UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended March 31, 20222023
OR
| | | | | |
☐ | 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
SELECT MEDICAL HOLDINGS CORPORATION
(Exact name of Registrant as specified in its Charter)
| | | | | | | | |
Delaware | | 20-1764048 |
(State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification Number) |
4714 Gettysburg Road, P.O. Box 2034
Mechanicsburg, PA 17055
(Address of Principal Executive Offices and Zip code)
(717) 972-1100
(Registrant’s 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 Registrant (1) has 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 Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the Registrant 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 filer | ☒ | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| | Emerging Growth Company | ☐ |
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. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of April 30, 2022,2023, Select Medical Holdings Corporation had outstanding 130,627,340127,126,909 shares of common stock.
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 Group Holdings Parent, LLC (“Concentra Group Holdings Parent”) and its subsidiaries, including Concentra Inc. References to the “Company,” “we,” “us,” and “our” refer collectively to Holdings, Select, and Concentra.
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Select Medical Holdings Corporation
Condensed Consolidated Balance Sheets
(unaudited)
(in thousands, except share and per share amounts)
| | | December 31, 2021 | | March 31, 2022 | | December 31, 2022 | | March 31, 2023 |
ASSETS | ASSETS | | | | ASSETS | | | |
Current Assets: | Current Assets: | | | | Current Assets: | | | |
Cash and cash equivalents | Cash and cash equivalents | $ | 74,310 | | | $ | 130,881 | | Cash and cash equivalents | $ | 97,906 | | | $ | 83,703 | |
Accounts receivable | Accounts receivable | 889,303 | | | 941,434 | | Accounts receivable | 941,312 | | | 997,274 | |
Prepaid income taxes | Prepaid income taxes | 55,620 | | | 40,761 | | Prepaid income taxes | 31,868 | | | 16,893 | |
Current portion of interest rate cap contract | | Current portion of interest rate cap contract | 74,857 | | | 72,127 | |
Other current assets | Other current assets | 120,206 | | | 137,775 | | Other current assets | 125,370 | | | 143,736 | |
Total Current Assets | Total Current Assets | 1,139,439 | | | 1,250,851 | | Total Current Assets | 1,271,313 | | | 1,313,733 | |
Operating lease right-of-use assets | Operating lease right-of-use assets | 1,078,754 | | | 1,102,710 | | Operating lease right-of-use assets | 1,169,740 | | | 1,186,534 | |
Property and equipment, net | Property and equipment, net | 961,467 | | | 952,926 | | Property and equipment, net | 1,001,440 | | | 987,283 | |
Goodwill | Goodwill | 3,448,912 | | | 3,465,456 | | Goodwill | 3,484,200 | | | 3,484,594 | |
Identifiable intangible assets, net | Identifiable intangible assets, net | 374,879 | | | 368,850 | | Identifiable intangible assets, net | 351,662 | | | 346,606 | |
Interest rate cap contract, net of current portion | | Interest rate cap contract, net of current portion | 45,200 | | | 26,994 | |
Other assets | Other assets | 356,720 | | | 395,151 | | Other assets | 341,738 | | | 353,992 | |
Total Assets | Total Assets | $ | 7,360,171 | | | $ | 7,535,944 | | Total Assets | $ | 7,665,293 | | | $ | 7,699,736 | |
LIABILITIES AND EQUITY | LIABILITIES AND EQUITY | | | | LIABILITIES AND EQUITY | | | |
Current Liabilities: | Current Liabilities: | | | | Current Liabilities: | | | |
Overdrafts | Overdrafts | $ | 42,353 | | | $ | 34,745 | | Overdrafts | $ | 31,961 | | | $ | 31,237 | |
Current operating lease liabilities | Current operating lease liabilities | 229,334 | | | 234,420 | | Current operating lease liabilities | 236,784 | | | 239,713 | |
Current portion of long-term debt and notes payable | Current portion of long-term debt and notes payable | 17,572 | | | 24,513 | | Current portion of long-term debt and notes payable | 44,351 | | | 113,894 | |
Accounts payable | Accounts payable | 233,844 | | | 238,150 | | Accounts payable | 186,729 | | | 174,101 | |
Accrued payroll | Accrued payroll | 247,292 | | | 242,749 | | Accrued payroll | 209,789 | | | 171,815 | |
Accrued vacation | Accrued vacation | 144,048 | | | 148,114 | | Accrued vacation | 150,695 | | | 156,433 | |
Accrued interest | Accrued interest | 29,002 | | | 9,932 | | Accrued interest | 29,837 | | | 10,241 | |
Accrued other | Accrued other | 244,312 | | | 232,297 | | Accrued other | 264,525 | | | 274,654 | |
Government advances | 83,790 | | | 20,862 | | |
Unearned government assistance | 93 | | | 194 | | |
| | Income taxes payable | Income taxes payable | 1,437 | | | 3,175 | | Income taxes payable | 480 | | | 13,618 | |
Total Current Liabilities | Total Current Liabilities | 1,273,077 | | | 1,189,151 | | Total Current Liabilities | 1,155,151 | | | 1,185,706 | |
Non-current operating lease liabilities | Non-current operating lease liabilities | 916,540 | | | 938,423 | | Non-current operating lease liabilities | 1,008,394 | | | 1,024,676 | |
Long-term debt, net of current portion | Long-term debt, net of current portion | 3,556,385 | | | 3,738,299 | | Long-term debt, net of current portion | 3,835,211 | | | 3,766,838 | |
Non-current deferred tax liability | Non-current deferred tax liability | 142,792 | | | 156,407 | | Non-current deferred tax liability | 169,793 | | | 163,024 | |
Other non-current liabilities | Other non-current liabilities | 106,442 | | | 105,098 | | Other non-current liabilities | 106,137 | | | 106,652 | |
Total Liabilities | Total Liabilities | 5,995,236 | | | 6,127,378 | | Total Liabilities | 6,274,686 | | | 6,246,896 | |
Commitments and contingencies (Note 14) | 0 | | 0 | |
Commitments and contingencies (Note 13) | | Commitments and contingencies (Note 13) | |
Redeemable non-controlling interests | Redeemable non-controlling interests | 39,033 | | | 41,670 | | Redeemable non-controlling interests | 34,043 | | | 34,399 | |
Stockholders’ Equity: | Stockholders’ Equity: | | | | Stockholders’ Equity: | | | |
Common stock, $0.001 par value, 700,000,000 shares authorized, 133,884,817 and 131,769,303 shares issued and outstanding at 2021 and 2022, respectively | 134 | | | 132 | | |
Common stock, $0.001 par value, 700,000,000 shares authorized, 127,173,871 and 127,176,279 shares issued and outstanding at 2022 and 2023, respectively | | Common stock, $0.001 par value, 700,000,000 shares authorized, 127,173,871 and 127,176,279 shares issued and outstanding at 2022 and 2023, respectively | 127 | | | 127 | |
Capital in excess of par | Capital in excess of par | 504,314 | | | 489,794 | | Capital in excess of par | 452,183 | | | 462,185 | |
Retained earnings | Retained earnings | 593,251 | | | 596,079 | | Retained earnings | 581,010 | | | 635,483 | |
Accumulated other comprehensive income | Accumulated other comprehensive income | 12,282 | | | 52,135 | | Accumulated other comprehensive income | 88,602 | | | 72,654 | |
Total Stockholders’ Equity | Total Stockholders’ Equity | 1,109,981 | | | 1,138,140 | | Total Stockholders’ Equity | 1,121,922 | | | 1,170,449 | |
Non-controlling interests | Non-controlling interests | 215,921 | | | 228,756 | | Non-controlling interests | 234,642 | | | 247,992 | |
Total Equity | Total Equity | 1,325,902 | | | 1,366,896 | | Total Equity | 1,356,564 | | | 1,418,441 | |
Total Liabilities and Equity | Total Liabilities and Equity | $ | 7,360,171 | | | $ | 7,535,944 | | Total Liabilities and Equity | $ | 7,665,293 | | | $ | 7,699,736 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Select Medical Holdings Corporation
Condensed Consolidated Statements of Operations
(unaudited)
(in thousands, except per share amounts)
| | | | For the Three Months Ended March 31, | | | For the Three Months Ended March 31, |
| | | 2021 | | 2022 | | | 2022 | | 2023 |
Revenue | Revenue | | $ | 1,546,463 | | | $ | 1,599,547 | | Revenue | | $ | 1,599,547 | | | $ | 1,664,980 | |
Costs and expenses: | Costs and expenses: | | | | | Costs and expenses: | | | | |
Cost of services, exclusive of depreciation and amortization | Cost of services, exclusive of depreciation and amortization | | 1,293,449 | | | 1,407,010 | | Cost of services, exclusive of depreciation and amortization | | 1,407,010 | | | 1,418,819 | |
General and administrative | General and administrative | | 35,403 | | | 37,513 | | General and administrative | | 37,513 | | | 42,279 | |
Depreciation and amortization | Depreciation and amortization | | 49,620 | | | 51,039 | | Depreciation and amortization | | 51,039 | | | 52,425 | |
Total costs and expenses | Total costs and expenses | | 1,378,472 | | | 1,495,562 | | Total costs and expenses | | 1,495,562 | | | 1,513,523 | |
Other operating income | | 34,021 | | | — | | |
| Income from operations | Income from operations | | 202,012 | | | 103,985 | | Income from operations | | 103,985 | | | 151,457 | |
Other income and expense: | Other income and expense: | | | | | Other income and expense: | | | | |
| Equity in earnings of unconsolidated subsidiaries | Equity in earnings of unconsolidated subsidiaries | | 9,919 | | | 5,397 | | Equity in earnings of unconsolidated subsidiaries | | 5,397 | | | 8,556 | |
| Interest income | | 4,749 | | | — | | |
| Interest expense | Interest expense | | (34,402) | | | (35,514) | | Interest expense | | (35,514) | | | (48,571) | |
Income before income taxes | Income before income taxes | | 182,278 | | | 73,868 | | Income before income taxes | | 73,868 | | | 111,442 | |
Income tax expense | Income tax expense | | 45,064 | | | 17,942 | | Income tax expense | | 17,942 | | | 26,185 | |
Net income | Net income | | 137,214 | | | 55,926 | | Net income | | 55,926 | | | 85,257 | |
Less: Net income attributable to non-controlling interests | Less: Net income attributable to non-controlling interests | | 26,668 | | | 6,809 | | Less: Net income attributable to non-controlling interests | | 6,809 | | | 14,452 | |
Net income attributable to Select Medical Holdings Corporation | Net income attributable to Select Medical Holdings Corporation | | $ | 110,546 | | | $ | 49,117 | | Net income attributable to Select Medical Holdings Corporation | | $ | 49,117 | | | $ | 70,805 | |
Earnings per common share (Note 13): | | | | | |
Earnings per common share (Note 12): | | Earnings per common share (Note 12): | | | | |
Basic and diluted | Basic and diluted | | $ | 0.82 | | | $ | 0.37 | | Basic and diluted | | $ | 0.37 | | | $ | 0.56 | |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Select Medical Holdings Corporation
Condensed Consolidated Statements of Comprehensive Income
(unaudited)
(in thousands)
| | | | For the Three Months Ended March 31, | | | For the Three Months Ended March 31, |
| | | 2021 | | 2022 | | | 2022 | | 2023 |
Net income | Net income | | $ | 137,214 | | | $ | 55,926 | | Net income | | $ | 55,926 | | | $ | 85,257 | |
Other comprehensive income, net of tax: | | | |
Gain on interest rate cap cash flow hedge | | 8,151 | | | 39,814 | | |
Other comprehensive income (loss), net of tax: | | Other comprehensive income (loss), net of tax: | | |
Gain (loss) on interest rate cap contract | | Gain (loss) on interest rate cap contract | | 39,814 | | | (2,696) | |
Reclassification adjustment for losses (gains) included in net income | Reclassification adjustment for losses (gains) included in net income | | — | | | 39 | | Reclassification adjustment for losses (gains) included in net income | | 39 | | | (13,252) | |
Net change, net of tax benefit (expense) of $(2,834) and $(13,284) | | 8,151 | | | 39,853 | | |
Net change, net of tax benefit (expense) of $(13,284) and $5,175 | | Net change, net of tax benefit (expense) of $(13,284) and $5,175 | | 39,853 | | | (15,948) | |
| Comprehensive income | Comprehensive income | | 145,365 | | | 95,779 | | Comprehensive income | | 95,779 | | | 69,309 | |
Less: Comprehensive income attributable to non-controlling interests | Less: Comprehensive income attributable to non-controlling interests | | 26,668 | | | 6,809 | | Less: Comprehensive income attributable to non-controlling interests | | 6,809 | | | 14,452 | |
Comprehensive income attributable to Select Medical Holdings Corporation | Comprehensive income attributable to Select Medical Holdings Corporation | | $ | 118,697 | | | $ | 88,970 | | Comprehensive income attributable to Select Medical Holdings Corporation | | $ | 88,970 | | | $ | 54,857 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Select Medical Holdings Corporation
Condensed Consolidated Statements of Changes in Equity and Income
(unaudited)
(in thousands)
| | | For the Three Months Ended March 31, 2022 | | For the Three Months Ended March 31, 2023 |
| | | | Total Stockholders’ Equity | | | | | | | Total Stockholders’ Equity | | | | |
| | Common Stock Issued | | Common Stock Par Value | | Capital in Excess of Par | | Retained Earnings | | Accumulated Other Comprehensive Income | | Total Stockholders’ Equity | | Non-controlling Interests | | Total Equity | | Common Stock Issued | | Common Stock Par Value | | Capital in Excess of Par | | Retained Earnings | | Accumulated Other Comprehensive Income | | Total Stockholders’ Equity | | Non-controlling Interests | | Total Equity |
Balance at December 31, 2021 | 133,884 | | | $ | 134 | | | $ | 504,314 | | | $ | 593,251 | | | $ | 12,282 | | | $ | 1,109,981 | | | $ | 215,921 | | | $ | 1,325,902 | | |
Balance at December 31, 2022 | | Balance at December 31, 2022 | 127,173 | | | $ | 127 | | | $ | 452,183 | | | $ | 581,010 | | | $ | 88,602 | | | $ | 1,121,922 | | | $ | 234,642 | | | $ | 1,356,564 | |
Net income attributable to Select Medical Holdings Corporation | Net income attributable to Select Medical Holdings Corporation | | 49,117 | | | 49,117 | | | 49,117 | | Net income attributable to Select Medical Holdings Corporation | | 70,805 | | | 70,805 | | | 70,805 | |
Net income attributable to non-controlling interests | Net income attributable to non-controlling interests | | — | | | 4,891 | | | 4,891 | | Net income attributable to non-controlling interests | | — | | | 12,811 | | | 12,811 | |
Cash dividends declared for common stockholders ($0.125 per share) | Cash dividends declared for common stockholders ($0.125 per share) | | (16,691) | | | (16,691) | | | (16,691) | | Cash dividends declared for common stockholders ($0.125 per share) | | (15,897) | | | (15,897) | | | (15,897) | |
Issuance of restricted stock | Issuance of restricted stock | 13 | | | 0 | | | 0 | | | — | | | — | | Issuance of restricted stock | 3 | | | 0 | | | 0 | | | — | | | — | |
| Vesting of restricted stock | Vesting of restricted stock | | 8,288 | | | 8,288 | | | 8,288 | | Vesting of restricted stock | | 10,003 | | | 10,003 | | | 10,003 | |
Repurchase of common shares | (2,128) | | | (2) | | | (23,459) | | | (28,215) | | | (51,676) | | | (51,676) | | |
| Issuance of non-controlling interests | Issuance of non-controlling interests | | 651 | | | 651 | | | 4,578 | | | 5,229 | | Issuance of non-controlling interests | | — | | | 2,731 | | | 2,731 | |
Non-controlling interests acquired in business combination, measurement period adjustment | | — | | | 12,463 | | | 12,463 | | |
Non-controlling interests acquired in business combination | | Non-controlling interests acquired in business combination | | — | | | 3,877 | | | 3,877 | |
Distributions to and purchases of non-controlling interests | Distributions to and purchases of non-controlling interests | | — | | | (9,097) | | | (9,097) | | Distributions to and purchases of non-controlling interests | | — | | | (6,069) | | | (6,069) | |
Redemption value adjustment on non-controlling interests | Redemption value adjustment on non-controlling interests | | (1,381) | | | (1,381) | | | (1,381) | | Redemption value adjustment on non-controlling interests | | (436) | | | (436) | | | (436) | |
Other comprehensive income | Other comprehensive income | | 39,853 | | | 39,853 | | | 39,853 | | Other comprehensive income | | (15,948) | | | (15,948) | | | (15,948) | |
Other | Other | | 0 | | (2) | | | (2) | | | 0 | | (2) | | Other | | (1) | | | 1 | | | — | | | — | |
| Balance at March 31, 2022 | 131,769 | | | $ | 132 | | | $ | 489,794 | | | $ | 596,079 | | | $ | 52,135 | | | $ | 1,138,140 | | | $ | 228,756 | | | $ | 1,366,896 | | |
Balance at March 31, 2023 | | Balance at March 31, 2023 | 127,176 | | | $ | 127 | | | $ | 462,185 | | | $ | 635,483 | | | $ | 72,654 | | | $ | 1,170,449 | | | $ | 247,992 | | | $ | 1,418,441 | |
| | | For the Three Months Ended March 31, 2021 | | For the Three Months Ended March 31, 2022 |
| | | | Total Stockholders’ Equity | | | | | | | Total Stockholders’ Equity | | | | |
| | Common Stock Issued | | Common Stock Par Value | | Capital in Excess of Par | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders’ Equity | | Non-controlling Interests | | Total Equity | | Common Stock Issued | | Common Stock Par Value | | Capital in Excess of Par | | Retained Earnings | | Accumulated Other Comprehensive Income | | Total Stockholders’ Equity | | Non-controlling Interests | | Total Equity |
Balance at December 31, 2020 | 134,850 | | | $ | 135 | | | $ | 509,128 | | | $ | 553,244 | | | $ | (2,027) | | | $ | 1,060,480 | | | $ | 192,493 | | | $ | 1,252,973 | | |
Balance at December 31, 2021 | | Balance at December 31, 2021 | 133,884 | | | $ | 134 | | | $ | 504,314 | | | $ | 593,251 | | | $ | 12,282 | | | $ | 1,109,981 | | | $ | 215,921 | | | $ | 1,325,902 | |
Net income attributable to Select Medical Holdings Corporation | Net income attributable to Select Medical Holdings Corporation | | 110,546 | | | 110,546 | | | 110,546 | | Net income attributable to Select Medical Holdings Corporation | | 49,117 | | | 49,117 | | | 49,117 | |
Net income attributable to non-controlling interests | Net income attributable to non-controlling interests | | — | | | 17,042 | | | 17,042 | | Net income attributable to non-controlling interests | | — | | | 4,891 | | | 4,891 | |
Cash dividends declared for common stockholders ($0.125 per share) | | Cash dividends declared for common stockholders ($0.125 per share) | | (16,691) | | | (16,691) | | | (16,691) | |
Issuance of restricted stock | Issuance of restricted stock | 2 | | | 0 | | | 0 | | | — | | | — | | Issuance of restricted stock | 13 | | | 0 | | | 0 | | | — | | | — | |
Forfeitures of unvested restricted stock | (14) | | | 0 | | | 0 | | | — | | | — | | |
| Vesting of restricted stock | Vesting of restricted stock | | 6,173 | | | 6,173 | | | 6,173 | | Vesting of restricted stock | | 8,288 | | | 8,288 | | | 8,288 | |
| Non-controlling interests acquired in business combination | | — | | | 8,193 | | | 8,193 | | |
Repurchase of common shares | | Repurchase of common shares | (2,128) | | | (2) | | | (23,459) | | | (28,215) | | | (51,676) | | | (51,676) | |
Issuance of non-controlling interests | | Issuance of non-controlling interests | | 651 | | | 651 | | | 4,578 | | | 5,229 | |
Non-controlling interests acquired in business combination, measurement period adjustment | | Non-controlling interests acquired in business combination, measurement period adjustment | | — | | | 12,463 | | | 12,463 | |
Distributions to and purchases of non-controlling interests | Distributions to and purchases of non-controlling interests | | (787) | | | (787) | | | (13,458) | | | (14,245) | | Distributions to and purchases of non-controlling interests | | — | | | (9,097) | | | (9,097) | |
Redemption value adjustment on non-controlling interests | Redemption value adjustment on non-controlling interests | | (38,405) | | | (38,405) | | | (38,405) | | Redemption value adjustment on non-controlling interests | | (1,381) | | | (1,381) | | | (1,381) | |
Other comprehensive income | Other comprehensive income | | 8,151 | | | 8,151 | | | 8,151 | | Other comprehensive income | | 39,853 | | | 39,853 | | | 39,853 | |
Other | Other | | (178) | | | (4) | | | (182) | | | 371 | | | 189 | | Other | | (2) | | | (2) | | | (2) | |
Balance at March 31, 2021 | 134,838 | | | $ | 135 | | | $ | 514,336 | | | $ | 625,381 | | | $ | 6,124 | | | $ | 1,145,976 | | | $ | 204,641 | | | $ | 1,350,617 | | |
Balance at March 31, 2022 | | Balance at March 31, 2022 | 131,769 | | | $ | 132 | | | $ | 489,794 | | | $ | 596,079 | | | $ | 52,135 | | | $ | 1,138,140 | | | $ | 228,756 | | | $ | 1,366,896 | |
| |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Select Medical Holdings Corporation
Condensed Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
| | | For the Three Months Ended March 31, | | For the Three Months Ended March 31, |
| | 2021 | | 2022 | | 2022 | | 2023 |
Operating activities | Operating activities | | | | Operating activities | | | |
Net income | Net income | $ | 137,214 | | | $ | 55,926 | | Net income | $ | 55,926 | | | $ | 85,257 | |
Adjustments to reconcile net income to net cash provided by operating activities: | Adjustments to reconcile net income to net cash provided by operating activities: | | | | Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Distributions from unconsolidated subsidiaries | Distributions from unconsolidated subsidiaries | 11,633 | | | 7,486 | | Distributions from unconsolidated subsidiaries | 7,486 | | | 2,566 | |
Depreciation and amortization | Depreciation and amortization | 49,620 | | | 51,039 | | Depreciation and amortization | 51,039 | | | 52,425 | |
Provision for expected credit losses | Provision for expected credit losses | 67 | | | 94 | | Provision for expected credit losses | 94 | | | 429 | |
Equity in earnings of unconsolidated subsidiaries | Equity in earnings of unconsolidated subsidiaries | (9,919) | | | (5,397) | | Equity in earnings of unconsolidated subsidiaries | (5,397) | | | (8,556) | |
| Loss (gain) on sale or disposal of assets | 72 | | | (23) | | |
Gain on sale or disposal of assets | | Gain on sale or disposal of assets | (23) | | | (7) | |
Stock compensation expense | Stock compensation expense | 6,709 | | | 8,823 | | Stock compensation expense | 8,823 | | | 10,181 | |
Amortization of debt discount, premium and issuance costs | Amortization of debt discount, premium and issuance costs | 543 | | | 558 | | Amortization of debt discount, premium and issuance costs | 558 | | | 565 | |
Deferred income taxes | Deferred income taxes | (897) | | | 420 | | Deferred income taxes | 420 | | | (2,601) | |
Changes in operating assets and liabilities, net of effects of business combinations: | Changes in operating assets and liabilities, net of effects of business combinations: | | | | Changes in operating assets and liabilities, net of effects of business combinations: | | | |
Accounts receivable | Accounts receivable | (60,142) | | | (52,225) | | Accounts receivable | (52,225) | | | (55,397) | |
Other current assets | Other current assets | (4,425) | | | (1,819) | | Other current assets | (1,819) | | | (11,742) | |
Other assets | Other assets | 961 | | | 2,686 | | Other assets | 2,686 | | | 3,659 | |
Accounts payable | Accounts payable | 23,460 | | | 16,074 | | Accounts payable | 16,074 | | | (4,564) | |
Accrued expenses | Accrued expenses | 21,167 | | | (31,076) | | Accrued expenses | (14,377) | | | (20,775) | |
Government advances | Government advances | — | | | (62,928) | | Government advances | (62,928) | | | — | |
Unearned government assistance | 19,207 | | | 101 | | |
| Income taxes | 44,618 | | | 16,598 | | |
| Net cash provided by operating activities | Net cash provided by operating activities | 239,888 | | | 6,337 | | Net cash provided by operating activities | 6,337 | | | 51,440 | |
Investing activities | Investing activities | | | | Investing activities | | | |
Business combinations, net of cash acquired | Business combinations, net of cash acquired | (6,314) | | | (5,186) | | Business combinations, net of cash acquired | (5,186) | | | (397) | |
Purchases of property and equipment | (39,719) | | | (46,845) | | |
Purchases of property, equipment, and other assets | | Purchases of property, equipment, and other assets | (46,845) | | | (58,885) | |
Investment in businesses | Investment in businesses | (6,571) | | | (3,337) | | Investment in businesses | (3,337) | | | (9,800) | |
Proceeds from sale of assets | Proceeds from sale of assets | 19 | | | 37 | | Proceeds from sale of assets | 37 | | | 20 | |
Net cash used in investing activities | Net cash used in investing activities | (52,585) | | | (55,331) | | Net cash used in investing activities | (55,331) | | | (69,062) | |
Financing activities | Financing activities | | | | Financing activities | | | |
Borrowings on revolving facilities | Borrowings on revolving facilities | — | | | 280,000 | | Borrowings on revolving facilities | 280,000 | | | 225,000 | |
Payments on revolving facilities | Payments on revolving facilities | — | | | (100,000) | | Payments on revolving facilities | (100,000) | | | (210,000) | |
| Borrowings of other debt | Borrowings of other debt | 8,915 | | | 15,794 | | Borrowings of other debt | 15,794 | | | 21,448 | |
Principal payments on other debt | Principal payments on other debt | (9,342) | | | (9,188) | | Principal payments on other debt | (9,188) | | | (11,170) | |
Dividends paid to common stockholders | Dividends paid to common stockholders | — | | | (16,691) | | Dividends paid to common stockholders | (16,691) | | | (15,897) | |
Repurchase of common stock | Repurchase of common stock | — | | | (51,676) | | Repurchase of common stock | (51,676) | | | — | |
| Decrease in overdrafts | Decrease in overdrafts | — | | | (7,608) | | Decrease in overdrafts | (7,608) | | | (724) | |
Proceeds from issuance of non-controlling interests | Proceeds from issuance of non-controlling interests | — | | | 5,229 | | Proceeds from issuance of non-controlling interests | 5,229 | | | 2,731 | |
Distributions to and purchases of non-controlling interests | Distributions to and purchases of non-controlling interests | (13,663) | | | (10,295) | | Distributions to and purchases of non-controlling interests | (10,295) | | | (7,969) | |
| Net cash provided by (used in) financing activities | (14,090) | | | 105,565 | | |
Net increase in cash and cash equivalents | 173,213 | | | 56,571 | | |
Net cash provided by financing activities | | Net cash provided by financing activities | 105,565 | | | 3,419 | |
Net increase (decrease) in cash and cash equivalents | | Net increase (decrease) in cash and cash equivalents | 56,571 | | | (14,203) | |
Cash and cash equivalents at beginning of period | Cash and cash equivalents at beginning of period | 577,061 | | | 74,310 | | Cash and cash equivalents at beginning of period | 74,310 | | | 97,906 | |
Cash and cash equivalents at end of period | Cash and cash equivalents at end of period | $ | 750,274 | | | $ | 130,881 | | Cash and cash equivalents at end of period | $ | 130,881 | | | $ | 83,703 | |
Supplemental Information | | | | |
Cash paid for interest | $ | 52,470 | | | $ | 53,517 | | |
Supplemental information | | Supplemental information | | | |
Cash paid for interest, excluding amounts received of $17,828 under the interest rate cap contract for the three months ended March 31, 2023 | | Cash paid for interest, excluding amounts received of $17,828 under the interest rate cap contract for the three months ended March 31, 2023 | $ | 53,517 | | | $ | 84,531 | |
Cash paid for taxes | Cash paid for taxes | 1,343 | | | 923 | | Cash paid for taxes | 923 | | | 336 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
The 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, Select, and Select’s subsidiaries are collectively referred to as the “Company.” The unaudited condensed consolidated financial statements of the Company as of March 31, 2022,2023, and for the three month periods ended March 31, 20212022 and 2022,2023, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim reporting and the 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 the 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 months ended March 31, 2022,2023, are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2022.2023. 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, 2021,2022, contained in the Company’s Annual Report on Form 10-K filed with the SEC on February 24, 2022.23, 2023.
2. Accounting Policies
Recent Accounting Guidance Not Yet Adopted
In March 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-01, Leases (Topic 842): Common Control Arrangements, which requires companies to amortize leasehold improvements associated with related party leases under common control over the useful life of the leasehold improvement to the common control group. The ASU is effective for annual reporting periods beginning on or after December 15, 2023, however, early adoption is permitted. The ASU can either be applied prospectively or retrospectively.
The Company is currently evaluating this ASU, but does not expect it to have a material impact on its consolidated financial statements upon adoption. The Company plans to adopt the ASU using the prospective method as of January 1, 2024.
Recently Adopted Accounting Guidance
Reference Rate Reform
In December 2022, FASB issued ASU 2022-06, Reference Rate Reform (Topic 848), Deferral of the Sunset Date of Topic 848, which extended the relief provided under Topic 848 to contract modifications made and hedging relationships entered into on or before December 31, 2024. The FASB had previously issued ASU 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting in March 2020, which provided temporary relief from some of the existing accounting rules governing contract modifications when the modification is related to the replacement of the London Interbank Offered Rate (“LIBOR”) or other reference rates discontinued as a result of reference rate reform.
For eligible contract modifications, the update generally allows an entity to account for and present modifications as an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. That is, the modified contract is accounted for as a continuation of the existing contract. For cash flow hedging relationships affected by reference rate reform, Topic 848 provides expedients that allow an entity to (i) change the reference rate of either the forecasted transaction or hedging instrument without requiring dedesignation of the hedging relationship; (ii) assert that changes to the hedged forecasted transaction will not impact whether it remains probable of occurring; and (iii) for the purposes of assessment of hedge effectiveness assume that the reference rate will not be replaced for the remainder of the hedging relationship if both the hedged forecasted transaction and hedging instrument are expected to be impacted by reference rate reform.
In March 2021, the Financial Conduct Authority announced that the intended cessation date of the one-, three-, six-, and 12-month tenors of USD LIBOR is June 30, 2023. Borrowings under the Company’s credit agreement bear interest, at the election of Select, based on LIBOR or an alternate base rate. The Company currently elects for its term loan borrowings to bear interest at a rate that is indexed to one-month LIBOR. Provisions within the credit agreement provide the Company with the ability to agree with JPMorgan Chase Bank, N.A., as administrative agent to the lenders, to replace LIBOR with a different reference rate in the event that LIBOR ceases to exist. The Company has not yet agreed upon a different reference rate with JPMorgan Chase Bank, N.A.
For the Company’s cash flow hedge, which mitigates the Company’s exposure to increases in the one-month LIBOR rate above 1.0% on $2.0 billion of principal outstanding under the term loan, the Company has elected to assert that the hedged forecasted transaction remains probable of occurring, regardless of a modification or expected modification that may replace one-month LIBOR with a different reference rate. The Company intends to modify the cash flow hedge’s contractual terms related to the replacement of the reference rate, as necessary, to align with the reference rate specified for the Company’s term loan. For the purpose of the assessment of hedge effectiveness, the Company assumes that the reference rate will not be replaced for the remainder of the hedging relationship, as outlined by Topic 848. The Company’s cash flow hedge is described further in Note 8 – Interest Rate Cap.
These updates have not had, and the Company does not expect them to have in future periods, a material impact on the Company's consolidated financial statements.
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, liabilities, revenues, and expenses. Actual results could differ from those estimates.
3. Credit Risk Concentrations
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash balances and accounts receivable. 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.
Because of the diversity in the Company’s non-governmental third-party payor base, as well as their geographic dispersion, accounts receivable due from the Medicare program represent the Company’s only significant concentration of credit risk. Approximately 15%19% and 20% of the Company’s accounts receivable is due from Medicare at both December 31, 20212022 and March 31, 2022.2023, respectively.
4. Redeemable Non-Controlling Interests
The ownership interests held by outside parties in subsidiaries, which include limited liability companies and limited partnerships, controlled by the Company are classified as non-controlling interests. Some of the Company’s non-controlling ownership interests consist of outside parties that have certain redemption rights that, if exercised, require the 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, after the attribution of net income or loss.
The changes in redeemable non-controlling interests are as follows:
| | | Three Months Ended March 31, | | Three Months Ended March 31, |
| | 2021 | | 2022 | | 2022 | | 2023 |
| | (in thousands) | | (in thousands) |
Balance as of January 1 | Balance as of January 1 | $ | 398,171 | | | $ | 39,033 | | Balance as of January 1 | $ | 39,033 | | | $ | 34,043 | |
Net income attributable to redeemable non-controlling interests | Net income attributable to redeemable non-controlling interests | 9,626 | | | 1,918 | | Net income attributable to redeemable non-controlling interests | 1,918 | | | 1,641 | |
| Distributions to and purchases of redeemable non-controlling interests | (614) | | | (1,198) | | |
Distributions to redeemable non-controlling interests | | Distributions to redeemable non-controlling interests | (1,198) | | | (1,900) | |
| Redemption value adjustment on redeemable non-controlling interests | Redemption value adjustment on redeemable non-controlling interests | 38,405 | | | 1,381 | | Redemption value adjustment on redeemable non-controlling interests | 1,381 | | | 436 | |
Other | Other | 343 | | | 536 | | Other | 536 | | | 179 | |
Balance as of March 31 | Balance as of March 31 | $ | 445,931 | | | $ | 41,670 | | Balance as of March 31 | $ | 41,670 | | | $ | 34,399 | |
|
5. Variable Interest Entities
Certain states prohibit the “corporate practice of medicine,” which restricts the Company from owning medical practices which directly employ physicians or therapists and from exercising control over medical decisions by physicians.physicians and therapists. In these states, the Company enters into long-term management agreements with medical practices that are owned by licensed physicians or therapists, which, in turn, employ or contract with physicians or therapists who provide professional medical services. The management agreements provide for the Company to direct the transfer of ownership of the medical practices to new licensed physicians at any time.practices. Based on the provisions of the management agreements, the medical practices are variable interest entities for which the Company is the primary beneficiary.
As of December 31, 20212022, and March 31, 2022,2023, the total assets of the Company’s variable interest entities were $225.1$232.1 million and $242.0$254.1 million, respectively, and are principally comprised of accounts receivable. As of December 31, 20212022, and March 31, 2022,2023, the total liabilities of the Company’s variable interest entities were $74.8$78.8 million and $79.1$82.2 million, respectively, and are principally comprised of accounts payable and accrued expenses. These variable interest entities have obligations payable for services received under their management agreements with the Company of $150.3$158.3 million and $163.4$178.4 million as of December 31, 20212022, and March 31, 2022,2023, respectively. These intercompany balances are eliminated in consolidation.
6. Leases
The Company has operating and finance leases for its facilities. The Company leases its corporate office space from related parties.
The Company’s total lease cost is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2021 | | Three Months Ended March 31, 2022 |
| Unrelated Parties | | Related Parties | | Total | | Unrelated Parties | | Related Parties | | Total |
| (in thousands) |
Operating lease cost | $ | 70,114 | | | $ | 1,799 | | | $ | 71,913 | | | $ | 73,962 | | | $ | 1,809 | | | $ | 75,771 | |
Finance lease cost: | | | | | | | | | | | |
Amortization of right-of-use assets | 35 | | | — | | | 35 | | | 347 | | | — | | | 347 | |
Interest on lease liabilities | 251 | | | — | | | 251 | | | 340 | | | — | | | 340 | |
Short-term lease cost | — | | | — | | | — | | | 35 | | | — | | | 35 | |
Variable lease cost | 13,009 | | | 3 | | | 13,012 | | | 13,655 | | | 39 | | | 13,694 | |
Sublease income | (2,234) | | | — | | | (2,234) | | | (1,966) | | | — | | | (1,966) | |
Total lease cost | $ | 81,175 | | | $ | 1,802 | | | $ | 82,977 | | | $ | 86,373 | | | $ | 1,848 | | | $ | 88,221 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2022 | | Three Months Ended March 31, 2023 |
| Unrelated Parties | | Related Parties | | Total | | Unrelated Parties | | Related Parties | | Total |
| (in thousands) |
Operating lease cost | $ | 73,962 | | | $ | 1,809 | | | $ | 75,771 | | | $ | 76,632 | | | $ | 1,834 | | | $ | 78,466 | |
Finance lease cost: | | | | | | | | | | | |
Amortization of right-of-use assets | 347 | | | — | | | 347 | | | 394 | | | — | | | 394 | |
Interest on lease liabilities | 340 | | | — | | | 340 | | | 320 | | | — | | | 320 | |
Short-term lease cost | 35 | | | — | | | 35 | | | — | | | — | | | — | |
Variable lease cost | 13,655 | | | 39 | | | 13,694 | | | 15,761 | | | 84 | | | 15,845 | |
Sublease income | (1,966) | | | — | | | (1,966) | | | (1,678) | | | — | | | (1,678) | |
Total lease cost | $ | 86,373 | | | $ | 1,848 | | | $ | 88,221 | | | $ | 91,429 | | | $ | 1,918 | | | $ | 93,347 | |
Supplemental cash flow information related to leases is as follows:
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2021 | | 2022 |
| (in thousands) |
Cash paid for amounts included in the measurement of lease liabilities: | | | |
Operating cash flows for operating leases | $ | 72,437 | | | $ | 77,689 | |
Operating cash flows for finance leases | 251 | | | 340 | |
Financing cash flows for finance leases | 58 | | | 344 | |
Right-of-use assets obtained in exchange for lease liabilities: | | | |
Operating leases | $ | 79,987 | | | $ | 88,636 | |
Finance leases | 138 | | | — | |
7.
Supplemental balance sheet information related to leases is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | March 31, 2022 |
| Unrelated Parties | | Related Parties | | Total | | Unrelated Parties | | Related Parties | | Total |
| (in thousands) |
Operating Leases | | | | | | | | | | | |
Operating lease right-of-use assets | $ | 1,052,603 | | | $ | 26,151 | | | $ | 1,078,754 | | | $ | 1,077,980 | | | $ | 24,730 | | | $ | 1,102,710 | |
| | | | | | | | | | | |
Current operating lease liabilities | $ | 222,865 | | | $ | 6,469 | | | $ | 229,334 | | | $ | 228,598 | | | $ | 5,822 | | | $ | 234,420 | |
Non-current operating lease liabilities | 894,104 | | | 22,436 | | | 916,540 | | | 916,887 | | | 21,536 | | | 938,423 | |
Total operating lease liabilities | $ | 1,116,969 | | | $ | 28,905 | | | $ | 1,145,874 | | | $ | 1,145,485 | | | $ | 27,358 | | | $ | 1,172,843 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | March 31, 2022 |
| Unrelated Parties | | Related Parties | | Total | | Unrelated Parties | | Related Parties | | Total |
| (in thousands) |
Finance Leases | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Property and equipment, net | $ | 8,505 | | | $ | — | | | $ | 8,505 | | | $ | 8,158 | | | $ | — | | | $ | 8,158 | |
| | | | | | | | | | | |
Current portion of long-term debt and notes payable | $ | 1,404 | | | $ | — | | | $ | 1,404 | | | $ | 1,436 | | | $ | — | | | $ | 1,436 | |
Long-term debt, net of current portion | 16,679 | | | — | | | 16,679 | | | 16,303 | | | — | | | 16,303 | |
Total finance lease liabilities | $ | 18,083 | | | $ | — | | | $ | 18,083 | | | $ | 17,739 | | | $ | — | | | $ | 17,739 | |
The weighted average remaining lease termsLong-Term Debt and discount rates are as follows:
| | | | | | | | | | | |
| December 31, 2021 | | March 31, 2022 |
Weighted average remaining lease term (in years): | | | |
Operating leases | 7.8 | | 7.6 |
Finance leases | 24.7 | | 24.8 |
Weighted average discount rate: | | | |
Operating leases | 5.6 | % | | 5.6 | % |
Finance leases | 7.4 | % | | 7.4 | % |
Notes Payable
As of March 31, 2022,2023, the Company’s long-term debt and notes payable are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Principal Outstanding | | Unamortized Premium (Discount) | | Unamortized Issuance Costs | | Carrying Value | | | Fair Value |
| (in thousands) |
6.250% senior notes | $ | 1,225,000 | | | $ | 20,065 | | | $ | (10,206) | | | $ | 1,234,859 | | | | $ | 1,188,250 | |
Credit facilities: | | | | | | | | | | |
Revolving facility | 460,000 | | | — | | | — | | | 460,000 | | | | 458,275 | |
Term loan | 2,103,437 | | | (3,881) | | | (4,230) | | | 2,095,326 | | | | 2,095,549 | |
Other debt, including finance leases | 90,664 | | | — | | | (117) | | | 90,547 | | | | 90,547 | |
Total debt | $ | 3,879,101 | | | $ | 16,184 | | | $ | (14,553) | | | $ | 3,880,732 | | | | $ | 3,832,621 | |
Principal maturities of lease liabilitiesthe Company’s long-term debt and notes payable are approximately as follows:
| | | | | | | | | | | | | |
| Operating Leases | | Finance Leases | | |
| (in thousands) | | |
2022 (remainder of year) | $ | 222,152 | | | $ | 2,040 | | | |
2023 | 259,672 | | | 2,747 | | | |
2024 | 219,375 | | | 2,384 | | | |
2025 | 175,699 | | | 2,101 | | | |
2026 | 145,837 | | | 2,126 | | | |
Thereafter | 495,998 | | | 28,181 | | | |
Total undiscounted cash flows | 1,518,733 | | | 39,579 | | | |
Less: Imputed interest | 345,890 | | | 21,840 | | | |
Total discounted lease liabilities | $ | 1,172,843 | | | $ | 17,739 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | Thereafter | | Total |
| (in thousands) |
6.250% senior notes | $ | — | | | $ | — | | | $ | — | | | $ | 1,225,000 | | | $ | — | | | $ | — | | | $ | 1,225,000 | |
Credit facilities: | | | | | | | | | | | | | |
Revolving facility | — | | | 84,923 | | | 375,077 | | | — | | | — | | | — | | | 460,000 | |
Term loan | 4,757 | | | 11,150 | | | 2,087,530 | | | — | | | — | | | — | | | 2,103,437 | |
Other debt, including finance leases | 19,928 | | | 56,356 | | | 1,408 | | | 1,308 | | | 823 | | | 10,841 | | | 90,664 | |
Total debt | $ | 24,685 | | | $ | 152,429 | | | $ | 2,464,015 | | | $ | 1,226,308 | | | $ | 823 | | | $ | 10,841 | | | $ | 3,879,101 | |
7.Intangible Assets
Goodwill
The following table shows changes in the carrying amountsAs of goodwill by reporting unit for the three months ended March 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Total |
| (in thousands) |
Balance as of December 31, 2021 | $ | 1,131,440 | | | $ | 442,155 | | | $ | 654,125 | | | $ | 1,221,192 | | | $ | 3,448,912 | |
Acquisition of businesses | — | | | — | | | 409 | | | 2,884 | | | 3,293 | |
| | | | | | | | | |
Measurement period adjustment | 13,251 | | | — | | | — | | | — | | | 13,251 | |
Balance as of March 31, 2022 | $ | 1,144,691 | | | $ | 442,155 | | | $ | 654,534 | | | $ | 1,224,076 | | | $ | 3,465,456 | |
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, 2021 | | March 31, 2022 |
| 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 | 21,478 | | | — | | | 21,478 | | | 21,625 | | | — | | | 21,625 | |
Accreditations | 1,874 | | | — | | | 1,874 | | | 1,874 | | | — | | | 1,874 | |
Finite-lived intangible assets: | | | | | | | | | | | |
Trademarks | 5,000 | | | (5,000) | | | — | | | 5,000 | | | (5,000) | | | — | |
Customer relationships | 304,289 | | | (141,111) | | | 163,178 | | | 305,839 | | | (148,283) | | | 157,556 | |
Non-compete agreements | 36,746 | | | (15,095) | | | 21,651 | | | 37,087 | | | (15,990) | | | 21,097 | |
Total identifiable intangible assets | $ | 536,085 | | | $ | (161,206) | | | $ | 374,879 | | | $ | 538,123 | | | $ | (169,273) | | | $ | 368,850 | |
The Company’s accreditations and trademarks have renewal terms and the costs to renew these intangible assets are expensed as incurred. At MarchDecember 31, 2022, the accreditationsCompany’s long-term debt and trademarks have a weighted average time until next renewalnotes payable are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Principal Outstanding | | Unamortized Premium (Discount) | | Unamortized Issuance Costs | | Carrying Value | | | Fair Value |
| (in thousands) |
6.250% senior notes | $ | 1,225,000 | | | $ | 21,555 | | | $ | (10,948) | | | $ | 1,235,607 | | | | $ | 1,163,689 | |
Credit facilities: | | | | | | | | | | |
Revolving facility | 445,000 | | | — | | | — | | | 445,000 | | | | 443,331 | |
Term loan | 2,103,437 | | | (4,376) | | | (4,771) | | | 2,094,290 | | | | 2,056,110 | |
Other debt, including finance leases | 104,800 | | | — | | | (135) | | | 104,665 | | | | 104,665 | |
Total debt | $ | 3,878,237 | | | $ | 17,179 | | | $ | (15,854) | | | $ | 3,879,562 | | | | $ | 3,767,795 | |
Select Credit Facilities
On February 21, 2023, Select entered into Amendment No. 6 to its senior secured credit agreement (the “Select credit agreement”). Amendment No. 6 extended the maturity date on $530.0 million of 1.5 years and 7.5 years, respectively.
Thethe total borrowing capacity of $650.0 million under its revolving credit facility (the “Select revolving facility”) to March 6, 2025; however, in the event the Company’s finite-lived intangible assets amortize over their estimated useful lives. Amortization expense was $7.1 million and $7.6 millionterm loan is not refinanced by January 3, 2025, the maturity date for the three months ended March 31, 2021 and 2022, respectively.those revolving borrowings will be January 3, 2025.
8.Long-Term Debt and Notes Payable
As of March 31, 2022, the Company’s long-term debt and notes payable were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Principal Outstanding | | Unamortized Premium (Discount) | | Unamortized Issuance Costs | | Carrying Value | | | Fair Value |
| (in thousands) |
6.250% senior notes | $ | 1,225,000 | | | $ | 26,131 | | | $ | (13,212) | | | $ | 1,237,919 | | | | $ | 1,262,118 | |
Credit facilities: | | | | | | | | | | |
Revolving facility | 340,000 | | | — | | | — | | | 340,000 | | | | 338,725 |
Term loan | 2,103,437 | | | (5,890) | | | (6,421) | | | 2,091,126 | | | | 2,079,773 | |
Other debt, including finance leases | 93,961 | | | — | | | (194) | | | 93,767 | | | | 93,767 | |
Total debt | $ | 3,762,398 | | | $ | 20,241 | | | $ | (19,827) | | | $ | 3,762,812 | | | | $ | 3,774,383 | |
Principal maturities of the Company’s long-term debt and notes payable were approximately as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2023 | | 2024 | | 2025 | | 2026 | | Thereafter | | Total |
| (in thousands) |
6.250% senior notes | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,225,000 | | | $ | — | | | $ | 1,225,000 | |
Credit facilities: | | | | | | | | | | | | | |
Revolving facility | — | | | — | | | 340,000 | | | — | | | — | | | — | | | 340,000 | |
Term loan | — | | | 4,757 | | | 11,150 | | | 2,087,530 | | | — | | | — | | | 2,103,437 | |
Other debt, including finance leases | 22,143 | | | 31,064 | | | 26,081 | | | 1,824 | | | 1,286 | | | 11,563 | | | 93,961 | |
Total debt | $ | 22,143 | | | $ | 35,821 | | | $ | 377,231 | | | $ | 2,089,354 | | | $ | 1,226,286 | | | $ | 11,563 | | | $ | 3,762,398 | |
As of December 31, 2021, the Company’s long-term debt and notes payable were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Principal Outstanding | | Unamortized Premium (Discount) | | Unamortized Issuance Costs | | Carrying Value | | | Fair Value |
| (in thousands) |
6.250% senior notes | $ | 1,225,000 | | | $ | 27,635 | | | $ | (13,951) | | | $ | 1,238,684 | | | | $ | 1,297,104 | |
Credit facilities: | | | | | | | | | | |
Revolving facility | 160,000 | | | — | | | — | | | 160,000 | | | | 159,400 | |
Term loan | 2,103,437 | | | (6,386) | | | (6,961) | | | 2,090,090 | | | | 2,087,661 | |
Other debt, including finance leases | 85,398 | | | — | | | (215) | | | 85,183 | | | | 85,183 | |
Total debt | $ | 3,573,835 | | | $ | 21,249 | | | $ | (21,127) | | | $ | 3,573,957 | | | | $ | 3,629,348 | |
9. Interest Rate Cap
The Company is subject to market risk exposure arising from changes in interest rates on its term loan, which bears interest at a rate that is indexed to one-month LIBOR. The Company’s objective in using an interest rate derivative is to mitigate its exposure to increases in interest rates. The interest rate cap limits the Company’s exposure to increases in the one-month LIBOR rate to 1.0% on $2.0 billion of principal outstanding under the term loan, as the interest rate cap provides for payments from the counterparty when interest rates rise above 1.0%. The interest rate cap has a $2.0 billion notional amount and becameis effective March 31, 2021 for the monthly periods from and including April 30, 2021 through September 30, 2024. The Company will pay a monthly premium for the interest rate cap over the term of the agreement. The annual premium is equal to 0.0916% of the notional amount, or approximately $1.8 million.
The interest rate cap has been designated as a cash flow hedge and is highly effective at offsetting the changes in cash outflows when one-month LIBOR exceeds 1.0%. Changes in the fair value of the interest rate cap, net of tax, are recognized in other comprehensive income and are reclassified out of accumulated other comprehensive income and into interest expense when the hedged interest obligations affect earnings.
The following table outlines the changes in accumulated other comprehensive income (loss), net of tax, during the periods presented:
| | | Three Months Ended March 31, | | Three Months Ended March 31, |
| | 2021 | | 2022 | | 2022 | | 2023 |
| | (in thousands) | | (in thousands) |
Balance as of January 1 | Balance as of January 1 | | $ | (2,027) | | | $ | 12,282 | | Balance as of January 1 | | $ | 12,282 | | | $ | 88,602 | |
Gain on interest rate cap cash flow hedge | | 8,151 | | | 39,814 | | |
Gain (loss) on interest rate cap cash flow hedge | | Gain (loss) on interest rate cap cash flow hedge | | 39,814 | | | (2,696) | |
Amounts reclassified from accumulated other comprehensive income | Amounts reclassified from accumulated other comprehensive income | | — | | | 39 | | Amounts reclassified from accumulated other comprehensive income | | 39 | | | (13,252) | |
Balance as of March 31 | Balance as of March 31 | | $ | 6,124 | | | $ | 52,135 | | Balance as of March 31 | | $ | 52,135 | | | $ | 72,654 | |
|
The effects on net income of amounts reclassified from accumulated other comprehensive income are as follows:
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
Statement of Operations | | | | | | 2022 | | 2023 |
| | | | | | (in thousands) |
Gains (losses) included in interest expense | | | | | | $ | (51) | | | $ | 17,552 | |
Income tax benefit (expense) | | | | | | 12 | | | (4,300) | |
Amounts reclassified from accumulated other comprehensive income | | | | | | $ | (39) | | | $ | 13,252 | |
The Company expects that approximately $16.9$71.1 million of estimated pre-tax gains will be reclassified from accumulated other comprehensive income into interest expense within the next twelve months.
Refer to Note 109 – Fair Value of Financial Instruments for information on the fair value of the Company’s interest rate cap contract and its balance sheet classification.
10.
9. Fair Value of Financial Instruments
Financial instruments which are measured at fair value, or for which a fair value is disclosed, are classified in the fair value hierarchy, as outlined below, on the basis of the observability of the inputs used in the fair value measurement:
•Level 1 – inputs are based upon quoted prices for identical instruments in active markets.
•Level 2 – inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant inputs are observable in the market or can be corroborated by observable market data.
•Level 3 – inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the instrument.
The Company’s interest rate cap contract is recorded at its fair value in the condensed consolidated balance sheets on a recurring basis. The fair value of the interest rate cap contract is based upon a model-derived valuation using observable market inputs, such as interest rates and interest rate volatility, and the strike price.
| Financial Instrument | Financial Instrument | | Balance Sheet Classification | | Level | | December 31, 2021 | | March 31, 2022 | Financial Instrument | | Balance Sheet Classification | | Level | | December 31, 2022 | | March 31, 2023 |
Asset: | Asset: | | | | | | (in thousands) | Asset: | | | | | | (in thousands) |
Interest rate cap contract, current portion | Interest rate cap contract, current portion | | Other current assets | | Level 2 | | $ | — | | | $ | 15,745 | | Interest rate cap contract, current portion | | Current portion of interest rate cap contract | | Level 2 | | $ | 74,857 | | | $ | 72,127 | |
Interest rate cap contract, non-current portion | Interest rate cap contract, non-current portion | | Other assets | | Level 2 | | 18,055 | | | 55,523 | | Interest rate cap contract, non-current portion | | Interest rate cap contract, net of current portion | | Level 2 | | 45,200 | | | 26,994 | |
Liability: | | |
Interest rate cap contract, current portion | | Accrued other | | Level 2 | | $ | 330 | | | $ | — | | |
| |
The Company does not measure its indebtedness at fair value in its condensed consolidated balance sheets. The fair value of the credit facilities is based on quoted market prices for this debt in the syndicated loan market. The fair value of the senior notes is based on quoted market prices. The carrying value of the Company’s other debt, as disclosed in Note 87 – Long-Term Debt and Notes Payable, approximates fair value.
| | | December 31, 2021 | | March 31, 2022 | | December 31, 2022 | | March 31, 2023 |
Financial Instrument | Financial Instrument | | Level | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value | Financial Instrument | | Level | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| | | | | (in thousands) | | | | | (in thousands) |
6.250% senior notes | 6.250% senior notes | | Level 2 | | $ | 1,238,684 | | | $ | 1,297,104 | | | $ | 1,237,919 | | | $ | 1,262,118 | | 6.250% senior notes | | Level 2 | | $ | 1,235,607 | | | $ | 1,163,689 | | | $ | 1,234,859 | | | $ | 1,188,250 | |
Credit facilities: | Credit facilities: | | Credit facilities: | |
Revolving facility | Revolving facility | | Level 2 | | 160,000 | | | 159,400 | | | 340,000 | | | 338,725 | | Revolving facility | | Level 2 | | 445,000 | | | 443,331 | | | 460,000 | | | 458,275 | |
Term loan | Term loan | | Level 2 | | 2,090,090 | | | 2,087,661 | | | 2,091,126 | | | 2,079,773 | | Term loan | | Level 2 | | 2,094,290 | | | 2,056,110 | | | 2,095,326 | | | 2,095,549 | |
|
The Company’s other financial instruments, which primarily consist of cash and cash equivalents, accounts receivable, and accounts payable, approximate fair value because of the short-term maturities of these instruments.
11.10. Segment Information
The Company’s reportable segments consist of the critical illness recovery hospital segment, rehabilitation hospital segment, outpatient rehabilitation segment, and Concentra segment. Other activities include the Company’s corporate shared services, certain investments, and employee leasing services with non-consolidating subsidiaries.
The Company evaluates the performance of its 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, gain (loss) on sale of businesses, 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.
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2021 | | 2022 |
| | | | | (in thousands) |
Revenue: | | | | | | | |
Critical illness recovery hospital | | | | | $ | 594,872 | | | $ | 601,755 | |
Rehabilitation hospital | | | | | 207,804 | | | 220,634 | |
Outpatient rehabilitation | | | | | 251,961 | | | 271,940 | |
Concentra | | | | | 422,840 | | | 423,423 | |
Other | | | | | 68,986 | | | 81,795 | |
Total Company | | | | | $ | 1,546,463 | | | $ | 1,599,547 | |
Adjusted EBITDA: | | | | | | | |
Critical illness recovery hospital | | | | | $ | 113,272 | | | $ | 35,967 | |
Rehabilitation hospital | | | | | 50,534 | | | 42,379 | |
Outpatient rehabilitation | | | | | 26,329 | | | 26,596 | |
Concentra | | | | | 82,015 | | | 89,469 | |
Other(1) | | | | | (13,809) | | | (30,564) | |
Total Company | | | | | $ | 258,341 | | | $ | 163,847 | |
Total assets: | | | | | | | |
Critical illness recovery hospital | | | | | $ | 2,233,067 | | | $ | 2,367,490 | |
Rehabilitation hospital | | | | | 1,188,387 | | | 1,187,118 | |
Outpatient rehabilitation | | | | | 1,321,268 | | | 1,350,374 | |
Concentra | | | | | 2,468,157 | | | 2,339,940 | |
Other | | | | | 709,902 | | | 291,022 | |
Total Company | | | | | $ | 7,920,781 | | | $ | 7,535,944 | |
Purchases of property and equipment: | | | | | | | |
Critical illness recovery hospital | | | | | $ | 14,385 | | | $ | 19,569 | |
Rehabilitation hospital | | | | | 665 | | | 6,274 | |
Outpatient rehabilitation | | | | | 7,335 | | | 9,414 | |
Concentra | | | | | 12,680 | | | 10,240 | |
Other | | | | | 4,654 | | | 1,348 | |
Total Company | | | | | $ | 39,719 | | | $ | 46,845 | |
_______________________________________________________________________________(1) For the three months ended March 31, 2021, Adjusted EBITDA included other operating income of $16.1 million related to the recognition of payments received under the Provider Relief Fund for health care related expenses and loss of revenue attributable to the coronavirus disease 2019 (“COVID-19”).
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2022 | | 2023 |
| | | | | (in thousands) |
Revenue: | | | | | | | |
Critical illness recovery hospital | | | | | $ | 601,755 | | | $ | 593,926 | |
Rehabilitation hospital | | | | | 220,634 | | | 231,462 | |
Outpatient rehabilitation | | | | | 271,940 | | | 295,903 | |
Concentra | | | | | 423,423 | | | 456,298 | |
Other | | | | | 81,795 | | | 87,391 | |
Total Company | | | | | $ | 1,599,547 | | | $ | 1,664,980 | |
Adjusted EBITDA: | | | | | | | |
Critical illness recovery hospital | | | | | $ | 35,967 | | | $ | 76,773 | |
Rehabilitation hospital | | | | | 42,379 | | | 47,216 | |
Outpatient rehabilitation | | | | | 26,596 | | | 30,199 | |
Concentra | | | | | 89,469 | | | 93,748 | |
Other | | | | | (30,564) | | | (33,873) | |
Total Company | | | | | $ | 163,847 | | | $ | 214,063 | |
Total assets: | | | | | | | |
Critical illness recovery hospital | | | | | $ | 2,367,490 | | | $ | 2,507,265 | |
Rehabilitation hospital | | | | | 1,187,118 | | | 1,203,069 | |
Outpatient rehabilitation | | | | | 1,350,374 | | | 1,397,823 | |
Concentra | | | | | 2,339,940 | | | 2,300,632 | |
Other | | | | | 291,022 | | | 290,947 | |
Total Company | | | | | $ | 7,535,944 | | | $ | 7,699,736 | |
Purchases of property, equipment, and other assets: | | | | | | | |
Critical illness recovery hospital | | | | | $ | 19,569 | | | $ | 23,658 | |
Rehabilitation hospital | | | | | 6,274 | | | 8,582 | |
Outpatient rehabilitation | | | | | 9,414 | | | 9,932 | |
Concentra | | | | | 10,240 | | | 14,400 | |
Other | | | | | 1,348 | | | 2,313 | |
Total Company | | | | | $ | 46,845 | | | $ | 58,885 | |
A reconciliation of Adjusted EBITDA to income before income taxes is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2021 |
| Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total |
| (in thousands) |
Adjusted EBITDA | $ | 113,272 | | | $ | 50,534 | | | $ | 26,329 | | | $ | 82,015 | | | $ | (13,809) | | | |
Depreciation and amortization | (13,050) | | | (7,060) | | | (7,191) | | | (19,898) | | | (2,421) | | | |
Stock compensation expense | — | | | — | | | — | | | (536) | | | (6,173) | | | |
Income (loss) from operations | $ | 100,222 | | | $ | 43,474 | | | $ | 19,138 | | | $ | 61,581 | | | $ | (22,403) | | | $ | 202,012 | |
| | | | | | | | | | | |
Equity in earnings of unconsolidated subsidiaries | | | | | | | | | | | 9,919 | |
| | | | | | | | | | | |
Interest income | | | | | | | | | | | 4,749 | |
Interest expense | | | | | | | | | | | (34,402) | |
Income before income taxes | | | | | | | | | | | $ | 182,278 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2022 |
| Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total |
| (in thousands) |
Adjusted EBITDA | $ | 35,967 | | | $ | 42,379 | | | $ | 26,596 | | | $ | 89,469 | | | $ | (30,564) | | | |
Depreciation and amortization | (14,618) | | | (6,802) | | | (8,029) | | | (18,812) | | | (2,778) | | | |
Stock compensation expense | — | | | — | | | — | | | (535) | | | (8,288) | | | |
Income (loss) from operations | $ | 21,349 | | | $ | 35,577 | | | $ | 18,567 | | | $ | 70,122 | | | $ | (41,630) | | | $ | 103,985 | |
| | | | | | | | | | | |
Equity in earnings of unconsolidated subsidiaries | | | | | | | | | | | 5,397 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Interest expense | | | | | | | | | | | (35,514) | |
Income before income taxes | | | | | | | | | | | $ | 73,868 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2023 |
| Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total |
| (in thousands) |
Adjusted EBITDA | $ | 76,773 | | | $ | 47,216 | | | $ | 30,199 | | | $ | 93,748 | | | $ | (33,873) | | | |
Depreciation and amortization | (16,637) | | | (6,888) | | | (8,457) | | | (18,310) | | | (2,133) | | | |
Stock compensation expense | — | | | — | | | — | | | (178) | | | (10,003) | | | |
Income (loss) from operations | $ | 60,136 | | | $ | 40,328 | | | $ | 21,742 | | | $ | 75,260 | | | $ | (46,009) | | | $ | 151,457 | |
| | | | | | | | | | | |
Equity in earnings of unconsolidated subsidiaries | | | | | | | | | | | 8,556 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Interest expense | | | | | | | | | | | (48,571) | |
Income before income taxes | | | | | | | | | | | $ | 111,442 | |
12.
11. Revenue from Contracts with Customers
The following tables disaggregate the Company’s revenue for the three months ended March 31, 20212022 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2021 |
| Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total |
| (in thousands) |
Patient service revenue: | | | | | | | | | | | |
Medicare | $ | 232,140 | | | $ | 102,375 | | | $ | 36,291 | | | $ | 230 | | | $ | — | | | $ | 371,036 | |
Non-Medicare | 361,152 | | | 95,342 | | | 200,819 | | | 420,654 | | | — | | | 1,077,967 | |
Total patient services revenues | 593,292 | | | 197,717 | | | 237,110 | | | 420,884 | | | — | | | 1,449,003 | |
Other revenue | 1,580 | | | 10,087 | | | 14,851 | | | 1,956 | | | 68,986 | | | 97,460 | |
Total revenue | $ | 594,872 | | | $ | 207,804 | | | $ | 251,961 | | | $ | 422,840 | | | $ | 68,986 | | | $ | 1,546,463 | |
2023: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2022 |
| Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total |
| (in thousands) |
Patient service revenue: | | | | | | | | | | | |
Medicare | $ | 218,987 | | | $ | 103,021 | | | $ | 41,904 | | | $ | 177 | | | $ | — | | | $ | 364,089 | |
Non-Medicare | 380,986 | | | 107,142 | | | 214,113 | | | 422,046 | | | — | | | 1,124,287 | |
Total patient services revenues | 599,973 | | | 210,163 | | | 256,017 | | | 422,223 | | | — | | | 1,488,376 | |
Other revenue | 1,782 | | | 10,471 | | | 15,923 | | | 1,200 | | | 81,795 | | | 111,171 | |
Total revenue | $ | 601,755 | | | $ | 220,634 | | | $ | 271,940 | | | $ | 423,423 | | | $ | 81,795 | | | $ | 1,599,547 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2023 |
| Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total |
| (in thousands) |
Patient service revenue: | | | | | | | | | | | |
Medicare | $ | 229,383 | | | $ | 110,055 | | | $ | 45,801 | | | $ | 243 | | | $ | — | | | $ | 385,482 | |
Non-Medicare | 363,305 | | | 109,925 | | | 231,985 | | | 454,598 | | | — | | | 1,159,813 | |
Total patient services revenues | 592,688 | | | 219,980 | | | 277,786 | | | 454,841 | | | — | | | 1,545,295 | |
Other revenue | 1,238 | | | 11,482 | | | 18,117 | | | 1,457 | | | 87,391 | | | 119,685 | |
Total revenue | $ | 593,926 | | | $ | 231,462 | | | $ | 295,903 | | | $ | 456,298 | | | $ | 87,391 | | | $ | 1,664,980 | |
13.12. Earnings per Share
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 contractual dividends paid for the three months ended March 31, 20212022 and 2022.2023.
(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.
(iii)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 and Diluted EPS | | | | | Basic and Diluted EPS | |
| | | Three Months Ended March 31, | | | | | Three Months Ended March 31, | |
| | | 2021 | | 2022 | | | | | 2022 | | 2023 | |
| | | (in thousands) | | | | (in thousands) | |
Net income | Net income | | | $ | 137,214 | | | $ | 55,926 | | | Net income | | | $ | 55,926 | | | $ | 85,257 | | |
Less: net income attributable to non-controlling interests | Less: net income attributable to non-controlling interests | | | 26,668 | | | 6,809 | | | Less: net income attributable to non-controlling interests | | | 6,809 | | | 14,452 | | |
Net income attributable to the Company | Net income attributable to the Company | | | 110,546 | | | 49,117 | | | Net income attributable to the Company | | | 49,117 | | | 70,805 | | |
Less: Distributed and undistributed income attributable to participating securities | Less: Distributed and undistributed income attributable to participating securities | | | 3,698 | | | 1,643 | | | Less: Distributed and undistributed income attributable to participating securities | | | 1,643 | | | 2,573 | | |
Distributed and undistributed income attributable to common shares | Distributed and undistributed income attributable to common shares | | | $ | 106,848 | | | $ | 47,474 | | | Distributed and undistributed income attributable to common shares | | | $ | 47,474 | | | $ | 68,232 | | |
The following tables set forth the computation of EPS under the two-class method:
| | | Three Months Ended March 31, | | Three Months Ended March 31, |
| | 2021 | | 2022 | | 2022 | | 2023 |
| | Net Income Allocation | | Shares(1) | | Basic and Diluted EPS | | Net Income Allocation | | Shares(1) | | Basic and Diluted EPS | | Net Income Allocation | | Shares(1) | | Basic and Diluted EPS | | Net Income Allocation | | Shares(1) | | Basic and Diluted EPS |
| | (in thousands, except for per share amounts) | | (in thousands, except for per share amounts) |
Common shares | Common shares | | $ | 106,848 | | | 130,329 | | | $ | 0.82 | | | | $ | 47,474 | | | 129,010 | | | $ | 0.37 | | Common shares | | $ | 47,474 | | | 129,010 | | | $ | 0.37 | | | | $ | 68,232 | | | 122,553 | | | $ | 0.56 | |
Participating securities | Participating securities | | 3,698 | | | 4,511 | | | $ | 0.82 | | | | 1,643 | | | 4,464 | | | $ | 0.37 | | Participating securities | | 1,643 | | | 4,464 | | | $ | 0.37 | | | | 2,573 | | | 4,622 | | | $ | 0.56 | |
Total Company | Total Company | | $ | 110,546 | | | | $ | 49,117 | | | Total Company | | $ | 49,117 | | | | $ | 70,805 | | |
_______________________________________________________________________________(1) Represents the weighted average share count outstanding during the period.
14.13. 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 hospital and outpatient clinic operations, the Company currently maintains insurance coverages under a combination of policies with a total annual aggregate limit of up to $37.0 million for professional malpractice liability insurance and $40.0 million for general liability insurance. For the Company’s Concentra center operations, the Company currently maintains insurance coverages under a combination of policies with a total annual aggregate limit of up to $19.0 million for professional malpractice liability insurance and $19.0 million for general liability insurance. 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 designed a separate insurance program that responds to the risks of specific joint ventures. Most of the Company’s joint ventures are insured under a master program with an annual aggregate limit of up to $80.0 million, subject to a sublimit aggregate ranging from $23.0 million to $33.0 million for most joint ventures. 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 also maintains additional types of liability insurance covering claims which, due to their nature or amount, are not covered by or not fully covered by the Company’s professional and general liability insurance policies. These insurance policies also do not generally cover punitive damages and are subject to various deductibles and policy limits. The Company reviews its insurance program annually and may make adjustments to the amount of insurance coverage and self-insured retentions in future years. 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.
Oklahoma City Subpoena. On August 24, 2020, the Company and Select Specialty Hospital – Oklahoma City, Inc. (“SSH–Oklahoma City”) received Civil Investigative Demands (“CIDs”) from the U.S. Attorney’s Office for the Western District of Oklahoma seeking responses to interrogatories and the production of various documents principally relating to the documentation, billing and reviews of medical services furnished to patients at SSH-Oklahoma City. The Company does not know whetherunderstands that the subpoena has been issued in connection withinvestigation arose from a qui tam lawsuit or in connection with possible civil, criminal or administrative proceedings by the government.alleging billing fraud related to charges for respiratory therapy services at SSH-Oklahoma City and Select Specialty Hospital - Wichita, Inc. The Company is producinghas produced documents in response to the subpoenaCIDs and is fully cooperating with this investigation. At this time, the Company is unable to predict the timing and outcome of this matter.
New Jersey Litigation. In December 2020, the United States District Court for the District of New Jersey unsealed a qui tam complaint in the United States of America and State of New Jersey ex rel. Keith A. DiLello, Sr. v. Hackensack Meridian Health, Jersey Shore University Medical Center, Ocean Medical Center, Seaview Orthopaedics, Shrewsbury Surgery Center, Kessler Rehabilitation, Dr. Halambros Demetriades, Dr. Theodore Kutzan, Dr. Adam Myers, Dr. Hoan-Vu Nguyen, Dr. Frederick De Paola, ABC Corporations 1-10, and John/Jane Does 1-10, Case 3:20-cv-02949-FLW-ZNQ. The complaint was filed under seal in March 2020 and was unsealed after the United States and the State of New Jersey declined to intervene in the case. In the complaint, the plaintiff-relator, an automobile accident victim and former patient of the defendant providers, alleges that they routinely billed both personal injury protection (“PIP”) carriers and CMS. He alleges that they violated federal and state law by billing CMS when other insurance is available and failing to return payment to CMS after payment was made by the PIP carriers. In March 2021, defendant Kessler Rehabilitation waived service of process of the complaint. In April 2022, the Court granted defendant Kessler Rehabilitation’s motion to dismiss the complaint, dismissing all counts without prejudice. The Court also gave the plaintiff-relator leave to amend his complaint, within 30 days of the Court’s order, to cure the deficiencies outlined in the Court’s opinion. 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.
Physical Therapy BillingBilling. . On October 7, 2021, the Company received a one-page letter from a Trial Attorney at the U.S. Department of Justice, Civil Division, Commercial Litigation Branch, Fraud Section (“DOJ”). The letter stated stating that the DOJ, in conjunction with the U.S. Department of Health and Human Services (“HHS”), is investigating the Company in connection with potential violations of the False Claims Act, 31 U.S.C. § 3729, et seq. The letter specified that the investigation relates to the Company’s billing offor physical therapy services.services, and indicated that the DOJ would be requesting certain records from the Company. In 2021, the DOJ requested, and the Company furnished, records relating to six of the Company’s outpatient therapy clinics in Florida. In 2022, the DOJ requested certain data relating to all of the Company’s outpatient therapy clinics nationwide, and sought information about the Company’s ability to produce additional data relating to the physical therapy services furnished by the Company’s outpatient therapy clinics and Concentra. The Company is producingcontinues to produce data and other documents and data in response to such letterrequested by the DOJ and is fully cooperating withon this investigation. At this time, the Company is unable to predict the timing and outcome of this matter.
15.14. Subsequent Event
On May 5, 2022,3, 2023, the Company’s boardBoard of directorsDirectors declared a cash dividend of $0.125 per share. The dividend will be payable on or about June 1, 2022May 31, 2023, to stockholders of record as of the close of business on May 19, 2022.18, 2023.
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, including the potential impact of the COVID-19 pandemic on those 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:
•developments relatedadverse economic conditions including an inflationary environment could cause us to continue to experience increases in the prices of labor and other costs of doing business resulting in a negative impact on our business, operating results, cash flows, and financial condition;
•shortages in qualified nurses, therapists, physicians, or other licensed providers, and/or the inability to attract or retain qualified healthcare professionals could limit our ability to staff our facilities;
•shortages in qualified health professionals could cause us to increase our dependence on contract labor, increase our efforts to recruit and train new employees, and expand upon our initiatives to retain existing staff, which could increase our operating costs significantly;
•the continuing effects of the COVID-19 pandemic including, but not limited to, the durationprolonged disruption to the global financial markets, increased operational costs due to recessionary pressures and severity of the pandemic,labor costs, additional measures taken by government authorities and the private sector to limit the spread of COVID-19, and further legislative and regulatory actions which impact healthcare providers, including actions that may impact the Medicare program;
•changes in government reimbursement for our services and/or new payment policies may result in a reduction in revenue, 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 revenue 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 revenue 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 and our ability to realize anticipated synergies;
•private third-party payors for our services may adopt payment policies that could limit our future revenue and profitability;
•the failure to maintain established relationships with the physicians in the areas we serve could reduce our revenue and profitability;
•competition may limit our ability to grow and result in a decrease in our revenue 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, 2021, as such risk factors may be updated from time to time in our periodic filings with the SEC.2022.
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, rehabilitation hospitals, outpatient rehabilitation clinics, and occupational health centers in the United States. As of March 31, 2022,2023, we had operations in 46 states and the District of Columbia. We operated 105 critical illness recovery hospitals in 28 states, 3032 rehabilitation hospitals in 12 states, and 1,9011,936 outpatient rehabilitation clinics in 3839 states and the District of Columbia. Concentra operated 518Columbia, 539 occupational health centers in 41 states, as of March 31, 2022. Concentra also provides contract servicesand 140 onsite clinics at employer worksites.
Our reportable segments include the critical illness recovery hospital segment, the rehabilitation hospital segment, the outpatient rehabilitation segment, and the Concentra segment. We had revenue of $1,599.5$1,665.0 million for the three months ended March 31, 2022.2023. Of this total, we earned approximately 38%36% of our revenue from our critical illness recovery hospital segment, approximately 14% from our rehabilitation hospital segment, approximately 17%18% from our outpatient rehabilitation segment, and approximately 26%27% 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 our critical illness recovery hospitals and rehabilitation hospitals from general acute care hospitals. 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 consumer health services as well as onsite clinics located at employer worksites that deliver occupational medicine services.
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 segments. Adjusted EBITDA is not a measure of financial performance under 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, gain (loss) on sale of businesses, 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 following table reconciles net income and income from operations to Adjusted EBITDA and should be referenced when we discuss Adjusted EBITDA:
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| | | | Three Months Ended March 31, |
| | | | | | 2021 | | 2022 |
| | | | | | (in thousands) |
Net income | | | | | | $ | 137,214 | | | $ | 55,926 | |
Income tax expense | | | | | | 45,064 | | | 17,942 | |
Interest expense | | | | | | 34,402 | | | 35,514 | |
Interest income | | | | | | (4,749) | | | — | |
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Equity in earnings of unconsolidated subsidiaries | | | | | | (9,919) | | | (5,397) | |
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Income from operations | | | | | | 202,012 | | | 103,985 | |
Stock compensation expense: | | | | | | | | |
Included in general and administrative | | | | | | 5,460 | | | 6,949 | |
Included in cost of services | | | | | | 1,249 | | | 1,874 | |
Depreciation and amortization | | | | | | 49,620 | | | 51,039 | |
Adjusted EBITDA | | | | | | $ | 258,341 | | | $ | 163,847 | |
Effects of the COVID-19 Pandemic on our Results of Operations
We have provided revenue and certain operating statistics below for each of our segments for the three months ended March 31, 2022 and 2021, as well as the comparable pre-COVID-19 pandemic period in 2019. We believe this additional data provides insight into how each segment has performed in comparison to the year prior to the widespread emergence of COVID-19 in the United States. The effects of the COVID-19 pandemic, including the duration and extent of disruption on our operations, continues to create uncertainties about our future operating results and financial condition. Please refer to the risk factors in Item 1A and the section titled “Effects of the COVID-19 Pandemic on our Results of Operations” in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021 for further discussion.
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| | Critical Illness Recovery Hospital |
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| | Revenue | | | Patient Days | | | Occupancy Rate | | | Number of Hospitals(1) |
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Three Months Ended March 31 | | $ | 457,534 | | | | | $ | 594,872 | | | $ | 601,755 | | | | 258,129 | | | | | 293,118 | | | 289,217 | | | | 71 | % | | | | 75 | % | | 71 | % | | | 96 | | | | 99 | | 105 |
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| | Rehabilitation Hospital |
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| | Revenue | | | Patient Days | | | Occupancy Rate | | | Number of Hospitals(1) |
| | 2019 | | | | 2021 | | 2022 | | | 2019 | | | | 2021 | | 2022 | | | 2019 | | | | 2021 | | 2022 | | | 2019 | | | | 2021 | | 2022 |
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Three Months Ended March 31 | | $ | 154,558 | | | | | $ | 207,804 | | | $ | 220,634 | | | | 82,816 | | | | | 102,439 | | | 103,802 | | | | 76 | % | | | | 84 | % | | 84 | % | | | 18 | | | | 20 | | 20 |
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| Outpatient Rehabilitation |
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| Revenue | | | Visits | | | Working Days(2) |
| 2019 | | | | 2021 | | 2022 | | | 2019 | | | | 2021 | | 2022 | | | 2019 | | | | 2021 | | 2022 |
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Three Months Ended March 31 | $ | 246,905 | | | | | $ | 251,961 | | | $ | 271,940 | | | | 2,054,483 | | | | | 2,100,154 | | | 2,310,086 | | | | 63 | | | | | 63 | | | 64 | |
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| Concentra |
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| Revenue | | | Visits | | | Working Days(2) |
| 2019 | | | | 2021 | | 2022 | | | 2019 | | | | 2021 | | 2022 | | | 2019 | | | | 2021 | | 2022 |
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Three Months Ended March 31 | $ | 396,321 | | | | | $ | 422,840 | | | $ | 423,423 | | | | 2,911,607 | | | | | 2,795,574 | | | 3,116,898 | | | | 63 | | | | | 63 | | | 64 | |
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_______________________________________________________________________________(1) Represents the number of hospitals included in our consolidated financial results at the end of each period presented and does not include the managed hospitals in which we have a minority ownership interest.
(2) Represents the number of days in which normal business operations were conducted during the periods presented.
Please refer to “Summary Financial Results” and “Results of Operations” for further discussion of our segment performance measures for the three months ended March 31, 2021 and 2022. Please refer to “Operating Statistics” for further discussion regarding the uses and calculations of the metrics provided above, as well as the operating statistics data for each segment for the three months ended March 31, 2021 and 2022. | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| | | | | | 2022 | | 2023 |
| | | | | (in thousands) |
Net income | | | | | | $ | 55,926 | | | $ | 85,257 | |
Income tax expense | | | | | | 17,942 | | | 26,185 | |
Interest expense | | | | | | 35,514 | | | 48,571 | |
| | | | | | | | |
| | | | | | | | |
Equity in earnings of unconsolidated subsidiaries | | | | | | (5,397) | | | (8,556) | |
| | | | | | | | |
Income from operations | | | | | | 103,985 | | | 151,457 | |
Stock compensation expense: | | | | | | | | |
Included in general and administrative | | | | | | 6,949 | | | 8,405 | |
Included in cost of services | | | | | | 1,874 | | | 1,776 | |
Depreciation and amortization | | | | | | 51,039 | | | 52,425 | |
Adjusted EBITDA | | | | | | $ | 163,847 | | | $ | 214,063 | |
Other Significant Events
Dividend PaymentsPayment
On February 17, 2022, the Company’s board16, 2023, our Board of directorsDirectors declared a cash dividend of $0.125 per share. The dividend,On March 15, 2023, cash dividends totaling $16.7$15.9 million was paidwere paid.
Financing Transaction
On February 21, 2023, Select entered into Amendment No. 6 to the Select credit agreement. Amendment No. 6 extended the maturity date on March 16, 2022 to stockholders of record as$530.0 million of the closetotal borrowing capacity of business on$650.0 million under the Select revolving facility to March 4, 2022.6, 2025; however, in the event the Company’s term loan is not refinanced by January 3, 2025, the maturity date for those revolving borrowings will be January 3, 2025.
Summary Financial Results
Three Months Ended March 31, 20222023
The following tables reconcile our segment performance measures to our consolidated operating results:
| | | Three Months Ended March 31, 2022 | | Three Months Ended March 31, 2023 |
| | Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total | | Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total |
| | (in thousands) | | (in thousands) |
Revenue | Revenue | $ | 601,755 | | | $ | 220,634 | | | $ | 271,940 | | | $ | 423,423 | | | $ | 81,795 | | | $ | 1,599,547 | | Revenue | $ | 593,926 | | | $ | 231,462 | | | $ | 295,903 | | | $ | 456,298 | | | $ | 87,391 | | | $ | 1,664,980 | |
Operating expenses | Operating expenses | (565,788) | | | (178,255) | | | (245,344) | | | (334,489) | | | (120,647) | | | (1,444,523) | | Operating expenses | (517,153) | | | (184,246) | | | (265,704) | | | (362,728) | | | (131,267) | | | (1,461,098) | |
Depreciation and amortization | Depreciation and amortization | (14,618) | | | (6,802) | | | (8,029) | | | (18,812) | | | (2,778) | | | (51,039) | | Depreciation and amortization | (16,637) | | | (6,888) | | | (8,457) | | | (18,310) | | | (2,133) | | | (52,425) | |
| Income (loss) from operations | Income (loss) from operations | $ | 21,349 | | | $ | 35,577 | | | $ | 18,567 | | | $ | 70,122 | | | $ | (41,630) | | | $ | 103,985 | | Income (loss) from operations | $ | 60,136 | | | $ | 40,328 | | | $ | 21,742 | | | $ | 75,260 | | | $ | (46,009) | | | $ | 151,457 | |
Depreciation and amortization | Depreciation and amortization | 14,618 | | | 6,802 | | | 8,029 | | | 18,812 | | | 2,778 | | | 51,039 | | Depreciation and amortization | 16,637 | | | 6,888 | | | 8,457 | | | 18,310 | | | 2,133 | | | 52,425 | |
Stock compensation expense | Stock compensation expense | — | | | — | | | — | | | 535 | | | 8,288 | | | 8,823 | | Stock compensation expense | — | | | — | | | — | | | 178 | | | 10,003 | | | 10,181 | |
Adjusted EBITDA | Adjusted EBITDA | $ | 35,967 | | | $ | 42,379 | | | $ | 26,596 | | | $ | 89,469 | | | $ | (30,564) | | | $ | 163,847 | | Adjusted EBITDA | $ | 76,773 | | | $ | 47,216 | | | $ | 30,199 | | | $ | 93,748 | | | $ | (33,873) | | | $ | 214,063 | |
Adjusted EBITDA margin | Adjusted EBITDA margin | 6.0 | % | | 19.2 | % | | 9.8 | % | | 21.1 | % | | N/M | | 10.2 | % | Adjusted EBITDA margin | 12.9 | % | | 20.4 | % | | 10.2 | % | | 20.5 | % | | N/M | | 12.9 | % |
| | | Three Months Ended March 31, 2021 | | Three Months Ended March 31, 2022 |
| | Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total | | Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total |
| | (in thousands) | | (in thousands) |
Revenue | Revenue | $ | 594,872 | | | $ | 207,804 | | | $ | 251,961 | | | $ | 422,840 | | | $ | 68,986 | | | $ | 1,546,463 | | Revenue | $ | 601,755 | | | $ | 220,634 | | | $ | 271,940 | | | $ | 423,423 | | | $ | 81,795 | | | $ | 1,599,547 | |
Operating expenses | Operating expenses | (499,487) | | | (157,270) | | | (225,632) | | | (341,361) | | | (105,102) | | | (1,328,852) | | Operating expenses | (565,788) | | | (178,255) | | | (245,344) | | | (334,489) | | | (120,647) | | | (1,444,523) | |
Depreciation and amortization | Depreciation and amortization | (13,050) | | | (7,060) | | | (7,191) | | | (19,898) | | | (2,421) | | | (49,620) | | Depreciation and amortization | (14,618) | | | (6,802) | | | (8,029) | | | (18,812) | | | (2,778) | | | (51,039) | |
Other operating income | 17,887 | | | — | | | — | | | — | | | 16,134 | | | 34,021 | | |
| Income (loss) from operations | Income (loss) from operations | $ | 100,222 | | | $ | 43,474 | | | $ | 19,138 | | | $ | 61,581 | | | $ | (22,403) | | | $ | 202,012 | | Income (loss) from operations | $ | 21,349 | | | $ | 35,577 | | | $ | 18,567 | | | $ | 70,122 | | | $ | (41,630) | | | $ | 103,985 | |
Depreciation and amortization | Depreciation and amortization | 13,050 | | | 7,060 | | | 7,191 | | | 19,898 | | | 2,421 | | | 49,620 | | Depreciation and amortization | 14,618 | | | 6,802 | | | 8,029 | | | 18,812 | | | 2,778 | | | 51,039 | |
Stock compensation expense | Stock compensation expense | — | | | — | | | — | | | 536 | | | 6,173 | | | 6,709 | | Stock compensation expense | — | | | — | | | — | | | 535 | | | 8,288 | | | 8,823 | |
Adjusted EBITDA | Adjusted EBITDA | $ | 113,272 | | | $ | 50,534 | | | $ | 26,329 | | | $ | 82,015 | | | $ | (13,809) | | | $ | 258,341 | | Adjusted EBITDA | $ | 35,967 | | | $ | 42,379 | | | $ | 26,596 | | | $ | 89,469 | | | $ | (30,564) | | | $ | 163,847 | |
Adjusted EBITDA margin | Adjusted EBITDA margin | 19.0 | % | | 24.3 | % | | 10.4 | % | | 19.4 | % | | N/M | | 16.7 | % | Adjusted EBITDA margin | 6.0 | % | | 19.2 | % | | 9.8 | % | | 21.1 | % | | N/M | | 10.2 | % |
Net income was $85.3 million for the three months ended March 31, 2023, compared to $55.9 million for the three months ended March 31, 2022, compared to $137.2 million for the three months ended March 31, 2021.2022.
The following table summarizes the changes in our segment performance measures for the three months ended March 31, 2022,2023, compared to the three months ended March 31, 2021:2022:
| | | Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total | | Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total |
Change in revenue | Change in revenue | 1.2 | % | | 6.2 | % | | 7.9 | % | | 0.1 | % | | 18.6 | % | | 3.4 | % | Change in revenue | (1.3) | % | | 4.9 | % | | 8.8 | % | | 7.8 | % | | 6.8 | % | | 4.1 | % |
Change in income from operations | Change in income from operations | (78.7) | % | | (18.2) | % | | (3.0) | % | | 13.9 | % | | N/M | | (48.5) | % | Change in income from operations | 181.7 | % | | 13.4 | % | | 17.1 | % | | 7.3 | % | | N/M | | 45.7 | % |
Change in Adjusted EBITDA | Change in Adjusted EBITDA | (68.2) | % | | (16.1) | % | | 1.0 | % | | 9.1 | % | | N/M | | (36.6) | % | Change in Adjusted EBITDA | 113.5 | % | | 11.4 | % | | 13.5 | % | | 4.8 | % | | N/M | | 30.6 | % |
_______________________________________________________________________________N/M — Not meaningful.
Regulatory Changes
Our Annual Report on Form 10-K for the year ended December 31, 2021,2022, filed with the SEC on February 24, 2022,23, 2023, 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 (“HHS”) and CMS. Revenue generated directly from the Medicare program represented approximately 23% of our revenue for both the three months ended March 31, 20222023, and for the year ended December 31, 2021.2022.
Federal Health Care Program Changes in Response to the COVID-19 Pandemic
On January 31, 2020, HHS declared a public health emergency under section 319 of the Public Health Service Act, 42 U.S.C. § 247d, in response to the COVID-19 outbreak in the United States. The HHS Secretary renewed the public health emergency determination for subsequent 90-day periods effectiveand it is now scheduled to end on April 26, 2020, July 25, 2020, October 23, 2020, January 21, 2021, April 21, 2021, July 20, 2021, October 18, 2021, January 16, 2022, and April 16, 2022. OnMay 11, 2023. The COVID-19 national emergency that was declared by President Trump on March 13, 2020, President Trump declaredwhich is separate from the public health emergency, ended on April 10, 2023 when H.R.J. Res. 7 was signed into law.
As a national emergency due toresult of the COVID-19 pandemic andnational emergency, the HHS Secretary authorized the waiver or modification of certain requirements under Medicare, Medicaid, and the Children’s Health Insurance Program (“CHIP”) pursuant to section 1135 of the Social Security Act. Under this authority, CMS issued a number of blanket waivers that excuse health care providers or suppliers from specific program requirements. The following blanket waivers, whileOur Annual Report on Form 10-K for the year ended December 31, 2022 contains a detailed discussion of the federal health care program changes made in effect, may impact our results of operations:
i.Inpatient rehabilitation facilities (“IRFs”), IRF units, and hospitals and units applying to be classified as IRFs, can exclude patients admitted solely to respondresponse to the emergency fromCOVID-19 pandemic, including these COVID-19 waivers, in Part II — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Regulatory Changes. Most of these COVID-19 waivers, including the calculationwaiver of the “60 percent rule” thresholdsIRF 60% Rule and the waiver of Medicare statutory requirements regarding site neutral payments to receive payment as an IRF.
ii.Long-termlong-term care hospitals (“LTCHs”), are scheduled to end when the public health emergency expires on May 11, 2023. However, LTCHs are exempt from the greater-than-25-day average length of stay requirement for all cost reporting periods that include the COVID-19 public health emergency period. Hospitals seeking LTCH classification can exclude patient stays fromAs a result, even when the greater-than-25-day average length of stay requirement where the patient was admitted or discharged to meet the demands of the COVID-19 public health emergency.
iii.Medicare expanded the types of health care professionals who can furnish telehealth servicesemergency ends on May 11, 2023, LTCHs with cost reporting periods that started prior to include all those who are eligible to bill Medicare for their professional services. This allows health care professionals who were previously ineligible to furnish and bill for Medicare telehealth services, including physical therapists, occupational therapists, speech language pathologists, and others, to receive payment for Medicare telehealth services.
iv.MedicareMay 11, 2023 will not require out-of-state physician and non-physician practitionerscontinue to be licensed inexempt for the state where they are providing services when they are licensed in another state, subject to certain conditions and state or local licensure requirements.
v.Many requirements under the hospital conditionsremainder of participation (“CoPs”) are waived during the emergency period to give hospitals more flexibility in treating COVID-19 patients.
vi.Hospitals can operate temporary expansion locations without meeting the provider-based entity requirements or certain requirements in the physical environment CoP for hospitals during the emergency. This waiver also allows hospitals to change the status of their current provider-based department locations to meet patient needs as part of the state or local pandemic plan.
vii.The HHS Secretary waived sanctions under the physician self-referral law (i.e., Stark law) for certain types of remuneration and referral arrangements that are related to a COVID-19 purpose. The Office of the Inspector General (“OIG”) will also exercise enforcement discretion to not impose administrative sanctions under the federal anti-kickback statute for many payments covered by the Stark law waivers.
Pursuant to the Coronavirus Preparedness and Response Supplemental Appropriations Act, Public Law 116-123, CMS has waived Medicare telehealth payment requirements during the emergency so that beneficiaries in all areas of the country (not just rural areas) can receive telehealth services, including in their homes, beginning on March 6, 2020. CMS issued additional waivers to permit more than 160 additional services to be furnished by telehealth, allow physicians to monitor patient services remotely, and fulfill face-to-face requirements in IRFs.cost reporting year.
In addition, to these agency actions, the CARESCoronavirus Aid, Relief, and Economic Security (“CARES”) Act was enacted on March 27, 2020. It provides additional waivers, reimbursement, grants and other funds to assist health care providers during the COVID-19 public health emergency. Some of the CARES Act provisions that may impact our operations include:
i.$100 billion in appropriations for the Public Health and Social Services Emergency Fund to be used for preventing, preparing, and responding to COVID-19 and for reimbursing “eligible health care providers for health care related expenses or lost revenues that are attributable to coronavirus.” The Paycheck Protection Program and Health Care Enhancement Act, Public Law 116-139, added $75 billion to this fund. The Consolidated Appropriations Act, 2021, added another $3 billion to this fund. HHS began distributing these funds to providers in April 2020. HHS initially allocated funds for a general distribution to providers that received Medicare fee-for-service payments in 2019. Later general distributions required providers to submit an application to HHS. Other funding was allocated for targeted distributions for specific provider types. Recipients of payments must report data to HHS on the use of the funds via an online portal by specific deadlines established by HHS based on the date of the payment. Any funds that a provider does not apply towards expenses or lost revenue attributable to COVID-19 must be returned to HHS within 30 calendar days after the end of the applicable reporting period. All recipients of funds are subject to audit by HHS, the HHS OIG, or the Pandemic Response Accountability Committee. Audits may include examination of the accuracy of the data providers submitted to HHS in their applications for payments.
ii.Expansion of the Accelerated and Advance Payment Program to advance three months of payments to Medicare providers. CMS has the ability to recoup the advanced payments through future Medicare claims. Section 2501 of the Continuing Appropriations Act, 2021 and Other Extensions Act, Public Law 116-159, modified the terms of repayment so that a provider can request no recoupment for one year after the advanced payment was issued, followed by a 25% offset the next 11 months, and a 50% offset the last 6 months. Any amounts that remain unpaid after 29 months will be subject to a 4% interest rate (instead of 10.25%). CMS began recouping advance payments on March 30, 2021, but the actual date for each provider is based on the first anniversary of when the provider received the first payment. CMS publishes repayment data every six months, beginning June 28, 2021.
iii.Temporary suspension oflegislation temporarily suspended the 2% cut to Medicare payments due to sequestration so that, for the period offrom May 1, 2020 to December 31, 2020, the Medicare program would be exempt from any sequestration order. The Consolidated Appropriations Act, 2021, extended this temporary suspension of the 2% sequestration cut through March 31, 2021. The Medicare sequester relief bill, which became Public Law 117-7, extended the temporary suspension of the sequestration cut again, through December 31, 2021. To pay for the continued suspension of the sequestration cuts through December 31, 2021, Congress increased the sequestration cut that will apply in fiscal year 2030. The Protecting Medicare and American Farmers from Sequester Cuts Act, signed into law by President Biden on December 10, 2021, further extended the suspension of the sequestration cut through March 31, 2022 and reducesreduced the sequestration cutadjustment from 2% to 1% from April 1 2022 through June 30, 2022. The full 2% sequestration cut will resumereduction resumed on July 1, 2022. To pay for this relief, Congress increased the sequestration cut to Medicare payments to 2.25% for the first six months of fiscal year 2030 and to 3% for the final six months of fiscal year 2030. The same legislation defersAdditionally, an across-the-board 4% payment cut required to take effect in January 2022 due to the American Rescue Plan from the FY 2022 Statutory Pay-As-You-Go (“PAYGO”) scorecard to the FY 2023 PAYGO scorecard.was deferred by Congress until 2025.
iv.Two waivers of Medicare statutory requirements regarding site neutral payment to LTCHs. The first waives the LTCH discharge payment percentage requirement (i.e., 50% rule)CARES Act and related legislation also provided more than $178 billion in appropriations for the cost reporting period(s)Public Health and Social Services Emergency Fund, also known as the Provider Relief Fund, to be used for preventing, preparing, and responding to COVID-19 and for reimbursing “eligible health care providers for health care related expenses or lost revenues that includeare attributable to coronavirus.” HHS began distributing these funds to providers in April 2020. Recipients of payments were required to report data to HHS on the emergency period. The second waives applicationuse of the site neutral payment rate so that all LTCH cases admitted duringfunds via an online portal by specific deadlines established by HHS based on the emergency period will be paid the LTCH-PPS standard federal rate.
v.Waiverdate of the IRF 3-hour rule so that IRF services provided duringpayment. All recipients of funds are subject to audit by HHS, the public health emergency period do not need to meetHHS OIG, or the coverage requirement that patients receive at least 3 hours of therapy a day or 15 hours of therapy per week.
vi.Broader waiver authority for HHS under section 1135Pandemic Response Accountability Committee. Audits may include examination of the Social Security Actaccuracy of the data providers submitted to issueHHS in their applications for payments. Additional distributions are not expected and as a result, the Company does not expect to recognize additional telehealth waivers.income associated with these funds in the future.
Medicare Reimbursement of LTCH Services
The following is a summary of significant regulatory changes to the Medicare prospective payment system for our critical illness recovery hospitals, which are certified by Medicare as LTCHs, which have affected our results of operations, as well as the policies and payment rates that may affect our future results of operations. Medicare payments to our critical illness recovery hospitals are made in accordance with the long-term care hospital prospective payment system (“LTCH-PPS”).
Fiscal Year 2021. On September 18, 2020, CMS published the final rule updating policies and payment rates for the LTCH-PPS for fiscal year 2021 (affecting discharges and cost reporting periods beginning on or after October 1, 2020 through September 30, 2021). Certain errors in the final rule were corrected in a document published December 7, 2020. The standard federal rate was set at $43,755, an increase from the standard federal rate applicable during fiscal year 2020 of $42,678. The update to the standard federal rate for fiscal year 2021 included a market basket increase of 2.3% with no productivity adjustment. The standard federal rate also included an area wage budget neutrality factor of 1.0016837. The fixed-loss amount for high cost outlier cases paid under LTCH-PPS was set at $27,195, an increase from the fixed-loss amount in the 2020 fiscal year of $26,778. The fixed-loss amount for high cost outlier cases paid under the site-neutral payment rate was set at $29,064, an increase from the fixed-loss amount in the 2020 fiscal year of $26,552.
Fiscal Year 2022. On August 13, 2021, CMS published the final rule updating policies and payment rates for the LTCH-PPS for fiscal year 2022 (affecting discharges and cost reporting periods beginning on or after October 1, 2021, through September 30, 2022). The standard federal rate was set at $44,714, an increase from the standard federal rate applicable during fiscal year 2021 of $43,755. The update to the standard federal rate for fiscal year 2022 included a market basket increase of 2.6%, less a productivity adjustment of 0.7%. The standard federal rate also included an area wage budget neutrality factor of 1.002848. As a result of the CARES Act, all LTCH cases are paid at the standard federal rate during the public health emergency. If the public health emergency ends during fiscal year 2022, then CMS will return to using the site-neutral payment rate for reimbursement of cases that do not meet the LTCH patient criteria. The fixed-loss amount for high cost outlier cases paid under LTCH-PPS was set at $33,015, an increase from the fixed-loss amount in the 2021 fiscal year of $27,195. The fixed-loss amount for high cost outlier cases paid under the site-neutral payment rate was set at $30,988, an increase from the fixed-loss amount in the 2021 fiscal year of $29,064.
Fiscal Year 2023. On April 18,August 10, 2022, CMS released a display copy ofpublished the proposedfinal rule to updateupdating policies and payment rates for the LTCH-PPS for fiscal year 2023 (affecting discharges and cost reporting periods beginning on or after October 1, 2022, through September 30, 2023). CMS is expected to issueCertain errors in the final rule were corrected in Augustdocuments published November 4, 2022, or shortly thereafter.and December 13, 2022. The proposed standard federal rate for fiscal year 2023 is $45,953,$46,433, an increase from the standard federal rate applicable during fiscal year 2022 of $44,714. The proposed update to the standard federal rate for fiscal year 2023 includes a market basket increase of 3.1%4.1%, less a productivity adjustment of 0.4%0.3%. The proposed standard federal rate also includes an area wage budget neutrality factor of 1.000691.1.0004304. As a result of the CARES Act, all LTCH cases are paid at the standard federal rate during the public health emergency. IfOnce the public health emergency ends, before or during fiscal yearwhich is expected to occur on May 11, 2023, then CMS will return to using the site-neutral payment rate for reimbursement of cases that do not meet the LTCH patient criteria. The proposed fixed-loss amount for high cost outlier cases paid under LTCH-PPS is $44,182,$38,518, an increase from the fixed-loss amount in the 2022 fiscal year of $33,015. The fixed-loss amount for high cost outlier cases paid under the site-neutral payment rate is $38,788, an increase from the fixed-loss amount in the 2022 fiscal year of $30,988.
Fiscal Year 2024. On April 10, 2023, CMS released a display copy of the proposed rule to update policies and payment rates for the LTCH-PPS for fiscal year 2024 (affecting discharges and cost reporting periods beginning on or after October 1, 2023 through September 30, 2024). CMS is expected to issue the final rule in August or shortly thereafter. The proposed standard federal rate for fiscal year 2024 is $47,948, an increase from the standard federal rate applicable during fiscal year 2023 of $46,433. The proposed update to the standard federal rate for fiscal year 2024 includes a market basket increase of 3.1%, less a productivity adjustment of 0.2%. The proposed standard federal rate also includes an area wage budget neutrality factor of 1.0035335. The proposed fixed-loss amount for high cost outlier cases paid under LTCH-PPS is $94,378, an increase from the fixed-loss amount in the 2023 fiscal year of $38,518. The proposed fixed-loss amount for high cost outlier cases paid under the site-neutral payment rate is $43,214,$40,732, an increase from the fixed-loss amount in the 20222023 fiscal year of $30,988.$38,788.
Medicare Reimbursement of IRF Services
The following is a summary of significant regulatory changes to the Medicare prospective payment system for our rehabilitation hospitals, which are certified by Medicare as IRFs, which have affected our results of operations, 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”).
Fiscal Year 2021. On August 10, 2020, CMS published the final rule updating policies and payment rates for the IRF-PPS for fiscal year 2021 (affecting discharges and cost reporting periods beginning on or after October 1, 2020 through September 30, 2021). The standard payment conversion factor for discharges for fiscal year 2021 was set at $16,856, an increase from the standard payment conversion factor applicable during fiscal year 2020 of $16,489. The update to the standard payment conversion factor for fiscal year 2021 included a market basket increase of 2.4% with no productivity adjustment. CMS decreased the outlier threshold amount for fiscal year 2021 to $7,906 from $9,300 established in the final rule for fiscal year 2020.
Fiscal Year 2022. On August 4, 2021, CMS published the final rule updating policies and payment rates for the IRF-PPS for fiscal year 2022 (affecting discharges and cost reporting periods beginning on or after October 1, 2021, through September 30, 2022). The standard payment conversion factor for discharges for fiscal year 2022 was set at $17,240, an increase from the standard payment conversion factor applicable during fiscal year 2021 of $16,856. The update to the standard payment conversion factor for fiscal year 2022 included a market basket increase of 2.6%, less a productivity adjustment of 0.7%. CMS increased the outlier threshold amount for fiscal year 2022 to $9,491 from $7,906 established in the final rule for fiscal year 2021.
Fiscal Year 2023. On April 6,August 1, 2022, CMS published a proposedthe final rule to updateupdating policies and payment rates for the IRF-PPS for fiscal year 2023 (affecting discharges and cost reporting periods beginning on or after October 1, 2022, through September 30, 2023). The standard payment conversion factor for discharges for fiscal year 2023 if adopted, would bewas set at $17,698,$17,878, an increase from the standard payment conversion factor applicable during fiscal year 2022 of $17,240. The update to the standard payment conversion factor for fiscal year 2023 included a market basket increase of 4.2%, less a productivity adjustment of 0.3%. CMS increased the outlier threshold amount for fiscal year 2023 to $12,526 from $9,491 established in the final rule for fiscal year 2022.
Fiscal Year 2024. On April 7, 2023, CMS published a proposed rule to update policies and payment rates for the IRF-PPS for fiscal year 2024 (affecting discharges and cost reporting periods beginning on or after October 1, 2023 through September 30, 2024). The standard payment conversion factor for discharges for fiscal year 2024 would be set at $18,471, an increase from the standard payment conversion factor applicable during fiscal year 2022 of $17,878. The update to the standard payment conversion factor for fiscal year 2024, if adopted, would include a market basket increase of 3.2%, less a productivity adjustment of 0.4%0.2%. CMS proposed to increasedecrease the outlier threshold amount for fiscal year 20232024 to $13,038$9,690 from $9,491$12,526 established in the final rule for fiscal year 2022.2023.
Medicare Reimbursement of Outpatient Rehabilitation Clinic Services
Outpatient rehabilitation providers enroll in Medicare as a rehabilitation agency, a clinic, or a public health agency. The Medicare program reimburses outpatient rehabilitation providers basedOur Annual Report on the Medicare physician fee schedule. For services provided in 2017 through 2019, a 0.5% update was applied each year to the fee schedule payment rates, subject to an adjustment beginning in 2019 under the Merit-Based Incentive Payment System (“MIPS”). In 2019, CMS added physical and occupational therapists to the list of MIPS eligible clinicians. For these therapists in private practice, payments under the fee schedule are subject to adjustment in a later year based on their performance in MIPS according to established performance standards. Calendar year 2021 is the first year that payments are adjusted, based upon the therapist’s performance under MIPS in 2019. Providers in facility-based outpatient therapy settings are excluded from MIPS eligibility and therefore not subject to this payment adjustment. 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 who meet certain criteria would receive annual updates of 0.75%, while all other professionals would receive annual updates of 0.25%.
Each year from 2019 through 2024 eligible clinicians who receive a significant share of their revenues through an advanced 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.
In the 2020 Medicare physician fee schedule final rule, CMS revised coding, documentation guidelines, and increased the valuation for evaluation and management (“E/M”) office visit codes, beginning in 2021. Because the Medicare physician fee schedule is budget-neutral, any revaluation of E/M services that will increase spending by more than $20 million requires a budget neutrality adjustment. To increase valuesForm 10-K for the E/M codes while maintaining budget neutrality under the fee schedule, CMS cut the valuesyear ended December 31, 2022 contains a detailed discussion of other codes to make up the difference, beginning in 2021.
In the 2021 Medicare physician fee schedule final rule, CMS increased the values for the E/M office visit codes and cuts to other specialty codes to maintain budget neutrality. As a result, therapy services provided inreimbursement regulations that affect our outpatient rehabilitation clinics received an estimated 3.6% decreaseclinic operations in payment from MedicarePart I — Business — Government Regulations and in calendar year 2021. The Consolidated Appropriations Act, 2021, provided relief in the formPart II — Management’s Discussion and Analysis of a one-time 3.75% increase in payments in calendar year 2021 for therapy servicesFinancial Condition and other services paid under the physician fee schedule.
In the calendar year 2022 physician fee schedule final rule, CMS announced that Medicare payments for the therapy specialty are expectedResults of Operations — Regulatory Changes. There have been no significant updates to decrease 1% in 2022. After CMS issued the final rule, Congress passed the Protecting Medicare and American Farmers from Sequester Cuts Act, which provided in Section 3 a one-time 3% increase in payments in calendar year 2022 to offset most of the 3.75% cut to payments for therapy services and other services paid under the physician fee schedule. In the final rule, CMS also adopted its plan to transition the MIPS program to MIPS Value Pathways (“MVPs”). CMS will begin the transition to MVPs in 2023 with an initial set of MVPs in which reporting is voluntary. Beginning in 2026, multispecialty groups must form subgroups to report MVPs. CMS plans to develop more MVPs from 2024 to 2027 and is considering that MVP reporting would become mandatory in 2028. Each MVP would include population health claims-based measures and require clinicians to report on the Promoting Interoperability performance category measures. In addition, MVP participants would select certain quality measures and improvement activities and then report data for such measures and activities.
these regulations subsequently. Modifiers to Identify Services of Physical Therapy Assistants or Occupational Therapy Assistants
InOur Annual Report on Form 10-K for the year ended December 31, 2022 contains a detailed discussion of Medicare physician fee schedule final rule for calendar year 2019, CMS established two new modifiers (CQ and CO) to identifyregulations concerning services furnished in whole or in partprovided by physical therapy assistants (“PTAs”) orand occupational therapy assistants (“OTAs”). These modifiers were mandated by the Bipartisan Budget Actin Part I — Business — Government Regulations and in Part II — Management’s Discussion and Analysis of 2018, which requires that claims for outpatient therapy services furnished in whole or part by therapy assistants on or after January 1, 2020 include the appropriate modifier. In the final 2020 Medicare physician fee schedule rule, CMS clarified that when the physical therapist is involved for the entire durationFinancial Condition and Results of the service and the PTA provides skilled therapy alongside the physical therapist, the CQ modifier is not required. Also, when the same service (code) is furnished separately by the physical therapist and PTA, CMS will apply the de minimis standardOperations — Regulatory Changes. There have been no significant updates to each 15-minute unit of codes, not on the total physical therapist and PTA time of the service, allowing the separate reporting, on two different claim lines, of the number of units to which the new modifiers apply and the number of units to which the modifiers do not apply. In the calendar year 2022 physician fee schedule final rule, CMS implemented the final part of the requirements in the Bipartisan Budget Act of 2018 regarding PTA and OTA services. For dates of service on and after January 1, 2022, CMS will pay for physical therapy and occupational therapy services provided by PTAs and OTAs at 85% of the otherwise applicable Part B payment amount. CMS also modified the de minimis standard for calendar year 2022. Specifically, CMS will allow a timed service to be billed without the CQ or CO modifier when a PTA or OTA participates in providing care, but the physical therapist or occupational therapist meets the Medicare billing requirements without including the PTA’s or OTA’s minutes. This occurs when the physical therapist or occupational therapist provides more minutes than the 15-minute midpoint.
these regulations subsequently.
Operating Statistics
The following table sets forth operating statistics for each of our reportable segments for the periods presented. The operating statistics reflect data for the period of time we managed these operations. Our operating statistics include metrics we believe provide relevant insight about the number of facilities we operate, volume of services we provide to our patients, and average payment rates for services we provide. These metrics are utilized by management to monitor trends and performance in our businesses and therefore may be important to investors because management may assess our performance based in part on such metrics. Other healthcare providers may present similar statistics, and these statistics are susceptible to varying definitions. Our statistics as presented may not be comparable to other similarly titled statistics of other companies.
| | | | | Three Months Ended March 31, | | | | Three Months Ended March 31, |
| | | | 2021 | | 2022 | | | | 2022 | | 2023 |
Critical illness recovery hospital data: | Critical illness recovery hospital data: | | | | | | Critical illness recovery hospital data: | | | | | |
Number of consolidated hospitals—start of period(1) | Number of consolidated hospitals—start of period(1) | | | 99 | | | 104 | | Number of consolidated hospitals—start of period(1) | | | 104 | | | 103 | |
Number of hospitals acquired | Number of hospitals acquired | | | — | | | — | | Number of hospitals acquired | | | — | | | — | |
Number of hospital start-ups | Number of hospital start-ups | | | — | | | 1 | | Number of hospital start-ups | | | 1 | | | 2 | |
Number of hospitals closed/sold | Number of hospitals closed/sold | | | — | | | — | | Number of hospitals closed/sold | | | — | | | — | |
Number of consolidated hospitals—end of period(1) | Number of consolidated hospitals—end of period(1) | | | 99 | | | 105 | | Number of consolidated hospitals—end of period(1) | | | 105 | | | 105 | |
| Available licensed beds(3) | Available licensed beds(3) | | | 4,380 | | | 4,524 | | Available licensed beds(3) | | | 4,524 | | | 4,440 | |
Admissions(3)(4) | Admissions(3)(4) | | | 9,859 | | | 9,457 | | Admissions(3)(4) | | | 9,457 | | | 9,438 | |
Patient days(3)(5) | Patient days(3)(5) | | | 293,118 | | | 289,217 | | Patient days(3)(5) | | | 289,217 | | | 286,746 | |
Average length of stay (days)(3)(6) | Average length of stay (days)(3)(6) | | | 30 | | | 30 | | Average length of stay (days)(3)(6) | | | 30 | | | 30 | |
Revenue per patient day(3)(7) | Revenue per patient day(3)(7) | | | $ | 2,024 | | | $ | 2,075 | | Revenue per patient day(3)(7) | | | $ | 2,075 | | | $ | 2,058 | |
Occupancy rate(3)(8) | Occupancy rate(3)(8) | | | 75 | % | | 71 | % | Occupancy rate(3)(8) | | | 71 | % | | 72 | % |
Percent patient days—Medicare(3)(9) | Percent patient days—Medicare(3)(9) | | | 40 | % | | 37 | % | Percent patient days—Medicare(3)(9) | | | 37 | % | | 39 | % |
Rehabilitation hospital data: | Rehabilitation hospital data: | | | | Rehabilitation hospital data: | | |
Number of consolidated hospitals—start of period(1) | Number of consolidated hospitals—start of period(1) | | | 19 | | | 20 | | Number of consolidated hospitals—start of period(1) | | | 20 | | | 20 | |
Number of hospitals acquired | Number of hospitals acquired | | | 1 | | | — | | Number of hospitals acquired | | | — | | | — | |
Number of hospital start-ups | Number of hospital start-ups | | | — | | | — | | Number of hospital start-ups | | | — | | | — | |
Number of hospitals closed/sold | Number of hospitals closed/sold | | | — | | | — | | Number of hospitals closed/sold | | | — | | | — | |
Number of consolidated hospitals—end of period(1) | Number of consolidated hospitals—end of period(1) | | | 20 | | | 20 | | Number of consolidated hospitals—end of period(1) | | | 20 | | | 20 | |
Number of unconsolidated hospitals managed—end of period(2) | Number of unconsolidated hospitals managed—end of period(2) | | | 10 | | | 10 | | Number of unconsolidated hospitals managed—end of period(2) | | | 10 | | | 12 | |
Total number of hospitals (all)—end of period | Total number of hospitals (all)—end of period | | | 30 | | | 30 | | Total number of hospitals (all)—end of period | | | 30 | | | 32 | |
Available licensed beds(3) | Available licensed beds(3) | | | 1,361 | | | 1,391 | | Available licensed beds(3) | | | 1,391 | | | 1,413 | |
Admissions(3)(4) | Admissions(3)(4) | | | 7,131 | | | 7,182 | | Admissions(3)(4) | | | 7,182 | | | 7,620 | |
Patient days(3)(5) | Patient days(3)(5) | | | 102,439 | | | 103,802 | | Patient days(3)(5) | | | 103,802 | | | 107,910 | |
Average length of stay (days)(3)(6) | Average length of stay (days)(3)(6) | | | 15 | | | 15 | | Average length of stay (days)(3)(6) | | | 15 | | | 14 | |
Revenue per patient day(3)(7) | Revenue per patient day(3)(7) | | | $ | 1,853 | | | $ | 1,943 | | Revenue per patient day(3)(7) | | | $ | 1,943 | | | $ | 1,969 | |
Occupancy rate(3)(8) | Occupancy rate(3)(8) | | | 84 | % | | 84 | % | Occupancy rate(3)(8) | | | 84 | % | | 86 | % |
Percent patient days—Medicare(3)(9) | Percent patient days—Medicare(3)(9) | | | 49 | % | | 47 | % | Percent patient days—Medicare(3)(9) | | | 47 | % | | 49 | % |
Outpatient rehabilitation data: | Outpatient rehabilitation data: | | | | Outpatient rehabilitation data: | | |
Number of consolidated clinics—start of period | Number of consolidated clinics—start of period | | | 1,503 | | | 1,572 | | Number of consolidated clinics—start of period | | | 1,572 | | | 1,622 | |
Number of clinics acquired | Number of clinics acquired | | | 8 | | | 2 | | Number of clinics acquired | | | 2 | | | 9 | |
Number of clinic start-ups | Number of clinic start-ups | | | 10 | | | 12 | | Number of clinic start-ups | | | 12 | | | 12 | |
Number of clinics closed/sold | Number of clinics closed/sold | | | (4) | | | (2) | | Number of clinics closed/sold | | | (2) | | | (11) | |
Number of consolidated clinics—end of period | Number of consolidated clinics—end of period | | | 1,517 | | | 1,584 | | Number of consolidated clinics—end of period | | | 1,584 | | | 1,632 | |
Number of unconsolidated clinics managed—end of period | Number of unconsolidated clinics managed—end of period | | | 292 | | | 317 | | Number of unconsolidated clinics managed—end of period | | | 317 | | | 304 | |
Total number of clinics (all)—end of period | Total number of clinics (all)—end of period | | | 1,809 | | | 1,901 | | Total number of clinics (all)—end of period | | | 1,901 | | | 1,936 | |
Number of visits(3)(10) | Number of visits(3)(10) | | | 2,100,154 | | | 2,310,086 | | Number of visits(3)(10) | | | 2,310,086 | | | 2,636,770 | |
Revenue per visit(3)(11) | Revenue per visit(3)(11) | | | $ | 104 | | | $ | 102 | | Revenue per visit(3)(11) | | | $ | 102 | | | $ | 101 | |
| | | | | Three Months Ended March 31, | | | | Three Months Ended March 31, |
| | | | 2021 | | 2022 | | | | 2022 | | 2023 |
Concentra data: | Concentra data: | | | | | | Concentra data: | | |
Number of consolidated centers—start of period | Number of consolidated centers—start of period | | | 517 | | | 518 | | Number of consolidated centers—start of period | | | 518 | | | 540 | |
Number of centers acquired | Number of centers acquired | | | 3 | | | 1 | | Number of centers acquired | | | 1 | | | — | |
Number of center start-ups | Number of center start-ups | | | — | | | — | | Number of center start-ups | | | — | | | — | |
Number of centers closed/sold | Number of centers closed/sold | | | (1) | | | (1) | | Number of centers closed/sold | | | (1) | | | (1) | |
Number of consolidated centers—end of period | Number of consolidated centers—end of period | | | 519 | | | 518 | | Number of consolidated centers—end of period | | | 518 | | | 539 | |
Number of onsite clinics operated—end of period | Number of onsite clinics operated—end of period | | | 133 | | | 140 | | Number of onsite clinics operated—end of period | | | 140 | | | 140 | |
| Number of visits(3)(10) | Number of visits(3)(10) | | | 2,795,574 | | | 3,116,898 | | Number of visits(3)(10) | | | 3,116,898 | | | 3,217,945 | |
Revenue per visit(3)(11) | Revenue per visit(3)(11) | | | $ | 125 | | | $ | 125 | | Revenue per visit(3)(11) | | | $ | 125 | | | $ | 133 | |
(1)Represents the number of hospitals included in our consolidated financial results at the end of each period presented.
(2)Represents the number of hospitals which are managed by us at the end of each period presented. We have minority ownership interests in these businesses.
(3)Data excludes locations managed by the Company. For purposes of our Concentra segment, onsite clinics are excluded.
(4)Represents the number of patients admitted to our hospitals during the periods presented.
(5)Each patient day represents one patient occupying one bed for one day during the periods presented.
(6)Represents the average number of days in which patients were admitted to our hospitals. Average length of stay is calculated by dividing the number of patient days, as presented above, by the number of patients discharged from our hospitals during the periods presented.
(7)Represents the average amount of revenue recognized for each patient day. Revenue per patient day is calculated by dividing patient service revenues, excluding revenues from certain other ancillary and outpatient services provided at our hospitals, by the total number of patient days.
(8)Represents the portion of our hospitals being utilized for patient care during the periods presented. Occupancy rate is calculated using the number of patient days, as presented above, divided by the total number of bed days available during the period. Bed days available is derived by adding the daily number of available licensed beds for each of the periods presented.
(9)Represents the portion of our patient days which are paid by Medicare. The Medicare patient day percentage is calculated by dividing the total number of patient days which are paid by Medicare by the total number of patient days, as presented above.
(10)Represents the number of visits in which patients were treated at our outpatient rehabilitation clinics and Concentra centers during the periods presented. COVID-19 screening and testing services provided by our Concentra segment are not included in these figures.
(11)Represents the average amount of revenue recognized for each patient visit. Revenue per visit is calculated by dividing patient service revenue, excluding revenues from certain other ancillary services, by the total number of visits. For purposes of this computation for our Concentra segment, patient service revenue does not include onsite clinics.clinics or revenues generated from COVID-19 screening and testing services.
Results of Operations
The following table outlines selected operating data as a percentage of revenue for the periods indicated:
| | | | | Three Months Ended March 31, | | | | Three Months Ended March 31, |
| | | | 2021 | | 2022 | | | | 2022 | | 2023 |
Revenue | Revenue | | | 100.0 | % | | 100.0 | % | Revenue | | | 100.0 | % | | 100.0 | % |
Costs and expenses: | Costs and expenses: | | | | Costs and expenses: | | |
Cost of services, exclusive of depreciation and amortization(1) | Cost of services, exclusive of depreciation and amortization(1) | | | 83.6 | | | 88.0 | | Cost of services, exclusive of depreciation and amortization(1) | | | 88.0 | | | 85.2 | |
General and administrative | General and administrative | | | 2.3 | | | 2.3 | | General and administrative | | | 2.3 | | | 2.5 | |
Depreciation and amortization | Depreciation and amortization | | | 3.2 | | | 3.2 | | Depreciation and amortization | | | 3.2 | | | 3.2 | |
Total costs and expenses | Total costs and expenses | | | 89.1 | | | 93.5 | | Total costs and expenses | | | 93.5 | | | 90.9 | |
Other operating income | | | 2.2 | | | — | | |
| Income from operations | Income from operations | | | 13.1 | | | 6.5 | | Income from operations | | | 6.5 | | | 9.1 | |
| Equity in earnings of unconsolidated subsidiaries | Equity in earnings of unconsolidated subsidiaries | | | 0.6 | | | 0.3 | | Equity in earnings of unconsolidated subsidiaries | | | 0.3 | | | 0.5 | |
| Interest income | | | 0.3 | | | — | | |
| Interest expense | Interest expense | | | (2.2) | | | (2.2) | | Interest expense | | | (2.2) | | | (2.9) | |
Income before income taxes | Income before income taxes | | | 11.8 | | | 4.6 | | Income before income taxes | | | 4.6 | | | 6.7 | |
Income tax expense | Income tax expense | | | 2.9 | | | 1.1 | | Income tax expense | | | 1.1 | | | 1.6 | |
Net income | Net income | | | 8.9 | | | 3.5 | | Net income | | | 3.5 | | | 5.1 | |
Net income attributable to non-controlling interests | Net income attributable to non-controlling interests | | | 1.8 | | | 0.4 | | Net income attributable to non-controlling interests | | | 0.4 | | | 0.8 | |
Net income attributable to Select Medical Holdings Corporation | Net income attributable to Select Medical Holdings Corporation | | | 7.1 | % | | 3.1 | % | Net income attributable to Select Medical Holdings Corporation | | | 3.1 | % | | 4.3 | % |
(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 segment for the periods indicated:
| | | | | Three Months Ended March 31, | | | | Three Months Ended March 31, |
| | | | 2021 | | 2022 | | % Change | | | | 2022 | | 2023 | | % Change |
| | | | (in thousands, except percentages) | | | (in thousands, except percentages) |
Revenue: | Revenue: | | | | | | | | Revenue: | | | | | | | |
Critical illness recovery hospital | Critical illness recovery hospital | | | $ | 594,872 | | | $ | 601,755 | | | 1.2 | % | Critical illness recovery hospital | | | $ | 601,755 | | | $ | 593,926 | | | (1.3) | % |
Rehabilitation hospital | Rehabilitation hospital | | | 207,804 | | | 220,634 | | | 6.2 | | Rehabilitation hospital | | | 220,634 | | | 231,462 | | | 4.9 | |
Outpatient rehabilitation | Outpatient rehabilitation | | | 251,961 | | | 271,940 | | | 7.9 | | Outpatient rehabilitation | | | 271,940 | | | 295,903 | | | 8.8 | |
Concentra | Concentra | | | 422,840 | | | 423,423 | | | 0.1 | | Concentra | | | 423,423 | | | 456,298 | | | 7.8 | |
Other(1) | Other(1) | | | 68,986 | | | 81,795 | | | 18.6 | | Other(1) | | | 81,795 | | | 87,391 | | | 6.8 | |
Total Company | Total Company | | | $ | 1,546,463 | | | $ | 1,599,547 | | | 3.4 | % | Total Company | | | $ | 1,599,547 | | | $ | 1,664,980 | | | 4.1 | % |
Income (loss) from operations: | Income (loss) from operations: | | | | | | | | Income (loss) from operations: | | | | | | | |
Critical illness recovery hospital(2) | | | $ | 100,222 | | | $ | 21,349 | | | (78.7) | % | |
Critical illness recovery hospital | | Critical illness recovery hospital | | | $ | 21,349 | | | $ | 60,136 | | | 181.7 | % |
Rehabilitation hospital | Rehabilitation hospital | | | 43,474 | | | 35,577 | | | (18.2) | | Rehabilitation hospital | | | 35,577 | | | 40,328 | | | 13.4 | |
Outpatient rehabilitation | Outpatient rehabilitation | | | 19,138 | | | 18,567 | | | (3.0) | | Outpatient rehabilitation | | | 18,567 | | | 21,742 | | | 17.1 | |
Concentra | Concentra | | | 61,581 | | | 70,122 | | | 13.9 | | Concentra | | | 70,122 | | | 75,260 | | | 7.3 | |
Other(1)(2) | | | (22,403) | | | (41,630) | | | N/M | |
Other(1) | | Other(1) | | | (41,630) | | | (46,009) | | | N/M |
Total Company | Total Company | | | $ | 202,012 | | | $ | 103,985 | | | (48.5) | % | Total Company | | | $ | 103,985 | | | $ | 151,457 | | | 45.7 | % |
Adjusted EBITDA: | Adjusted EBITDA: | | | | | | | | Adjusted EBITDA: | | | | | | | |
Critical illness recovery hospital(2) | | | $ | 113,272 | | | $ | 35,967 | | | (68.2) | % | |
Critical illness recovery hospital | | Critical illness recovery hospital | | | $ | 35,967 | | | $ | 76,773 | | | 113.5 | % |
Rehabilitation hospital | Rehabilitation hospital | | | 50,534 | | | 42,379 | | | (16.1) | | Rehabilitation hospital | | | 42,379 | | | 47,216 | | | 11.4 | |
Outpatient rehabilitation | Outpatient rehabilitation | | | 26,329 | | | 26,596 | | | 1.0 | | Outpatient rehabilitation | | | 26,596 | | | 30,199 | | | 13.5 | |
Concentra | Concentra | | | 82,015 | | | 89,469 | | | 9.1 | | Concentra | | | 89,469 | | | 93,748 | | | 4.8 | |
Other(1)(2) | | | (13,809) | | | (30,564) | | | N/M | |
Other(1) | | Other(1) | | | (30,564) | | | (33,873) | | | N/M |
Total Company | Total Company | | | $ | 258,341 | | | $ | 163,847 | | | (36.6) | % | Total Company | | | $ | 163,847 | | | $ | 214,063 | | | 30.6 | % |
Adjusted EBITDA margins: | Adjusted EBITDA margins: | | | | | | | | Adjusted EBITDA margins: | | | | | | | |
Critical illness recovery hospital(2) | | | 19.0 | % | | 6.0 | % | | | |
Critical illness recovery hospital | | Critical illness recovery hospital | | | 6.0 | % | | 12.9 | % | | |
Rehabilitation hospital | Rehabilitation hospital | | | 24.3 | | | 19.2 | | | Rehabilitation hospital | | | 19.2 | | | 20.4 | | |
Outpatient rehabilitation | Outpatient rehabilitation | | | 10.4 | | | 9.8 | | | | Outpatient rehabilitation | | | 9.8 | | | 10.2 | | | |
Concentra | Concentra | | | 19.4 | | | 21.1 | | | | Concentra | | | 21.1 | | | 20.5 | | | |
Other(1)(2) | | | N/M | | N/M | | | |
Other(1) | | Other(1) | | | N/M | | N/M | | |
Total Company | Total Company | | | 16.7 | % | | 10.2 | % | | | Total Company | | | 10.2 | % | | 12.9 | % | | |
Total assets: | Total assets: | | | | | | | | Total assets: | | | | | | | |
Critical illness recovery hospital | Critical illness recovery hospital | | | $ | 2,233,067 | | | $ | 2,367,490 | | | | Critical illness recovery hospital | | | $ | 2,367,490 | | | $ | 2,507,265 | | | |
Rehabilitation hospital | Rehabilitation hospital | | | 1,188,387 | | | 1,187,118 | | | Rehabilitation hospital | | | 1,187,118 | | | 1,203,069 | | |
Outpatient rehabilitation | Outpatient rehabilitation | | | 1,321,268 | | | 1,350,374 | | | | Outpatient rehabilitation | | | 1,350,374 | | | 1,397,823 | | | |
Concentra | Concentra | | | 2,468,157 | | | 2,339,940 | | | | Concentra | | | 2,339,940 | | | 2,300,632 | | | |
Other(1) | Other(1) | | | 709,902 | | | 291,022 | | | | Other(1) | | | 291,022 | | | 290,947 | | | |
Total Company | Total Company | | | $ | 7,920,781 | | | $ | 7,535,944 | | | | Total Company | | | $ | 7,535,944 | | | $ | 7,699,736 | | | |
Purchases of property and equipment: | | | | | | | | |
Purchases of property, equipment, and other assets: | | Purchases of property, equipment, and other assets: | | | | | | | |
Critical illness recovery hospital | Critical illness recovery hospital | | | $ | 14,385 | | | $ | 19,569 | | | Critical illness recovery hospital | | | $ | 19,569 | | | $ | 23,658 | | |
Rehabilitation hospital | Rehabilitation hospital | | | 665 | | | 6,274 | | | | Rehabilitation hospital | | | 6,274 | | | 8,582 | | | |
Outpatient rehabilitation | Outpatient rehabilitation | | | 7,335 | | | 9,414 | | | | Outpatient rehabilitation | | | 9,414 | | | 9,932 | | | |
Concentra | Concentra | | | 12,680 | | | 10,240 | | | | Concentra | | | 10,240 | | | 14,400 | | | |
Other(1) | Other(1) | | | 4,654 | | | 1,348 | | | | Other(1) | | | 1,348 | | | 2,313 | | | |
Total Company | Total Company | | | $ | 39,719 | | | $ | 46,845 | | | | Total Company | | | $ | 46,845 | | | $ | 58,885 | | | |
(1) Other includes our corporate administration and shared services, as well as employee leasing services with our non-consolidating subsidiaries. Total assets include certain non-consolidating joint ventures and minority investments in other healthcare related businesses.
(2) During the three months ended March 31, 2021, we recognized other operating income of $34.0 million. The impact of this income on the operating results of our critical illness recovery hospital segment and other activities is outlined within the table presented under “Summary Financial Results” for the three months ended March 31, 2021.
N/M — Not meaningful.
Three Months Ended March 31, 2022,2023, Compared to Three Months Ended March 31, 20212022
InFor the following,three months ended March 31, 2023, we discuss our resultshad revenue of operations related to revenue, operating expenses, other operating income, Adjusted EBITDA, depreciation$1,665.0 million and amortization, income from operations equity in earnings of unconsolidated subsidiaries, interest,$151.5 million, as compared to revenue of $1,599.5 million and income taxes, and net income attributable to non-controlling interests.
Please refer to “Effectsfrom operations of the COVID-19 Pandemic on our Results of Operations” above for further discussion.
Revenue
Our revenue increased 3.4% to $1,599.5$104.0 million for the three months ended March 31, 2022,2022. For the three months ended March 31, 2023, Adjusted EBITDA was $214.1 million, with an Adjusted EBITDA margin of 12.9%, as compared to $1,546.5Adjusted EBITDA of $163.8 million and an Adjusted EBITDA margin of 10.2% for the three months ended March 31, 2022.
The most significant contributor to the improvement in our financial performance for the three months ended March 31, 2023, compared to the three months ended March 31, 2022, was a decrease in labor costs in our critical illness recovery hospital segment as the investments made in the recruitment, hiring, and retention of full-time staff in 2022 resulted in a significant decrease in contract labor utilization. Additionally, reduced demand in the marketplace resulted in lower contract labor rates, which further contributed to the decrease in total contract labor costs. We believe the ratio of personnel expense to net revenue for the critical illness recovery hospital segment for the three months ended March 31, 2023, is indicative of a more stabilized labor environment.
Revenue
Critical Illness Recovery Hospital Segment. Revenue was $593.9 million for the three months ended March 31, 2021.
Critical Illness Recovery Hospital Segment. Revenue increased 1.2%2023, compared to $601.8 million for the three months ended March 31, 2022, compared to $594.9 million2022. Our patient days were 286,746 for the three months ended March 31, 2021. The increase in revenue was due2023, compared to an increase in revenue per patient day during289,217 days for the three months ended March 31, 2022, as compared to2022. Occupancy in our critical illness recovery hospitals was 72% and 71% for the three months ended March 31, 2021.2023 and 2022, respectively. Revenue per patient day increased 2.5%was $2,058 for the three months ended March 31, 2023, compared to $2,075 for the three months ended March 31, 2022, compared to $2,024 for the three months ended March 31, 2021. We experienced increases in both our non-Medicare and2022. Our Medicare revenue per patient day decreased during the three months ended March 31, 2022, compared2023 primarily due to the three months ended March 31, 2021. Our patient days were 289,217 for the three months ended March 31, 2022, compared to 293,118 days for the three months ended March 31, 2021. Our patient days for the three months ended March 31, 2021 benefited from an increase in referrals from general acute care hospitals, which was due in part to an increase in volume in the intensive care units in those hospitals as a resultreinstatement of the COVID-19 pandemic. As COVID-19 cases which require hospitalization decline, the patient volume experienced in intensive care units has also declined. This adversely impacted the level of referrals we received during the three months ended March 31, 2022. Occupancy in our critical illness recovery hospitals was 71%, 75%, and 71% for the three months ended March 31, 2022, 2021, and 2019, respectively.2.0% cut to Medicare payments due to sequestration.
Rehabilitation Hospital Segment. Revenue increased 6.2%4.9% to $231.5 million for the three months ended March 31, 2023, compared to $220.6 million for the three months ended March 31, 2022, compared2022. The increase in revenue was principally due to $207.8 millionan increase in patient days. Our patient days increased 4.0% to 107,910 days for the three months ended March 31, 2021. The increase in revenue resulted principally due2023, compared to an increase in revenue per patient day during103,802 days for the three months ended March 31, 2022, compared to2022. Occupancy in our rehabilitation hospitals was 86% and 84% for the three months ended March 31, 2021.2023 and 2022, respectively. Our revenue per patient day increased 4.9%1.3% to $1,969 for the three months ended March 31, 2023, compared to $1,943 for the three months ended March 31, 2022, compared to $1,853 for the three months ended March 31, 2021.2022. We experienced increases in both our Medicare and non-Medicare revenue per patient day during the three months ended March 31, 2022,2023, compared to the three months ended March 31, 2021. Our patient days increased 1.3% to 103,802 days for the three months ended March 31, 2022, compared to 102,439 days for the three months ended March 31, 2021. Occupancy in our rehabilitation hospitals was 84%, 84%, and 76% for the three months ended March 31, 2022, 2021, and 2019, respectively.2022.
Outpatient Rehabilitation Segment. Revenue increased 7.9%8.8% to $295.9 million for the three months ended March 31, 2023, compared to $271.9 million for the three months ended March 31, 2022, compared to $252.0 million for the three months ended March 31, 2021.2022. The increase in revenue was dueprimarily attributable to an increase inpatient visits, which increased 10.0%14.1% to 2,310,086 for the three months ended March 31, 2022, compared to 2,100,154 and 2,054,4832,636,770 visits for the three months ended March 31, 2021 and 2019, respectively. The increase in2023, compared to 2,310,086 visits was attributable to outpatient rehabilitation clinics which commenced operations since March 31, 2021, as well as improvement in volume in our clinics which operated during bothfor the three months ended March 31, 2022 and 2021.2022. Our patientrevenue per visit volume was adversely impacted by the ongoing effects of the COVID-19 pandemic duringdecreased to $101 for the three months ended March 31, 2021. Our revenue per visit was2023, compared to $102 for the three months ended March 31, 2022, comparedprimarily due to $104a decrease in Medicare reimbursement rates along with the impact of the reinstatement of the 2.0% cut to Medicare payments due to sequestration.
Concentra Segment. Revenue increased 7.8% to $456.3 million for the three months ended March 31, 2021. The decrease in revenue per visit was primarily due to a decrease in the reimbursement rates received under the Medicare physician fee schedule, as described further under “Regulatory Changes.” Additionally, we experienced a greater proportion of Medicare visits during the three months ended March 31, 2022. These visits yield lower per visit rates.
Concentra Segment. Revenue increased2023, compared to $423.4 million for the three months ended March 31, 2022, compared2022. The increase in revenue was due to $422.8 millionincreases in both revenue per visit and patient visits. Our revenue per visit increased 6.4% to $133 for the three months ended March 31, 2021. The increase in revenue was primarily attributable2023, compared to an increase in visits, which increased 11.5% to 3,116,898$125 for the three months ended March 31, 2022, compared2022. Our patient visits increased 3.2% to 2,795,574 and 2,911,6073,217,945 for the three months ended March 31, 2023, compared to 3,116,898 visits for the three months ended March 31, 2021 and 2019, respectively. This increase was offset partially by a decline in the revenue generated from our2022. COVID-19 screening and testing services. These services contributeddid not contribute to the Concentra segment’s revenue for the three months ended March 31, 2023, compared to $9.1 million of revenue from these services during the three months ended March 31, 2022, compared to $51.7 million during the three months ended March 31, 2021. Our revenue per visit was $125 for both the three months ended March 31, 2022 and 2021. We experienced increases in the reimbursement rates for our employer services and workers’ compensation visits during the three months ended March 31, 2022. The increases in our reimbursement rates were offset, however, by a greater percentage of employer services visits, which yield lower per visit rates.
Operating Expenses
Our operating expenses consist principally of cost of services and general and administrative expenses. Our operating expenses were $1,461.1 million, or 87.7% of revenue, for the three months ended March 31, 2023, compared to $1,444.5 million, or 90.3% of revenue, for the three months ended March 31, 2022, compared to $1,328.9 million, or 85.9% of revenue, for the three months ended March 31, 2021.2022. Our cost of services, a major component of which is labor expense, was $1,418.8 million, or 85.2% of revenue, for the three months ended March 31, 2023, compared to $1,407.0 million, or 88.0% of revenue, for the three months ended March 31, 2022 compared to $1,293.4 million, or 83.6% of revenue, for the three months ended March 31, 2021.. The increasedecrease in our operating expenses relative to our revenue was principally dueattributable to increasedthe decreased labor costs within our critical illness recovery hospital and rehabilitation hospital segments,segment, as discussedexplained further below underwithin the “Adjusted EBITDA.EBITDA” discussion. General and administrative expenses were $42.3 million, or 2.5% of revenue, for the three months ended March 31, 2023, compared to $37.5 million, or 2.3% of revenue, for the three months ended March 31, 2022, compared to $35.4 million, or 2.3%2022.
Other Operating Income
For the three months ended March 31, 2021, we had other operating income of $34.0 million. Of this amount, $16.1 million related to the recognition of payments received under the Public Health and Social Services Emergency Fund, also referred to as the Provider Relief Fund, for health care related expenses and lost revenues attributable to COVID-19. This income is included within the operating results of our other activities. The remaining $17.9 million is related to the outcome of litigation with CMS. This income is included within the operating results of our critical illness recovery hospital segment.
Adjusted EBITDA
Critical Illness Recovery Hospital Segment. Adjusted EBITDA wasincreased 113.5% to $76.8 million for the three months ended March 31, 2023, compared to $36.0 million for the three months ended March 31, 2022, compared to $113.3 million for the three months ended March 31, 2021.2022. Our Adjusted EBITDA margin for the critical illness recovery hospital segment was 12.9% for the three months ended March 31, 2023, compared to 6.0% for the three months ended March 31, 2022, compared to 19.0% for the three months ended March 31, 2021. Our2022. The increases in our Adjusted EBITDA and Adjusted EBITDA margin for the three months ended March 31, 2022 were adversely affected by the incurrence of additional labor costs. Constrained staffing due to a shortage of healthcare workers, which has led to increases in incentive and bonus pay for our employees, and greater dependence on contract clinical workers have contributed to the increased labor costs. Our use of contract clinical workers has increased by approximately 26.0% during the three months ended March 31, 2022,2023, as compared to the three months ended March 31, 2021. For2022, were principally due to lower labor costs resulting from our efforts in 2022 to hire additional full-time nursing staff, improve retention among our employees, and decrease our reliance on contract labor, and lower contract labor rates due to reduced demand in the marketplace. Our total contract labor costs decreased by approximately 76.0% during the three months ended March 31, 2022, our contracted clinical labor represented approximately 27.0% of our workforce, compared to approximately 21.0% for the three months ended March 31, 2021. Additionally, the cost of contract clinical labor has risen significantly due to the demand for healthcare professionals. These costs were approximately 23.0% higher during the three months ended March 31, 2022,2023, as compared to the three months ended March 31, 2021. During2022, which was driven by a 53.1% decrease in the three months ended March 31, 2021, our Adjusted EBITDAutilization of contract registered nurses and Adjusted EBITDA margin also benefited froma 42.0% decrease in the recognition of $17.9 million of other operating income, as described further above under “Other Operating Income.”rate per hour for contract registered nurses.
Rehabilitation Hospital Segment. Adjusted EBITDA wasincreased 11.4% to $47.2 million for the three months ended March 31, 2023, compared to $42.4 million for the three months ended March 31, 2022, compared to $50.5 million for the three months ended March 31, 2021.2022. Our Adjusted EBITDA margin for the rehabilitation hospital segment was 20.4% for the three months ended March 31, 2023, compared to 19.2% for the three months ended March 31, 2022, compared to 24.3%2022. The increase in Adjusted EBITDA for the three months ended March 31, 2021. Our Adjusted EBITDA and Adjusted EBITDA margin for2023, as compared to the three months ended March 31, 2022, were adversely affectedwas primarily attributable to an increase in revenue, which was partially offset by the incurrence of additional labor costs. Constrained staffing due to a shortage of healthcare workers, which has led to increases in incentive and bonus pay for our employees, and greater dependence on contract clinical workers have contributed tocosts associated with the increased labor costs. Additionally, the cost of contract clinical labor has risen significantly due to the demand for healthcare professionals. The increase in contracted clinical labor usage and labor rates occurred predominantly within our hospitals operating in California and New Jersey.patient days.
Outpatient Rehabilitation Segment. Adjusted EBITDA increased 1.0%13.5% to $30.2 million for the three months ended March 31, 2023, compared to $26.6 million for the three months ended March 31, 2022, compared to $26.3 million for the three months ended March 31, 2021.2022. Our Adjusted EBITDA margin for the outpatient rehabilitation segment was 10.2% for the three months ended March 31, 2023, compared to 9.8% for the three months ended March 31, 2022,2022. The increase in our Adjusted EBITDA was primarily due to an increase in patient visits, partially offset by increases in labor costs for the three months ended March 31, 2023, as compared to 10.4%the three months ended March 31, 2022.
Concentra Segment. Adjusted EBITDA increased 4.8% to $93.7 million for the three months ended March 31, 2021. The increase in Adjusted EBITDA was principally driven by an increase in patient visit volume during2023, compared to $89.5 million for the three months ended March 31, 2022. Our Adjusted EBITDA and Adjusted EBITDA margin for the Concentra segment was 20.5% for the three months ended March 31, 2022 were adversely affected by disruptions in our workforce which were caused by the COVID-19 Omicron variant.
Concentra Segment. Adjusted EBITDA increased 9.1% to $89.5 million for the three months ended March 31, 2022,2023, compared to $82.0 million for the three months ended March 31, 2021. Our Adjusted EBITDA margin for the Concentra segment was 21.1% for the three months ended March 31, 2022, compared2022. The increase in Adjusted EBITDA was primarily due to 19.4%an increase in revenue, partially offset by increases in labor costs for the three months ended March 31, 2021. The increases in Adjusted EBITDA and Adjusted EBITDA margin were primarily attributable2023, as compared to an increase in patient visits in our centers during the three months ended March 31, 2022.
Depreciation and Amortization
Depreciation and amortization expense was $52.4 million for the three months ended March 31, 2023, compared to $51.0 million for the three months ended March 31, 2022, compared to $49.6 million for the three months ended March 31, 2021.2022.
Income from Operations
For the three months ended March 31, 2022,2023, we had income from operations of $104.0$151.5 million, compared to $202.0$104.0 million for the three months ended March 31, 2021.2022. The increasedecline in labor costs experienced within our critical illness recovery hospital and rehabilitation hospital segmentssegment was the primary cause of the decreaseincrease in income from operations, as discussed above under “Adjusted EBITDA.” Additionally, we recognized other operating income of $34.0 million during the three months ended March 31, 2021, as described further under “Other Operating IncomeEBITDA.”
Equity in Earnings of Unconsolidated Subsidiaries
For the three months ended March 31, 2022,2023, we had equity in earnings of unconsolidated subsidiaries of $5.4$8.6 million, compared to $9.9$5.4 million for the three months ended March 31, 2021.2022. The decreaseincrease in equity in earnings is principally due in part to an increase in labor costs incurred by the improved operating performance of our rehabilitation businesses in which we are a minority owner. Additionally, certain
Interest
Our term loan is subject to an interest rate cap, which limits the one-month LIBOR rate to 1.0% on $2.0 billion of these rehabilitation businesses recognized incomeprincipal outstanding under the term loan. The one-month LIBOR rate was 4.86% at March 31, 2023, compared to 0.45% at March 31, 2022. Accordingly, the interest rate cap mitigated our exposure to increases in one-month LIBOR in excess of 1.0% during the three months ended March 31, 2023. Interest expense was $48.6 million for the three months ended March 31, 2021 for the payments they received under the Provider Relief Fund for health care related expenses and lost revenues attributable2023, compared to COVID-19.
Interest
Interest expense was $35.5 million for the three months ended March 31, 2022, compared to $34.4 million for the three months ended March 31, 2021.2022. The increase in interest expense was caused by the borrowings we made under our revolving facility, duringas well an increase in the one-month LIBOR rate, as described further above.
Income Taxes
We recorded income tax expense of $26.2 million for the three months ended March 31, 2022.
For the three months ended March 31, 2021, we recognized interest income2023, which represented an effective tax rate of $4.7 million. The interest income is related to the outcome of litigation with CMS.
Income Taxes
23.5%. We recorded income tax expense of $17.9 million for the three months ended March 31, 2022, which represented an effective tax rate of 24.3%. We recorded
The reduction in our effective tax rate resulted principally from an increase in our income before income taxes generated from our less than wholly owned subsidiaries taxed as partnerships. For these subsidiaries, we only incur income tax expense on our share of $45.1 millionthe earnings, however the full earnings of these subsidiaries are reflected in income before income taxes on the Condensed Consolidated Statement of Operations. The downward effect of the untaxed income allocated to non-controlling interests on the effective tax rate was 3.5% for the three months ended March 31, 2021, which represented an effective tax rate of 24.7%.2023, compared to 2.5% for the three months ended March 31, 2022.
Net Income Attributable to Non-Controlling Interests
Net income attributable to non-controlling interests was $14.5 million for the three months ended March 31, 2023, compared to $6.8 million for the three months ended March 31, 2022, compared to $26.7 million for the three months ended March 31, 2021.2022. The decreaseincrease in net income attributable to non-controlling interests was principally due to a decreasean increase in the net income of our less than wholly owned critical illness recovery hospitals and rehabilitation hospitals.subsidiaries. Many of these hospitals were impacted by increases insubsidiaries benefited from lower labor costs during the three months ended March 31, 2022,2023, as compared to the three months ended March 31, 2021. The decline in net income attributable to non-controlling interests was also due to a change in our ownership interest of Concentra Group Holdings Parent. Since March 31, 2021, we have acquired additional outstanding membership interests of Concentra Group Holdings Parent.2022.
Liquidity and Capital Resources
Cash Flows for the Three Months Ended March 31, 20222023 and Three Months Ended March 31, 20212022
In the following, we discuss cash flows from operating activities, investing activities, and financing activities.
| | | | Three Months Ended March 31, | | | Three Months Ended March 31, |
| | | 2021 | | 2022 | | | 2022 | | 2023 |
| | | (in thousands) | | | (in thousands) |
Cash flows provided by operating activities | Cash flows provided by operating activities | | $ | 239,888 | | | $ | 6,337 | | Cash flows provided by operating activities | | $ | 6,337 | | | $ | 51,440 | |
Cash flows used in investing activities | Cash flows used in investing activities | | (52,585) | | | (55,331) | | Cash flows used in investing activities | | (55,331) | | | (69,062) | |
Cash flows provided by (used in) financing activities | | (14,090) | | | 105,565 | | |
Net increase in cash and cash equivalents | | 173,213 | | | 56,571 | | |
Cash flows provided by financing activities | | Cash flows provided by financing activities | | 105,565 | | | 3,419 | |
Net increase (decrease) in cash and cash equivalents | | Net increase (decrease) in cash and cash equivalents | | 56,571 | | | (14,203) | |
Cash and cash equivalents at beginning of period | Cash and cash equivalents at beginning of period | | 577,061 | | | 74,310 | | Cash and cash equivalents at beginning of period | | 74,310 | | | 97,906 | |
Cash and cash equivalents at end of period | Cash and cash equivalents at end of period | | $ | 750,274 | | | $ | 130,881 | | Cash and cash equivalents at end of period | | $ | 130,881 | | | $ | 83,703 | |
Operating activities provided $51.4 million of cash flows for the three months ended March 31, 2023, compared to $6.3 million of cash flows for the three months ended March 31, 2022, compared to $239.9 million of cash flows for the three months ended March 31, 2021.2022. The decrease in cash flows from operating activities was primarily due to our financial performance during the three months ended March 31, 2022. We also repaid2022 included the repayment of $62.9 million of Medicare advance payments received under the Accelerated and Advance Payment Program during the three months endedpayments. The remaining change in cash flows provided by operating activities year over year is attributable to routine changes in net working capital, partially offset by an increase in net income.
Our days sales outstanding was 54 days at March 31, 2023, compared to 55 days at December 31, 2022. CMS began recouping these payments in April 2021.
Our days sales outstanding was 53 days at March 31, 2022, compared to 52 days at December 31, 2021. Our days sales outstanding was 56 days at both March 31, 2021 and December 31, 2020. Our days sales outstanding will fluctuate based upon variability in our collection cycles and patient volumes.
Investing activities used $69.1 million of cash flows for the three months ended March 31, 2023. The principal uses of cash were $58.9 million for purchases of property, equipment, and other assets, and $10.2 million for investments in and acquisitions of businesses. Investing activities used $55.3 million of cash flows for the three months ended March 31, 2022. The principal uses of cash were $46.8 million for purchases of property and equipment and $8.5 million for investments in and acquisitions of businesses. Investing
Financing activities used $52.6provided $3.4 million of cash flows for the three months ended March 31, 2021.2023. The principal source of cash was net borrowings under our revolving facility of $15.0 million and net borrowings on our other debt of $10.3 million. The principal uses of cash were $39.7$15.9 million of dividend payments to common stockholders and $8.0 million for distributions to and purchases of property and equipment and $12.9 million for investments in and acquisitions of businesses.
non-controlling interests. Financing activities provided $105.6 million of cash flows for the three months ended March 31, 2022. The principal source of cash was net borrowings under our revolving facility of $180.0 million. The principal uses of cash were $51.7 million of cash for repurchases of common stock, $16.7 million of dividend payments to common stockholders and $10.3 million for distributions to and purchases of non-controlling interests. Financing activities used $14.1 million of cash flows for the three months ended March 31, 2021. The principal use of cash was $13.7 million for distributions to and purchases of non-controlling interests.
Capital Resources
Working capital. We had net working capital of $61.7$128.0 million at March 31, 2022,2023, compared to a net working capital deficit of $133.6$116.2 million at December 31, 2021.2022. The increase in working capital was primarily due to increasesan increase in accounts receivable and a decrease in our cash and cash equivalents and accounts receivable, as well as a reductionaccrued expenses. This was partially offset by an increase in the current portion of our liability related to the payments we received under the Accelerated and Advance Payment Program.long-term debt.
Credit facilities. On February 21, 2023, Select entered into Amendment No. 6 to the Select credit agreement. Amendment No. 6 extended the maturity date on $530.0 million of the total borrowing capacity of $650.0 million under the Select revolving facility to March 6, 2025; however, in the event the Company’s term loan is not refinanced by January 3, 2025, the maturity date for those revolving borrowings will be January 3, 2025.
At March 31, 2022,2023, Select had outstanding borrowings under its credit facilities consisting of a $2,103.4 million term loan (excluding unamortized original issue discounts and debt issuance costs of $12.3$8.1 million) and borrowings of $340.0$460.0 million under ourits revolving facility. At March 31, 2022,2023, Select had $252.8$133.8 million of availability under its revolving facility after giving effect to $57.2$56.2 million of outstanding letters of credit.
Stock Repurchase Program. Holdings’ boardBoard of directorsDirectors has authorized a common stock repurchase program to repurchase up to $1.0 billion worth of shares of its common stock. The common stock repurchase program will remain in effect until December 31, 2023, unless further extended or earlier terminated by the boardBoard of directors.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 its revolving facility. DuringHoldings did not repurchase shares during the three months ended March 31, 2022, Holdings repurchased 2,128,494 shares at a cost of approximately $51.7 million, or $24.28 per share, which includes transaction costs.2023. Since the inception of the program through March 31, 2022,2023, Holdings has repurchased 42,480,12248,234,823 shares at a cost of approximately $466.9$600.3 million, or $10.99$12.45 per share, which includes transaction costs. The Inflation Reduction Act of 2022, which enacted a 1% excise tax on stock repurchases that exceed $1.0 million, became effective January 1, 2023.
Use of Capital Resources. We may from time to time pursue opportunities to develop new joint venture relationships with large, regional health systems and other healthcare 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.
Liquidity
The duration and extent of the impact from the COVID-19 pandemic on our operations and liquidity depends on future developments that cannot be accurately predicted at this time; however, weWe believe our internally generated cash flows and borrowing capacity under our revolving facility will allow us to finance our operations in both the short and long term. As of March 31, 2022,2023, we had cash and cash equivalents of $130.9$83.7 million and $252.8$133.8 million of availability under the revolving facility after giving effect to $340.0$460.0 million of outstanding borrowings and $57.2$56.2 million of outstanding letters of credit.
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.
Dividend
On May 5, 2022,3, 2023, our boardBoard of directorsDirectors declared a cash dividend of $0.125 per share. The dividend will be payable on or about June 1, 2022May 31, 2023 to stockholders of record as of the close of business on May 19, 2022.18, 2023.
There is no assurance that future dividends will be declared. The declaration and payment of dividends in the future are at the discretion of our boardBoard of directorsDirectors after taking into account various factors, including, but not limited to, our financial condition, operating results, available cash and current and anticipated cash needs, the terms of our indebtedness, and other factors our boardBoard of directorsDirectors may deem to be relevant.
Recent Accounting PronouncementsEffects of Inflation
There were no new accounting standards issued since December 31, 2021, which willThe healthcare industry is labor intensive and our largest expenses are labor related costs. Wage and other expenses increase during periods of inflation and when labor shortages occur in the marketplace. We have a material effect onrecently experienced higher labor costs related to the financial statements upon adoption.current inflationary environment and competitive labor market. In addition, suppliers have passed along rising costs to us in the form of higher prices. We cannot predict our ability to pass along cost increases to our customers.
Recent Accounting Pronouncements
Refer to Note 2 – Accounting Policies of the notes to our condensed consolidated financial statements included herein for information regarding recent accounting pronouncements.
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 our credit facilities, which generally bear interest rates that are indexed against LIBOR.
At March 31, 2022,2023, Select had outstanding borrowings under its credit facilities consisting of a $2,103.4 million term loan (excluding unamortized original issue discounts and debt issuance costs of $12.3$8.1 million) and $340.0$460.0 million of borrowings under its revolving facility.
In order to mitigate our exposure to rising interest rates, we entered into an interest rate cap transaction to limit our 1-monthone-month LIBOR rate to 1.0% on $2.0 billion of principal outstanding under our term loan. The agreement applies to interest payments through September 30, 2024. As of March 31, 2022,2023, the 1-monthone-month LIBOR rate was 0.45%4.86%. AAs of March 31, 2023, $103.4 million of our term loan borrowings are subject to variable interest rates.
As of March 31, 2023, each 0.25% changeincrease in market interest rates wouldwill impact the annual interest expense on our variable rate debt by $6.1 million until 1-month LIBOR exceeds 1.0%, at which time the impact of increases in 1-month LIBOR on the interest expense incurred on our term loan borrowings will be mitigated in part by the interest rate cap, as described further in Note 9 – Interest Rate Cap of the notes to our condensed consolidated financial statements included herein.$1.4 million.
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 March 31, 2022,2023, 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.
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 first quarter ended March 31, 2022,2023, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there is only reasonable assurance that our controls will succeed in achieving their goals under all potential future conditions.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Refer to the “Litigation” section contained within Note 1413 – Commitments and Contingencies of the notes to our condensed consolidated financial statements included herein.
ITEM 1A. RISK FACTORS
TheThere have been no material changes from our risk factorfactors set forth in this report updates, and should be read together with, the risk factors discussed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021.2022.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Purchases of Equity Securities by the Issuer
Holdings’ boardBoard of directorsDirectors authorized a common stock repurchase program to repurchase up to $1.0 billion worth of shares of its common stock. The program will remain in effect until December 31, 2023, unless further extended or earlier terminated by the boardBoard of directors.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.
The following table provides information regarding repurchases of our common stock duringDuring the three months ended March 31, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total Number of Shares Purchased | | Average Price Paid Per Share | | 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 |
January 1 - January 31, 2022 | | — | | | $ | — | | | — | | | $ | 584,796,612 | |
February 1 - February 28, 2022 | | — | | | — | | | — | | | 584,796,612 | |
March 1 - March 31, 2022 | | 2,128,494 | | | 24.28 | | | 2,128,494 | | | 533,120,670 | |
Total | | 2,128,494 | | | $ | 24.28 | | | 2,128,494 | | | $ | 533,120,670 | |
2023, Holdings did not repurchase shares under the authorized common stock repurchase program. The common stock repurchase program has an available capacity of $399.7 million as of March 31, 2023.ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
| | | | | | | | |
Number | | Description |
10.1 | | Amendment No 6, dated as of February 21, 2023, to the Credit Agreement, dated as of March 6, 2017, by and among Select Medical Holdings Corporation, Select Medical Corporation, JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, and the other lenders and issuing banks party thereto, as amended by Amendment No. 1, dated as of March 22, 2018, Amendment No. 2, dated as of October 26, 2018, Amendment No. 3, dated as of August 1, 2019, Amendment No. 4, dated as of December 10, 2019, and Amendment No. 5, dated as of June 2, 2021 (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K (file No. 001-34465) filed on February 22, 2023). |
10.2 | | |
31.1 | | |
31.2 | | |
32.1 | | |
101.INS | | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document. |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document. |
101.PRE | | Inline 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 tags are embedded within the Inline XBRL document. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | |
| 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. RombergerChristopher S. Weigl |
| | Scott A. RombergerChristopher S. Weigl |
| | Senior Vice President, Controller & Chief Accounting Officer |
| | (Principal Accounting Officer) |
Dated: May 5, 20224, 2023