 30, 2016,2017, compared to $8.7$9.6 million for the nine months ended September 30, 2015.2016. The increase is principally due to increases in net income of our joint venture subsidiary, Concentra, and the acquisitionimproved operating performance of Concentra, offset in part by the minority interest owners’ share of losses from newjoint venture inpatient rehabilitation facilities operating within our specialty hospitals.hospitals segment.
Liquidity and Capital Resources
Cash Flows for the Nine Months Ended September 30, 20162017 and Nine Months Ended September 30, 20152016
|
| For the Nine Months Ended |
| ||||
|
| 2015 |
| 2016 |
| ||
|
| (in thousands) |
| ||||
|
|
|
|
|
| ||
Cash provided by operating activities |
| $ | 203,431 |
| $ | 280,247 |
|
Cash used in investing activities |
| (1,130,929 | ) | (463,002 | ) | ||
Cash provided by financing activities |
| 946,779 |
| 236,543 |
| ||
Increase in cash and equivalents |
| 19,281 |
| 53,788 |
| ||
Cash and equivalents at beginning of period |
| 3,354 |
| 14,435 |
| ||
Cash and equivalents at end of period |
| $ | 22,635 |
| $ | 68,223 |
|
In the following, we discuss cash flows from operating activities, investing activities, and financing activities, which, in each case, are the same for Holdings and Select.
|
| Nine Months Ended September 30, |
| ||||
|
| 2016 |
| 2017 |
| ||
|
| (in thousands) |
| ||||
Cash flows provided by operating activities |
| $ | 280,761 |
| $ | 129,972 |
|
Cash flows used in investing activities |
| (463,002 | ) | (169,990 | ) | ||
Cash flows provided by financing activities |
| 236,029 |
| 48,289 |
| ||
Net increase in cash and cash equivalents |
| 53,788 |
| 8,271 |
| ||
Cash and cash equivalents at beginning of period |
| 14,435 |
| 99,029 |
| ||
Cash and cash equivalents at end of period |
| $ | 68,223 |
| $ | 107,300 |
|
Operating activities provided $280.2$130.0 million of cash flows for the nine months ended September 30, 2016, compared to $203.4 million of cash flows provided for the nine months ended September 30, 2015.2017. The increasedecrease in operating cash flows for the nine months ended September 30, 20162017 compared to the nine months ended September 30, 20152016 is principally due to cash flows provided from Concentra which was acquired on June 1, 2015, Physiotherapy which was acquired on March 4, 2016, and cash distributions we received from unconsolidated investmentsincreases in which we are minority owners.
our accounts receivable. Our days sales outstanding were 52was 60 days at September 30, 2016,2017, compared to 5351 days at December 31, 20152016 and 52 days at September 30, 2015.2016. Our days sales outstanding will fluctuate based upon variability in our collection cycles. OurThe increase in our days sales outstanding atand related decline in our operating cash flows is primarily related to the current underpayments we are receiving through the periodic interim payment program from Medicare in our LTCHs. These underpayments will be corrected in future months as our periodic interim payments are reconciled and reset by our fiscal intermediaries.
Investing activities used $170.0 million for the nine months ended September 30, 2016, December 31, 20152017. The principal use of cash was $173.8 million for purchases of property and September 30, 2015 all fall within our expected range.
equipment and $19.4 million for the acquisition of businesses, offset in part by $34.6 million of proceeds received from the sale of assets. Investing activities used $463.0 million of cash flowflows for the nine months ended September 30, 2016, principally due to the acquisition of Physiotherapy. Investing activities for the nine months ended September 30, 2016 also included $118.3 million for purchases of property and equipment, offset in part by proceeds received from the salesales of businesses and an equity investment of $71.4$72.6 million. Investing
Financing activities used $1,130.9provided $48.3 million of cash flowflows for the nine months ended September 30, 2015, principally due to $1,047.22017. The principal source of cash was $100.0 million of net borrowings under the Select revolving facility, offset in part by $23.1 million of cash used for a principal prepayment associated with the Concentra credit facilities, $5.8 million of cash used for term loan payments associated with the Select credit facilities, and cash used for the payment of financing costs related to the Concentra acquisition and $114.0 million for purchasesrefinancing of property and equipment.the Select credit facilities.
Financing activities for Select provided $236.5$236.0 million of cash flowflows for the nine months ended September 30, 2016. The principal source of cash was the issuance of $625.0 million aggregate principal amount of Seriesseries F Tranchetranche B Term Loans under the Select credit facilities,term loans, resulting in net proceeds of $600.1 million, offset in part by $215.7 million of cash used to repay the Seriesseries D Tranchetranche B Term Loans under the Select credit facilitiesterm loans and $125.0 million of net repayments under the Select and Concentra revolving facilities.
Financing activities provided $946.8 million of cash flow for the nine months ended September 30, 2015. The principal sources of cash for financing activities were $165.0 million of net borrowings under the Select revolving facility, $646.9 million borrowed under the Concentra credit facilities, and $217.1 million attributable to a non-consolidating interest in Group Holdings.
Capital Resources
Working capitalcapital. - We had net working capital of $255.4$304.5 million at September 30, 20162017, compared to net working capital of $19.9$191.3 million at December 31, 2015.2016. The increase in net working capital is primarily due to the early retirement of Series D Tranche B Term Loans, which were classified as a current liability at December 31, 2015, and an increase in cash over the nine months ended September 30, 2016.our accounts receivable.
Select credit facilitiesfacilities. - On March 2, 2016,6, 2017, Select madeentered into a principal prepaymentnew senior secured credit agreement that provides for $1.6 billion in senior secured credit facilities comprising a $1.15 billion, seven-year term loan and a $450.0 million, five-year revolving credit facility, including a $75.0 million sublimit for the issuance of $10.2 million associated with thestandby letters of credit. Select term loans in accordance with the provision inused borrowings under the Select credit facilities that requires mandatory prepayments ofto: (i) repay the Selectseries E tranche B term loans as a result of annual excess cash flow as defineddue June 1, 2018, the series F tranche B term loans due March 31, 2021, and the revolving facility maturing March 1, 2018 under its then existing credit facilities; and (ii) pay fees and expenses in connection with the refinancing.
Borrowings under the Select credit facilities.
On March 4, 2016, Select entered into an Additional Credit Extension Amendment (the “Additional Credit Extension Amendment”) to Select’s senior secured credit facility with JPMorgan Chase Bank, N.A., as administrative agent, collateral agent and lender, and the additional lenders named therein (the “Select credit facilities”). The Additional Credit Extension Amendment (i) provided for the lenders named therein to make available an aggregate of $625.0 million of Series F Tranche B Term Loans, (ii) extended the financial covenants through March 3, 2021, (iii) added a 1.00% prepayment premium for prepayments made with new term loans on or prior to March 4, 2017 if such new term loans have a lower yield than the Series F Tranche B Term Loans, and (iv) made certain other technical amendments to the Select credit facilities. The Series F Tranche B Term Loansfacilities bear interest at a rate per annum equal toto: (i) in the case of the Select term loan, Adjusted LIBO Rate (as defined in the Select credit facilities, subjectagreement) plus 3.50% (subject to an Adjusted LIBO Rate floor of 1.00%) plus 5.00% for Eurodollar Loans, or the Alternate Base Rate (as defined in the Select credit facilities)agreement) plus 4.00% for2.50% (subject to an Alternate Base Rate Loans (as definedfloor of 2.00%); and (ii) in the case of the Select credit facilities).revolving facility, Adjusted LIBO plus a percentage ranging from 3.00% to 3.25% or Alternate Base Rate plus a percentage ranging from 2.00% to 2.25%, in each case based on Select’s leverage ratio.
The Select is required to make principal payments on the Series F Tranche B Term Loansterm loan amortizes in equal quarterly installments on the last day of each of March, June, September and December, beginning June 30, 2016, in amounts equal to 0.25% of the aggregate original principal amount of the Series F Tranche B Term Loans outstanding as of the date of the Additional Credit Extension Amendment.Select term loan commencing on June 30, 2017. The balance of the Series F Tranche B Term Loans isSelect term loan will be payable on March 3,8, 2024; however, if the Select 6.375% senior notes, which are due June 1, 2021, are outstanding on March 1, 2021, the maturity date for the Select term loan will become March 1, 2021. Except as specifically set forth inThe Select revolving facility will be payable on March 8, 2022; however, if the Additional Credit Extension Amendment,Select 6.375% senior notes are outstanding on February 1, 2021, the terms and conditions ofmaturity date for the Series F Tranche B Term Loans are identicalSelect revolving facility will become February 1, 2021.
Select will be required to the terms of the outstanding Series E Term B Loansprepay borrowings under the Select credit facilities and the other loan documents to which Select is party.
Select used the proceedswith (i) 100% of the Series F Tranche B Term Loans to (i) refinance in full the Series D Tranche B Term Loans due December 20, 2016, (ii) consummate the acquisition of Physiotherapy, and (iii) pay fees and expenses incurred in connection with the acquisition of Physiotherapy, the refinancing, and the Additional Credit Extension Amendment.
Asnet cash proceeds received from non-ordinary course asset sales or other dispositions, or as a result of the Additional Credit Extension Amendment relatinga casualty or condemnation, subject to reinvestment provisions and other customary carveouts and, to the Series F Tranche B Term Loans,extent required, the payment of certain indebtedness secured by liens having priority over the debt under the Select credit facilities or subject to a first lien intercreditor agreement, (ii) 100% of the net cash proceeds received from the issuance of debt obligations other than certain permitted debt obligations, and (iii) 50% of excess cash flow (as defined in the Select credit agreement) if Select’s leverage ratio is greater than 4.50 to 1.00 and 25% of excess cash flow if Select’s leverage ratio is less than or equal to 4.50 to 1.00 and greater than 4.00 to 1.00, in each case, reduced by the aggregate amount of term loans, revolving loans and certain other debt optionally prepaid during the applicable fiscal year. Select will not be required to prepay borrowings with excess cash flow if Select’s leverage ratio is less than or equal to 4.00 to 1.00.
The Select revolving facility requires Select to maintain a leverage ratio (as defined in the Select credit agreement), which is tested quarterly, not to exceed 6.25 to 1.00. After March 31, 2019, the leverage ratio must not exceed 6.00 to 1.00. Failure to comply with this covenant would result in an event of default under the Select revolving facility and, absent a waiver or an amendment from the revolving lenders, preclude Select from making further borrowings under the Select revolving facility and permit the revolving lenders to accelerate all outstanding borrowings under the Select revolving facility. The termination of the Select revolving facility commitments and the acceleration of amounts outstanding thereunder would constitute an event of default with respect to the Select term loan. As of September 30, 2017, Select’s leverage ratio was 5.82 to 1.00.
The Select credit facilities also contain a number of other affirmative and restrictive covenants, including limitations on mergers, consolidations and dissolutions; sales of assets; investments and acquisitions; indebtedness; liens; affiliate transactions; and dividends and restricted payments. The Select credit facilities contain events of default for non-payment of principal and interest rate payable onwhen due (subject, as to interest, to a grace period), cross-default and cross-acceleration provisions and an event of default that would be triggered by a change of control.
Borrowings under the Series E Tranche B Term Loans was increased from Adjusted LIBO plus 4.00% (subjectSelect credit facilities are guaranteed by Holdings and substantially all of Select’s current domestic subsidiaries and will be guaranteed by substantially all of Select’s future domestic subsidiaries and secured by substantially all of Select’s existing and future property and assets and by a pledge of Select’s capital stock, the capital stock of Select’s domestic subsidiaries and up to an Adjusted LIBO rate floor65% of 1.00%),the capital stock of Select’s foreign subsidiaries held directly by Select or Alternative Base Rate plus 3.00%, to Adjusted LIBO plus 5.00% (subject to an Adjusted LIBO rate floor of 1.00%), or Alternative Base Rate plus 4.00%.a domestic subsidiary.
At September 30, 2016,2017, Select had outstanding borrowings under the Select credit facilities consisting of $1,149.3a $1,144.3 million of Select term loansloan (excluding unamortized discounts and debt issuance costs of $27.7$26.0 million) and borrowings of $175.0$320.0 million (excluding letters of credit) under the Select revolving facility. After giving effect to $39.7 million of outstanding letters of credit atAt September 30, 2016,2017, Select had $235.3$91.4 million of availability under the Select revolving facility.
The Select credit facilities require Selectfacility after giving effect to maintain certain leverage ratios (as defined in the Select credit facilities). For the quarter ended September 30, 2016, Select was required to maintain its leverage ratio at less than 5.75 to 1.00. Select’s leverage ratio was 5.11 to 1.00 as$38.6 million of September 30, 2016.outstanding letters of credit.
Concentra credit facilitiesfacilities. - Select and Holdings are not parties to the Concentra credit facilities and are not obligors with respect to Concentra’s debt under such agreements. While this debt is non-recourse to Select, it is included in Select’s consolidated financial statements.
On September 26, 2016,March 1, 2017, Concentra entered into Amendment No. 1 (the “Concentra Credit Agreement Amendment”) tomade a principal prepayment of $23.1 million associated with its first lien credit agreement (the “Concentra first lien credit agreement”) dated June 1, 2015. Theterm loans in accordance with the provision in the Concentra first lien credit agreement initially provided for $500.0 million in first lien credit facilities composedthat requires mandatory prepayments of $450.0 million, seven-year term loans (“as a result of annual excess cash flow, as defined in the Concentra first lien term loan”) and a $50.0 million, five-year revolving credit facility (“facilities.
As of September 30, 2017, Concentra revolving facility”).
The Concentra Credit Agreement Amendment provided an additional $200.0had $619.2 million of first lien term loans due June 1, 2022, the proceeds of which were used to prepay in full Concentra’s second lien term loan due June 1, 2023; and also amended certain restrictive covenants to give Concentra greater operational flexibility.
The Concentra first lien term loan continues to bear interest at a rate equal to Adjusted LIBO (as defined in the Concentra first lien credit agreement) plus 3.00% (subject to an Adjusted LIBO floor of 1.00%), or Alternate Base Rate (as defined in the Concentra first lien credit agreement) plus 2.00% (subject to an Alternate Base Rate floor of 2.00%). The Concentra first lien term loan amortizes in equal quarterly installments of $1.6 million through March 31, 2022, with the remaining unamortized aggregate principal due on the maturity date.
At September 30, 2016, Concentra had outstanding borrowings of $643.9 million under the Concentra term loans (excluding unamortized discounts and debt issuance costs of $16.6$13.7 million). under the Concentra credit facilities. Concentra did not have any borrowings, excluding letters of credit, outstanding under the Concentra revolving facility. AfterAt September 30 2017, Concentra had $43.4 million of availability under its revolving facility after giving effect to $6.6 million of outstanding letters of credit at September 30, 2016, Concentra had $43.4 million of availability under its revolving facility.credit.
Stock Repurchase ProgramProgram. - Holdings’ board of directors has authorized a common stock repurchase program to repurchase up to $500.0 million worth of shares of its common stock. The program has been extended until December 31, 20172018, and will remain in effect until then, unless further extended or earlier terminated by the board of directors. Stock repurchases under this program may be made in the open market or through privately negotiated transactions, and at times and in such amounts as Holdings deems appropriate. Holdings is fundingfunds this program with cash on hand and borrowings under Select’sthe Select revolving credit facility. Holdings did not repurchase shares during the ninethree months ended September 30, 2016.2017. Since the inception of the program through September 30, 2016,2017, Holdings has repurchased 35,924,128 shares at a cost of approximately $314.7 million, or $8.76 per share, which includes transaction costs.
LiquidityLiquidity. - We believe our internally generated cash flows and borrowing capacity under the Select and Concentra credit facilities will be sufficient to finance operations over the next twelve months. We may from time to time seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions, tender offers or otherwise. Such repurchases or exchanges, if any, may be funded from operating cash flows or other sources and will depend on
prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
Use of Capital ResourcesResources. - We may from time to time pursue opportunities to develop new joint venture relationships with significant health systems and other healthcare providers, and from time to time we may also develop new inpatient rehabilitation hospitals.hospitals and occupational medicine centers. We also intend to open new outpatient rehabilitation clinics in local areas that we currently serve where we can benefit from existing referral relationships and brand awareness to produce incremental growth. In addition to our development activities, we may grow our business through opportunistic acquisitions.acquisitions such as the pending acquisition of U.S. HealthWorks.
Recent Accounting Pronouncements
In AugustJanuary 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. ASU 2017-01 states that if substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the transaction should be accounted for as an asset acquisition. In addition, the ASU clarifies the requirements for a set of activities to be considered a business and narrows the definition of an output. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. ASU 2017-01 will be applied prospectively and is effective for annual periods beginning after December 15, 2017. Early adoption is permitted.
In October 2016, the Financial Accounting Standards Board (the “FASB”)FASB issued Accounting Standards Update (“ASU”) 2016-15,ASU 2016-16, StatementIncome Taxes (Topic 740), Intra-Entity Transfers of Cash Flows (Topic 230), ClassificationAssets Other Than Inventory. Current GAAP prohibits the recognition of Certain Cash Receiptscurrent and Cash Payments, which addressesdeferred income taxes for an intra-entity asset transfer until the diversity in practice in how certain cash receipts and cash payments are presented and classified inasset has been sold to an outside party. The ASU requires an entity to recognize the statementincome tax consequences of cash flows.an intra-entity transfer of an asset other than inventory when the transfer occurs. The standard will be effective for fiscal years beginning after December 15, 2017. The Company is currently evaluatingplans to adopt the standard to determine the impact it will have on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation, which simplifies various aspects of accounting for share-based payments to employees. The areas for simplification involve several aspectsguidance effective January 1, 2018. Adoption of the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The standardguidance will be applied on a modified retrospective approach through a cumulative effect adjustment to retained earnings as of the effective for fiscal years beginning after December 15, 2016.date. The Company is currently evaluating the standard to determine the impact it will have on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases. This ASU includes a lessee accounting model that recognizes two types of leases; finance and operating. This ASU requires that a lessee recognize on the balance sheet assets and liabilities for all leases with lease terms of more than twelve months. Lessees will need to recognize almost all leases on the balance sheet as a right-of-use asset and a lease liability. For income statement purposes, the FASB retained the dual model, requiring leases to be classified as either operating or finance. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will depend on its classification as a finance or operating lease. For short-term leases of twelve months or less, lessees are permitted to make an accounting election by class of underlying asset not to recognize right-of-use assets or lease liabilities. If the alternative is elected, lease expense would be recognized generally on the straight-line basis over the respective lease term.
The amendments in ASU 2016-02 will take effect for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Earlier application is permitted as of the beginning of an interim or annual reporting period. A modified retrospective approach is required for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. The Company is currently evaluating the standard to determine the impact it will have on its consolidated financial statements.
In November 2015,Upon adoption, the FASB issued ASU No. 2015-17, Balance Sheet ClassificationCompany will recognize significant assets and liabilities on the consolidated balance sheets as a result of Deferred Taxes, which changes the presentationoperating lease obligations of deferred income taxes. The intent is to simplify the presentationCompany. Operating lease expense will still be recognized as rent expense on a straight-line basis over the respective lease terms in the consolidated statements of deferred income taxes through the requirement that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The revised guidance is effective for annual fiscal periodsoperations.
beginning after December 15, 2016. Early adoption is permitted.
The Company is currently evaluatingwill implement the new standard beginning January 1, 2019. The Company’s implementation efforts are focused on designing accounting processes, disclosure processes, and internal controls in order to determineaccount for its leases under the impact it will have on its consolidated financial statements.new standard.
In May 2014, March 2016, April 2016, and AprilDecember 2016, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, ASU 2016-08, Revenue from Contracts with Customers, Principal versus Agent Considerations, ASU 2016-10, Revenue from Contracts with Customers, Identifying Performance Obligations and Licensing, and ASU 2016-12, Revenue from Contracts with Customers, Narrow Scope Improvements and Practical Expedients, and ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customer (collectively “the standards”), respectively, which supersede most of the current revenue recognition requirements. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. New disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers are also required. The original standards were effective for fiscal years beginning after December 15, 2016; however, in July 2015, the FASB approved a one-year deferral of these standards, with a new effective date for fiscal years beginning after December 15, 2017. The standards require the selection of a modified retrospective or cumulative effect transition method for retrospective application. The Company is currently evaluating the standards to determine the impact they will have on its consolidated financial statements.method.
The Company will implement the new standard beginning January 1, 2018 using the retrospective transition method. Adoption of the new standard will result in material changes to the presentation of net operating revenues and bad debt expense in the consolidated statements of operations, but the presentation of the amount of income from operations and net income is not expected to materially change upon adoption of the new standards. The principal change is how the new standard requires healthcare providers to estimate the amount of variable consideration to be included in the transaction price up to an amount which is probable that a significant reversal will not occur. The most common form of variable consideration the Company experiences are amounts for services provided that are ultimately not realizable from a customer. Under the current standards, the Company’s estimate for unrealizable amounts was recorded to bad debt expense. Under the new standards, the Company’s estimate for unrealizable amounts will be recognized as a constraint to revenue and will be reflected as an allowance. Substantially all of the bad debt expense as of September 30, 2016 and September 30, 2017 will be reclassified as an allowance when the Company retrospectively applies the guidance in the standards on January 1, 2018.
The Company’s remaining implementation efforts are focused principally on refining the accounting processes, disclosure processes, and internal controls.
Recently Adopted Accounting Pronouncements
In April and AugustNovember 2015, the FASB issued ASU 2015-03 and ASU 2015-15, each titledNo. 2015-17, Interest- ImputationBalance Sheet Classification of InterestDeferred Taxes, to simplifywhich changed the presentation of debt issuance costs.deferred income taxes. The standard requires debt issuance costschanged the presentation of deferred income taxes through the requirement that all deferred tax liabilities and assets be presentedclassified as noncurrent in the balance sheet as a direct deduction from the carrying valueclassified statement of the debt liability. The FASB clarified that debt issuance costs related to line-of-credit arrangements can be presented as an asset and amortized over the term of the arrangement.financial position. The Company adopted the standard on January 1, 2017. The consolidated balance sheet at the beginningDecember 31, 2016 has been retrospectively adjusted. Adoption of the first quarter of 2016. The balance sheetnew standard impacted the Company’s previously reported results as of December 31, 2015 was retrospectively conformed to reflect the adoption of the standard and approximately $38.0 million of unamortized debt issuance costs were reclassified to be a direct reduction of debt, rather than a component of other assets.follows:
|
| December 31, 2016 |
| ||||
|
| As Reported |
| As Adjusted |
| ||
|
| (in thousands) |
| ||||
Current deferred tax asset |
| $ | 45,165 |
| $ | — |
|
Total current assets |
| 808,068 |
| 762,903 |
| ||
Other assets |
| 152,548 |
| 173,944 |
| ||
Total assets |
| 4,944,395 |
| 4,920,626 |
| ||
|
|
|
|
|
| ||
Non-current deferred tax liability |
| 222,847 |
| 199,078 |
| ||
Total liabilities |
| 3,616,335 |
| 3,592,566 |
| ||
Total liabilities and equity |
| 4,944,395 |
| 4,920,626 |
| ||
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and Qualitative Disclosures about Market Risk
We are subject to interest rate risk in connection with our variable rate long-term indebtedness. Our principal interest rate exposure relates to the loans outstanding under the Select credit facilities and Concentra credit facilities.
As of September 30, 2016,2017, Select had $1,149.3a $1,144.3 million term loan outstanding (excluding unamortized discounts and debt issuance costs) in term loans outstanding under the Select credit facilitiescosts of $26.0 million) and $175.0$320.0 million in revolving borrowings outstanding under the Select credit facilities, which bear interest at variable rates.
As of September 30, 2016,2017, Concentra had outstanding borrowings under the Concentra credit facilities$619.2 million of $643.9 millionfirst lien term loans outstanding (excluding unamortized discounts and debt issuance costs)costs of term loans,$13.7 million) under the Concentra credit facilities, which bear interest at variable rates. Concentra did not have any outstanding revolving borrowings. Certain of Select’s and Concentra’s outstanding borrowings that bear interest at variable rates were effectively fixed as of September 30, 2016 based upon then current interest rates because the Adjusted LIBO Rate did not then exceed the applicable Adjusted LIBO Rate floors for such borrowings:2017.
· Select’s aggregate $527.4 million in Series E Tranche B Term Loans are subject to an Adjusted LIBO Rate floor of 1.00%At September 30, 2017, the 3-month LIBOR rate was 1.33%. Therefore, until the Adjusted LIBO Rate exceeds 1.00%, Select’s interest rate on this indebtedness is effectively fixed at 6.00%.
· Select’s aggregate $621.9 million in Series F Tranche B Term Loans are subject to an Adjusted LIBO Rate floor of 1.00%. Therefore, until the Adjusted LIBO Rate exceeds 1.00%, Select’s interest rate on this indebtedness is effectively fixed at 6.00%.
· The $643.9 million Concentra first lien term loan is subject to an Adjusted LIBO Rate floor of 1.00%. Therefore, until the Adjusted LIBO Rate exceeds 1.00%, Concentra’s interest rate on this indebtedness is effectively fixed at 4.00%.
However, the Select and Concentra revolving borrowings are not subject to an Adjusted LIBO Rate floor.
The following table summarizes the impact of hypothetical increasesConsequently, each 0.25% increase in market interest rates as of September 30, 2016 on our consolidated interest expense over the subsequent twelve month period:
Increase in |
| Interest Rate Expense |
|
0.25 | % | 2,230.7 |
|
0.50 | % | 7,151.1 |
|
0.75 | % | 12,071.6 |
|
1.00 | % | 16,992.1 |
|
(1) Based on the 3-month LIBOR rate of 0.85% as of September 30, 2016, a change in interest rates of up to 0.15% would only increase interest expense with respect to the Select and Concentra revolving borrowings, which are not subject to an Adjusted LIBO Rate floor. Increases in interest rates greater than 0.15% as of September 30, 2016 wouldwill impact the interest rate paidexpense on all of Select’s and Concentra’s variable rate debt as indicated in the table above.by $5.2 million per annum.
ITEM 4.CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) as of the end of the period covered in this report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures, including the accumulation and communication of disclosure to our principal executive officer and principal financial officer as appropriate to allow timely decisions regarding disclosure, are effective as of September 30, 20162017 to provide reasonable assurance that material information required to be included in our periodic SEC reports is recorded, processed, summarized, and reported within the time periods specified in the relevant SEC rules and forms.
Physiotherapy Acquisition
On March 4, 2016, Select consummated the acquisition of Physiotherapy. SEC guidance permits management to omit an assessment of an acquired business’ internal control over financial reporting from management’s assessment of internal control over financial reporting for a period not to exceed one year from the date of the acquisition.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934) identified in connection with the evaluation required by Rule 13a-15(d) of the Securities Exchange Act of 1934 that occurred during the third quarter ended September 30, 20162017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there is only reasonable assurance that our controls will succeed in achieving their goals under all potential future conditions.
Litigation
The Company is a party to various legal actions, proceedings, and claims (some of which are not insured), and regulatory and other governmental audits and investigations in the ordinary course of its business. The Company cannot predict the ultimate outcome of pending litigation, proceedings, and regulatory and other governmental audits and investigations. These matters could potentially subject the Company to sanctions, damages, recoupments, fines, and other penalties. The Department of Justice, CMS, or other federal and state enforcement and regulatory agencies may conduct additional investigations related to the Company’s businesses in the future that may, either individually or in the aggregate, have a material adverse effect on the Company’s business, financial position, results of operations, and liquidity.
To address claims arising out of the Company’s operations, the Company maintains professional malpractice liability insurance and general liability insurance, subject to self-insured retention of $2.0 million per medical incident for professional liability claims and $2.0 million per occurrence for general liability claims. The Company also maintains umbrella liability insurance covering claims which, due to their nature or amount, are not covered by or not fully covered by the Company’s other insurance policies. These insurance policies also do not generally cover punitive damages and are subject to various deductibles and policy limits. Significant legal actions, as well as the cost and possible lack of available insurance, could subject the Company to substantial uninsured liabilities. In the Company’s opinion, the outcome of these actions, individually or in the aggregate, will not have a material adverse effect on its financial position, results of operations or cash flows.
Healthcare providers are subject to lawsuits under the qui tam provisions of the federal False Claims Act. Qui tam lawsuits typically remain under seal (hence, usually unknown to the defendant) for some time while the government decides whether or not to intervene on behalf of a private qui tam plaintiff (known as a relator) and take the lead in the litigation. These lawsuits can involve significant monetary damages and penalties and award bounties to private plaintiffs who successfully bring the suits. The Company is and has been a defendant in these cases in the past, and may be named as a defendant in similar cases from time to time in the future.
Evansville Litigation.
On October 19, 2015, the plaintiff-relators filed a Second Amended Complaint in United States of America, ex rel. Tracy Conroy, Pamela Schenk and Lisa Wilson v. Select Medical Corporation, Select Specialty Hospital—Evansville, LLC (‘‘SSH-Evansville’’(“SSH-Evansville”), Select Employment Services, Inc., and Dr. Richard Sloan. The case is a civil action filed in the United States District Court for the Southern District of Indiana by private plaintiff-relators on behalf of the United States under the federal False Claims Act. The plaintiff-relators are the former CEO and two former case managers at SSH-Evansville, and the defendants currently include the Company, SSH-Evansville, a subsidiary of the Company serving as common paymaster for its employees, and a physician who practices at SSH-Evansville. The plaintiff-relators allege that from 2006 until April 2012, SSH-Evansville discharged patients too early or held patients too long, improperly discharged patients to and readmitted them from short stay hospitals, up-coded diagnoses at admission, and admitted patients for whom long-term acute care was not medically necessary. They also allege that the defendants engaged in retaliation in violation of federal and state law. The Second Amended Complaint replacesreplaced a prior complaint that was filed under seal on September 28, 2012 and served on the Company on February 15, 2013, after a federal magistrate judge unsealed it on January 8, 2013. All deadlines in the case had been stayed after the seal was lifted in order to allow the government time to complete its investigation and to decide whether or
not to intervene. On June 19, 2015, the U.S.United States Department of Justice notified the District Court of its decision not to intervene in the case, and the District Court thereafter approved a case management plan imposing certain deadlines.case.
In December 2015, the defendants filed a Motion to Dismiss the Second Amended Complaint on multiple grounds. One basis forgrounds, including that the Motion to Dismiss wasaction is disallowed by the False Claims Act’s public disclosure bar, which disqualifies qui tam actions that are based on fraud already publicly disclosed through enumerated sources, unless the relator is an original source. The Affordable Care Act, enacted on March 23, 2010, altered the public disclosure bar language of the False Claims Act by, among other things, giving the United States the right to oppose dismissal of a case based on the public disclosure bar. In their Motion to Dismiss, the defendants contended that the public disclosure bar applies because substantially the same conduct as the plaintiff-relators have alleged had previously been publicly disclosed, including in a New York Times articlesource, and a prior qui tam case. A second basis for the defendants’ Motion to Dismiss was that the plaintiff-relators did not plead their claims with sufficient particularity, as required by the Federal Rules of Civil Procedure.
Then, based on the Affordable Care Act’s changes to the public disclosure bar language of the False Claims Act,Thereafter, the United States filed a notice asserting a veto of the defendants’ use of the public disclosure bar for claims arising from conduct from and after March 23, 2010. The defendants filed briefs challenging the United States’ contention that the2010, which was based on certain statutory changes gives it an unfettered right to veto the applicability of the public disclosure bar.bar language included in the Affordable Care Act. On September 30, 2016, the District Court partially granted and partially denied the defendants’ Motion to Dismiss. It ruled that the plaintiff-relators alleged substantially the same conduct as had been publicly disclosed and that the plaintiff relators are not original sources, so that the public disclosure bar requires dismissal of all non-retaliation claims arising from conduct before March 23, 2010. The District Court also ruled that the statutory changes to the public disclosure bar gave the United States the power to veto its applicability to claims arising from conduct on and after March 23, 2010, and therefore did not dismiss those claims based on the public disclosure bar. However,
the District Court ruled that the plaintiff-relators did not plead certain of their claims relating to interrupted stay manipulation and premature discharging of patients with the requisite particularity, and dismissed those claims. The District Court declined to dismiss the plaintiff-relators’plaintiff relators’ claims arising from conduct from and after March 23, 2010 relating to delayed discharging of patients and upcodingup-coding and the plaintiff-relators’plaintiff relators’ retaliation claims.
On October 17, 2016, The plaintiff-relators then proposed a case management plan seeking nationwide discovery involving all of the Company’s LTCHs for the period from March 23, 2010 through the present, which the defendants filed a Motion seeking certification to file an interlocutory appeal with the United States Court of Appeals for the Seventh Circuit of the District Court’s ruling that the United States’ has the power to veto the application of the public disclosure bar to the defendants’ conduct from and after March 23, 2010.have opposed. The Company intends to vigorously defend this action, but at this time the Company is unable to predict the timing and outcome of this matter.
Knoxville Litigation.
On July 13, 2015, the federalUnited States District Court for the Eastern District of Tennessee unsealed a qui tam Complaint in Armes v. Garman, et al, No. 3:14-cv-00172-TAV-CCS, which named as defendants Select, Select Specialty Hospital—Knoxville, Inc. (‘‘SSH-Knoxville’’(“SSH-Knoxville”), Select Specialty Hospital—North Knoxville, Inc. and ten current or former employees of these facilities. The Complaint was unsealed after the United States and the State of Tennessee notified the court on July 13, 2015 that each had decided not to intervene in the case. The Complaint is a civil action that was filed under seal on April 29, 2014 by a respiratory therapist formerly employed at SSH-Knoxville. The Complaint alleges violations of the federal False Claims Act and the Tennessee Medicaid False Claims Act based on extending patient stays to increase reimbursement and to increase average length of stay; artificially prolonging the lives of patients to increase Medicare reimbursements and decrease inspections; admitting patients who do not require medically necessary care; performing unnecessary procedures and services; and delaying performance of procedures to increase billing. The Complaint was served on some of the defendants during October 2015.
In November 2015, the defendants filed a Motion to Dismiss the Complaint on multiple grounds. The defendants first argued that False Claims Act’s first-to-file bar required dismissal of plaintiff-relator’s claims. Under the first-to-file bar, if a qui tam case is pending, no person may bring a related action based on the facts underlying the first action. The defendants asserted that the plaintiff-relator’s claims were based on the same underlying facts as were asserted in the Evansville litigation, discussed above. The defendants also argued that the plaintiff-relator’s claims must be dismissed under the public disclosure bar, and because the plaintiff-relator did not plead his claims with sufficient particularity.
In June 2016, the District Court granted the defendants’ Motion to Dismiss and dismissed with prejudice the plaintiff-relator’s lawsuit in its entirety. The District Court ruled that the first-to-file bar precludes all but one of the plaintiff-relator’s claims, and that the remaining claim must also be dismissed because the plaintiff-relator failed to plead it with sufficient particularity. In July 2016, the plaintiff-relator filed a Notice of Appeal to the United States Court of Appeals for the Sixth Circuit. Then, on October 11, 2016, the plaintiff-relator filed a Motion to Remand the case to the District Court for further proceedings, arguing that the September 30, 2016 decision in the Evansville litigation, discussed above, undermines the basis for the District Court’s dismissal. After the Court of Appeals denied the Motion to Remand, the plaintiff-relator then sought an indicative ruling from the District Court that it would vacate its prior dismissal ruling and allow plaintiff-relator to supplement his Complaint, which the defendants have opposed. The case has been fully briefed and argued in the Court of Appeals. The Company intends to vigorously defend this action, but at this time the Company is unable to predict the timing and outcome of this matter.
Wilmington Litigation
On January 19, 2017, the United States District Court for the District of Delaware unsealed a qui tam Complaint in United States of America and State of Delaware ex rel. Theresa Kelly v. Select Specialty Hospital—Wilmington, Inc. (“SSH-Wilmington”), Select Specialty Hospitals, Inc., Select Employment Services, Inc., Select Medical Corporation, and Crystal Cheek, No. 16-347-LPS. The Complaint was initially filed under seal on May 12, 2016 by a former chief nursing officer at SSH-Wilmington and was unsealed after the United States filed a Notice of Election to Decline Intervention on January 13, 2017. The corporate defendants were served on March 6, 2017. In the complaint, the plaintiff-relator alleges that the Select defendants and an individual defendant, who is a former health information manager at SSH-Wilmington, violated the False Claims Act and the Delaware False Claims and Reporting Act based on allegedly falsifying medical practitioner signatures on medical records and failing to properly examine the credentials of medical practitioners at SSH-Wilmington. In response to the Select defendants’ motion to dismiss the Complaint, on May 17, 2017 the plaintiff-relator filed an Amended Complaint asserting the same causes of action. The Select defendants filed a Motion to Dismiss the Amended Complaint, which is now pending, based on numerous grounds, including that the Amended Complaint did not plead any alleged fraud with sufficient particularity, failed to plead that the alleged fraud was material to the government’s payment decision, failed to plead sufficient facts to establish that the Select defendants knowingly submitted false claims or records, and failed to allege any reverse false claim.
On March 24, 2017, the plaintiff-relator initiated a second action by filing a Complaint in the Superior Court of the State of Delaware in Theresa Kelly v. Select Medical Corporation, Select Employment Services, Inc., and SSH-Wilmington, C.A. No. N17C-03-293 CLS. The Delaware Complaint alleges that the defendants retaliated against her in violation of the Delaware Whistleblowers’ Protection Act for reporting the same alleged violations that are the subject of the federal Amended Complaint. The defendants filed a motion to dismiss, or alternatively to stay, the Delaware Complaint based on the pending federal Amended Complaint and the failure to allege facts to support a violation of the Delaware Whistleblowers’ Protection Act. The motion is currently pending.
The Company intends to vigorously defend these actions, but at this time the Company is unable to predict the timing and outcome of this matter.
Contract Therapy Subpoena
On May 18, 2017, the Company received a subpoena from the U.S. Attorney’s Office for the District of New Jersey seeking various documents principally relating to the Company’s contract therapy division, which contracted to furnish rehabilitation therapy services to residents of skilled nursing facilities (“SNFs”) and other providers. The Company operated its contract therapy division through a subsidiary until March 31, 2016, when the Company sold the stock of the subsidiary. The subpoena seeks documents that appear to be aimed at assessing whether therapy services were furnished and billed in compliance with Medicare SNF billing requirements, including whether therapy services were coded at inappropriate levels and whether excessive or unnecessary therapy was furnished to justify coding at higher paying levels. The Company does not know whether the subpoena has been issued in connection with a qui tam lawsuit or in connection with possible civil, criminal or administrative proceedings by the government. The Company is producing documents in response to the subpoena and intends to fully cooperate with this investigation. At this time, the Company is unable to predict the timing and outcome of this matter.
Northern District of Alabama Investigation
On October 30, 2017, the Company was contacted by the U.S. Attorney’s Office for the Northern District of Alabama to request cooperation in connection with an investigation that may involve Medicare billing compliance at certain of the Company’s Physiotherapy outpatient rehabilitation clinics. The Company intends to cooperate with this investigation. At this time, the Company is unable to predict the timing and outcome of this matter.
There have been no material changes from ourThe information set forth in this report should be read in conjunction with the risk factors as previously reportedset forth below and the risk factors discussed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2015.2016.
The closing of the acquisition of U.S. HealthWorks by Concentra is subject to the satisfaction of certain conditions, and we cannot predict whether the necessary conditions will be satisfied or waived.
The closing of the acquisition of U.S. HealthWorks by Concentra is subject to regulatory approvals and customary conditions, including, without limitation:
· the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended;
· the accuracy of the representations and warranties in the Purchase Agreement and compliance with the respective covenants of the parties, subject to certain qualifiers;
· the absence of any law or injunction that prohibits the consummation of the acquisition;
· the absence of certain governmental actions; and
· the absence of a material adverse effect on U.S. HealthWorks or Concentra.
The acquisition of U.S. HealthWorks may not close in the anticipated time frame, if at all. The Company has no control over certain conditions in the Purchase Agreement, and cannot predict whether such conditions will be satisfied or waived.
The acquisition of U.S. HealthWorks by Concentra and future acquisitions may use significant resources, may be unsuccessful and could expose us to unforeseen liabilities.
As part of our growth strategy, we may pursue acquisitions of specialty hospitals, outpatient rehabilitation clinics and other related healthcare facilities and services. These acquisitions, including the acquisition of U.S. HealthWorks by Concentra, may involve significant cash expenditures, debt incurrence, additional operating losses and expenses and compliance risks that could have a material adverse effect on our financial condition and results of operations.
We may not be able to successfully integrate U.S. HealthWorks or other acquired businesses into ours, and therefore we may not be able to realize the intended benefits from an acquisition. If we fail to successfully integrate U.S. HealthWorks or other acquisitions, our financial condition and results of operations may be materially adversely affected. The acquisition of U.S. HealthWorks by Concentra and other acquisitions could result in difficulties integrating acquired operations, technologies and personnel into our business. Such difficulties may divert significant financial, operational and managerial resources from our existing operations and make it more difficult to achieve our operating and strategic objectives. We may fail to retain employees or patients acquired through the acquisition of U.S. HealthWorks by Concentra or other acquisitions, which may negatively impact the integration efforts. The acquisition of U.S. HealthWorks by Concentra or other acquisitions could also have a negative impact on our results of operations if it is subsequently determined that goodwill or other acquired intangible assets are impaired, thus resulting in an impairment charge in a future period.
In addition, the acquisition of U.S. HealthWorks by Concentra and other acquisitions involve risks that the acquired businesses will not perform in accordance with expectations; that we may become liable for unforeseen financial or business liabilities of the acquired businesses, including liabilities for failure to comply with healthcare regulations; that the expected synergies associated with acquisitions will not be achieved; and that business judgments concerning the value, strengths and weaknesses of businesses acquired will prove incorrect, which could have an material adverse effect on our financial condition and results of operations.
Our substantial indebtedness may limit the amount of cash flow available to invest in the ongoing needs of our business.
We have a substantial amount of indebtedness. As of September 30, 2017, Select had approximately $2,177.3 million of total indebtedness, and Concentra had approximately $613.0 million of total indebtedness, which is nonrecourse to Select. As of September 30, 2017, our total indebtedness was $2,790.3 million. In connection with the closing of the acquisition of U.S. HealthWorks, Concentra’s indebtedness is expected to substantially increase with the addition of a proposed $555.0 million senior secured incremental term facility under its existing credit facility and a proposed $240.0 million second lien term facility. Our indebtedness could have important consequences to you. For example, it:
· requires us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, reducing the availability of our cash flow to fund working capital, capital expenditures, development activity, acquisitions, and other general corporate purposes;
· increases our vulnerability to adverse general economic or industry conditions;
· limits our flexibility in planning for, or reacting to, changes in our business or the industries in which we operate;
· makes us more vulnerable to increases in interest rates, as borrowings under our senior secured credit facilities are at variable rates;
· limits our ability to obtain additional financing in the future for working capital or other purposes; and
· places us at a competitive disadvantage compared to our competitors that have less indebtedness.
Any of these consequences could have a material adverse effect on our business, financial condition, results of operations, prospects, and ability to satisfy our obligations under our indebtedness. In addition, there would be a material adverse effect on our business, financial condition, results of operations and cash flows if we were unable to service our indebtedness or obtain additional financing, as needed.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Purchases of Equity Securities by the Issuer
Holdings’ board of directors has authorized a common stock repurchase program to repurchase up to $500.0 million worth of shares of its common stock. The program has been extended until December 31, 20172018 and will remain in effect until then, unless further extended or earlier terminated by the board of directors. Stock repurchases under this program may be made in the open market or through privately negotiated transactions, and at times and in such amounts as Holdings deems appropriate. Holdings did not repurchase shares during the three months ended September 30, 20162017 under the authorized common stock repurchase program.
The following table provides information regarding repurchases of our common stock during the three months ended September 30, 2016:
|
| Total Number of |
| Average Price |
| Total Number of Shares |
| Approximate |
| ||
July 1 - July 31, 2016 |
| — |
| $ | — |
| — |
| $ | 185,249,408 |
|
August 1 - August 31, 2016 |
| — |
| — |
| — |
| 185,249,408 |
| ||
September 1 - September 30, 2016 |
| 116,975 |
| 12.26 |
| — |
| 185,249,408 |
| ||
Total |
| 116,975 |
| $ | 12.26 |
| — |
| $ | 185,249,408 |
|
(1) Represents2017. The shares repurchased during the three months ended September 30, 2017 relate entirely to shares of common stock surrendered to us to satisfy tax withholding obligations associated with the vesting of restricted shares issued to employees, pursuant to the provisions of our equity incentive plans.
|
| Total Number of |
| Average Price |
| Total Number |
| Approximate |
| ||
July 1 - July 31, 2017 |
| — |
| $ | — |
| — |
| $ | 185,249,408 |
|
August 1 - August 31, 2017 |
| 175,113 |
| 17.15 |
| — |
| 185,249,408 |
| ||
September 1 - September 30, 2017 |
| — |
| — |
| — |
| 185,249,408 |
| ||
Total |
| 175,113 |
| $ | 17.15 |
| — |
| $ | 185,249,408 |
|
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.applicable
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
None.
The exhibits to this report are listed in the Exhibit Index appearing on page 68 hereof.
Number | Description | |
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | ||
32.1 | ||
101 | The following financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2016 and 2017, (ii) Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016, (iii) Condensed Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2016 and 2017, (iv) Condensed Consolidated Statements of Changes in Equity and Income for the nine months ended September 30, 2017 and (v) Notes to Condensed Consolidated Financial Statements. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrants have duly caused this Report to be signed on their behalf by the undersigned, thereunto duly authorized.
| SELECT MEDICAL CORPORATION | |
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| By: | /s/ Martin F. Jackson |
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| Martin F. Jackson |
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| Executive Vice President and Chief Financial Officer |
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| (Duly Authorized Officer) |
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| By: | /s/ Scott A. Romberger |
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| Scott A. Romberger |
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| Senior Vice President, Chief Accounting Officer and Controller |
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| (Principal Accounting Officer) |
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Dated: November 2, 2017
| SELECT MEDICAL HOLDINGS CORPORATION | |
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| |
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| |
| By: | /s/ Martin F. Jackson |
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| Martin F. Jackson |
|
| Executive Vice President and Chief Financial Officer |
|
| (Duly Authorized Officer) |
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| |
| By: | /s/ Scott A. Romberger |
|
| Scott A. Romberger |
|
| Senior Vice President, Chief Accounting Officer and Controller |
|
| (Principal Accounting Officer) |
|
EXHIBIT INDEXDated: November 2, 2017
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