UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
| |
ý☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended June 30, 2018
2019
OR
|
| |
o☐ | TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file numbers: 001-34465 and 001-31441
SELECT MEDICAL HOLDINGS CORPORATIONCORPORATION
SELECT MEDICAL CORPORATION
(Exact name of Registrant as specified in its Charter)
|
| | |
Delaware Delaware
| | 20-1764048 23-2872718
|
Delaware | | 23-2872718 |
(State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification Number) |
4714 Gettysburg Road, P.O. Box 2034
Mechanicsburg, PA17055
(Address of Principal Executive Offices and Zip code)
(717) (717) 972-1100
(Registrants’ telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: |
| | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, par value $0.001 per share | SEM | New York Stock Exchange | (NYSE) |
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. Yesý ☒ No 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). Yesý ☒ No o☐
Indicate by check mark whether the Registrant, Select Medical Holdings Corporation, is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
|
| | | |
Large accelerated filerx | ☒ | Accelerated filero | ☐ |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| | |
Non-accelerated filer o
| | Smaller reporting company o
|
(Do not check if a smaller reporting company) | | Emerging Growth Companyo | ☐ |
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, Select Medical Corporation, is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
|
| | | |
Large accelerated filero | ☐ | Accelerated filero | ☐ |
Non-accelerated filer | ☒ | Smaller reporting company | ☐ |
| | |
Non-accelerated filer x
| | Smaller reporting company o
|
(Do not check if a smaller reporting company) | | Emerging Growth Companyo | ☐ |
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). Yes o☐ No ý☒
As of July 31, 2018,2019, Select Medical Holdings Corporation had outstanding 135,376,051135,620,857 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 Parent, LLC (“Concentra Group Holdings Parent”), and its subsidiaries. References to the “Company,” “we,” “us,” and “our” refer collectively to Holdings, Select, and Concentra Group Holdings Parent and its subsidiaries.
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
(unaudited)
(in thousands, except share and per share amounts)
|
| | | | | | | | | | | | | | | |
| Select Medical Holdings Corporation | | Select Medical Corporation |
| December 31, 2017 | | June 30, 2018 | | December 31, 2017 | | June 30, 2018 |
ASSETS | |
| | |
| | |
| | |
|
Current Assets: | |
| | |
| | |
| | |
|
Cash and cash equivalents | $ | 122,549 |
| | $ | 141,029 |
| | $ | 122,549 |
| | $ | 141,029 |
|
Accounts receivable | 691,732 |
| | 775,610 |
| | 691,732 |
| | 775,610 |
|
Prepaid income taxes | 31,387 |
| | 14,488 |
| | 31,387 |
| | 14,488 |
|
Other current assets | 75,158 |
| | 88,215 |
| | 75,158 |
| | 88,215 |
|
Total Current Assets | 920,826 |
| | 1,019,342 |
| | 920,826 |
| | 1,019,342 |
|
Property and equipment, net | 912,591 |
| | 965,844 |
| | 912,591 |
| | 965,844 |
|
Goodwill | 2,782,812 |
| | 3,314,606 |
| | 2,782,812 |
| | 3,314,606 |
|
Identifiable intangible assets, net | 326,519 |
| | 451,932 |
| | 326,519 |
| | 451,932 |
|
Other assets | 184,418 |
| | 213,076 |
| | 184,418 |
| | 213,076 |
|
Total Assets | $ | 5,127,166 |
| | $ | 5,964,800 |
| | $ | 5,127,166 |
| | $ | 5,964,800 |
|
LIABILITIES AND EQUITY | |
| | |
| | |
| | |
|
Current Liabilities: | |
| | |
| | |
| | |
|
Overdrafts | $ | 29,463 |
| | $ | 23,292 |
| | $ | 29,463 |
| | $ | 23,292 |
|
Current portion of long-term debt and notes payable | 22,187 |
| | 24,479 |
| | 22,187 |
| | 24,479 |
|
Accounts payable | 128,194 |
| | 131,830 |
| | 128,194 |
| | 131,830 |
|
Accrued payroll | 160,562 |
| | 149,967 |
| | 160,562 |
| | 149,967 |
|
Accrued vacation | 92,875 |
| | 109,958 |
| | 92,875 |
| | 109,958 |
|
Accrued interest | 19,885 |
| | 13,293 |
| | 19,885 |
| | 13,293 |
|
Accrued other | 143,166 |
| | 170,067 |
| | 143,166 |
| | 170,067 |
|
Income taxes payable | 9,071 |
| | 4,425 |
| | 9,071 |
| | 4,425 |
|
Total Current Liabilities | 605,403 |
| | 627,311 |
| | 605,403 |
| | 627,311 |
|
Long-term debt, net of current portion | 2,677,715 |
| | 3,386,209 |
| | 2,677,715 |
| | 3,386,209 |
|
Non-current deferred tax liability | 124,917 |
| | 150,694 |
| | 124,917 |
| | 150,694 |
|
Other non-current liabilities | 145,709 |
| | 172,427 |
| | 145,709 |
| | 172,427 |
|
Total Liabilities | 3,553,744 |
| | 4,336,641 |
| | 3,553,744 |
| | 4,336,641 |
|
Commitments and contingencies (Note 10) |
|
| |
|
| |
|
| |
|
|
Redeemable non-controlling interests | 640,818 |
| | 616,232 |
| | 640,818 |
| | 616,232 |
|
Stockholders’ Equity: | |
| | |
| | |
| | |
|
Common stock of Holdings, $0.001 par value, 700,000,000 shares authorized, 134,114,715 and 134,326,823 shares issued and outstanding at 2017 and 2018, respectively | 134 |
| | 134 |
| | — |
| | — |
|
Common stock of Select, $0.01 par value, 100 shares issued and outstanding | — |
| | — |
| | 0 |
| | 0 |
|
Capital in excess of par | 463,499 |
| | 474,812 |
| | 947,370 |
| | 959,173 |
|
Retained earnings (accumulated deficit) | 359,735 |
| | 420,525 |
| | (124,002 | ) | | (63,702 | ) |
Total Select Medical Holdings Corporation and Select Medical Corporation Stockholders’ Equity | 823,368 |
| | 895,471 |
| | 823,368 |
| | 895,471 |
|
Non-controlling interests | 109,236 |
| | 116,456 |
| | 109,236 |
| | 116,456 |
|
Total Equity | 932,604 |
| | 1,011,927 |
| | 932,604 |
| | 1,011,927 |
|
Total Liabilities and Equity | $ | 5,127,166 |
| | $ | 5,964,800 |
| | $ | 5,127,166 |
| | $ | 5,964,800 |
|
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 |
| For the Three Months Ended June 30, | | For the Three Months Ended June 30, |
| 2017 | | 2018 | | 2017 | | 2018 |
Net operating revenues | $ | 1,102,465 |
| | $ | 1,296,210 |
| | $ | 1,102,465 |
| | $ | 1,296,210 |
|
Costs and expenses: | |
| | |
| | |
| | |
|
Cost of services | 920,194 |
| | 1,094,731 |
| | 920,194 |
| | 1,094,731 |
|
General and administrative | 28,275 |
| | 29,194 |
| | 28,275 |
| | 29,194 |
|
Depreciation and amortization | 38,333 |
| | 51,724 |
| | 38,333 |
| | 51,724 |
|
Total costs and expenses | 986,802 |
| | 1,175,649 |
| | 986,802 |
| | 1,175,649 |
|
Income from operations | 115,663 |
| | 120,561 |
| | 115,663 |
| | 120,561 |
|
Other income and expense: | |
| | |
| | |
| | |
|
Equity in earnings of unconsolidated subsidiaries | 5,666 |
| | 4,785 |
| | 5,666 |
| | 4,785 |
|
Non-operating gain | — |
| | 6,478 |
| | — |
| | 6,478 |
|
Interest expense | (37,655 | ) | | (50,159 | ) | | (37,655 | ) | | (50,159 | ) |
Income before income taxes | 83,674 |
| | 81,665 |
| | 83,674 |
| | 81,665 |
|
Income tax expense | 32,374 |
| | 21,106 |
| | 32,374 |
| | 21,106 |
|
Net income | 51,300 |
| | 60,559 |
| | 51,300 |
| | 60,559 |
|
Less: Net income attributable to non-controlling interests | 9,245 |
| | 14,048 |
| | 9,245 |
| | 14,048 |
|
Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation | $ | 42,055 |
| | $ | 46,511 |
| | $ | 42,055 |
| | $ | 46,511 |
|
Income per common share: | |
| | |
| | |
| | |
|
Basic | $ | 0.32 |
| | $ | 0.35 |
| | |
| | |
|
Diluted | $ | 0.32 |
| | $ | 0.35 |
| | |
| | |
|
Weighted average shares outstanding: | |
| | |
| | |
| | |
|
Basic | 128,624 |
| | 129,830 |
| | |
| | |
|
Diluted | 128,777 |
| | 129,924 |
| | |
| | |
|
|
| | | | | | | | | | | | | | | |
| Select Medical Holdings Corporation | | Select Medical Corporation |
| December 31, 2018 | | June 30, 2019 | | December 31, 2018 | | June 30, 2019 |
ASSETS | |
| | |
| | |
| | |
|
Current Assets: | |
| | |
| | |
| | |
|
Cash and cash equivalents | $ | 175,178 |
| | $ | 124,036 |
| | $ | 175,178 |
| | $ | 124,036 |
|
Accounts receivable | 706,676 |
| | 791,769 |
| | 706,676 |
| | 791,769 |
|
Prepaid income taxes | 20,539 |
| | 12,318 |
| | 20,539 |
| | 12,318 |
|
Other current assets | 90,131 |
| | 99,942 |
| | 90,131 |
| | 99,942 |
|
Total Current Assets | 992,524 |
| | 1,028,065 |
| | 992,524 |
| | 1,028,065 |
|
Operating lease right-of-use assets | — |
| | 971,385 |
| | — |
| | 971,385 |
|
Property and equipment, net | 979,810 |
| | 1,008,555 |
| | 979,810 |
| | 1,008,555 |
|
Goodwill | 3,320,726 |
| | 3,385,394 |
| | 3,320,726 |
| | 3,385,394 |
|
Identifiable intangible assets, net | 437,693 |
| | 419,335 |
| | 437,693 |
| | 419,335 |
|
Other assets | 233,512 |
| | 294,206 |
| | 233,512 |
| | 294,206 |
|
Total Assets | $ | 5,964,265 |
| | $ | 7,106,940 |
| | $ | 5,964,265 |
| | $ | 7,106,940 |
|
LIABILITIES AND EQUITY | |
| | |
| | |
| | |
|
Current Liabilities: | |
| | |
| | |
| | |
|
Overdrafts | $ | 25,083 |
| | $ | 27,259 |
| | $ | 25,083 |
| | $ | 27,259 |
|
Current operating lease liabilities | — |
| | 202,484 |
| | — |
| | 202,484 |
|
Current portion of long-term debt and notes payable | 43,865 |
| | 9,012 |
| | 43,865 |
| | 9,012 |
|
Accounts payable | 146,693 |
| | 138,015 |
| | 146,693 |
| | 138,015 |
|
Accrued payroll | 172,386 |
| | 147,397 |
| | 172,386 |
| | 147,397 |
|
Accrued vacation | 110,660 |
| | 122,277 |
| | 110,660 |
| | 122,277 |
|
Accrued interest | 12,137 |
| | 10,234 |
| | 12,137 |
| | 10,234 |
|
Accrued other | 190,691 |
| | 184,247 |
| | 190,691 |
| | 184,247 |
|
Income taxes payable | 3,671 |
| | 11,767 |
| | 3,671 |
| | 11,767 |
|
Total Current Liabilities | 705,186 |
| | 852,692 |
| | 705,186 |
| | 852,692 |
|
Non-current operating lease liabilities | — |
| | 813,903 |
| | — |
| | 813,903 |
|
Long-term debt, net of current portion | 3,249,516 |
| | 3,349,702 |
| | 3,249,516 |
| | 3,349,702 |
|
Non-current deferred tax liability | 153,895 |
| | 147,716 |
| | 153,895 |
| | 147,716 |
|
Other non-current liabilities | 158,940 |
| | 102,555 |
| | 158,940 |
| | 102,555 |
|
Total Liabilities | 4,267,537 |
| | 5,266,568 |
| | 4,267,537 |
| | 5,266,568 |
|
Commitments and contingencies (Note 13) |
|
| |
|
| |
|
| |
|
|
Redeemable non-controlling interests | 780,488 |
| | 844,422 |
| | 780,488 |
| | 844,422 |
|
Stockholders’ Equity: | |
| | |
| | |
| | |
|
Common stock of Holdings, $0.001 par value, 700,000,000 shares authorized, 135,265,864 and 134,563,999 shares issued and outstanding at 2018 and 2019, respectively | 135 |
| | 135 |
| | — |
| | — |
|
Common stock of Select, $0.01 par value, 100 shares issued and outstanding | — |
| | — |
| | 0 |
| | 0 |
|
Capital in excess of par | 482,556 |
| | 492,569 |
| | 970,156 |
| | 988,333 |
|
Retained earnings (accumulated deficit) | 320,351 |
| | 353,305 |
| | (167,114 | ) | | (142,324 | ) |
Total Select Medical Holdings Corporation and Select Medical Corporation Stockholders’ Equity | 803,042 |
| | 846,009 |
| | 803,042 |
| | 846,009 |
|
Non-controlling interests | 113,198 |
| | 149,941 |
| | 113,198 |
| | 149,941 |
|
Total Equity | 916,240 |
| | 995,950 |
| | 916,240 |
| | 995,950 |
|
Total Liabilities and Equity | $ | 5,964,265 |
| | $ | 7,106,940 |
| | $ | 5,964,265 |
| | $ | 7,106,940 |
|
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 | | | | | | | | | |
| For the Six Months Ended June 30, | | For the Six Months Ended June 30, | Select Medical Holdings Corporation | | Select Medical Corporation |
| 2017 | | 2018 | | 2017 | | 2018 | For the Three Months Ended June 30, | | For the Three Months Ended June 30, |
| | | | | | | | 2018 | | 2019 | | 2018 | | 2019 |
Net operating revenues | $ | 2,193,982 |
| | $ | 2,549,174 |
| | $ | 2,193,982 |
| | $ | 2,549,174 |
| $ | 1,296,210 |
| | $ | 1,361,364 |
| | $ | 1,296,210 |
| | $ | 1,361,364 |
|
Costs and expenses: | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
Cost of services | 1,849,332 |
| | 2,160,544 |
| | 1,849,332 |
| | 2,160,544 |
| |
Cost of services, exclusive of depreciation and amortization | | 1,094,731 |
| | 1,150,150 |
| | 1,094,731 |
| | 1,150,150 |
|
General and administrative | 56,350 |
| | 60,976 |
| | 56,350 |
| | 60,976 |
| 29,194 |
| | 31,339 |
| | 29,194 |
| | 31,339 |
|
Depreciation and amortization | 80,872 |
| | 98,495 |
| | 80,872 |
| | 98,495 |
| 51,724 |
| | 54,993 |
| | 51,724 |
| | 54,993 |
|
Total costs and expenses | 1,986,554 |
| | 2,320,015 |
| | 1,986,554 |
| | 2,320,015 |
| 1,175,649 |
| | 1,236,482 |
| | 1,175,649 |
| | 1,236,482 |
|
Income from operations | 207,428 |
| | 229,159 |
| | 207,428 |
| | 229,159 |
| 120,561 |
| | 124,882 |
| | 120,561 |
| | 124,882 |
|
Other income and expense: | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
Loss on early retirement of debt | (19,719 | ) | | (10,255 | ) | | (19,719 | ) | | (10,255 | ) | |
Equity in earnings of unconsolidated subsidiaries | 11,187 |
| | 9,482 |
| | 11,187 |
| | 9,482 |
| 4,785 |
| | 7,394 |
| | 4,785 |
| | 7,394 |
|
Non-operating gain (loss) | (49 | ) | | 6,877 |
| | (49 | ) | | 6,877 |
| |
Non-operating gain | | 6,478 |
| | — |
| | 6,478 |
| | — |
|
Interest expense | (78,508 | ) | | (97,322 | ) | | (78,508 | ) | | (97,322 | ) | (50,159 | ) | | (51,464 | ) | | (50,159 | ) | | (51,464 | ) |
Income before income taxes | 120,339 |
| | 137,941 |
| | 120,339 |
| | 137,941 |
| 81,665 |
| | 80,812 |
| | 81,665 |
| | 80,812 |
|
Income tax expense | 45,576 |
| | 33,400 |
| | 45,576 |
| | 33,400 |
| 21,106 |
| | 20,826 |
| | 21,106 |
| | 20,826 |
|
Net income | 74,763 |
| | 104,541 |
| | 74,763 |
| | 104,541 |
| 60,559 |
| | 59,986 |
| | 60,559 |
| | 59,986 |
|
Less: Net income attributable to non-controlling interests | 16,838 |
| | 24,291 |
| | 16,838 |
| | 24,291 |
| 14,048 |
| | 15,170 |
| | 14,048 |
| | 15,170 |
|
Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation | $ | 57,925 |
| | $ | 80,250 |
| | $ | 57,925 |
| | $ | 80,250 |
| $ | 46,511 |
| | $ | 44,816 |
| | $ | 46,511 |
| | $ | 44,816 |
|
Income per common share: | |
| | |
| | |
| | |
| |
Earnings per common share (Note 12): | | |
| | |
| | |
| | |
|
Basic | $ | 0.44 |
| | $ | 0.60 |
| | |
| | |
| $ | 0.35 |
| | $ | 0.33 |
| | |
| | |
|
Diluted | $ | 0.44 |
| | $ | 0.60 |
| | |
| | |
| $ | 0.35 |
| | $ | 0.33 |
| | |
| | |
|
Weighted average shares outstanding: | |
| | |
| | |
| | |
| |
Basic | 128,544 |
| | 129,761 |
| | |
| | |
| |
Diluted | 128,703 |
| | 129,871 |
| | |
| | |
| |
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 |
| For the Six Months Ended June 30, | | For the Six Months Ended June 30, |
| 2018 | | 2019 | | 2018 | | 2019 |
Net operating revenues | $ | 2,549,174 |
| | $ | 2,685,995 |
| | $ | 2,549,174 |
| | $ | 2,685,995 |
|
Costs and expenses: | |
| | |
| | |
| | |
|
Cost of services, exclusive of depreciation and amortization | 2,160,544 |
| | 2,282,242 |
| | 2,160,544 |
| | 2,282,242 |
|
General and administrative | 60,976 |
| | 60,016 |
| | 60,976 |
| | 60,016 |
|
Depreciation and amortization | 98,495 |
| | 107,131 |
| | 98,495 |
| | 107,131 |
|
Total costs and expenses | 2,320,015 |
| | 2,449,389 |
| | 2,320,015 |
| | 2,449,389 |
|
Income from operations | 229,159 |
| | 236,606 |
| | 229,159 |
| | 236,606 |
|
Other income and expense: | |
| | |
| | |
| | |
|
Loss on early retirement of debt | (10,255 | ) | | — |
| | (10,255 | ) | | — |
|
Equity in earnings of unconsolidated subsidiaries | 9,482 |
| | 11,760 |
| | 9,482 |
| | 11,760 |
|
Non-operating gain | 6,877 |
| | 6,532 |
| | 6,877 |
| | 6,532 |
|
Interest expense | (97,322 | ) | | (102,275 | ) | | (97,322 | ) | | (102,275 | ) |
Income before income taxes | 137,941 |
| | 152,623 |
| | 137,941 |
| | 152,623 |
|
Income tax expense | 33,400 |
| | 39,293 |
| | 33,400 |
| | 39,293 |
|
Net income | 104,541 |
| | 113,330 |
| | 104,541 |
| | 113,330 |
|
Less: Net income attributable to non-controlling interests | 24,291 |
| | 27,680 |
| | 24,291 |
| | 27,680 |
|
Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation | $ | 80,250 |
| | $ | 85,650 |
| | $ | 80,250 |
| | $ | 85,650 |
|
Earnings per common share (Note 12): | |
| | |
| | |
| | |
|
Basic | $ | 0.60 |
| | $ | 0.63 |
| | |
| | |
|
Diluted | $ | 0.60 |
| | $ | 0.63 |
| | |
| | |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Condensed Consolidated Statements of Changes in Equity and Income
(unaudited)
(in thousands)
| | | | | Select Medical Holdings Corporation Stockholders | | | | | For the Six Months Ended June 30, 2019 |
| Redeemable Non-controlling Interests | | | Common Stock Issued | | Common Stock Par Value | | Capital in Excess of Par | | Retained Earnings | | Total Stockholders’ Equity | | Non-controlling Interests | | Total Equity | | | | | |
Balance at December 31, 2017 | $ | 640,818 |
| | | 134,115 |
| | $ | 134 |
| | $ | 463,499 |
| | $ | 359,735 |
| | $ | 823,368 |
| | $ | 109,236 |
| | $ | 932,604 |
| |
| | Select Medical Holdings Corporation Stockholders | | | | |
| | Common Stock Issued | | Common Stock Par Value | | Capital in Excess of Par | | Retained Earnings | | Total Stockholders’ Equity | | Non-controlling Interests | | Total Equity |
Balance at December 31, 2018 | | 135,266 |
| | $ | 135 |
| | $ | 482,556 |
| | $ | 320,351 |
| | $ | 803,042 |
| | $ | 113,198 |
| | $ | 916,240 |
|
Net income attributable to Select Medical Holdings Corporation | |
| | | |
| | |
| | |
| | 80,250 |
| | 80,250 |
| |
|
| | 80,250 |
| |
| | |
| | |
| | 40,834 |
| | 40,834 |
| |
|
| | 40,834 |
|
Net income attributable to non-controlling interests | 16,652 |
| | | |
| | |
| | |
| | |
| | — |
| | 7,639 |
| | 7,639 |
| |
| | |
| | |
| | |
| | — |
| | 4,810 |
| | 4,810 |
|
Issuance of restricted stock | |
| | | 174 |
| | 0 |
| | 0 |
| | |
| | — |
| |
|
| | — |
| 21 |
| | 0 |
| | 0 |
| | |
| | — |
| |
|
| | — |
|
Forfeitures of unvested restricted stock | | | | (88 | ) | | 0 |
| | 0 |
| | | | — |
| | | | — |
| (24 | ) | | 0 |
| | 0 |
| | | | — |
| | | | — |
|
Vesting of restricted stock | | | | | | | | 9,562 |
| | | | 9,562 |
| | | | 9,562 |
| | | | | 5,488 |
| | | | 5,488 |
| | | | 5,488 |
|
Repurchase of common shares | |
| | | (49 | ) | | 0 |
| | (490 | ) | | (399 | ) | | (889 | ) | |
|
| | (889 | ) | |
Exercise of stock options | |
| | | 175 |
| | 0 |
| | 1,620 |
| | |
| | 1,620 |
| |
|
| | 1,620 |
| |
Issuance and exchange of non-controlling interests | 163,659 |
| | | | | | | 1,553 |
| | 74,341 |
| | 75,894 |
| | 1,921 |
| | 77,815 |
| |
Issuance of non-controlling interests | | | | | | | | | | — |
| | 6,837 |
| | 6,837 |
|
Distributions to and purchases of non-controlling interests | (215,084 | ) | | | |
| | |
| | (932 | ) | | (83,617 | ) | | (84,549 | ) | | (3,052 | ) | | (87,601 | ) | |
| | |
| | 259 |
| |
|
| | 259 |
| | (2,739 | ) | | (2,480 | ) |
Redemption adjustment on non-controlling interests | 9,551 |
| | | |
| | |
| | |
| | (9,551 | ) | | (9,551 | ) | |
|
| | (9,551 | ) | |
| | |
| | |
| | (47,470 | ) | | (47,470 | ) | |
|
| | (47,470 | ) |
Other | 636 |
| | | |
| | |
| | |
| | (234 | ) | | (234 | ) | | 712 |
| | 478 |
| |
| | |
| | |
| | (122 | ) | | (122 | ) | | 413 |
| | 291 |
|
Balance at June 30, 2018 | $ | 616,232 |
| | | 134,327 |
| | $ | 134 |
| | $ | 474,812 |
| | $ | 420,525 |
| | $ | 895,471 |
| | $ | 116,456 |
| | $ | 1,011,927 |
| |
Balance at March 31, 2019 | | 135,263 |
| | $ | 135 |
| | $ | 488,303 |
| | $ | 313,593 |
| | $ | 802,031 |
| | $ | 122,519 |
| | $ | 924,550 |
|
Net income attributable to Select Medical Holdings Corporation | | | | | | | | 44,816 |
| | 44,816 |
| | | | 44,816 |
|
Net income attributable to non-controlling interests | | | | | | | | | | — |
| | 3,663 |
| | 3,663 |
|
Issuance of restricted stock | | 187 |
| | 0 |
| | 0 |
| | | | — |
| | | | — |
|
Vesting of restricted stock | | | | | | 5,591 |
| | | | 5,591 |
| | | | 5,591 |
|
Repurchase of common shares | | (936 | ) | | 0 |
| | (8,164 | ) | | (5,456 | ) | | (13,620 | ) | | | | (13,620 | ) |
Exercise of stock options | | 50 |
| | 0 |
| | 459 |
| | | | 459 |
| | | | 459 |
|
Issuance of non-controlling interests | | | | | | 6,366 |
| | | | 6,366 |
| | 24,761 |
| | 31,127 |
|
Distributions to and purchases of non-controlling interests | | | | | | 14 |
| | | | 14 |
| | (1,430 | ) | | (1,416 | ) |
Redemption adjustment on non-controlling interests | | | | | | | | 270 |
| | 270 |
| | | | 270 |
|
Other | | | | | | | | 82 |
| | 82 |
| | 428 |
| | 510 |
|
Balance at June 30, 2019 | | 134,564 |
| | $ | 135 |
| | $ | 492,569 |
| | $ | 353,305 |
| | $ | 846,009 |
| | $ | 149,941 |
| | $ | 995,950 |
|
| | | | For the Six Months Ended June 30, 2018 |
| | | | | | | | | | | | | | | | | | | | | | |
| | | Select Medical Corporation Stockholders | | | | | Select Medical Holdings Corporation Stockholders | | | | |
| Redeemable Non-controlling Interests | | | Common Stock Issued | | Common Stock Par Value | | Capital in Excess of Par | | Accumulated Deficit | | Total Stockholders’ Equity | | Non-controlling Interests | | Total Equity | Common Stock Issued | | Common Stock Par Value | | Capital in Excess of Par | | Retained Earnings | | Total Stockholders’ Equity | | Non-controlling Interests | | Total Equity |
Balance at December 31, 2017 | $ | 640,818 |
| | | 0 |
| | $ | 0 |
| | $ | 947,370 |
| | $ | (124,002 | ) | | $ | 823,368 |
| | $ | 109,236 |
| | $ | 932,604 |
| 134,115 |
| | $ | 134 |
| | $ | 463,499 |
| | $ | 359,735 |
| | $ | 823,368 |
| | $ | 109,236 |
| | $ | 932,604 |
|
Net income attributable to Select Medical Corporation | |
| | | |
| | |
| | |
| | 80,250 |
| | 80,250 |
| | |
| | 80,250 |
| |
Net income attributable to Select Medical Holdings Corporation | | |
| | |
| | |
| | 33,739 |
| | 33,739 |
| | | | 33,739 |
|
Net income attributable to non-controlling interests | 16,652 |
| | | |
| | |
| | |
| | |
| | — |
| | 7,639 |
| | 7,639 |
| |
| | |
| | |
| | |
| | — |
| | 4,500 |
| | 4,500 |
|
Additional investment by Holdings | |
| | | |
| | |
| | 1,620 |
| | |
| | 1,620 |
| | |
| | 1,620 |
| |
Dividends declared and paid to Holdings | |
| | | |
| | |
| | |
| | (889 | ) | | (889 | ) | | |
| | (889 | ) | |
Contribution related to restricted stock award issuances by Holdings | |
| | | |
| | |
| | 9,562 |
| | |
| | 9,562 |
| | |
| | 9,562 |
| |
Issuance of restricted stock | | 4 |
| | 0 |
| | 0 |
| | |
| | — |
| | | | — |
|
Forfeitures of unvested restricted stock | | (88 | ) | | 0 |
| | 0 |
| | | | — |
| | | | — |
|
Vesting of restricted stock | | | | | | 4,717 |
| | | | 4,717 |
| | | | 4,717 |
|
Repurchase of common shares | | (7 | ) | | 0 |
| | (69 | ) | | (53 | ) | | (122 | ) | | | | (122 | ) |
Exercise of stock options | | 80 |
| | 0 |
| | 738 |
| | |
| | 738 |
| | | | 738 |
|
Issuance and exchange of non-controlling interests | | | | | | | | 74,341 |
| | 74,341 |
| | | | 74,341 |
|
Distributions to and purchases of non-controlling interests | | |
| | |
| | |
| | (83,233 | ) | | (83,233 | ) | | (1,094 | ) | | (84,327 | ) |
Redemption adjustment on non-controlling interests | | |
| | |
| | |
| | (1,051 | ) | | (1,051 | ) | | | | (1,051 | ) |
Other | | |
| | |
| | |
| | 103 |
| | 103 |
| | 35 |
| | 138 |
|
Balance at March 31, 2018 | | 134,104 |
| | $ | 134 |
| | $ | 468,885 |
| | $ | 383,581 |
| | $ | 852,600 |
| | $ | 112,677 |
| | $ | 965,277 |
|
Net income attributable to Select Medical Holdings Corporation | | | | | | | | 46,511 |
| | 46,511 |
| | | | 46,511 |
|
Net income attributable to non-controlling interests | | | | | | | | | | — |
| | 3,139 |
| | 3,139 |
|
Issuance of restricted stock | | 170 |
| | 0 |
| | 0 |
| | | | — |
| | | | — |
|
Vesting of restricted stock | | | | | | 4,845 |
| | | | 4,845 |
| | | | 4,845 |
|
Repurchase of common shares | | (42 | ) | | 0 |
| | (421 | ) | | (346 | ) | | (767 | ) | | | | (767 | ) |
Exercise of stock options | | 95 |
| | 0 |
| | 882 |
| | | | 882 |
| | | | 882 |
|
Issuance and exchange of non-controlling interests | 163,659 |
| | | | | | | 1,553 |
| | 74,341 |
| | 75,894 |
| | 1,921 |
| | 77,815 |
| | | | | 1,553 |
| | | | 1,553 |
| | 1,921 |
| | 3,474 |
|
Distributions to and purchases of non-controlling interests | (215,084 | ) | | | |
| | |
| | (932 | ) | | (83,617 | ) | | (84,549 | ) | | (3,052 | ) | | (87,601 | ) | | | | | (932 | ) | | (384 | ) | | (1,316 | ) | | (1,958 | ) | | (3,274 | ) |
Redemption adjustment on non-controlling interests | 9,551 |
| | | |
| | |
| | |
| | (9,551 | ) | | (9,551 | ) | | |
| | (9,551 | ) | | | | | | | (8,500 | ) | | (8,500 | ) | | | | (8,500 | ) |
Other | 636 |
| | | |
| | |
| | |
| | (234 | ) | | (234 | ) | | 712 |
| | 478 |
| | | | | | | (337 | ) | | (337 | ) | | 677 |
| | 340 |
|
Balance at June 30, 2018 | $ | 616,232 |
| | | 0 |
| | $ | 0 |
| | $ | 959,173 |
| | $ | (63,702 | ) | | $ | 895,471 |
| | $ | 116,456 |
| | $ | 1,011,927 |
| 134,327 |
| | $ | 134 |
| | $ | 474,812 |
| | $ | 420,525 |
| | $ | 895,471 |
| | $ | 116,456 |
| | $ | 1,011,927 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Condensed Consolidated Statements of Changes in Equity and Income (Continued)
(unaudited)
(in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Six Months Ended June 30, 2019 |
| | | | | |
| Select Medical Corporation Stockholders | | | | |
| Common Stock Issued | | Common Stock Par Value | | Capital in Excess of Par | | Accumulated Deficit | | Total Stockholders’ Equity | | Non-controlling Interests | | Total Equity |
Balance at December 31, 2018 | 0 |
| | $ | 0 |
| | $ | 970,156 |
| | $ | (167,114 | ) | | $ | 803,042 |
| | $ | 113,198 |
| | $ | 916,240 |
|
Net income attributable to Select Medical Corporation | |
| | |
| | |
| | 40,834 |
| | 40,834 |
| | |
| | 40,834 |
|
Net income attributable to non-controlling interests | |
| | |
| | |
| | |
| | — |
| | 4,810 |
| | 4,810 |
|
Contribution related to restricted stock award issuances by Holdings | |
| | |
| | 5,488 |
| | |
| | 5,488 |
| | |
| | 5,488 |
|
Issuance of non-controlling interests | | | | | | | | | — |
| | 6,837 |
| | 6,837 |
|
Distributions to and purchases of non-controlling interests | |
| | |
| | 259 |
| |
|
| | 259 |
| | (2,739 | ) | | (2,480 | ) |
Redemption adjustment on non-controlling interests | |
| | |
| | |
| | (47,470 | ) | | (47,470 | ) | | |
| | (47,470 | ) |
Other | |
| | |
| | |
| | (122 | ) | | (122 | ) | | 413 |
| | 291 |
|
Balance at March 31, 2019 | 0 |
| | $ | 0 |
| | $ | 975,903 |
| | $ | (173,872 | ) | | $ | 802,031 |
| | $ | 122,519 |
| | $ | 924,550 |
|
Net income attributable to Select Medical Corporation | |
| | |
| | |
| | 44,816 |
| | 44,816 |
| | | | 44,816 |
|
Net income attributable to non-controlling interests | | | | | | | | | — |
| | 3,663 |
| | 3,663 |
|
Additional investment by Holdings | | | | | 459 |
| | |
| | 459 |
| | | | 459 |
|
Dividends declared and paid to Holdings | | | | | |
| | (13,620 | ) | | (13,620 | ) | | | | (13,620 | ) |
Contribution related to restricted stock award issuances by Holdings | |
| | |
| | 5,591 |
| | |
| | 5,591 |
| | | | 5,591 |
|
Issuance of non-controlling interests | | | | | 6,366 |
| | | | 6,366 |
| | 24,761 |
| | 31,127 |
|
Distributions to and purchases of non-controlling interests | |
| | |
| | 14 |
| | | | 14 |
| | (1,430 | ) | | (1,416 | ) |
Redemption adjustment on non-controlling interests | |
| | |
| | |
| | 270 |
| | 270 |
| | |
| | 270 |
|
Other | |
| | |
| | |
| | 82 |
| | 82 |
| | 428 |
| | 510 |
|
Balance at June 30, 2019 | 0 |
| | $ | 0 |
| | $ | 988,333 |
| | $ | (142,324 | ) | | $ | 846,009 |
| | $ | 149,941 |
| | $ | 995,950 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Six Months Ended June 30, 2018 |
| | | | | |
| Select Medical Corporation Stockholders | | | | |
| Common Stock Issued | | Common Stock Par Value | | Capital in Excess of Par | | Accumulated Deficit | | Total Stockholders’ Equity | | Non-controlling Interests | | Total Equity |
Balance at December 31, 2017 | 0 |
| | $ | 0 |
| | $ | 947,370 |
| | $ | (124,002 | ) | | $ | 823,368 |
| | $ | 109,236 |
| | $ | 932,604 |
|
Net income attributable to Select Medical Corporation | |
| | |
| | |
| | 33,739 |
| | 33,739 |
| | |
| | 33,739 |
|
Net income attributable to non-controlling interests | |
| | |
| | |
| | |
| | — |
| | 4,500 |
| | 4,500 |
|
Additional investment by Holdings | |
| | |
| | 738 |
| | |
| | 738 |
| | |
| | 738 |
|
Dividends declared and paid to Holdings | |
| | |
| | |
| | (122 | ) | | (122 | ) | | |
| | (122 | ) |
Contribution related to restricted stock award issuances by Holdings | |
| | |
| | 4,717 |
| | |
| | 4,717 |
| | |
| | 4,717 |
|
Issuance and exchange of non-controlling interests | | | | | | | 74,341 |
| | 74,341 |
| | | | 74,341 |
|
Distributions to and purchases of non-controlling interests | |
| | |
| | |
| | (83,233 | ) | | (83,233 | ) | | (1,094 | ) | | (84,327 | ) |
Redemption adjustment on non-controlling interests | |
| | |
| | |
| | (1,051 | ) | | (1,051 | ) | | |
| | (1,051 | ) |
Other | |
| | |
| | |
| | 103 |
| | 103 |
| | 35 |
| | 138 |
|
Balance at March 31, 2018 | 0 |
| | $ | 0 |
| | $ | 952,825 |
| | $ | (100,225 | ) | | $ | 852,600 |
| | $ | 112,677 |
| | $ | 965,277 |
|
Net income attributable to Select Medical Corporation | | | | | | | 46,511 |
| | 46,511 |
| | | | 46,511 |
|
Net income attributable to non-controlling interests | | | | | | | | | — |
| | 3,139 |
| | 3,139 |
|
Additional investment by Holdings | | | | | 882 |
| | | | 882 |
| | | | 882 |
|
Dividends declared and paid to Holdings | | | | | | | (767 | ) | | (767 | ) | | | | (767 | ) |
Contribution related to restricted stock award issuances by Holdings | | | | | 4,845 |
| | | | 4,845 |
| | | | 4,845 |
|
Issuance and exchange of non-controlling interests | | | | | 1,553 |
| | | | 1,553 |
| | 1,921 |
| | 3,474 |
|
Distributions to and purchases of non-controlling interests | | | | | (932 | ) | | (384 | ) | | (1,316 | ) | | (1,958 | ) | | (3,274 | ) |
Redemption adjustment on non-controlling interests | | | | | | | (8,500 | ) | | (8,500 | ) | | | | (8,500 | ) |
Other | | | | | | | (337 | ) | | (337 | ) | | 677 |
| | 340 |
|
Balance at June 30, 2018 | 0 |
| | $ | 0 |
| | $ | 959,173 |
| | $ | (63,702 | ) | | $ | 895,471 |
| | $ | 116,456 |
| | $ | 1,011,927 |
|
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 Six Months Ended June 30, | | For the Six Months Ended June 30, | For the Six Months Ended June 30, | | For the Six Months Ended June 30, |
| 2017 | | 2018 | | 2017 | | 2018 | 2018 | | 2019 | | 2018 | | 2019 |
Operating activities | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
Net income | $ | 74,763 |
| | $ | 104,541 |
| | $ | 74,763 |
| | $ | 104,541 |
| $ | 104,541 |
| | $ | 113,330 |
| | $ | 104,541 |
| | $ | 113,330 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
Distributions from unconsolidated subsidiaries | 10,933 |
| | 7,830 |
| | 10,933 |
| | 7,830 |
| 7,830 |
| | 11,148 |
| | 7,830 |
| | 11,148 |
|
Depreciation and amortization | 80,872 |
| | 98,495 |
| | 80,872 |
| | 98,495 |
| 98,495 |
| | 107,131 |
| | 98,495 |
| | 107,131 |
|
Provision for bad debts | 745 |
| | 102 |
| | 745 |
| | 102 |
| 102 |
| | 1,958 |
| | 102 |
| | 1,958 |
|
Equity in earnings of unconsolidated subsidiaries | (11,187 | ) | | (9,482 | ) | | (11,187 | ) | | (9,482 | ) | (9,482 | ) | | (11,760 | ) | | (9,482 | ) | | (11,760 | ) |
Loss on extinguishment of debt | 6,527 |
| | 484 |
| | 6,527 |
| | 484 |
| 484 |
| | — |
| | 484 |
| | — |
|
Gain on sale of assets and businesses | (9,523 | ) | | (6,980 | ) | | (9,523 | ) | | (6,980 | ) | (6,980 | ) | | (6,354 | ) | | (6,980 | ) | | (6,354 | ) |
Stock compensation expense | 9,270 |
| | 10,911 |
| | 9,270 |
| | 10,911 |
| 10,911 |
| | 12,613 |
| | 10,911 |
| | 12,613 |
|
Amortization of debt discount, premium and issuance costs | 5,974 |
| | 6,486 |
| | 5,974 |
| | 6,486 |
| 6,486 |
| | 6,326 |
| | 6,486 |
| | 6,326 |
|
Deferred income taxes | (1,474 | ) | | (1,691 | ) | | (1,474 | ) | | (1,691 | ) | (1,691 | ) | | (6,290 | ) | | (1,691 | ) | | (6,290 | ) |
Changes in operating assets and liabilities, net of effects of business combinations: | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
Accounts receivable | (140,949 | ) | | (5,774 | ) | | (140,949 | ) | | (5,774 | ) | (5,774 | ) | | (85,873 | ) | | (5,774 | ) | | (85,873 | ) |
Other current assets | (5,557 | ) | | (3,011 | ) | | (5,557 | ) | | (3,011 | ) | (3,011 | ) | | (9,236 | ) | | (3,011 | ) | | (9,236 | ) |
Other assets | 4,621 |
| | 6,684 |
| | 4,621 |
| | 6,684 |
| 6,684 |
| | (939 | ) | | 6,684 |
| | (939 | ) |
Accounts payable | 759 |
| | (5,462 | ) | | 759 |
| | (5,462 | ) | (5,462 | ) | | 2,670 |
| | (5,462 | ) | | 2,670 |
|
Accrued expenses | (4,833 | ) | | 1,207 |
| | (4,833 | ) | | 1,207 |
| 1,207 |
| | (18,156 | ) | | 1,207 |
| | (18,156 | ) |
Income taxes | 19,399 |
| | 12,610 |
| | 19,399 |
| | 12,610 |
| 12,610 |
| | 16,346 |
| | 12,610 |
| | 16,346 |
|
Net cash provided by operating activities | 40,340 |
| | 216,950 |
| | 40,340 |
| | 216,950 |
| 216,950 |
| | 132,914 |
| | 216,950 |
| | 132,914 |
|
Investing activities | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
Business combinations, net of cash acquired | (18,508 | ) | | (517,704 | ) | | (18,508 | ) | | (517,704 | ) | (517,704 | ) | | (86,062 | ) | | (517,704 | ) | | (86,062 | ) |
Purchases of property and equipment | (105,302 | ) | | (81,648 | ) | | (105,302 | ) | | (81,648 | ) | (81,648 | ) | | (89,285 | ) | | (81,648 | ) | | (89,285 | ) |
Investment in businesses | (9,874 | ) | | (3,291 | ) | | (9,874 | ) | | (3,291 | ) | (3,291 | ) | | (52,257 | ) | | (3,291 | ) | | (52,257 | ) |
Proceeds from sale of assets and businesses | 34,552 |
| | 6,672 |
| | 34,552 |
| | 6,672 |
| 6,672 |
| | 125 |
| | 6,672 |
| | 125 |
|
Net cash used in investing activities | (99,132 | ) | | (595,971 | ) | | (99,132 | ) | | (595,971 | ) | (595,971 | ) | | (227,479 | ) | | (595,971 | ) | | (227,479 | ) |
Financing activities | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
Borrowings on revolving facilities | 630,000 |
| | 265,000 |
| | 630,000 |
| | 265,000 |
| 265,000 |
| | 635,000 |
| | 265,000 |
| | 635,000 |
|
Payments on revolving facilities | (550,000 | ) | | (345,000 | ) | | (550,000 | ) | | (345,000 | ) | (345,000 | ) | | (460,000 | ) | | (345,000 | ) | | (460,000 | ) |
Proceeds from term loans | 1,139,487 |
| | 779,904 |
| | 1,139,487 |
| | 779,904 |
| 779,904 |
| | — |
| | 779,904 |
| | — |
|
Payments on term loans | (1,173,692 | ) | | (5,750 | ) | | (1,173,692 | ) | | (5,750 | ) | (5,750 | ) | | (132,685 | ) | | (5,750 | ) | | (132,685 | ) |
Revolving facility debt issuance costs | (4,392 | ) | | (1,333 | ) | | (4,392 | ) | | (1,333 | ) | (1,333 | ) | | — |
| | (1,333 | ) | | — |
|
Borrowings of other debt | 9,444 |
| | 19,928 |
| | 9,444 |
| | 19,928 |
| 19,928 |
| | 14,230 |
| | 19,928 |
| | 14,230 |
|
Principal payments on other debt | (10,437 | ) | | (11,521 | ) | | (10,437 | ) | | (11,521 | ) | (11,521 | ) | | (12,680 | ) | | (11,521 | ) | | (12,680 | ) |
Repurchase of common stock | (600 | ) | | (889 | ) | | — |
| | — |
| (889 | ) | | (13,620 | ) | | — |
| | — |
|
Dividends paid to Holdings | — |
| | — |
| | (600 | ) | | (889 | ) | — |
| | — |
| | (889 | ) | | (13,620 | ) |
Proceeds from exercise of stock options | 963 |
| | 1,620 |
| | — |
| | — |
| 1,620 |
| | 459 |
| | — |
| | — |
|
Equity investment by Holdings | — |
| | — |
| | 963 |
| | 1,620 |
| — |
| | — |
| | 1,620 |
| | 459 |
|
Decrease in overdrafts | (5,228 | ) | | (6,171 | ) | | (5,228 | ) | | (6,171 | ) | |
Increase (decrease) in overdrafts | | (6,171 | ) | | 2,176 |
| | (6,171 | ) | | 2,176 |
|
Proceeds from issuance of non-controlling interests | 3,553 |
| | 2,926 |
| | 3,553 |
| | 2,926 |
| 2,926 |
| | 18,288 |
| | 2,926 |
| | 18,288 |
|
Distributions to non-controlling interests | (5,536 | ) | | (301,213 | ) | | (5,536 | ) | | (301,213 | ) | |
Distributions to and purchases of non-controlling interests | | (301,213 | ) | | (7,745 | ) | | (301,213 | ) | | (7,745 | ) |
Net cash provided by financing activities | 33,562 |
| | 397,501 |
| | 33,562 |
| | 397,501 |
| 397,501 |
| | 43,423 |
| | 397,501 |
| | 43,423 |
|
Net increase (decrease) in cash and cash equivalents | (25,230 | ) | | 18,480 |
| | (25,230 | ) | | 18,480 |
| 18,480 |
| | (51,142 | ) | | 18,480 |
| | (51,142 | ) |
Cash and cash equivalents at beginning of period | 99,029 |
| | 122,549 |
| | 99,029 |
| | 122,549 |
| 122,549 |
| | 175,178 |
| | 122,549 |
| | 175,178 |
|
Cash and cash equivalents at end of period | $ | 73,799 |
| | $ | 141,029 |
| | $ | 73,799 |
| | $ | 141,029 |
| $ | 141,029 |
| | $ | 124,036 |
| | $ | 141,029 |
| | $ | 124,036 |
|
Supplemental Information | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
Cash paid for interest | $ | 76,650 |
| | $ | 97,338 |
| | $ | 76,650 |
| | $ | 97,338 |
| $ | 97,338 |
| | $ | 97,909 |
| | $ | 97,338 |
| | $ | 97,909 |
|
Cash paid for taxes | $ | 27,626 |
| | $ | 22,480 |
| | $ | 27,626 |
| | $ | 22,480 |
| 22,480 |
| | 29,241 |
| | 22,480 |
| | 29,241 |
|
Non-cash equity exchange for acquisition of U.S. HealthWorks | $ | — |
| | $ | 238,000 |
| | $ | — |
| | $ | 238,000 |
| 238,000 |
| | — |
| | 238,000 |
| | — |
|
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 PresentationThe unaudited condensed consolidated financial statements of Select Medical Holdings Corporation (“Holdings”) include 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 June 30, 2018,2019, and for the three and six month periods ended June 30, 20172018 and 2018,2019, have been prepared pursuant to the rules and regulations of the Securities Exchange Commission (the “SEC”) for interim reporting and accounting principles generally accepted in 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 six months ended June 30, 2018,2019, are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2018.2019. 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, 2017,2018, contained in the Company’s Annual Report on Form 10-K filed with the SEC on February 22, 2018.21, 2019.
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, including disclosure of contingencies, at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Recent Accounting PronouncementsCredit Risk Concentrations
Lease AccountingFinancial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash balances and trade receivables. The Company’s excess cash is held with large financial institutions. The Company grants unsecured credit to its patients, most of whom reside in the service area of the Company’s facilities and are insured under third-party payor agreements. The Company’s general policy is to verify insurance coverage prior to the date of admission for patients admitted to the Company’s critical illness recovery hospitals and rehabilitation hospitals. Within the Company’s outpatient rehabilitation clinics, the Company verifies insurance coverage prior to the patient’s visit. Within the Company’s Concentra centers, the Company verifies insurance coverage or receives authorization from the patient’s employer prior to the patient’s visit.
Beginning in February 2016,Because of the Financial Accounting Standards Board (the “FASB”) issued several Accounting Standards Updates (“ASU”)geographic diversity of the Company’s facilities and non-governmental third-party payors, Medicare represents the Company’s only significant concentration of credit risk. Approximately 16% of the Company’s accounts receivable is from Medicare at both December 31, 2018, and June 30, 2019.
Leases
The Company evaluates whether a contract is or contains a lease at the inception of the contract. Upon lease commencement, the date on which established Topic 842, Leases (the “standard”). This standard includes a lessee accounting model thatlessor makes the underlying asset available to the Company for use, the Company classifies the lease as either an operating or finance lease. Most of the Company’s facility and equipment leases are classified as operating leases.
Balance Sheet
For both operating and finance leases, the Company recognizes two types of leases: finance and operating. This standard 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,liability at lease commencement. A right-of-use asset represents the FASB retainedCompany’s right to use an underlying asset for the dual model, requiring leaseslease term while the lease liability represents an obligation to be classified as either operating or finance. The recognition, measurement, and presentation of expenses and cash flowsmake lease payments arising from a lease bywhich are measured on a lessee will depend ondiscounted basis. The Company elected the short-term lease exemption for its classification as finance or operating lease. For short-termequipment leases; accordingly, equipment leases with an initial term of twelve12 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 generallyrecorded on the consolidated balance sheets.
Lease liabilities are measured at the present value of the remaining, fixed lease payments at lease commencement. The Company primarily uses its incremental borrowing rate, based on the information available at lease commencement, in determining the present value of its remaining lease payments. The Company’s leases may also specify extension or termination clauses. These options are factored into the measurement of the lease liability when it is reasonably certain that the Company will exercise the option. Right-of-use assets are measured at an amount equal to the initial lease liability, plus any prepaid lease payments (less any incentives received, such as reimbursement for leasehold improvements) and initial direct costs, at the lease commencement date.
The Company has elected to account for lease and non-lease components, such as common area maintenance, as a single lease component for its facility leases. As a result, the fixed payments that would otherwise be allocated to the non-lease components will be accounted for as lease payments and are included in the measurement of the Company’s right-of-use asset and lease liability.
Statement of Operations
For the Company’s operating leases, rent expense, a component of cost of services and general and administrative expenses on the consolidated statements of operations, is recognized on a straight-line basis over the respective lease term. The straight-line rent expense is reflective of the interest expense on the lease liability using the effective interest method and the amortization of the right-of-use asset. The Company may enter into arrangements to sublease portions of its facilities and the Company typically retains the obligation to the lessor under these arrangements. The Company’s subleases are classified as operating leases; accordingly, the Company continues to account for the original leases as it did prior to commencement of the sublease. Sublease income, a component of cost of services on the consolidated statements of operations, is recognized on a straight-line basis, as a reduction to rent expense, over the term of the sublease.
For the Company’s finance leases, interest expense on the lease liability is recognized using the effective interest method. Amortization expense related to the right-of-use asset is recognized on a straight-line basis over the shorter of the estimated useful life of the asset or the lease term.
The amendmentsCompany elected the short-term lease exemption for its equipment leases. For these leases, the Company recognizes lease payments on a straight-line basis over the lease term and variable lease payments are expensed as incurred. These expenses are included as components of cost of services on the consolidated statements of operations.
The Company makes payments related to changes in indexes or rates after the lease commencement date. Additionally, the Company makes payments, which are not fixed at lease commencement, for property taxes, insurance, and common area maintenance related to its facility leases. These variable lease payments, which are expensed as incurred, are included as a component of cost of services and general and administrative expenses on the consolidated statements of operations.
Recent Accounting Pronouncements
Financial Instruments
In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments — Credit Losses: Measurement of Credit Losses on Financial Instruments. The current standard delays the recognition of a credit loss on a financial asset until the loss is probable of occurring. The new standard removes the requirement that a credit loss be probable of occurring for it to be recognized and requires entities to use historical experience, current conditions, and reasonable and supportable forecasts to estimate their future expected credit losses. The Company’s accounts receivable derived from contracts with customers will be subject to ASU 2016-13.
The standard will take effect for public companiesbe effective for fiscal years beginning after December 15, 2018,2019, including interim periods within those fiscal years. Earlier application is permitted as of the beginning of an interim or annual reporting period. AThe guidance must be applied using a modified retrospective approach is required for leases that exist or are entered into afterthrough a cumulative-effect adjustment to retained earnings as of the beginning of the earliest comparative period in the financial statements.
Upon adoption, Given the very high rate of collectability of the Company’s accounts receivable derived from contracts with customers, the Company will recognize significant assets and liabilities onbelieves that the consolidated balance sheets as a resultimpact of the operating lease obligations of the Company. Operating lease expense will stillASU 2016-13 is unlikely to be recognized as rent expense on a straight-line basis over the respective lease terms in the consolidated statements of operations.material.
The Company will implement the new standard beginning January 1, 2019. The Company has completed its inventory of leases and has begun to implement a new IT platform to account for leases under the new standard. The Company is currently validating the data in the IT platform to ensure it is complete and accurate. The Company’s remaining implementation efforts are focused on designingthe accounting processes, disclosure processes,risk assessments, and internal controls in order to accountcontrol objectives associated with accounting for its leasesfinancial instruments under the new standard.
Recently Adopted Accounting Pronouncements
Revenue from Contracts with CustomersLeases
Beginning in May 2014, the FASB issued severalThe Company adopted Accounting Standards UpdatesCodification (“ASC”) Topic 842, Leases using a modified retrospective approach as of January 1, 2019, for leases which established Topic 606, Revenue from Contracts with Customers (the “standard”). This standard supersedes existing revenue recognition requirementsexisted on that date. Prior comparative periods were not adjusted and seeks to eliminate most industry-specific guidance under current GAAP. 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 expectscontinue to be entitledreported in exchange for those goods or services.accordance with ASC Topic 840, Leases.
The Company adoptedelected the new standard on January 1, 2018, usingpackage of practical expedients, which permitted the full retrospective transition method. AdoptionCompany not to reassess under ASC Topic 842 the Company’s prior conclusions about lease identification, lease classification, and initial direct costs. The Company did not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to the Company.
The adoption of the revenue recognition standard impacted the Company’s reported results as follows:
|
| | | | | | | | | | | |
| Three Months Ended June 30, 2017 |
| As Reported | | As Adjusted(1) | | Adoption Impact |
| (in thousands) |
Condensed Consolidated Statements of Operations | | | | | |
Net operating revenues | $ | 1,120,675 |
| | $ | 1,102,465 |
| | $ | (18,210 | ) |
Bad debt expense | 18,174 |
| | (36 | ) | | (18,210 | ) |
|
| | | | | | | | | | | |
| Six Months Ended June 30, 2017 |
| As Reported | | As Adjusted(1) | | Adoption Impact |
| (in thousands) |
Condensed Consolidated Statements of Operations | | | | | |
Net operating revenues | $ | 2,232,036 |
| | $ | 2,193,982 |
| | $ | (38,054 | ) |
Bad debt expense | 38,799 |
| | 745 |
| | (38,054 | ) |
| | | | | |
Condensed Consolidated Statements of Cash Flows | | | | | |
Provision for bad debts | 38,799 |
| | 745 |
| | $ | (38,054 | ) |
Changes in accounts receivable | (179,003 | ) | | (140,949 | ) | | 38,054 |
|
_____________________________________________________________
(1) Bad debt expense is now includedresulted in cost of services on the condensed consolidated statements of operations.
|
| | | | | | | | | | | |
| December 31, 2017 |
| As Reported | | As Adjusted | | Adoption Impact |
| (in thousands) |
Condensed Consolidated Balance Sheets | | | | | |
Accounts receivable | $ | 767,276 |
| | $ | 691,732 |
| | $ | (75,544 | ) |
Allowance for doubtful accounts | 75,544 |
| | — |
| | (75,544 | ) |
Accounts receivable | $ | 691,732 |
| | $ | 691,732 |
| | $ | — |
|
The Company has presented the applicable disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers in Note 7.
Income Taxes
In October 2016, the FASB issued ASU 2016-16, IncomeTaxes (Topic 740), and Intra-Entity Transfers of Assets Other Than Inventory. Previous GAAP prohibited the recognition of currentoperating lease right-of-use assets of $1,015.0 million and operating lease liabilities of $1,057.0 million at January 1, 2019. The difference between the operating lease right-of-use assets and operating lease liabilities resulted from the reclassification of prepaid rent, deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. The ASU requires an entity to recognize the income tax consequences of an intra‑entity transfer of an asset other than inventory when the transfer occurs.rent, unamortized lease incentives, and acquired favorable and unfavorable leasehold interests upon adoption. The Company adopteddid not recognize a cumulative-effect adjustment to retained earnings upon adoption.
| |
3. | Redeemable Non-Controlling Interests |
The ownership interests held by outside parties in subsidiaries, limited liability companies, and limited partnerships controlled by the guidance effective January 1, 2018. AdoptionCompany are classified as non-controlling interests. Some of the guidance did notCompany’s non-controlling ownership interests consist of outside parties that have a material impact oncertain redemption rights that, if exercised, require the Company’s consolidated financial statements.Company to purchase the parties’ ownership interests. These interests are classified and reported as redeemable non-controlling interests and have been adjusted to their approximate redemption values.
The changes in redeemable non-controlling interests, which are the same for Holdings and Select, are as follows (in thousands):
|
| | | |
Balance as of December 31, 2017 | $ | 640,818 |
|
Net income attributable to redeemable non-controlling interests | 5,743 |
|
Issuance and exchange of redeemable non-controlling interests | 163,659 |
|
Distributions to and purchases of redeemable non-controlling interests | (203,972 | ) |
Redemption adjustment on redeemable non-controlling interests | 1,051 |
|
Other | 175 |
|
Balance as of March 31, 2018 | $ | 607,474 |
|
Net income attributable to redeemable non-controlling interests | 10,909 |
|
Distributions to and purchases of redeemable non-controlling interests | (11,112 | ) |
Redemption adjustment on redeemable non-controlling interests | 8,500 |
|
Other | 461 |
|
Balance as of June 30, 2018 | $ | 616,232 |
|
3. Acquisitions |
| | | |
Balance as of December 31, 2018 | $ | 780,488 |
|
Net income attributable to redeemable non-controlling interests | 7,700 |
|
Distributions to and purchases of redeemable non-controlling interests | (2,771 | ) |
Redemption adjustment on redeemable non-controlling interests | 47,470 |
|
Other | 354 |
|
Balance as of March 31, 2019 | $ | 833,241 |
|
Net income attributable to redeemable non-controlling interests | 11,507 |
|
Distributions to and purchases of redeemable non-controlling interests | (395 | ) |
Redemption adjustment on redeemable non-controlling interests | (270 | ) |
Other | 339 |
|
Balance as of June 30, 2019 | $ | 844,422 |
|
U.S. HealthWorks Acquisition
On February 1, 2018, Concentra Inc. (“Concentra”) acquired all of the issued and outstanding shares of stock of U.S. HealthWorks, Inc. (“U.S. HealthWorks”), an occupational medicine and urgent care service provider, pursuant to the terms of an Equity Purchase and Contribution Agreement (the “Purchase Agreement”from Dignity Health Holding Corporation (“DHHC”) dated as of October 22, 2017, by and among .
Concentra acquired U.S. HealthWorks Concentra Group Holdings, LLC (“Concentra Group Holdings”),for $753.6 million. DHHC, a subsidiary of Dignity Health, was issued a 20.0% equity interest in Concentra Group Holdings Parent, LLC (“Concentra Group Holdings Parent”) and Dignity Health Holding Corporation (“DHHC”). For the six months ended June 30, 2018, the Company recognized $2.9 million of U.S. HealthWorks acquisition costs which are included in general and administrative expense.
In connection with the closing of the transaction, Concentra Group Holdings made distributions to its equity holders and redeemed certain of its outstanding equity interests from existing minority equity holders. Subsequently, Concentra Group Holdings and a wholly owned subsidiary of Concentra Group Holdings Parent merged, with Concentra Group Holdings surviving the merger and becoming a wholly owned subsidiary of Concentra Group Holdings Parent. As a result of the merger, the equity interests of Concentra Group Holdings outstanding after the redemption described above were exchanged for membership interests in Concentra Group Holdings Parent.
Concentra acquired U.S. HealthWorks for $753.0 million. The Purchase Agreement provides for certain post-closing adjustments for cash, indebtedness, transaction expenses, and working capital. DHHC, a subsidiary of Dignity Health, was issued a 20% equity interest in Concentra Group Holdings Parent, which was valued at $238.0 million. The remainder of the purchase price was paid in cash. Select retained a majority voting interest in Concentra Group Holdings Parent following the closing of the transaction.
For the U.S. HealthWorks acquisition, the Company allocated the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their preliminary estimated fair values in accordance with the provisions of Accounting Standards CodificationASC Topic 805, Business Combinations. The Company is inDuring the process of completing its assessment of the acquisition-date fair values of the assets acquired and the liabilities assumed and determining the estimated useful lives of long-lived assets and finite-lived intangible assets; therefore, the values set forth below are subject to adjustment during the measurement period. The amount of these potential adjustments could be significant. The Company expects to complete its purchase price allocation activities byyear ended December 31, 2018.2018, the Company finalized the purchase accounting related to this acquisition.
The following table reconciles the preliminary allocationfair values of estimated fair value to identifiable net assets and goodwill to the consideration given for the acquired business (in thousands):
|
| | | |
Accounts receivable | $ | 68,934 |
|
Other current assets | 10,810 |
|
Property and equipment | 69,712 |
|
Identifiable intangible assets | 140,406 |
|
Other assets | 25,435 |
|
Goodwill | 540,067 |
|
Total assets | 855,364 |
|
Accounts payable and other current liabilities | 49,925 |
|
Deferred income taxes and other long-term liabilities | 51,851 |
|
Total liabilities | 101,776 |
|
Consideration given | $ | 753,588 |
|
|
| | | |
Identifiable tangible assets | $ | 181,189 |
|
Identifiable intangible assets | 140,406 |
|
Goodwill | 534,347 |
|
Total assets | 855,942 |
|
Total liabilities | 102,942 |
|
Consideration given | $ | 753,000 |
|
A preliminary estimate for goodwill of $534.3 million has been recognized for the business combination, representing the excess of the consideration given over the fair value of identifiable net assets acquired. The value of goodwill is derived from U.S. HealthWorks’ future earnings potential and its assembled workforce. Goodwill has been assigned to the Concentra reporting unit and is not deductible for tax purposes. However, prior to its acquisition by the Company, U.S. HealthWorks completed certain acquisitions that resulted in tax deductible goodwill with an estimated value of $83.1 million, which the Company will deduct through 2032.
For the three months ended June 30, 2018, U.S. HealthWorks hadcontributed net operating revenues of $139.4 million which is reflected in the Company’s consolidated statementsstatement of operations. For the period February 1, 2018 through June 30, 2018, U.S. HealthWorks hadcontributed net operating revenues of $229.4 million which is reflected in the Company’s consolidated statementsstatement of operations for the six months ended June 30, 2018. Due to the integrated nature of ourthe Company’s operations, the Company believes that it is not practicable to separately identify earnings of U.S. HealthWorks on a stand-alone basis.
Pro Forma Results
The following pro forma unaudited results of operations have been prepared assuming the acquisition of U.S. HealthWorks occurred on January 1, 2017. These results are not necessarily indicative of the results of future operations nor of the results that would have occurred had the acquisition been consummated on the aforementioned date.
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2017 | | 2018 | | 2017 | | 2018 |
| (in thousands, except per share amounts) |
Net revenue | $ | 1,243,221 |
| | $ | 1,296,210 |
| | $ | 2,471,705 |
| | $ | 2,596,755 |
|
Net income | 51,080 |
| | 62,612 |
| | 66,668 |
| | 107,524 |
|
Net income attributable to the Company | 38,954 |
| | 48,563 |
| | 46,070 |
| | 82,365 |
|
Income per common share: | | | | | |
| | |
Basic | $ | 0.29 |
| | $ | 0.36 |
| | $ | 0.35 |
| | $ | 0.61 |
|
Diluted | $ | 0.29 |
| | $ | 0.36 |
| | $ | 0.35 |
| | $ | 0.61 |
|
The pro forma financial information is based on For the preliminary allocation of the purchase price of the U.S. HealthWorks acquisitionthree 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 U.S. HealthWorks had been a subsidiary of the Company as of January 1, 2017.
For the six months ended June 30, 2017,2019, the Company’s results of operations include U.S. HealthWorks for the entire period and no pro forma adjustments were made.
|
| | | | | | | |
| Three Months Ended June 30, 2018 | | Six Months Ended June 30, 2018 |
| (in thousands) |
Net operating revenues | $ | 1,296,210 |
| | $ | 2,596,755 |
|
Net income attributable to the Company | 48,563 |
| | 82,365 |
|
The Company’s pro forma results were adjusted to include therecognize U.S. HealthWorks acquisition costs recognized by the Company during 2017 and 2018, which were approximately $5.7 million. Foras of January 1, 2017. Accordingly, for the six months ended June 30, 2018, pro forma results were adjusted to exclude approximately $2.9 million of U.S. HealthWorks acquisition costs which were recognized bycosts.
During the six months ended June 30, 2019, the Company duringrecognized a non-operating gain of $6.5 million which resulted from the period.sale of 22 wholly-owned outpatient rehabilitation clinics to a non-consolidating subsidiary. During the six months ended June 30, 2018, the Company recognized a non-operating gain of $6.9 million. The non-operating gain resulted principally from the sale of 26 wholly-owned outpatient rehabilitation clinics to a non-consolidating subsidiary.
| |
6. | Variable Interest Entities |
Concentra does not own many of its medical practices, as certain states prohibit the “corporate practice of medicine,” which restricts business corporations from practicing medicine through the direct employment of physicians or from exercising control over medical decisions by physicians. In these states, Concentra typically enters into long-term management agreements with professional corporations or associations that are owned by licensed physicians, which, in turn, employ or contract with physicians who provide professional medical services in its occupational health centers.
The management agreements have terms that provide for Concentra to conduct, supervise, and manage the day-to-day non-medical operations of the occupational health centers and provide all management and administrative services. Concentra receives a management fee for these services, which is based, in part, on the performance of the professional corporation or association. Additionally, the outstanding voting equity interests of the professional corporations or associations are typically owned by licensed physicians appointed at Concentra’s discretion. Concentra has the ability to direct the transfer of ownership of the professional corporation or association to a new licensed physician at any time.
The total assets of Concentra’s variable interest entities, which are comprised principally of accounts receivable, were $166.2 million and $193.2 million at December 31, 2018, and June 30, 2019, respectively. The total liabilities of Concentra’s variable interest entities, which are comprised principally of accounts payable, accrued expenses, and obligations payable for services received under the aforementioned management agreements, were $164.4 million and $191.6 million at December 31, 2018, and June 30, 2019, respectively.
The Company has operating and finance leases for its facilities and certain equipment. The Company leases its corporate office space from related parties.
The Company’s critical illness recovery hospitals and rehabilitation hospitals generally have lease terms of 10 years with two, five year renewal options. These renewal options vary for hospitals which operate as a hospital within a hospital, or “HIH.” The Company’s outpatient rehabilitation clinics generally have lease terms of five years with two, three to five year renewal options. The Company’s Concentra centers generally have lease terms of 10 years with two, five year renewal options.
For the three and six months ended June 30, 2019, the Company’s total lease cost was as follows (in thousands):
|
| | | | | | | | | | | |
| Three Months Ended June 30, 2019 |
| Unrelated Parties | | Related Parties | | Total |
Operating lease cost | $ | 67,718 |
| | $ | 1,342 |
| | $ | 69,060 |
|
Finance lease cost: | | | | | |
Amortization of right-of-use assets | 90 |
| | — |
| | 90 |
|
Interest on lease liabilities | 199 |
| | — |
| | 199 |
|
Short-term lease cost | 592 |
| | — |
| | 592 |
|
Variable lease cost | 8,755 |
| | 85 |
| | 8,840 |
|
Sublease income | (2,442 | ) | | — |
| | (2,442 | ) |
Total lease cost | $ | 74,912 |
| | $ | 1,427 |
| | $ | 76,339 |
|
|
| | | | | | | | | | | |
| Six Months Ended June 30, 2019 |
| Unrelated Parties | | Related Parties | | Total |
Operating lease cost | $ | 134,554 |
| | $ | 2,684 |
| | $ | 137,238 |
|
Finance lease cost: | | | | | |
Amortization of right-of-use assets | 126 |
| | — |
| | 126 |
|
Interest on lease liabilities | 296 |
| | — |
| | 296 |
|
Short-term lease cost | 1,184 |
| | — |
| | 1,184 |
|
Variable lease cost | 20,591 |
| | 241 |
| | 20,832 |
|
Sublease income | (4,930 | ) | | — |
| | (4,930 | ) |
Total lease cost | $ | 151,821 |
| | $ | 2,925 |
| | $ | 154,746 |
|
For the six months ended June 30, 2019, supplemental cash flow information related to leases was as follows (in thousands):
|
| | | |
Cash paid for amounts included in the measurement of lease liabilities: | |
Operating cash flows for operating leases | $ | 136,300 |
|
Operating cash flows for finance leases | 274 |
|
Financing cash flows for finance leases | 142 |
|
Right-of-use assets obtained in exchange for lease liabilities: | |
Operating leases(1) | $ | 1,123,793 |
|
Finance leases | 9,102 |
|
_______________________________________________________________________________ | |
(1) | Includes the right-of-use assets obtained in exchange for lease liabilities of $1,057.0 million which were recognized upon adoption of ASC Topic 842 at January 1, 2019. |
As of June 30, 2019, supplemental balance sheet information related to leases was as follows (in thousands):
|
| | | | | | | | | | | |
| Operating Leases |
| Unrelated Parties | | Related Parties | | Total |
Operating lease right-of-use assets | $ | 951,993 |
| | $ | 19,392 |
| | $ | 971,385 |
|
| | | | | |
Current operating lease liabilities | $ | 197,660 |
| | $ | 4,824 |
| | $ | 202,484 |
|
Non-current operating lease liabilities | 796,240 |
| | 17,663 |
| | 813,903 |
|
Total operating lease liabilities | $ | 993,900 |
| | $ | 22,487 |
| | $ | 1,016,387 |
|
|
| | | | | | | | | | | |
| Finance Leases |
| Unrelated Parties | | Related Parties | | Total |
Property and equipment, net | $ | 5,099 |
| | $ | — |
| | $ | 5,099 |
|
| | | | | |
Current portion of long-term debt and notes payable | $ | 204 |
| | $ | — |
| | $ | 204 |
|
Long-term debt, net of current portion | 13,185 |
| | — |
| | 13,185 |
|
Total finance lease liabilities | $ | 13,389 |
| | $ | — |
| | $ | 13,389 |
|
As of June 30, 2019, the weighted average remaining lease terms and discount rates were as follows:
|
| | |
Weighted average remaining lease term (in years): | |
Operating leases | 8.1 |
|
Finance leases | 34.8 |
|
Weighted average discount rate: | |
Operating leases | 5.9 | % |
Finance leases | 7.4 | % |
As of June 30, 2019, maturities of lease liabilities were approximately as follows (in thousands):
|
| | | | | | | | | | | |
| Operating Leases | | Finance Leases | | Total |
2019 (remainder of year) | $ | 132,470 |
| | $ | 588 |
| | $ | 133,058 |
|
2020 | 238,479 |
| | 1,182 |
| | 239,661 |
|
2021 | 200,677 |
| | 1,193 |
| | 201,870 |
|
2022 | 159,238 |
| | 1,203 |
| | 160,441 |
|
2023 | 118,365 |
| | 1,214 |
| | 119,579 |
|
Thereafter | 516,615 |
| | 31,630 |
| | 548,245 |
|
Total undiscounted cash flows | 1,365,844 |
| | 37,010 |
| | 1,402,854 |
|
Less: Imputed interest | 349,457 |
| | 23,621 |
| | 373,078 |
|
Total discounted lease liabilities | $ | 1,016,387 |
| | $ | 13,389 |
| | $ | 1,029,776 |
|
As disclosed in the Company’s 2018 Annual Report on Form 10-K, the Company’s undiscounted future minimum lease obligations on long-term, non-cancelable operating leases with related and unrelated parties were approximately as follows as of December 31, 2018 (in thousands):
|
| | | |
| Total |
2019 | $ | 267,846 |
|
2020 | 231,711 |
|
2021 | 193,155 |
|
2022 | 150,155 |
|
2023 | 107,759 |
|
Thereafter | 484,038 |
|
| $ | 1,434,664 |
|
4.Intangible AssetsGoodwill
The following table shows changes in the carrying amounts of goodwill by reporting unit for the six months ended June 30, 2018:2019:
|
| | | | | | | | | | | | | | | | | | | |
| Critical Illness Recovery Hospital(1) | | Rehabilitation Hospital(1) | | Outpatient Rehabilitation | | Concentra | | Total |
| (in thousands) |
Balance as of December 31, 2017 | $ | 1,045,220 |
| | $ | 415,528 |
| | $ | 647,522 |
| | $ | 674,542 |
| | $ | 2,782,812 |
|
Acquired | — |
| | 1,118 |
| | 2,465 |
| | 535,595 |
| | 539,178 |
|
Measurement period adjustment | — |
| | — |
| | — |
| | (1,248 | ) | | (1,248 | ) |
Sold | — |
| | — |
| | (6,136 | ) | | — |
| | (6,136 | ) |
Balance as of June 30, 2018 | $ | 1,045,220 |
| | $ | 416,646 |
| | $ | 643,851 |
| | $ | 1,208,889 |
| | $ | 3,314,606 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Total |
| (in thousands) |
Balance as of December 31, 2018 | $ | 1,045,220 |
| | $ | 416,646 |
| | $ | 642,422 |
| | $ | 1,216,438 |
| | $ | 3,320,726 |
|
Acquired | 30,028 |
| | 14,254 |
| | 7,712 |
| | 18,298 |
| | 70,292 |
|
Sold | — |
| | — |
| | (5,624 | ) | | — |
| | (5,624 | ) |
Balance as of June 30, 2019 | $ | 1,075,248 |
| | $ | 430,900 |
| | $ | 644,510 |
| | $ | 1,234,736 |
| | $ | 3,385,394 |
|
| |
(1) | The critical illness recovery hospital reporting unit was previously referred to as the long term acute care reporting unit. The rehabilitation hospital reporting unit was previously referred to as the inpatient rehabilitation reporting unit. |
Identifiable Intangible Assets
The following table provides the gross carrying amounts, accumulated amortization, and net carrying amounts for the Company’s identifiable intangible assets:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 | | June 30, 2019 |
| | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| | (in thousands) |
Indefinite-lived intangible assets: | | |
| | |
| | |
| | |
| | |
| | |
|
Trademarks | | $ | 166,698 |
| | $ | — |
| | $ | 166,698 |
| | $ | 166,698 |
| | $ | — |
| | $ | 166,698 |
|
Certificates of need | | 19,174 |
| | — |
| | 19,174 |
| | 17,080 |
| | — |
| | 17,080 |
|
Accreditations | | 1,857 |
| | — |
| | 1,857 |
| | 1,857 |
| | — |
| | 1,857 |
|
Finite-lived intangible assets: | | |
| | |
| | |
| | |
| | |
| | |
|
Trademarks | | 5,000 |
| | (4,583 | ) | | 417 |
| | 5,000 |
| | (5,000 | ) | | — |
|
Customer relationships | | 280,710 |
| | (61,900 | ) | | 218,810 |
| | 284,440 |
| | (74,516 | ) | | 209,924 |
|
Favorable leasehold interests(1) | | 13,553 |
| | (6,064 | ) | | 7,489 |
| | — |
| | — |
| | — |
|
Non-compete agreements | | 29,400 |
| | (6,152 | ) | | 23,248 |
| | 31,197 |
| | (7,421 | ) | | 23,776 |
|
Total identifiable intangible assets | | $ | 516,392 |
| | $ | (78,699 | ) | | $ | 437,693 |
| | $ | 506,272 |
| | $ | (86,937 | ) | | $ | 419,335 |
|
_______________________________________________________________________________ | |
(1) | Favorable leasehold interests are a component of the operating lease right-of-use assets upon adoption of ASC Topic 842, Leases. |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 | | June 30, 2018 |
| | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| | (in thousands) |
Indefinite-lived intangible assets: | | |
| | |
| | |
| | |
| | |
| | |
|
Trademarks | | $ | 166,698 |
| | $ | — |
| | $ | 166,698 |
| | $ | 166,698 |
| | $ | — |
| | $ | 166,698 |
|
Certificates of need | | 19,155 |
| | — |
| | 19,155 |
| | 19,173 |
| | — |
| | 19,173 |
|
Accreditations | | 1,895 |
| | — |
| | 1,895 |
| | 1,895 |
| | — |
| | 1,895 |
|
Finite-lived intangible assets: | | |
| | |
| | |
| | |
| | |
| | |
|
Trademarks | | — |
| | — |
| | — |
| | 5,000 |
| | (2,083 | ) | | 2,917 |
|
Customer relationships | | 143,953 |
| | (38,281 | ) | | 105,672 |
| | 278,969 |
| | (49,617 | ) | | 229,352 |
|
Favorable leasehold interests | | 13,295 |
| | (4,319 | ) | | 8,976 |
| | 13,553 |
| | (5,148 | ) | | 8,405 |
|
Non-compete agreements | | 28,023 |
| | (3,900 | ) | | 24,123 |
| | 28,472 |
| | (4,980 | ) | | 23,492 |
|
Total identifiable intangible assets | | $ | 373,019 |
| | $ | (46,500 | ) | | $ | 326,519 |
| | $ | 513,760 |
| | $ | (61,828 | ) | | $ | 451,932 |
|
The Company’s accreditations and indefinite-lived trademarks have renewal terms and the costs to renew these intangible assets are expensed as incurred. At June 30, 2018,2019, the accreditations and indefinite-lived trademarks have a weighted average time until next renewal of 1.5 years and 8.77.7 years, respectively.
The Company’s finite-lived customer relationships, non-compete agreements, and trademarksintangible assets amortize over their estimated useful lives. Amortization expense was $4.3$7.8 million and $7.8$8.9 million for the three months ended June 30, 20172018 and 2018,2019, respectively. Amortization expense was $8.7$14.2 million and $14.2$16.0 million for the six months ended June 30, 20172018 and 2018,2019, respectively. The Company’s leasehold interests have finite lives and 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.
| |
5.9.
| 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.
As of June 30, 2018,2019, the Company’s long-term debt and notes payable arewere as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| Principal Outstanding | | Unamortized Premium (Discount) | | Unamortized Issuance Costs | | Carrying Value | | | Fair Value |
Select: | |
| | |
| | |
| | |
| | | |
|
6.375% senior notes | $ | 710,000 |
| | $ | 436 |
| | $ | (3,689 | ) | | $ | 706,747 |
| | | $ | 710,852 |
|
Credit facilities: | |
| | |
| | |
| | |
| | | |
|
Revolving facility | 195,000 |
| | — |
| | — |
| | 195,000 |
| | | 179,400 |
|
Term loan | 1,031,068 |
| | (8,879 | ) | | (8,458 | ) | | 1,013,731 |
| | | 1,027,201 |
|
Other debt, including finance leases | 74,864 |
| | — |
| | (444 | ) | | 74,420 |
| | | 74,420 |
|
Total Select debt | 2,010,932 |
| | (8,443 | ) | | (12,591 | ) | | 1,989,898 |
| | | 1,991,873 |
|
Concentra: | |
| | |
| | |
| | |
| | | |
|
Credit facilities: | |
| | |
| | |
| | |
| | | |
|
Term loans | 1,380,297 |
| | (2,354 | ) | | (15,648 | ) | | 1,362,295 |
| | | 1,380,158 |
|
Other debt, including finance leases | 6,521 |
| | — |
| | — |
| | 6,521 |
| | | 6,521 |
|
Total Concentra debt | 1,386,818 |
| | (2,354 | ) | | (15,648 | ) | | 1,368,816 |
| | | 1,386,679 |
|
Total debt | $ | 3,397,750 |
| | $ | (10,797 | ) | | $ | (28,239 | ) | | $ | 3,358,714 |
| | | $ | 3,378,552 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| Principal Outstanding | | Unamortized Premium (Discount) | | Unamortized Issuance Costs | | Carrying Value | | | Fair Value |
Select: | |
| | |
| | |
| | |
| | | |
|
6.375% senior notes | $ | 710,000 |
| | $ | 664 |
| | $ | (5,601 | ) | | $ | 705,063 |
| | | $ | 718,094 |
|
Credit facilities: | |
| | |
| | |
| | |
| | | |
|
Revolving facility | 150,000 |
| | — |
| | — |
| | 150,000 |
| | | 138,000 |
|
Term loans | 1,135,625 |
| | (11,444 | ) | | (11,504 | ) | | 1,112,677 |
| | | 1,148,401 |
|
Other | 43,680 |
| | — |
| | (500 | ) | | 43,180 |
| | | 43,180 |
|
Total Select debt | 2,039,305 |
| | (10,780 | ) | | (17,605 | ) | | 2,010,920 |
| | | 2,047,675 |
|
Concentra: | |
| | |
| | |
| | |
| | | |
|
Credit facilities: | |
| | |
| | |
| | |
| | | |
|
Term loans | 1,414,175 |
| | (3,288 | ) | | (21,720 | ) | | 1,389,167 |
| | | 1,414,840 |
|
Other | 10,601 |
| | — |
| | — |
| | 10,601 |
| | | 10,601 |
|
Total Concentra debt | 1,424,776 |
| | (3,288 | ) | | (21,720 | ) | | 1,399,768 |
| | | 1,425,441 |
|
Total debt | $ | 3,464,081 |
| | $ | (14,068 | ) | | $ | (39,325 | ) | | $ | 3,410,688 |
| | | $ | 3,473,116 |
|
Principal maturities of the Company’s long-term debt and notes payable arewere approximately as follows (in thousands): |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | Thereafter | | Total |
Select: | |
| | |
| | |
| | |
| | |
| | |
| | |
|
6.375% senior notes | $ | — |
| | $ | — |
| | $ | 710,000 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 710,000 |
|
Credit facilities: | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Revolving facility | — |
| | — |
| | — |
| | 195,000 |
| | — |
| | — |
| | 195,000 |
|
Term loan | — |
| | — |
| | — |
| | — |
| | — |
| | 1,031,068 |
| | 1,031,068 |
|
Other debt, including finance leases | 5,595 |
| | 3,003 |
| | 1,814 |
| | 23,036 |
| | 38 |
| | 41,378 |
| | 74,864 |
|
Total Select debt | 5,595 |
| | 3,003 |
| | 711,814 |
| | 218,036 |
| | 38 |
| | 1,072,446 |
| | 2,010,932 |
|
Concentra: | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Credit facilities: | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Term loans | — |
| | — |
| | — |
| | 1,140,298 |
| | 239,999 |
| | — |
| | 1,380,297 |
|
Other debt, including finance leases | 807 |
| | 1,194 |
| | 330 |
| | 358 |
| | 363 |
| | 3,469 |
| | 6,521 |
|
Total Concentra debt | 807 |
| | 1,194 |
| | 330 |
| | 1,140,656 |
| | 240,362 |
| | 3,469 |
| | 1,386,818 |
|
Total debt | $ | 6,402 |
| | $ | 4,197 |
| | $ | 712,144 |
| | $ | 1,358,692 |
| | $ | 240,400 |
| | $ | 1,075,915 |
| | $ | 3,397,750 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | Thereafter | | Total |
Select: | |
| | |
| | |
| | |
| | |
| | |
| | |
|
6.375% senior notes | $ | — |
| | $ | — |
| | $ | — |
| | $ | 710,000 |
| | $ | — |
| | $ | — |
| | $ | 710,000 |
|
Credit facilities: | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Revolving facility | — |
| | — |
| | — |
| | — |
| | 150,000 |
| | — |
| | 150,000 |
|
Term loans | 5,750 |
| | 11,500 |
| | 11,500 |
| | 11,500 |
| | 11,500 |
| | 1,083,875 |
| | 1,135,625 |
|
Other | 6,119 |
| | 3,321 |
| | 25,285 |
| | 221 |
| | — |
| | 8,734 |
| | 43,680 |
|
Total Select debt | 11,869 |
| | 14,821 |
| | 36,785 |
| | 721,721 |
| | 161,500 |
| | 1,092,609 |
| | 2,039,305 |
|
Concentra: | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Credit facilities: | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Term loans | — |
| | — |
| | 5,719 |
| | 12,365 |
| | 1,156,091 |
| | 240,000 |
| | 1,414,175 |
|
Other | 2,860 |
| | 3,418 |
| | 322 |
| | 320 |
| | 308 |
| | 3,373 |
| | 10,601 |
|
Total Concentra debt | 2,860 |
| | 3,418 |
| | 6,041 |
| | 12,685 |
| | 1,156,399 |
| | 243,373 |
| | 1,424,776 |
|
Total debt | $ | 14,729 |
| | $ | 18,239 |
| | $ | 42,826 |
| | $ | 734,406 |
| | $ | 1,317,899 |
| | $ | 1,335,982 |
| | $ | 3,464,081 |
|
As of December 31, 2017,2018, the Company’s long-term debt and notes payable arewere as follows (in thousands): |
| | | | | | | | | | | | | | | | | | | | |
| Principal Outstanding | | Unamortized Premium (Discount) | | Unamortized Issuance Costs | | Carrying Value | | | Fair Value |
Select: | |
| | |
| | |
| | |
| | | |
|
6.375% senior notes | $ | 710,000 |
| | $ | 550 |
| | $ | (4,642 | ) | | $ | 705,908 |
| | | $ | 706,450 |
|
Credit facilities: | |
| | |
| | |
| | |
| | | |
|
Revolving facility | 20,000 |
| | — |
| | — |
| | 20,000 |
| | | 18,400 |
|
Term loan | 1,129,875 |
| | (9,690 | ) | | (9,321 | ) | | 1,110,864 |
| | | 1,076,206 |
|
Other | 56,415 |
| | — |
| | (484 | ) | | 55,931 |
| | | 55,931 |
|
Total Select debt | 1,916,290 |
| | (9,140 | ) | | (14,447 | ) | | 1,892,703 |
| | | 1,856,987 |
|
Concentra: | |
| | |
| | |
| | |
| | | |
|
Credit facilities: | |
| | |
| | |
| | |
| | | |
|
Term loans | 1,414,175 |
| | (2,765 | ) | | (18,648 | ) | | 1,392,762 |
| | | 1,357,802 |
|
Other debt, including finance leases | 7,916 |
| | — |
| | — |
| | 7,916 |
| | | 7,916 |
|
Total Concentra debt | 1,422,091 |
| | (2,765 | ) | | (18,648 | ) | | 1,400,678 |
| | | 1,365,718 |
|
Total debt | $ | 3,338,381 |
| | $ | (11,905 | ) | | $ | (33,095 | ) | | $ | 3,293,381 |
| | | $ | 3,222,705 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| Principal Outstanding | | Unamortized Premium (Discount) | | Unamortized Issuance Costs | | Carrying Value | | | Fair Value |
Select: | |
| | |
| | |
| | |
| | | |
|
6.375% senior notes | $ | 710,000 |
| | $ | 778 |
| | $ | (6,553 | ) | | $ | 704,225 |
| | | $ | 727,750 |
|
Credit facilities: | |
| | |
| | |
| | |
| | | |
|
Revolving facility | 230,000 |
| | — |
| | — |
| | 230,000 |
| | | 211,600 |
|
Term loans | 1,141,375 |
| | (12,445 | ) | | (12,500 | ) | | 1,116,430 |
| | | 1,154,215 |
|
Other | 36,877 |
| | — |
| | (533 | ) | | 36,344 |
| | | 36,344 |
|
Total Select debt | 2,118,252 |
| | (11,667 | ) | | (19,586 | ) | | 2,086,999 |
| | | 2,129,909 |
|
Concentra: | |
| | |
| | |
| | |
| | | |
|
Credit facilities: | |
| | |
| | |
| | |
| | | |
|
Term loans | 619,175 |
| | (2,257 | ) | | (10,668 | ) | | 606,250 |
| | | 625,173 |
|
Other | 6,653 |
| | — |
| | — |
| | 6,653 |
| | | 6,653 |
|
Total Concentra debt | 625,828 |
| | (2,257 | ) | | (10,668 | ) | | 612,903 |
| | | 631,826 |
|
Total debt | $ | 2,744,080 |
| | $ | (13,924 | ) | | $ | (30,254 | ) | | $ | 2,699,902 |
| | | $ | 2,761,735 |
|
Select Credit Facilities
On March 22, 2018, Select entered into Amendment No. 1 to the senior secured credit agreement (the “Select credit agreement”) dated March 6, 2017. The Select credit agreement originally provided for $1.6 billion in senior secured credit facilities comprised of $1.15 billion in term loans (the “Select term loans”) and a $450.0 million revolving credit facility (the “Select revolving facility” and together with the Select term loans, the “Select credit facilities”), including a $75.0 million sublimit for the issuance of standby letters of credit.
Amendment No. 1 (i) decreased the applicable interest rate on the Select term loans from the Adjusted LIBO Rate (as defined in the Select credit agreement and subject to an Adjusted LIBO floor of 1.00%) plus 3.50% to the Adjusted LIBO Rate plus a percentage ranging from 2.50% to 2.75%, or from the Alternative Base Rate (as defined in the Select credit agreement and subject to an Alternate Base Rate floor of 2.00%) plus 2.50% to the Alternative Base Rate plus a percentage ranging from 1.50% to 1.75%, in each case based on Select’s total net leverage ratio (as defined in the Select credit agreement); (ii) decreased the applicable interest rate on the loans outstanding under the Select revolving credit facility from the Adjusted LIBO Rate plus a percentage ranging from 3.00% to 3.25% to the Adjusted LIBO Rate plus a percentage ranging from 2.50% to 2.75%, or from the Alternative Base Rate plus a percentage ranging from 2.00% to 2.25% to the Alternative Base Rate plus a percentage ranging from 1.50% to 1.75%, in each case based on Select’s total net leverage ratio; (iii) extended the maturity date for the Select term loans from March 6, 2024 to March 6, 2025; and (iv) made certain other technical amendments to the Select credit agreement as set forth therein.
Concentra Credit Facilities
Concentra First Lien Credit Agreement
On February 1, 2018,April 8, 2019, Concentra entered into an amendmentAmendment No. 5 to itsthe Concentra first lien credit agreement (the “Concentra first lienagreement. Amendment No. 5 extended the maturity date of the Concentra revolving credit agreement”) datedfacility from June 1, 2015, by2020 to June 1, 2021 and amongincreased the aggregate commitments available under the Concentra revolving credit facility from $75.0 million to $100.0 million.
Excess Cash Flow Payment
In February 2019, Select made a principal prepayment of approximately $98.8 million associated with its term loans in accordance with the provision in the Select credit facilities that requires mandatory prepayments of term loans as a result of annual excess cash flow, as defined in the borrower,Select credit facilities. The principal prepayment was applied against future payments sequentially; as a result, no further loan amortization payments will be required on the Select term loan until maturity on March 6, 2025.
In February 2019, Concentra Holdings, Inc.,made a subsidiaryprincipal prepayment of approximately $33.9 million associated with its term loans in accordance with the provision in the Concentra Group Holdings Parent, JPMorgan Chase Bank, N.A.,credit facilities that requires mandatory prepayments of term loans as a result of annual excess cash flow, as defined in the administrative agent andConcentra credit facilities. The principal prepayment was applied against future payments sequentially; as a result, no further loan amortization payments will be required on the collateral agent, and the other lenders party thereto. Concentra used borrowingsterms loans outstanding under the Concentra first lien credit agreement and the Concentra second lien credit agreement, as described below, together with cashuntil maturity on hand, to pay the purchase price for all of the issued and outstanding stock of U.S. HealthWorks to DHHC and to finance the redemption and reorganization transactions executed under the Purchase Agreement (as described in Note 3), as well as to pay fees and expenses associated with the financing.
Concentra amended the Concentra first lien credit agreement to, among other things, provide for (i) an additional $555.0 million in tranche B term loans that, along with the existing tranche B term loans under the Concentra first lien credit agreement, have a maturity date of June 1, 2022 (collectively, the “Concentra first lien term loan”) and (ii) an additional $25.0 million to the $50.0 million, five-year revolving credit facility under the terms of the existing Concentra first lien credit agreement. The tranche B term loans bear interest at a rate equal to the Adjusted LIBO Rate (as defined in the Concentra first lien credit agreement) plus 2.75% (subject to an Adjusted LIBO Rate floor of 1.00%) for Eurodollar Borrowings (as defined in the Concentra first lien credit agreement), or Alternate Base Rate (as defined in the Concentra first lien credit agreement) plus 1.75% (subject to an Alternate Base Rate floor of 2.00%) for ABR Borrowings (as defined in the Concentra first lien credit agreement). All other material terms and conditions applicable to the original tranche B term loan commitments are applicable to the additional tranche B term loans created under the Concentra first lien credit agreement.
Concentra Second Lien Credit Agreement
On February 1, 2018, Concentra entered into a second lien credit agreement (the “Concentra second lien credit agreement” and, together with the Concentra first lien credit agreement, the “Concentra credit facilities”) with Concentra Holdings, Inc., Wells Fargo Bank, National Association, as the administrative agent and the collateral agent, and the other lenders party thereto.
The Concentra second lien credit agreement provided for $240.0 million in term loans (the “Concentra second lien term loan” and, together with the Concentra first lien term loan, the “Concentra term loans”) with a maturity date of June 1, 2023. Borrowings under the Concentra second lien credit agreement bear interest at a rate equal to the Adjusted LIBO Rate (as defined in the Concentra second lien credit agreement) plus 6.50% (subject to an Adjusted LIBO Rate floor of 1.00%), or Alternate Base Rate (as defined in the Concentra second lien credit agreement) plus 5.50% (subject to an Alternate Base Rate floor of 2.00%).
In the event that, on or prior to February 1, 2019, Concentra prepays any of the Concentra second lien term loan to refinance such term loans, Concentra shall pay a premium of 2.00% of the aggregate principal amount of the Concentra second lien term loan prepaid. If Concentra prepays any of the Concentra second lien term loan to refinance such term loans on or prior to February 1, 2020, Concentra shall pay a premium of 1.00% of the aggregate principal amount of the Concentra second lien term loan prepaid.
Concentra will be required to prepay borrowings under the Concentra second lien term loan 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 the payment of certain indebtedness secured by liens, (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 Concentra second lien credit agreement) if Concentra’s leverage ratio is greater than 4.25 to 1.00 and 25% of excess cash flow if Concentra’s leverage ratio is less than or equal to 4.25 to 1.00 and greater than 3.75 to 1.00, in each case, reduced by the aggregate amount of term loans and certain debt optionally prepaid during the applicable fiscal year and the aggregate amount of senior revolving commitments reduced permanently during the applicable fiscal year (other than in connection with a refinancing). Concentra will not be required to prepay borrowings with excess cash flow if Concentra’s leverage ratio is less than or equal to 3.75 to 1.00.
The Concentra second lien credit agreement also contains a number of 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 Concentra second lien credit agreement contains events of default for non-payment of principal and interest when due (subject to a grace period for interest), cross-default and cross-acceleration provisions and an event of default that would be triggered by a change of control.
The borrowings under the Concentra second lien term loan are guaranteed, on a second lien basis, by Concentra Holdings, Inc., Concentra, and certain domestic subsidiaries of Concentra and will be guaranteed by Concentra’s future domestic subsidiaries (other than Excluded Subsidiaries and Consolidated Practices, each as defined in the Concentra second lien credit agreement). The borrowings under the Concentra second lien term loan are secured by substantially all of Concentra’s and its domestic subsidiaries’ existing and future property and assets and by a pledge of Concentra’s capital stock, the capital stock of certain of Concentra’s domestic subsidiaries and up to 65% of the voting capital stock and 100% of the non-voting capital stock of Concentra’s foreign subsidiaries, if any.
Loss on Early Retirement of Debt
The amendments to the Select credit facilities and Concentra credit facilities resulted in losses on early retirement of debt totaling $10.3 million for the six months ended June 30, 2018. The losses on early retirement of debt consisted of $0.5 million of debt extinguishment losses and $9.8 million of debt modification losses during the six months ended June 30, 2018.2022.
Fair Value
The Company considers the inputs in the valuation process to be Level 2 in the fair value 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.
6. Segment Information
The Company identifies its operating segments according to how the chief operating decision maker evaluates financial performance and allocates resources. During the year ended December 31, 2017, the Company changed its internal segment reporting structure which is reflective of how the Company now manages its business operations, reviews operating performance, and allocates resources. The Company’s reportable segments include the critical illness recovery hospital segment, (previously referred to as the long term acute care segment), rehabilitation hospital segment, (previously referred to as the inpatient rehabilitation segment), outpatient rehabilitation segment, and Concentra segment. Prior year results for the three and six months ended June 30, 2017, presented herein have been recast to conform to the current presentation. The Company previously disclosed financial information for the following reportable segments: specialty hospitals, outpatient rehabilitation, and Concentra.
Other activities include the Company’s corporate shared services, certain investments, and certainemployee leasing services with non-consolidating subsidiaries. During the three months ended June 30, 2019, the Company began reporting the net operating revenues and expenses associated with employee leasing services provided to its non-consolidating subsidiaries as part of the Company’s other activities. Previously, these services were reflected in the financial results of the Company’s reportable segments. Under these employee leasing arrangements, actual labor costs are passed through to the Company’s non-consolidating joint ventures and minority investmentssubsidiaries, resulting in other healthcare related businesses. the Company’s recognition of net operating revenues equal to the actual labor costs incurred.
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, acquisition costs associated with U.S. HealthWorks, non-operating gain (loss), and equity in earnings (losses) of unconsolidated subsidiaries. The Company has provided additional information regarding its reportable segments, such as total assets, which contributes to the understanding of the Company and provides useful information to the users of the consolidated financial statements.
The following tables summarize selected financial data for the Company’s reportable segments. Prior year results presented herein have been changed to conform to the current presentation. The segment results of Holdings are identical to those of Select.
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2019 | | 2018 | | 2019 |
| (in thousands) |
Net operating revenues: | |
| | |
| | |
| | |
|
Critical illness recovery hospital | $ | 442,452 |
| | $ | 461,143 |
| | $ | 907,128 |
| | $ | 918,677 |
|
Rehabilitation hospital | 144,779 |
| | 160,374 |
| | 288,087 |
| | 314,932 |
|
Outpatient rehabilitation | 253,914 |
| | 261,891 |
| | 498,145 |
| | 508,796 |
|
Concentra | 412,823 |
| | 413,451 |
| | 768,939 |
| | 809,772 |
|
Other | 42,242 |
| | 64,505 |
| | 86,875 |
| | 133,818 |
|
Total Company | $ | 1,296,210 |
| | $ | 1,361,364 |
| | $ | 2,549,174 |
| | $ | 2,685,995 |
|
Adjusted EBITDA: | |
| | |
| | |
| | |
|
Critical illness recovery hospital | $ | 60,725 |
| | $ | 64,138 |
| | $ | 133,697 |
| | $ | 137,136 |
|
Rehabilitation hospital | 28,195 |
| | 29,968 |
| | 54,971 |
| | 55,765 |
|
Outpatient rehabilitation | 41,947 |
| | 42,584 |
| | 72,472 |
| | 71,575 |
|
Concentra | 72,568 |
| | 76,087 |
| | 130,365 |
| | 142,345 |
|
Other | (25,207 | ) | | (26,544 | ) | | (50,045 | ) | | (50,471 | ) |
Total Company | $ | 178,228 |
| | $ | 186,233 |
| | $ | 341,460 |
| | $ | 356,350 |
|
Total assets: | |
| | |
| | |
| | |
|
Critical illness recovery hospital | $ | 1,828,038 |
| | $ | 2,119,574 |
| | $ | 1,828,038 |
| | $ | 2,119,574 |
|
Rehabilitation hospital | 867,175 |
| | 1,107,852 |
| | 867,175 |
| | 1,107,852 |
|
Outpatient rehabilitation | 979,678 |
| | 1,265,487 |
| | 979,678 |
| | 1,265,487 |
|
Concentra | 2,174,931 |
| | 2,447,387 |
| | 2,174,931 |
| | 2,447,387 |
|
Other | 114,978 |
| | 166,640 |
| | 114,978 |
| | 166,640 |
|
Total Company | $ | 5,964,800 |
| | $ | 7,106,940 |
| | $ | 5,964,800 |
| | $ | 7,106,940 |
|
Purchases of property and equipment: | |
| | |
| | |
| | |
|
Critical illness recovery hospital | $ | 12,849 |
| | $ | 14,488 |
| | $ | 23,321 |
| | $ | 24,648 |
|
Rehabilitation hospital | 8,080 |
| | 5,356 |
| | 20,997 |
| | 18,539 |
|
Outpatient rehabilitation | 8,018 |
| | 6,705 |
| | 15,356 |
| | 15,745 |
|
Concentra | 10,121 |
| | 12,240 |
| | 16,742 |
| | 27,938 |
|
Other | 2,963 |
| | 1,423 |
| | 5,232 |
| | 2,415 |
|
Total Company | $ | 42,031 |
| | $ | 40,212 |
| | $ | 81,648 |
| | $ | 89,285 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2017 | | 2018 | | 2017 | | 2018 |
| (in thousands) |
Net operating revenues:(1) | |
| | |
| | |
| | |
|
Critical illness recovery hospital(2) | $ | 439,194 |
| | $ | 442,452 |
| | $ | 884,317 |
| | $ | 907,128 |
|
Rehabilitation hospital(2) | 151,378 |
| | 173,769 |
| | 296,203 |
| | 348,543 |
|
Outpatient rehabilitation | 254,984 |
| | 267,183 |
| | 505,355 |
| | 524,564 |
|
Concentra | 256,887 |
| | 412,823 |
| | 507,476 |
| | 768,939 |
|
Other | 22 |
| | (17 | ) | | 631 |
| | — |
|
Total Company | $ | 1,102,465 |
| | $ | 1,296,210 |
| | $ | 2,193,982 |
| | $ | 2,549,174 |
|
Adjusted EBITDA: | |
| | |
| | |
| | |
|
Critical illness recovery hospital(2) | $ | 75,043 |
| | $ | 60,725 |
| | $ | 147,380 |
| | $ | 133,697 |
|
Rehabilitation hospital(2) | 23,129 |
| | 28,195 |
| | 39,457 |
| | 54,971 |
|
Outpatient rehabilitation | 41,926 |
| | 41,947 |
| | 73,277 |
| | 72,472 |
|
Concentra | 43,061 |
| | 72,568 |
| | 85,653 |
| | 130,365 |
|
Other | (24,479 | ) | | (25,207 | ) | | (48,197 | ) | | (50,045 | ) |
Total Company | $ | 158,680 |
| | $ | 178,228 |
| | $ | 297,570 |
| | $ | 341,460 |
|
Total assets: | |
| | |
| | |
| | |
|
Critical illness recovery hospital(2) | $ | 1,989,618 |
| | $ | 1,828,038 |
| | $ | 1,989,618 |
| | $ | 1,828,038 |
|
Rehabilitation hospital(2) | 665,999 |
| | 867,175 |
| | 665,999 |
| | 867,175 |
|
Outpatient rehabilitation | 982,811 |
| | 979,678 |
| | 982,811 |
| | 979,678 |
|
Concentra | 1,310,483 |
| | 2,174,931 |
| | 1,310,483 |
| | 2,174,931 |
|
Other | 105,300 |
| | 114,978 |
| | 105,300 |
| | 114,978 |
|
Total Company | $ | 5,054,211 |
| | $ | 5,964,800 |
| | $ | 5,054,211 |
| | $ | 5,964,800 |
|
Purchases of property and equipment, net: | |
| | |
| | |
| | |
|
Critical illness recovery hospital(2) | $ | 9,771 |
| | $ | 12,849 |
| | $ | 20,714 |
| | $ | 23,321 |
|
Rehabilitation hospital(2) | 26,920 |
| | 8,080 |
| | 48,334 |
| | 20,997 |
|
Outpatient rehabilitation | 6,201 |
| | 8,018 |
| | 12,874 |
| �� | 15,356 |
|
Concentra | 7,601 |
| | 10,121 |
| | 16,287 |
| | 16,742 |
|
Other | 4,156 |
| | 2,963 |
| | 7,093 |
| | 5,232 |
|
Total Company | $ | 54,649 |
| | $ | 42,031 |
| | $ | 105,302 |
| | $ | 81,648 |
|
A reconciliation of Adjusted EBITDA to income before income taxes is as follows:
| | | Three Months Ended June 30, 2017 | Three Months Ended June 30, 2018 |
| Critical Illness Recovery Hospital(2) | | Rehabilitation Hospital(2) | | Outpatient Rehabilitation | | Concentra | | Other | | Total | Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total |
| (in thousands) | (in thousands) |
Adjusted EBITDA | $ | 75,043 |
| | $ | 23,129 |
| | $ | 41,926 |
| | $ | 43,061 |
| | $ | (24,479 | ) | | |
| $ | 60,725 |
| | $ | 28,195 |
| | $ | 41,947 |
| | $ | 72,568 |
| | $ | (25,207 | ) | | |
|
Depreciation and amortization | (10,917 | ) | | (4,537 | ) | | (5,878 | ) | | (15,429 | ) | | (1,572 | ) | | |
| (11,952 | ) | | (6,015 | ) | | (6,704 | ) | | (24,697 | ) | | (2,356 | ) | | |
|
Stock compensation expense | — |
| | — |
| | — |
| | (264 | ) | | (4,420 | ) | | |
| — |
| | — |
| | — |
| | (1,138 | ) | | (4,846 | ) | | |
|
U.S. HealthWorks acquisition costs | | — |
| | — |
| | — |
| | 41 |
| | — |
| | |
Income (loss) from operations | $ | 64,126 |
| | $ | 18,592 |
| | $ | 36,048 |
| | $ | 27,368 |
| | $ | (30,471 | ) | | $ | 115,663 |
| $ | 48,773 |
| | $ | 22,180 |
| | $ | 35,243 |
| | $ | 46,774 |
| | $ | (32,409 | ) | | $ | 120,561 |
|
Equity in earnings of unconsolidated subsidiaries | |
| | | | |
| | |
| | |
| | 5,666 |
| |
| | | | |
| | |
| | |
| | 4,785 |
|
Non-operating gain | | | | | | | | | | | | 6,478 |
|
Interest expense | |
| | | | |
| | |
| | |
| | (37,655 | ) | |
| | | | |
| | |
| | |
| | (50,159 | ) |
Income before income taxes | |
| | | | |
| | |
| | |
| | $ | 83,674 |
| |
| | | | |
| | |
| | |
| | $ | 81,665 |
|
| | | Three Months Ended June 30, 2018 | Three Months Ended June 30, 2019 |
| Critical Illness Recovery Hospital(2) | | Rehabilitation Hospital(2) | | Outpatient Rehabilitation | | Concentra | | Other | | Total | Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total |
| (in thousands) | (in thousands) |
Adjusted EBITDA | $ | 60,725 |
| | $ | 28,195 |
| | $ | 41,947 |
| | $ | 72,568 |
| | $ | (25,207 | ) | | |
| $ | 64,138 |
| | $ | 29,968 |
| | $ | 42,584 |
| | $ | 76,087 |
| | $ | (26,544 | ) | | |
|
Depreciation and amortization | (11,952 | ) | | (6,015 | ) | | (6,704 | ) | | (24,697 | ) | | (2,356 | ) | | |
| (14,495 | ) | | (6,696 | ) | | (6,991 | ) | | (24,479 | ) | | (2,332 | ) | | |
|
Stock compensation expense | — |
| | — |
| | — |
| | (1,138 | ) | | (4,846 | ) | | |
| — |
| | — |
| | — |
| | (767 | ) | | (5,591 | ) | | |
|
U.S. HealthWorks acquisition costs | — |
| | — |
| | — |
| | 41 |
| | — |
| | | |
Income (loss) from operations | $ | 48,773 |
| | $ | 22,180 |
| | $ | 35,243 |
| | $ | 46,774 |
| | $ | (32,409 | ) | | $ | 120,561 |
| $ | 49,643 |
| | $ | 23,272 |
| | $ | 35,593 |
| | $ | 50,841 |
| | $ | (34,467 | ) | | $ | 124,882 |
|
Equity in earnings of unconsolidated subsidiaries | |
| | | | |
| | |
| | |
| | 4,785 |
| |
| | | | |
| | |
| | |
| | 7,394 |
|
Non-operating gain | | | | | | | | | | | 6,478 |
| |
Interest expense | |
| | | | |
| | |
| | |
| | (50,159 | ) | |
| | | | |
| | |
| | |
| | (51,464 | ) |
Income before income taxes | |
| | | | |
| | |
| | |
| | $ | 81,665 |
| |
| | | | |
| | |
| | |
| | $ | 80,812 |
|
| | | Six Months Ended June 30, 2017 | Six Months Ended June 30, 2018 |
| Critical Illness Recovery Hospital(2) | | Rehabilitation Hospital(2) | | Outpatient Rehabilitation | | Concentra | | Other | | Total | Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total |
| (in thousands) | (in thousands) |
Adjusted EBITDA | $ | 147,380 |
| | $ | 39,457 |
| | $ | 73,277 |
| | $ | 85,653 |
| | $ | (48,197 | ) | | |
| $ | 133,697 |
| | $ | 54,971 |
| | $ | 72,472 |
| | $ | 130,365 |
| | $ | (50,045 | ) | | |
|
Depreciation and amortization | (23,959 | ) | | (9,995 | ) | | (12,218 | ) | | (31,552 | ) | | (3,148 | ) | | |
| (23,010 | ) | | (11,737 | ) | | (13,341 | ) | | (45,844 | ) | | (4,563 | ) | | |
|
Stock compensation expense | — |
| | — |
| | — |
| | (570 | ) | | (8,700 | ) | | |
| — |
| | — |
| | — |
| | (1,349 | ) | | (9,562 | ) | | |
|
U.S. HealthWorks acquisition costs | | — |
| | — |
| | — |
| | (2,895 | ) | | — |
| | |
Income (loss) from operations | $ | 123,421 |
| | $ | 29,462 |
| | $ | 61,059 |
| | $ | 53,531 |
| | $ | (60,045 | ) | | $ | 207,428 |
| $ | 110,687 |
| | $ | 43,234 |
| | $ | 59,131 |
| | $ | 80,277 |
| | $ | (64,170 | ) | | $ | 229,159 |
|
Loss on early retirement of debt | |
| | | | |
| | |
| | |
| | (19,719 | ) | |
| | | | |
| | |
| | |
| | (10,255 | ) |
Equity in earnings of unconsolidated subsidiaries | |
| | | | |
| | |
| | |
| | 11,187 |
| |
| | | | |
| | |
| | |
| | 9,482 |
|
Non-operating loss | |
| | | | |
| | |
| | |
| | (49 | ) | |
Non-operating gain | | |
| | | | |
| | |
| | |
| | 6,877 |
|
Interest expense | |
| | | | |
| | |
| | |
| | (78,508 | ) | |
| | | | |
| | |
| | |
| | (97,322 | ) |
Income before income taxes | |
| | | | |
| | |
| | |
| | $ | 120,339 |
| |
| | | | |
| | |
| | |
| | $ | 137,941 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2019 |
| Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total |
| (in thousands) |
Adjusted EBITDA | $ | 137,136 |
| | $ | 55,765 |
| | $ | 71,575 |
| | $ | 142,345 |
| | $ | (50,471 | ) | | |
|
Depreciation and amortization | (25,946 | ) | | (13,098 | ) | | (14,023 | ) | | (49,383 | ) | | (4,681 | ) | | |
|
Stock compensation expense | — |
| | — |
| | — |
| | (1,534 | ) | | (11,079 | ) | | |
|
Income (loss) from operations | $ | 111,190 |
| | $ | 42,667 |
| | $ | 57,552 |
| | $ | 91,428 |
| | $ | (66,231 | ) | | $ | 236,606 |
|
Equity in earnings of unconsolidated subsidiaries | |
| | | | |
| | |
| | |
| | 11,760 |
|
Non-operating gain | |
| | | | |
| | |
| | |
| | 6,532 |
|
Interest expense | |
| | | | |
| | |
| | |
| | (102,275 | ) |
Income before income taxes | |
| | | | |
| | |
| | |
| | $ | 152,623 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2018 |
| Critical Illness Recovery Hospital(2) | | Rehabilitation Hospital(2) | | Outpatient Rehabilitation | | Concentra | | Other | | Total |
| (in thousands) |
Adjusted EBITDA | $ | 133,697 |
| | $ | 54,971 |
| | $ | 72,472 |
| | $ | 130,365 |
| | $ | (50,045 | ) | | |
|
Depreciation and amortization | (23,010 | ) | | (11,737 | ) | | (13,341 | ) | | (45,844 | ) | | (4,563 | ) | | |
|
Stock compensation expense | — |
| | — |
| | — |
| | (1,349 | ) | | (9,562 | ) | | |
|
U.S. HealthWorks acquisition costs | — |
| | — |
| | — |
| | (2,895 | ) | | — |
| | |
Income (loss) from operations | $ | 110,687 |
| | $ | 43,234 |
| | $ | 59,131 |
| | $ | 80,277 |
| | $ | (64,170 | ) | | $ | 229,159 |
|
Loss on early retirement of debt | |
| | | | |
| | |
| | |
| | (10,255 | ) |
Equity in earnings of unconsolidated subsidiaries | |
| | | | |
| | |
| | |
| | 9,482 |
|
Non-operating gain | |
| | | | |
| | |
| | |
| | 6,877 |
|
Interest expense | |
| | | | |
| | |
| | |
| | (97,322 | ) |
Income before income taxes | |
| | | | |
| | |
| | |
| | $ | 137,941 |
|
| |
(1)11. | Net operating revenues were retrospectively conformed to reflect the adoption Topic 606, Revenue from Contracts with Customers. Customers |
| |
(2) | The critical illness recovery hospital segment was previously referred to as the long term acute care segment. The rehabilitation hospital segment was previously referred to as the inpatient rehabilitation segment. |
7. Revenue from Contracts with Customers
Net operating revenues consist primarily of patient service revenues generated from services provided to patients and other revenues for services provided to healthcare institutions under contractual arrangements. The following tables disaggregate the Company’s net operating revenues by operating segment for the three and six months ended June 30, 20172018 and 2018:2019:
| | | Three Months Ended June 30, 2017 | Three Months Ended June 30, 2018 |
| Critical Illness Recovery Hospital(1) | | Rehabilitation Hospital(1) | | Outpatient Rehabilitation | | Concentra | Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total |
| (in thousands) | (in thousands) |
Patient service revenues: | | | | | | | | | | | | | | | | | | |
Medicare | $ | 228,733 |
| | $ | 62,089 |
| | $ | 38,119 |
| | $ | 571 |
| $ | 225,857 |
| | $ | 73,054 |
| | $ | 41,475 |
| | $ | 517 |
| | $ | — |
| | $ | 340,903 |
|
Non-Medicare | 207,875 |
| | 51,434 |
| | 189,009 |
| | 254,107 |
| 213,083 |
| | 62,387 |
| | 194,611 |
| | 409,922 |
| | — |
| | 880,003 |
|
Total patient services revenues | 436,608 |
| | 113,523 |
| | 227,128 |
| | 254,678 |
| 438,940 |
| | 135,441 |
| | 236,086 |
| | 410,439 |
| | — |
| | 1,220,906 |
|
Other revenues(1) | 2,586 |
| | 37,855 |
| | 27,856 |
| | 2,209 |
| 3,512 |
| | 9,338 |
| | 17,828 |
| | 2,384 |
| | 42,242 |
| | 75,304 |
|
Total net operating revenues | $ | 439,194 |
| | $ | 151,378 |
| | $ | 254,984 |
| | $ | 256,887 |
| $ | 442,452 |
| | $ | 144,779 |
| | $ | 253,914 |
| | $ | 412,823 |
| | $ | 42,242 |
| | $ | 1,296,210 |
|
| | | Three Months Ended June 30, 2018 | Three Months Ended June 30, 2019 |
| Critical Illness Recovery Hospital(1) | | Rehabilitation Hospital(1) | | Outpatient Rehabilitation | | Concentra | Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total |
| (in thousands) | (in thousands) |
Patient service revenues: | | | | | | | | | | | | | | | | | | |
Medicare | $ | 225,857 |
| | $ | 73,054 |
| | $ | 41,475 |
| | $ | 517 |
| $ | 223,688 |
| | $ | 77,260 |
| | $ | 43,869 |
| | $ | 474 |
| | $ | — |
| | $ | 345,291 |
|
Non-Medicare | 213,083 |
| | 62,387 |
| | 194,611 |
| | 409,922 |
| 234,616 |
| | 73,972 |
| | 198,241 |
| | 410,277 |
| | — |
| | 917,106 |
|
Total patient services revenues | 438,940 |
| | 135,441 |
| | 236,086 |
| | 410,439 |
| 458,304 |
| | 151,232 |
| | 242,110 |
| | 410,751 |
| | — |
| | 1,262,397 |
|
Other revenues | 3,512 |
| | 38,328 |
| | 31,097 |
| | 2,384 |
| 2,839 |
| | 9,142 |
| | 19,781 |
| | 2,700 |
| | 64,505 |
| | 98,967 |
|
Total net operating revenues | $ | 442,452 |
| | $ | 173,769 |
| | $ | 267,183 |
| | $ | 412,823 |
| $ | 461,143 |
| | $ | 160,374 |
| | $ | 261,891 |
| | $ | 413,451 |
| | $ | 64,505 |
| | $ | 1,361,364 |
|
| | | Six Months Ended June 30, 2017 | Six Months Ended June 30, 2018 |
| Critical Illness Recovery Hospital(1) | | Rehabilitation Hospital(1) | | Outpatient Rehabilitation | | Concentra | Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total |
| (in thousands) | (in thousands) |
Patient service revenues: | | | | | | | | | | | | | | | | | | |
Medicare | $ | 465,170 |
| | $ | 119,593 |
| | $ | 74,817 |
| | $ | 1,116 |
| $ | 466,849 |
| | $ | 145,895 |
| | $ | 79,665 |
| | $ | 1,145 |
| | $ | — |
| | $ | 693,554 |
|
Non-Medicare | 414,500 |
| | 98,677 |
| | 372,812 |
| | 501,908 |
| 433,089 |
| | 124,289 |
| | 383,511 |
| | 763,174 |
| | — |
| | 1,704,063 |
|
Total patient services revenues | 879,670 |
| | 218,270 |
| | 447,629 |
| | 503,024 |
| 899,938 |
| | 270,184 |
| | 463,176 |
| | 764,319 |
| | — |
| | 2,397,617 |
|
Other revenues(1) | 4,647 |
| | 77,933 |
| | 57,726 |
| | 4,452 |
| 7,190 |
| | 17,903 |
| | 34,969 |
| | 4,620 |
| | 86,875 |
| | 151,557 |
|
Total net operating revenues | $ | 884,317 |
| | $ | 296,203 |
| | $ | 505,355 |
| | $ | 507,476 |
| $ | 907,128 |
| | $ | 288,087 |
| | $ | 498,145 |
| | $ | 768,939 |
| | $ | 86,875 |
| | $ | 2,549,174 |
|
|
| | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2018 |
| Critical Illness Recovery Hospital(1) | | Rehabilitation Hospital(1) | | Outpatient Rehabilitation | | Concentra |
| (in thousands) |
Patient service revenues: | | | | | | | |
Medicare | $ | 466,849 |
| | $ | 145,895 |
| | $ | 79,665 |
| | $ | 1,145 |
|
Non-Medicare | 433,089 |
| | 124,289 |
| | 383,511 |
| | 763,174 |
|
Total patient services revenues | 899,938 |
| | 270,184 |
| | 463,176 |
| | 764,319 |
|
Other revenues | 7,190 |
| | 78,359 |
| | 61,388 |
| | 4,620 |
|
Total net operating revenues | $ | 907,128 |
| | $ | 348,543 |
| | $ | 524,564 |
| | $ | 768,939 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2019 |
| Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total |
| (in thousands) |
Patient service revenues: | | | | | | | | | | | |
Medicare | $ | 461,857 |
| | $ | 151,839 |
| | $ | 84,147 |
| | $ | 1,029 |
| | $ | — |
| | $ | 698,872 |
|
Non-Medicare | 451,575 |
| | 144,614 |
| | 386,155 |
| | 803,513 |
| | — |
| | 1,785,857 |
|
Total patient services revenues | 913,432 |
| | 296,453 |
| | 470,302 |
| | 804,542 |
| | — |
| | 2,484,729 |
|
Other revenues | 5,245 |
| | 18,479 |
| | 38,494 |
| | 5,230 |
| | 133,818 |
| | 201,266 |
|
Total net operating revenues | $ | 918,677 |
| | $ | 314,932 |
| | $ | 508,796 |
| | $ | 809,772 |
| | $ | 133,818 |
| | $ | 2,685,995 |
|
| |
(1) | The critical illness recovery hospital segment was previously referredFor the three and six months ended June 30, 2018, the financial results of the Company’s reportable segments have been changed to remove the net operating revenues associated with employee leasing services provided to the Company’s non-consolidating subsidiaries. These results are now reported as part of the long term acute care segment. The rehabilitation hospital segment was previously referred to as the inpatient rehabilitation segment.Company’s other activities. |
The Company’s capital structure includes common stock and unvested restricted stock awards. To compute earnings per share (“EPS”), the Company applies the two-class method because the Company’s unvested restricted stock awards are participating securities which are entitled to participate equally with the Company’s common stock in undistributed earnings. Application of the Company’s two-class method is as follows:
| |
(i) | Net income attributable to the Company is reduced by the amount of dividends declared and by the contractual amount of dividends that must be paid for the current period for each class of stock. There were no dividends declared or contractual dividends paid for the three and six months ended June 30, 2018 and 2019. |
| |
(ii) | The remaining undistributed net income of the Company is then equally allocated to its common stock and unvested restricted stock awards, as if all of the earnings for the period had been distributed. The total net income allocated to each security is determined by adding both distributed and undistributed net income for the period. |
| |
(i) | The net income allocated to each security is then divided by the weighted average number of outstanding shares for the period to determine the EPS for each security considered in the two-class method. |
The following table sets forth the net income attributable to the Company, its common shares outstanding, and its participating securities outstanding.
|
| | | | | | | | | | | | | | | | | |
| | Basic EPS | | Diluted EPS | |
| | Three Months Ended June 30, | | Three Months Ended June 30, | |
| | 2018 | | 2019 | | 2018 | | 2019 | |
| | (in thousands) | |
Net income | | $ | 60,559 |
| | $ | 59,986 |
| | $ | 60,559 |
| | $ | 59,986 |
| |
Less: net income attributable to non-controlling interests | | 14,048 |
| | 15,170 |
| | 14,048 |
| | 15,170 |
| |
Net income attributable to the Company | | 46,511 |
| | 44,816 |
| | 46,511 |
| | 44,816 |
| |
Less: net income attributable to participating securities | | 1,517 |
| | 1,484 |
| | 1,517 |
| | 1,484 |
| |
Net income attributable to common shares | | $ | 44,994 |
| | $ | 43,332 |
| | $ | 44,994 |
| | $ | 43,332 |
| |
|
| | | | | | | | | | | | | | | | | |
| | Basic EPS | | Diluted EPS | |
| | Six Months Ended June 30, | | Six Months Ended June 30, | |
| | 2018 | | 2019 | | 2018 | | 2019 | |
| | (in thousands) | |
Net income | | $ | 104,541 |
| | $ | 113,330 |
| | $ | 104,541 |
| | $ | 113,330 |
| |
Less: net income attributable to non-controlling interests | | 24,291 |
| | 27,680 |
| | 24,291 |
| | 27,680 |
| |
Net income attributable to the Company | | 80,250 |
| | 85,650 |
| | 80,250 |
| | 85,650 |
| |
Less: net income attributable to participating securities | | 2,630 |
| | 2,827 |
| | 2,628 |
| | 2,826 |
| |
Net income attributable to common shares | | $ | 77,620 |
| | $ | 82,823 |
| | $ | 77,622 |
| | $ | 82,824 |
| |
Patient Services Revenue
Patient services revenue is recognized when obligationsThe following tables set forth the computation of EPS under the terms oftwo-class method:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2018 |
| | Net Income Allocation | | Shares(1) | | Basic EPS | | | Net Income Allocation | | Shares(1) | | Diluted EPS |
| | (in thousands, except for per share amounts) |
Common shares | | $ | 44,994 |
| | 129,830 |
| | $ | 0.35 |
| | | $ | 44,994 |
| | 129,924 |
| | $ | 0.35 |
|
Participating securities | | 1,517 |
| | 4,379 |
| | $ | 0.35 |
| | | 1,517 |
| | 4,379 |
| | $ | 0.35 |
|
Total Company | | $ | 46,511 |
| | | | | | | $ | 46,511 |
| | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2019 |
| | Net Income Allocation | | Shares(1) | | Basic EPS | | | Net Income Allocation | | Shares(1) | | Diluted EPS |
| | (in thousands, except for per share amounts) |
Common shares | | $ | 43,332 |
| | 130,525 |
| | $ | 0.33 |
| | | $ | 43,332 |
| | 130,562 |
| | $ | 0.33 |
|
Participating securities | | 1,484 |
| | 4,471 |
| | $ | 0.33 |
| | | 1,484 |
| | 4,471 |
| | $ | 0.33 |
|
Total Company | | $ | 44,816 |
| | | | | | | $ | 44,816 |
| | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2018 |
| | Net Income Allocation | | Shares(1) | | Basic EPS | | | Net Income Allocation | | Shares(1) | | Diluted EPS |
| | (in thousands, except for per share amounts) |
Common shares | | $ | 77,620 |
| | 129,761 |
| | $ | 0.60 |
| | | $ | 77,622 |
| | 129,871 |
| | $ | 0.60 |
|
Participating securities | | 2,630 |
| | 4,397 |
| | $ | 0.60 |
| | | 2,628 |
| | 4,397 |
| | $ | 0.60 |
|
Total Company | | $ | 80,250 |
| | | | | | | $ | 80,250 |
| | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2019 |
| | Net Income Allocation | | Shares(1) | | Basic EPS | | | Net Income Allocation | | Shares(1) | | Diluted EPS |
| | (in thousands, except for per share amounts) |
Common shares | | $ | 82,823 |
| | 130,672 |
| | $ | 0.63 |
| | | $ | 82,824 |
| | 130,711 |
| | $ | 0.63 |
|
Participating securities | | 2,827 |
| | 4,460 |
| | $ | 0.63 |
| | | 2,826 |
| | 4,460 |
| | $ | 0.63 |
|
Total Company | | $ | 85,650 |
| | | | | | | $ | 85,650 |
| | | | |
(1) Represents the contract are satisfied; generally, this occurs asweighted average share count outstanding during the Company provides healthcare services, as each service provided is distinct and future services rendered are not dependent on previously rendered services. Patient service revenues are recognized at an amount equal to the consideration the Company expects to receive in exchange for providing healthcare services to its patients. These amounts are due from patients; third-party payors, including health insurers and government programs; and other payors.
Medicare: Medicare is a federal program that provides medical insurance benefits to persons age 65 and over, some disabled persons, and persons with end stage renal disease. Amounts we receive for treatment of patients covered by the Medicare program are generally less than the standard billing rates; accordingly, the Company recognizes revenue based on amounts which are reimbursable by Medicare under prospective payment systems and provisions of cost-reimbursement and other payment methods. The amount reimbursed is derived based on the type of services provided.
Non-Medicare: The Company is reimbursed for healthcare services provided from various other payor sources which include insurance companies, workers’ compensation programs, health maintenance organizations, preferred provider organizations, other managed care companies and employers, as well as patients. The Company is reimbursed by these payors using a variety of payment methodologies and the amounts the Company receives are generally less than the standard billing rates.
In the critical illness recovery hospital and rehabilitation hospital segments, the Company recognizes revenue based on known contractual provisions associated with the specific payor or, where the Company has a relatively homogeneous patient population, the Company will monitor individual payors’ historical reimbursement rates to derive a per diem rate which is used to determine the amount of revenue to be recognized for services rendered.
In the outpatient rehabilitation and Concentra segments, the Company recognizes revenue from payors based on known contractual provisions, negotiated amounts, or usual and customary amounts associated with the specific payor. The Company performs provision testing, using internally developed systems, whereby the Company monitors a payors’ historical reimbursement rates and compares them against the associated gross charges for the service provided. The percentage of historical reimbursed claims to gross charges is utilized to determine the amount of revenue to be recognized for services rendered.
The Company is subject to potential retrospective adjustments to net operating revenues in future periods for matters related to claims processing and other price concessions. These adjustments, which are estimated based on an analysis of historical experience by payor source, are accounted for as a constraint to the amount of revenue recognized by the Company in the period services are rendered.
Other Revenues
The Company recognizes revenue for services provided to healthcare institutions, principally management and employee leasing services, under contractual arrangements with related parties affiliated through the Company’s equity investments and other third-party healthcare institutions. Revenue is recognized when obligations under the terms of the contract are satisfied. Revenues from these services are measured as the amount of consideration the Company expects to receive for those services.period.
| |
8.13. | Income TaxesCommitments and Contingencies |
In December 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law which made significant changes to the Internal Revenue Code. These changes included a corporate tax rate decrease from 35.0% to 21.0% effective after December 31, 2017. Reconciliations of the statutory federal income tax rate to the effective income tax rate are as follows:
|
| | | | | |
| Three Months Ended June 30, |
| 2017 | | 2018 |
Federal income tax at statutory rate | 35.0 | % | | 21.0 | % |
State and local income taxes, less federal income tax benefit | 3.7 |
| | 4.6 |
|
Permanent differences | 1.2 |
| | 2.0 |
|
Valuation allowance | 0.6 |
| | (0.7 | ) |
Uncertain tax positions | 0.2 |
| | 0.2 |
|
Non-controlling interest | (1.7 | ) | | (1.6 | ) |
Stock-based compensation | (0.2 | ) | | (0.6 | ) |
Other | (0.1 | ) | | 0.9 |
|
Total effective income tax rate | 38.7 | % | | 25.8 | % |
|
| | | | | |
| Six Months Ended June 30, |
| 2017 | | 2018 |
Federal income tax at statutory rate | 35.0 | % | | 21.0 | % |
State and local income taxes, less federal income tax benefit | 3.8 |
| | 4.6 |
|
Permanent differences | 1.1 |
| | 1.9 |
|
Valuation allowance | 0.1 |
| | (0.2 | ) |
Uncertain tax positions | 0.2 |
| | 0.2 |
|
Non-controlling interest | (1.9 | ) | | (2.1 | ) |
Stock-based compensation | (0.4 | ) | | (2.5 | ) |
Other | — |
| | 1.3 |
|
Total effective income tax rate | 37.9 | % | | 24.2 | % |
9. 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 the calculation of income per 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 earnings per share, respectively.
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2017 | | 2018 | | 2017 | | 2018 |
| (in thousands, except per share amounts) |
Numerator: | |
| | |
| | |
| | |
|
Net income attributable to Select Medical Holdings Corporation | $ | 42,055 |
| | $ | 46,511 |
| | $ | 57,925 |
| | $ | 80,250 |
|
Less: Earnings allocated to unvested restricted stockholders | 1,341 |
| | 1,517 |
| | 1,849 |
| | 2,630 |
|
Net income available to common stockholders | $ | 40,714 |
| | $ | 44,994 |
| | $ | 56,076 |
| | $ | 77,620 |
|
Denominator: | |
| | |
| | |
| | |
|
Weighted average shares—basic | 128,624 |
| | 129,830 |
| | 128,544 |
| | 129,761 |
|
Effect of dilutive securities: | |
| | |
| | |
| | |
|
Stock options | 153 |
| | 94 |
| | 159 |
| | 110 |
|
Weighted average shares—diluted | 128,777 |
| | 129,924 |
| | 128,703 |
| | 129,871 |
|
Basic income per common share: | $ | 0.32 |
| | $ | 0.35 |
| | $ | 0.44 |
| | $ | 0.60 |
|
Diluted income per common share: | $ | 0.32 |
| | $ | 0.35 |
| | $ | 0.44 |
| | $ | 0.60 |
|
10. 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 coverages through a number of different programs that are dependent upon such factors as the state where the Company is operating and whether the operations are wholly owned or are operated through a joint venture. For the Company’s wholly owned operations, the Company currently maintains insurance coverages under a combination of policies with a total annual aggregate limit of $35.0up to $40.0 million. The Company’s insurance for the professional liability coverage is written on a “claims-made” basis, and its commercial general liability coverage is maintained on an “occurrence” basis. These coverages apply after a self-insured retention limit is exceeded. For the Company’s joint venture operations, the Company has numerous programs that are designed to respond to the risks of the specific joint venture. The annual aggregate limit under these programs ranges from $5.0 million to $20.0 million. The policies are generally written on a “claims-made” basis. Each of these programs has either a deductible or self-insured retention limit. The Company reviews its insurance program annually and may make adjustments to the amount of insurance coverage and self-insured retentions in future years. 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”), 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 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 replaced 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 United States Department of Justice notified the District Court of its decision not to intervene in the case.
In December 2015, the defendants filed a Motion to Dismiss the Second Amended Complaint on multiple grounds, including that the action 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, and that the plaintiff‑relators did not plead their claims with sufficient particularity, as required by the Federal Rules of Civil Procedure.
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, which was based on certain statutory changes to the public disclosure 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’ claims arising from conduct from and after March 23, 2010 relating to delayed discharging of patients and up-coding and the plaintiff relators’ retaliation claims. 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 and allowing discovery that would facilitate the use of statistical sampling to prove liability, which the defendants opposed. In April 2018, a U.S. magistrate judge ruled that plaintiff‑relators’ discovery will be limited to only SSH-Evansville for the period from March 23, 2010 through September 30, 2016, and that the plaintiff‑relators will be required to prove the fraud that they allege on a claim-by-claim basis, rather than using statistical sampling. The plaintiff-relators have appealed this decision to the District Judge.district judge who, in March 2019, affirmed the decision of the magistrate judge regarding the geographic and temporal scope of the case, but ruled that the question of statistical sampling is not ripe for review.
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 United 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”), 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, but the District Court denied such request. In December 2017, the Court of Appeals, relying on the public disclosure bar, denied the appeal of the plaintiff‑relator and affirmed the judgment of the District Court. In February 2018, the Court of Appeals denied a petition for rehearing that the plaintiff-relator filed in January 2018.
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 in May 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 in January 2017. The corporate defendants were served in March 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, in May 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 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. In March 2018, the District Court dismissed the plaintiff‑relator’s claims related to the alleged failure to properly examine medical practitioners’ credentials, her reverse false claims allegations, and her claim that defendants violated the Delaware False Claims and Reporting Act. It denied the defendant’sdefendants’ motion to dismiss claims that the allegedly falsified medical practitioner signatures violated the False Claims Act. Separately, the District Court dismissed the individual defendant due to plaintiff-relator’s failure to timely serve the amended complaint upon her.
In March 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. In January 2018, the Court stayed the Delaware Complaint pending the outcome of the federal case.
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.
Issuance and Sale of Senior Notes
On August 1, 2019, Select issued and sold $550.0 million aggregate principal amount of senior notes due August 15, 2026. Select intends to use a portion of the net proceeds of the senior notes, together with a portion of the proceeds from the incremental term loan borrowings under the Select credit facilities (as described below), to redeem in full Select’s $710 million 6.375% senior notes due 2021, to repay in full the outstanding borrowings under Select’s revolving credit facility, and pay related fees and expenses associated with the financing.
Interest on the senior notes accrues at the rate of 6.250% per annum and is payable semi-annually in arrears on February 15 and August 15 of each year, commencing on February 15, 2020. The senior notes are Select’s senior unsecured obligations which are subordinated to all of Select’s existing and future secured indebtedness, including the Select credit facilities. The senior notes rank equally in right of payment with all of Select’s other existing and future senior unsecured indebtedness and senior in right of payment to all of Select’s existing and future subordinated indebtedness. The senior notes are unconditionally guaranteed on a joint and several basis by each of Select’s direct or indirect existing and future domestic restricted subsidiaries, other than certain non-guarantor subsidiaries.
Select may redeem some or all of the senior notes prior to August 15, 2022 by paying a “make-whole” premium. Select may redeem some or all of the senior notes on or after August 15, 2022 at specified redemption prices. In addition, prior to August 15, 2022, Select may redeem up to 40% of the principal amount of the senior notes with the net proceeds of certain equity offerings at a price of 106.250% plus accrued and unpaid interest, if any. Select is obligated to offer to repurchase the senior notes at a price of 101% of their principal amount plus accrued and unpaid interest, if any, as a result of certain change of control events. These restrictions and prohibitions are subject to certain qualifications and exceptions.
The terms of the senior notes contains covenants that, among other things, limit Select’s ability and the ability of certain of Select’s subsidiaries to (i) grant liens on its assets, (ii) make dividend payments, other distributions or other restricted payments, (iii) incur restrictions on the ability of Select’s restricted subsidiaries to pay dividends or make other payments, (iv) enter into sale and leaseback transactions, (v) merge, consolidate, transfer or dispose of substantially all of their assets, (vi) incur additional indebtedness, (vii) make investments, (viii) sell assets, including capital stock of subsidiaries, (ix) use the proceeds from sales of assets, including capital stock of restricted subsidiaries, and (x) enter into transactions with affiliates. These covenants are subject to a number of exceptions, limitations and qualifications.
Amendment to Select Credit Facilities
On August 1, 2019, Select entered into Amendment No. 3 to the Select credit agreement dated March 6, 2017. Among other things, the amendment (i) provided for an additional $500.0 million in term loans that, along with the existing Select term loan, have a maturity date of March 6, 2025, (ii) extended the maturity date of Select’s revolving credit facility from March 6, 2022 to March 6, 2024, and (iii) increased the total net leverage ratio permitted under the Select credit agreement.
11. Condensed Consolidating Financial Information
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15. | Condensed Consolidating Financial Information |
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 are defined as subsidiaries 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” and Concentra Group Holdings Parent and its subsidiaries, the “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.
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
June 30, 20182019
(unaudited)
| | | Select (Parent Company Only) | | Subsidiary Guarantors | | Non-Guarantor Subsidiaries | | Non-Guarantor Concentra | | Consolidating and Eliminating Adjustments | | Consolidated Select Medical Corporation | Select (Parent Company Only) | | Subsidiary Guarantors | | Non-Guarantor Subsidiaries | | Non-Guarantor Concentra | | Consolidating and Eliminating Adjustments | | Consolidated Select Medical Corporation |
| (in thousands) | (in thousands) |
Assets | |
| | |
| | |
| | |
| | |
| | |
| |
ASSETS | | |
| | |
| | |
| | |
| | |
| | |
|
Current Assets: | |
| | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
| | |
|
Cash and cash equivalents | $ | 15,074 |
| | $ | 6,360 |
| | $ | 4,396 |
| | $ | 115,199 |
| | $ | — |
| | $ | 141,029 |
| $ | 78 |
| | $ | 7,576 |
| | $ | 3,256 |
| | $ | 113,126 |
| | $ | — |
| | $ | 124,036 |
|
Accounts receivable | — |
| | 439,614 |
| | 129,585 |
| | 206,411 |
| | — |
| | 775,610 |
| — |
| | 445,484 |
| | 129,946 |
| | 216,339 |
| | — |
| | 791,769 |
|
Intercompany receivables | — |
| | 1,672,980 |
| | 80,189 |
| | — |
| | (1,753,169 | ) | (a) | — |
| — |
| | 1,702,313 |
| | 147,990 |
| | — |
| | (1,850,303 | ) | (a) | — |
|
Prepaid income taxes | 10,691 |
| | — |
| | — |
| | 3,797 |
| | — |
| | 14,488 |
| 142 |
| | 5,936 |
| | 8 |
| | 6,838 |
| | (606 | ) | (f) | 12,318 |
|
Other current assets | 13,897 |
| | 28,254 |
| | 10,075 |
| | 35,989 |
| | — |
| | 88,215 |
| 29,306 |
| | 32,072 |
| | 9,923 |
| | 28,641 |
| | — |
| | 99,942 |
|
Total Current Assets | 39,662 |
| | 2,147,208 |
| | 224,245 |
| | 361,396 |
| | (1,753,169 | ) | | 1,019,342 |
| 29,526 |
| | 2,193,381 |
| | 291,123 |
| | 364,944 |
| | (1,850,909 | ) | | 1,028,065 |
|
Operating lease right-of-use assets | | 33,568 |
| | 441,710 |
| | 513,796 |
| | 307,623 |
| | (325,312 | ) | (a) | 971,385 |
|
Property and equipment, net | 37,157 |
| | 616,853 |
| | 84,834 |
| | 227,000 |
| | — |
| | 965,844 |
| 28,578 |
| | 658,686 |
| | 114,256 |
| | 207,035 |
| | — |
| | 1,008,555 |
|
Investment in affiliates | 4,566,506 |
| | 132,640 |
| | — |
| | — |
| | (4,699,146 | ) | (b)(c) | — |
| 4,543,196 |
| | 175,551 |
| | — |
| | — |
| | (4,718,747 | ) | (b)(c) | — |
|
Goodwill | — |
| | 2,105,717 |
| | — |
| | 1,208,889 |
| | — |
| | 3,314,606 |
| — |
| | 2,150,658 |
| | — |
| | 1,234,736 |
| | — |
| | 3,385,394 |
|
Identifiable intangible assets, net | 3 |
| | 103,119 |
| | 4,968 |
| | 343,842 |
| | — |
| | 451,932 |
| 3 |
| | 98,033 |
| | 4,676 |
| | 316,623 |
| | — |
| | 419,335 |
|
Other assets | 35,011 |
| | 119,499 |
| | 34,360 |
| | 33,804 |
| | (9,598 | ) | (e) | 213,076 |
| 34,285 |
| | 236,642 |
| | 16,524 |
| | 16,426 |
| | (9,671 | ) | (e) | 294,206 |
|
Total Assets | $ | 4,678,339 |
| | $ | 5,225,036 |
| | $ | 348,407 |
| | $ | 2,174,931 |
| | $ | (6,461,913 | ) | | $ | 5,964,800 |
| $ | 4,669,156 |
| | $ | 5,954,661 |
| | $ | 940,375 |
| | $ | 2,447,387 |
| | $ | (6,904,639 | ) | | $ | 7,106,940 |
|
Liabilities and Equity | |
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LIABILITIES AND EQUITY | | |
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Current Liabilities: | |
| | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
| | |
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Overdrafts | $ | 23,292 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 23,292 |
| $ | 27,259 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 27,259 |
|
Current operating lease liabilities | | 6,419 |
| | 102,709 |
| | 39,896 |
| | 67,155 |
| | (13,695 | ) | (a) | 202,484 |
|
Current portion of long-term debt and notes payable | 17,390 |
| | 527 |
| | 967 |
| | 5,595 |
| | — |
| | 24,479 |
| 6,376 |
| | 524 |
| | 192 |
| | 1,920 |
| | — |
| | 9,012 |
|
Accounts payable | 9,929 |
| | 71,355 |
| | 18,508 |
| | 32,038 |
| | — |
| | 131,830 |
| 14,227 |
| | 80,569 |
| | 22,931 |
| | 20,288 |
| | — |
| | 138,015 |
|
Intercompany payables | 1,672,980 |
| | 80,189 |
| | — |
| | — |
| | (1,753,169 | ) | (a) | — |
| 1,702,313 |
| | 147,990 |
| | — |
| | — |
| | (1,850,303 | ) | (a) | — |
|
Accrued payroll | 8,649 |
| | 89,842 |
| | 3,650 |
| | 47,826 |
| | — |
| | 149,967 |
| 7,498 |
| | 95,373 |
| | 4,579 |
| | 39,947 |
| | — |
| | 147,397 |
|
Accrued vacation | 4,551 |
| | 61,895 |
| | 14,091 |
| | 29,421 |
| | — |
| | 109,958 |
| 5,086 |
| | 67,198 |
| | 15,767 |
| | 34,226 |
| | — |
| | 122,277 |
|
Accrued interest | 6,926 |
| | 11 |
| | 20 |
| | 6,336 |
| | — |
| | 13,293 |
| 5,282 |
| | 35 |
| | 6 |
| | 4,911 |
| | — |
| | 10,234 |
|
Accrued other | 39,928 |
| | 64,563 |
| | 15,172 |
| | 50,404 |
| | — |
| | 170,067 |
| 63,952 |
| | 64,262 |
| | 14,735 |
| | 41,298 |
| | — |
| | 184,247 |
|
Income taxes payable | 2,387 |
| | — |
| | — |
| | 2,038 |
| | — |
| | 4,425 |
| 8,333 |
| | 3,082 |
| | 47 |
| | 911 |
| | (606 | ) | (f) | 11,767 |
|
Total Current Liabilities | 1,786,032 |
| | 368,382 |
| | 52,408 |
| | 173,658 |
| | (1,753,169 | ) | | 627,311 |
| 1,846,745 |
| | 561,742 |
| | 98,153 |
| | 210,656 |
| | (1,864,604 | ) | | 852,692 |
|
Non-current operating lease liabilities | | 30,244 |
| | 363,883 |
| | 455,165 |
| | 251,521 |
| | (286,910 | ) | (a) | 813,903 |
|
Long-term debt, net of current portion | 1,958,529 |
| | 90 |
| | 33,417 |
| | 1,394,173 |
| | — |
| | 3,386,209 |
| 1,918,283 |
| | 9,473 |
| | 55,050 |
| | 1,366,896 |
| | — |
| | 3,349,702 |
|
Non-current deferred tax liability | — |
| | 89,230 |
| | 820 |
| | 70,242 |
| | (9,598 | ) | (e) | 150,694 |
| — |
| | 100,310 |
| | 1,359 |
| | 55,718 |
| | (9,671 | ) | (e) | 147,716 |
|
Other non-current liabilities | 38,307 |
| | 63,983 |
| | 9,482 |
| | 60,655 |
| | — |
| | 172,427 |
| 27,875 |
| | 63,035 |
| | 3,235 |
| | 33,117 |
| | (24,707 | ) | (a) | 102,555 |
|
Total Liabilities | 3,782,868 |
| | 521,685 |
| | 96,127 |
| | 1,698,728 |
| | (1,762,767 | ) | | 4,336,641 |
| 3,823,147 |
| | 1,098,443 |
| | 612,962 |
| | 1,917,908 |
| | (2,185,892 | ) | | 5,266,568 |
|
Redeemable non-controlling interests | — |
| | — |
| | — |
| | 18,549 |
| | 597,683 |
| (d) | 616,232 |
| — |
| | — |
| | — |
| | 17,432 |
| | 826,990 |
| (d) | 844,422 |
|
Stockholders’ Equity: | |
| | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
| | |
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Common stock | 0 |
| | — |
| | — |
| | — |
| | — |
| | 0 |
| 0 |
| | — |
| | — |
| | — |
| | — |
| | 0 |
|
Capital in excess of par | 959,173 |
| | — |
| | — |
| | — |
| | — |
| | 959,173 |
| 988,333 |
| | — |
| | — |
| | — |
| | — |
| | 988,333 |
|
Retained earnings (accumulated deficit) | (63,702 | ) | | 1,478,075 |
| | (20,267 | ) | | (3,529 | ) | | (1,454,279 | ) | (c)(d) | (63,702 | ) | (142,324 | ) | | 1,613,283 |
| | (24,651 | ) | | 45,806 |
| | (1,634,438 | ) | (c)(d) | (142,324 | ) |
Subsidiary investment | — |
| | 3,225,276 |
| | 272,547 |
| | 455,753 |
| | (3,953,576 | ) | (b)(d) | — |
| — |
| | 3,242,935 |
| | 352,064 |
| | 460,757 |
| | (4,055,756 | ) | (b)(d) | — |
|
Total Select Medical Corporation Stockholders’ Equity | 895,471 |
| | 4,703,351 |
| | 252,280 |
| | 452,224 |
| | (5,407,855 | ) | | 895,471 |
| 846,009 |
| | 4,856,218 |
| | 327,413 |
| | 506,563 |
| | (5,690,194 | ) | | 846,009 |
|
Non-controlling interests | — |
| | — |
| | — |
| | 5,430 |
| | 111,026 |
| (d) | 116,456 |
| — |
| | — |
| | — |
| | 5,484 |
| | 144,457 |
| (d) | 149,941 |
|
Total Equity | 895,471 |
| | 4,703,351 |
| | 252,280 |
| | 457,654 |
| | (5,296,829 | ) | | 1,011,927 |
| 846,009 |
| | 4,856,218 |
| | 327,413 |
| | 512,047 |
| | (5,545,737 | ) | | 995,950 |
|
Total Liabilities and Equity | $ | 4,678,339 |
| | $ | 5,225,036 |
| | $ | 348,407 |
| | $ | 2,174,931 |
| | $ | (6,461,913 | ) | | $ | 5,964,800 |
| $ | 4,669,156 |
| | $ | 5,954,661 |
| | $ | 940,375 |
| | $ | 2,447,387 |
| | $ | (6,904,639 | ) | | $ | 7,106,940 |
|
| |
(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 non-controlling interests. |
| |
(e) | Reclassification of non-current deferred tax asset to report net non-current deferred tax liability in consolidation. |
| |
(f) | Reclassification to report prepaid income taxes and income taxes payable by tax jurisdiction in consolidation. |
Select Medical Corporation
Condensed Consolidating Statement of Operations
For the Three Months Ended June 30, 20182019
(unaudited)
| | | Select (Parent Company Only) | | Subsidiary Guarantors | | Non-Guarantor Subsidiaries | | Non-Guarantor Concentra | | Consolidating and Eliminating Adjustments | | Consolidated Select Medical Corporation | Select (Parent Company Only) | | Subsidiary Guarantors | | Non-Guarantor Subsidiaries | | Non-Guarantor Concentra | | Consolidating and Eliminating Adjustments | | Consolidated Select Medical Corporation |
| (in thousands) | (in thousands) |
Net operating revenues | $ | (17 | ) | | $ | 690,766 |
| | $ | 192,638 |
| | $ | 412,823 |
| | $ | — |
| | $ | 1,296,210 |
| $ | — |
| | $ | 734,359 |
| | $ | 213,554 |
| | $ | 413,451 |
| | $ | — |
| | $ | 1,361,364 |
|
Costs and expenses: | |
| | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
| | |
|
Cost of services | 799 |
| | 589,707 |
| | 162,832 |
| | 341,393 |
| | — |
| | 1,094,731 |
| |
Cost of services, exclusive of depreciation and amortization | | 796 |
| | 629,118 |
| | 182,105 |
| | 338,131 |
| | — |
| | 1,150,150 |
|
General and administrative | 29,208 |
| | 27 |
| | — |
| | (41 | ) | | — |
| | 29,194 |
| 31,865 |
| | (526 | ) | | — |
| | — |
| | — |
| | 31,339 |
|
Depreciation and amortization | 2,355 |
| | 20,535 |
| | 4,137 |
| | 24,697 |
| | — |
| | 51,724 |
| 2,213 |
| | 22,866 |
| | 5,435 |
| | 24,479 |
| | — |
| | 54,993 |
|
Total costs and expenses | 32,362 |
| | 610,269 |
| | 166,969 |
| | 366,049 |
| | — |
| | 1,175,649 |
| 34,874 |
| | 651,458 |
| | 187,540 |
| | 362,610 |
| | — |
| | 1,236,482 |
|
Income (loss) from operations | (32,379 | ) | | 80,497 |
| | 25,669 |
| | 46,774 |
| | — |
| | 120,561 |
| (34,874 | ) | | 82,901 |
| | 26,014 |
| | 50,841 |
| | — |
| | 124,882 |
|
Other income and expense: | |
| | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
| | |
|
Intercompany interest and royalty fees | 7,553 |
| | (3,629 | ) | | (3,609 | ) | | (315 | ) | | — |
| | — |
| 4,705 |
| | (2,128 | ) | | (2,204 | ) | | (373 | ) | | — |
| | — |
|
Intercompany management fees | 55,416 |
| | (43,931 | ) | | (11,485 | ) | | — |
| | — |
| | — |
| 57,738 |
| | (42,503 | ) | | (15,235 | ) | | — |
| | — |
| | — |
|
Equity in earnings of unconsolidated subsidiaries | — |
| | 4,776 |
| | 9 |
| | — |
| | — |
| | 4,785 |
| — |
| | 7,370 |
| | 24 |
| | — |
| | — |
| | 7,394 |
|
Non-operating gain | 1,654 |
| | 4,824 |
| | — |
| | — |
| | — |
| | 6,478 |
| |
Interest income (expense) | (29,412 | ) | | 188 |
| | (186 | ) | | (20,749 | ) | | — |
| | (50,159 | ) | (29,109 | ) | | 8 |
| | (219 | ) | | (22,144 | ) | | — |
| | (51,464 | ) |
Income before income taxes | 2,832 |
| | 42,725 |
| | 10,398 |
| | 25,710 |
| | — |
| | 81,665 |
| |
Income (loss) before income taxes | | (1,540 | ) | | 45,648 |
| | 8,380 |
| | 28,324 |
| | — |
| | 80,812 |
|
Income tax expense | 831 |
| | 14,254 |
| | 145 |
| | 5,876 |
| | — |
| | 21,106 |
| 1,140 |
| | 13,021 |
| | 138 |
| | 6,527 |
| | — |
| | 20,826 |
|
Equity in earnings of consolidated subsidiaries | 44,510 |
| | 6,840 |
| | — |
| | — |
| | (51,350 | ) | (a) | — |
| 47,496 |
| | 4,687 |
| | — |
| | — |
| | (52,183 | ) | (a) | — |
|
Net income | 46,511 |
| | 35,311 |
| | 10,253 |
| | 19,834 |
| | (51,350 | ) | | 60,559 |
| 44,816 |
| | 37,314 |
| | 8,242 |
| | 21,797 |
| | (52,183 | ) | | 59,986 |
|
Less: Net income attributable to non-controlling interests | — |
| | 12 |
| | 3,413 |
| | 10,623 |
| | — |
| | 14,048 |
| — |
| | — |
| | 3,555 |
| | 11,615 |
| | — |
| | 15,170 |
|
Net income attributable to Select Medical Corporation | $ | 46,511 |
| | $ | 35,299 |
| | $ | 6,840 |
| | $ | 9,211 |
| | $ | (51,350 | ) | | $ | 46,511 |
| $ | 44,816 |
| | $ | 37,314 |
| | $ | 4,687 |
| | $ | 10,182 |
| | $ | (52,183 | ) | | $ | 44,816 |
|
| |
(a) | Elimination of equity in earnings of consolidated subsidiaries. |
Select Medical Corporation
Condensed Consolidating Statement of Operations
For the Six Months Ended June 30, 20182019
(unaudited)
| | | Select (Parent Company Only) | | Subsidiary Guarantors | | Non-Guarantor Subsidiaries | | Non-Guarantor Concentra | | Consolidating and Eliminating Adjustments | | Consolidated Select Medical Corporation | Select (Parent Company Only) | | Subsidiary Guarantors | | Non-Guarantor Subsidiaries | | Non-Guarantor Concentra | | Consolidating and Eliminating Adjustments | | Consolidated Select Medical Corporation |
| (in thousands) | (in thousands) |
Net operating revenues | $ | — |
| | $ | 1,397,178 |
| | $ | 383,057 |
| | $ | 768,939 |
| | $ | — |
| | $ | 2,549,174 |
| $ | — |
| | $ | 1,454,189 |
| | $ | 422,034 |
| | $ | 809,772 |
| | $ | — |
| | $ | 2,685,995 |
|
Costs and expenses: | |
| | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
| | |
|
Cost of services | 1,525 |
| | 1,197,733 |
| | 321,363 |
| | 639,923 |
| | — |
| | 2,160,544 |
| |
Cost of services, exclusive of depreciation and amortization | | 1,535 |
| | 1,253,593 |
| | 358,153 |
| | 668,961 |
| | — |
| | 2,282,242 |
|
General and administrative | 58,015 |
| | 66 |
| | — |
| | 2,895 |
| | — |
| | 60,976 |
| 60,562 |
| | (546 | ) | | — |
| | — |
| | — |
| | 60,016 |
|
Depreciation and amortization | 4,562 |
| | 39,982 |
| | 8,107 |
| | 45,844 |
| | — |
| | 98,495 |
| 4,444 |
| | 43,400 |
| | 9,904 |
| | 49,383 |
| | — |
| | 107,131 |
|
Total costs and expenses | 64,102 |
| | 1,237,781 |
| | 329,470 |
| | 688,662 |
| | — |
| | 2,320,015 |
| 66,541 |
| | 1,296,447 |
| | 368,057 |
| | 718,344 |
| | — |
| | 2,449,389 |
|
Income (loss) from operations | (64,102 | ) | | 159,397 |
| | 53,587 |
| | 80,277 |
| | — |
| | 229,159 |
| (66,541 | ) | | 157,742 |
| | 53,977 |
| | 91,428 |
| | — |
| | 236,606 |
|
Other income and expense: | |
| | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
| | |
|
Intercompany interest and royalty fees | 15,672 |
| | (7,924 | ) | | (7,240 | ) | | (508 | ) | | — |
| | — |
| 8,813 |
| | (3,230 | ) | | (4,847 | ) | | (736 | ) | | — |
| | — |
|
Intercompany management fees | 116,148 |
| | (93,471 | ) | | (22,677 | ) | | — |
| | — |
| | — |
| 119,210 |
| | (91,273 | ) | | (27,937 | ) | | — |
| | — |
| | — |
|
Loss on early retirement of debt | (2,229 | ) | | — |
| | — |
| | (8,026 | ) | | — |
| | (10,255 | ) | |
Equity in earnings of unconsolidated subsidiaries | — |
| | 9,460 |
| | 22 |
| | — |
| | — |
| | 9,482 |
| — |
| | 11,713 |
| | 47 |
| | — |
| | — |
| | 11,760 |
|
Non-operating gain | 1,654 |
| | 5,223 |
| | — |
| | — |
| | — |
| | 6,877 |
| — |
| | 6,532 |
| | — |
| | — |
| | — |
| | 6,532 |
|
Interest income (expense) | (60,483 | ) | | 121 |
| | (337 | ) | | (36,623 | ) | | — |
| | (97,322 | ) | (57,309 | ) | | 128 |
| | (440 | ) | | (44,654 | ) | | — |
| | (102,275 | ) |
Income before income taxes | 6,660 |
| | 72,806 |
| | 23,355 |
| | 35,120 |
| | — |
| | 137,941 |
| 4,173 |
| | 81,612 |
| | 20,800 |
| | 46,038 |
| | — |
| | 152,623 |
|
Income tax expense | 1,345 |
| | 26,189 |
| | 238 |
| | 5,628 |
| | — |
| | 33,400 |
| 1,197 |
| | 27,246 |
| | 545 |
| | 10,305 |
| | — |
| | 39,293 |
|
Equity in earnings of consolidated subsidiaries | 74,935 |
| | 15,123 |
| | — |
| | — |
| | (90,058 | ) | (a) | — |
| 82,674 |
| | 11,898 |
| | — |
| | — |
| | (94,572 | ) | (a) | — |
|
Net income | 80,250 |
| | 61,740 |
| | 23,117 |
| | 29,492 |
| | (90,058 | ) | | 104,541 |
| 85,650 |
| | 66,264 |
| | 20,255 |
| | 35,733 |
| | (94,572 | ) | | 113,330 |
|
Less: Net income attributable to non-controlling interests | — |
| | 97 |
| | 7,994 |
| | 16,200 |
| | — |
| | 24,291 |
| — |
| | — |
| | 8,357 |
| | 19,323 |
| | — |
| | 27,680 |
|
Net income attributable to Select Medical Corporation | $ | 80,250 |
| | $ | 61,643 |
| | $ | 15,123 |
| | $ | 13,292 |
| | $ | (90,058 | ) | | $ | 80,250 |
| $ | 85,650 |
| | $ | 66,264 |
| | $ | 11,898 |
| | $ | 16,410 |
| | $ | (94,572 | ) | | $ | 85,650 |
|
_______________________________________________________________________________ | |
(a) | Elimination of equity in earnings of consolidated subsidiaries. |
Select Medical Corporation
Condensed Consolidating Statement of Cash Flows
For the Six Months Ended June 30, 20182019
| | | Select (Parent Company Only) | | Subsidiary Guarantors | | Non-Guarantor Subsidiaries | | Non-Guarantor Concentra | | Consolidating and Eliminating Adjustments | | Consolidated Select Medical Corporation | Select (Parent Company Only) | | Subsidiary Guarantors | | Non-Guarantor Subsidiaries | | Non-Guarantor Concentra | | Consolidating and Eliminating Adjustments | | Consolidated Select Medical Corporation |
| (in thousands) | (in thousands) |
Operating activities | |
| | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
| | |
|
Net income | $ | 80,250 |
| | $ | 61,740 |
| | $ | 23,117 |
| | $ | 29,492 |
| | $ | (90,058 | ) | (a) | $ | 104,541 |
| $ | 85,650 |
| | $ | 66,264 |
| | $ | 20,255 |
| | $ | 35,733 |
| | $ | (94,572 | ) | (a) | $ | 113,330 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
| | |
|
Distributions from unconsolidated subsidiaries | — |
| | 7,800 |
| | 30 |
| | — |
| | — |
| | 7,830 |
| — |
| | 11,140 |
| | 8 |
| | — |
| | — |
| | 11,148 |
|
Depreciation and amortization | 4,562 |
| | 39,982 |
| | 8,107 |
| | 45,844 |
| | — |
| | 98,495 |
| 4,444 |
| | 43,400 |
| | 9,904 |
| | 49,383 |
| | — |
| | 107,131 |
|
Provision for bad debts | — |
| | 41 |
| | — |
| | 61 |
| | — |
| | 102 |
| — |
| | 28 |
| | 1,735 |
| | 195 |
| | — |
| | 1,958 |
|
Equity in earnings of unconsolidated subsidiaries | — |
| | (9,460 | ) | | (22 | ) | | — |
| | — |
| | (9,482 | ) | — |
| | (11,713 | ) | | (47 | ) | | — |
| | — |
| | (11,760 | ) |
Equity in earnings of consolidated subsidiaries | (74,935 | ) | | (15,123 | ) | | — |
| | — |
| | 90,058 |
| (a) | — |
| (82,674 | ) | | (11,898 | ) | | — |
| | — |
| | 94,572 |
| (a) | — |
|
Loss on extinguishment of debt | 115 |
| | — |
| | — |
| | 369 |
| | — |
| | 484 |
| |
Gain on sale of assets and businesses | (1,642 | ) | | (5,338 | ) | | — |
| | — |
| | — |
| | (6,980 | ) | |
Loss (gain) on sale of assets and businesses | | 300 |
| | (6,617 | ) | | (37 | ) | | — |
| | — |
| | (6,354 | ) |
Stock compensation expense | 9,562 |
| | — |
| | — |
| | 1,349 |
| | — |
| | 10,911 |
| 11,079 |
| | — |
| | — |
| | 1,534 |
| | — |
| | 12,613 |
|
Amortization of debt discount, premium and issuance costs | 3,553 |
| | — |
| | — |
| | 2,933 |
| | — |
| | 6,486 |
| 3,226 |
| | — |
| | — |
| | 3,100 |
| | — |
| | 6,326 |
|
Deferred income taxes | 664 |
| | 1,056 |
| | 40 |
| | (3,451 | ) | | — |
| | (1,691 | ) | (2,338 | ) | | (401 | ) | | 366 |
| | (3,917 | ) | | — |
| | (6,290 | ) |
Changes in operating assets and liabilities, net of effects of business combinations: | |
| | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
| | |
|
Accounts receivable | — |
| | 9,838 |
| | (6,857 | ) | | (8,755 | ) | | — |
| | (5,774 | ) | — |
| | (47,838 | ) | | (12,998 | ) | | (25,037 | ) | | — |
| | (85,873 | ) |
Other current assets | (876 | ) | | 1,927 |
| | 2,956 |
| | (7,018 | ) | | — |
| | (3,011 | ) | (10,868 | ) | | 558 |
| | 2,624 |
| | (1,550 | ) | | — |
| | (9,236 | ) |
Other assets | 945 |
| | (9,261 | ) | | 1,110 |
| | 13,890 |
| | — |
| | 6,684 |
| (167 | ) | | (1,019 | ) | | (3,152 | ) | | 3,734 |
| | (335 | ) | (b) | (939 | ) |
Accounts payable | (1,470 | ) | | (7,516 | ) | | 1,864 |
| | 1,660 |
| | — |
| | (5,462 | ) | (46 | ) | | 4,192 |
| | 2,491 |
| | (3,967 | ) | | — |
| | 2,670 |
|
Accrued expenses | (15,020 | ) | | 14,589 |
| | 4,914 |
| | (3,276 | ) | | — |
| | 1,207 |
| (8,649 | ) | | 9,546 |
| | (773 | ) | | (18,615 | ) | | 335 |
| (b) | (18,156 | ) |
Income taxes | 14,757 |
| | 4,401 |
| | 1 |
| | (6,549 | ) | | — |
| | 12,610 |
| 18,425 |
| | 491 |
| | (151 | ) | | (2,419 | ) | | — |
| | 16,346 |
|
Net cash provided by operating activities | 20,465 |
| | 94,676 |
| | 35,260 |
| | 66,549 |
| | — |
| | 216,950 |
| 18,382 |
| | 56,133 |
| | 20,225 |
| | 38,174 |
| | — |
| | 132,914 |
|
Investing activities | |
| | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
| | |
|
Business combinations, net of cash acquired | — |
| | (2,666 | ) | | (22 | ) | | (515,016 | ) | | — |
| | (517,704 | ) | — |
| | (61,861 | ) | | (3,974 | ) | | (20,227 | ) | | — |
| | (86,062 | ) |
Purchases of property and equipment | (5,232 | ) | | (44,865 | ) | | (14,809 | ) | | (16,742 | ) | | — |
| | (81,648 | ) | (2,415 | ) | | (36,648 | ) | | (22,284 | ) | | (27,938 | ) | | — |
| | (89,285 | ) |
Investment in businesses | — |
| | (3,286 | ) | | — |
| | (5 | ) | | — |
| | (3,291 | ) | — |
| | (52,057 | ) | | (200 | ) | | — |
| | — |
| | (52,257 | ) |
Proceeds from sale of assets and businesses | 1,655 |
| | 5,017 |
| | — |
| | — |
| | — |
| | 6,672 |
| — |
| | 88 |
| | 37 |
| | — |
| | — |
| | 125 |
|
Net cash used in investing activities | (3,577 | ) | | (45,800 | ) | | (14,831 | ) | | (531,763 | ) | | — |
| | (595,971 | ) | (2,415 | ) | | (150,478 | ) | | (26,421 | ) | | (48,165 | ) | | — |
| | (227,479 | ) |
Financing activities | |
| | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
| | |
|
Borrowings on revolving facilities | 265,000 |
| | — |
| | — |
| | — |
| | — |
| | 265,000 |
| 635,000 |
| | — |
| | — |
| | — |
| | — |
| | 635,000 |
|
Payments on revolving facilities | (345,000 | ) | | — |
| | — |
| | — |
| | — |
| | (345,000 | ) | (460,000 | ) | | — |
| | — |
| | — |
| | — |
| | (460,000 | ) |
Proceeds from term loans (financing costs) | (11 | ) | | — |
| | — |
| | 779,915 |
| | — |
| | 779,904 |
| |
Payments on term loans | (5,750 | ) | | — |
| | — |
| | — |
| | — |
| | (5,750 | ) | (98,807 | ) | | — |
| | — |
| | (33,878 | ) | | — |
| | (132,685 | ) |
Revolving facility debt issuance costs | (837 | ) | | — |
| | — |
| | (496 | ) | | — |
| | (1,333 | ) | |
Borrowings of other debt | 5,549 |
| | — |
| | 9,820 |
| | 4,559 |
| | — |
| | 19,928 |
| 5,613 |
| | — |
| | 8,617 |
| | — |
| | — |
| | 14,230 |
|
Principal payments on other debt | (5,987 | ) | | (261 | ) | | (2,400 | ) | | (2,873 | ) | | — |
| | (11,521 | ) | (6,103 | ) | | (245 | ) | | (3,818 | ) | | (2,514 | ) | | — |
| | (12,680 | ) |
Dividends paid to Holdings | (889 | ) | | — |
| | — |
| | — |
| | — |
| | (889 | ) | (13,620 | ) | | — |
| | — |
| | — |
| | — |
| | (13,620 | ) |
Equity investment by Holdings | 1,620 |
| | — |
| | — |
| | — |
| | — |
| | 1,620 |
| 459 |
| | — |
| | — |
| | — |
| | — |
| | 459 |
|
Intercompany | 90,589 |
| | (45,661 | ) | | (27,290 | ) | | (17,638 | ) | | — |
| | — |
| (80,684 | ) | | 94,742 |
| | (14,058 | ) | | — |
| | — |
| | — |
|
Decrease in overdrafts | (6,171 | ) | | — |
| | — |
| | — |
| | — |
| | (6,171 | ) | |
Increase in overdrafts | | 2,176 |
| | — |
| | — |
| | — |
| | — |
| | 2,176 |
|
Proceeds from issuance of non-controlling interests | — |
| | — |
| | 957 |
| | 1,969 |
| | — |
| | 2,926 |
| — |
| | — |
| | 18,288 |
| | — |
| | — |
| | 18,288 |
|
Distributions to non-controlling interests | — |
| | (1,450 | ) | | (1,681 | ) | | (298,082 | ) | | — |
| | (301,213 | ) | |
Distributions to and purchases of non-controlling interests | | — |
| | (150 | ) | | (3,988 | ) | | (3,607 | ) | | — |
| | (7,745 | ) |
Net cash provided by (used in) financing activities | (1,887 | ) | | (47,372 | ) | | (20,594 | ) | | 467,354 |
| | — |
| | 397,501 |
| (15,966 | ) | | 94,347 |
| | 5,041 |
| | (39,999 | ) | | — |
| | 43,423 |
|
Net increase (decrease) in cash and cash equivalents | 15,001 |
| | 1,504 |
| | (165 | ) | | 2,140 |
| | — |
| | 18,480 |
| 1 |
| | 2 |
| | (1,155 | ) | | (49,990 | ) | | — |
| | (51,142 | ) |
Cash and cash equivalents at beginning of period | 73 |
| | 4,856 |
| | 4,561 |
| | 113,059 |
| | — |
| | 122,549 |
| 77 |
| | 7,574 |
| | 4,411 |
| | 163,116 |
| | — |
| | 175,178 |
|
Cash and cash equivalents at end of period | $ | 15,074 |
| | $ | 6,360 |
| | $ | 4,396 |
| | $ | 115,199 |
| | $ | — |
| | $ | 141,029 |
| $ | 78 |
| | $ | 7,576 |
| | $ | 3,256 |
| | $ | 113,126 |
| | $ | — |
| | $ | 124,036 |
|
| |
(a) | Elimination of equity in earnings of consolidated subsidiaries. |
| |
(b) | Elimination of intercompany balances. |
Select Medical Corporation
Condensed Consolidating Balance Sheet
December 31, 20172018
(unaudited)
| | | Select (Parent Company Only) | | Subsidiary Guarantors | | Non-Guarantor Subsidiaries | | Non-Guarantor Concentra | | Consolidating and Eliminating Adjustments | | Consolidated Select Medical Corporation | Select (Parent Company Only) | | Subsidiary Guarantors | | Non-Guarantor Subsidiaries | | Non-Guarantor Concentra | | Consolidating and Eliminating Adjustments | | Consolidated Select Medical Corporation |
| (in thousands) | (in thousands) |
Assets | |
| | |
| | |
| | |
| | |
| | |
| |
ASSETS | | |
| | |
| | |
| | |
| | |
| | |
|
Current Assets: | |
| | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
| | |
|
Cash and cash equivalents | $ | 73 |
| | $ | 4,856 |
| | $ | 4,561 |
| | $ | 113,059 |
| | $ | — |
| | $ | 122,549 |
| $ | 77 |
| | $ | 7,574 |
| | $ | 4,411 |
| | $ | 163,116 |
| | $ | — |
| | $ | 175,178 |
|
Accounts receivable | — |
| | 449,493 |
| | 122,728 |
| | 119,511 |
| | — |
| | 691,732 |
| — |
| | 397,674 |
| | 118,683 |
| | 190,319 |
| | — |
| | 706,676 |
|
Intercompany receivables | — |
| | 1,598,212 |
| | 60,707 |
| | — |
| | (1,658,919 | ) | (a) | — |
| — |
| | 1,787,184 |
| | 83,230 |
| | — |
| | (1,870,414 | ) | (a) | — |
|
Prepaid income taxes | 22,704 |
| | 5,703 |
| | 31 |
| | 2,949 |
| | — |
| | 31,387 |
| 10,205 |
| | 5,711 |
| | — |
| | 4,623 |
| | — |
| | 20,539 |
|
Other current assets | 13,021 |
| | 30,209 |
| | 13,031 |
| | 18,897 |
| | — |
| | 75,158 |
| 17,866 |
| | 31,181 |
| | 14,048 |
| | 27,036 |
| | — |
| | 90,131 |
|
Total Current Assets | 35,798 |
| | 2,088,473 |
| | 201,058 |
| | 254,416 |
| | (1,658,919 | ) | | 920,826 |
| 28,148 |
| | 2,229,324 |
| | 220,372 |
| | 385,094 |
| | (1,870,414 | ) | | 992,524 |
|
Property and equipment, net | 39,836 |
| | 623,085 |
| | 79,013 |
| | 170,657 |
| | — |
| | 912,591 |
| 30,103 |
| | 625,947 |
| | 103,006 |
| | 220,754 |
| | — |
| | 979,810 |
|
Investment in affiliates | 4,524,385 |
| | 124,104 |
| | — |
| | — |
| | (4,648,489 | ) | (b)(c) | — |
| 4,497,167 |
| | 127,036 |
| | — |
| | — |
| | (4,624,203 | ) | (b)(c) | — |
|
Goodwill | — |
| | 2,108,270 |
| | — |
| | 674,542 |
| | — |
| | 2,782,812 |
| — |
| | 2,104,288 |
| | — |
| | 1,216,438 |
| | — |
| | 3,320,726 |
|
Identifiable intangible assets, net | — |
| | 104,067 |
| | 5,046 |
| | 217,406 |
| | — |
| | 326,519 |
| 3 |
| | 102,120 |
| | 5,020 |
| | 330,550 |
| | — |
| | 437,693 |
|
Other assets | 36,494 |
| | 98,575 |
| | 35,440 |
| | 23,898 |
| | (9,989 | ) | (e) | 184,418 |
| 37,281 |
| | 145,467 |
| | 33,417 |
| | 26,032 |
| | (8,685 | ) | (e) | 233,512 |
|
Total Assets | $ | 4,636,513 |
| | $ | 5,146,574 |
| | $ | 320,557 |
| | $ | 1,340,919 |
| | $ | (6,317,397 | ) | | $ | 5,127,166 |
| $ | 4,592,702 |
| | $ | 5,334,182 |
| | $ | 361,815 |
| | $ | 2,178,868 |
| | $ | (6,503,302 | ) | | $ | 5,964,265 |
|
Liabilities and Equity | |
| | |
| | |
| | |
| | |
| | |
| |
LIABILITIES AND EQUITY | | |
| | |
| | |
| | |
| | |
| | |
|
Current Liabilities: | |
| | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
| | |
|
Overdrafts | $ | 29,463 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 29,463 |
| $ | 25,083 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 25,083 |
|
Current portion of long-term debt and notes payable | 16,635 |
| | 740 |
| | 2,212 |
| | 2,600 |
| | — |
| | 22,187 |
| 4,363 |
| | 248 |
| | 2,001 |
| | 37,253 |
| | — |
| | 43,865 |
|
Accounts payable | 12,504 |
| | 85,489 |
| | 17,475 |
| | 12,726 |
| | — |
| | 128,194 |
| 14,033 |
| | 84,343 |
| | 20,956 |
| | 27,361 |
| | — |
| | 146,693 |
|
Intercompany payables | 1,598,212 |
| | 60,707 |
| | — |
| | — |
| | (1,658,919 | ) | (a) | — |
| 1,787,184 |
| | 83,230 |
| | — |
| | — |
| | (1,870,414 | ) | (a) | — |
|
Accrued payroll | 16,736 |
| | 98,887 |
| | 4,819 |
| | 40,120 |
| | — |
| | 160,562 |
| 15,533 |
| | 99,803 |
| | 5,936 |
| | 51,114 |
| | — |
| | 172,386 |
|
Accrued vacation | 4,083 |
| | 58,355 |
| | 12,295 |
| | 18,142 |
| | — |
| | 92,875 |
| 4,613 |
| | 60,989 |
| | 13,942 |
| | 31,116 |
| | — |
| | 110,660 |
|
Accrued interest | 17,479 |
| | 7 |
| | 6 |
| | 2,393 |
| | — |
| | 19,885 |
| 5,996 |
| | 22 |
| | 3 |
| | 6,116 |
| | — |
| | 12,137 |
|
Accrued other | 39,219 |
| | 57,378 |
| | 12,599 |
| | 33,970 |
| | — |
| | 143,166 |
| 60,056 |
| | 61,226 |
| | 17,098 |
| | 52,311 |
| | — |
| | 190,691 |
|
Income taxes payable | — |
| | 1,302 |
| | 30 |
| | 7,739 |
| | — |
| | 9,071 |
| — |
| | 2,366 |
| | 190 |
| | 1,115 |
| | — |
| | 3,671 |
|
Total Current Liabilities | 1,734,331 |
| | 362,865 |
| | 49,436 |
| | 117,690 |
| | (1,658,919 | ) | | 605,403 |
| 1,916,861 |
| | 392,227 |
| | 60,126 |
| | 206,386 |
| | (1,870,414 | ) | | 705,186 |
|
Long-term debt, net of current portion | 2,042,555 |
| | 127 |
| | 24,730 |
| | 610,303 |
| | — |
| | 2,677,715 |
| 1,837,241 |
| | 448 |
| | 48,402 |
| | 1,363,425 |
| | — |
| | 3,249,516 |
|
Non-current deferred tax liability | — |
| | 88,376 |
| | 780 |
| | 45,750 |
| | (9,989 | ) | (e) | 124,917 |
| — |
| | 101,214 |
| | 994 |
| | 60,372 |
| | (8,685 | ) | (e) | 153,895 |
|
Other non-current liabilities | 36,259 |
| | 56,721 |
| | 8,138 |
| | 44,591 |
| | — |
| | 145,709 |
| 35,558 |
| | 59,901 |
| | 9,194 |
| | 54,287 |
| | — |
| | 158,940 |
|
Total Liabilities | 3,813,145 |
| | 508,089 |
| | 83,084 |
| | 818,334 |
| | (1,668,908 | ) | | 3,553,744 |
| 3,789,660 |
| | 553,790 |
| | 118,716 |
| | 1,684,470 |
| | (1,879,099 | ) | | 4,267,537 |
|
Redeemable non-controlling interests | — |
| | — |
| | — |
| | 16,270 |
| | 624,548 |
| (d) | 640,818 |
| — |
| | — |
| | — |
| | 18,525 |
| | 761,963 |
| (d) | 780,488 |
|
Stockholders’ Equity: | |
| | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
| | |
|
Common stock | 0 |
| | — |
| | — |
| | — |
| | — |
| | 0 |
| 0 |
| | — |
| | — |
| | — |
| | — |
| | 0 |
|
Capital in excess of par | 947,370 |
| | — |
| | — |
| | — |
| | — |
| | 947,370 |
| 970,156 |
| | — |
| | — |
| | — |
| | — |
| | 970,156 |
|
Retained earnings (accumulated deficit) | (124,002 | ) | | 1,416,857 |
| | (35,942 | ) | | 64,626 |
| | (1,445,541 | ) | (c)(d) | (124,002 | ) | (167,114 | ) | | 1,547,018 |
| | (29,553 | ) | | 12,355 |
| | (1,529,820 | ) | (c)(d) | (167,114 | ) |
Subsidiary investment | — |
| | 3,221,628 |
| | 273,415 |
| | 437,779 |
| | (3,932,822 | ) | (b)(d) | — |
| — |
| | 3,233,374 |
| | 272,652 |
| | 457,974 |
| | (3,964,000 | ) | (b)(d) | — |
|
Total Select Medical Corporation Stockholders’ Equity | 823,368 |
| | 4,638,485 |
| | 237,473 |
| | 502,405 |
| | (5,378,363 | ) | | 823,368 |
| 803,042 |
| | 4,780,392 |
| | 243,099 |
| | 470,329 |
| | (5,493,820 | ) | | 803,042 |
|
Non-controlling interests | — |
| | — |
| | — |
| | 3,910 |
| | 105,326 |
| (d) | 109,236 |
| — |
| | — |
| | — |
| | 5,544 |
| | 107,654 |
| (d) | 113,198 |
|
Total Equity | 823,368 |
| | 4,638,485 |
| | 237,473 |
| | 506,315 |
| | (5,273,037 | ) | | 932,604 |
| 803,042 |
| | 4,780,392 |
| | 243,099 |
| | 475,873 |
| | (5,386,166 | ) | | 916,240 |
|
Total Liabilities and Equity | $ | 4,636,513 |
| | $ | 5,146,574 |
| | $ | 320,557 |
| | $ | 1,340,919 |
| | $ | (6,317,397 | ) | | $ | 5,127,166 |
| $ | 4,592,702 |
| | $ | 5,334,182 |
| | $ | 361,815 |
| | $ | 2,178,868 |
| | $ | (6,503,302 | ) | | $ | 5,964,265 |
|
| |
(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 non-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 June 30, 20172018
(unaudited)
| | | Select (Parent Company Only) | | Subsidiary Guarantors | | Non-Guarantor Subsidiaries | | Non-Guarantor Concentra | | Consolidating and Eliminating Adjustments | | Consolidated Select Medical Corporation | Select (Parent Company Only) | | Subsidiary Guarantors | | Non-Guarantor Subsidiaries | | Non-Guarantor Concentra | | Consolidating and Eliminating Adjustments | | Consolidated Select Medical Corporation |
| (in thousands) | (in thousands) |
Net operating revenues | $ | 23 |
| | $ | 681,564 |
| | $ | 163,991 |
| | $ | 256,887 |
| | $ | — |
| | $ | 1,102,465 |
| $ | (17 | ) | | $ | 690,766 |
| | $ | 192,638 |
| | $ | 412,823 |
| | $ | — |
| | $ | 1,296,210 |
|
Costs and expenses: | |
| | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
| | |
|
Cost of services | 644 |
| | 564,781 |
| | 140,679 |
| | 214,090 |
| | — |
| | 920,194 |
| |
Cost of services, exclusive of depreciation and amortization | | 799 |
| | 589,707 |
| | 162,832 |
| | 341,393 |
| | — |
| | 1,094,731 |
|
General and administrative | 28,227 |
| | 48 |
| | — |
| | — |
| | — |
| | 28,275 |
| 29,208 |
| | 27 |
| | — |
| | (41 | ) | | — |
| | 29,194 |
|
Depreciation and amortization | 1,573 |
| | 18,182 |
| | 3,149 |
| | 15,429 |
| | — |
| | 38,333 |
| 2,355 |
| | 20,535 |
| | 4,137 |
| | 24,697 |
| | — |
| | 51,724 |
|
Total costs and expenses | 30,444 |
| | 583,011 |
| | 143,828 |
| | 229,519 |
| | — |
| | 986,802 |
| 32,362 |
| | 610,269 |
| | 166,969 |
| | 366,049 |
| | — |
| | 1,175,649 |
|
Income (loss) from operations | (30,421 | ) | | 98,553 |
| | 20,163 |
| | 27,368 |
| | — |
| | 115,663 |
| (32,379 | ) | | 80,497 |
| | 25,669 |
| | 46,774 |
| | — |
| | 120,561 |
|
Other income and expense: | |
| | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
| | |
|
Intercompany interest and royalty fees | 8,195 |
| | (4,735 | ) | | (3,460 | ) | | — |
| | — |
| | — |
| 7,553 |
| | (3,629 | ) | | (3,609 | ) | | (315 | ) | | — |
| | — |
|
Intercompany management fees | 63,504 |
| | (53,414 | ) | | (10,090 | ) | | — |
| | — |
| | — |
| 55,416 |
| | (43,931 | ) | | (11,485 | ) | | — |
| | — |
| | — |
|
Equity in earnings of unconsolidated subsidiaries | — |
| | 5,646 |
| | 20 |
| | — |
| | — |
| | 5,666 |
| — |
| | 4,776 |
| | 9 |
| | — |
| | — |
| | 4,785 |
|
Interest expense | (30,081 | ) | | (49 | ) | | (87 | ) | | (7,438 | ) | | — |
| | (37,655 | ) | |
Non-operating gain | | 1,654 |
| | 4,824 |
| | — |
| | — |
| | — |
| | 6,478 |
|
Interest income (expense) | | (29,412 | ) | | 188 |
| | (186 | ) | | (20,749 | ) | | — |
| | (50,159 | ) |
Income before income taxes | 11,197 |
| | 46,001 |
| | 6,546 |
| | 19,930 |
| | — |
| | 83,674 |
| 2,832 |
| | 42,725 |
| | 10,398 |
| | 25,710 |
| | — |
| | 81,665 |
|
Income tax expense (benefit) | (2,324 | ) | | 27,473 |
| | 143 |
| | 7,082 |
| | — |
| | 32,374 |
| |
Income tax expense | | 831 |
| | 14,254 |
| | 145 |
| | 5,876 |
| | — |
| | 21,106 |
|
Equity in earnings of consolidated subsidiaries | 28,534 |
| | 4,189 |
| | — |
| | — |
| | (32,723 | ) | (a) | — |
| 44,510 |
| | 6,840 |
| | — |
| | — |
| | (51,350 | ) | (a) | — |
|
Net income | 42,055 |
| | 22,717 |
| | 6,403 |
| | 12,848 |
| | (32,723 | ) | | 51,300 |
| 46,511 |
| | 35,311 |
| | 10,253 |
| | 19,834 |
| | (51,350 | ) | | 60,559 |
|
Less: Net income (loss) attributable to non-controlling interests | — |
| | (39 | ) | | 2,214 |
| | 7,070 |
| | — |
| | 9,245 |
| |
Less: Net income attributable to non-controlling interests | | — |
| | 12 |
| | 3,413 |
| | 10,623 |
| | — |
| | 14,048 |
|
Net income attributable to Select Medical Corporation | $ | 42,055 |
| | $ | 22,756 |
| | $ | 4,189 |
| | $ | 5,778 |
| | $ | (32,723 | ) | | $ | 42,055 |
| $ | 46,511 |
| | $ | 35,299 |
| | $ | 6,840 |
| | $ | 9,211 |
| | $ | (51,350 | ) | | $ | 46,511 |
|
| |
(a) | Elimination of equity in earnings of consolidated subsidiaries. |
Select Medical Corporation
Condensed Consolidating Statement of Operations
For the Six Months Ended June 30, 20172018
(unaudited)
| | | Select (Parent Company Only) | | Subsidiary Guarantors | | Non-Guarantor Subsidiaries | | Non-Guarantor Concentra | | Consolidating and Eliminating Adjustments | | Consolidated Select Medical Corporation | Select (Parent Company Only) | | Subsidiary Guarantors | | Non-Guarantor Subsidiaries | | Non-Guarantor Concentra | | Consolidating and Eliminating Adjustments | | Consolidated Select Medical Corporation |
| (in thousands) | (in thousands) |
Net operating revenues | $ | 631 |
| | $ | 1,364,617 |
| | $ | 321,258 |
| | $ | 507,476 |
| | $ | — |
| | $ | 2,193,982 |
| $ | — |
| | $ | 1,397,178 |
| | $ | 383,057 |
| | $ | 768,939 |
| | $ | — |
| | $ | 2,549,174 |
|
Costs and expenses: | |
| | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
| | |
|
Cost of services | 1,176 |
| | 1,150,810 |
| | 274,953 |
| | 422,393 |
| | — |
| | 1,849,332 |
| |
Cost of services, exclusive of depreciation and amortization | | 1,525 |
| | 1,197,733 |
| | 321,363 |
| | 639,923 |
| | — |
| | 2,160,544 |
|
General and administrative | 56,263 |
| | 87 |
| | — |
| | — |
| | — |
| | 56,350 |
| 58,015 |
| | 66 |
| | — |
| | 2,895 |
| | — |
| | 60,976 |
|
Depreciation and amortization | 3,148 |
| | 39,553 |
| | 6,619 |
| | 31,552 |
| | — |
| | 80,872 |
| 4,562 |
| | 39,982 |
| | 8,107 |
| | 45,844 |
| | — |
| | 98,495 |
|
Total costs and expenses | 60,587 |
| | 1,190,450 |
| | 281,572 |
| | 453,945 |
| | — |
| | 1,986,554 |
| 64,102 |
| | 1,237,781 |
| | 329,470 |
| | 688,662 |
| | — |
| | 2,320,015 |
|
Income (loss) from operations | (59,956 | ) | | 174,167 |
| | 39,686 |
| | 53,531 |
| | — |
| | 207,428 |
| (64,102 | ) | | 159,397 |
| | 53,587 |
| | 80,277 |
| | — |
| | 229,159 |
|
Other income and expense: | |
| | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
| | |
|
Intercompany interest and royalty fees | 16,895 |
| | (9,701 | ) | | (7,194 | ) | | — |
| | — |
| | — |
| 15,672 |
| | (7,924 | ) | | (7,240 | ) | | (508 | ) | | — |
| | — |
|
Intercompany management fees | 125,202 |
| | (106,011 | ) | | (19,191 | ) | | — |
| | — |
| | — |
| 116,148 |
| | (93,471 | ) | | (22,677 | ) | | — |
| | — |
| | — |
|
Loss on early retirement of debt | (19,719 | ) | | — |
| | — |
| | — |
| | — |
| | (19,719 | ) | (2,229 | ) | | — |
| | — |
| | (8,026 | ) | | — |
| | (10,255 | ) |
Equity in earnings of unconsolidated subsidiaries | — |
| | 11,139 |
| | 48 |
| | — |
| | — |
| | 11,187 |
| — |
| | 9,460 |
| | 22 |
| | — |
| | — |
| | 9,482 |
|
Non-operating loss | — |
| | (49 | ) | | — |
| | — |
| | — |
| | (49 | ) | |
Interest expense | (63,485 | ) | | (1 | ) | | (85 | ) | | (14,937 | ) | | — |
| | (78,508 | ) | |
Income (loss) before income taxes | (1,063 | ) | | 69,544 |
| | 13,264 |
| | 38,594 |
| | — |
| | 120,339 |
| |
Income tax expense (benefit) | (2,198 | ) | | 33,573 |
| | 283 |
| | 13,918 |
| | — |
| | 45,576 |
| |
Non-operating gain | | 1,654 |
| | 5,223 |
| | — |
| | — |
| | — |
| | 6,877 |
|
Interest income (expense) | | (60,483 | ) | | 121 |
| | (337 | ) | | (36,623 | ) | | — |
| | (97,322 | ) |
Income before income taxes | | 6,660 |
| | 72,806 |
| | 23,355 |
| | 35,120 |
| | — |
| | 137,941 |
|
Income tax expense | | 1,345 |
| | 26,189 |
| | 238 |
| | 5,628 |
| | — |
| | 33,400 |
|
Equity in earnings of consolidated subsidiaries | 56,790 |
| | 9,734 |
| | — |
| | — |
| | (66,524 | ) | (a) | — |
| 74,935 |
| | 15,123 |
| | — |
| | — |
| | (90,058 | ) | (a) | — |
|
Net income | 57,925 |
| | 45,705 |
| | 12,981 |
| | 24,676 |
| | (66,524 | ) | | 74,763 |
| 80,250 |
| | 61,740 |
| | 23,117 |
| | 29,492 |
| | (90,058 | ) | | 104,541 |
|
Less: Net income (loss) attributable to non-controlling interests | — |
| | (3 | ) | | 3,247 |
| | 13,594 |
| | — |
| | 16,838 |
| |
Less: Net income attributable to non-controlling interests | | — |
| | 97 |
| | 7,994 |
| | 16,200 |
| | — |
| | 24,291 |
|
Net income attributable to Select Medical Corporation | $ | 57,925 |
| | $ | 45,708 |
| | $ | 9,734 |
| | $ | 11,082 |
| | $ | (66,524 | ) | | $ | 57,925 |
| $ | 80,250 |
| | $ | 61,643 |
| | $ | 15,123 |
| | $ | 13,292 |
| | $ | (90,058 | ) | | $ | 80,250 |
|
| |
(a) | Elimination of equity in earnings of consolidated subsidiaries. |
Select Medical Corporation
Condensed Consolidating Statement of Cash Flows
For the Six Months Ended June 30, 20172018
(unaudited)
| | | Select (Parent Company Only) | | Subsidiary Guarantors | | Non-Guarantor Subsidiaries | | Non-Guarantor Concentra | | Consolidating and Eliminating Adjustments | | Consolidated Select Medical Corporation | Select (Parent Company Only) | | Subsidiary Guarantors | | Non-Guarantor Subsidiaries | | Non-Guarantor Concentra | | Consolidating and Eliminating Adjustments | | Consolidated Select Medical Corporation |
| (in thousands) | (in thousands) |
Operating activities | |
| | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
| | |
|
Net income | $ | 57,925 |
| | $ | 45,705 |
| | $ | 12,981 |
| | $ | 24,676 |
| | $ | (66,524 | ) | (a) | $ | 74,763 |
| $ | 80,250 |
| | $ | 61,740 |
| | $ | 23,117 |
| | $ | 29,492 |
| | $ | (90,058 | ) | (a) | $ | 104,541 |
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |
| | |
| | |
| | |
| | |
| | |
| |
Adjustments to reconcile net income to net cash provided by operating activities: | | |
| | |
| | |
| | |
| | |
| | |
|
Distributions from unconsolidated subsidiaries | — |
| | 10,902 |
| | 31 |
| | — |
| | — |
| | 10,933 |
| — |
| | 7,800 |
| | 30 |
| | — |
| | — |
| | 7,830 |
|
Depreciation and amortization | 3,148 |
| | 39,553 |
| | 6,619 |
| | 31,552 |
| | — |
| | 80,872 |
| 4,562 |
| | 39,982 |
| | 8,107 |
| | 45,844 |
| | — |
| | 98,495 |
|
Provision for bad debts | — |
| | 715 |
| | — |
| | 30 |
| | — |
| | 745 |
| — |
| | 41 |
| | — |
| | 61 |
| | — |
| | 102 |
|
Equity in earnings of unconsolidated subsidiaries | — |
| | (11,139 | ) | | (48 | ) | | — |
| | — |
| | (11,187 | ) | — |
| | (9,460 | ) | | (22 | ) | | — |
| | — |
| | (9,482 | ) |
Equity in earnings of consolidated subsidiaries | (56,790 | ) | | (9,734 | ) | | — |
| | — |
| | 66,524 |
| (a) | — |
| (74,935 | ) | | (15,123 | ) | | — |
| | — |
| | 90,058 |
| (a) | — |
|
Loss on extinguishment of debt | 6,527 |
| | — |
| | — |
| | — |
| | — |
| | 6,527 |
| 115 |
| | — |
| | — |
| | 369 |
| | — |
| | 484 |
|
Gain on sale of assets and businesses | (8 | ) | | (4,828 | ) | | (4,687 | ) | | — |
| | — |
| | (9,523 | ) | (1,642 | ) | | (5,338 | ) | | — |
| | — |
| | — |
| | (6,980 | ) |
Stock compensation expense | 8,700 |
| | — |
| | — |
| | 570 |
| | — |
| | 9,270 |
| 9,562 |
| | — |
| | — |
| | 1,349 |
| | — |
| | 10,911 |
|
Amortization of debt discount, premium and issuance costs | 4,342 |
| | — |
| | — |
| | 1,632 |
| | — |
| | 5,974 |
| 3,553 |
| | — |
| | — |
| | 2,933 |
| | — |
| | 6,486 |
|
Deferred income taxes | 5,987 |
| | — |
| | — |
| | (7,461 | ) | | — |
| | (1,474 | ) | 664 |
| | 1,056 |
| | 40 |
| | (3,451 | ) | | — |
| | (1,691 | ) |
Changes in operating assets and liabilities, net of effects of business combinations: | |
| | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
| | |
|
Accounts receivable | — |
| | (104,767 | ) | | (22,291 | ) | | (13,891 | ) | | — |
| | (140,949 | ) | — |
| | 9,838 |
| | (6,857 | ) | | (8,755 | ) | | — |
| | (5,774 | ) |
Other current assets | (5,631 | ) | | 6,047 |
| | (3,112 | ) | | (2,861 | ) | | — |
| | (5,557 | ) | (876 | ) | | 1,927 |
| | 2,956 |
| | (7,018 | ) | | — |
| | (3,011 | ) |
Other assets | 3,184 |
| | (16,925 | ) | | 17,426 |
| | 936 |
| | — |
| | 4,621 |
| 945 |
| | (9,261 | ) | | 1,110 |
| | 13,890 |
| | — |
| | 6,684 |
|
Accounts payable | (413 | ) | | (1,697 | ) | | 137 |
| | 2,732 |
| | — |
| | 759 |
| (1,470 | ) | | (7,516 | ) | | 1,864 |
| | 1,660 |
| | — |
| | (5,462 | ) |
Accrued expenses | (5,618 | ) | | (4,507 | ) | | 8,394 |
| | (3,102 | ) | | — |
| | (4,833 | ) | (15,020 | ) | | 14,589 |
| | 4,914 |
| | (3,276 | ) | | — |
| | 1,207 |
|
Income taxes | 9,366 |
| | — |
| | — |
| | 10,033 |
| | — |
| | 19,399 |
| 14,757 |
| | 4,401 |
| | 1 |
| | (6,549 | ) | | — |
| | 12,610 |
|
Net cash provided by (used in) operating activities | 30,719 |
| | (50,675 | ) | | 15,450 |
| | 44,846 |
| | — |
| | 40,340 |
| |
Net cash provided by operating activities | | 20,465 |
| | 94,676 |
| | 35,260 |
| | 66,549 |
| | — |
| | 216,950 |
|
Investing activities | |
| | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
| | |
|
Business combinations, net of cash acquired | — |
| | (2,305 | ) | | — |
| | (16,203 | ) | | — |
| | (18,508 | ) | — |
| | (2,666 | ) | | (22 | ) | | (515,016 | ) | | — |
| | (517,704 | ) |
Purchases of property and equipment | (7,093 | ) | | (72,005 | ) | | (9,917 | ) | | (16,287 | ) | | — |
| | (105,302 | ) | (5,232 | ) | | (44,865 | ) | | (14,809 | ) | | (16,742 | ) | | — |
| | (81,648 | ) |
Investment in businesses | — |
| | (9,874 | ) | | — |
| | — |
| | — |
| | (9,874 | ) | — |
| | (3,286 | ) | | — |
| | (5 | ) | | — |
| | (3,291 | ) |
Proceeds from sale of assets and businesses | 8 |
| | 15,007 |
| | 19,537 |
| | — |
| | — |
| | 34,552 |
| 1,655 |
| | 5,017 |
| | — |
| | — |
| | — |
| | 6,672 |
|
Net cash provided by (used in) investing activities | (7,085 | ) | | (69,177 | ) | | 9,620 |
| | (32,490 | ) | | — |
| | (99,132 | ) | |
Net cash used in investing activities | | (3,577 | ) | | (45,800 | ) | | (14,831 | ) | | (531,763 | ) | | — |
| | (595,971 | ) |
Financing activities | |
| | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
| | |
|
Borrowings on revolving facilities | 630,000 |
| | — |
| | — |
| | — |
| | — |
| | 630,000 |
| 265,000 |
| | — |
| | — |
| | — |
| | — |
| | 265,000 |
|
Payments on revolving facilities | (550,000 | ) | | — |
| | — |
| | — |
| | — |
| | (550,000 | ) | (345,000 | ) | | — |
| | — |
| | — |
| | — |
| | (345,000 | ) |
Proceeds from term loans | 1,139,487 |
| | — |
| | — |
| | — |
| | — |
| | 1,139,487 |
| |
Proceeds from term loans (financing costs) | | (11 | ) | | — |
| | — |
| | 779,915 |
| | — |
| | 779,904 |
|
Payments on term loans | (1,150,627 | ) | | — |
| | — |
| | (23,065 | ) | | — |
| | (1,173,692 | ) | (5,750 | ) | | — |
| | — |
| | — |
| | — |
| | (5,750 | ) |
Revolving facility debt issuance costs | (4,392 | ) | | — |
| | — |
| | — |
| | — |
| | (4,392 | ) | (837 | ) | | — |
| | — |
| | (496 | ) | | — |
| | (1,333 | ) |
Borrowings of other debt | 6,572 |
| | — |
| | 105 |
| | 2,767 |
| | — |
| | 9,444 |
| 5,549 |
| | — |
| | 9,820 |
| | 4,559 |
| | — |
| | 19,928 |
|
Principal payments on other debt | (7,353 | ) | | (204 | ) | | (1,183 | ) | | (1,697 | ) | | — |
| | (10,437 | ) | (5,987 | ) | | (261 | ) | | (2,400 | ) | | (2,873 | ) | | — |
| | (11,521 | ) |
Dividends paid to Holdings | (600 | ) | | — |
| | — |
| | — |
| | — |
| | (600 | ) | (889 | ) | | — |
| | — |
| | — |
| | — |
| | (889 | ) |
Equity investment by Holdings | 963 |
| | — |
| | — |
| | — |
| | — |
| | 963 |
| 1,620 |
| | — |
| | — |
| | — |
| | — |
| | 1,620 |
|
Intercompany | (93,455 | ) | | 119,128 |
| | (25,673 | ) | | — |
| | — |
| | — |
| 90,589 |
| | (45,661 | ) | | (27,290 | ) | | (17,638 | ) | | — |
| | — |
|
Decrease in overdrafts | (5,228 | ) | | — |
| | — |
| | — |
| | — |
| | (5,228 | ) | (6,171 | ) | | — |
| | — |
| | — |
| | — |
| | (6,171 | ) |
Proceeds from issuance of non-controlling interests | — |
| | — |
| | 3,553 |
| | — |
| | — |
| | 3,553 |
| — |
| | — |
| | 957 |
| | 1,969 |
| | — |
| | 2,926 |
|
Distributions to non-controlling interests | — |
| | (6 | ) | | (1,982 | ) | | (3,548 | ) | | — |
| | (5,536 | ) | — |
| | (1,450 | ) | | (1,681 | ) | | (298,082 | ) | | — |
| | (301,213 | ) |
Net cash provided by (used in) financing activities | (34,633 | ) | | 118,918 |
| | (25,180 | ) | | (25,543 | ) | | — |
| | 33,562 |
| (1,887 | ) | | (47,372 | ) | | (20,594 | ) | | 467,354 |
| | — |
| | 397,501 |
|
Net decrease in cash and cash equivalents | (10,999 | ) | | (934 | ) | | (110 | ) | | (13,187 | ) | | — |
| | (25,230 | ) | |
Net increase (decrease) in cash and cash equivalents | | 15,001 |
| | 1,504 |
| | (165 | ) | | 2,140 |
| | — |
| | 18,480 |
|
Cash and cash equivalents at beginning of period | 11,071 |
| | 6,467 |
| | 5,056 |
| | 76,435 |
| | — |
| | 99,029 |
| 73 |
| | 4,856 |
| | 4,561 |
| | 113,059 |
| | — |
| | 122,549 |
|
Cash and cash equivalents at end of period | $ | 72 |
| | $ | 5,533 |
| | $ | 4,946 |
| | $ | 63,248 |
| | $ | — |
| | $ | 73,799 |
| $ | 15,074 |
| | $ | 6,360 |
| | $ | 4,396 |
| | $ | 115,199 |
| | $ | — |
| | $ | 141,029 |
|
_______________________________________________________________________________ | |
(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,” 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 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 Medicare-certified long term 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 failure of our Medicare-certified long term care hospitals or inpatient rehabilitation facilities to maintain their Medicare certifications may cause our net operating revenues and profitability to decline;
the failure of our Medicare-certified long term care hospitals and inpatient rehabilitation facilitiesoperated as “hospitals within hospitals” to qualify as hospitals separate from their host hospitals may cause our net operating revenues and profitability to decline;
| |
• | the failure of our Medicare-certified long term care hospitals and inpatient rehabilitation facilitiesoperated 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 our acquisitions, including the acquisition of U.S. HealthWorks by Concentra, and our ability to realize anticipated synergies;
private third-party payors for our services may adopt 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;
a security breach of our or our third-party vendors’ information technology systems may subject us to potential legal and reputational harm and may result in a violation of the Health Insurance Portability and Accountability Act of 1996 or the Health Information Technology for Economic and Clinical Health Act; and
other factors discussed from time to time in our filings with the SEC, including factors discussed under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017,2018, 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, based on number of facilities, are one of the largest operators of critical illness recovery hospitals, (previously referred to as long term acute care hospitals), rehabilitation hospitals, (previously referred to as inpatient rehabilitation facilities), outpatient rehabilitation clinics, and occupational health centers in the United States based on the number of facilities. Our reportable segments include the critical illness recovery hospital segment, rehabilitation hospital segment, outpatient rehabilitation segment, and Concentra segment.States. As of June 30, 2018,2019, we had operations in 47 states and the District of Columbia. We operated 98100 critical illness recovery hospitals in 2728 states, 2628 rehabilitation hospitals in 1112 states, and 1,6381,695 outpatient rehabilitation clinics in 37 states and the District of Columbia. Concentra, which is operated through a joint venture subsidiary, operated 527526 occupational health centers in 41 states as of June 30, 2018 after giving effect to the closing of the acquisition of U.S. HealthWorks on February 1, 2018.2019. Concentra also provides contract services at employer worksites and Department of Veterans Affairs community-based outpatient clinics or “CBOCs.” As of June 30, 2018, we had operations in 47 states(“CBOCs”).
Our reportable segments include the critical illness recovery hospital segment, the rehabilitation hospital segment, the outpatient rehabilitation segment, and the District of Columbia.
Concentra segment. We had net operating revenues of $2,549.2$2,686.0 million for the six months ended June 30, 2018.2019. Of this total, we earned approximately 36%34% of our net operating revenues from our critical illness recovery hospital segment, approximately 14%12% from our rehabilitation hospital segment, approximately 20%19% from our outpatient rehabilitation segment, and approximately 30% from our Concentra segment. Our critical illness recovery hospital segment consists of hospitals designed to serve the needs of patients recovering from critical illnesses, often with complex medical needs, and our rehabilitation hospital segment consists of hospitals designed to serve patients that require intensive physical rehabilitation care. Patients are typically admitted to the Company’sour critical illness recovery hospitals and rehabilitation hospitals from general acute care hospitals. These patients have specialized needs, with serious and often complex medical conditions. Our outpatient rehabilitation segment consists of clinics that provide physical, occupational, and speech rehabilitation services. Our Concentra segment consists of occupational health centers that provide workers’ compensation injury care, physical therapy, and contractconsumer health services providedas well as onsite clinics located at employer worksites that deliver occupational medicine physical therapy, and consumer health services. Additionally, our Concentra segment delivers veteran’s healthcare through its Department of Veterans Affairs CBOCs. During the three months ended June 30, 2019, we began reporting the net operating revenues and expenses associated with employee leasing services provided to our non-consolidating subsidiaries as part of our other activities. Previously, these services were reflected in the financial results of our reportable segments. Under these employee leasing arrangements, actual labor costs are passed through to our non-consolidating subsidiaries, resulting in our recognition of net operating revenues equal to the actual labor costs incurred. Prior year results presented herein have been changed to conform to the current presentation.
Non-GAAP Measure
We believe that the presentation of Adjusted EBITDA, as defined below, 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 segments. Adjusted EBITDA is not a measure of financial performance under accounting principles generally accepted in 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 definitions, 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, acquisition costs associated with U.S. HealthWorks, 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.
The table below reconciles net income and income from operations to Adjusted EBITDA and should be referenced when we discuss Adjusted EBITDA:
| | | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2017 | | 2018 | | 2017 | | 2018 | | 2018 | | 2019 | | 2018 | | 2019 |
| | (in thousands) | | (in thousands) |
Net income | | $ | 51,300 |
| | $ | 60,559 |
| | $ | 74,763 |
| | $ | 104,541 |
| | $ | 60,559 |
| | $ | 59,986 |
| | $ | 104,541 |
| | $ | 113,330 |
|
Income tax expense | | 32,374 |
| | 21,106 |
| | 45,576 |
| | 33,400 |
| | 21,106 |
| | 20,826 |
| | 33,400 |
| | 39,293 |
|
Interest expense | | 37,655 |
| | 50,159 |
| | 78,508 |
| | 97,322 |
| | 50,159 |
| | 51,464 |
| | 97,322 |
| | 102,275 |
|
Non-operating loss (gain) | | — |
| | (6,478 | ) | | 49 |
| | (6,877 | ) | |
Non-operating gain | | | (6,478 | ) | | — |
| | (6,877 | ) | | (6,532 | ) |
Equity in earnings of unconsolidated subsidiaries | | (5,666 | ) | | (4,785 | ) | | (11,187 | ) | | (9,482 | ) | | (4,785 | ) | | (7,394 | ) | | (9,482 | ) | | (11,760 | ) |
Loss on early retirement of debt | | — |
| | — |
| | 19,719 |
| | 10,255 |
| | — |
| | — |
| | 10,255 |
| | — |
|
Income from operations | | 115,663 |
| | 120,561 |
| | 207,428 |
| | 229,159 |
| | 120,561 |
| | 124,882 |
| | 229,159 |
| | 236,606 |
|
Stock compensation expense: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Included in general and administrative | | 3,775 |
| | 4,047 |
| | 7,524 |
| | 8,037 |
| | 4,047 |
| | 4,796 |
| | 8,037 |
| | 9,544 |
|
Included in cost of services | | 909 |
| | 1,937 |
| | 1,746 |
| | 2,874 |
| | 1,937 |
| | 1,562 |
| | 2,874 |
| | 3,069 |
|
Depreciation and amortization | | 38,333 |
| | 51,724 |
| | 80,872 |
| | 98,495 |
| | 51,724 |
| | 54,993 |
| | 98,495 |
| | 107,131 |
|
U.S. HealthWorks acquisition costs | | — |
| | (41 | ) | | — |
| | 2,895 |
| | (41 | ) | | — |
| | 2,895 |
| | — |
|
Adjusted EBITDA | | $ | 158,680 |
| | $ | 178,228 |
| | $ | 297,570 |
| | $ | 341,460 |
| | $ | 178,228 |
| | $ | 186,233 |
| | $ | 341,460 |
| | $ | 356,350 |
|
Summary Financial Results
Three Months Ended June 30, 20182019
For the three months ended June 30, 2018,2019, our net operating revenues increased 17.6%5.0% to $1,296.2$1,361.4 million, compared to $1,102.5$1,296.2 million for the three months ended June 30, 2017.2018. Income from operations increased 4.2%3.6% to $124.9 million for the three months ended June 30, 2019, compared to $120.6 million for the three months ended June 30, 2018, compared to $115.72018.
Net income was $60.0 million for the three months ended June 30, 2017.
Net income increased 18.0%2019, compared to $60.6 million for the three months ended June 30, 2018, compared to $51.32018. Net income included a pre-tax non-operating gain of $6.5 million for the three months ended June 30, 2017. Net income2018.
Adjusted EBITDA increased 4.5% to $186.2 million for the three months ended June 30, 2018 included non-operating gains of $6.5 million.
Adjusted EBITDA increased 12.3%2019, compared to $178.2 million for the three months ended June 30, 2018, compared to $158.7 million for the three months ended June 30, 2017.2018. Our Adjusted EBITDA margin was 13.7% for both the three months ended June 30, 2018, compared to 14.4% for the three months ended June 30, 2017.
2019 and 2018.
The following tables reconcile our segment performance measures to our consolidated operating results:
| | | Three Months Ended June 30, 2018 | Three Months Ended June 30, 2019 |
| Critical Illness Recovery Hospital(1) | | Rehabilitation Hospital(1) | | Outpatient Rehabilitation | | Concentra | | Other | | Total | Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total |
| (in thousands) | (in thousands) |
Net operating revenues | $ | 442,452 |
| | $ | 173,769 |
| | $ | 267,183 |
| | $ | 412,823 |
| | $ | (17 | ) | | $ | 1,296,210 |
| $ | 461,143 |
| | $ | 160,374 |
| | $ | 261,891 |
| | $ | 413,451 |
| | $ | 64,505 |
| | $ | 1,361,364 |
|
Operating expenses | 381,727 |
| | 145,574 |
| | 225,236 |
| | 341,352 |
| | 30,036 |
| | 1,123,925 |
| 397,005 |
| | 130,406 |
| | 219,307 |
| | 338,131 |
| | 96,640 |
| | 1,181,489 |
|
Depreciation and amortization | 11,952 |
| | 6,015 |
| | 6,704 |
| | 24,697 |
| | 2,356 |
| | 51,724 |
| 14,495 |
| | 6,696 |
| | 6,991 |
| | 24,479 |
| | 2,332 |
| | 54,993 |
|
Income (loss) from operations | $ | 48,773 |
| | $ | 22,180 |
| | $ | 35,243 |
| | $ | 46,774 |
| | $ | (32,409 | ) | | $ | 120,561 |
| $ | 49,643 |
| | $ | 23,272 |
| | $ | 35,593 |
| | $ | 50,841 |
| | $ | (34,467 | ) | | $ | 124,882 |
|
Depreciation and amortization | 11,952 |
| | 6,015 |
| | 6,704 |
| | 24,697 |
| | 2,356 |
| | 51,724 |
| 14,495 |
| | 6,696 |
| | 6,991 |
| | 24,479 |
| | 2,332 |
| | 54,993 |
|
Stock compensation expense | — |
| | — |
| | — |
| | 1,138 |
| | 4,846 |
| | 5,984 |
| — |
| | — |
| | — |
| | 767 |
| | 5,591 |
| | 6,358 |
|
U.S. HealthWorks acquisition costs | — |
| | — |
| | — |
| | (41 | ) | | — |
| | (41 | ) | |
Adjusted EBITDA | $ | 60,725 |
| | $ | 28,195 |
| | $ | 41,947 |
| | $ | 72,568 |
| | $ | (25,207 | ) | | $ | 178,228 |
| $ | 64,138 |
| | $ | 29,968 |
| | $ | 42,584 |
| | $ | 76,087 |
| | $ | (26,544 | ) | | $ | 186,233 |
|
Adjusted EBITDA margin | 13.7 | % | | 16.2 | % | | 15.7 | % | | 17.6 | % | | N/M |
| | 13.7 | % | 13.9 | % | | 18.7 | % | | 16.3 | % | | 18.4 | % | | N/M |
| | 13.7 | % |
| | | Three Months Ended June 30, 2017 | Three Months Ended June 30, 2018 |
| Critical Illness Recovery Hospital(1) | | Rehabilitation Hospital(1) | | Outpatient Rehabilitation | | Concentra | | Other | | Total | Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total |
| (in thousands) | (in thousands) |
Net operating revenues(1) | $ | 439,194 |
| | $ | 151,378 |
| | $ | 254,984 |
| | $ | 256,887 |
| | $ | 22 |
| | $ | 1,102,465 |
| $ | 442,452 |
| | $ | 144,779 |
| | $ | 253,914 |
| | $ | 412,823 |
| | $ | 42,242 |
| | $ | 1,296,210 |
|
Operating expenses(1) | 364,151 |
| | 128,249 |
| | 213,058 |
| | 214,090 |
| | 28,921 |
| | 948,469 |
| 381,727 |
| | 116,584 |
| | 211,967 |
| | 341,352 |
| | 72,295 |
| | 1,123,925 |
|
Depreciation and amortization | 10,917 |
| | 4,537 |
| | 5,878 |
| | 15,429 |
| | 1,572 |
| | 38,333 |
| 11,952 |
| | 6,015 |
| | 6,704 |
| | 24,697 |
| | 2,356 |
| | 51,724 |
|
Income (loss) from operations | $ | 64,126 |
| | $ | 18,592 |
| | $ | 36,048 |
| | $ | 27,368 |
| | $ | (30,471 | ) | | $ | 115,663 |
| $ | 48,773 |
| | $ | 22,180 |
| | $ | 35,243 |
| | $ | 46,774 |
| | $ | (32,409 | ) | | $ | 120,561 |
|
Depreciation and amortization | 10,917 |
| | 4,537 |
| | 5,878 |
| | 15,429 |
| | 1,572 |
| | 38,333 |
| 11,952 |
| | 6,015 |
| | 6,704 |
| | 24,697 |
| | 2,356 |
| | 51,724 |
|
Stock compensation expense | — |
| | — |
| | — |
| | 264 |
| | 4,420 |
| | 4,684 |
| — |
| | — |
| | — |
| | 1,138 |
| | 4,846 |
| | 5,984 |
|
U.S. HealthWorks acquisition costs | | — |
| | — |
| | — |
| | (41 | ) | | — |
| | (41 | ) |
Adjusted EBITDA | $ | 75,043 |
| | $ | 23,129 |
| | $ | 41,926 |
| | $ | 43,061 |
| | $ | (24,479 | ) | | $ | 158,680 |
| $ | 60,725 |
| | $ | 28,195 |
| | $ | 41,947 |
| | $ | 72,568 |
| | $ | (25,207 | ) | | $ | 178,228 |
|
Adjusted EBITDA margin | 17.1 | % | | 15.3 | % | | 16.4 | % | | 16.8 | % | | N/M |
| | 14.4 | % | 13.7 | % | | 19.5 | % | | 16.5 | % | | 17.6 | % | | N/M |
| | 13.7 | % |
The following table summarizes changes in segment performance measures for the three months ended June 30, 2018,2019, compared to the three months ended June 30, 2017:2018:
|
| | | | | | | | | | | | | | | | | |
| Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total |
Change in net operating revenues | 4.2 | % | | 10.8 | % | | 3.1 | % | | 0.2 | % | | 52.7 | % | | 5.0 | % |
Change in income from operations | 1.8 | % | | 4.9 | % | | 1.0 | % | | 8.7 | % | | (6.4 | )% | | 3.6 | % |
Change in Adjusted EBITDA | 5.6 | % | | 6.3 | % | | 1.5 | % | | 4.8 | % | | (5.3 | )% | | 4.5 | % |
_______________________________________________________________________________ |
| | | | | | | | | | | | | | | | | |
| Critical Illness Recovery Hospital(1) | | Rehabilitation Hospital(1) | | Outpatient Rehabilitation | | Concentra | | Other | | Total |
Change in net operating revenues | 0.7 | % | | 14.8 | % | | 4.8 | % | | 60.7 | % | | N/M |
| | 17.6 | % |
Change in income from operations | (23.9 | )% | | 19.3 | % | | (2.2 | )% | | 70.9 | % | | (6.4 | )% | | 4.2 | % |
Change in Adjusted EBITDA | (19.1 | )% | | 21.9 | % | | 0.1 | % | | 68.5 | % | | (3.0 | )% | | 12.3 | % |
N/M — Not meaningful. | |
(1) | The critical illness recovery hospital segment was previously referredFor the three months ended June 30, 2018, the financial results of our reportable segments have been changed to remove the net operating revenues and expenses associated with employee leasing services provided to our non-consolidating subsidiaries. These results are now reported as the long term acute care segment. The rehabilitation hospital segment was previously referredpart of our other activities. We lease employees at cost to as the inpatient rehabilitation segment.these non-consolidating subsidiaries. |
N/M — Not meaningful.
Six Months Ended June 30, 20182019
For the six months ended June 30, 2018,2019, our net operating revenues increased 16.2%5.4% to $2,549.2$2,686.0 million, compared to $2,194.0$2,549.2 million for the six months ended June 30, 2017.2018. Income from operations increased 10.5%3.2% to $236.6 million for the six months ended June 30, 2019, compared to $229.2 million for the six months ended June 30, 2018, compared2018.
Net income increased 8.4% to $207.4$113.3 million for the six months ended June 30, 2017.
Net income increased 39.8%2019, compared to $104.5 million for the six months ended June 30, 2018, compared to $74.82018. Net income included a pre-tax non-operating gain of $6.5 million for the six months ended June 30, 2017.2019. Net income for the six months ended June 30, 2018 included a pre-tax losslosses on early retirement of debt of $10.3 million, and pre-tax non-operating gains of $6.9 million. Net incomemillion, and pre-tax U.S. HealthWorks acquisition costs of $2.9 million for the six months ended June 30, 2017 included a pre-tax loss on early retirement of debt of $19.7 million.2018.
Adjusted EBITDA increased 14.7%4.4% to $356.4 million for the six months ended June 30, 2019, compared to $341.5 million for the six months ended June 30, 2018, compared to $297.6 million2018. Our Adjusted EBITDA margin was 13.3% for the six months ended June 30, 2017. Our Adjusted EBITDA margin was2019, compared to 13.4% for the six months ended June 30, 2018, compared to 13.6% for the six months ended June 30, 2017.2018.
The following tables reconcile our segment performance measures to our consolidated operating results:
| | | Six Months Ended June 30, 2018 | Six Months Ended June 30, 2019 |
| Critical Illness Recovery Hospital(1) | | Rehabilitation Hospital(1) | | Outpatient Rehabilitation | | Concentra | | Other | | Total | Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total |
| (in thousands) | (in thousands) |
Net operating revenues | $ | 907,128 |
| | $ | 348,543 |
| | $ | 524,564 |
| | $ | 768,939 |
| | $ | — |
| | $ | 2,549,174 |
| $ | 918,677 |
| | $ | 314,932 |
| | $ | 508,796 |
| | $ | 809,772 |
| | $ | 133,818 |
| | $ | 2,685,995 |
|
Operating expenses | 773,431 |
| | 293,572 |
| | 452,092 |
| | 642,818 |
| | 59,607 |
| | 2,221,520 |
| 781,541 |
| | 259,167 |
| | 437,221 |
| | 668,961 |
| | 195,368 |
| | 2,342,258 |
|
Depreciation and amortization | 23,010 |
| | 11,737 |
| | 13,341 |
| | 45,844 |
| | 4,563 |
| | 98,495 |
| 25,946 |
| | 13,098 |
| | 14,023 |
| | 49,383 |
| | 4,681 |
| | 107,131 |
|
Income (loss) from operations | $ | 110,687 |
| | $ | 43,234 |
| | $ | 59,131 |
| | $ | 80,277 |
| | $ | (64,170 | ) | | $ | 229,159 |
| $ | 111,190 |
| | $ | 42,667 |
| | $ | 57,552 |
| | $ | 91,428 |
| | $ | (66,231 | ) | | $ | 236,606 |
|
Depreciation and amortization | 23,010 |
| | 11,737 |
| | 13,341 |
| | 45,844 |
| | 4,563 |
| | 98,495 |
| 25,946 |
| | 13,098 |
| | 14,023 |
| | 49,383 |
| | 4,681 |
| | 107,131 |
|
Stock compensation expense | — |
| | — |
| | — |
| | 1,349 |
| | 9,562 |
| | 10,911 |
| — |
| | — |
| | — |
| | 1,534 |
| | 11,079 |
| | 12,613 |
|
U.S. HealthWorks acquisition costs | — |
| | — |
| | — |
| | 2,895 |
| | — |
| | 2,895 |
| |
Adjusted EBITDA | $ | 133,697 |
| | $ | 54,971 |
| | $ | 72,472 |
| | $ | 130,365 |
| | $ | (50,045 | ) | | $ | 341,460 |
| $ | 137,136 |
| | $ | 55,765 |
| | $ | 71,575 |
| | $ | 142,345 |
| | $ | (50,471 | ) | | $ | 356,350 |
|
Adjusted EBITDA margin | 14.7 | % | | 15.8 | % | | 13.8 | % | | 17.0 | % | | N/M |
| | 13.4 | % | 14.9 | % | | 17.7 | % | | 14.1 | % | | 17.6 | % | | N/M |
| | 13.3 | % |
| | | Six Months Ended June 30, 2017 | Six Months Ended June 30, 2018 |
| Critical Illness Recovery Hospital(1) | | Rehabilitation Hospital(1) | | Outpatient Rehabilitation | | Concentra | | Other | | Total | Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total |
| (in thousands) | (in thousands) |
Net operating revenues(1) | $ | 884,317 |
| | $ | 296,203 |
| | $ | 505,355 |
| | $ | 507,476 |
| | $ | 631 |
| | $ | 2,193,982 |
| $ | 907,128 |
| | $ | 288,087 |
| | $ | 498,145 |
| | $ | 768,939 |
| | $ | 86,875 |
| | $ | 2,549,174 |
|
Operating expenses(1) | 736,937 |
| | 256,746 |
| | 432,078 |
| | 422,393 |
| | 57,528 |
| | 1,905,682 |
| 773,431 |
| | 233,116 |
| | 425,673 |
| | 642,818 |
| | 146,482 |
| | 2,221,520 |
|
Depreciation and amortization | 23,959 |
| | 9,995 |
| | 12,218 |
| | 31,552 |
| | 3,148 |
| | 80,872 |
| 23,010 |
| | 11,737 |
| | 13,341 |
| | 45,844 |
| | 4,563 |
| | 98,495 |
|
Income (loss) from operations | $ | 123,421 |
| | $ | 29,462 |
| | $ | 61,059 |
| | $ | 53,531 |
| | $ | (60,045 | ) | | $ | 207,428 |
| $ | 110,687 |
| | $ | 43,234 |
| | $ | 59,131 |
| | $ | 80,277 |
| | $ | (64,170 | ) | | $ | 229,159 |
|
Depreciation and amortization | 23,959 |
| | 9,995 |
| | 12,218 |
| | 31,552 |
| | 3,148 |
| | 80,872 |
| 23,010 |
| | 11,737 |
| | 13,341 |
| | 45,844 |
| | 4,563 |
| | 98,495 |
|
Stock compensation expense | — |
| | — |
| | — |
| | 570 |
| | 8,700 |
| | 9,270 |
| — |
| | — |
| | — |
| | 1,349 |
| | 9,562 |
| | 10,911 |
|
U.S. HealthWorks acquisition costs | | — |
| | — |
| | — |
| | 2,895 |
| | — |
| | 2,895 |
|
Adjusted EBITDA | $ | 147,380 |
| | $ | 39,457 |
| | $ | 73,277 |
| | $ | 85,653 |
| | $ | (48,197 | ) | | $ | 297,570 |
| $ | 133,697 |
| | $ | 54,971 |
| | $ | 72,472 |
| | $ | 130,365 |
| | $ | (50,045 | ) | | $ | 341,460 |
|
Adjusted EBITDA margin | 16.7 | % | | 13.3 | % | | 14.5 | % | | 16.9 | % | | N/M |
| | 13.6 | % | 14.7 | % | | 19.1 | % | | 14.5 | % | | 17.0 | % | | N/M |
| | 13.4 | % |
The following table summarizes changes in segment performance measures for the six months ended June 30, 2018,2019, compared to the six months ended June 30, 2017:2018:
|
| | | | | | | | | | | | | | | | | |
| Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total |
Change in net operating revenues | 1.3 | % | | 9.3 | % | | 2.1 | % | | 5.3 | % | | 54.0 | % | | 5.4 | % |
Change in income from operations | 0.5 | % | | (1.3 | )% | | (2.7 | )% | | 13.9 | % | | (3.2 | )% | | 3.2 | % |
Change in Adjusted EBITDA | 2.6 | % | | 1.4 | % | | (1.2 | )% | | 9.2 | % | | (0.9 | )% | | 4.4 | % |
_______________________________________________________________________________ |
| | | | | | | | | | | | | | | | | |
| Critical Illness Recovery Hospital(1) | | Rehabilitation Hospital(1) | | Outpatient Rehabilitation | | Concentra | | Other | | Total |
Change in net operating revenues | 2.6 | % | | 17.7 | % | | 3.8 | % | | 51.5 | % | | N/M |
| | 16.2 | % |
Change in income from operations | (10.3 | )% | | 46.7 | % | | (3.2 | )% | | 50.0 | % | | (6.9 | )% | | 10.5 | % |
Change in Adjusted EBITDA | (9.3 | )% | | 39.3 | % | | (1.1 | )% | | 52.2 | % | | (3.8 | )% | | 14.7 | % |
N/M — Not meaningful. | |
(1) | The critical illness recovery hospital segment was previously referredFor the six months ended June 30, 2018, the financial results of our reportable segments have been changed to remove the net operating revenues and expenses associated with employee leasing services provided to our non-consolidating subsidiaries. These results are now reported as the long term acute care segment. The rehabilitation hospital segment was previously referredpart of our other activities. We lease employees at cost to as the inpatient rehabilitation segment.these non-consolidating subsidiaries. |
N/M — Not meaningful.
Significant Events
Acquisition of U.S. HealthWorks
On February 1, 2018, Concentra acquired all of the issued and outstanding shares of stock of U.S. HealthWorks, an occupational medicine and urgent care provider, pursuant to the terms of the Purchase Agreement.
In connection with the closing of the transaction, Concentra Group Holdings made distributions to its equity holders and redeemed certain of its outstanding equity interests from existing minority equity holders. Subsequently, Concentra Group Holdings and a wholly owned subsidiary of Concentra Group Holdings Parent merged, with Concentra Group Holdings surviving the merger and becoming a wholly owned subsidiary of Concentra Group Holdings Parent. As a result of the merger, the equity interests of Concentra Group Holdings outstanding after the redemption described above were exchanged for membership interests in Concentra Group Holdings Parent.
Concentra acquired U.S. HealthWorks for $753.0 million. The Purchase Agreement provides for certain post-closing adjustments for cash, indebtedness, transaction expenses, and working capital. DHHC, a subsidiary of Dignity Health, was issued a 20% equity interest in Concentra Group Holdings Parent, which was valued at $238.0 million. Select retained a majority voting interest in Concentra Group Holdings Parent following the closing of the transaction.
Concentra used borrowings under the Concentra first lien credit agreement and the Concentra second lien credit agreement, as described below, together with cash on hand, to pay the purchase price for all of the issued and outstanding stock of U.S. HealthWorks to DHHC, to finance the redemption and reorganization transactions executed under the Purchase Agreement, and to pay fees and expenses associated with the financing.
Amendment to the Concentra Credit Facilities
On February 1, 2018, in connection with the transactions executed under the Purchase Agreement, Concentra amended the Concentra first lien credit agreement to, among other things, provide for (i) an additional $555.0 million in tranche B term loans that, along with the existing tranche B term loans under the Concentra first lien credit agreement, have a maturity date of June 1, 2022 and (ii) an additional $25.0 million to the $50.0 million, five-year revolving credit facility under the terms of the existing Concentra first lien credit agreement. The tranche B term loans bear interest at a rate equal to the Adjusted LIBO Rate (as defined in the Concentra first lien credit agreement) plus 2.75% (subject to an Adjusted LIBO Rate floor of 1.00%) for Eurodollar Borrowings (as defined in the Concentra first lien credit agreement), or Alternate Base Rate (as defined in the Concentra first lien credit agreement) plus 1.75% (subject to an Alternate Base Rate floor of 2.00%) for ABR Borrowings (as defined in the Concentra first lien credit agreement). All other material terms and conditions applicable to the original tranche B term loan commitments are applicable to the additional tranche B term loans created under the Concentra first lien credit agreement.
In addition, Concentra entered into the Concentra second lien credit agreement that provided for $240.0 million in term loans with a maturity date of June 1, 2023. Borrowings under the Concentra second lien credit agreement bear interest at a rate equal to the Adjusted LIBO Rate (as defined in the Concentra second lien credit agreement) plus 6.50% (subject to an Adjusted LIBO Rate floor of 1.00%), or Alternate Base Rate (as defined in the Concentra second lien credit agreement) plus 5.50% (subject to an Alternate Base Rate floor of 2.00%).
Amendment to the Select Credit Facilities
On March 22, 2018, Select entered into Amendment No. 1 to the Select credit agreement dated March 6, 2017. Amendment No. 1 (i) decreased the applicable interest rate on the Select term loans from the Adjusted LIBO Rate (as defined in the Select credit agreement and subject to an Adjusted LIBO floor of 1.00%) plus 3.50% to the Adjusted LIBO Rate plus a percentage ranging from 2.50% to 2.75%, or from the Alternative Base Rate (as defined in the Select credit agreement and subject to an Alternate Base Rate floor of 2.00%) plus 2.50% to the Alternative Base Rate plus a percentage ranging from 1.50% to 1.75%, in each case based on Select’s total net leverage ratio (as defined in the Select credit agreement); (ii) decreased the applicable interest rate on the loans outstanding under the Select revolving credit facility from the Adjusted LIBO Rate plus a percentage ranging from 3.00% to 3.25% to the Adjusted LIBO Rate plus a percentage ranging from 2.50% to 2.75%, or from the Alternative Base Rate plus a percentage ranging from 2.00% to 2.25% to the Alternative Base Rate plus a percentage ranging from 1.50% to 1.75%, in each case based on Select’s total net leverage ratio; (iii) extended the maturity date for the Select term loans from March 6, 2024 to March 6, 2025; and (iv) made certain other technical amendments to the Select credit agreement as set forth therein.
Regulatory Changes
Our Annual Report on Form 10-K for the year ended December 31, 2017,2018, filed with the SEC on February 22, 2018,21, 2019, contains a detailed discussion of the regulations that affect our business in Part I — Business — Government Regulations. The following is a discussion of some of the more significant healthcare regulatory changes that have affected our financial performance in the periods covered by this report or are likely to affect our financial performance and 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 27%26% of our net operating revenues for the six months ended June 30, 2018,2019, and 30%27% of our net operating revenues for the year ended December 31, 2017.2018.
Medicare Reimbursement of Critical Illness Recovery HospitalLTCH Services
There have been significant regulatory changes affecting our critical illness recovery hospitals, which are certified by Medicare as long term care hospitals (“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 critical illness recovery hospitals are made in accordance with the long term care hospital prospective payment system (“LTCH-PPS”). Proposed rules specifically related to LTCH-PPS are generally published in May, finalized in August and effective on October 1 of each year.
The following is a summary of significant changes to LTCH-PPS which have affected our results of operations, as well as the policies and payment rates that may affect our future results of operations.
Fiscal Year 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 included 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 $23,573, an increase from the fixed‑loss amount in the 2016 fiscal year of $22,538.
Fiscal Year 2018. On August 14, 2017, CMS published the final rule updating policies and payment rates for the LTCH-PPS for fiscal year 2018 (affecting discharges and cost reporting periods beginning on or after October 1, 2017 through September 30, 2018). Certain errors in the final rule published on August 14, 2017 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 less a reduction of 0.75% mandated by the ACA.Affordable Care Act (“ACA”). The update to the standard federal rate for fiscal year 2018 was further 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.
Fiscal Year 2019. On May 7,August 17, 2018, CMS published the proposedfinal rule updating policies and payment rates for the LTCH-PPS for fiscal year 2019 (affecting discharges and cost reporting periods beginning on or after October 1, 2018 through September 30, 2019). Certain errors in the final rule were corrected in a final rule published October 3, 2018. The standard federal rate would bewas set at $41,483,$41,559, an increase from the standard federal rate applicable during fiscal year 2018 of $41,415. The update to the standard federal rate for fiscal year 2019 if adopted, includesincluded a market basket increase of 2.7%2.9%, less a productivity adjustment of 0.8%, and less a reduction of 0.75% mandated by the ACA. The standard federal rate if adopted, also includes a proposedincluded an area wage budget neutrality factor of 0.9997130.999215 and a proposedtemporary, one-time permanent budget neutrality adjustment of 0.9905350.990878 in connection with the proposed elimination of the 25 Percent Rule (discussed further below)herein). The fixed-loss amount for high cost outlier cases paid under LTCH-PPS if adopted, would bewas set at $30,639, which is an increase$27,121, a decrease from the fixed-loss amount in the 2018 fiscal year of $27,381. The fixed-loss amount for high cost outlier cases paid under the site-neutral payment rate if adopted, would bewas set at $27,545, an increase$25,743, a decrease from the fixed-loss amount in the 2018 fiscal year of $26,537.
Fiscal Year 2020. On May 3, 2019, CMS published the proposed policies and payment rates for the LTCH-PPS for fiscal year 2020 (affecting discharges and cost reporting periods beginning on or after October 1, 2019 through September 30, 2020). The standard federal rate would be set at $42,951, an increase from the standard federal rate applicable during fiscal year 2019 of $41,559. The update to the standard federal rate for fiscal year 2020, if adopted, includes a market basket increase of 3.2%, less a productivity adjustment of 0.5%. The standard federal rate also includes an area wage budget neutrality factor of 1.0064747 and a temporary, one-time budget neutrality adjustment of 0.999856 in connection with the elimination of the 25 Percent Rule (discussed herein). The fixed-loss amount for high cost outlier cases paid under LTCH-PPS, if adopted, would be set at $29,997, which is an increase from the fixed-loss amount in the 2019 fiscal year of $27,121. The fixed-loss amount for high cost outlier cases paid under the site-neutral payment rate, if adopted, would be set at $26,994, an increase from the fixed-loss amount in the 2019 fiscal year of $25,743. For LTCH discharges occurring in cost reporting periods beginning in FY 2020, site neutral payment rate cases will begin to be paid fully on the site neutral payment rate, rather than the transitional blended rate.
25 Percent Rule
The “25 Percent Rule” iswas a downward payment adjustment that appliesapplied 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) exceedsexceeded the applicable percentage admissions threshold during a particular cost reporting period. Specifically, the payment rate for only Medicare patients above the percentage admissions threshold are subject to a downward payment adjustment. For Medicare patients above the applicable percentage admissions threshold, the LTCH is reimbursed at a rate equivalent to that under general acute care hospital inpatient prospective payment system, or “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 after October 1, 2016 and before October 1, 2017. In addition, current law applies higher percentage admissions thresholds under the 25 Percent Rule for most LTCHs operating as a hospital within a hospital (“HIH”) and satellites 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 most HIHs and satellites 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. As a result, the 25 Percent Rule does not apply until discharges occurring on or after October 1, 2018. After the expiration of the regulatory moratorium, our LTCHs (whether freestanding, HIH or satellite) will 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 applicable percentage admissions threshold of all Medicare patients discharged from the LTCH during the cost reporting period. These regulatory changes have the potential to cause an adverse financial impact on the net operating revenues and profitability of many of these hospitals for discharges on or after October 1, 2018.
For fiscal year 2019 and thereafter, CMS is proposing to eliminateeliminated the 25 Percent Rule entirely. The elimination of the 25 Percent Rule is being implemented in a budget neutral manner. CMS proposes to accomplish thismanner by adjusting the standard federal payment rates down such that the projection of aggregate LTCH payments in fiscal year 2019 would equal the projection of aggregate LTCH payments in fiscal year 2019 that would have been paid if the moratorium ended and the 25 Percent Rule went into effect on October 1, 2018. Under this proposal, the LTCH-PPS standard federal payment rate would be adjusted downward byAs a factor of 0.990535 to maintain aggregate LTCH-PPS payments at the estimated levels they would be in the absence of this proposed change. As proposed,result, the elimination of the 25 Percent Rule would be accomplished throughincludes a temporary, one-time permanent adjustment to the fiscal year 2019 LTCH-PPS standard federal payment rate. CMS has requested public comments on the proposal to permanently eliminate the 25 Percent Rule inrate, a budget neutral manner, or, in the alternative, the adoption of an additional one year delay on the implementation of the 25 Percent Rule with a budget neutrality adjustment.
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 Medicare severity long-term care diagnosis-related group (“MS-LTC-DRG”), referred to as a short stay outlier, or “SSO.” For discharges before October 1, 2017, SSO cases were 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.
The SSO rule also had a category referred to as a “very short stay outlier,” which applied to cases with a length of stay that is less than the average length of stay plus one standard deviation for the same Medicare severity diagnosis-related group (“MS-DRG”) under IPPS, referred to as the so-called “IPPS comparable threshold.” The LTCH payment for very short stay outlier cases was equivalenttemporary, one-time adjustment to the general acute care hospital IPPS per diem rate.
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 (i.e., the fourth option under the prior policy). Under this policy, as the length of stay of a SSO case increases, the percentage of the per diem payment amounts based on the full MS-LTCH-DRG2020 LTCH-PPS standard federal payment rate, increases and a permanent, one-time adjustment to the percentage of theLTCH-PPS standard federal payment based on the IPPS comparable amount decreases. In addition, the very short stay outlier category was eliminated.
rate in fiscal years 2021 and subsequent years.
Medicare Reimbursement of Rehabilitation HospitalIRF Services
The following is a summary of significant regulatory changes affecting our rehabilitation hospitals, which are certified by Medicare as inpatient rehabilitation facilities (“IRFs”), as well as the policies and payment rates that may affect our future results of operations. Medicare payments to our rehabilitation hospitals are made in accordance with the inpatient rehabilitation facility prospective payment system (“IRF-PPS”).
The following is a summary of significant changes to IRF-PPS which have affected our results of operations, as well as the policies and payment rates that may affect our future results of operations.
Fiscal Year 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 included 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. The standard payment conversion factor for fiscal year 2018 was further impacted further by the Medicare Access and CHIP Reauthorization Act of 2015, which limitslimited 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.
Fiscal Year 2019. On July 31,August 6, 2018, CMS released an advanced copy ofpublished the final rule updating policies and payment rates for the IRF-PPS for fiscal year 2019 (affecting discharges and cost reporting periods beginning on or after October 1, 2018 through September 30, 2019). The standard payment conversion factor for discharges for fiscal year 2019 iswas set at $16,021, an increase from the standard payment conversion factor applicable during fiscal year 2018 of $15,838. The update to the standard payment conversion factor for fiscal year 2019 includesincluded a market basket increase of 2.9%, less a productivity adjustment of 0.8%, and less a reduction of 0.75% mandated by the ACA. CMS increased the outlier threshold amount for fiscal year 2019 to $9,402 from $8,679 established in the final rule for fiscal year 2018.
Fiscal Year 2020. On July 31, 2019, CMS released an advanced copy of the final rule updating policies and payment rates for the IRF-PPS for fiscal year 2020 (affecting discharges and cost reporting periods beginning on or after October 1, 2019 through September 30, 2020). The standard payment conversion factor for discharges for fiscal year 2020 was set at $16,489, an increase from the standard payment conversion factor applicable during fiscal year 2019 of $16,021. The update to the standard payment conversion factor for fiscal year 2020 included a market basket increase of 2.9%, less a productivity adjustment of 0.4%. CMS increased the outlier threshold amount for fiscal year 2020 to $9,935 from $9,402 established in the final rule for fiscal year 2019.
Medicare Reimbursement of Outpatient Rehabilitation Clinic Services
The Medicare program reimburses outpatient rehabilitation providers based on the Medicare physician fee schedule. For services provided in 2017 through 2019, a 0.5% update will bewas applied each year to the fee schedule payment rates, subject to an adjustment beginning in 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 the alternative payment models (“APMs”). In 2026 and subsequent years, eligible professionals participating in APMs thatwho meet certain criteria would receive annual updates of 0.75%, while all other professionals would receive annual updates of 0.25%.
Beginning in 2019, payments under the fee schedule are subject to adjustment based on performance in MIPS, which measures performance based on certain quality metrics, resource use, and meaningful use of electronic health records. Under the MIPS requirements a provider’san eligible clinician’s performance is assessed according to established performance standards and used to determine an adjustment factor that is then applied to the professional’sclinician’s payment for a year. Each year from 2019 through 2024 professionalseligible clinicians 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 to promote the alignment of incentives across payors. MIPS and APM applies to physicians and other practitioners included within the definition of “eligible clinicians.” Currently, physical therapists and occupational therapists may voluntarily participate in MIPS and APM. In the Medicare Physician Fee Schedule proposed rule for calendar year 2019, CMS proposes to include physical therapists and occupational therapists as “eligible clinicians” which, if the proposed rule is adopted, would require physical therapists and occupational therapists to participate in these programs beginning in 2021. CMS requested public comment on requiring speech-language pathologists to participate in these programs beginning in 2021. The specifics of the MIPS and APM adjustments beginning in 2019 and 2020, respectively, remain subject to future notice and comment rule‑making.
Therapy Caps
Outpatient therapy providers reimbursed under the Medicare physician fee schedule have been subject to annual limits for therapy expenses. For example, for the calendar year beginning January 1, 2017, the annual limit on outpatient therapy services was $1,980 for combined physical and speech language pathology services and $1,980 for occupational therapy services. The Bipartisan Budget Act of 2018 repealed the annual limits on outpatient therapy.
The annual limits for therapy expenses historically did not apply to services furnished and billed by outpatient hospital departments. However, the Medicare Access and CHIP Reauthorization Act of 2015, and prior legislation, extended the annual limits on therapy expenses in hospital outpatient department settings through December 31, 2017. The application of annual limits to hospital outpatient department settings sunset on December 31, 2017.
Prior to calendar year 2028, all therapy claims exceeding $3,000 are subject to a manual medical review process. The $3,000 threshold is applied to physical therapy and speech therapy services combined and separately applied to occupational therapy. CMS will continue to require that an appropriate modifier be included on claims over the current exception threshold indicating that the therapy services are medically necessary. Beginning in 2028 and in each calendar year thereafter, the threshold amount for claims requiring manual medical review will increase by the percentage increase in the Medicare Economic Index.
Modifiers to Identify Services of Physical Therapy Assistants or Occupational Therapy Assistants
In the Medicare Physician Fee Schedule proposedfinal rule for calendar year 2019, CMS proposes to establishestablished two new therapy modifiers to identify the services furnished in whole or in part by physical therapy assistants (“PTAs”) or occupational therapy assistants (“OTAs”) beginning. January 1, 2020. This change, which was. These modifiers were mandated by the Bipartisan Budget Act of 2018, establishes modifiers to be used whenever a PTA or OTA furnishes allwhich requires that claims for outpatient therapy services furnished in whole or part of any covered outpatientby therapy service.assistants on or after January 1, 2020 include the appropriate modifier. CMS intends to use these modifiers to developimplement a proposed planned payment differential that would reimburse services provided by PTAs and OTAs at 85% of the fee schedule rate beginning in calendar year 2022. CMS proposes the creation of a voluntary reporting system for the new modifiers beginning in 2019.
Critical Accounting Matters
Revenue Adjustments
Net operating revenues include amounts estimated by us to be reimbursable by Medicare under prospective payment systems and provisions of cost-reimbursement and other payment methods. The amount reimbursed is derived based on the type of services provided. Additionally, we are reimbursed for healthcare services provided from various other payor sources which include insurance companies, workers’ compensation programs, health maintenance organizations, preferred provider organizations, other managed care companies and employers, as well as patients. We are reimbursed by these payors using a variety of payment methodologies.
On January 1, 2018, we adopted Topic 606, Revenue from Contracts with Customers (“Topic 606”). Under Topic 606, we recognize a contractual allowance for fixed discounts based on the difference between our standard billing rates and the fees legislated, negotiated or otherwise arranged between us and our patients. Additionally, we are subject to potential retrospective adjustments to net operating revenues in future periods, such as for matters related to claims processing and other price concessions. These adjustments, which are estimated based on an analysis of historical experience by payor source, are recognized as a constraint to revenue in the period services are rendered. Under the previous standard, these adjustments were classified as a component of bad debt expense.
In the critical illness recovery hospital and rehabilitation hospital segments, we estimate our contractual allowances based on known contractual provisions associated with the specific payor or, where we have a relatively homogeneous patient population, we will monitor individual payors’ historical reimbursement rates to estimate a per diem rate. The estimated per diem rate is used to derive the contractual allowance recognized in the period services are rendered. In the outpatient rehabilitation and Concentra segments, we estimate our contractual allowances based on known contractual provisions, negotiated amounts, or usual and customary amounts associated with the specific payor. We estimate our contractual allowances using internally developed systems in which we monitor a payors’ historical reimbursement rates and compare them against the associated gross charges for the service provided. The percentage of historical reimbursed claims to gross charges is used to estimate the contractual allowance recognized in the period services are rendered. In each of our segments, estimates for potential retrospective adjustments are recognized as an additional contractual allowance during the period services are rendered.2022.
Operating Statistics
The following table 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:operations.
| | | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2017 | | 2018 | | 2017 | | 2018 | | 2018 | | 2019 | | 2018 | | 2019 |
Critical illness recovery hospital data:(1) | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Number of hospitals owned—start of period | | 101 |
| | 99 |
| | 102 |
| | 99 |
| | 99 |
| | 96 |
| | 99 |
| | 96 |
|
Number of hospitals acquired | | 1 |
| | — |
| | 1 |
| | — |
| | — |
| | 3 |
| | — |
| | 3 |
|
Number of hospital start-ups | | — |
| | — |
| | — |
| | 1 |
| | — |
| | — |
| | 1 |
| | — |
|
Number of hospitals closed/sold | | (1 | ) | | (1 | ) | | (2 | ) | | (2 | ) | | (1 | ) | | — |
| | (2 | ) | | — |
|
Number of hospitals owned—end of period | | 101 |
| | 98 |
| | 101 |
| | 98 |
| | 98 |
| | 99 |
| | 98 |
| | 99 |
|
Number of hospitals managed—end of period | | 1 |
| | — |
| | 1 |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
|
Total number of hospitals (all)—end of period | | 102 |
| | 98 |
| | 102 |
| | 98 |
| | 98 |
| | 100 |
| | 98 |
| | 100 |
|
Available licensed beds(2)(1) | | 4,172 |
| | 4,124 |
| | 4,172 |
| | 4,124 |
| | 4,124 |
| | 4,230 |
| | 4,124 |
| | 4,230 |
|
Admissions(2)(1) | | 8,901 |
| | 9,121 |
| | 18,210 |
| | 18,954 |
| | 9,121 |
| | 9,172 |
| | 18,954 |
| | 18,628 |
|
Patient days(2)(1) | | 251,302 |
| | 256,132 |
| | 506,399 |
| | 521,972 |
| | 256,132 |
| | 262,860 |
| | 521,972 |
| | 520,989 |
|
Average length of stay (days)(2)(1) | | 28 |
| | 28 |
| | 28 |
| | 28 |
| | 28 |
| | 28 |
| | 28 |
| | 28 |
|
Net revenue per patient day(5)(2) | | $ | 1,733 |
| | $ | 1,710 |
| | $ | 1,732 |
| | $ | 1,721 |
| | $ | 1,710 |
| | $ | 1,739 |
| | $ | 1,721 |
| | $ | 1,749 |
|
Occupancy rate(2)(1) | | 66 | % | | 68 | % | | 67 | % | | 69 | % | | 68 | % | | 69 | % | | 69 | % | | 70 | % |
Percent patient days—Medicare(2)(1) | | 54 | % | | 53 | % | | 54 | % | | 53 | % | | 53 | % | | 50 | % | | 53 | % | | 52 | % |
Rehabilitation hospital data:(1) | | | | | | | | | | | | | | | | |
Number of facilities owned—start of period | | 13 |
| | 16 |
| | 13 |
| | 16 |
| |
Number of facilities acquired | | — |
| | — |
| | — |
| | — |
| |
Number of facilities start-ups | | — |
| | 1 |
| | — |
| | 1 |
| |
Number of facilities closed/sold | | — |
| | — |
| | — |
| | — |
| |
Number of facilities owned—end of period | | 13 |
| | 17 |
| | 13 |
| | 17 |
| |
Number of facilities managed—end of period | | 8 |
| | 9 |
| | 8 |
| | 9 |
| |
Total number of facilities (all)—end of period | | 21 |
| | 26 |
| | 21 |
| | 26 |
| |
Available licensed beds(2) | | 983 |
| | 1,189 |
| | 983 |
| | 1,189 |
| |
Admissions(2) | | 4,570 |
| | 5,455 |
| | 8,946 |
| | 10,849 |
| |
Patient days(2) | | 65,582 |
| | 77,415 |
| | 127,850 |
| | 154,305 |
| |
Average length of stay (days)(2) | | 14 |
| | 14 |
| | 14 |
| | 14 |
| |
Net revenue per patient day(2)(3)(5) | | $ | 1,569 |
| | $ | 1,608 |
| | $ | 1,544 |
| | $ | 1,615 |
| |
Occupancy rate(2) | | 73 | % | | 73 | % | | 72 | % | | 74 | % | |
Percent patient days—Medicare(2) | | 54 | % | | 54 | % | | 54 | % | | 54 | % | |
Number of hospitals owned—start of period | | | 16 |
| | 18 |
| | 16 |
| | 17 |
|
Number of hospitals start-ups | | | 1 |
| | 1 |
| | 1 |
| | 2 |
|
Number of hospitals owned—end of period | | | 17 |
| | 19 |
| | 17 |
| | 19 |
|
Number of hospitals managed—end of period | | | 9 |
| | 9 |
| | 9 |
| | 9 |
|
Total number of hospitals (all)—end of period | | | 26 |
| | 28 |
| | 26 |
| | 28 |
|
Available licensed beds(1) | | | 1,189 |
| | 1,299 |
| | 1,189 |
| | 1,299 |
|
Admissions(1) | | | 5,455 |
| | 6,017 |
| | 10,849 |
| | 11,853 |
|
Patient days(1) | | | 77,415 |
| | 86,525 |
| | 154,305 |
| | 169,341 |
|
Average length of stay (days)(1) | | | 14 |
| | 14 |
| | 14 |
| | 14 |
|
Net revenue per patient day(1)(2) | | | $ | 1,608 |
| | $ | 1,635 |
| | $ | 1,615 |
| | $ | 1,634 |
|
Occupancy rate(1) | | | 73 | % | | 75 | % | | 74 | % | | 76 | % |
Percent patient days—Medicare(1) | | | 54 | % | | 50 | % | | 54 | % | | 51 | % |
Outpatient rehabilitation data: | | |
| | |
| | | | | | |
| | |
| | | | |
Number of clinics owned—start of period | | 1,445 |
| | 1,449 |
| | 1,445 |
| | 1,447 |
| | 1,449 |
| | 1,407 |
| | 1,447 |
| | 1,423 |
|
Number of clinics acquired | | — |
| | 11 |
| | 1 |
| | 14 |
| | 11 |
| | 10 |
| | 14 |
| | 14 |
|
Number of clinic start-ups | | 6 |
| | 10 |
| | 14 |
| | 18 |
| | 10 |
| | 11 |
| | 18 |
| | 22 |
|
Number of clinics closed/sold | | (10 | ) | | (35 | ) | | (19 | ) | | (44 | ) | | (35 | ) | | (9 | ) | | (44 | ) | | (40 | ) |
Number of clinics owned—end of period | | 1,441 |
| | 1,435 |
| | 1,441 |
| | 1,435 |
| | 1,435 |
| | 1,419 |
| | 1,435 |
| | 1,419 |
|
Number of clinics managed—end of period | | 167 |
| | 203 |
| | 167 |
| | 203 |
| | 203 |
| | 276 |
| | 203 |
| | 276 |
|
Total number of clinics (all)—end of period | | 1,608 |
| | 1,638 |
| | 1,608 |
| | 1,638 |
| | 1,638 |
| | 1,695 |
| | 1,638 |
| | 1,695 |
|
Number of visits(2) | | 2,106,760 |
| | 2,144,655 |
| | 4,182,550 |
| | 4,212,120 |
| |
Net revenue per visit(2)(4)(5) | | $ | 101 |
| | $ | 103 |
| | $ | 100 |
| | $ | 103 |
| |
Number of visits(1) | | | 2,144,655 |
| | 2,203,505 |
| | 4,212,120 |
| | 4,257,988 |
|
Net revenue per visit(1)(3) | | | $ | 103 |
| | $ | 102 |
| | $ | 103 |
| | $ | 103 |
|
Concentra data: | | | | | | | |
| | |
|
Number of centers owned—start of period | | | 531 |
| | 525 |
| | 312 |
| | 524 |
|
Number of centers acquired | | | — |
| | 4 |
| | 219 |
| | 5 |
|
Number of centers closed/sold | | | (4 | ) | | (3 | ) | | (4 | ) | | (3 | ) |
Number of centers owned—end of period | | | 527 |
| | 526 |
| | 527 |
| | 526 |
|
Number of onsite clinics operated—end of period | | | 123 |
| | 129 |
| | 123 |
| | 129 |
|
Number of CBOCs owned—end of period | | | 31 |
| | 33 |
| | 31 |
| | 33 |
|
Number of visits(1) | | | 3,024,121 |
| | 3,103,089 |
| | 5,620,180 |
| | 6,014,696 |
|
Net revenue per visit(1)(3) | | | $ | 125 |
| | $ | 121 |
| | $ | 125 |
| | $ | 122 |
|
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2017 | | 2018 | | 2017 | | 2018 |
Concentra data: | | | | | | |
| | |
|
Number of centers owned—start of period | | 308 |
| | 531 |
| | 300 |
| | 312 |
|
Number of centers acquired | | 5 |
| | — |
| | 11 |
| | 219 |
|
Number of clinic start-ups | | 2 |
| | — |
| | 4 |
| | — |
|
Number of centers closed/sold | | — |
| | (4 | ) | | — |
| | (4 | ) |
Number of centers owned—end of period | | 315 |
| | 527 |
| | 315 |
| | 527 |
|
Number of visits(2) | | 1,982,255 |
| | 3,024,121 |
| | 3,869,070 |
| | 5,620,180 |
|
Net revenue per visit(2)(4)(5) | | $ | 114 |
| | $ | 125 |
| | $ | 115 |
| | $ | 125 |
|
| |
(1) | The critical illness recovery hospital segment was previously referred to as the long term acute care segment. The rehabilitation hospital segment was previously referred to as the inpatient rehabilitation segment. |
| |
(2) | Data excludes locations managed by the Company. For purposes of our Concentra segment, onsite clinics and community-based outpatient clinics are excluded. |
| |
(3)(2) | Net revenue per patient day is calculated by dividing direct patient service revenues by the total number of patient days. |
| |
(4)(3) | Net revenue per visit is calculated by dividing direct patient service revenue by the total number of visits. For purposes of this computation for our Concentra segment, direct patient service revenue does not include onsite clinics and community-based outpatient clinics. |
| |
(5) | Net revenue per patient day and net revenue per visit were retrospectively conformed to reflect the impact of Topic 606, Revenue from Contracts with Customers.
|
Results of Operations
The following table outlines selected operating data as a percentage of net operating revenues for the periods indicated:
| | | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2017 | | 2018 | | 2017 | | 2018 | | 2018 | | 2019 | | 2018 | | 2019 |
Net operating revenues | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Cost of services(1) | | 83.5 |
| | 84.5 |
| | 84.3 |
| | 84.8 |
| |
Cost of services, exclusive of depreciation and amortization(1) | | | 84.5 |
| | 84.5 |
| | 84.8 |
| | 85.0 |
|
General and administrative | | 2.6 |
| | 2.3 |
| | 2.6 |
| | 2.4 |
| | 2.3 |
| | 2.3 |
| | 2.4 |
| | 2.2 |
|
Depreciation and amortization | | 3.4 |
| | 3.9 |
| | 3.6 |
| | 3.8 |
| | 3.9 |
| | 4.0 |
| | 3.8 |
| | 4.0 |
|
Income from operations | | 10.5 |
| | 9.3 |
| | 9.5 |
| | 9.0 |
| | 9.3 |
| | 9.2 |
| | 9.0 |
| | 8.8 |
|
Loss on early retirement of debt | | — |
| | — |
| | (0.9 | ) | | (0.4 | ) | | — |
| | — |
| | (0.4 | ) | | — |
|
Equity in earnings of unconsolidated subsidiaries | | 0.5 |
| | 0.4 |
| | 0.5 |
| | 0.4 |
| | 0.4 |
| | 0.5 |
| | 0.4 |
| | 0.5 |
|
Non-operating gain (loss) | | — |
| | 0.5 |
| | (0.0 | ) | | 0.2 |
| |
Non-operating gain | | | 0.5 |
| | — |
| | 0.2 |
| | 0.2 |
|
Interest expense | | (3.4 | ) | | (3.9 | ) | | (3.6 | ) | | (3.8 | ) | | (3.9 | ) | | (3.8 | ) | | (3.8 | ) | | (3.8 | ) |
Income before income taxes | | 7.6 |
| | 6.3 |
| | 5.5 |
| | 5.4 |
| | 6.3 |
| | 5.9 |
| | 5.4 |
| | 5.7 |
|
Income tax expense | | 2.9 |
| | 1.6 |
| | 2.1 |
| | 1.3 |
| | 1.6 |
| | 1.5 |
| | 1.3 |
| | 1.5 |
|
Net income | | 4.7 |
| | 4.7 |
| | 3.4 |
| | 4.1 |
| | 4.7 |
| | 4.4 |
| | 4.1 |
| | 4.2 |
|
Net income attributable to non-controlling interests | | 0.9 |
| | 1.1 |
| | 0.8 |
| | 1.0 |
| | 1.1 |
| | 1.1 |
| | 1.0 |
| | 1.0 |
|
Net income attributable to Holdings and Select | | 3.8 | % | | 3.6 | % | | 2.6 | % | | 3.1 | % | | 3.6 | % | | 3.3 | % | | 3.1 | % | | 3.2 | % |
_______________________________________________________________________________ | |
(1) | Cost of services includes salaries, wages and benefits, operating supplies, lease and rent expense, and other operating costs. |
The following table summarizes selected financial data by business segment for the periods indicated:
| | | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2017 | | 2018 | | % Change | | 2017 | | 2018 | | % Change | | 2018(2) | | 2019 | | % Change | | 2018(2) | | 2019 | | % Change |
| | (in thousands) | | (in thousands) |
Net operating revenues:(1) | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Critical illness recovery hospital(2) | | $ | 439,194 |
| | $ | 442,452 |
| | 0.7 | % | | $ | 884,317 |
| | $ | 907,128 |
| | 2.6 | % | |
Rehabilitation hospital(2) | | 151,378 |
| | 173,769 |
| | 14.8 | % | | 296,203 |
| | 348,543 |
| | 17.7 | % | |
Critical illness recovery hospital | | | $ | 442,452 |
| | $ | 461,143 |
| | 4.2 | % | | $ | 907,128 |
| | $ | 918,677 |
| | 1.3 | % |
Rehabilitation hospital | | | 144,779 |
| | 160,374 |
| | 10.8 |
| | 288,087 |
| | 314,932 |
| | 9.3 |
|
Outpatient rehabilitation | | 254,984 |
| | 267,183 |
| | 4.8 | % | | 505,355 |
| | 524,564 |
| | 3.8 | % | | 253,914 |
| | 261,891 |
| | 3.1 |
| | 498,145 |
| | 508,796 |
| | 2.1 |
|
Concentra | | 256,887 |
| | 412,823 |
| | 60.7 | % | | 507,476 |
| | 768,939 |
| | 51.5 | % | | 412,823 |
| | 413,451 |
| | 0.2 |
| | 768,939 |
| | 809,772 |
| | 5.3 |
|
Other(3) | | 22 |
| | (17 | ) | | N/M |
| | 631 |
| | — |
| | N/M |
| |
Other(1) | | | 42,242 |
| | 64,505 |
| | 52.7 |
| | 86,875 |
| | 133,818 |
| | 54.0 |
|
Total Company | | $ | 1,102,465 |
| | $ | 1,296,210 |
| | 17.6 | % | | $ | 2,193,982 |
| | $ | 2,549,174 |
| | 16.2 | % | | $ | 1,296,210 |
| | $ | 1,361,364 |
| | 5.0 | % | | $ | 2,549,174 |
| | $ | 2,685,995 |
| | 5.4 | % |
Income (loss) from operations: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Critical illness recovery hospital(2) | | $ | 64,126 |
| | $ | 48,773 |
| | (23.9 | )% | | $ | 123,421 |
| | $ | 110,687 |
| | (10.3 | )% | |
Rehabilitation hospital(2) | | 18,592 |
| | 22,180 |
| | 19.3 | % | | 29,462 |
| | 43,234 |
| | 46.7 | % | |
Critical illness recovery hospital | | | $ | 48,773 |
| | $ | 49,643 |
| | 1.8 | % | | $ | 110,687 |
| | $ | 111,190 |
| | 0.5 | % |
Rehabilitation hospital | | | 22,180 |
| | 23,272 |
| | 4.9 |
| | 43,234 |
| | 42,667 |
| | (1.3 | ) |
Outpatient rehabilitation | | 36,048 |
| | 35,243 |
| | (2.2 | )% | | 61,059 |
| | 59,131 |
| | (3.2 | )% | | 35,243 |
| | 35,593 |
| | 1.0 |
| | 59,131 |
| | 57,552 |
| | (2.7 | ) |
Concentra | | 27,368 |
| | 46,774 |
| | 70.9 | % | | 53,531 |
| | 80,277 |
| | 50.0 | % | | 46,774 |
| | 50,841 |
| | 8.7 |
| | 80,277 |
| | 91,428 |
| | 13.9 |
|
Other(3) | | (30,471 | ) | | (32,409 | ) | | (6.4 | )% | | (60,045 | ) | | (64,170 | ) | | (6.9 | )% | |
Other(1) | | | (32,409 | ) | | (34,467 | ) | | (6.4 | ) | | (64,170 | ) | | (66,231 | ) | | (3.2 | ) |
Total Company | | $ | 115,663 |
| | $ | 120,561 |
| | 4.2 | % | | $ | 207,428 |
| | $ | 229,159 |
| | 10.5 | % | | $ | 120,561 |
| | $ | 124,882 |
| | 3.6 | % | | $ | 229,159 |
| | $ | 236,606 |
| | 3.2 | % |
Adjusted EBITDA: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Critical illness recovery hospital(2) | | $ | 75,043 |
| | $ | 60,725 |
| | (19.1 | )% | | $ | 147,380 |
| | $ | 133,697 |
| | (9.3 | )% | |
Rehabilitation hospital(2) | | 23,129 |
| | 28,195 |
| | 21.9 | % | | 39,457 |
| | 54,971 |
| | 39.3 | % | |
Critical illness recovery hospital | | | $ | 60,725 |
| | $ | 64,138 |
| | 5.6 | % | | $ | 133,697 |
| | $ | 137,136 |
| | 2.6 | % |
Rehabilitation hospital | | | 28,195 |
| | 29,968 |
| | 6.3 |
| | 54,971 |
| | 55,765 |
| | 1.4 |
|
Outpatient rehabilitation | | 41,926 |
| | 41,947 |
| | 0.1 | % | | 73,277 |
| | 72,472 |
| | (1.1 | )% | | 41,947 |
| | 42,584 |
| | 1.5 |
| | 72,472 |
| | 71,575 |
| | (1.2 | ) |
Concentra | | 43,061 |
| | 72,568 |
| | 68.5 | % | | 85,653 |
| | 130,365 |
| | 52.2 | % | | 72,568 |
| | 76,087 |
| | 4.8 |
| | 130,365 |
| | 142,345 |
| | 9.2 |
|
Other(3) | | (24,479 | ) | | (25,207 | ) | | (3.0 | )% | | (48,197 | ) | | (50,045 | ) | | (3.8 | )% | |
Other(1) | | | (25,207 | ) | | (26,544 | ) | | (5.3 | ) | | (50,045 | ) | | (50,471 | ) | | (0.9 | ) |
Total Company | | $ | 158,680 |
| | $ | 178,228 |
| | 12.3 | % | | $ | 297,570 |
| | $ | 341,460 |
| | 14.7 | % | | $ | 178,228 |
| | $ | 186,233 |
| | 4.5 | % | | $ | 341,460 |
| | $ | 356,350 |
| | 4.4 | % |
Adjusted EBITDA margins: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Critical illness recovery hospital(2) | | 17.1 | % | | 13.7 | % | | |
| | 16.7 | % | | 14.7 | % | | |
| |
Rehabilitation hospital(2) | | 15.3 |
| | 16.2 |
| | | | 13.3 |
| | 15.8 |
| | | |
Critical illness recovery hospital | | | 13.7 | % | | 13.9 | % | | |
| | 14.7 | % | | 14.9 | % | | |
|
Rehabilitation hospital | | | 19.5 |
| | 18.7 |
| | | | 19.1 |
| | 17.7 |
| | |
Outpatient rehabilitation | | 16.4 |
| | 15.7 |
| | |
| | 14.5 |
| | 13.8 |
| | |
| | 16.5 |
| | 16.3 |
| | |
| | 14.5 |
| | 14.1 |
| | |
|
Concentra | | 16.8 |
| | 17.6 |
| | |
| | 16.9 |
| | 17.0 |
| | |
| | 17.6 |
| | 18.4 |
| | |
| | 17.0 |
| | 17.6 |
| | |
|
Other(3) | | N/M |
| | N/M |
| | |
| | N/M |
| | N/M |
| | |
| |
Other(1) | | | N/M |
| | N/M |
| | |
| | N/M |
| | N/M |
| | |
|
Total Company | | 14.4 | % | | 13.7 | % | | |
| | 13.6 | % | | 13.4 | % | | |
| | 13.7 | % | | 13.7 | % | | |
| | 13.4 | % | | 13.3 | % | | |
|
Total assets: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Critical illness recovery hospital(2) | | $ | 1,989,618 |
| | $ | 1,828,038 |
| | |
| | $ | 1,989,618 |
| | $ | 1,828,038 |
| | |
| |
Rehabilitation hospital(2) | | 665,999 |
| | 867,175 |
| | | | 665,999 |
| | 867,175 |
| | | |
Critical illness recovery hospital | | | $ | 1,828,038 |
| | $ | 2,119,574 |
| | |
| | $ | 1,828,038 |
| | $ | 2,119,574 |
| | |
|
Rehabilitation hospital | | | 867,175 |
| | 1,107,852 |
| | | | 867,175 |
| | 1,107,852 |
| | |
Outpatient rehabilitation | | 982,811 |
| | 979,678 |
| | |
| | 982,811 |
| | 979,678 |
| | |
| | 979,678 |
| | 1,265,487 |
| | |
| | 979,678 |
| | 1,265,487 |
| | |
|
Concentra | | 1,310,483 |
| | 2,174,931 |
| | |
| | 1,310,483 |
| | 2,174,931 |
| | |
| | 2,174,931 |
| | 2,447,387 |
| | |
| | 2,174,931 |
| | 2,447,387 |
| | |
|
Other(3) | | 105,300 |
| | 114,978 |
| | |
| | 105,300 |
| | 114,978 |
| | |
| |
Other(1) | | | 114,978 |
| | 166,640 |
| | |
| | 114,978 |
| | 166,640 |
| | |
|
Total Company | | $ | 5,054,211 |
| | $ | 5,964,800 |
| | |
| | $ | 5,054,211 |
| | $ | 5,964,800 |
| | |
| | $ | 5,964,800 |
| | $ | 7,106,940 |
| | |
| | $ | 5,964,800 |
| | $ | 7,106,940 |
| | |
|
Purchases of property and equipment, net: | | |
| | |
| | |
| | |
| | |
| | |
| |
Critical illness recovery hospital(2) | | $ | 9,771 |
| | $ | 12,849 |
| | | | $ | 20,714 |
| | $ | 23,321 |
| | | |
Rehabilitation hospital(2) | | 26,920 |
| | 8,080 |
| | |
| | 48,334 |
| | 20,997 |
| | |
| |
Purchases of property and equipment: | | | |
| | |
| | |
| | |
| | |
| | |
|
Critical illness recovery hospital | | | $ | 12,849 |
| | $ | 14,488 |
| | | | $ | 23,321 |
| | $ | 24,648 |
| | |
Rehabilitation hospital | | | 8,080 |
| | 5,356 |
| | |
| | 20,997 |
| | 18,539 |
| | |
|
Outpatient rehabilitation | | 6,201 |
| | 8,018 |
| | |
| | 12,874 |
| | 15,356 |
| | |
| | 8,018 |
| | 6,705 |
| | |
| | 15,356 |
| | 15,745 |
| | |
|
Concentra | | 7,601 |
| | 10,121 |
| | |
| | 16,287 |
| | 16,742 |
| | |
| | 10,121 |
| | 12,240 |
| | |
| | 16,742 |
| | 27,938 |
| | |
|
Other(3) | | 4,156 |
| | 2,963 |
| | |
| | 7,093 |
| | 5,232 |
| | |
| |
Other(1) | | | 2,963 |
| | 1,423 |
| | |
| | 5,232 |
| | 2,415 |
| | |
|
Total Company | | $ | 54,649 |
| | $ | 42,031 |
| | |
| | $ | 105,302 |
| | $ | 81,648 |
| | |
| | $ | 42,031 |
| | $ | 40,212 |
| | |
| | $ | 81,648 |
| | $ | 89,285 |
| | |
|
| |
(1) | Net operating revenues were retrospectively conformed to reflect the adoption Topic 606, Revenue from Contracts with Customers.
|
| |
(2) | The critical illness recovery hospital segment was previously referred to as the long term acute care segment. The rehabilitation hospital segment was previously referred to as the inpatient rehabilitation segment. |
| |
(3) | Other includes our corporate administration and shared services, andas well as employee leasing services with our non-consolidating subsidiaries. Total assets include certain other non-consolidating joint ventures and minority investments in other healthcare related businesses. |
| |
(2) | For the three and six months ended June 30, 2018, the financial results of our reportable segments have been changed to remove the net operating revenues and expenses associated with employee leasing services provided to our non-consolidating subsidiaries. These results are now reported as part of our other activities. We lease employees at cost to these non-consolidating subsidiaries. |
N/M — Not meaningful.
Three Months Ended June 30, 2018,2019, Compared to Three Months Ended June 30, 20172018
In the following, we discuss our results of operations related to net operating revenues, operating expenses, Adjusted EBITDA, depreciation and amortization, income from operations, equity in earnings of unconsolidated subsidiaries, non-operating gain, (loss), interest expense, income taxes, and net income attributable to non-controlling interests, which, in each case, are the same for Holdings and Select.
Net Operating Revenues
Our net operating revenues increased 17.6%5.0% to $1,361.4 million for the three months ended June 30, 2019, compared to $1,296.2 million for the three months ended June 30, 2018, compared2018.
Critical Illness Recovery Hospital Segment. Net operating revenues increased 4.2% to $1,102.5$461.1 million for the three months ended June 30, 2017.
Critical Illness Recovery Hospital Segment. Net operating revenues increased2019, compared to $442.5 million for the three months ended June 30, 2018, compared2018. The increase in net operating revenues was due to $439.2 millionincreases in both patient volume and net revenue per patient day. Our patient days increased 2.6% to 262,860 days for the three months ended June 30, 2017. Our patient days increased 1.9%2019, compared to 256,132 days for the three months ended June 30, 2018, compared to 251,302 days for the three months ended June 30, 2017, which was the principal cause of the2018. The increase in net operating revenuespatient days was principally due to the acquisition of three hospitals during the three months ended June 30, 2019, offset in part by a decrease in patient days from hospital closures which occurred during 2018, including the temporary closure of our hospital located in Panama City, Florida as a result of damage sustained from Hurricane Michael in October 2018. Additionally, our occupancy increased to 68% forFor the three months ended June 30, 2018, compared to 66% for the three months ended June 30, 2017. Our2019, our net revenue per patient day wasincreased 1.7% to $1,739, as compared to $1,710 for the three months ended June 30, 2018, compared to $1,733 for the three months ended June 30, 2017. The decrease principally resulted from changes we2018. We experienced increases in both our Medicare and non-Medicare net revenue per patient day during the three months ended June 30, 2018.day.
Rehabilitation Hospital Segment. Net operating revenues increased 14.8%10.8% to $173.8$160.4 million for the three months ended June 30, 2018,2019, compared to $151.4$144.8 million for the three months ended June 30, 2017.2018. Our patient days increased 11.8% to 86,525 days for the three months ended June 30, 2019, compared to 77,415 days for the three months ended June 30, 2018. The increase in patient days was principally driven by our rehabilitation hospitals which recently commenced operations. We also experienced an increase in patient days within our existing hospitals. Our net revenue per patient day increased 1.7% to $1,635 for the three months ended June 30, 2019, compared to $1,608 for the three months ended June 30, 2018. We experienced increases in both our Medicare and non-Medicare net revenue per patient day.
Outpatient Rehabilitation Segment. Net operating revenues increased 3.1% to $261.9 million for the three months ended June 30, 2019, compared to $253.9 million for the three months ended June 30, 2018. The increase in net operating revenues was principally attributable to an increase in patient volumesvisits, which increased 2.7% to 2,203,505 for the three months ended June 30, 2019, compared to 2,144,655 visits for the three months ended June 30, 2018. The increase in visits was due to growth within both our existing clinics and new outpatient rehabilitation clinics. This growth was offset in part by the sale of outpatient rehabilitation clinics to non-consolidating subsidiaries since June 30, 2018. These clinics contributed 69,295 visits during the three months ended June 30, 2018. During the three months ended June 30, 2019, we also experienced an increase in management fee revenues related to services provided to our non-consolidating subsidiaries. These services have expanded as a result of our sales of clinics to these non-consolidating subsidiaries. Our patient days increased 18.0% to 77,415 daysnet revenue per visit was $102 for the three months ended June 30, 2018,2019, compared to 65,582 days for the three months ended June 30, 2017. The increase in patient days was principally due to the maturation of our rehabilitation hospitals which commenced operations during 2016 and 2017. Our net revenue per patient day increased 2.5% to $1,608 for the three months ended June 30, 2018, compared to $1,569 for the three months ended June 30, 2017. This increase was principally attributable to an increase in our non-Medicare net revenue per patient day.
Outpatient Rehabilitation Segment. Net operating revenues increased 4.8% to $267.2 million for the three months ended June 30, 2018, compared to $255.0 million for the three months ended June 30, 2017. The increase in net operating revenues was attributable to an increase in our net revenue per visit, which increased 2.0% to $103 for the three months ended June 30, 2018, compared2018.
Concentra Segment. Net operating revenues increased to $101$413.5 million for the three months ended June 30, 2017, and an increase in visits. Our net revenue per visit benefited from improved contracted rates with some of our payors. Visits increased 1.8% to 2,144,655 for the three months ended June 30, 2018,2019, compared to 2,106,760 visits for the three months ended June 30, 2017. The increase in visits resulted principally from both start-up and newly acquired outpatient rehabilitation clinics and growth within our existing clinics.
Concentra Segment. Net operating revenues increased 60.7% to $412.8 million for the three months ended June 30, 2018, compared to $256.9 million for the three months ended June 30, 2017. The increase in net operating revenues was principally due to the acquisition of U.S. HealthWorks on February 1, 2018, which contributed $139.4 million of net operating revenues during the quarter.2018. Visits in our centers increased 52.6%2.6% to 3,024,121 for the three months ended June 30, 2018, compared to 1,982,2553,103,089 visits for the three months ended June 30, 2017.2019, compared to 3,024,121 visits for the three months ended June 30, 2018. Net revenue per visit increased 9.6%was $121 for the three months ended June 30, 2019, compared to $125 for the three months ended June 30, 2018, compared2018. The decrease in net revenue per visit was principally due to $114an increased proportion of employer service visits, which yield lower per visit rates.
Other. Net operating revenues increased to $64.5 million for the three months ended June 30, 2017.2019, compared to $42.2 million for the three months ended June 30, 2018. These net operating revenues are attributable to the employee leasing services we provide to certain of our non-consolidating subsidiaries. The increase in net revenue per visitoperating revenues was driven principally by U.S. HealthWorks visits, which yield higher per visit rates,due to both new employee leasing arrangements entered into since June 30, 2018, as well as an increase in workers’ compensation reimbursement rates in ourincreased services provided under existing Concentra centers.employee leasing arrangements.
Operating Expenses
Our operating expenses consist principally of cost of services and general and administrative expenses. Our operating expenses were $1,181.5 million, or 86.8% of net operating revenues, for the three months ended June 30, 2019, compared to $1,123.9 million, or 86.8% of net operating revenues, for the three months ended June 30, 2018, compared to $948.5 million, or 86.1% of net operating revenues, for the three months ended June 30, 2017.2018. Our cost of services, a major component of which is labor expense, was $1,150.2 million, or 84.5% of net operating revenues, for the three months ended June 30, 2019, compared to $1,094.7 million, or 84.5% of net operating revenues, for the three months ended June 30, 2018, compared2018. Our operating expenses, relative to $920.2our net operating revenues, were adversely impacted by an increase in expenses incurred by our start-up rehabilitation hospitals during the three months ended June 30, 2019. General and administrative expenses were $31.3 million, or 83.5%2.3% of net operating revenues, for the three months ended June 30, 2017. The increase in our operating expenses relative to our net operating revenues was principally attributable to our critical illness recovery hospital segment, which experienced relative increases in wages, benefits, and other operating costs during the three months ended June 30, 2018, as2019, compared to the three months ended June 30, 2017. Facility rent expense, a component of cost of services, was $67.7 million for the three months ended June 30, 2018, compared to $57.2 million for the three months ended June 30, 2017. The increase in our facility rent expense was primarily attributable to the acquisition of U.S. HealthWorks. General and administrative expenses were $29.2 million, or 2.3% of net operating revenues, for the three months ended June 30, 2018, compared2018.
Adjusted EBITDA
Critical Illness Recovery Hospital Segment. Adjusted EBITDA increased 5.6% to $28.3$64.1 million or 2.6% of net operating revenues, for the three months ended June 30, 2017.
Adjusted EBITDA
Critical Illness Recovery Hospital Segment. Adjusted EBITDA was2019, compared to $60.7 million for the three months ended June 30, 2018, compared to $75.0 million for the three months ended June 30, 2017.2018. Our Adjusted EBITDA margin for the critical illness recovery hospital segment was 13.9% for the three months ended June 30, 2019, compared to 13.7% for the three months ended June 30, 2018, compared to 17.1% for the three months ended June 30, 2017. Our2018. The increase in Adjusted EBITDA for our critical illness recovery hospital segment was primarily driven by increases in patient volumes and Adjusted EBITDA margin decreased as a result of a decline in net revenue per patient day, as discussed above under “Net Operating Revenues” and an increase in labor expenses and other operating expenses relative to net operating revenues, as discussed above under “Operating Expenses.”
Rehabilitation Hospital Segment. Adjusted EBITDA increased 21.9%6.3% to $30.0 million for the three months ended June 30, 2019, compared to $28.2 million for the three months ended June 30, 2018, compared to $23.1 million for the three months ended June 30, 2017.2018. Our Adjusted EBITDA margin for the rehabilitation hospital segment was 16.2%18.7% for the three months ended June 30, 2018,2019, compared to 15.3%19.5% for the three months ended June 30, 2017.2018. The increasesincrease in Adjusted EBITDA was primarily attributable to an increase in patient volume at several of our existing hospitals. Our Adjusted EBITDA and Adjusted EBITDA margin for our rehabilitation hospital segmentmargins were primarily drivenadversely impacted by increases in patient volume within our rehabilitation hospitals that commenced operations during 2016 and 2017, which allowed our facilities to operate at lower relative costs compared to the prior period. Adjusted EBITDA losses in our start-up hospitalshospitals. Adjusted EBITDA start-up losses were $6.0 million for the three months ended June 30, 2019, compared to $2.1 million for the three months ended June 30, 2018, compared2018.
Outpatient Rehabilitation Segment. Adjusted EBITDA increased 1.5% to $1.2$42.6 million orfor the three months ended June 30, 2017.
Outpatient Rehabilitation Segment. Adjusted EBITDA was2019, compared to $41.9 million for both the three months ended June 30, 2018 and 2017.2018. Our Adjusted EBITDA margin for the outpatient rehabilitation segment was 15.7%16.3% for the three months ended June 30, 2018,2019, compared to 16.4%16.5% for the three months ended June 30, 2017.2018. For the three months ended June 30, 2018,2019, our Adjusted EBITDA increased as a result of newly acquired and developed clinics. Our Adjusted EBITDA margin werewas adversely impacted by certain markets which experienced higherincreases in employee costs relative labor coststo our net operating revenues during the three months ended June 30, 2018, as compared2019.
Concentra Segment. Adjusted EBITDA increased 4.8% to $76.1 million for the three months ended June 30, 2017.
Concentra Segment. Adjusted EBITDA increased 68.5%2019, compared to $72.6 million for the three months ended June 30, 2018, compared to $43.1 million for the three months ended June 30, 2017. The increase in Adjusted EBITDA was principally due to the operating results of U.S. HealthWorks, which we acquired on February 1, 2018. Our Adjusted EBITDA margin for the Concentra segment was 18.4% for the three months ended June 30, 2019, compared to 17.6% for the three months ended June 30, 2018, compared to 16.8% for the three months ended June 30, 2017.2018. The increaseincreases in Adjusted EBITDA and Adjusted EBITDA margin resulted from achieving lower relative operating costs across our combined Concentra and U.S. HealthWorks businesses.
Other. The Adjusted EBITDA loss was $26.5 million for the three months ended June 30, 2019, compared to an Adjusted EBITDA loss of $25.2 million for the three months ended June 30, 2018, compared to an Adjusted EBITDA loss of $24.5 million for the three months ended June 30, 2017.2018. The increase in our Adjusted EBITDA loss was due to an increase in general and administrative costs, which encompass our corporate shared service activities.
Depreciation and Amortization
Depreciation and amortization expense was $55.0 million for the three months ended June 30, 2019, compared to $51.7 million for the three months ended June 30, 2018, compared to $38.3 million for2018. The increase principally occurred within our critical illness recovery hospital segment. During the three months ended June 30, 2017. The increase principally occurred within2019, certificate of need regulations were repealed in the state of Florida effective July 1, 2019; accordingly, the certificate of need intangible assets for our Concentra segment due toFlorida critical illness recovery hospitals were fully amortized during the acquisition of U.S. HealthWorks.
three months ended June 30, 2019.
Income from Operations
For the three months ended June 30, 2018,2019, we had income from operations of $120.6$124.9 million, compared to $115.7$120.6 million for the three months ended June 30, 2017.2018. The increase in income from operations resulted principally from the improved performance of our rehabilitation hospital and Concentra segments, as discussed above.segment.
Equity in Earnings of Unconsolidated Subsidiaries
Our equity in earnings of unconsolidated subsidiaries principally relates to rehabilitation businesses in which we are a minority owner. For the three months ended June 30, 2018,2019, we had equity in earnings of unconsolidated subsidiaries of $4.8$7.4 million, compared to $5.7$4.8 million for the three months ended June 30, 2017.2018. The increase in equity in earnings was principally attributable to the growth of certain non-consolidating subsidiaries as a result of our sales of outpatient rehabilitation clinics to these subsidiaries.
Non-Operating Gain
We recognized a non-operating gain of $6.5 million during the three months ended June 30, 2018. The non-operating gain was principally attributable to the sale of outpatient rehabilitation clinics to a non-consolidating subsidiary.
Interest Expense
Interest expense was $51.5 million for the three months ended June 30, 2019, compared to $50.2 million for the three months ended June 30, 2018, compared to $37.7 million for the three months ended June 30, 2017.2018. The increase in interest expense was principally due to an increase in our indebtedness as a result of the acquisition of U.S. HealthWorks.variable interest rates associated with the Concentra credit facilities.
Income Taxes
We recorded income tax expense of $20.8 million for the three months ended June 30, 2019, which represented an effective tax rate of 25.8%. We recorded income tax expense of $21.1 million for the three months ended June 30, 2018, which represented an effective tax rate of 25.8%. We recorded income tax expense of $32.4 million for the three months ended June 30, 2017, which represented an effective tax rate of 38.7%. The lower effective tax rate for the three months ended June 30, 2018 resulted primarily from the effects of the federal tax reform legislation enacted on December 22, 2017.
Net Income Attributable to Non-Controlling Interests
Net income attributable to non-controlling interests was $15.2 million for the three months ended June 30, 2019, compared to $14.0 million for the three months ended June 30, 2018, compared to $9.2 million for the three months ended June 30, 2017.2018. The increase was principally due to the improved operating performance of our Concentra segment and several of our joint venture rehabilitation hospitals.segment.
Six Months Ended June 30, 2018,2019, Compared to Six Months Ended June 30, 20172018
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 interests, which, in each case, are the same for Holdings and Select.
Net Operating Revenues
Our net operating revenues increased 16.2%5.4% to $2,686.0 million for the six months ended June 30, 2019, compared to $2,549.2 million for the six months ended June 30, 2018, compared2018.
Critical Illness Recovery Hospital Segment. Net operating revenues increased 1.3% to $2,194.0$918.7 million for the six months ended June 30, 2017.
Critical Illness Recovery Hospital Segment. Net operating revenues increased 2.6%2019, compared to $907.1 million for the six months ended June 30, 2018, compared2018. The primary cause of the increase in net operating revenues was due to $884.3 millionincreases in both our Medicare and non-Medicare net revenue per patient day. Net revenue per patient day increased 1.6% to $1,749 for the six months ended June 30, 2017.2019, compared to $1,721 for the six months ended June 30, 2018. Our patient days increased 3.1%were 520,989 days for the six months ended June 30, 2019, compared to 521,972 days for the six months ended June 30, 2018, compared to 506,399 days for the six months ended June 30, 2017, which was the principal cause of the increase in net operating revenues during the six months ended June 30, 2018. Additionally, our occupancy increased to 69% for the six months ended June 30, 2018, compared to 67% for the six months ended June 30, 2017. Our net revenue per patient day was $1,721 for the six months ended June 30, 2018, compared to $1,732 for the six months ended June 30, 2017. The decrease principally resulted from changes we experienced in both our Medicare and non-Medicare net revenue per patient day during the six months ended June 30, 2018.
Rehabilitation Hospital Segment. Net operating revenues increased 17.7%9.3% to $348.5$314.9 million for the six months ended June 30, 2018,2019, compared to $296.2$288.1 million for the six months ended June 30, 2017.2018. The increase in net operating revenues was principally attributable toresulted primarily from an increase in patient volumes during the six months ended June 30, 2018.2019. Our patient days increased 20.7%9.7% to 169,341 days for the six months ended June 30, 2019, compared to 154,305 days for the six months ended June 30, 2018, compared2018. The increase in patient days was principally driven by our rehabilitation hospitals which recently commenced operations. We also experienced an increase in patient days in our existing hospitals. Our net revenue per patient day increased 1.2% to 127,850 days$1,634 for the six months ended June 30, 2017. The increase in patient days was principally attributable to our rehabilitation hospitals which commenced operations during 2016 and 2017. Our net revenue per patient day increased 4.6%2019, compared to $1,615 for the six months ended June 30, 2018, compared to $1,544 for the six months ended June 30, 2017. This increase was principally attributable to an increase in our non-Medicare net revenue per patient day.2018.
Outpatient Rehabilitation Segment. Net operating revenues increased 3.8%2.1% to $524.6$508.8 million for the six months ended June 30, 2018,2019, compared to $505.4$498.1 million for the six months ended June 30, 2017.2018. The increase in net operating revenues was principally attributabledue to an increase in our net revenue per visit,visits, which increased 3.0%1.1% to $1034,257,988 for the six months ended June 30, 2018,2019, compared to $100 for the six months ended June 30, 2017. Our net revenue per visit benefited from improved contracted rates with some of our payors. Visits increased to 4,212,120 for the six months ended June 30, 2018, compared to 4,182,550 visits for the six months ended June 30, 2017.2018. The increase in visits resulted principally from start-upwas due to growth within both our existing clinics and newly acquirednew outpatient rehabilitation clinics. This growth was offset in part by the sale of outpatient rehabilitation clinics to non-consolidating subsidiaries since June 30, 2018. These clinics contributed 168,003 visits during the six months ended June 30, 2018. During the six months ended June 30, 2019, we also experienced an increase in management fee revenues related to services provided to our non-consolidating subsidiaries. These services have expanded as a result of our sales of clinics to these non-consolidating subsidiaries. Our net revenue per visit was $103 for both the six months ended June 30, 2019 and 2018.
Concentra Segment. Net operating revenues increased 51.5%5.3% to $809.8 million for the six months ended June 30, 2019, compared to $768.9 million for the six months ended June 30, 2018, compared2018. Visits in our centers increased 7.0% to $507.5 million6,014,696 for the six months ended June 30, 2017. The increase in net operating revenues was principally due to the acquisition of U.S. HealthWorks on February 1, 2018, which contributed $229.4 million of net operating revenues during the period. Visits in our centers increased 45.3% to 5,620,180 for the six months ended June 30, 2018,2019, compared to 3,869,0705,620,180 visits for the six months ended June 30, 2017.2018. The increases in net operating revenues and visits were principally due to U.S. HealthWorks, which we acquired on February 1, 2018. Net revenue per visit increased 8.7%was $122 for the six months ended June 30, 2019, compared to $125 for the six months ended June 30, 2018, compared2018. The decrease in net revenue per visit was principally due to $115an increased proportion of employer service visits, which yield lower per visit rates.
Other. Net operating revenues increased to $133.8 million for the six months ended June 30, 2017.2019, compared to $86.9 million for the six months ended June 30, 2018. These net operating revenues are attributable to the employee leasing services we provide to certain of our non-consolidating subsidiaries. The increase in net revenue per visitoperating revenues was driven principally by U.S. HealthWorks visits, which yield higher per visit rates,due to both new employee leasing arrangements entered into since June 30, 2018, as well as an increase in workers’ compensation reimbursement rates in ourincreased services provided under existing Concentra centers.employee leasing arrangements.
Operating Expenses
Our operating expenses consist principally of cost of services and general and administrative expenses. Our operating expenses were $2,342.3 million, or 87.2% of net operating revenues, for the six months ended June 30, 2019, compared to $2,221.5 million, or 87.2% of net operating revenues, for the six months ended June 30, 2018, compared to $1,905.7 million, or 86.9% of net operating revenues, for the six months ended June 30, 2017.2018. Our cost of services, a major component of which is labor expense, was $2,282.2 million, or 85.0% of net operating revenues, for the six months ended June 30, 2019, compared to $2,160.5 million, or 84.8% of net operating revenues, for the six months ended June 30, 2018, compared2018. Our operating expenses, relative to $1,849.3our net operating revenues, were adversely impacted by an increase in expenses incurred by our start-up rehabilitation hospitals. General and administrative expenses were $60.0 million, or 84.3%2.2% of net operating revenues, for the six months ended June 30, 2017. The increase in our operating expenses relative to our net operating revenues was principally attributable to our critical illness recovery hospital segment, which experienced relative increases in wages, benefits, and other operating costs during the six months ended June 30, 2018, as compared to the six months ended June 30, 2017. Facility rent expense, a component of cost of services, was $132.1 million for the six months ended June 30, 2018, compared to $113.8 million for the six months ended June 30, 2017. The increase in our facility rent expense was primarily attributable to the acquisition of U.S. HealthWorks.2019. General and administrative expenses were $61.0 million, or 2.4% of net operating revenues, for the six months ended June 30, 2018, which2018. General and administrative expenses included $2.9 million of U.S. HealthWorks acquisition costs. General and administrative expenses were $56.4 million, or 2.6% of net operating revenues,costs for the six months ended June 30, 2017.2018.
Adjusted EBITDA
Critical Illness Recovery Hospital Segment. Adjusted EBITDA wasincreased 2.6% to $137.1 million for the six months ended June 30, 2019, compared to $133.7 million for the six months ended June 30, 2018, compared to $147.4 million for the six months ended June 30, 2017.2018. Our Adjusted EBITDA margin for the critical illness recovery hospital segment was 14.9% for the six months ended June 30, 2019, compared to 14.7% for the six months ended June 30, 2018, compared to 16.7% for the six months ended June 30, 2017. Our2018. The increase in Adjusted EBITDA and Adjusted EBITDA margin decreased as a result of a decline in net revenue per patient day, as discussed above under “Net Operating Revenues,” and an increase in labor expenses and other operating expenses relative to net operating revenues, as discussed above under “Operating Expenses.”
Rehabilitation Hospital Segment. Adjusted EBITDA increased 39.3% to $55.0 million for the six months ended June 30, 2018, compared to $39.5 million for the six months ended June 30, 2017. Our Adjusted EBITDA margin for the rehabilitationour critical illness recovery hospital segment was 15.8% for the six months ended June 30, 2018, compared to 13.3% for the six months ended June 30, 2017. The increases in Adjusted EBITDA and Adjusted EBITDA margin for our rehabilitation hospital segment were primarily driven by our rehabilitation hospitals which commenced operations during 2016 and 2017. These hospitals have experienced increases in occupancy during the six months ended June 30, 2018, allowing our facilities to operate at lower relative costs compared to the prior period. The increases in Adjusted EBITDA and Adjusted EBITDA margin were also attributable to an increase in net revenue per patient day, as discussed above under “Net Operating Revenues.Revenues.”
Rehabilitation Hospital Segment. Adjusted EBITDA increased 1.4% to $55.8 million for the six months ended June 30, 2019, compared to $55.0 million for the six months ended June 30, 2018. Our Adjusted EBITDA margin for the rehabilitation hospital segment was 17.7% for the six months ended June 30, 2019, compared to 19.1% for the six months ended June 30, 2018. The increase in Adjusted EBITDA was primarily attributable to an increase in patient volume at several of our existing hospitals. The decrease in Adjusted EBITDA margin for our rehabilitation hospital segment was primarily driven by Adjusted EBITDA losses in our start-up hospitals during the six months ended June 30, 2019. Adjusted EBITDA start-up losses were $8.8 million for the six months ended June 30, 2019, compared to $3.0 million for the six months ended June 30, 2018, compared to $3.22018.
Outpatient Rehabilitation Segment. Adjusted EBITDA was $71.6 million orfor the six months ended June 30, 2017.
Outpatient Rehabilitation Segment. Adjusted EBITDA was2019, compared to $72.5 million for the six months ended June 30, 2018, compared to $73.3 million for the six months ended June 30, 2017.2018. Our Adjusted EBITDA margin for the outpatient rehabilitation segment was 13.8%14.1% for the six months ended June 30, 2018,2019, compared to 14.5% for the six months ended June 30, 2017.2018. For the six months ended June 30, 2018,2019, our Adjusted EBITDA and Adjusted EBITDA margins declined as a result of increased labormargin were adversely impacted by increases in employee costs relative to our net operating revenues as well as a decline in patient visits, without a corresponding reduction in operating costs, in regions impacted by severe winter weather conditions during the first quarter of 2018.revenues.
Concentra Segment. Adjusted EBITDA increased 52.2%9.2% to $142.3 million for the six months ended June 30, 2019, compared to $130.4 million for the six months ended June 30, 2018, compared to $85.7 million forwhich included the six months ended June 30, 2017.operating results of U.S. HealthWorks beginning February 1, 2018. Our Adjusted EBITDA margin for the Concentra segment was 17.6% for the six months ended June 30, 2019, compared to 17.0% for the six months ended June 30, 2018, compared to 16.9%2018. The increases in Adjusted EBITDA and Adjusted EBITDA margin resulted from achieving lower relative operating costs across our combined Concentra and U.S. HealthWorks businesses.
Other. The Adjusted EBITDA loss was $50.5 million for the six months ended June 30, 2017.2019, compared to an Adjusted EBITDA loss of $50.0 million for the six months ended June 30, 2018.
Depreciation and Amortization
Depreciation and amortization expense was $107.1 million for the six months ended June 30, 2019, compared to $98.5 million for the six months ended June 30, 2018. The increase principally occurred within our Concentra and critical illness recovery hospital segments. The increase in Adjusted EBITDAour Concentra segment was principally due to the operating resultsacquisition of U.S. HealthWorks, which we acquired on February 1, 2018.
Other. The Adjusted EBITDA lossincrease in our critical illness recovery hospital segment was $50.0 millionprincipally due to the repeal of certificate of need regulations in the state of Florida effective July 1, 2019; accordingly, the certificate of need intangible assets for our Florida critical illness recovery hospitals were fully amortized during the six months ended June 30, 2018, compared to an Adjusted EBITDA loss of $48.2 million for the six months ended June 30, 2017. The increase in our Adjusted EBITDA loss was due to an increase in general and administrative costs, which encompass our corporate shared service activities.
Depreciation and Amortization
Depreciation and amortization expense was $98.5 million for the six months ended June 30, 2018, compared to $80.9 million for the six months ended June 30, 2017. The increase principally occurred within our Concentra segment due to the acquisition of U.S. HealthWorks.
2019.
Income from Operations
For the six months ended June 30, 2018,2019, we had income from operations of $229.2$236.6 million, compared to $207.4$229.2 million for the six months ended June 30, 2017.2018. The increase in income from operations resulted principally from the improved performance of our rehabilitation hospital segment and the growth of our Concentra segment, as discussed above.segment.
Loss on Early Retirement of Debt
During the six months ended June 30, 2018, we amended both SelectSelect’s senior secured credit facilities and Concentra’s first lien credit facilities, as discussed above under “Significant Events,”agreement which resulted in losses on early retirement of debt of $10.3 million during the six months ended June 30, 2018.
During the six months ended June 30, 2017, we refinanced Select’s senior secured credit facilities which resulted in a loss on early retirement of debt of $19.7 million during the six months ended June 30, 2017.
Equity in Earnings of Unconsolidated Subsidiaries
Our equity in earnings of unconsolidated subsidiaries principally relates to rehabilitation businesses in which we are a minority owner. For the six months ended June 30, 2018,2019, we had equity in earnings of unconsolidated subsidiaries of $9.5$11.8 million, compared to $11.2$9.5 million for the six months ended June 30, 2017.2018. The increase in equity in earnings was principally attributable to the growth of certain non-consolidating subsidiaries as a result of our sales of outpatient rehabilitation clinics to these subsidiaries.
Non-Operating Gain
We recognized a non-operating gaingains of $6.5 million and $6.9 million during the six months ended June 30, 2018.2019 and 2018, respectively. The non-operating gain wasgains were principally attributable to the salesales of outpatient rehabilitation clinics to a non-consolidating subsidiary.subsidiaries.
Interest Expense
Interest expense was $102.3 million for the six months ended June 30, 2019, compared to $97.3 million for the six months ended June 30, 2018, compared to $78.5 million for the six months ended June 30, 2017.2018. The increase in interest expense was principally due an increase in variable interest rates associated with the Concentra credit facilities. We also experienced an increase in interest expense due to an increase in our indebtedness as a result of the acquisition of U.S. HealthWorks.HealthWorks on February 1, 2018.
Income Taxes
We recorded income tax expense of $39.3 million for the six months ended June 30, 2019, which represented an effective tax rate of 25.7%. We recorded income tax expense of $33.4 million for the six months ended June 30, 2018, which represented an effective tax rate of 24.2%. We recorded income tax expense of $45.6 million forFor the six months ended June 30, 2017, which represented an effective tax rate of 37.9%. The2018, the lower effective tax rate for the six months ended June 30, 2018 resulted primarilyprincipally from the effects of the federal tax reform legislation enacted on December 22, 2017 and the discrete tax benefits realized from certain equity interests redeemed as part ofat our Concentra subsidiary and completed in connection with the closing of the U.S. HealthWorks transaction during the first quarter ofacquisition on February 1, 2018.
Net Income Attributable to Non-Controlling Interests
Net income attributable to non-controlling interests was $27.7 million for the six months ended June 30, 2019, compared to $24.3 million for the six months ended June 30, 2018, compared to $16.8 million for the six months ended June 30, 2017.2018. The increase was principally due to the improved operating performance of our Concentra segmentsegment. During the six months ended June 30, 2018, Concentra incurred costs associated with the acquisition of U.S. HealthWorks and severalthe amendment of our joint venture rehabilitation hospitals.Concentra’s first lien credit agreement.
Liquidity and Capital Resources
Cash Flows for the Six Months Ended June 30, 20182019 and Six Months Ended June 30, 20172018
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.
| | | | Six Months Ended June 30, | | Six Months Ended June 30, |
| | 2017 | | 2018 | | 2018 | | 2019 |
| | (in thousands) | | (in thousands) |
Cash flows provided by operating activities | | $ | 40,340 |
| | $ | 216,950 |
| | $ | 216,950 |
| | $ | 132,914 |
|
Cash flows used in investing activities | | (99,132 | ) | | (595,971 | ) | | (595,971 | ) | | (227,479 | ) |
Cash flows provided by financing activities | | 33,562 |
| | 397,501 |
| |
Net cash provided by financing activities | | | 397,501 |
| | 43,423 |
|
Net increase (decrease) in cash and cash equivalents | | (25,230 | ) | | 18,480 |
| | 18,480 |
| | (51,142 | ) |
Cash and cash equivalents at beginning of period | | 99,029 |
| | 122,549 |
| | 122,549 |
| | 175,178 |
|
Cash and cash equivalents at end of period | | $ | 73,799 |
| | $ | 141,029 |
| | $ | 141,029 |
| | $ | 124,036 |
|
Operating activities provided $132.9 million of cash flows for the six months ended June 30, 2019, compared to $217.0 million of cash flows for the six months ended June 30, 2018, compared to $40.3 million of cash flows for the six months ended June 30, 2017.2018. The increase inlower operating cash flows for the six months ended June 30, 2018,2019, compared to the six months ended June 30, 2017,2018, was principally driven by the change in our accounts receivablereceivable. We experienced an increase in their respective periods.Our days sales outstanding decreased from 58to 53 days at June 30, 2019, compared to 51 days at December 31, 20172018. We experienced a decline in days sales outstanding to 54 days at June 30, 2018, while our days sales outstanding increased from 51compared to 58 days at December 31, 2016 to 59 days at June 30, 2017. The decrease in days sales outstanding during the six months ended June 30, 2018 resulted from the recoupment of Medicare periodic interim underpayments from prior periods. The increase in days sales outstanding during the six months ended June 30, 2017 was caused by the significant underpayments we received through the Medicare periodic interim payment program in our critical illness recovery hospitals. Additionally, we received overpayments during 2016 which were repaid during the first quarter of 2017. Our days sales outstanding will fluctuate based upon variability in our collection cycles. Our days sales outstanding fell within our expected range at June 30, 2019 and December 31, 2018.
Investing activities used $227.5 million of cash flows for the six months ended June 30, 2019. The principal uses of cash were $89.3 million for purchases of property and equipment and $138.3 million for investments in and acquisitions of businesses. Investing activities used $596.0 million of cash flows for the six months ended June 30, 2018. The principal uses of cash were $515.0 million related to the acquisition of U.S. HealthWorks and $81.6 million for purchases of property and equipment. Investing
Financing activities used $99.1provided $43.4 million of cash flows for the six months ended June 30, 2017.2019. The principal usessource of cash were $105.3was net borrowings of $175.0 million for purchases of property and equipment and $18.5 million of acquisition-related payments,under the Select revolving facility. This was offset in part by $34.6$98.8 million and $33.9 million for mandatory prepayments of proceeds fromterm loans under the sale of assets.Select credit facilities and Concentra credit facilities, respectively.
Financing activities provided $397.5 million of cash flows for the six months ended June 30, 2018. The principal source of cash was from the issuance of term loans under the Concentra credit facilities which resulted in net proceeds of $779.9 million. This was offset in part by $301.2 million of distributions to non-controlling interests, of which $294.9 million related to the redemption and reorganization transactions executed underin connection with the Purchase Agreement, as described above under “Significant Events,”acquisition of U.S. HealthWorks, and $80.0 million of net repayments under the Select revolving facility.
Financing activities provided $33.6 million of cash flows for the six months ended June 30, 2017. The principal source of cash was net borrowings under the Select revolving facility of $80.0 million, offset in part by $23.1 million of cash used for a principal prepayment associated with the Concentra credit facilities, $2.9 million of cash used for a term loan payment associated with the Select credit facilities, and $9.2 million of cash used for financing costs.
Capital Resources
Working capital. We had net working capital of $392.0$175.4 million at June 30, 2018,2019, compared to $315.4$287.3 million at December 31, 2017.2018. The increasedecrease in net working capital was primarilyprincipally due to the acquisitionrecognition of U.S. HealthWorks and an increase in our accounts receivable.current operating lease liabilities upon the adoption of ASC Topic 842, Leases, on January 1, 2019.
Select credit facilities.
On March 22, 2018,In February 2019, Select entered into Amendment No. 1 tomade a principal prepayment of $98.8 million associated with its term loans in accordance with the provision in the Select credit agreement dated March 6, 2017. Amendment No. 1 (i) decreased the applicable interest rate on the Selectfacilities that requires mandatory prepayments of term loans from the Adjusted LIBO Rate (asas a result of annual excess cash flow, as defined in the Select credit agreement and subject to an Adjusted LIBO floor of 1.00%) plus 3.50% to the Adjusted LIBO Rate plus a percentage ranging from 2.50% to 2.75%, or from the Alternative Base Rate (as defined in the Select credit agreement and subject to an Alternate Base Rate floor of 2.00%) plus 2.50% to the Alternative Base Rate plus a percentage ranging from 1.50% to 1.75%, in each case based on Select’s total net leverage ratio (as defined in the Select credit agreement); (ii) decreased the applicable interest rate on the loans outstanding under the Select revolving credit facility from the Adjusted LIBO Rate plus a percentage ranging from 3.00% to 3.25% to the Adjusted LIBO Rate plus a percentage ranging from 2.50% to 2.75%, or from the Alternative Base Rate plus a percentage ranging from 2.00% to 2.25% to the Alternative Base Rate plus a percentage ranging from 1.50% to 1.75%, in each case based on Select’s total net leverage ratio; (iii) extended the maturity date for the Select term loans from March 6, 2024 to March 6, 2025; and (iv) made certain other technical amendments to the Select credit agreement as set forth therein.facilities.
At June 30, 2018,2019, Select had outstanding borrowings under the Select credit facilities consisting of $1,135.6$1,031.1 million in Select term loans (excluding unamortized discounts and debt issuance costs of $22.9$17.3 million) and borrowings of $150.0$195.0 million (excluding letters of credit) under the Select revolving facility. At June 30, 2018,2019, Select had $262.0$216.6 million of availability under the Select revolving facility after giving effect to $38.0$38.4 million of outstanding letters of credit.
On August 1, 2019, Select entered into Amendment No. 3 to the Select credit agreement dated March 6, 2017. Among other things, the amendment (i) provided for an additional $500.0 million in term loans that, along with the existing Select term loan, have a maturity date of March 6, 2025, (ii) extended the maturity date of Select’s revolving credit facility from March 6, 2022 to March 6, 2024, and (iii) increased the total net leverage ratio permitted under the Select credit agreement.
Select senior notes.
On August 1, 2019, Select issued and sold $550.0 million aggregate principal amount of senior notes due August 15, 2026. Select intends to use a portion of the net proceeds of the senior notes, together with a portion of the proceeds from the incremental term loan borrowings under the Select credit facilities (as described above), to redeem in full Select’s $710 million 6.375% senior notes due 2021, to repay in full the outstanding borrowings under Select’s revolving credit facility, and pay related fees and expenses associated with the financing.
Interest on the senior notes accrues at the rate of 6.250% per annum and is payable semi-annually in arrears on February 15 and August 15 of each year, commencing on February 15, 2020. The senior notes are Select’s senior unsecured obligations which are subordinated to all of Select’s existing and future secured indebtedness, including the Select credit facilities. The senior notes rank equally in right of payment with all of Select’s other existing and future senior unsecured indebtedness and senior in right of payment to all of Select’s existing and future subordinated indebtedness. The senior notes are unconditionally guaranteed on a joint and several basis by each of Select’s direct or indirect existing and future domestic restricted subsidiaries, other than certain non-guarantor subsidiaries.
Select may redeem some or all of the senior notes prior to August 15, 2022 by paying a “make-whole” premium. Select may redeem some or all of the senior notes on or after August 15, 2022 at specified redemption prices. In addition, prior to August 15, 2022, Select may redeem up to 40% of the principal amount of the senior notes with the net proceeds of certain equity offerings at a price of 106.250% plus accrued and unpaid interest, if any. Select is obligated to offer to repurchase the senior notes at a price of 101% of their principal amount plus accrued and unpaid interest, if any, as a result of certain change of control events. These restrictions and prohibitions are subject to certain qualifications and exceptions.
The terms of the senior notes contains covenants that, among other things, limit Select’s ability and the ability of certain of Select’s subsidiaries to (i) grant liens on its assets, (ii) make dividend payments, other distributions or other restricted payments, (iii) incur restrictions on the ability of Select’s restricted subsidiaries to pay dividends or make other payments, (iv) enter into sale and leaseback transactions, (v) merge, consolidate, transfer or dispose of substantially all of their assets, (vi) incur additional indebtedness, (vii) make investments, (viii) sell assets, including capital stock of subsidiaries, (ix) use the proceeds from sales of assets, including capital stock of restricted subsidiaries, and (x) enter into transactions with affiliates. These covenants are subject to a number of exceptions, limitations and qualifications.
Concentra credit facilities. 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.
OnIn February 1, 2018,2019, Concentra made a principal prepayment of $33.9 million associated with its term loans in connectionaccordance with the transactions executed underprovision in the Purchase Agreement,Concentra credit facilities that requires mandatory prepayments of term loans as described above under “Significant Events,”a result of annual excess cash flow, as defined in the Concentra amendedcredit facilities.
On April 8, 2019, Concentra entered into Amendment No. 5 to the Concentra first lien credit agreementagreement. Amendment No. 5 extended the maturity date of the Concentra revolving credit facility from June 1, 2020 to among other things, provide for (i) an additional $555.0 million in tranche B term loans that, along withJune 1, 2021 and increased the existing tranche B term loansaggregate commitments available under the Concentra first lien credit agreement, have a maturity date of June 1, 2022 and (ii) an additional $25.0 million to the $50.0 million, five-year revolving credit facility under the terms of the existing Concentra first lien credit agreement. The tranche B term loans bear interest at a rate equalfrom $75.0 million to the Adjusted LIBO Rate (as defined in the Concentra first lien credit agreement) plus 2.75% (subject to an Adjusted LIBO Rate floor of 1.00%) for Eurodollar Borrowings (as defined in the Concentra first lien credit agreement), or Alternate Base Rate (as defined in the Concentra first lien credit agreement) plus 1.75% (subject to an Alternate Base Rate floor of 2.00%) for ABR Borrowings (as defined in the Concentra first lien credit agreement). All other material terms and conditions applicable to the original tranche B term loan commitments are applicable to the additional tranche B term loans created under the Concentra first lien credit agreement.
In addition, on February 1, 2018, Concentra entered into the Concentra second lien credit agreement. The Concentra second lien credit agreement provided for a $240.0 million Concentra second lien term loan with a maturity date of June 1, 2023. Borrowings under the Concentra second lien credit agreement bear interest at a rate equal to the Adjusted LIBO Rate (as defined in the Concentra second lien credit agreement) plus 6.50% (subject to an Adjusted LIBO Rate floor of 1.00%), or Alternate Base Rate (as defined in the Concentra second lien credit agreement) plus 5.50% (subject to an Alternate Base Rate floor of 2.00%).
In the event that, on or prior to February 1, 2019, Concentra prepays any of the Concentra second lien term loan to refinance such term loans, Concentra shall pay a premium of 2.00% of the aggregate principal amount of the Concentra second lien term loan prepaid. If Concentra prepays any of the Concentra second lien term loan to refinance such term loans on or prior to February 1, 2020, Concentra shall pay a premium of 1.00% of the aggregate principal amount of the Concentra second lien term loan prepaid.$100.0 million.
Concentra will be required to prepay borrowings under the Concentra second lien term loan 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 the payment of certain indebtedness secured by liens, (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 Concentra second lien credit agreement) if Concentra’s leverage ratio is greater than 4.25 to 1.00 and 25% of excess cash flow if Concentra’s leverage ratio is less than or equal to 4.25 to 1.00 and greater than 3.75 to 1.00, in each case, reduced by the aggregate amount of term loans and certain debt optionally prepaid during the applicable fiscal year and the aggregate amount of senior revolving commitments reduced permanently during the applicable fiscal year (other than in connection with a refinancing). Concentra will not be required to prepay borrowings with excess cash flow if Concentra’s leverage ratio is less than or equal to 3.75 to 1.00.
The Concentra second lien credit agreement also contains a number of 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 Concentra second lien credit agreement contains events of default for non-payment of principal and interest when due (subject to a grace period for interest), cross-default and cross-acceleration provisions and an event of default that would be triggered by a change of control.
The borrowings under the Concentra second lien term loan are guaranteed, on a second lien basis, by Concentra Holdings, Inc., Concentra, and certain domestic subsidiaries of Concentra and will be guaranteed by Concentra’s future domestic subsidiaries (other than Excluded Subsidiaries and Consolidated Practices, each as defined in the Concentra second lien credit agreement). The borrowings under the Concentra second lien term loan are secured by substantially all of Concentra’s and its domestic subsidiaries’ existing and future property and assets and by a pledge of Concentra’s capital stock, the capital stock of certain of Concentra’s domestic subsidiaries and up to 65% of the voting capital stock and 100% of the non-voting capital stock of Concentra’s foreign subsidiaries, if any.
Concentra used borrowings under the Concentra first lien credit agreement and the Concentra second lien credit agreement, together with cash on hand, to pay the purchase price for all of the issued and outstanding stock of U.S. HealthWorks to DHHC and to finance the redemption and reorganization transactions executed under the Purchase Agreement.
At June 30, 2018,2019, Concentra had outstanding borrowings under the Concentra credit facilities consisting of $1,414.2$1,380.3 million of Concentra term loans (excluding unamortized discounts and debt issuance costs of $25.0$18.0 million). Concentra did not have any borrowings under the Concentra revolving facility. At June 30, 2018,2019, Concentra had $61.9$87.3 million of availability under its revolving facility after giving effect to $13.1$12.7 million of outstanding letters of credit.
Stock Repurchase Program. 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, 2018,2019, 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 funds this program with cash on hand and borrowings under the Select revolving facility. Holdings did not repurchase shares duringDuring the threesix months ended June 30, 2018.2019, Holdings repurchased 902,313 shares at a cost of approximately $13.1 million, an average cost per share of $14.55, which includes transaction costs. Since the inception of the program through June 30, 2018,2019, Holdings has repurchased 35,924,12836,826,441 shares at a cost of approximately $314.7$327.9 million, or $8.76$8.90 per share, which includes transaction costs.
Liquidity. 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 Resources. 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 rehabilitation hospitals and occupational health centers.providers. We also intend to open new outpatient rehabilitation clinics and occupational health centers 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 through opportunistic acquisitions, such as the acquisition of U.S. HealthWorks.
Contractual Obligations
Our contractual obligations and commercial commitments have changed materially from those reported in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, due to the following:
the incremental $555.0 million in tranche B term loans provided for under the Concentra first lien credit agreement;
the $240.0 million of term loans provided for under the Concentra second lien credit agreement;
the additional $25.0 million five-year revolving credit facility made available under the Concentra first lien credit agreement; and
the extension of the maturity date for the Select term loans under the Amendment No. 1 to the Select credit agreement from March 6, 2024 to March 6, 2025.acquisitions.
Recent Accounting Pronouncements
LeaseRefer to Note 2 – Accounting
Beginning in February 2016, the Financial Accounting Standards Board (the “FASB”) issued several Accounting Standards Updates (“ASU”) which established Topic 842, Leases (the “standard”). This standard includes a lessee accounting model that recognizes two types of leases: finance and operating. This standard 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 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 the standard 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 Policies 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.
Upon adoption, the Company will recognize significant assets and liabilities on the consolidated balance sheets as a result of the operating lease obligations of the Company. 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 operations.
The Company will implement the new standard beginning January 1, 2019. The Company has completed its inventory of leases and has begunnotes to implement a new IT platform to account for leases under the new standard. The Company is currently validating the data in the IT platform to ensure it is complete and accurate. The Company’s remaining implementation efforts are focused on designing accounting processes, disclosure processes, and internal controls in order to account for its leases under the new standard.
Recently Adopted Accounting Pronouncements
Revenue from Contracts with Customers
Beginning in May 2014, the FASB issued several Accounting Standards Updates which established Topic 606, Revenue from Contracts with Customers (the “standard”). This standard supersedes existing revenue recognition requirements and seeks to eliminate most industry-specific guidance under current GAAP. 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.
The Company adopted the new standard on January 1, 2018, using the full retrospective transition method. Adoption of the revenue recognition standard impacted the Company’s reported results as follows:
|
| | | | | | | | | | | |
| Three Months Ended June 30, 2017 |
| As Reported | | As Adjusted(1) | | Adoption Impact |
| (in thousands) |
Condensed Consolidated Statements of Operations | | | | | |
Net operating revenues | $ | 1,120,675 |
| | $ | 1,102,465 |
| | $ | (18,210 | ) |
Bad debt expense | 18,174 |
| | (36 | ) | | (18,210 | ) |
|
| | | | | | | | | | | |
| Six Months Ended June 30, 2017 |
| As Reported | | As Adjusted(1) | | Adoption Impact |
| (in thousands) |
Condensed Consolidated Statements of Operations | | | | | |
Net operating revenues | $ | 2,232,036 |
| | $ | 2,193,982 |
| | $ | (38,054 | ) |
Bad debt expense | 38,799 |
| | 745 |
| | (38,054 | ) |
| | | | | |
Condensed Consolidated Statements of Cash Flows | | | | | |
Provision for bad debts | 38,799 |
| | 745 |
| | $ | (38,054 | ) |
Changes in accounts receivable | (179,003 | ) | | (140,949 | ) | | 38,054 |
|
_____________________________________________________________
| |
(1) | Bad debt expense is now included in cost of services on the condensed consolidated statements of operations. |
|
| | | | | | | | | | | |
| December 31, 2017 |
| As Reported | | As Adjusted | | Adoption Impact |
| (in thousands) |
Condensed Consolidated Balance Sheets | | | | | |
Accounts receivable | $ | 767,276 |
| | $ | 691,732 |
| | $ | (75,544 | ) |
Allowance for doubtful accounts | 75,544 |
| | — |
| | (75,544 | ) |
Accounts receivable | $ | 691,732 |
| | $ | 691,732 |
| | $ | — |
|
The Company has presented the applicable disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers in Note 7 of the Company’sour condensed consolidated financial statements.statements included herein for information regarding recent accounting pronouncements.
Income Taxes
In October 2016, the FASB issued ASU 2016-16, IncomeTaxes (Topic 740), and Intra-Entity Transfers of Assets Other Than Inventory. Previous GAAP prohibited the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. The ASU requires an entity to recognize the income tax consequences of an intra‑entity transfer of an asset other than inventory when the transfer occurs. The Company adopted the guidance effective January 1, 2018. Adoption of the guidance did not have a material impact on the Company’s consolidated financial statements.
ITEM 3. 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.
At June 30, 2018,2019, Select had outstanding borrowings under the Select credit facilities consisting of $1,135.6$1,031.1 million ofin Select term loans (excluding unamortized discounts and debt issuance costs of $22.9$17.3 million) and borrowings of $150.0$195.0 million (excluding letters of credit) under the Select revolving facility, which bear interest at variable rates.
At June 30, 2018,2019, Concentra had outstanding borrowings under the Concentra credit facilities consisting of $1,414.2$1,380.3 million of Concentra term loans (excluding unamortized discounts and debt issuance costs of $25.0$18.0 million), which bear interest at variable rates. Concentra did not have any borrowings under the Concentra revolving facility.
EachAs of June 30, 2019, each 0.25% increase in market interest rates will impact the interest expense on Select’s and Concentra’s variable rate debt by $6.7$6.5 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, as of June 30, 2018,2019, 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 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.
U.S. HealthWorks Acquisition
On February 1, 2018, Concentra consummated the acquisition of U.S. HealthWorks. 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 second quarter ended June 30, 2018,2019, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
On February 1, 2018, Concentra consummated the acquisition of U.S. HealthWorks. Effective from that date, we began integrating U.S. HealthWorks into our existing control procedures. The U.S. HealthWorks integration may lead us to modify certain controls in future periods, but we do not expect changes to significantly 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.
PART II: OTHER INFORMATION
ITEM 1.LEGAL PROCEEDINGS
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 coverages through a number of different programs that are dependent upon such factors as the state where the Company is operating and whether the operations are wholly owned or are operated through a joint venture. For the Company’s wholly owned operations, the Company currently maintains insurance coverages under a combination of policies with a total annual aggregate limit of $35.0up to $40.0 million. The Company’s insurance for the professional liability coverage is written on a “claims-made” basis, and its commercial general liability coverage is maintained on an “occurrence” basis. These coverages apply after a self-insured retention limit is exceeded. For the Company’s joint venture operations, the Company has numerous programs that are designed to respond to the risks of the specific joint venture. The annual aggregate limit under these programs ranges from $5.0 million to $20.0 million. The policies are generally written on a “claims-made” basis. Each of these programs has either a deductible or self-insured retention limit. The Company reviews its insurance program annually and may make adjustments to the amount of insurance coverage and self-insured retentions in future years. 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”), 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 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 replaced 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 United States Department of Justice notified the District Court of its decision not to intervene in the case.
In December 2015, the defendants filed a Motion to Dismiss the Second Amended Complaint on multiple grounds, including that the action 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, and that the plaintiff‑relators did not plead their claims with sufficient particularity, as required by the Federal Rules of Civil Procedure.
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, which was based on certain statutory changes to the public disclosure 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’ claims arising from conduct from and after March 23, 2010 relating to delayed discharging of patients and up-coding and the plaintiff relators’ retaliation claims. 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 and allowing discovery that would facilitate the use of statistical sampling to prove liability, which the defendants opposed. In April 2018, a U.S. magistrate judge ruled that plaintiff‑relators’ discovery will be limited to only SSH-Evansville for the period from March 23, 2010 through September 30, 2016, and that the plaintiff‑relators will be required to prove the fraud that they allege on a claim-by-claim basis, rather than using statistical sampling. The plaintiff-relators have appealed this decision to the District Judge.district judge who, in March 2019, affirmed the decision of the magistrate judge regarding the geographic and temporal scope of the case, but ruled that the question of statistical sampling is not ripe for review.
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 United 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”), 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, but the District Court denied such request. In December 2017, the Court of Appeals, relying on the public disclosure bar, denied the appeal of the plaintiff‑relator and affirmed the judgment of the District Court. In February 2018, the Court of Appeals denied a petition for rehearing that the plaintiff-relator filed in January 2018.
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 in May 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 in January 2017. The corporate defendants were served in March 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, in May 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 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. In March 2018, the District Court dismissed the plaintiff‑relator’s claims related to the alleged failure to properly examine medical practitioners’ credentials, her reverse false claims allegations, and her claim that defendants violated the Delaware False Claims and Reporting Act. It denied the defendant’sdefendants’ motion to dismiss claims that the allegedly falsified medical practitioner signatures violated the False Claims Act. Separately, the District Court dismissed the individual defendant due to plaintiff-relator’s failure to timely serve the amended complaint upon her.
In March 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. In January 2018, the Court stayed the Delaware Complaint pending the outcome of the federal case.
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.
ITEM 1A.RISK FACTORS
There have been no material changes from our risk factors as previously reported in our Annual Report on Form 10-K for the year ended December 31, 2017.2018.
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, which has been extended until December 31, 2018 and2019, 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 June 30, 2018 under the authorized common stock repurchase program.
The following table provides information regarding repurchases of our common stock during the three months ended June 30, 2018. As set forth below, the shares repurchased during the three months ended June 30, 2018 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.2019.
|
| | | | | | | | | | | | | | |
| | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publically Announced Plans or Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under Plans or Programs |
April 1 - April 30, 2018 | | 42,517 |
| | $ | 18.05 |
| | — |
| | $ | 185,249,408 |
|
May 1 - May 31, 2018 | | — |
| | — |
| | — |
| | 185,249,408 |
|
June 1 - June 30, 2018 | | — |
| | — |
| | — |
| | 185,249,408 |
|
Total | | 42,517 |
| | $ | 18.05 |
| | — |
| | $ | 185,249,408 |
|
|
| | | | | | | | | | | | | | |
| | Total Number of Shares Purchased(1) | | Average Price Paid Per Share(1) | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under Plans or Programs |
April 1 - April 30, 2019 | | 33,939 |
| | $ | 14.58 |
| | — |
| | $ | 185,249,408 |
|
May 1 - May 31, 2019 | | 731,703 |
| | 14.62 |
| | 731,703 |
| | 174,548,606 |
|
June 1 - June 30, 2019 | | 170,610 |
| | 14.21 |
| | 170,610 |
| | 172,124,038 |
|
Total | | 936,252 |
| | $ | 14.55 |
| | 902,313 |
| | $ | 172,124,038 |
|
| |
(1) | Includes share repurchases under our common stock repurchase program and 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. |
ITEM 3.DEFAULTS UPON SENIOR SECURITIES
Not applicableapplicable.
ITEM 4.MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5.OTHER INFORMATION
None.
ITEM 6.EXHIBITS
|
| | |
Number | | Description |
10.1 | | Amendment No. 5, dated April 8, 2019, to the First Lien Credit Agreement, dated as of June 1, 2015, among Concentra Holdings Inc., MJ Acquisition Corporation, Concentra Inc., the lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative and Collateral Agent, as amended by Amendment No. 1, dated as of September 26, 2016, Amendment No. 2, dated as of March 20, 2017, Amendment No. 3, dated as of February 1, 2018, and Amendment No. 4, dated as of October 26, 2018 (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K, filed on April 11, 2019). |
31.1 | | |
31.2 | | |
32.1 | | |
101101.INS | | The following financial information fromXBRL Instance Document - the Registrant’s Quarterly Report on Form 10-Q forinstance document does not appear in the quarter ended June 30, 2018 formattedInteractive Data File because its XBRL tags are embedded within the Inline XBRL document. |
101.SCH | | XBRL Taxonomy Extension Schema Document. |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document. |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document. |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document. |
104 | | Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations fortags are embedded within the three and six months ended June 30, 2017 and 2018, (ii) Condensed Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017, (iii) Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and 2018, (iv) Condensed Consolidated Statements of Changes in Equity and Income for the six months ended June 30, 2018 and (v) Notes to Condensed Consolidated Financial Statements.Inline XBRL document. |
SIGNATURES
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 |
| |
| |
| By: | /s/ Martin F. Jackson |
| | Martin F. Jackson |
| | Executive Vice President and Chief Financial Officer |
| | (Duly Authorized Officer) |
| | |
| By: | /s/ Scott A. Romberger |
| | Scott A. Romberger |
| | Senior Vice President, Chief Accounting Officer and Controller |
| | (Principal Accounting Officer) |
Dated: August 2, 20181, 2019
|
| | |
| SELECT MEDICAL HOLDINGS CORPORATION |
| |
| |
| By: | /s/ Martin F. Jackson |
| | Martin F. Jackson |
| | Executive Vice President and Chief Financial Officer |
| | (Duly Authorized Officer) |
| | |
| By: | /s/ Scott A. Romberger |
| | Scott A. Romberger |
| | Senior Vice President, Chief Accounting Officer and Controller |
| | (Principal Accounting Officer) |
Dated: August 2, 20181, 2019