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 September 30, 2019March 31, 2020
|
| |
☐ | 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 October 31, 2019,April 30, 2020, Select Medical Holdings Corporation had outstanding 134,326,112133,977,064 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, 2018 | | September 30, 2019 | | December 31, 2019 | | March 31, 2020 | |
ASSETS | |
| | |
| | |
| | |
| |
Current Assets: | |
| | |
| | |
| | |
| |
Cash and cash equivalents | $ | 175,178 |
| | $ | 135,963 |
| | $ | 335,882 |
| | $ | 73,163 |
| |
Accounts receivable | 706,676 |
| | 798,805 |
| | 762,677 |
| | 816,405 |
| |
Prepaid income taxes | 20,539 |
| | 18,804 |
| | 18,585 |
| | 12,634 |
| |
Other current assets | 90,131 |
| | 96,721 |
| | 95,848 |
| | 95,828 |
| |
Total Current Assets | 992,524 |
| | 1,050,293 |
| | 1,212,992 |
| | 998,030 |
| |
Operating lease right-of-use assets | — |
| | 986,519 |
| | 1,003,986 |
| | 1,014,969 |
| |
Property and equipment, net | 979,810 |
| | 997,467 |
| | 998,406 |
| | 978,547 |
| |
Goodwill | 3,320,726 |
| | 3,382,656 |
| | 3,391,955 |
| | 3,391,078 |
| |
Identifiable intangible assets, net | 437,693 |
| | 415,763 |
| | 409,068 |
| | 405,374 |
| |
Other assets | 233,512 |
| | 322,058 |
| | 323,881 |
| | 327,569 |
| |
Total Assets | $ | 5,964,265 |
| | $ | 7,154,756 |
| | $ | 7,340,288 |
| | $ | 7,115,567 |
| |
LIABILITIES AND EQUITY | |
| | |
| | |
| | |
| |
Current Liabilities: | |
| | |
| | |
| | |
| |
Overdrafts | $ | 25,083 |
| | $ | — |
| | |
Current operating lease liabilities | — |
| | 204,936 |
| | $ | 207,950 |
| | $ | 212,884 |
| |
Current portion of long-term debt and notes payable | 43,865 |
| | 15,656 |
| | 25,167 |
| | 17,161 |
| |
Accounts payable | 146,693 |
| | 136,801 |
| | 145,731 |
| | 131,601 |
| |
Accrued payroll | 172,386 |
| | 170,294 |
| | 183,754 |
| | 140,009 |
| |
Accrued vacation | 110,660 |
| | 119,286 |
| | 124,111 |
| | 128,705 |
| |
Accrued interest | 12,137 |
| | 10,112 |
| | 33,853 |
| | 11,339 |
| |
Accrued other | 190,691 |
| | 209,887 |
| | 191,076 |
| | 194,165 |
| |
Income taxes payable | 3,671 |
| | 2,815 |
| | 2,638 |
| | 8,090 |
| |
Total Current Liabilities | 705,186 |
| | 869,787 |
| | 914,280 |
| | 843,954 |
| |
Non-current operating lease liabilities | — |
| | 836,205 |
| | 852,897 |
| | 860,796 |
| |
Long-term debt, net of current portion | 3,249,516 |
| | 3,336,506 |
| | 3,419,943 |
| | 3,553,056 |
| |
Non-current deferred tax liability | 153,895 |
| | 147,567 |
| | 148,258 |
| | 158,782 |
| |
Other non-current liabilities | 158,940 |
| | 105,251 |
| | 101,334 |
| | 103,783 |
| |
Total Liabilities | 4,267,537 |
| | 5,295,316 |
| | 5,436,712 |
| | 5,520,371 |
| |
Commitments and contingencies (Note 13) |
|
| |
|
| | |
Commitments and contingencies (Note 11) | |
|
| |
|
| |
Redeemable non-controlling interests | 780,488 |
| | 953,697 |
| | 974,541 |
| | 620,377 |
| |
Stockholders’ Equity: | |
| | |
| | |
| | |
| |
Common stock, $0.001 par value, 700,000,000 shares authorized, 135,265,864 and 134,171,529 shares issued and outstanding at 2018 and 2019, respectively | 135 |
| | 134 |
| | |
Common stock, $0.001 par value, 700,000,000 shares authorized, 134,328,112 and 133,823,713 shares issued and outstanding at 2019 and 2020, respectively | | 134 |
| | 134 |
| |
Capital in excess of par | 482,556 |
| | 485,415 |
| | 491,038 |
| | 491,824 |
| |
Retained earnings | 320,351 |
| | 269,169 |
| | 279,800 |
| | 316,680 |
| |
Total Stockholders’ Equity | 803,042 |
| | 754,718 |
| | 770,972 |
| | 808,638 |
| |
Non-controlling interests | 113,198 |
| | 151,025 |
| | 158,063 |
| | 166,181 |
| |
Total Equity | 916,240 |
| | 905,743 |
| | 929,035 |
| | 974,819 |
| |
Total Liabilities and Equity | $ | 5,964,265 |
| | $ | 7,154,756 |
| | $ | 7,340,288 |
| | $ | 7,115,567 |
| |
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 September 30, | |
| 2018 | | 2019 | |
Net operating revenues | $ | 1,267,401 |
| | $ | 1,393,343 |
| |
Costs and expenses: | |
| | |
| |
Cost of services, exclusive of depreciation and amortization | 1,087,062 |
| | 1,183,111 |
| |
General and administrative | 29,975 |
| | 34,385 |
| |
Depreciation and amortization | 50,527 |
| | 52,941 |
| |
Total costs and expenses | 1,167,564 |
| | 1,270,437 |
| |
Income from operations | 99,837 |
| | 122,906 |
| |
Other income and expense: | |
| | |
| |
Loss on early retirement of debt | — |
| | (18,643 | ) | |
Equity in earnings of unconsolidated subsidiaries | 5,432 |
| | 6,950 |
| |
Gain on sale of businesses (Note 5) | 2,139 |
| | — |
| |
Interest expense | (50,669 | ) | | (54,336 | ) | |
Income before income taxes | 56,739 |
| | 56,877 |
| |
Income tax expense | 14,060 |
| | 12,847 |
| |
Net income | 42,679 |
| | 44,030 |
| |
Less: Net income attributable to non-controlling interests | 9,762 |
| | 13,298 |
| |
Net income attributable to Select Medical Holdings Corporation | $ | 32,917 |
| | $ | 30,732 |
| |
Earnings per common share (Note 12): | |
| | |
| |
Basic | $ | 0.24 |
| | $ | 0.23 |
| |
Diluted | $ | 0.24 |
| | $ | 0.23 |
| |
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 Nine Months Ended September 30, | | For the Three Months Ended March 31, | |
| 2018 | | 2019 | | 2019 | | 2020 | |
Net operating revenues | $ | 3,816,575 |
| | $ | 4,079,338 |
| | $ | 1,324,631 |
| | $ | 1,414,632 |
| |
Costs and expenses: | |
| | |
| | |
| | |
| |
Cost of services, exclusive of depreciation and amortization | 3,247,606 |
| | 3,465,353 |
| | 1,132,092 |
| | 1,200,371 |
| |
General and administrative | 90,951 |
| | 94,401 |
| | 28,677 |
| | 33,831 |
| |
Depreciation and amortization | 149,022 |
| | 160,072 |
| | 52,138 |
| | 51,752 |
| |
Total costs and expenses | 3,487,579 |
| | 3,719,826 |
| | 1,212,907 |
| | 1,285,954 |
| |
Income from operations | 328,996 |
| | 359,512 |
| | 111,724 |
| | 128,678 |
| |
Other income and expense: | |
| | |
| | |
| | |
| |
Loss on early retirement of debt | (10,255 | ) | | (18,643 | ) | | |
Equity in earnings of unconsolidated subsidiaries | 14,914 |
| | 18,710 |
| | 4,366 |
| | 2,588 |
| |
Gain on sale of businesses (Note 5) | 9,016 |
| | 6,532 |
| | |
Gain on sale of businesses | | 6,532 |
| | 7,201 |
| |
Interest expense | (147,991 | ) | | (156,611 | ) | | (50,811 | ) | | (46,107 | ) | |
Income before income taxes | 194,680 |
| | 209,500 |
| | 71,811 |
| | 92,360 |
| |
Income tax expense | 47,460 |
| | 52,140 |
| | 18,467 |
| | 21,912 |
| |
Net income | 147,220 |
| | 157,360 |
| | 53,344 |
| | 70,448 |
| |
Less: Net income attributable to non-controlling interests | 34,053 |
| | 40,978 |
| | 12,510 |
| | 17,323 |
| |
Net income attributable to Select Medical Holdings Corporation | $ | 113,167 |
| | $ | 116,382 |
| | $ | 40,834 |
| | $ | 53,125 |
| |
Earnings per common share (Note 12): | |
| | |
| | |
Earnings per common share (Note 10): | | |
| | |
| |
Basic | $ | 0.84 |
| | $ | 0.86 |
| | $ | 0.30 |
| | $ | 0.40 |
| |
Diluted | $ | 0.84 |
| | $ | 0.86 |
| | $ | 0.30 |
| | $ | 0.40 |
| |
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 Nine Months Ended September 30, 2019 |
| | | | | |
| | | Total Stockholders’ Equity | | | | |
| Common Stock Issued | | Common Stock Par Value | | Capital in Excess of Par | | Retained Earnings | | Total Stockholders’ Equity | | Non-controlling Interests | | Total Equity |
Balance at December 31, 2018 | 135,266 |
| | $ | 135 |
| | $ | 482,556 |
| | $ | 320,351 |
| | $ | 803,042 |
| | $ | 113,198 |
| | $ | 916,240 |
|
Net income attributable to Select Medical Holdings Corporation | |
| | |
| | |
| | 40,834 |
| | 40,834 |
| |
|
| | 40,834 |
|
Net income attributable to non-controlling interests | |
| | |
| | |
| | |
| | — |
| | 4,810 |
| | 4,810 |
|
Issuance of restricted stock | 21 |
| | 0 |
| | 0 |
| | |
| | — |
| |
|
| | — |
|
Forfeitures of unvested restricted stock | (24 | ) | | 0 |
| | 0 |
| | | | — |
| | | | — |
|
Vesting of restricted stock | | | | | 5,488 |
| | | | 5,488 |
| | | | 5,488 |
|
Issuance of non-controlling interests | | | | | | | | | — |
| | 6,837 |
| | 6,837 |
|
Distributions to and purchases of non-controlling interests | |
| | |
| | 259 |
| |
|
| | 259 |
| | (2,739 | ) | | (2,480 | ) |
Redemption adjustment on non-controlling interests | |
| | |
| | |
| | (47,470 | ) | | (47,470 | ) | |
|
| | (47,470 | ) |
Other | |
| | |
| | |
| | (122 | ) | | (122 | ) | | 413 |
| | 291 |
|
Balance at March 31, 2019 | 135,263 |
| | $ | 135 |
| | $ | 488,303 |
| | $ | 313,593 |
| | $ | 802,031 |
| | $ | 122,519 |
| | $ | 924,550 |
|
Net income attributable to Select Medical Holdings Corporation | | | | | | | 44,816 |
| | 44,816 |
| | | | 44,816 |
|
Net income attributable to non-controlling interests | | | | | | | | | — |
| | 3,663 |
| | 3,663 |
|
Issuance of restricted stock | 187 |
| | 0 |
| | 0 |
| | | | — |
| | | | — |
|
Vesting of restricted stock | | | | | 5,591 |
| | | | 5,591 |
| | | | 5,591 |
|
Repurchase of common shares | (936 | ) | | 0 |
| | (8,164 | ) | | (5,456 | ) | | (13,620 | ) | | | | (13,620 | ) |
Exercise of stock options | 50 |
| | 0 |
| | 459 |
| | | | 459 |
| | | | 459 |
|
Issuance of non-controlling interests | | | | | 6,366 |
| | | | 6,366 |
| | 24,761 |
| | 31,127 |
|
Distributions to and purchases of non-controlling interests | | | | | 14 |
| | | | 14 |
| | (1,430 | ) | | (1,416 | ) |
Redemption adjustment on non-controlling interests | | | | | | | 270 |
| | 270 |
| | | | 270 |
|
Other | | | | | | | 82 |
| | 82 |
| | 428 |
| | 510 |
|
Balance at June 30, 2019 | 134,564 |
| | $ | 135 |
| | $ | 492,569 |
| | $ | 353,305 |
| | $ | 846,009 |
| | $ | 149,941 |
| | $ | 995,950 |
|
Net income attributable to Select Medical Holdings Corporation | | | | | | | 30,732 |
| | 30,732 |
| | | | 30,732 |
|
Net income attributable to non-controlling interests | | | | | | | | | — |
| | 7,202 |
| | 7,202 |
|
Issuance of restricted stock | 1,069 |
| | 1 |
| | (1 | ) | | | | — |
| | | | — |
|
Forfeitures of unvested restricted stock | (12 | ) | | 0 |
| | 0 |
| | | | — |
| | | | — |
|
Vesting of restricted stock | | | | | 6,050 |
| | | | 6,050 |
| | | | 6,050 |
|
Repurchase of common shares | (1,494 | ) | | (2 | ) | | (13,616 | ) | | (10,071 | ) | | (23,689 | ) | | | | (23,689 | ) |
Exercise of stock options | 45 |
| | 0 |
| | 413 |
| | | | 413 |
| | | | 413 |
|
Distributions to and purchases of non-controlling interests | | | | |
|
| | | | — |
| | (6,538 | ) | | (6,538 | ) |
Redemption adjustment on non-controlling interests | | | | | | | (104,553 | ) | | (104,553 | ) | | | | (104,553 | ) |
Other | | | | | | | (244 | ) | | (244 | ) | | 420 |
| | 176 |
|
Balance at September 30, 2019 | 134,172 |
| | $ | 134 |
| | $ | 485,415 |
| | $ | 269,169 |
| | $ | 754,718 |
| | $ | 151,025 |
| | $ | 905,743 |
|
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, 2020 |
| | | | | |
| | | Total Stockholders’ Equity | | | | |
| Common Stock Issued | | Common Stock Par Value | | Capital in Excess of Par | | Retained Earnings | | Total Stockholders’ Equity | | Non-controlling Interests | | Total Equity |
Balance at December 31, 2019 | 134,328 |
| | $ | 134 |
| | $ | 491,038 |
| | $ | 279,800 |
| | $ | 770,972 |
| | $ | 158,063 |
| | $ | 929,035 |
|
Net income attributable to Select Medical Holdings Corporation | |
| | |
| | |
| | 53,125 |
| | 53,125 |
| |
|
| | 53,125 |
|
Net income attributable to non-controlling interests | |
| | |
| | |
| | |
| | — |
| | 10,067 |
| | 10,067 |
|
Issuance of restricted stock | 2 |
| | 0 |
| | 0 |
| | |
| | — |
| |
|
| | — |
|
Forfeitures of unvested restricted stock | (15 | ) | | 0 |
| | 0 |
| | | | — |
| | | | — |
|
Vesting of restricted stock | | | | | 6,136 |
| | | | 6,136 |
| | | | 6,136 |
|
Repurchase of common shares | (492 | ) | | 0 |
| | (5,350 | ) | | (3,341 | ) | | (8,691 | ) | | | | (8,691 | ) |
Issuance of non-controlling interests | | | | | | | | | — |
| | 1,679 |
| | 1,679 |
|
Distributions to and purchases of non-controlling interests | |
| | |
| |
|
| | (2,726 | ) | | (2,726 | ) | | (4,048 | ) | | (6,774 | ) |
Redemption adjustment on non-controlling interests | |
| | |
| | |
| | (10,123 | ) | | (10,123 | ) | |
|
| | (10,123 | ) |
Other | |
| | |
| | |
| | (55 | ) | | (55 | ) | | 420 |
| | 365 |
|
Balance at March 31, 2020 | 133,823 |
| | $ | 134 |
| | $ | 491,824 |
| | $ | 316,680 |
| | $ | 808,638 |
| | $ | 166,181 |
| | $ | 974,819 |
|
| | | For the Nine Months Ended September 30, 2018 | For the Three Months Ended March 31, 2019 |
| | | | | | | | | | |
| | | Total Stockholders’ Equity | | | | | | | Total Stockholders’ Equity | | | | |
| Common Stock Issued | | Common Stock Par Value | | Capital in Excess of Par | | Retained Earnings | | Total Stockholders’ Equity | | Non-controlling Interests | | Total Equity | Common Stock Issued | | Common Stock Par Value | | Capital in Excess of Par | | Retained Earnings | | Total Stockholders’ Equity | | Non-controlling Interests | | Total Equity |
Balance at December 31, 2017 | 134,115 |
| | $ | 134 |
| | $ | 463,499 |
| | $ | 359,735 |
| | $ | 823,368 |
| | $ | 109,236 |
| | $ | 932,604 |
| |
Balance at December 31, 2018 | | 135,266 |
| | $ | 135 |
| | $ | 482,556 |
| | $ | 320,351 |
| | $ | 803,042 |
| | $ | 113,198 |
| | $ | 916,240 |
|
Net income attributable to Select Medical Holdings Corporation | |
| | |
| | |
| | 33,739 |
| | 33,739 |
| | | | 33,739 |
| | | | | | | 40,834 |
| | 40,834 |
| | | | 40,834 |
|
Net income attributable to non-controlling interests | |
| | |
| | |
| | |
| | — |
| | 4,500 |
| | 4,500 |
| | | | | | | | | — |
| | 4,810 |
| | 4,810 |
|
Issuance of restricted stock | 4 |
| | 0 |
| | 0 |
| | |
| | — |
| | | | — |
| 21 |
| | 0 |
| | 0 |
| | | | — |
| | | | — |
|
Forfeitures of unvested restricted stock | (88 | ) | | 0 |
| | 0 |
| | | | — |
| | | | — |
| (24 | ) | | 0 |
| | 0 |
| | | | — |
| | | | — |
|
Vesting of restricted stock | | | | | 4,717 |
| | | | 4,717 |
| | | | 4,717 |
| | | | | 5,488 |
| | | | 5,488 |
| | | | 5,488 |
|
Repurchase of common shares | (7 | ) | | 0 |
| | (69 | ) | | (53 | ) | | (122 | ) | | | | (122 | ) | |
Exercise of stock options | 80 |
| | 0 |
| | 738 |
| | |
| | 738 |
| | | | 738 |
| |
Issuance and exchange of non-controlling interests | | | | | | | 74,341 |
| | 74,341 |
| | | | 74,341 |
| |
Issuance of non-controlling interests | | | | | | | | | | — |
| | 6,837 |
| | 6,837 |
|
Distributions to and purchases of non-controlling interests | |
| | |
| | |
| | (83,233 | ) | | (83,233 | ) | | (1,094 | ) | | (84,327 | ) | | | | | 259 |
| | | | 259 |
| | (2,739 | ) | | (2,480 | ) |
Redemption adjustment on non-controlling interests | |
| | |
| | |
| | (1,051 | ) | | (1,051 | ) | | | | (1,051 | ) | | | | | | | (47,470 | ) | | (47,470 | ) | | | | (47,470 | ) |
Other | |
| | |
| | |
| | 103 |
| | 103 |
| | 35 |
| | 138 |
| | | | | | | (122 | ) | | (122 | ) | | 413 |
| | 291 |
|
Balance at March 31, 2018 | 134,104 |
| | $ | 134 |
| | $ | 468,885 |
| | $ | 383,581 |
| | $ | 852,600 |
| | $ | 112,677 |
| | $ | 965,277 |
| |
Net income attributable to Select Medical Holdings Corporation | | | | | | | 46,511 |
| | 46,511 |
| | | | 46,511 |
| |
Net income attributable to non-controlling interests | | | | | | | | | — |
| | 3,139 |
| | 3,139 |
| |
Issuance of restricted stock | 170 |
| | 0 |
| | 0 |
| | | | — |
| | | | — |
| |
Vesting of restricted stock | | | | | 4,845 |
| | | | 4,845 |
| | | | 4,845 |
| |
Repurchase of common shares | (42 | ) | | 0 |
| | (421 | ) | | (346 | ) | | (767 | ) | | | | (767 | ) | |
Exercise of stock options | 95 |
| | 0 |
| | 882 |
| | | | 882 |
| | | | 882 |
| |
Issuance and exchange of non-controlling interests | | | | | 1,553 |
| | | | 1,553 |
| | 1,921 |
| | 3,474 |
| |
Distributions to and purchases of non-controlling interests | | | | | (932 | ) | | (384 | ) | | (1,316 | ) | | (1,958 | ) | | (3,274 | ) | |
Redemption adjustment on non-controlling interests | | | | | | | (8,500 | ) | | (8,500 | ) | | | | (8,500 | ) | |
Other | | | | | | | (337 | ) | | (337 | ) | | 677 |
| | 340 |
| |
Balance at June 30, 2018 | 134,327 |
| | $ | 134 |
| | $ | 474,812 |
| | $ | 420,525 |
| | $ | 895,471 |
| | $ | 116,456 |
| | $ | 1,011,927 |
| |
Net income attributable to Select Medical Holdings Corporation | | | | | | | 32,917 |
| | 32,917 |
| | | | 32,917 |
| |
Net income attributable to non-controlling interests | | | | | | | | | — |
| | 518 |
| | 518 |
| |
Issuance of restricted stock | 1,048 |
| | 1 |
| | (1 | ) | | | | — |
| | | | — |
| |
Vesting of restricted stock | | | | | 5,497 |
| |
|
| | 5,497 |
| | | | 5,497 |
| |
Repurchase of common shares | (236 | ) | | 0 |
| | (2,499 | ) | | (2,252 | ) | | (4,751 | ) | | | | (4,751 | ) | |
Exercise of stock options | 1 |
| | 0 |
| | 13 |
| | | | 13 |
| | | | 13 |
| |
Distributions to and purchases of non-controlling interests | | | | | | |
|
| | — |
| | (4,419 | ) | | (4,419 | ) | |
Redemption adjustment on non-controlling interests | | | | | | | (154,514 | ) | | (154,514 | ) | | | | (154,514 | ) | |
Other | | | | | | | (41 | ) | | (41 | ) | | 421 |
| | 380 |
| |
Balance at September 30, 2018 | 135,140 |
| | $ | 135 |
| | $ | 477,822 |
| | $ | 296,635 |
| | $ | 774,592 |
| | $ | 112,976 |
| | $ | 887,568 |
| |
Balance at March 31, 2019 | | 135,263 |
| | $ | 135 |
| | $ | 488,303 |
| | $ | 313,593 |
| | $ | 802,031 |
| | $ | 122,519 |
| | $ | 924,550 |
|
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 Nine Months Ended September 30, | | For the Three Months Ended March 31, | |
| 2018 | | 2019 | | 2019 | | 2020 | |
Operating activities | |
| | |
| | |
| | |
| |
Net income | $ | 147,220 |
| | $ | 157,360 |
| | $ | 53,344 |
| | $ | 70,448 |
| |
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
| | |
| | |
| |
Distributions from unconsolidated subsidiaries | 10,734 |
| | 13,609 |
| | 7,872 |
| | 8,479 |
| |
Depreciation and amortization | 149,022 |
| | 160,072 |
| | 52,138 |
| | 51,752 |
| |
Provision for bad debts | (373 | ) | | 2,344 |
| | |
Provision for expected credit losses | | 1,567 |
| | 199 |
| |
Equity in earnings of unconsolidated subsidiaries | (14,914 | ) | | (18,710 | ) | | (4,366 | ) | | (2,588 | ) | |
Loss on extinguishment of debt | 484 |
| | 10,160 |
| | |
Gain on sale of assets and businesses | (9,129 | ) | | (6,349 | ) | | (6,233 | ) | | (7,339 | ) | |
Stock compensation expense | 17,175 |
| | 19,431 |
| | 6,255 |
| | 6,903 |
| |
Amortization of debt discount, premium and issuance costs | 9,845 |
| | 9,469 |
| | 3,231 |
| | 553 |
| |
Deferred income taxes | (2,092 | ) | | (7,247 | ) | | (81 | ) | | 9,364 |
| |
Changes in operating assets and liabilities, net of effects of business combinations: | |
| | |
| | |
| | |
| |
Accounts receivable | 23,495 |
| | (93,425 | ) | | (74,752 | ) | | (53,928 | ) | |
Other current assets | (10,274 | ) | | (6,016 | ) | | (7,523 | ) | | 27 |
| |
Other assets | 4,828 |
| | 1,259 |
| | 57,319 |
| | 2,248 |
| |
Accounts payable | (3,507 | ) | | 1,369 |
| | 4,324 |
| | (8,992 | ) | |
Accrued expenses | 49,391 |
| | 22,396 |
| | (69,163 | ) | | (44,455 | ) | |
Income taxes | 9,072 |
| | 918 |
| | 17,830 |
| | 11,413 |
| |
Net cash provided by operating activities | 380,977 |
| | 266,640 |
| | 41,762 |
| | 44,084 |
| |
Investing activities | |
| | |
| | |
| | |
| |
Business combinations, net of cash acquired | (519,258 | ) | | (86,269 | ) | | (6,120 | ) | | (6,833 | ) | |
Purchases of property and equipment | (121,039 | ) | | (123,956 | ) | | (49,073 | ) | | (39,208 | ) | |
Investment in businesses | (12,936 | ) | | (60,668 | ) | | (27,608 | ) | | (9,848 | ) | |
Proceeds from sale of assets and businesses | 6,691 |
| | 183 |
| | 2 |
| | 11,230 |
| |
Net cash used in investing activities | (646,542 | ) | | (270,710 | ) | | (82,799 | ) | | (44,659 | ) | |
Financing activities | |
| | |
| | |
| | |
| |
Borrowings on revolving facilities | 420,000 |
| | 700,000 |
| | 360,000 |
| | 460,000 |
| |
Payments on revolving facilities | (585,000 | ) | | (720,000 | ) | | (220,000 | ) | | (295,000 | ) | |
Proceeds from term loans | 779,904 |
| | 593,683 |
| | |
Payments on term loans | (8,625 | ) | | (375,084 | ) | | (132,685 | ) | | (39,843 | ) | |
Proceeds from 6.250% senior notes | — |
| | 539,176 |
| | |
Payment on 6.375% senior notes | — |
| | (710,000 | ) | | |
Revolving facility debt issuance costs | (1,333 | ) | | (310 | ) | | |
Borrowings of other debt | 30,134 |
| | 19,282 |
| | 8,290 |
| | 6,487 |
| |
Principal payments on other debt | (17,971 | ) | | (22,628 | ) | | (6,155 | ) | | (8,099 | ) | |
Repurchase of common stock | (5,640 | ) | | (37,309 | ) | | — |
| | (8,691 | ) | |
Proceeds from exercise of stock options | 1,633 |
| | 872 |
| | |
Decrease in overdrafts | (6,172 | ) | | (25,083 | ) | | |
Increase in overdrafts | | 6,050 |
| | — |
| |
Proceeds from issuance of non-controlling interests | 2,926 |
| | 18,288 |
| | 3,425 |
| | 1,679 |
| |
Distributions to and purchases of non-controlling interests | (306,427 | ) | | (16,032 | ) | | (5,251 | ) | | (12,474 | ) | |
Purchase of membership interests of Concentra Group Holdings Parent (Note 4) | | — |
| | (366,203 | ) | |
Net cash provided by (used in) financing activities | 303,429 |
| | (35,145 | ) | | 13,674 |
| | (262,144 | ) | |
Net increase (decrease) in cash and cash equivalents | 37,864 |
| | (39,215 | ) | | |
Net decrease in cash and cash equivalents | | (27,363 | ) | | (262,719 | ) | |
Cash and cash equivalents at beginning of period | 122,549 |
| | 175,178 |
| | 175,178 |
| | 335,882 |
| |
Cash and cash equivalents at end of period | $ | 160,413 |
| | $ | 135,963 |
| | $ | 147,815 |
| | $ | 73,163 |
| |
Supplemental Information | |
| | |
| | |
| | |
| |
Cash paid for interest | $ | 134,378 |
| | $ | 149,090 |
| | $ | 37,199 |
| | $ | 67,885 |
| |
Cash paid for taxes | 40,460 |
| | 58,472 |
| | 718 |
| | 1,135 |
| |
Non-cash equity exchange for acquisition of U.S. HealthWorks | 238,000 |
| | — |
| | |
Operating lease right-of-use assets obtained in exchange for lease liabilities, excluding adoption impact of ASC Topic 842 at January 1, 2019 | | 24,176 |
| | 67,894 |
| |
The accompanying notes are an integral part of these condensed consolidated financial statements.
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 and Select and its subsidiaries are collectively referred to as the “Company.” The unaudited condensed consolidated financial statements of the Company as of September 30, 2019,March 31, 2020, and for the three and nine month periods ended September 30, 2018March 31, 2019 and 2019,2020, have been prepared pursuant to the rules and regulations of the Securities Exchange Commission (the “SEC”) for interim reporting and accounting principles generally accepted in the United States of America (“GAAP”). Accordingly, certain information and disclosures required by GAAP, which are normally included in the notes to consolidated financial statements, have been condensed or omitted pursuant to those rules and regulations, although the Company believes the disclosure is adequate to make the information presented not misleading. In the opinion of management, such information contains all adjustments, which are normal and recurring in nature, necessary for a fair statement of the financial position, results of operations and cash flow for such periods. All significant intercompany transactions and balances have been eliminated.
The results of operations for the three and nine months ended September 30, 2019,March 31, 2020, are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2019.2020. 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, 2018,2019, contained in the Company’s Annual Report on Form 10-K filed with the SEC on February 21, 2019.20, 2020.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including disclosure of contingencies, at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Recently Adopted Accounting Pronouncements
Financial Instruments
On January 1, 2020, the Company adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Risk ConcentrationsLosses: Measurement of Credit Losses on Financial Instruments (Topic 326), which replaced the incurred loss approach for recognizing credit losses on financial instruments with an expected loss approach. The expected loss approach is subject to management judgments using assessments of incurred credit losses, assessments of current conditions, and forecasts using reasonable and supportable assumptions. The standard was required to be applied using the modified retrospective approach with a cumulative-effect adjustment to retained earnings, if any, upon adoption.
The Company’s primary financial instrument subject to the standard is its accounts receivable derived from contracts with patients. Historically, the Company has experienced infrequent, immaterial credit losses related to its accounts receivable and, based on its experience, believes the risk of material defaults is low. The Company experienced credit losses of $1.1 million for the year ended December 31, 2017, credit loss recoveries of $0.1 million for the year ended December 31, 2018, and credit losses of $3.0 million for the year ended December 31, 2019. The Company’s historical credit losses have been infrequent and immaterial largely because the Company’s accounts receivable are typically paid for by highly-solvent, creditworthy payors such as Medicare, other governmental programs, and highly-regulated commercial insurers, on behalf of the patient. The Company believes it has moderate credit risk related to defaults on self-pay amounts in accounts receivable; however, these amounts represented less than 1.0% of the Company’s accounts receivable at January 1, 2020.
In estimating the Company’s expected credit losses under Topic 326, the Company considers its incurred loss experience and adjusts for known and expected events and other circumstances, identified using periodic assessments implemented by the Company, which management believes are relevant in assessing the collectability of its accounts receivable. Because of the infrequent and insignificant nature of the Company’s historical credit losses, forecasts of expected credit losses are generally unnecessary. Expected credit losses are recognized by the Company through an allowance for credit losses and related credit loss expense.
As of January 1, 2020, the Company completed its expected credit loss assessment for its financial instruments subject to Topic 326. The Company’s estimate of expected credit losses as of January 1, 2020, resulted in 0 adjustments to the allowance for credit losses and 0 cumulative-effect adjustment to retained earnings on the adoption date of the standard.
| |
3. | Credit Risk Concentrations |
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash balances and tradeaccounts receivables. The Company’s excess cash is held with large financial institutions. The Company grants unsecured credit to its patients, most of whom reside in the service area of the Company’s facilities and are insured under third-party payor agreements. The Company’s general policy is to verify insurance coverage prior to the date of admission for patients admitted to the Company’sits critical illness recovery hospitals and rehabilitation hospitals. Within the Company’s outpatient rehabilitation clinics, the Company verifies insurance coverage is verified prior to the patient’s visit. Within the Company’s Concentra centers, the Company verifies insurance coverage is verified or receivesan authorization is received from the patient’s employer prior to the patient’s visit.
Because of the geographic diversity ofin the Company’s facilities and non-governmental third-party payors,payor base, as well as their geographic dispersion, patient accounts receivable which are due from the Medicare representsprogram represent the Company’s only significant concentration of credit risk. Approximately 16%15% and 15%18% of the Company’s accounts receivable is from Medicare at December 31, 2018,2019, and September 30, 2019,March 31, 2020, respectively.
Leases
The Company evaluates whether a contract is or contains a lease at the inception of the contract. Upon lease commencement, the date on which a lessor makes the underlying asset available to the Company for use, the Company classifies the lease as either an operating or finance lease. Most of the Company’s facility and equipment leases are classified as operating leases.
Balance Sheet
For both operating and finance leases, the Company recognizes a right-of-use asset and lease liability at lease commencement. A right-of-use asset represents the Company’s right to use an underlying asset for the lease term while the lease liability represents an obligation to make lease payments arising from a lease which are measured on a discounted basis. The Company elected the short-term lease exemption for its equipment leases; accordingly, equipment leases with an initial term of 12 months or less are not recorded on the consolidated balance sheets.
Lease liabilities are measured at the present value of the remaining, fixed lease payments at lease commencement. The Company primarily uses its incremental borrowing rate, based on the information available at lease commencement, in determining the present value of its remaining lease payments. The Company’s leases may also specify extension or termination clauses. These options are factored into the measurement of the lease liability when it is reasonably certain that the Company will exercise the option. Right-of-use assets are measured at an amount equal to the initial lease liability, plus any prepaid lease payments (less any incentives received, such as reimbursement for leasehold improvements) and initial direct costs, at the lease commencement date.
The Company has elected to account for lease and non-lease components, such as common area maintenance, as a single lease component for its facility leases. As a result, the fixed payments that would otherwise be allocated to the non-lease components will be accounted for as lease payments and are included in the measurement of the Company’s right-of-use asset and lease liability.
Statement of Operations
For the Company’s operating leases, rent expense, a component of cost of services and general and administrative expenses on the consolidated statements of operations, is recognized on a straight-line basis over the lease term. The straight-line rent expense is reflective of the interest expense on the lease liability using the effective interest method and the amortization of the right-of-use asset. The Company may enter into arrangements to sublease portions of its facilities and the Company typically retains the obligation to the lessor under these arrangements. The Company’s subleases are classified as operating leases; accordingly, the Company continues to account for the original leases as it did prior to commencement of the subleases. Sublease income, a component of cost of services on the consolidated statements of operations, is recognized on a straight-line basis, as a reduction to rent expense, over the term of the sublease.
For the Company’s finance leases, interest expense on the lease liability is recognized using the effective interest method. Amortization expense related to the right-of-use asset is recognized on a straight-line basis over the shorter of the estimated useful life of the asset or the lease term.
The Company elected the short-term lease exemption for its equipment leases. For these leases, the Company recognizes lease payments on a straight-line basis over the lease term and variable lease payments are expensed as incurred. These expenses are included as components of cost of services on the consolidated statements of operations.
The Company makes payments related to changes in indexes or rates after the lease commencement date. Additionally, the Company makes payments, which are not fixed at lease commencement, for property taxes, insurance, and common area maintenance related to its facility leases. These variable lease payments, which are expensed as incurred, are included as a component of cost of services and general and administrative expenses on the consolidated statements of operations.
Recent Accounting Pronouncements
Financial Instruments
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments — Credit Losses: Measurement of Credit Losses on Financial Instruments. The current standard delays the recognition of a credit loss on a financial asset until the loss is probable of occurring. The new standard removes the requirement that a credit loss be probable of occurring for it to be recognized and requires entities to use historical experience, current conditions, and reasonable and supportable forecasts to estimate their future expected credit losses. The financial instruments subject to ASU 2016-13 are the Company’s accounts receivable and notes receivable.
The standard will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The guidance must be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the earliest comparative period in the financial statements. Given the very high rate of collectability of the Company’s financial instruments, the impact of ASU 2016-13 will not be material to the Company’s consolidated financial statements.
The Company’s implementation efforts are focused on finalizing the accounting processes and related controls associated with accounting for its financial instruments under the new standard.
Recently Adopted Accounting Pronouncements
Leases
The Company adopted Accounting Standards Codification (“ASC”) Topic 842, Leases using a modified retrospective approach as of January 1, 2019, for leases which existed on that date. Prior comparative periods were not adjusted and continue to be reported in accordance with ASC Topic 840, Leases.
The Company elected the package of practical expedients, which permitted the Company not to reassess under ASC Topic 842 the Company’s prior conclusions about lease identification, lease classification, and initial direct costs. The Company did not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to the Company.
The adoption of the standard resulted in the recognition of operating lease right-of-use assets of $1,015.0 million and operating lease liabilities of $1,057.0 million at January 1, 2019. The difference between the operating lease right-of-use assets and operating lease liabilities resulted from the reclassification of prepaid rent, deferred rent, unamortized lease incentives, and acquired favorable and unfavorable leasehold interests upon adoption. The Company did not recognize a cumulative-effect adjustment to retained earnings upon adoption.
| |
3.4. | Redeemable Non-Controlling Interests |
The ownership interests held by outside parties in subsidiaries, 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.
On January 1, 2020, Select acquired approximately 17.2% of the outstanding membership interests of Concentra Group Holdings Parent on a fully diluted basis from Welsh, Carson, Anderson & Stowe XII, L.P. (“WCAS”), Dignity Health Holding Corporation (“DHHC”), and certain other sellers in exchange for an aggregate purchase price of approximately $338.4 million. On February 1, 2020, Select acquired an additional 1.4% of the outstanding membership interests of Concentra Group Holdings Parent on a fully diluted basis from WCAS, DHHC, and certain other sellers in exchange for an aggregate purchase price of approximately $27.8 million. These purchases were in lieu of, and are considered to be, the exercise of the first put right provided to certain equity holders under the terms of the Amended and Restated Limited Liability Company Agreement of Concentra Group Holdings Parent, dated as of February 1, 2018, as amended (the “Concentra LLC Agreement”).
Following these purchases, Select owns approximately 66.6% of the outstanding membership interests of Concentra Group Holdings Parent on a fully diluted basis and approximately 68.8% of the outstanding Class A membership interests of Concentra Group Holdings Parent.
The changes in redeemable non-controlling interests are as follows (in thousands):
| | | Nine Months Ended September 30, | Three Months Ended March 31, |
| 2018 | | 2019 | 2019 | | 2020 |
Balance as of January 1 | $ | 640,818 |
| | $ | 780,488 |
| $ | 780,488 |
| | $ | 974,541 |
|
Net income attributable to redeemable non-controlling interests | 5,743 |
| | 7,700 |
| 7,700 |
| | 7,256 |
|
Issuance and exchange of redeemable non-controlling interests | 163,659 |
| | — |
| |
Distributions to and purchases of redeemable non-controlling interests | (203,972 | ) | | (2,771 | ) | (2,771 | ) | | (5,687 | ) |
Purchase of membership interests of Concentra Group Holdings Parent | | — |
| | (366,203 | ) |
Redemption adjustment on redeemable non-controlling interests | 1,051 |
| | 47,470 |
| 47,470 |
| | 10,123 |
|
Other | 175 |
| | 354 |
| 354 |
| | 347 |
|
Balance as of March 31 | $ | 607,474 |
| | $ | 833,241 |
| $ | 833,241 |
| | $ | 620,377 |
|
Net income attributable to redeemable non-controlling interests | 10,909 |
| | 11,507 |
| |
Distributions to and purchases of redeemable non-controlling interests | (11,112 | ) | | (395 | ) | |
Redemption adjustment on redeemable non-controlling interests | 8,500 |
| | (270 | ) | |
Other | 461 |
| | 339 |
| |
Balance as of June 30 | $ | 616,232 |
| | $ | 844,422 |
| |
Net income attributable to redeemable non-controlling interests | 9,244 |
| | 6,096 |
| |
Distributions to and purchases of redeemable non-controlling interests | (763 | ) | | (1,721 | ) | |
Redemption adjustment on redeemable non-controlling interests | 154,514 |
| | 104,553 |
| |
Other | 347 |
| | 347 |
| |
Balance as of September 30 | $ | 779,574 |
| | $ | 953,697 |
| |
U.S. HealthWorks Acquisition
On February 1, 2018, Concentra Inc. acquired all of the issued and outstanding shares of stock of U.S. HealthWorks, Inc. (“U.S. HealthWorks”), an occupational medicine and urgent care service provider, from Dignity Health Holding Corporation (“DHHC”).
U.S. HealthWorks was acquired for $753.6 million. DHHC, a subsidiary of Dignity Health, was issued a 20.0% equity interest in Concentra Group Holdings Parent, LLC (“Concentra Group Holdings Parent”) which was valued at $238.0 million. The remainder of the purchase price was paid in cash. Select retained a majority voting interest in Concentra Group Holdings Parent following the closing of the transaction.
For the U.S. HealthWorks acquisition, the Company allocated the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values in accordance with the provisions of ASC Topic 805, Business Combinations. During the year ended December 31, 2018, the Company finalized the purchase accounting related to this acquisition.
The following table reconciles the fair values of identifiable net assets and goodwill to the consideration given for the acquired business (in thousands):
|
| | | |
Accounts receivable | $ | 68,934 |
|
Other current assets | 10,810 |
|
Property and equipment | 69,712 |
|
Identifiable intangible assets | 140,406 |
|
Other assets | 25,435 |
|
Goodwill | 540,067 |
|
Total assets | 855,364 |
|
Accounts payable and other current liabilities | 49,925 |
|
Deferred income taxes and other long-term liabilities | 51,851 |
|
Total liabilities | 101,776 |
|
Consideration given | $ | 753,588 |
|
For the three months ended September 30, 2018, U.S. HealthWorks contributed net operating revenues of $133.3 million which is reflected in the Company’s consolidated statement of operations. For the period February 1, 2018 through September 30, 2018, U.S. HealthWorks contributed net operating revenues of $362.7 million which is reflected in the Company’s consolidated statement of operations for the nine months ended September 30, 2018. Due to the integrated nature of the Company’s operations, the Company believes that it is not practicable to separately identify earnings of U.S. HealthWorks on a stand-alone basis.
Pro Forma Results
The following pro forma unaudited results of operations have been prepared assuming the acquisition of U.S. HealthWorks occurred on January 1, 2017. These results are not necessarily indicative of the results of future operations nor of the results that would have occurred had the acquisition been consummated on the aforementioned date. For the three and nine months ended September 30, 2019, the Company’s results of operations include U.S. HealthWorks for the entire period and no pro forma adjustments were made.
|
| | | | | | | |
| Three Months Ended September 30, 2018 | | Nine Months Ended September 30, 2018 |
| (in thousands) |
Net operating revenues | $ | 1,267,401 |
| | $ | 3,864,155 |
|
Net income attributable to Select Medical Holdings Corporation | 34,441 |
| | 116,135 |
|
The Company’s pro forma results were adjusted to recognize U.S. HealthWorks acquisition costs as of January 1, 2017. Accordingly, for the nine months ended September 30, 2018, pro forma results were adjusted to exclude $2.9 million of U.S. HealthWorks acquisition costs.
During the nine months ended September 30, 2019, the Company recognized a gain of $6.5 million which resulted from the sale of 22 wholly owned outpatient rehabilitation clinics to a non-consolidating subsidiary. During the nine months ended September 30, 2018, the Company recognized a gain of $9.0 million. The gain resulted principally from the sale of 41 wholly owned outpatient rehabilitation clinics to non-consolidating subsidiaries.
| |
6. | Variable Interest Entities |
Concentra does not own many of its medical practices, as certain states prohibit the “corporate practice of medicine,” which restricts business corporations from practicing medicine through the direct employment of physicians or from exercising control over medical decisions by physicians. In these states, Concentra typically enters into long-term management agreements with professional corporations or associations that are owned by licensed physicians, which, in turn, employ or contract with physicians who provide professional medical services in itsConcentra’s occupational health centers.
The management agreements have terms that provide for Concentra to conduct, supervise, and manage the day-to-day non-medical operations of the occupational health centers and provide all management and administrative services. Concentra receives a management fee for these services, which is based, in part, on the performance of the professional corporation or association. Additionally, the outstanding voting equity interests of the professional corporations or associations are typically owned by licensed physicians appointed at Concentra’s discretion. Concentra has the ability to direct the transfer of ownership of the professional corporation or association to a new licensed physician at any time.
The total assets of Concentra’s variable interest entities, which are comprised principally of accounts receivable, were $166.2$178.4 million and $202.3$173.7 million at December 31, 2018,2019, and September 30, 2019,March 31, 2020, respectively. The total liabilities of Concentra’s variable interest entities, which are comprised principally of accounts payable, accrued expenses, and obligations payable for services received under the aforementioned management agreements, were $164.4$176.7 million and $200.9$172.1 million at December 31, 2018,2019, and September 30, 2019,March 31, 2020, respectively.
The Company has operating and finance leases for its facilities and certain equipment. The Company leases its corporate office space from related parties.
The Company’s critical illness recovery hospitals and rehabilitation hospitals generally have lease terms of 10 years with 2, five year renewal options. These renewal options vary for hospitals which operate as a hospital within a hospital, or “HIH.” The Company’s outpatient rehabilitation clinics generally have lease terms of five years with 2, three to five year renewal options. The Company’s Concentra centers generally have lease terms of 10 years with 2, five year renewal options.
For the three and nine months ended September 30, 2019, the Company’s total lease cost was as follows (in thousands):
|
| | | | | | | | | | | |
| Three Months Ended September 30, 2019 |
| Unrelated Parties | | Related Parties | | Total |
Operating lease cost | $ | 68,046 |
| | $ | 1,342 |
| | $ | 69,388 |
|
Finance lease cost: | | | | | |
Amortization of right-of-use assets | 73 |
| | — |
| | 73 |
|
Interest on lease liabilities | 259 |
| | — |
| | 259 |
|
Short-term lease cost | 592 |
| | — |
| | 592 |
|
Variable lease cost | 11,789 |
| | 156 |
| | 11,945 |
|
Sublease income | (2,458 | ) | | — |
| | (2,458 | ) |
Total lease cost | $ | 78,301 |
| | $ | 1,498 |
| | $ | 79,799 |
|
|
| | | | | | | | | | | |
| Nine Months Ended September 30, 2019 |
| Unrelated Parties | | Related Parties | | Total |
Operating lease cost | $ | 202,600 |
| | $ | 4,026 |
| | $ | 206,626 |
|
Finance lease cost: | | | | | |
Amortization of right-of-use assets | 199 |
| | — |
| | 199 |
|
Interest on lease liabilities | 555 |
| | — |
| | 555 |
|
Short-term lease cost | 1,776 |
| | — |
| | 1,776 |
|
Variable lease cost | 32,380 |
| | 397 |
| | 32,777 |
|
Sublease income | (7,388 | ) | | — |
| | (7,388 | ) |
Total lease cost | $ | 230,122 |
| | $ | 4,423 |
| | $ | 234,545 |
|
For the nine months ended September 30, 2019, supplemental cash flow information related to leases was as follows (in thousands):
|
| | | |
Cash paid for amounts included in the measurement of lease liabilities: | |
Operating cash flows for operating leases | $ | 204,909 |
|
Operating cash flows for finance leases | 526 |
|
Financing cash flows for finance leases | 183 |
|
Right-of-use assets obtained in exchange for lease liabilities: | |
Operating leases(1) | $ | 1,202,165 |
|
Finance leases | 9,102 |
|
_______________________________________________________________________________ | |
(1) | Includes the right-of-use assets obtained in exchange for lease liabilities of $1,057.0 million which were recognized upon adoption of ASC Topic 842 at January 1, 2019. |
As of September 30, 2019, supplemental balance sheet information related to leases was as follows (in thousands):
|
| | | | | | | | | | | |
| Operating Leases |
| Unrelated Parties | | Related Parties | | Total |
Operating lease right-of-use assets | $ | 968,181 |
| | $ | 18,338 |
| | $ | 986,519 |
|
| | | | | |
Current operating lease liabilities | $ | 200,012 |
| | $ | 4,924 |
| | $ | 204,936 |
|
Non-current operating lease liabilities | 819,808 |
| | 16,397 |
| | 836,205 |
|
Total operating lease liabilities | $ | 1,019,820 |
| | $ | 21,321 |
| | $ | 1,041,141 |
|
|
| | | | | | | | | | | |
| Finance Leases |
| Unrelated Parties | | Related Parties | | Total |
Property and equipment, net | $ | 5,027 |
| | $ | — |
| | $ | 5,027 |
|
| | | | | |
Current portion of long-term debt and notes payable | $ | 210 |
| | $ | — |
| | $ | 210 |
|
Long-term debt, net of current portion | 13,137 |
| | — |
| | 13,137 |
|
Total finance lease liabilities | $ | 13,347 |
| | $ | — |
| | $ | 13,347 |
|
As of September 30, 2019, the weighted average remaining lease terms and discount rates were as follows:
|
| | |
Weighted average remaining lease term (in years): | |
Operating leases | 8.1 |
|
Finance leases | 34.9 |
|
Weighted average discount rate: | |
Operating leases | 5.9 | % |
Finance leases | 7.4 | % |
As of September 30, 2019, maturities of lease liabilities were approximately as follows (in thousands): |
| | | | | | | | | | | |
| Operating Leases | | Finance Leases | | Total |
2019 (remainder of year) | $ | 67,567 |
| | $ | 294 |
| | $ | 67,861 |
|
2020 | 250,778 |
| | 1,182 |
| | 251,960 |
|
2021 | 213,486 |
| | 1,193 |
| | 214,679 |
|
2022 | 173,399 |
| | 1,203 |
| | 174,602 |
|
2023 | 131,550 |
| | 1,214 |
| | 132,764 |
|
Thereafter | 556,103 |
| | 31,630 |
| | 587,733 |
|
Total undiscounted cash flows | 1,392,883 |
| | 36,716 |
| | 1,429,599 |
|
Less: Imputed interest | 351,742 |
| | 23,369 |
| | 375,111 |
|
Total discounted lease liabilities | $ | 1,041,141 |
| | $ | 13,347 |
| | $ | 1,054,488 |
|
As disclosed in the Company’s 2018 Annual Report on Form 10-K, the Company’s undiscounted future minimum lease obligations on long-term, non-cancelable operating leases with related and unrelated parties were approximately as follows as of December 31, 2018 (in thousands):
|
| | | |
| Total |
2019 | $ | 267,846 |
|
2020 | 231,711 |
|
2021 | 193,155 |
|
2022 | 150,155 |
|
2023 | 107,759 |
|
Thereafter | 484,038 |
|
| $ | 1,434,664 |
|
Goodwill
The following table shows changes in the carrying amounts of goodwill by reporting unit for the ninethree months ended September 30, 2019:March 31, 2020:
| | | Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Total | Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Total |
| (in thousands) | (in thousands) |
Balance as of December 31, 2018 | $ | 1,045,220 |
| | $ | 416,646 |
| | $ | 642,422 |
| | $ | 1,216,438 |
| | $ | 3,320,726 |
| |
Balance as of December 31, 2019 | | $ | 1,078,804 |
| | $ | 430,900 |
| | $ | 649,763 |
| | $ | 1,232,488 |
| | $ | 3,391,955 |
|
Acquired | 30,028 |
| | 14,254 |
| | 7,996 |
| | 18,299 |
| | 70,577 |
| — |
| | — |
| | 610 |
| | 4,567 |
| | 5,177 |
|
Sold | — |
| | — |
| | (5,629 | ) | | — |
| | (5,629 | ) | — |
| | — |
| | (6,034 | ) | | — |
| | (6,034 | ) |
Measurement period adjustment | 421 |
| | — |
| | — |
| | (3,439 | ) | | (3,018 | ) | — |
| | — |
| | — |
| | (20 | ) | | (20 | ) |
Balance as of September 30, 2019 | $ | 1,075,669 |
| | $ | 430,900 |
| | $ | 644,789 |
| | $ | 1,231,298 |
| | $ | 3,382,656 |
| |
Balance as of March 31, 2020 | | $ | 1,078,804 |
| | $ | 430,900 |
| | $ | 644,339 |
| | $ | 1,237,035 |
| | $ | 3,391,078 |
|
Identifiable Intangible Assets
The following table provides the gross carrying amounts, accumulated amortization, and net carrying amounts for the Company’s identifiable intangible assets:
| | | | December 31, 2018 | | September 30, 2019 | | December 31, 2019 | | March 31, 2020 |
| | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| | (in thousands) | | (in thousands) |
Indefinite-lived intangible assets: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Trademarks | | $ | 166,698 |
| | $ | — |
| | $ | 166,698 |
| | $ | 166,698 |
| | $ | — |
| | $ | 166,698 |
| | $ | 166,698 |
| | $ | — |
| | $ | 166,698 |
| | $ | 166,698 |
| | $ | — |
| | $ | 166,698 |
|
Certificates of need | | 19,174 |
| | — |
| | 19,174 |
| | 17,166 |
| | — |
| | 17,166 |
| | 17,157 |
| | — |
| | 17,157 |
| | 18,348 |
| | — |
| | 18,348 |
|
Accreditations | | 1,857 |
| | — |
| | 1,857 |
| | 1,874 |
| | — |
| | 1,874 |
| | 1,874 |
| | — |
| | 1,874 |
| | 1,874 |
| | — |
| | 1,874 |
|
Finite-lived intangible assets: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Trademarks | | 5,000 |
| | (4,583 | ) | | 417 |
| | 5,000 |
| | (5,000 | ) | | — |
| | 5,000 |
| | (5,000 | ) | | — |
| | 5,000 |
| | (5,000 | ) | | — |
|
Customer relationships | | 280,710 |
| | (61,900 | ) | | 218,810 |
| | 287,880 |
| | (81,010 | ) | | 206,870 |
| | 287,373 |
| | (87,346 | ) | | 200,027 |
| | 288,963 |
| | (93,814 | ) | | 195,149 |
|
Favorable leasehold interests(1) | | 13,553 |
| | (6,064 | ) | | 7,489 |
| | — |
| | — |
| | — |
| |
Non-compete agreements | | 29,400 |
| | (6,152 | ) | | 23,248 |
| | 31,255 |
| | (8,100 | ) | | 23,155 |
| | 32,114 |
| | (8,802 | ) | | 23,312 |
| | 32,845 |
| | (9,540 | ) | | 23,305 |
|
Total identifiable intangible assets | | $ | 516,392 |
| | $ | (78,699 | ) | | $ | 437,693 |
| | $ | 509,873 |
| | $ | (94,110 | ) | | $ | 415,763 |
| | $ | 510,216 |
|
| $ | (101,148 | ) |
| $ | 409,068 |
|
| $ | 513,728 |
|
| $ | (108,354 | ) |
| $ | 405,374 |
|
_______________________________________________________________________________
| |
(1) | Favorable leasehold interests are a component of the operating lease right-of-use assets upon adoption of ASC Topic 842, Leases.
|
The Company’s accreditations and indefinite-lived trademarks have renewal terms and the costs to renew these intangible assets are expensed as incurred. At September 30, 2019,March 31, 2020, the accreditations and indefinite-lived trademarks have a weighted average time until next renewal of 1.5 years and 7.46.9 years, respectively.
The Company’s finite-lived intangible assets amortize over their estimated useful lives. Amortization expense was $7.9$7.1 million and $6.9 million for the three months ended September 30, 2018March 31, 2019 and 2019, respectively. Amortization expense was $22.1 million and $22.9 million for the nine months ended September 30, 2018 and 2019,2020, respectively.
| |
9.7.
| Long-Term Debt and Notes Payable |
For purposes of this indebtedness footnote, references to Select exclude Concentra Inc. because the Concentra credit facilities are non-recourse to Holdings and Select.
As of September 30, 2019,March 31, 2020, the Company’s long-term debt and notes payable were as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| Principal Outstanding | | Unamortized Discount | | Unamortized Issuance Costs | | Carrying Value | | | Fair Value |
Select: | |
| | |
| | |
| | |
| | | |
|
6.250% senior notes | $ | 550,000 |
| | $ | — |
| | $ | (10,582 | ) | | $ | 539,418 |
| | | $ | 576,125 |
|
Credit facilities: | |
| | |
| | |
| | |
| | | |
|
Term loan | 1,531,068 |
| | (10,915 | ) | | (11,302 | ) | | 1,508,851 |
| | | 1,532,982 |
|
Other debt, including finance leases | 70,816 |
| | — |
| | (420 | ) | | 70,396 |
| | | 70,396 |
|
Total Select debt | 2,151,884 |
| | (10,915 | ) | | (22,304 | ) | | 2,118,665 |
| | | 2,179,503 |
|
Concentra Inc.: | |
| | |
| | |
| | |
| | | |
|
Credit facilities: | |
| | |
| | |
| | |
| | | |
|
Term loan | 1,240,298 |
| | (2,643 | ) | | (10,008 | ) | | 1,227,647 |
| | | 1,246,499 |
|
Other debt, including finance leases | 5,850 |
| | — |
| | — |
| | 5,850 |
| | | 5,850 |
|
Total Concentra Inc. debt | 1,246,148 |
| | (2,643 | ) | | (10,008 | ) | | 1,233,497 |
| | | 1,252,349 |
|
Total debt | $ | 3,398,032 |
| | $ | (13,558 | ) | | $ | (32,312 | ) | | $ | 3,352,162 |
| | | $ | 3,431,852 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| Principal Outstanding | | Unamortized Premium (Discount) | | Unamortized Issuance Costs | | Carrying Value | | | Fair Value |
Select 6.250% senior notes | $ | 1,225,000 |
| | $ | 38,437 |
| | $ | (19,200 | ) | | $ | 1,244,237 |
| | | $ | 1,222,673 |
|
Select credit facilities: | |
| | |
| | |
| | |
| | | |
|
Select revolving facility | 165,000 |
| | — |
| | — |
| | 165,000 |
| | | 164,381 |
|
Select term loan | 2,103,437 |
| | (9,905 | ) | | (10,796 | ) | | 2,082,736 |
| | | 1,987,748 |
|
Other debt, including finance leases | 78,617 |
| | — |
| | (373 | ) | | 78,244 |
| | | 78,244 |
|
Total debt | $ | 3,572,054 |
| | $ | 28,532 |
| | $ | (30,369 | ) | | $ | 3,570,217 |
| | | $ | 3,453,046 |
|
Principal maturities of the Company’s long-term debt and notes payable were approximately as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | Thereafter | | Total |
Select: | |
| | |
| | |
| | |
| | |
| | |
| | |
|
6.250% senior notes | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 550,000 |
| | $ | 550,000 |
|
Credit facilities: | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Term loan | 1,250 |
| | 5,000 |
| | 5,000 |
| | 5,000 |
| | 5,000 |
| | 1,509,818 |
| | 1,531,068 |
|
Other debt, including finance leases | 3,541 |
| | 5,502 |
| | 1,814 |
| | 18,036 |
| | 38 |
| | 41,885 |
| | 70,816 |
|
Total Select debt | 4,791 |
| | 10,502 |
| | 6,814 |
| | 23,036 |
| | 5,038 |
| | 2,101,703 |
| | 2,151,884 |
|
Concentra Inc.: | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Credit facilities: | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Term loan | 250 |
| | 1,000 |
| | 1,000 |
| | 1,238,048 |
| | — |
| | — |
| | 1,240,298 |
|
Other debt, including finance leases | 136 |
| | 1,194 |
| | 330 |
| | 358 |
| | 363 |
| | 3,469 |
| | 5,850 |
|
Total Concentra Inc. debt | 386 |
| | 2,194 |
| | 1,330 |
| | 1,238,406 |
| | 363 |
| | 3,469 |
| | 1,246,148 |
|
Total debt | $ | 5,177 |
| | $ | 12,696 |
| | $ | 8,144 |
| | $ | 1,261,442 |
| | $ | 5,401 |
| | $ | 2,105,172 |
| | $ | 3,398,032 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | Thereafter | | Total |
Select 6.250% senior notes | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,225,000 |
| | $ | 1,225,000 |
|
Select credit facilities: | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Select revolving facility | — |
| | — |
| | — |
| | — |
| | 165,000 |
| | — |
| | 165,000 |
|
Select term loan | — |
| | — |
| | — |
| | 4,757 |
| | 11,150 |
| | 2,087,530 |
| | 2,103,437 |
|
Other debt, including finance leases | 14,318 |
| | 8,130 |
| | 17,215 |
| | 3,364 |
| | 23,550 |
| | 12,040 |
| | 78,617 |
|
Total debt | $ | 14,318 |
| | $ | 8,130 |
| | $ | 17,215 |
| | $ | 8,121 |
| | $ | 199,700 |
| | $ | 3,324,570 |
| | $ | 3,572,054 |
|
As of December 31, 2018,2019, the Company’s long-term debt and notes payable were as follows (in thousands): |
| | | | | | | | | | | | | | | | | | | | |
| Principal Outstanding | | Unamortized Premium (Discount) | | Unamortized Issuance Costs | | Carrying Value | | | Fair Value |
Select: | |
| | |
| | |
| | |
| | | |
|
6.375% senior notes | $ | 710,000 |
| | $ | 550 |
| | $ | (4,642 | ) | | $ | 705,908 |
| | | $ | 706,450 |
|
Credit facilities: | |
| | |
| | |
| | |
| | | |
|
Revolving facility | 20,000 |
| | — |
| | — |
| | 20,000 |
| | | 18,400 |
|
Term loan | 1,129,875 |
| | (9,690 | ) | | (9,321 | ) | | 1,110,864 |
| | | 1,076,206 |
|
Other | 56,415 |
| | — |
| | (484 | ) | | 55,931 |
| | | 55,931 |
|
Total Select debt | 1,916,290 |
| | (9,140 | ) | | (14,447 | ) | | 1,892,703 |
| | | 1,856,987 |
|
Concentra Inc.: | |
| | |
| | |
| | |
| | | |
|
Credit facilities: | |
| | |
| | |
| | |
| | | |
|
Term loans | 1,414,175 |
| | (2,765 | ) | | (18,648 | ) | | 1,392,762 |
| | | 1,357,802 |
|
Other debt, including finance leases | 7,916 |
| | — |
| | — |
| | 7,916 |
| | | 7,916 |
|
Total Concentra Inc. debt | 1,422,091 |
| | (2,765 | ) | | (18,648 | ) | | 1,400,678 |
| | | 1,365,718 |
|
Total debt | $ | 3,338,381 |
| | $ | (11,905 | ) | | $ | (33,095 | ) | | $ | 3,293,381 |
| | | $ | 3,222,705 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| Principal Outstanding | | Unamortized Premium (Discount) | | Unamortized Issuance Costs | | Carrying Value | | | Fair Value |
Select 6.250% senior notes | $ | 1,225,000 |
| | $ | 39,988 |
| | $ | (19,944 | ) | | $ | 1,245,044 |
| | | $ | 1,322,020 |
|
Select credit facilities: | |
| | |
| | |
| | |
| | | |
|
Select revolving facility | — |
| | — |
| | — |
| | — |
| | | — |
|
Select term loan | 2,143,280 |
| | (10,411 | ) | | (11,348 | ) | | 2,121,521 |
| | | 2,145,959 |
|
Other debt, including finance leases | 78,941 |
| | — |
| | (396 | ) | | 78,545 |
| | | 78,545 |
|
Total debt | $ | 3,447,221 |
| | $ | 29,577 |
| | $ | (31,688 | ) | | $ | 3,445,110 |
| | | $ | 3,546,524 |
|
Concentra Credit Facilities
On April 8, 2019, Concentra Inc. entered into Amendment No. 5 to the Concentra first lien credit agreement. Amendment No. 5, among other things, (i) extended the maturity date of the Concentra revolving facility from June 1, 2020 to June 1, 2021 and (ii) increased the aggregate commitments available under the Concentra revolving facility from $75.0 million to $100.0 million.
On September 20, 2019, Concentra Inc. entered into Amendment No. 6 to the Concentra first lien credit agreement. Amendment No. 6, among other things, (i) provided for an additional $100.0 million in term loans that, along with the existing Concentra first lien term loans, have a maturity date of June 1, 2022 and (ii) extended the maturity date of the revolving facility from June 1, 2021 to March 1, 2022. Concentra Inc. used the incremental borrowings under the Concentra first lien credit agreement to prepay in full all of its term loans outstanding under the Concentra second lien credit agreement on September 20, 2019.
Select Credit Facilities
On August 1, 2019, Select entered into Amendment No. 3 to the Select credit agreement dated March 6, 2017. Amendment No. 3, among other things, (i) provided for an additional $500.0 million in term loans that, along with the existing term loans, have a maturity date of March 6, 2025, (ii) extended the maturity date of Select’s revolving facility from March 6, 2022 to March 6, 2024, and (iii) increased the total net leverage ratio permitted under the Select credit agreement.
Select 6.250% Senior Notes
On August 1, 2019, Select issued and sold $550.0 million aggregate principal amount of 6.250% senior notes due August 15, 2026. Select used a portion of the net proceeds of the 6.250% senior notes, together with a portion of the proceeds from the incremental term loan borrowings under the Select credit facilities (as described above), in part to (i) redeem in full the $710.0 million aggregate principal amount of the 6.375% senior notes on August 30, 2019 at the redemption price of 100.000% of the principal amount plus accrued and unpaid interest, (ii) repay in full the outstanding borrowings under Select’s revolving facility, and (iii) pay related fees and expenses associated with the financing.
Interest on the senior notes accrues at the rate of 6.250% per annum and is payable semi-annually in arrears on February 15 and August 15 of each year, commencing on February 15, 2020. The senior notes are Select’s senior unsecured obligations which are subordinated to all of Select’s existing and future secured indebtedness, including the Select credit facilities. The senior notes rank equally in right of payment with all of Select’s other existing and future senior unsecured indebtedness and senior in right of payment to all of Select’s existing and future subordinated indebtedness. The senior notes are unconditionally guaranteed on a joint and several basis by each of Select’s direct or indirect existing and future domestic restricted subsidiaries, other than certain non-guarantor subsidiaries.
Select may redeem some or all of the senior notes prior to August 15, 2022 by paying a “make-whole” premium. Select may redeem some or all of the senior notes on or after August 15, 2022 at specified redemption prices. In addition, prior to August 15, 2022, Select may redeem up to 40% of the principal amount of the senior notes with the net proceeds of certain equity offerings at a price of 106.250% plus accrued and unpaid interest, if any. Select is obligated to offer to repurchase the senior notes at a price of 101% of their principal amount plus accrued and unpaid interest, if any, as a result of certain change of control events. These restrictions and prohibitions are subject to certain qualifications and exceptions.
The terms of the senior notes contains covenants that, among other things, limit Select’s ability and the ability of certain of Select’s subsidiaries to (i) grant liens on its assets, (ii) make dividend payments, other distributions or other restricted payments, (iii) incur restrictions on the ability of Select’s restricted subsidiaries to pay dividends or make other payments, (iv) enter into sale and leaseback transactions, (v) merge, consolidate, transfer or dispose of substantially all of their assets, (vi) incur additional indebtedness, (vii) make investments, (viii) sell assets, including capital stock of subsidiaries, (ix) use the proceeds from sales of assets, including capital stock of restricted subsidiaries, and (x) enter into transactions with affiliates. These covenants are subject to a number of exceptions, limitations and qualifications.
Loss on Early Retirement of Debt
The Company incurred losses on early retirement of debt totaling $18.6 million for the nine months ended September 30, 2019.
Excess Cash Flow Payment
In February 2019,2020, Select made a principal prepayment of approximately $98.8$39.8 million associated with its term loans in accordance with the provision in its senior secured credit agreement, dated March 6, 2017 (together with any borrowings thereunder, the Select“Select credit facilitiesfacilities”) that requires mandatory prepayments of term loans as a result of annual excess cash flow, as defined in the Select credit facilities.
In February 2019, Concentra Inc. made a principal prepayment of approximately $33.9 million associated with its term loans in accordance with the provision in the Concentra credit facilities that requires mandatory prepayments of term loans as a result of annual excess cash flow, as defined in the Concentra credit facilities.
Fair Value
The Company considers the inputs in the valuation process to be Level 2 in the fair value hierarchy for Select’sits 6.250% senior notes due August 15, 2026 (the “senior notes”) and for the Select and Concentra credit facilities. Level 2 in the fair value hierarchy is defined as inputs that are observable for the asset or liability, either directly or indirectly, which includes quoted prices for identical assets or liabilities in markets that are not active.
The fair valuesvalue of the Select credit facilities and the Concentra credit facilities werewas based on quoted market prices for this debt in the syndicated loan market. The fair value of Select’s 6.250%the senior notes was based on quoted market prices. The carrying amount of other debt, principally short-term notes payable, approximates fair value.
| |
10. 8. | Segment Information |
The Company’s reportable segments include 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. Prior to 2019, these employee leasing services were reflected in the financial results of the Company’s reportable segments. Net operating revenues have been conformed to the current presentation for the three and nine months ended September 30, 2018.
The Company evaluates performance of the segments based on Adjusted EBITDA. Adjusted EBITDA is defined as earnings excluding interest, income taxes, depreciation and amortization, gain (loss) on early retirement of debt, stock compensation expense, acquisition costs associated with U.S. HealthWorks, 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. Prior year results presented herein have been changed to conform to the current presentation.
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended March 31, |
| 2018 | | 2019 | | 2018 | | 2019 | | 2019 | | 2020 |
| (in thousands) | (in thousands) |
Net operating revenues:(1) | |
| | |
| | |
| | |
| | |
| | |
|
Critical illness recovery hospital | $ | 420,108 |
| | $ | 462,892 |
| | $ | 1,327,236 |
| | $ | 1,381,569 |
| | $ | 457,534 |
| | $ | 500,521 |
|
Rehabilitation hospital | 144,588 |
| | 173,369 |
| | 432,675 |
| | 488,301 |
| | 154,558 |
| | 182,019 |
|
Outpatient rehabilitation | 245,234 |
| | 265,330 |
| | 743,379 |
| | 774,126 |
| | 246,905 |
| | 255,249 |
|
Concentra | 404,481 |
| | 421,900 |
| | 1,173,420 |
| | 1,231,672 |
| | 396,321 |
| | 398,535 |
|
Other | 52,990 |
| | 69,852 |
| | 139,865 |
| | 203,670 |
| | 69,313 |
| | 78,308 |
|
Total Company | $ | 1,267,401 |
| | $ | 1,393,343 |
| | $ | 3,816,575 |
| | $ | 4,079,338 |
| | $ | 1,324,631 |
| | $ | 1,414,632 |
|
Adjusted EBITDA: | |
| | |
| | |
| | |
| | |
| | |
|
Critical illness recovery hospital | $ | 53,292 |
| | $ | 57,247 |
| | $ | 186,989 |
| | $ | 194,383 |
| | $ | 72,998 |
| | $ | 88,570 |
|
Rehabilitation hospital | 25,343 |
| | 36,780 |
| | 80,314 |
| | 92,545 |
| | 25,797 |
| | 38,569 |
|
Outpatient rehabilitation | 34,531 |
| | 40,040 |
| | 107,003 |
| | 111,615 |
| | 28,991 |
| | 27,122 |
|
Concentra | 68,754 |
| | 77,679 |
| | 199,119 |
| | 220,024 |
| | 66,258 |
| | 61,466 |
|
Other | (25,292 | ) | | (29,081 | ) | | (75,337 | ) | | (79,552 | ) | | (23,927 | ) | | (28,394 | ) |
Total Company | $ | 156,628 |
| | $ | 182,665 |
| | $ | 498,088 |
| | $ | 539,015 |
| | $ | 170,117 |
| | $ | 187,333 |
|
Total assets: | |
| | |
| | |
| | |
| | |
| | |
|
Critical illness recovery hospital | $ | 1,785,336 |
| | $ | 2,116,512 |
| | $ | 1,785,336 |
| | $ | 2,116,512 |
| | $ | 2,062,659 |
| | $ | 2,148,779 |
|
Rehabilitation hospital | 888,342 |
| | 1,121,260 |
| | 888,342 |
| | 1,121,260 |
| | 1,089,391 |
| | 1,127,267 |
|
Outpatient rehabilitation | 991,105 |
| | 1,280,712 |
| | 991,105 |
| | 1,280,712 |
| | 1,250,015 |
| | 1,285,449 |
|
Concentra | 2,201,869 |
| | 2,366,227 |
| | 2,201,869 |
| | 2,366,227 |
| | 2,464,317 |
| | 2,354,169 |
|
Other | 113,529 |
| | 270,045 |
| | 113,529 |
| | 270,045 |
| | 155,110 |
| | 199,903 |
|
Total Company | $ | 5,980,181 |
| | $ | 7,154,756 |
| | $ | 5,980,181 |
| | $ | 7,154,756 |
| | $ | 7,021,492 |
| | $ | 7,115,567 |
|
Purchases of property and equipment: | |
| | |
| | |
| | |
| | |
| | |
|
Critical illness recovery hospital | $ | 8,134 |
| | $ | 12,254 |
| | $ | 31,455 |
| | $ | 36,902 |
| | $ | 10,160 |
| | $ | 8,965 |
|
Rehabilitation hospital | 8,769 |
| | 5,293 |
| | 29,766 |
| | 23,832 |
| | 13,183 |
| | 3,325 |
|
Outpatient rehabilitation | 7,209 |
| | 7,476 |
| | 22,565 |
| | 23,221 |
| | 9,040 |
| | 8,384 |
|
Concentra | 12,539 |
| | 8,240 |
| | 29,281 |
| | 36,178 |
| | 15,698 |
| | 15,586 |
|
Other | 2,740 |
| | 1,408 |
| | 7,972 |
| | 3,823 |
| | 992 |
| | 2,948 |
|
Total Company | $ | 39,391 |
| | $ | 34,671 |
| | $ | 121,039 |
| | $ | 123,956 |
| | $ | 49,073 |
| | $ | 39,208 |
|
| |
(1) | Prior to the quarter ended June 30, 2019, the financial results of employee leasing services provided to non-consolidating subsidiaries were included with the Company’s reportable segments. These results are now reported as part of the Company’s other activities. Net operating revenues have been conformed to the current presentation for the three months ended March 31, 2019. |
A reconciliation of Adjusted EBITDA to income before income taxes is as follows:
| | | Three Months Ended September 30, 2018 | Three Months Ended March 31, 2019 |
| 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) |
Adjusted EBITDA | $ | 53,292 |
| | $ | 25,343 |
| | $ | 34,531 |
| | $ | 68,754 |
| | $ | (25,292 | ) | | |
| $ | 72,998 |
| | $ | 25,797 |
| | $ | 28,991 |
| | $ | 66,258 |
| | $ | (23,927 | ) | | |
|
Depreciation and amortization | (11,136 | ) | | (6,079 | ) | | (6,597 | ) | | (24,488 | ) | | (2,227 | ) | | |
| (11,451 | ) | | (6,402 | ) | | (7,032 | ) | | (24,904 | ) | | (2,349 | ) | | |
|
Stock compensation expense | — |
| | — |
| | — |
| | (767 | ) | | (5,497 | ) | | |
| — |
| | — |
| | — |
| | (767 | ) | | (5,488 | ) | | |
|
Income (loss) from operations | $ | 42,156 |
| | $ | 19,264 |
| | $ | 27,934 |
| | $ | 43,499 |
| | $ | (33,016 | ) | | $ | 99,837 |
| $ | 61,547 |
| | $ | 19,395 |
| | $ | 21,959 |
| | $ | 40,587 |
| | $ | (31,764 | ) | | $ | 111,724 |
|
Equity in earnings of unconsolidated subsidiaries | |
| | | | |
| | |
| | |
| | 5,432 |
| |
| | | | |
| | |
| | |
| | 4,366 |
|
Gain on sale of businesses | | | | | | | | | | | 2,139 |
| | | | | | | | | | | 6,532 |
|
Interest expense | |
| | | | |
| | |
| | |
| | (50,669 | ) | |
| | | | |
| | |
| | |
| | (50,811 | ) |
Income before income taxes | |
| | | | |
| | |
| | |
| | $ | 56,739 |
| |
| | | | |
| | |
| | |
| | $ | 71,811 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2019 |
| Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total |
| (in thousands) |
Adjusted EBITDA | $ | 57,247 |
| | $ | 36,780 |
| | $ | 40,040 |
| | $ | 77,679 |
| | $ | (29,081 | ) | | |
|
Depreciation and amortization | (12,484 | ) | | (7,234 | ) | | (6,887 | ) | | (23,989 | ) | | (2,347 | ) | | |
|
Stock compensation expense | — |
| | — |
| | — |
| | (768 | ) | | (6,050 | ) | | |
|
Income (loss) from operations | $ | 44,763 |
| | $ | 29,546 |
| | $ | 33,153 |
| | $ | 52,922 |
| | $ | (37,478 | ) | | $ | 122,906 |
|
Loss on early retirement of debt | | | | | | | | | | | (18,643 | ) |
Equity in earnings of unconsolidated subsidiaries | |
| | | | |
| | |
| | |
| | 6,950 |
|
Interest expense | |
| | | | |
| | |
| | |
| | (54,336 | ) |
Income before income taxes | |
| | | | |
| | |
| | |
| | $ | 56,877 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2018 |
| Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total |
| (in thousands) |
Adjusted EBITDA | $ | 186,989 |
| | $ | 80,314 |
| | $ | 107,003 |
| | $ | 199,119 |
| | $ | (75,337 | ) | | |
|
Depreciation and amortization | (34,146 | ) | | (17,816 | ) | | (19,938 | ) | | (70,332 | ) | | (6,790 | ) | | |
|
Stock compensation expense | — |
| | — |
| | — |
| | (2,116 | ) | | (15,059 | ) | | |
|
U.S. HealthWorks acquisition costs | — |
| | — |
| | — |
| | (2,895 | ) | | — |
| | |
Income (loss) from operations | $ | 152,843 |
| | $ | 62,498 |
| | $ | 87,065 |
| | $ | 123,776 |
| | $ | (97,186 | ) | | $ | 328,996 |
|
Loss on early retirement of debt | |
| | | | |
| | |
| | |
| | (10,255 | ) |
Equity in earnings of unconsolidated subsidiaries | |
| | | | |
| | |
| | |
| | 14,914 |
|
Gain on sale of businesses | |
| | | | |
| | |
| | |
| | 9,016 |
|
Interest expense | |
| | | | |
| | |
| | |
| | (147,991 | ) |
Income before income taxes | |
| | | | |
| | |
| | |
| | $ | 194,680 |
|
| | | Nine Months Ended September 30, 2019 | Three Months Ended March 31, 2020 |
| 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) |
Adjusted EBITDA | $ | 194,383 |
| | $ | 92,545 |
| | $ | 111,615 |
| | $ | 220,024 |
| | $ | (79,552 | ) | | |
| $ | 88,570 |
| | $ | 38,569 |
| | $ | 27,122 |
| | $ | 61,466 |
| | $ | (28,394 | ) | | |
|
Depreciation and amortization | (38,430 | ) | | (20,332 | ) | | (20,910 | ) | | (73,372 | ) | | (7,028 | ) | | |
| (12,336 | ) | | (6,887 | ) | | (7,218 | ) | | (22,887 | ) | | (2,424 | ) | | |
|
Stock compensation expense | — |
| | — |
| | — |
| | (2,302 | ) | | (17,129 | ) | | |
| — |
| | — |
| | — |
| | (767 | ) | | (6,136 | ) | | |
|
Income (loss) from operations | $ | 155,953 |
| | $ | 72,213 |
| | $ | 90,705 |
| | $ | 144,350 |
| | $ | (103,709 | ) | | $ | 359,512 |
| $ | 76,234 |
| | $ | 31,682 |
| | $ | 19,904 |
| | $ | 37,812 |
| | $ | (36,954 | ) | | $ | 128,678 |
|
Loss on early retirement of debt | | | | | | | | | | | (18,643 | ) | |
Equity in earnings of unconsolidated subsidiaries | |
| | | | |
| | |
| | |
| | 18,710 |
| |
| | | | |
| | |
| | |
| | 2,588 |
|
Gain on sale of businesses | |
| | | | |
| | |
| | |
| | 6,532 |
| |
| | | | |
| | |
| | |
| | 7,201 |
|
Interest expense | |
| | | | |
| | |
| | |
| | (156,611 | ) | |
| | | | |
| | |
| | |
| | (46,107 | ) |
Income before income taxes | |
| | | | |
| | |
| | |
| | $ | 209,500 |
| |
| | | | |
| | |
| | |
| | $ | 92,360 |
|
| |
11.9. | Revenue from Contracts with Customers |
Net operating revenues consist primarily of revenues generated from services provided to patients and other revenues for services provided to healthcare institutions under contractual arrangements. The following tables disaggregate the Company’s net operating revenues for the three and nine months ended September 30, 2018March 31, 2019 and 2019:2020:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2018 |
| Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total |
| (in thousands) |
Patient service revenues: | | | | | | | | | | | |
Medicare | $ | 210,101 |
| | $ | 71,564 |
| | $ | 40,563 |
| | $ | 455 |
| | $ | — |
| | $ | 322,683 |
|
Non-Medicare | 206,629 |
| | 64,322 |
| | 185,787 |
| | 401,537 |
| | — |
| | 858,275 |
|
Total patient services revenues | 416,730 |
| | 135,886 |
| | 226,350 |
| | 401,992 |
| | — |
| | 1,180,958 |
|
Other revenues(1) | 3,378 |
| | 8,702 |
| | 18,884 |
| | 2,489 |
| | 52,990 |
| | 86,443 |
|
Total net operating revenues | $ | 420,108 |
| | $ | 144,588 |
| | $ | 245,234 |
| | $ | 404,481 |
| | $ | 52,990 |
| | $ | 1,267,401 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2019 |
| Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total |
| (in thousands) |
Patient service revenues: | | | | | | | | | | | |
Medicare | $ | 218,096 |
| | $ | 86,495 |
| | $ | 44,230 |
| | $ | 451 |
| | $ | — |
| | $ | 349,272 |
|
Non-Medicare | 240,603 |
| | 76,957 |
| | 200,093 |
| | 418,380 |
| | — |
| | 936,033 |
|
Total patient services revenues | 458,699 |
| | 163,452 |
| | 244,323 |
| | 418,831 |
| | — |
| | 1,285,305 |
|
Other revenues | 4,193 |
| | 9,917 |
| | 21,007 |
| | 3,069 |
| | 69,852 |
| | 108,038 |
|
Total net operating revenues | $ | 462,892 |
| | $ | 173,369 |
| | $ | 265,330 |
| | $ | 421,900 |
| | $ | 69,852 |
| | $ | 1,393,343 |
|
| | | Nine Months Ended September 30, 2018 | Three Months Ended March 31, 2019 |
| 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) |
Patient service revenues: | | | | | | | | | | | | | | | | | | | | | | |
Medicare | $ | 676,950 |
| | $ | 217,459 |
| | $ | 120,228 |
| | $ | 1,600 |
| | $ | — |
| | $ | 1,016,237 |
| $ | 238,169 |
| | $ | 74,579 |
| | $ | 40,278 |
| | $ | 555 |
| | $ | — |
| | $ | 353,581 |
|
Non-Medicare | 639,718 |
| | 188,611 |
| | 569,298 |
| | 1,164,711 |
| | — |
| | 2,562,338 |
| 216,959 |
| | 70,642 |
| | 187,914 |
| | 393,236 |
| | — |
| | 868,751 |
|
Total patient services revenues | 1,316,668 |
| | 406,070 |
| | 689,526 |
| | 1,166,311 |
| | — |
| | 3,578,575 |
| 455,128 |
| | 145,221 |
| | 228,192 |
| | 393,791 |
| | — |
| | 1,222,332 |
|
Other revenues(1) | 10,568 |
| | 26,605 |
| | 53,853 |
| | 7,109 |
| | 139,865 |
| | 238,000 |
| 2,406 |
| | 9,337 |
| | 18,713 |
| | 2,530 |
| | 69,313 |
| | 102,299 |
|
Total net operating revenues | $ | 1,327,236 |
| | $ | 432,675 |
| | $ | 743,379 |
| | $ | 1,173,420 |
| | $ | 139,865 |
| | $ | 3,816,575 |
| $ | 457,534 |
| | $ | 154,558 |
| | $ | 246,905 |
| | $ | 396,321 |
| | $ | 69,313 |
| | $ | 1,324,631 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2019 |
| Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total |
| (in thousands) |
Patient service revenues: | | | | | | | | | | | |
Medicare | $ | 679,953 |
| | $ | 238,334 |
| | $ | 128,377 |
| | $ | 1,480 |
| | $ | — |
| | $ | 1,048,144 |
|
Non-Medicare | 692,178 |
| | 221,571 |
| | 586,248 |
| | 1,221,893 |
| | — |
| | 2,721,890 |
|
Total patient services revenues | 1,372,131 |
| | 459,905 |
| | 714,625 |
| | 1,223,373 |
| | — |
| | 3,770,034 |
|
Other revenues | 9,438 |
| | 28,396 |
| | 59,501 |
| | 8,299 |
| | 203,670 |
| | 309,304 |
|
Total net operating revenues | $ | 1,381,569 |
| | $ | 488,301 |
| | $ | 774,126 |
| | $ | 1,231,672 |
| | $ | 203,670 |
| | $ | 4,079,338 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2020 |
| Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total |
| (in thousands) |
Patient service revenues: | | | | | | | | | | | |
Medicare | $ | 241,509 |
| | $ | 90,752 |
| | $ | 40,832 |
| | $ | 472 |
| | $ | — |
| | $ | 373,565 |
|
Non-Medicare | 255,947 |
| | 81,436 |
| | 196,890 |
| | 395,033 |
| | — |
| | 929,306 |
|
Total patient services revenues | 497,456 |
| | 172,188 |
| | 237,722 |
| | 395,505 |
| | — |
| | 1,302,871 |
|
Other revenues | 3,065 |
| | 9,831 |
| | 17,527 |
| | 3,030 |
| | 78,308 |
| | 111,761 |
|
Total net operating revenues | $ | 500,521 |
| | $ | 182,019 |
| | $ | 255,249 |
| | $ | 398,535 |
| | $ | 78,308 |
| | $ | 1,414,632 |
|
| |
(1) | ForPrior to the three and nine monthsquarter ended SeptemberJune 30, 2018,2019, the financial results of the Company’s reportable segments have been changed to remove the net operating revenues associated with employee leasing services provided to non-consolidating subsidiaries were included with the Company’s non-consolidating subsidiaries.reportable segments. These results are now reported as part of the Company’s other activities. Net operating revenues have been conformed to the current presentation for the three months ended March 31, 2019. |
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 0 dividends declared or contractual dividends paid for the three and nine months ended September 30, 2018March 31, 2019 and 2019.2020. |
| |
(ii) | The remaining undistributed net income of the Company is then equally allocated to its common stock and unvested restricted stock awards, as if all of the earnings for the period had been distributed. The total net income allocated to each security is determined by adding both distributed and undistributed net income for the period. |
| |
(i)(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 EPS | | Diluted EPS | |
| | Three Months Ended September 30, | | Three Months Ended September 30, | |
| | 2018 | | 2019 | | 2018 | | 2019 | |
| | (in thousands) | |
Net income | | $ | 42,679 |
| | $ | 44,030 |
| | $ | 42,679 |
| | $ | 44,030 |
| |
Less: net income attributable to non-controlling interests | | 9,762 |
| | 13,298 |
| | 9,762 |
| | 13,298 |
| |
Net income attributable to the Company | | 32,917 |
| | 30,732 |
| | 32,917 |
| | 30,732 |
| |
Less: net income attributable to participating securities | | 1,098 |
| | 1,052 |
| | 1,098 |
| | 1,052 |
| |
Net income attributable to common shares | | $ | 31,819 |
| | $ | 29,680 |
| | $ | 31,819 |
| | $ | 29,680 |
| |
|
| | | | | | | | | | | | | | | | | |
| | Basic EPS | | Diluted EPS | |
| | Nine Months Ended September 30, | | Nine Months Ended September 30, | |
| | 2018 | | 2019 | | 2018 | | 2019 | |
| | (in thousands) | |
Net income | | $ | 147,220 |
| | $ | 157,360 |
| | $ | 147,220 |
| | $ | 157,360 |
| |
Less: net income attributable to non-controlling interests | | 34,053 |
| | 40,978 |
| | 34,053 |
| | 40,978 |
| |
Net income attributable to the Company | | 113,167 |
| | 116,382 |
| | 113,167 |
| | 116,382 |
| |
Less: net income attributable to participating securities | | 3,732 |
| | 3,889 |
| | 3,729 |
| | 3,888 |
| |
Net income attributable to common shares | | $ | 109,435 |
| | $ | 112,493 |
| | $ | 109,438 |
| | $ | 112,494 |
| |
The following tables set forth the computation of EPS under the two-class method: |
| | | | | | | | | | | | | | | | | |
| | Basic EPS | | Diluted EPS | |
| | Three Months Ended March 31, | | Three Months Ended March 31, | |
| | 2019 | | 2020 | | 2019 | | 2020 | |
| | (in thousands) | |
Net income | | $ | 53,344 |
| | $ | 70,448 |
| | $ | 53,344 |
| | $ | 70,448 |
| |
Less: net income attributable to non-controlling interests | | 12,510 |
| | 17,323 |
| | 12,510 |
| | 17,323 |
| |
Net income attributable to the Company | | 40,834 |
| | 53,125 |
| | 40,834 |
| | 53,125 |
| |
Less: net income attributable to participating securities | | 1,343 |
| | 1,818 |
| | 1,343 |
| | 1,818 |
| |
Net income attributable to common shares | | $ | 39,491 |
| | $ | 51,307 |
| | $ | 39,491 |
| | $ | 51,307 |
| |
| | | | Three Months Ended September 30, 2018 | | Three Months Ended March 31, 2019 |
| | Net Income Allocation | | Shares(1) | | Basic EPS | | Net Income Allocation | | Shares(1) | | Diluted EPS | | Net Income Allocation | | Shares(1) | | Basic EPS | | Net Income Allocation | | Shares(1) | | Diluted EPS |
| | (in thousands, except for per share amounts) | | (in thousands, except for per share amounts) |
Common shares | | $ | 31,819 |
| | 130,387 |
| | $ | 0.24 |
| | | $ | 31,819 |
| | 130,447 |
| | $ | 0.24 |
| | $ | 39,491 |
| | 130,821 |
| | $ | 0.30 |
| | | $ | 39,491 |
| | 130,861 |
| | $ | 0.30 |
|
Participating securities | | 1,098 |
| | 4,501 |
| | $ | 0.24 |
| | | 1,098 |
| | 4,501 |
| | $ | 0.24 |
| | 1,343 |
| | 4,449 |
| | $ | 0.30 |
| | | 1,343 |
| | 4,449 |
| | $ | 0.30 |
|
Total Company | | $ | 32,917 |
| | | | | | | $ | 32,917 |
| | | | | | $ | 40,834 |
| | | | | | | $ | 40,834 |
| | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 |
| | Net Income Allocation | | Shares(1) | | Basic EPS | | | Net Income Allocation | | Shares(1) | | Diluted EPS |
| | (in thousands, except for per share amounts) |
Common shares | | $ | 51,307 |
| | 129,638 |
| | $ | 0.40 |
| | | $ | 51,307 |
| | 129,638 |
| | $ | 0.40 |
|
Participating securities | | 1,818 |
| | 4,594 |
| | $ | 0.40 |
| | | 1,818 |
| | 4,594 |
| | $ | 0.40 |
|
Total Company | | $ | 53,125 |
| | | | | | | $ | 53,125 |
| | | | |
_______________________________________________________________________________ |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2019 |
| | Net Income Allocation | | Shares(1) | | Basic EPS | | | Net Income Allocation | | Shares(1) | | Diluted EPS |
| | (in thousands, except for per share amounts) |
Common shares | | $ | 29,680 |
| | 129,988 |
| | $ | 0.23 |
| | | $ | 29,680 |
| | 130,007 |
| | $ | 0.23 |
|
Participating securities | | 1,052 |
| | 4,607 |
| | $ | 0.23 |
| | | 1,052 |
| | 4,607 |
| | $ | 0.23 |
|
Total Company | | $ | 30,732 |
| | | | | | | $ | 30,732 |
| | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2018 |
| | Net Income Allocation | | Shares(1) | | Basic EPS | | | Net Income Allocation | | Shares(1) | | Diluted EPS |
| | (in thousands, except for per share amounts) |
Common shares | | $ | 109,435 |
| | 129,972 |
| | $ | 0.84 |
| | | $ | 109,438 |
| | 130,066 |
| | $ | 0.84 |
|
Participating securities | | 3,732 |
| | 4,432 |
| | $ | 0.84 |
| | | 3,729 |
| | 4,432 |
| | $ | 0.84 |
|
Total Company | | $ | 113,167 |
| | | | | | | $ | 113,167 |
| | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2019 |
| | Net Income Allocation | | Shares(1) | | Basic EPS | | | Net Income Allocation | | Shares(1) | | Diluted EPS |
| | (in thousands, except for per share amounts) |
Common shares | | $ | 112,493 |
| | 130,442 |
| | $ | 0.86 |
| | | $ | 112,494 |
| | 130,474 |
| | $ | 0.86 |
|
Participating securities | | 3,889 |
| | 4,509 |
| | $ | 0.86 |
| | | 3,888 |
| | 4,509 |
| | $ | 0.86 |
|
Total Company | | $ | 116,382 |
| | | | | | | $ | 116,382 |
| | | | |
(1) Represents the weighted average share count outstanding during the period.
| |
13.11. | Commitments and Contingencies |
Litigation
The Company is a party to various legal actions, proceedings, and claims (some of which are not insured), and regulatory and other governmental audits and investigations in the ordinary course of its business. The Company cannot predict the ultimate outcome of pending litigation, proceedings, and regulatory and other governmental audits and investigations. These matters could potentially subject the Company to sanctions, damages, recoupments, fines, and other penalties. The Department of Justice, Centers for Medicare & Medicaid Services (“CMS”), or other federal and state enforcement and regulatory agencies may conduct additional investigations related to the Company’s businesses in the future that may, either individually or in the aggregate, have a material adverse effect on the Company’s business, financial position, results of operations, and liquidity.
To address claims arising out of the Company’s operations, the Company maintains professional malpractice liability insurance and general liability insurance coverages through a number of different programs that are dependent upon such factors as the state where the Company is operating and whether the operations are wholly owned or are operated through a joint venture. For the Company’s wholly owned operations, the Company currently maintains insurance coverages under a combination of policies with a total annual aggregate limit of up to $40.0 million. The Company’s insurance for the professional liability coverage is written on a “claims-made” basis, and its commercial general liability coverage is maintained on an “occurrence” basis. These coverages apply after a self-insured retention limit is exceeded. For the Company’s joint venture operations, the Company has numerous programs that are designed to respond to the risks of the specific joint venture. The annual aggregate limit under these programs ranges from $5.0$6.0 million to $20.0 million. The policies are generally written on a “claims-made” basis. Each of these programs has either a deductible or self-insured retention limit. The Company reviews its insurance program annually and may make adjustments to the amount of insurance coverage and self-insured retentions in future years. The Company also maintains umbrella liability insurance covering claims which, due to their nature or amount, are not covered by or not fully covered by the Company’s other insurance policies. These insurance policies also do not generally cover punitive damages and are subject to various deductibles and policy limits. Significant legal actions, as well as the cost and possible lack of available insurance, could subject the Company to substantial uninsured liabilities. In the Company’s opinion, the outcome of these actions, individually or in the aggregate, will not have a material adverse effect on its financial position, results of operations, or cash flows.
Healthcare providers are subject to lawsuits under the qui tam provisions of the federal False Claims Act. Qui tam lawsuits typically remain under seal (hence, usually unknown to the defendant) for some time while the government decides whether or not to intervene on behalf of a private qui tam plaintiff (known as a relator) and take the lead in the litigation. These lawsuits can involve significant monetary damages and penalties and award bounties to private plaintiffs who successfully bring the suits. The Company is and has been a defendant in these cases in the past, and may be named as a defendant in similar cases from time to time in the future.
Evansville Litigation. On October 19, 2015, the plaintiff‑relators filed a Second Amended Complaint in United States of America, ex rel. Tracy Conroy, Pamela Schenk and Lisa Wilson v. Select Medical Corporation, Select Specialty Hospital-Evansville, LLC (“SSH‑Evansville”), Select Employment Services, Inc., and Dr. Richard Sloan. The case is a civil action filed in the United States District Court for the Southern District of Indiana by private plaintiff‑relators on behalf of the United States under the federal False Claims Act. The plaintiff‑relators are the former CEO and 2 former case managers at SSH‑Evansville, and the defendants currently include the Company, SSH‑Evansville, a subsidiary of the Company serving as common paymaster for its employees, and a physician who practices at SSH‑Evansville. The plaintiff‑relators allege that SSH‑Evansville discharged patients too early or held patients too long, improperly discharged patients to and readmitted them from short stay hospitals, up‑coded diagnoses at admission, and admitted patients for whom long‑term acute care was not medically necessary. They also allege that the defendants engaged in retaliation in violation of federal and state law. The Second Amended Complaint replaced a prior complaint that was filed under seal on September 28, 2012 and served on the Company on February 15, 2013, after a federal magistrate judge unsealed it on January 8, 2013. All deadlines in the case had been stayed after the seal was lifted in order to allow the government time to complete its investigation and to decide whether or not to intervene. On June 19, 2015, the United States Department of Justice notified the District Court of its decision not to intervene in the case.
In December 2015, the defendants filed a Motion to Dismiss the Second Amended Complaint on multiple grounds, including that the action is disallowed by the False Claims Act’s public disclosure bar, which disqualifies qui tam actions that are based on fraud already publicly disclosed through enumerated sources, unless the relator is an original source, and that the plaintiff‑relators did not plead their claims with sufficient particularity, as required by the Federal Rules of Civil Procedure.
Thereafter, the United States filed a notice asserting a veto of the defendants’ use of the public disclosure bar for claims arising from conduct from and after March 23, 2010, which was based on certain statutory changes to the public disclosure bar language included in the Affordable Care Act. On September 30, 2016, the District Court partially granted and partially denied the defendants’ Motion to Dismiss. It ruled that the plaintiff‑relators alleged substantially the same conduct as had been publicly disclosed and that the plaintiff-relators are not original sources, so that the public disclosure bar requires dismissal of all non‑retaliation claims arising from conduct before March 23, 2010. The District Court also ruled that the statutory changes to the public disclosure bar gave the United States the power to veto its applicability to claims arising from conduct on and after March 23, 2010, and therefore did not dismiss those claims based on the public disclosure bar. However, the District Court ruled that the plaintiff‑relators did not plead certain of their claims relating to interrupted stay manipulation and premature discharging of patients with the requisite particularity, and dismissed those claims. The District Court declined to dismiss the plaintiff-relators’ claims arising from conduct from and after March 23, 2010 relating to delayed discharging of patients and up-coding and the plaintiff-relators’ retaliation claims. The plaintiff-relators then proposed a case management plan seeking nationwide discovery involving all of the Company’s LTCHs for the period from March 23, 2010 through the present and allowing discovery that would facilitate the use of statistical sampling to prove liability, which the defendants opposed. In April 2018, a U.S. magistrate judge ruled that plaintiff‑relators’ discovery will be limited to only SSH-Evansville for the period from March 23, 2010 through September 30, 2016, and that the plaintiff‑relators will be required to prove the fraud that they allege on a claim-by-claim basis, rather than using statistical sampling. The plaintiff-relators appealed this decision to the district judge who, in March 2019, affirmed the decision of the magistrate judge regarding the geographic and temporal scope of the case, but ruled that the question of statistical sampling is not ripe for review.
In October 2019, the Company entered into a settlement agreement with the United States government and the plaintiff-relators. Under the terms of the settlement, the Company agreed to make payments to the government, the plaintiff-relators and their counsel. Such payments, in the aggregate, are immaterial to the Company’s financial statements. In the settlement agreement, the government and the plaintiff-relators released all defendants from liability for all conduct alleged in the complaint, and the Company admitted no liability or wrongdoing.
Wilmington Litigation. On January 19, 2017, the United States District Court for the District of Delaware unsealed a qui tam Complaint in United States of America and State of Delaware ex rel. Theresa Kelly v. Select Specialty Hospital-Wilmington, Inc. (“SSH‑Wilmington”), Select Specialty Hospitals, Inc., Select Employment Services, Inc., Select Medical Corporation, and Crystal Cheek, No. 16‑347‑LPS. The Complaint was initially filed under seal in May 2016 by a former chief nursing officer at SSH‑Wilmington and was unsealed after the United States filed a Notice of Election to Decline Intervention in January 2017. The corporate defendants were served in March 2017. In the complaint, the plaintiff‑relator alleges that the Select defendants and an individual defendant, who is a former health information manager at SSH‑Wilmington, violated the False Claims Act and the Delaware False Claims and Reporting Act based on allegedly falsifying medical practitioner signatures on medical records and failing to properly examine the credentials of medical practitioners at SSH‑Wilmington. In response to the Select defendants’ motion to dismiss the Complaint, in May 2017 the plaintiff-relator filed an Amended Complaint asserting the same causes of action. The Select defendants filed a Motion to Dismiss the Amended Complaint based on numerous grounds, including that the Amended Complaint did not plead any alleged fraud with sufficient particularity, failed to plead that the alleged fraud was material to the government’s payment decision, failed to plead sufficient facts to establish that the Select defendants knowingly submitted false claims or records, and failed to allege any reverse false claim. In March 2018, the District Court dismissed the plaintiff‑relator’s claims related to the alleged failure to properly examine medical practitioners’ credentials, her reverse false claims allegations, and her claim that defendants violated the Delaware False Claims and Reporting Act. It denied the defendants’ motion to dismiss claims that the allegedly falsified medical practitioner signatures violated the False Claims Act. Separately, the District Court dismissed the individual defendant due to plaintiff-relator’s failure to timely serve the amended complaint upon her.
In March 2017, the plaintiff-relator initiated a second action by filing a Complaint in the Superior Court of the State of Delaware in Theresa Kelly v. Select Medical Corporation, Select Employment Services, Inc., and SSH‑Wilmington, C.A. No. N17C-03-293 CLS. The Delaware Complaint alleges that the defendants retaliated against her in violation of the Delaware Whistleblowers’ Protection Act for reporting the same alleged violations that are the subject of the federal Amended Complaint. The defendants filed a motion to dismiss, or alternatively to stay, the Delaware Complaint based on the pending federal Amended Complaint and the failure to allege facts to support a violation of the Delaware Whistleblowers’ Protection Act. In January 2018, the Court stayed the Delaware Complaint pending the outcome of the federal case.
The Company intends to vigorously defend these actions, but at this time the Company is unable to predict the timing and outcome of this matter.
Contract Therapy Subpoena. On May 18, 2017, the Company received a subpoena from the U.S. Attorney’s Office for the District of New Jersey seeking various documents principally relating to the Company’s contract therapy division, which contracted to furnish rehabilitation therapy services to residents of skilled nursing facilities (“SNFs”) and other providers. The Company operated its contract therapy division through a subsidiary until March 31, 2016, when the Company sold the stock of the subsidiary. The subpoena seeks documents that appear to be aimed at assessing whether therapy services were furnished and billed in compliance with Medicare SNF billing requirements, including whether therapy services were coded at inappropriate levels and whether excessive or unnecessary therapy was furnished to justify coding at higher paying levels. The Company does not know whether the subpoena has been issued in connection with a qui tam lawsuit or in connection with possible civil, criminal or administrative proceedings by the government. The Company is producinghas produced documents in response to the subpoena and intends to fully cooperate with this investigation. At this time, the Company is unable to predict the timing and outcome of this matter.
14. Supplemental Financial InformationOn March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted. The CARES Act includes changes to certain tax law related to net operating losses and the deductibility of Concentra Group Holdings Parent
The following tables summarize selected financial informationinterest expense and depreciation. ASC 740, Income Taxes, requires the effects of Concentra Group Holdings Parent.
|
| | | | | | | |
| December 31, 2018 | | September 30, 2019 |
| (in thousands) |
Assets | | | |
Current assets | $ | 385,094 |
| | $ | 287,514 |
|
Non-current assets | 1,793,774 |
| | 2,078,713 |
|
Total Assets | $ | 2,178,868 |
| | $ | 2,366,227 |
|
Liabilities and Equity | |
| | |
|
Current liabilities | $ | 206,386 |
| | $ | 232,035 |
|
Non-current liabilities | 1,478,084 |
| | 1,587,721 |
|
Total Liabilities | 1,684,470 |
| | 1,819,756 |
|
Redeemable non-controlling interests | 18,525 |
| | 17,268 |
|
Members' Equity of Concentra Group Holdings Parent | 470,329 |
| | 523,814 |
|
Non-controlling interests | 5,544 |
| | 5,389 |
|
Total Equity | 475,873 |
| | 529,203 |
|
Total Liabilities and Equity | $ | 2,178,868 |
| | $ | 2,366,227 |
|
changes in tax rates and laws on deferred tax balances to be recognized in the period in which the legislation is enacted. This legislation had the effect of increasing the Company’s deferred income taxes and decreasing its current income taxes payable by approximately $15.5 million during the three months ended March 31, 2020. |
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2018 | | 2019 | | 2018 | | 2019 |
| (in thousands) |
Net operating revenues | $ | 404,481 |
| | $ | 421,900 |
| | $ | 1,173,420 |
| | $ | 1,231,672 |
|
Income from operations | 43,499 |
| | 52,922 |
| | 123,776 |
| | 144,350 |
|
Net income | 16,084 |
| | 17,788 |
| | 45,576 |
| | 53,521 |
|
Net income attributable to Select Medical Holdings Corporation | 7,486 |
| | 8,124 |
| | 20,778 |
| | 24,534 |
|
Title VIII in Division B of the CARES Act established the Public Health and Social Services Emergency Fund, also referred to as the Cares Act Provider Relief Fund, which set aside $100.0 billion to be administered through grants and other mechanisms to hospitals, public entities, not-for-profit entities, and Medicare- and Medicaid-enrolled suppliers and institutional providers. The purpose of these funds is to reimburse providers for lost revenue attributable to the coronavirus disease 2019 (“COVID-19”) pandemic, such as forgone revenues from canceled procedures, and to provide support for related healthcare expenses, such as constructing temporary structures or emergency operation centers, retrofitting facilities, purchasing medical supplies and equipment including personal protective equipment and testing supplies, and increasing workforce. Further, these relief funds ensure uninsured patients are receiving testing and treatment for COVID-19. On April 10, 2020, the U.S. Department of Health & Human Services began making payments to healthcare providers from the $100.0 billion appropriation. These are payments, rather than loans, to healthcare providers, and will not need to be repaid. The Company received approximately $93.7 million of payments as part of the Cares Act Provider Relief Fund. The Company concluded that the receipt of these payments would be accounted for in periods subsequent to March 31, 2020, as the Company was not able to determine eligibility for the assistance or the amounts that would be distributed until April 2020. |
| | | | | | | |
| Nine Months Ended September 30, |
| 2018 | | 2019 |
| (in thousands) |
Net cash provided by operating activities | $ | 119,147 |
| | $ | 104,234 |
|
Net cash used in investing activities | (545,856 | ) | | (56,400 | ) |
Net cash provided by (used in) financing activities | 465,314 |
| | (185,717 | ) |
Net increase (decrease) in cash and cash equivalents | 38,605 |
| | (137,883 | ) |
Cash and cash equivalents at beginning of period | 113,059 |
| | 163,116 |
|
Cash and cash equivalents at end of period | $ | 151,664 |
| | $ | 25,233 |
|
Additionally, the CARES Act allows for qualified healthcare providers to receive advanced payments under the existing Medicare Accelerated and Advance Payments Program during the COVID-19 pandemic. Under this program, healthcare providers may receive advanced payments for future Medicare services provided. The Company applied for and received approval from CMS in April 2020 to receive advanced payments and, through April 30, 2020, the Company has received $316.1 million under this program. Because
these payments are made on behalf of patients before services are provided, the Company will record these payments as a contract liability until all performance obligations have been met. These advanced payments will be recouped by CMS through future Medicare claims billed by the Company, beginning 121 days after receipt of the advanced payment. After 120 days, any new Medicare claim billed by the Company will reduce the liability owed to CMS. The Company is required to repay any advanced payments not recouped by CMS within 210 days from the date the Company originally received the payment. Failure to repay the advanced payments when due will result in interest charges on the outstanding balance owed.
In April 2020, the Company began deferring payment on its share of payroll taxes owed, as allowed by the CARES Act through December 31, 2020. The Company is able to defer half of its share of payroll taxes owed until December 31, 2021, with the remaining half due on December 31, 2022.
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 related to the COVID-19 pandemic including, but not limited to, the duration and severity of the pandemic, 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 net operating revenues, an increase in costs, and a reduction in profitability;
the failure of our Medicare-certified long term care hospitals or inpatient rehabilitation facilities to maintain their Medicare certifications may cause our net operating revenues and profitability to decline;
| |
• | the failure of our Medicare-certified long term care hospitals and inpatient rehabilitation facilities operated as “hospitals within hospitals” to qualify as hospitals separate from their host hospitals may cause our net operating revenues and profitability to decline; |
a government investigation or assertion that we have violated applicable regulations may result in sanctions or reputational harm and increased costs;
acquisitions or joint ventures may prove difficult or unsuccessful, use significant resources, or expose us to unforeseen liabilities;
our plans and expectations related to our acquisitions including the acquisition of U.S. HealthWorks by Concentra, and our ability to realize anticipated synergies;
private third-party payors for our services may adopt payment policies that could limit our future net operating revenues and profitability;
the failure to maintain established relationships with the physicians in the areas we serve could reduce our net operating revenues and profitability;
shortages in qualified nurses, therapists, physicians, or other licensed providers, or the inability to attract or retain healthcare professionals due to the heightened risk of infection related to the COVID-19 pandemic, could increase our operating costs significantly or limit our ability to staff our facilities;
competition may limit our ability to grow and result in a decrease in our net operating revenues and profitability;
the loss of key members of our management team could significantly disrupt our operations;
the effect of claims asserted against us could subject us to substantial uninsured liabilities;
a security breach of our or our third-party vendors’ information technology systems may subject us to potential legal and reputational harm and may result in a violation of the Health Insurance Portability and Accountability Act of 1996 or the Health Information Technology for Economic and Clinical Health Act; and
other factors discussed from time to time in our filings with the SEC, including factors discussed under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018,2019, as such risk factors may be updated from time to time in our periodic filings with the SEC.
SEC, including the risk factors discussed in Item 1A. Risk Factors on this Form 10-Q.
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 September 30, 2019,March 31, 2020, we had operations in 47 states and the District of Columbia. We operated 100101 critical illness recovery hospitals in 28 states, 29 rehabilitation hospitals in 12 states, and 1,7071,753 outpatient rehabilitation clinics in 37 states and the District of Columbia. Concentra, a joint venture subsidiary, operated 523 occupational health centers in 41 states as of September 30, 2019.March 31, 2020. Concentra also provides contract services at employer worksites and Department of Veterans Affairs community-based outpatient clinics (“CBOCs”).
Our reportable segments include the critical illness recovery hospital segment, the rehabilitation hospital segment, the outpatient rehabilitation segment, and the Concentra segment. We had net operating revenues of $4,079.3$1,414.6 million for the ninethree months ended September 30, 2019.March 31, 2020. Of this total, we earned approximately 34%35% of our net operating revenues from our critical illness recovery hospital segment, approximately 12%13% from our rehabilitation hospital segment, approximately 19%18% from our outpatient rehabilitation segment, and approximately 30%28% 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. Additionally, our Concentra segment delivers veteran’s healthcare through its Department of Veterans Affairs CBOCs.
During the quarter ended June 30, 2019, we began reporting the net operating revenues and expenses associated with employee leasing services provided to our non-consolidating subsidiaries as part of our other activities. Previously, these services were reflected in the financial results of our reportable segments. Under these employee leasing arrangements, actual labor costs are passed through to our non-consolidating subsidiaries, resulting in our recognition of net operating revenues equal to the actual labor costs incurred. Prior year results presented herein have been changed to conform to the current presentation.
Non-GAAP Measure
We believe that the presentation of Adjusted EBITDA, as defined below, is important to investors because Adjusted EBITDA is commonly used as an analytical indicator of performance by investors within the healthcare industry. Adjusted EBITDA is used by management to evaluate financial performance and determine resource allocation for each of our operating segments. Adjusted EBITDA is not a measure of financial performance under accounting principles generally accepted in the United States of America (“GAAP”).GAAP. Items excluded from Adjusted EBITDA are significant components in understanding and assessing financial performance. Adjusted EBITDA should not be considered in isolation or as an alternative to, or substitute for, net income, income from operations, cash flows generated by operations, investing or financing activities, or other financial statement data presented in the consolidated financial statements as indicators of financial performance or liquidity. Because Adjusted EBITDA is not a measurement determined in accordance with GAAP and is thus susceptible to varying definitions, Adjusted EBITDA as presented may not be comparable to other similarly titled measures of other companies.
We define Adjusted EBITDA as earnings excluding interest, income taxes, depreciation and amortization, gain (loss) on early retirement of debt, stock compensation expense, acquisition costs associated with U.S. HealthWorks, 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 table below reconciles net income and income from operations to Adjusted EBITDA and should be referenced when we discuss Adjusted EBITDA:
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended March 31, | |
| | 2018 | | 2019 | | 2018 | | 2019 | | 2019 | | 2020 | |
| | (in thousands) | | (in thousands) |
Net income | | $ | 42,679 |
| | $ | 44,030 |
| | $ | 147,220 |
| | $ | 157,360 |
| | $ | 53,344 |
| | $ | 70,448 |
| |
Income tax expense | | 14,060 |
| | 12,847 |
| | 47,460 |
| | 52,140 |
| | 18,467 |
| | 21,912 |
| |
Interest expense | | 50,669 |
| | 54,336 |
| | 147,991 |
| | 156,611 |
| | 50,811 |
| | 46,107 |
| |
Gain on sale of businesses | | (2,139 | ) | | — |
| | (9,016 | ) | | (6,532 | ) | | (6,532 | ) | | (7,201 | ) | |
Equity in earnings of unconsolidated subsidiaries | | (5,432 | ) | | (6,950 | ) | | (14,914 | ) | | (18,710 | ) | | (4,366 | ) | | (2,588 | ) | |
Loss on early retirement of debt | | — |
| | 18,643 |
| | 10,255 |
| | 18,643 |
| |
Income from operations | | 99,837 |
| | 122,906 |
| | 328,996 |
| | 359,512 |
| | 111,724 |
| | 128,678 |
| |
Stock compensation expense: | | |
| | |
| | |
| | |
| | |
| | |
| |
Included in general and administrative | | 4,683 |
| | 5,305 |
| | 12,720 |
| | 14,849 |
| | 4,748 |
| | 5,437 |
| |
Included in cost of services | | 1,581 |
| | 1,513 |
| | 4,455 |
| | 4,582 |
| | 1,507 |
| | 1,466 |
| |
Depreciation and amortization | | 50,527 |
| | 52,941 |
| | 149,022 |
| | 160,072 |
| | 52,138 |
| | 51,752 |
| |
U.S. HealthWorks acquisition costs | | — |
| | — |
| | 2,895 |
| | — |
| |
Adjusted EBITDA | | $ | 156,628 |
| | $ | 182,665 |
| | $ | 498,088 |
| | $ | 539,015 |
| | $ | 170,117 |
| | $ | 187,333 |
| |
Effects of the COVID-19 Pandemic on our Results of Operations
The broader implications of the COVID-19 pandemic on our results of operations and overall financial performance remain uncertain. We are a healthcare service provider that provides patient care services in both inpatient and outpatient settings. We have provided certain additional performance metrics to assist readers in understanding how the COVID-19 pandemic impacted each of our segments during the one month ended March 31, 2020, including our (i) net operating revenues and Adjusted EBITDA for the two months ended February 29, 2020 and February 28, 2019, (ii) net operating revenues and Adjusted EBITDA for the one month ended March 31, 2020 and 2019, (iii) net operating revenues and Adjusted EBITDA for the three months ended March 31, 2020 and 2019, and (iv) certain operating statistics for each of the aforementioned periods. Please refer to our risk factors discussed in Item 1A “Risk Factors” of this Form 10-Q and as previously reported in our Annual Report on Form 10-K for the year ended December 31, 2019 for further discussion.
Critical Illness Recovery Hospital Segment. Our critical illness recovery hospitals are a key part of the inpatient hospital continuum of care. Both CMS and Congress acted to temporarily suspend certain regulations concerning length of stay requirements, which impact our critical illness recovery hospitals, in order to facilitate the transfer of patients from general acute care hospitals (see “Regulatory Changes” for further discussion of the temporary suspension of regulations). This was done in order to expand hospital bed capacity to care for COVID-19 patients. As COVID-19 has spread in the general acute care hospitals in many markets where we operate, we have admitted patients with COVID-19 and have faced the challenging task of treating them while attempting to protect our patients and staff members who do not have COVID-19. We have followed CDC guidelines, directives and recommendations with regard to the use of personal protective equipment and the isolation and treatment of patients with COVID-19. The pandemic has caused, and will continue to cause, disruptions in our critical illness recovery hospitals, which include, in some cases, the addition or reduction of beds, the creation of isolated units and spaces, temporary increases or restrictions on admissions, the incurrence of additional costs, staff illnesses, and the increased use of contract clinical labor.
Rehabilitation Hospital Segment. Our rehabilitation hospitals receive most of their admissions from general acute care hospitals. Both CMS and Congress acted to temporarily suspend certain regulations that govern admissions into our rehabilitation hospitals to facilitate the transfer of patients from general acute care hospitals and critical illness recovery hospitals (see “Regulatory Changes” for further discussion of the temporary suspension of regulations). This was done in order to expand hospital bed capacity to care for COVID-19 patients. As COVID-19 has spread in the general acute care hospitals in many markets where we operate, we have admitted patients with COVID-19 and have faced the challenging task of treating them while attempting to protect our patients and staff members who do not have COVID-19. We have followed CDC guidelines, directives and recommendations with regard to the use of personal protective equipment and the isolation and treatment of patients with COVID-19. The pandemic has caused, and will continue to cause, disruptions in our rehabilitation hospitals, which include, in some cases, the addition or reduction of beds, the creation of isolated units and spaces, temporary restrictions on admissions, the incurrence of additional costs, staff illnesses, and the increased use of contract clinical labor. Additionally, elective surgeries at hospitals and other facilities have been suspended which is reducing the need for inpatient rehabilitation services.
Outpatient Rehabilitation Segment. Beginning in mid-March, hospitals and other facilities began to suspend elective surgeries. Additionally, state governments in the areas experiencing the most significant growth of COVID-19 infections began implementing mandatory closures of non-essential or non-life sustaining businesses, restrictions on individual activities outside of the home, restrictions on travel, and closures of schools. These actions continued to expand throughout March and by the end of March, most states implemented significant restrictions on businesses and individuals. The suspension of elective surgeries at hospitals and other facilities and the reduction of physician office visits combined with recommendations of social distancing and the other items noted above have had significant effects on our patient visit volumes. As a result, we have temporarily consolidated the operations of some of our clinics by transferring staff and patients.
Concentra Segment. Beginning in mid-March, state governments in the areas experiencing the most significant growth of COVID-19 infections began implementing mandatory closures of non-essential or non-life sustaining businesses. These actions continued to expand throughout March. By the end of March, most states implemented significant restrictions on businesses. These actions have had significant effects on our patient visit volumes as employers have furloughed workforces and temporarily ceased operations or have significantly reduced their operations. As a result, we have temporarily consolidated the operations of some of our centers by transferring staff and patients.
We provided below certain performance measures and operating statistics used by management to help illustrate the impact of the COVID-19 pandemic on our operating results. For the quarter ended March 31, 2020, we defined the pre-COVID-19 outbreak period as the two months ended February 29, 2020, and the post-COVID-19 outbreak period as the one month ended March 31, 2020. We provided prior year comparative data for the pre-COVID-19 and post-COVID-19 outbreak periods presented. The following performance measures and operating statistics should be considered in conjunction with the operating results for the full quarter ended March 31, 2020. The performance measures and operating statistics presented for the two months ended February 29, 2020 and the one month ended March 31, 2020 are, when combined, equal to the performance measures and operating statistics presented for the full quarter ended March 31, 2020. The same is true for the prior year comparative data.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Two Months Ended February | | | One Month Ended March | | | Three Months Ended March |
| | 2019 | | 2020 | | % Change | | | 2019 | | 2020 | | % Change | | | 2019 | | 2020 |
Selected financial data: | | | | | | | | | | | | | | | | | | |
Net operating revenues: | | |
| | |
| | | | | | | | | | | | | | |
Critical illness recovery hospital | | $ | 295,385 |
| | $ | 328,613 |
| | 11.2 | % | | | $ | 162,149 |
| | $ | 171,908 |
| | 6.0 | % | | | $ | 457,534 |
| | $ | 500,521 |
|
Rehabilitation hospital | | 98,695 |
| | 122,363 |
| | 24.0 |
| | | 55,863 |
| | 59,656 |
| | 6.8 |
| | | 154,558 |
| | 182,019 |
|
Outpatient rehabilitation | | 161,758 |
| | 179,163 |
| | 10.8 |
| | | 85,147 |
| | 76,086 |
| | (10.6 | ) | | | 246,905 |
| | 255,249 |
|
Concentra | | 259,816 |
| | 274,926 |
| | 5.8 |
| | | 136,505 |
| | 123,609 |
| | (9.4 | ) | | | 396,321 |
| | 398,535 |
|
Other(1) | | 38,532 |
| | 54,283 |
| | 40.9 |
| | | 30,781 |
| | 24,025 |
| | (21.9 | ) | | | 69,313 |
| | 78,308 |
|
Total Company | | $ | 854,186 |
| | $ | 959,348 |
| | 12.3 | % | | | $ | 470,445 |
| | $ | 455,284 |
| | (3.2 | )% | | | $ | 1,324,631 |
| | $ | 1,414,632 |
|
Income (loss) from operations: | | | | | | | | | | | | | | | | | | |
Critical illness recovery hospital | | $ | 36,355 |
| | $ | 48,395 |
| | 33.1 | % | | | $ | 25,192 |
| | $ | 27,839 |
| | 10.5 | % | | | $ | 61,547 |
| | $ | 76,234 |
|
Rehabilitation hospital | | 11,605 |
| | 22,855 |
| | 96.9 |
| | | 7,790 |
| | 8,827 |
| | 13.3 |
| | | 19,395 |
| | 31,682 |
|
Outpatient rehabilitation | | 12,623 |
| | 18,289 |
| | 44.9 |
| | | 9,336 |
| | 1,615 |
| | (82.7 | ) | | | 21,959 |
| | 19,904 |
|
Concentra | | 23,373 |
| | 29,624 |
| | 26.7 |
| | | 17,214 |
| | 8,188 |
| | (52.4 | ) | | | 40,587 |
| | 37,812 |
|
Other(1) | | (22,432 | ) | | (24,868 | ) | | (10.9 | ) | | | (9,332 | ) | | (12,086 | ) | | (29.5 | ) | | | (31,764 | ) | | (36,954 | ) |
Total Company | | $ | 61,524 |
| | $ | 94,295 |
| | 53.3 | % | | | $ | 50,200 |
| | $ | 34,383 |
| | (31.5 | )% | | | $ | 111,724 |
| | $ | 128,678 |
|
Adjusted EBITDA: | | | | | | | | | | | | | | | | | | |
Critical illness recovery hospital | | $ | 44,035 |
| | $ | 56,648 |
| | 28.6 | % | | | $ | 28,963 |
| | $ | 31,922 |
| | 10.2 | % | | | $ | 72,998 |
| | $ | 88,570 |
|
Rehabilitation hospital | | 15,908 |
| | 27,448 |
| | 72.5 |
| | | 9,889 |
| | 11,121 |
| | 12.5 |
| | | 25,797 |
| | 38,569 |
|
Outpatient rehabilitation | | 17,265 |
| | 23,062 |
| | 33.6 |
| | | 11,726 |
| | 4,060 |
| | (65.4 | ) | | | 28,991 |
| | 27,122 |
|
Concentra | | 40,785 |
| | 45,537 |
| | 11.7 |
| | | 25,473 |
| | 15,929 |
| | (37.5 | ) | | | 66,258 |
| | 61,466 |
|
Other(1) | | (17,278 | ) | | (19,281 | ) | | (11.6 | ) | | | (6,649 | ) | | (9,113 | ) | | (37.1 | ) | | | (23,927 | ) | | (28,394 | ) |
Total Company | | $ | 100,715 |
| | $ | 133,414 |
| | 32.5 | % | | | $ | 69,402 |
| | $ | 53,919 |
| | (22.3 | )% | | | $ | 170,117 |
| | $ | 187,333 |
|
Adjusted EBITDA margins: | | | | | | | | | | | | | | | | | | |
Critical illness recovery hospital | | 14.9 | % | | 17.2 | % | | | | | 17.9 | % | | 18.6 | % | | | | | 16.0 | % | | 17.7 | % |
Rehabilitation hospital | | 16.1 |
| | 22.4 |
| | | | | 17.7 |
| | 18.6 |
| | | | | 16.7 |
| | 21.2 |
|
Outpatient rehabilitation | | 10.7 |
| | 12.9 |
| | | | | 13.8 |
| | 5.3 |
| | | | | 11.7 |
| | 10.6 |
|
Concentra | | 15.7 |
| | 16.6 |
| | | | | 18.7 |
| | 12.9 |
| | | | | 16.7 |
| | 15.4 |
|
Other(1) | | N/M |
| | N/M |
| | | | | N/M |
| | N/M |
| | | | | N/M |
| | N/M |
|
Total Company | | 11.8 | % | | 13.9 | % | | | | | 14.8 | % | | 11.8 | % | | | | | 12.8 | % | | 13.2 | % |
| | | | | | | | | | | | | | | | | | |
| | Two Months Ended February | | | One Month Ended March | | | Three Months Ended March |
| | 2019 | | 2020 | | % Change | | | 2019 | | 2020 | | % Change | | | 2019 | | 2020 |
Operating statistics: | | | | | | | | | | | | | | | | | | |
Critical illness recovery hospital: | | | | | | | | | | | | | | | | | | |
Admissions | | 6,303 |
| | 6,427 |
| | 2.0 | % | | | 3,153 |
| | 3,106 |
| | (1.5 | )% | | | 9,456 |
| | 9,533 |
|
Patient days | | 167,044 |
| | 178,627 |
| | 6.9 | % | | | 91,085 |
| | 91,831 |
| | 0.8 | % | | | 258,129 |
| | 270,458 |
|
Occupancy rate | | 70 | % | | 70 | % | | | | | 73 | % | | 70 | % | | | | | 71 | % | | 70 | % |
Rehabilitation hospital: | | | | | | | | | | | | | | | | | | |
Admissions | | 3,758 |
| | 4,412 |
| | 17.4 | % | | | 2,078 |
| | 1,921 |
| | (7.6 | )% | | | 5,836 |
| | 6,333 |
|
Patient days | | 52,876 |
| | 63,924 |
| | 20.9 | % | | | 29,940 |
| | 30,644 |
| | 2.4 | % | | | 82,816 |
| | 94,568 |
|
Occupancy rate | | 75 | % | | 81 | % | | | | | 78 | % | | 76 | % | | | | | 76 | % | | 79 | % |
Outpatient rehabilitation: | | | | | | | | | | | | | | | | | | |
Number of visits | | 1,345,617 |
| | 1,496,232 |
| | 11.2 | % | | | 708,866 |
| | 626,433 |
| | (11.6 | )% | | | 2,054,483 |
| | 2,122,665 |
|
Concentra: | | | | | | | | | | | | | | | | | | |
Number of visits | | 1,904,663 |
| | 1,997,810 |
| | 4.9 | % | | | 1,006,944 |
| | 879,585 |
| | (12.6 | )% | | | 2,911,607 |
| | 2,877,395 |
|
_______________________________________________________________________________ | |
(1) | Other includes our corporate administration and shared services, as well as employee leasing services with our non-consolidating subsidiaries. |
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, 2019 and 2020. 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, 2019 and 2020.
The COVID-19 pandemic and its adverse effects have become more prevalent throughout April 2020, and we are experiencing more pronounced disruptions in our outpatient rehabilitation and Concentra operations. The continued uncertainty of the potential impact of the COVID-19 pandemic on the healthcare sector could materially adversely impact our business, results of operations, and overall financial performance in future periods. See “Risk Factors” for further discussion of the possible impact of the COVID-19 pandemic on our business.
Other Significant Events
Purchase of Concentra Interest
On January 1, 2020, Select, WCAS, and DHHC entered into an agreement pursuant to which Select acquired approximately 17.2% of the outstanding membership interests of Concentra Group Holdings Parent on a fully diluted basis from WCAS, DHHC, and other equity holders of Concentra Group Holdings Parent for approximately $338.4 million.
On February 1, 2020, Select, WCAS and DHHC entered into an agreement pursuant to which Select acquired an additional 1.4% of the outstanding membership interests of Concentra Group Holdings Parent on a fully diluted basis from WCAS, DHHC, and other equity holders of Concentra Group Holdings Parent for approximately $27.8 million.
Following these purchases, Select owns approximately 66.6% of the outstanding membership interests of Concentra Group Holdings Parent on a fully diluted basis and approximately 68.8% of the outstanding Class A membership interests of Concentra Group Holdings Parent. These purchases were in lieu of, and are considered to be, the exercise of the first put right provided to certain equity holders under the terms of the Concentra LLC Agreement.
Summary Financial Results
Three Months Ended September 30, 2019
For the three months ended September 30, 2019,March 31, 2020, our net operating revenues increased 9.9%6.8% to $1,393.3$1,414.6 million, compared to $1,267.4$1,324.6 million for the three months ended September 30, 2018.March 31, 2019. Income from operations increased 23.1%15.2% to $122.9$128.7 million for the three months ended September 30, 2019,March 31, 2020, compared to $99.8$111.7 million for the three months ended September 30, 2018.March 31, 2019.
Net income increased 3.2%32.1% to $44.0$70.4 million for the three months ended September 30, 2019,March 31, 2020, compared to $42.7$53.3 million for the three months ended September 30, 2018. Net income included pre-tax losses on early retirement of debt of $18.6 million for the three months ended September 30,March 31, 2019. Net income included a pre-tax gain on sale of businesses of $2.1$7.2 million and $6.5 million for the three months ended September 30, 2018.March 31, 2020 and 2019, respectively.
Adjusted EBITDA increased 16.6%10.1% to $182.7$187.3 million for the three months ended September 30, 2019,March 31, 2020, compared to $156.6$170.1 million for the three months ended September 30, 2018.March 31, 2019. Our Adjusted EBITDA margin was 13.1%13.2% for the three months ended September 30, 2019,March 31, 2020, compared to 12.4%12.8% for the three months ended September 30, 2018.March 31, 2019.
The following tables reconcile our segment performance measures to our consolidated operating results:
| | | Three Months Ended September 30, 2019 | Three Months Ended March 31, 2020 |
| 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) |
Net operating revenues | $ | 462,892 |
| | $ | 173,369 |
| | $ | 265,330 |
| | $ | 421,900 |
| | $ | 69,852 |
| | $ | 1,393,343 |
| $ | 500,521 |
| | $ | 182,019 |
| | $ | 255,249 |
| | $ | 398,535 |
| | $ | 78,308 |
| | $ | 1,414,632 |
|
Operating expenses | 405,645 |
| | 136,589 |
| | 225,290 |
| | 344,989 |
| | 104,983 |
| | 1,217,496 |
| 411,951 |
| | 143,450 |
| | 228,127 |
| | 337,836 |
| | 112,838 |
| | 1,234,202 |
|
Depreciation and amortization | 12,484 |
| | 7,234 |
| | 6,887 |
| | 23,989 |
| | 2,347 |
| | 52,941 |
| 12,336 |
| | 6,887 |
| | 7,218 |
| | 22,887 |
| | 2,424 |
| | 51,752 |
|
Income (loss) from operations | $ | 44,763 |
| | $ | 29,546 |
| | $ | 33,153 |
| | $ | 52,922 |
| | $ | (37,478 | ) | | $ | 122,906 |
| $ | 76,234 |
| | $ | 31,682 |
| | $ | 19,904 |
| | $ | 37,812 |
| | $ | (36,954 | ) | | $ | 128,678 |
|
Depreciation and amortization | 12,484 |
| | 7,234 |
| | 6,887 |
| | 23,989 |
| | 2,347 |
| | 52,941 |
| 12,336 |
| | 6,887 |
| | 7,218 |
| | 22,887 |
| | 2,424 |
| | 51,752 |
|
Stock compensation expense | — |
| | — |
| | — |
| | 768 |
| | 6,050 |
| | 6,818 |
| — |
| | — |
| | — |
| | 767 |
| | 6,136 |
| | 6,903 |
|
Adjusted EBITDA | $ | 57,247 |
| | $ | 36,780 |
| | $ | 40,040 |
| | $ | 77,679 |
| | $ | (29,081 | ) | | $ | 182,665 |
| $ | 88,570 |
| | $ | 38,569 |
| | $ | 27,122 |
| | $ | 61,466 |
| | $ | (28,394 | ) | | $ | 187,333 |
|
Adjusted EBITDA margin | 12.4 | % | | 21.2 | % | | 15.1 | % | | 18.4 | % | | N/M |
| | 13.1 | % | 17.7 | % | | 21.2 | % | | 10.6 | % | | 15.4 | % | | N/M |
| | 13.2 | % |
| | | Three Months Ended September 30, 2018 | Three Months Ended March 31, 2019 |
| 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) |
Net operating revenues(1) | $ | 420,108 |
| | $ | 144,588 |
| | $ | 245,234 |
| | $ | 404,481 |
| | $ | 52,990 |
| | $ | 1,267,401 |
| $ | 457,534 |
| | $ | 154,558 |
| | $ | 246,905 |
| | $ | 396,321 |
| | $ | 69,313 |
| | $ | 1,324,631 |
|
Operating expenses(1) | 366,816 |
| | 119,245 |
| | 210,703 |
| | 336,494 |
| | 83,779 |
| | 1,117,037 |
| 384,536 |
| | 128,761 |
| | 217,914 |
| | 330,830 |
| | 98,728 |
| | 1,160,769 |
|
Depreciation and amortization | 11,136 |
| | 6,079 |
| | 6,597 |
| | 24,488 |
| | 2,227 |
| | 50,527 |
| 11,451 |
| | 6,402 |
| | 7,032 |
| | 24,904 |
| | 2,349 |
| | 52,138 |
|
Income (loss) from operations | $ | 42,156 |
| | $ | 19,264 |
| | $ | 27,934 |
| | $ | 43,499 |
| | $ | (33,016 | ) | | $ | 99,837 |
| $ | 61,547 |
| | $ | 19,395 |
| | $ | 21,959 |
| | $ | 40,587 |
| | $ | (31,764 | ) | | $ | 111,724 |
|
Depreciation and amortization | 11,136 |
| | 6,079 |
| | 6,597 |
| | 24,488 |
| | 2,227 |
| | 50,527 |
| 11,451 |
| | 6,402 |
| | 7,032 |
| | 24,904 |
| | 2,349 |
| | 52,138 |
|
Stock compensation expense | — |
| | — |
| | — |
| | 767 |
| | 5,497 |
| | 6,264 |
| — |
| | — |
| | — |
| | 767 |
| | 5,488 |
| | 6,255 |
|
Adjusted EBITDA | $ | 53,292 |
| | $ | 25,343 |
| | $ | 34,531 |
| | $ | 68,754 |
| | $ | (25,292 | ) | | $ | 156,628 |
| $ | 72,998 |
| | $ | 25,797 |
| | $ | 28,991 |
| | $ | 66,258 |
| | $ | (23,927 | ) | | $ | 170,117 |
|
Adjusted EBITDA margin | 12.7 | % | | 17.5 | % | | 14.1 | % | | 17.0 | % | | N/M |
| | 12.4 | % | 16.0 | % | | 16.7 | % | | 11.7 | % | | 16.7 | % | | N/M |
| | 12.8 | % |
The following table summarizes changes in segment performance measures for the three months ended September 30, 2019,March 31, 2020, compared to the three months ended September 30, 2018:March 31, 2019:
| | | Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total | Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total |
Change in net operating revenues | 10.2 | % | | 19.9 | % | | 8.2 | % | | 4.3 | % | | 31.8 | % | | 9.9 | % | 9.4 | % | | 17.8 | % | | 3.4 | % | | 0.6 | % | | 13.0 | % | | 6.8 | % |
Change in income from operations | 6.2 | % | | 53.4 | % | | 18.7 | % | | 21.7 | % | | (13.5 | )% | | 23.1 | % | 23.9 | % | | 63.4 | % | | (9.4 | )% | | (6.8 | )% | | (16.3 | )% | | 15.2 | % |
Change in Adjusted EBITDA | 7.4 | % | | 45.1 | % | | 16.0 | % | | 13.0 | % | | (15.0 | )% | | 16.6 | % | 21.3 | % | | 49.5 | % | | (6.4 | )% | | (7.2 | )% | | (18.7 | )% | | 10.1 | % |
_______________________________________________________________________________N/M — Not meaningful.
| |
(1) | For the three months ended September 30, 2018, the financial results of our reportable segments have been changed to remove the net operating revenues and expenses associated with employee leasing services provided to our non-consolidating subsidiaries. These results are now reported as part of our other activities. We lease employees at cost to these non-consolidating subsidiaries. |
Nine Months Ended September 30,March 31, 2019,
For the nine months ended September 30, 2019, our net operating revenues increased 6.9% to $4,079.3 million, compared to $3,816.6 million for the nine months ended September 30, 2018. Income from operations increased 9.3% to $359.5 million for the nine months ended September 30, 2019, compared to $329.0 million for the nine months ended September 30, 2018.
Net income increased 6.9% to $157.4 million for the nine months ended September 30, 2019, compared to $147.2 million for the nine months ended September 30, 2018. Net income included pre-tax losses on early retirement of debt of $18.6 million and a pre-tax gain on sale of businesses of $6.5 million for the nine months ended September 30, 2019. Net income included pre-tax losses on early retirement of debt of $10.3 million, pre-tax gains on sales of businesses of $9.0 million, and pre-tax U.S. HealthWorks acquisition costs of $2.9 million for the nine months ended September 30, 2018.
Adjusted EBITDA increased 8.2% to $539.0 million for the nine months ended September 30, 2019, compared to $498.1 million for the nine months ended September 30, 2018. Our Adjusted EBITDA margin was 13.2% for the nine months ended September 30, 2019, compared to 13.1% for the nine months ended September 30, 2018.
The following tables reconcile our segment performance measures to our consolidated operating results:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2019 |
| Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total |
| (in thousands) |
Net operating revenues | $ | 1,381,569 |
| | $ | 488,301 |
| | $ | 774,126 |
| | $ | 1,231,672 |
| | $ | 203,670 |
| | $ | 4,079,338 |
|
Operating expenses | 1,187,186 |
| | 395,756 |
| | 662,511 |
| | 1,013,950 |
| | 300,351 |
| | 3,559,754 |
|
Depreciation and amortization | 38,430 |
| | 20,332 |
| | 20,910 |
| | 73,372 |
| | 7,028 |
| | 160,072 |
|
Income (loss) from operations | $ | 155,953 |
| | $ | 72,213 |
| | $ | 90,705 |
| | $ | 144,350 |
| | $ | (103,709 | ) | | $ | 359,512 |
|
Depreciation and amortization | 38,430 |
| | 20,332 |
| | 20,910 |
| | 73,372 |
| | 7,028 |
| | 160,072 |
|
Stock compensation expense | — |
| | — |
| | — |
| | 2,302 |
| | 17,129 |
| | 19,431 |
|
Adjusted EBITDA | $ | 194,383 |
| | $ | 92,545 |
| | $ | 111,615 |
| | $ | 220,024 |
| | $ | (79,552 | ) | | $ | 539,015 |
|
Adjusted EBITDA margin | 14.1 | % | | 19.0 | % | | 14.4 | % | | 17.9 | % | | N/M |
| | 13.2 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2018 |
| Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total |
| (in thousands) |
Net operating revenues(1) | $ | 1,327,236 |
| | $ | 432,675 |
| | $ | 743,379 |
| | $ | 1,173,420 |
| | $ | 139,865 |
| | $ | 3,816,575 |
|
Operating expenses(1) | 1,140,247 |
| | 352,361 |
| | 636,376 |
| | 979,312 |
| | 230,261 |
| | 3,338,557 |
|
Depreciation and amortization | 34,146 |
| | 17,816 |
| | 19,938 |
| | 70,332 |
| | 6,790 |
| | 149,022 |
|
Income (loss) from operations | $ | 152,843 |
| | $ | 62,498 |
| | $ | 87,065 |
| | $ | 123,776 |
| | $ | (97,186 | ) | | $ | 328,996 |
|
Depreciation and amortization | 34,146 |
| | 17,816 |
| | 19,938 |
| | 70,332 |
| | 6,790 |
| | 149,022 |
|
Stock compensation expense | — |
| | — |
| | — |
| | 2,116 |
| | 15,059 |
| | 17,175 |
|
U.S. HealthWorks acquisition costs | — |
| | — |
| | — |
| | 2,895 |
| | — |
| | 2,895 |
|
Adjusted EBITDA | $ | 186,989 |
| | $ | 80,314 |
| | $ | 107,003 |
| | $ | 199,119 |
| | $ | (75,337 | ) | | $ | 498,088 |
|
Adjusted EBITDA margin | 14.1 | % | | 18.6 | % | | 14.4 | % | | 17.0 | % | | N/M |
| | 13.1 | % |
The following table summarizes changes in segment performance measures for the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018:
|
| | | | | | | | | | | | | | | | | |
| Critical Illness Recovery Hospital | | Rehabilitation Hospital | | Outpatient Rehabilitation | | Concentra | | Other | | Total |
Change in net operating revenues | 4.1 | % | | 12.9 | % | | 4.1 | % | | 5.0 | % | | 45.6 | % | | 6.9 | % |
Change in income from operations | 2.0 | % | | 15.5 | % | | 4.2 | % | | 16.6 | % | | (6.7 | )% | | 9.3 | % |
Change in Adjusted EBITDA | 4.0 | % | | 15.2 | % | | 4.3 | % | | 10.5 | % | | (5.6 | )% | | 8.2 | % |
_______________________________________________________________________________N/M — Not meaningful.
| |
(1) | For the nine months ended September 30, 2018, the financial results of our reportable segments have been changed to remove the net operating revenues and expenses associated with employee leasing services provided to our non-consolidating subsidiaries. These results are now reported as part of our other activities. We lease employees at cost to these non-consolidating subsidiaries. |
Significant Events
Select 6.250% Senior Notes
On August 1, 2019, Select issued and sold $550.0 million aggregate principal amount of 6.250% senior notes due August 15, 2026. Select used a portion of the net proceeds of the 6.250% senior notes, together with a portion of the proceeds from the incremental term loan borrowings under the Select credit facilities (as described below) in part to (i) redeem in full the $710.0 million aggregate principal amount of the 6.375% senior notes on August 30, 2019 at the redemption price of 100.000% of the principal amount plus accrued and unpaid interest, (ii) repay in full the outstanding borrowings under Select’s revolving facility, and (iii) pay related fees and expenses associated with the financing.
Select Credit Facilities
On August 1, 2019, Select entered into Amendment No. 3 to the Select credit agreement dated March 6, 2017. Amendment No. 3, among other things, (i) provided for an additional $500.0 million in term loans that, along with the existing term loans, have a maturity date of March 6, 2025, (ii) extended the maturity date of Select’s revolving facility from March 6, 2022 to March 6, 2024, and (iii) increased the total net leverage ratio permitted under the Select credit agreement.
Concentra Credit Facilities
On September 20, 2019, Concentra Inc. entered into Amendment No. 6 to the Concentra first lien credit agreement. Amendment No. 6, among other things, (i) provided for an additional $100.0 million in term loans that, along with the existing Concentra first lien term loans, have a maturity date of June 1, 2022 and (ii) extended the maturity date of the revolving facility from June 1, 2021 to March 1, 2022. Concentra Inc. used the incremental borrowings under the Concentra first lien credit agreement to prepay in full all of its term loans outstanding under the Concentra second lien credit agreement on September 20, 2019.
Regulatory Changes
Our Annual Report on Form 10-K for the year ended December 31, 2018,2019, filed with the SEC on February 21, 2019,20, 2020, contains a detailed discussion of the regulations that affect our business in Part I — Business — Government Regulations. The following is a discussion of some of the more significant healthcare regulatory changes that have affected our financial performance in the periods covered by this report or are likely to affect our financial performance and financial condition in the future. The information below should be read in conjunction with the more detailed discussion of regulations contained in our Form 10-K.
Medicare Reimbursement
The Medicare program reimburses healthcare providers for services furnished to Medicare beneficiaries, which are generally persons age 65 and older, those who are chronically disabled, and those suffering from end stage renal disease. The program is governed by the Social Security Act of 1965 and is administered primarily by the Department of Health and Human Services and CMS. Net operating revenues generated directly from the Medicare program represented approximately 26% of our net operating revenues for the ninethree months ended September 30, 2019,March 31, 2020, and 27%26% of our net operating revenues for the year ended December 31, 2018.2019.
Federal Health Care Program Changes in Response to the COVID-19 Pandemic
On January 31, 2020, the Secretary of Health and Human Services (“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. On March 13, 2020, President Trump declared a national emergency due to the COVID-19 pandemic and the HHS Secretary authorized the waiver or modification of certain requirements under the Medicare, Medicaid and 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, while 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 respond to the emergency from the calculation of the “60 percent rule” thresholds to receive payment as an IRF. |
| |
ii. | Long-term care hospitals (“LTCHs”), and hospitals seeking LTCH classification, can exclude patient stays from the greater-than-25-day average length of stay requirement where the patient was admitted or discharged to meet the demands of the emergency. |
| |
iii. | Medicare will not require out-of-state physician and non-physician practitioners to be licensed in the state where they are providing services when they are licensed in another state, subject to state or local licensure requirements. |
| |
iv. | Many requirements under the hospital conditions of participation (“CoPs”) are waived during the emergency period to give hospitals more flexibility in treating COVID-19 patients. |
| |
v. | Hospitals can operate temporary expansion locations without meeting the provider-based entity requirements or the hospital CoPs that continue to apply 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. |
| |
vi. | IRFs, LTCHs and certain other providers do not need to submit quality data to Medicare for October 1, 2019 through June 30, 2020 to comply with the quality reporting programs. |
| |
vii. | The HHS Office of the Inspector General (“OIG”) waived sanctions under the physician self-referral law (i.e., Stark law) for patient referrals and claims related to the emergency. The 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. |
CMS also approved 53 state Medicaid program emergency waivers, 39 state plan amendments, 16 COVID-19 pandemic related Medicaid Disaster Amendments and one CHIP Disaster Amendment. CMS will consider specific waiver requests from providers and suppliers. We have submitted one or more specific waiver requests to make it easier for our operators or referral partners to treat COVID-19 patients, and we may submit others in the future.
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 80 additional services to be furnished by telehealth, allow physicians to monitor patient services remotely, and fulfill face-to-face requirements in IRFs.
In addition to these agency actions, the 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 the coronavirus, and for reimbursing “eligible health care providers for health care related expenses or lost revenues that are attributable to coronavirus.” Half of the fund is allocated for general distribution to Medicare providers. The first $30 billion was distributed to health care providers that received Medicare fee-for-service payments in 2019. The remaining $20 billion is being distributed to Medicare providers in a manner that makes the entire $50 billion general distribution proportional to providers’ share of 2018 net patient revenue. The other half of the fund is for targeted allocations to providers in high impact COVID-19 areas ($10 billion), rural providers ($10 billion), Indian Health Service ($400 million), and unspecified allocations for treatment of uninsured COVID-19 patients and providers who need additional funding such as skilled nursing facilities, dentists, and providers that only treat Medicaid patients. |
| |
ii. | Expansion of the Accelerated and Advance Payment Program to advance three months of payments to Medicare providers as loans to be repaid after 120 days. |
| |
iii. | Temporary suspension of the 2% cut to Medicare payments due to sequestration so that, for the period of May 1, 2020 to December 31, 2020, the Medicare program will be exempt from any sequestration order. |
| |
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) for the cost reporting period(s) that include the emergency period. The second waives application of the site neutral payment rate so that all LTCH cases admitted during the emergency period will be paid the LTCH-PPS standard federal rate. |
| |
v. | Waiver of the IRF 3-hour rule so that IRF services provided during the public health emergency period do not need to meet the coverage requirement that patients receive at least 3 hours of therapy a day or 15 hours of therapy per week. |
The CARES Act also provides for a 20% increase in the payment weight for Medicare payments to hospitals paid under the inpatient hospital prospective payment system (“IPPS”) for treating COVID-19 patients. We are monitoring developments related to this provision, in case CMS provides a similar payment add-on for LTCHs and IRFs.
Medicare Reimbursement of LTCH Services
The following is a summary of significant regulatory changes affectingto the Medicare prospective payment system for our critical illness recovery hospitals, which are certified by Medicare as long term care hospitals (“LTCHs”),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”).
The following is a summary of significant changes to LTCH-PPS which have affected our results of operations, as well as the policies and payment rates that may affect our future results of operations.
Fiscal Year 2018. On August 14, 2017, CMS published the final rule updating policies and payment rates for the LTCH-PPS for fiscal year 2018 (affecting discharges and cost reporting periods beginning on or after October 1, 2017 through September 30, 2018). Certain errors in the final rule published on August 14, 2017 were corrected in a final rule published October 4, 2017. The standard federal rate was set at $41,415, a decrease from the standard federal rate applicable during fiscal year 2017 of $42,476. The update to the standard federal rate for fiscal year 2018 included a market basket increase of 2.7%, less a productivity adjustment of 0.6%, and less a reduction of 0.75% mandated by the Affordable Care Act (“ACA”). The update to the standard federal rate for fiscal year 2018 was further impacted by the Medicare Access and CHIP Reauthorization Act of 2015, which limits the update for fiscal year 2018 to 1.0%. The fixed-loss amount for high cost outlier cases paid under LTCH-PPS was set at $27,381, an increase from the fixed-loss amount in the 2017 fiscal year of $21,943. The fixed-loss amount for high cost outlier cases paid under the site-neutral payment rate was set at $26,537, an increase from the fixed-loss amount in the 2017 fiscal year of $23,573.
Fiscal Year 2019. On August 17, 2018, CMS published the final rule updating policies and payment rates for the LTCH-PPS for fiscal year 2019 (affecting discharges and cost reporting periods beginning on or after October 1, 2018 through September 30, 2019). Certain errors in the final rule were corrected in a final ruledocument published October 3, 2018. The standard federal rate was set at $41,559, an increase from the standard federal rate applicable during fiscal year 2018 of $41,415. The update to the standard federal rate for fiscal year 2019 included a market basket increase of 2.9%, less a productivity adjustment of 0.8%, and less a reduction of 0.75% mandated by the ACA. The standard federal rate also included an area wage budget neutrality factor of 0.999215 and a temporary, one-time budget neutrality adjustment of 0.990878 in connection with the elimination of the 25 Percent Rule (discussed herein).Rule. The fixed-loss amount for high cost outlier cases paid under LTCH-PPS was set at $27,121, a decrease from the fixed-loss amount in the 2018 fiscal year of $27,381. The fixed-loss amount for high cost outlier cases paid under the site-neutral payment rate was set at $25,743, a decrease from the fixed-loss amount in the 2018 fiscal year of $26,537.
Fiscal Year 2020. On August 16, 2019, CMS published the final rule updating policies and payment rates for the LTCH-PPS for fiscal year 2020 (affecting discharges and cost reporting periods beginning on or after October 1, 2019 through September 30, 2020). Certain errors in the final rule were corrected in a final ruledocument published October 8, 2019. The standard federal rate was set at $42,678, an increase from the standard federal rate applicable during fiscal year 2019 of $41,559. The update to the standard federal rate for fiscal year 2020 included a market basket increase of 2.9%, less a productivity adjustment of 0.4%. The standard federal rate also included an area wage budget neutrality factor of 1.0020203 and a temporary, one-time budget neutrality adjustment of 0.999858 in connection with the elimination of the 25 Percent Rule (discussed herein).Rule. The fixed-loss amount for high cost outlier cases paid under LTCH-PPS was set at $26,778, a decrease from the fixed-loss amount in the 2019 fiscal year of $27,121. The fixed-loss amount for high cost outlier cases paid under the site-neutral payment rate was set at $26,552, an increase from the fixed-loss amount in the 2019 fiscal year of $25,743. For LTCH discharges occurring in cost reporting periods beginning in FY 2020, site neutral payment rate cases will begin to be paid fully on the site neutral payment rate, rather than the transitional blended rate.
25 Percent Rule
The “25 Percent Rule” was a downward However, the CARES Act waives the site neutral payment adjustment that applied if the percentage of Medicarerate for patients discharged from LTCHs who were admitted from a referring hospital (regardless of whether the LTCH or LTCH satellite is co-located with the referring hospital) exceeded the applicable percentage admissions threshold during a particular cost reporting period.
For fiscal year 2018, CMS adopted a regulatory moratorium on the implementation of the 25 Percent Rule.
For fiscal year 2019such coronavirus emergency period and thereafter, CMS eliminated the 25 Percent Rule entirely. The elimination of the 25 Percent Rule is being implemented in a budget neutral manner by adjusting the standard federal payment rates down such that the projection of aggregate LTCH payments would equal the projection of aggregate LTCH payments that would have been paid if the moratorium ended and the 25 Percent Rule went into effect on October 1, 2018. As a result, the elimination of the 25 Percent Rule includes a temporary, one-time adjustmentresponse to the fiscal year 2019 LTCH-PPS standard federal payment rate, a temporary, one-time adjustment to the fiscal year 2020 LTCH-PPS standard federal payment rate, and a permanent, one-time adjustment to the LTCH-PPS standard federal payment rate in fiscal years 2021 and subsequent years.public health emergency, as discussed above.
Medicare Reimbursement of IRF Services
The following is a summary of significant regulatory changes affectingto the Medicare prospective payment system for our rehabilitation hospitals, which are certified by Medicare as inpatient rehabilitation facilities (“IRFs”),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”).
The following is a summary of significant changes to IRF-PPS which have affected our results of operations, as well as the policies and payment rates that may affect our future results of operations.
Fiscal Year 2018. On August 3, 2017, CMS published the final rule updating policies and payment rates for the IRF-PPS for fiscal year 2018 (affecting discharges and cost reporting periods beginning on or after October 1, 2017 through September 30, 2018). The standard payment conversion factor for discharges for fiscal year 2018 was set at $15,838, an increase from the standard payment conversion factor applicable during fiscal year 2017 of $15,708. The update to the standard payment conversion factor for fiscal year 2018 included a market basket increase of 2.6%, less a productivity adjustment of 0.6%, and less a reduction of 0.75% mandated by the ACA. The standard payment conversion factor for fiscal year 2018 was further impacted by the Medicare Access and CHIP Reauthorization Act of 2015, which limited the update for fiscal year 2018 to 1.0%. CMS increased the outlier threshold amount for fiscal year 2018 to $8,679 from $7,984 established in the final rule for fiscal year 2017.
Fiscal Year 2019. On August 6, 2018, CMS published the final rule updating policies and payment rates for the IRF-PPS for fiscal year 2019 (affecting discharges and cost reporting periods beginning on or after October 1, 2018 through September 30, 2019). The standard payment conversion factor for discharges for fiscal year 2019 was set at $16,021, an increase from the standard payment conversion factor applicable during fiscal year 2018 of $15,838. The update to the standard payment conversion factor for fiscal year 2019 included a market basket increase of 2.9%, less a productivity adjustment of 0.8%, and less a reduction of 0.75% mandated by the ACA. CMS increased the outlier threshold amount for fiscal year 2019 to $9,402 from $8,679 established in the final rule for fiscal year 2018.
Fiscal Year 2020. On August 8, 2019, CMS published the final rule updating policies and payment rates for the IRF-PPS for fiscal year 2020 (affecting discharges and cost reporting periods beginning on or after October 1, 2019 through September 30, 2020). The standard payment conversion factor for discharges for fiscal year 2020 was set at $16,489, an increase from the standard payment conversion factor applicable during fiscal year 2019 of $16,021. The update to the standard payment conversion factor for fiscal year 2020 included a market basket increase of 2.9%, less a productivity adjustment of 0.4%. CMS decreased the outlier threshold amount for fiscal year 2020 to $9,300 from $9,402 established in the final rule for fiscal year 2019.
Fiscal Year 2021. On April 16, 2020, CMS released an advanced copy of the proposed 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 would be set at $16,847, 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, if adopted, would include a market basket increase of 2.9%, less a productivity adjustment of 0.4%. CMS proposed to decrease the outlier threshold amount for fiscal year 2021 to $8,102 from $9,300 established in the final rule for fiscal year 2020.
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 based 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%.
Beginning in 2019, payments under the fee schedule are subject to adjustment based on performance in MIPS, which measures performance based on certain quality metrics, resource use, and meaningful use of electronic health records. Under the MIPS requirements an eligible clinician’s performance is assessed according to established performance standards and used to determine an adjustment factor that is then applied to the clinician’s payment for a year.
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 final 2020 Medicare physician fee schedule, CMS revised coding, documentation guidelines, and valuation for evaluation and management (“E/M”) office visit codes. Because the Medicare physician fee schedule is budget-neutral, any revaluation of E/M services that will increase spending by more than $20 million will require a budget neutrality adjustment. To increase values for the E/M codes while maintaining budget neutrality under the fee schedule, CMS proposed cuts to other codes to make up the difference, beginning in 2021. Under the proposal, physical and occupational therapy services could see code reductions that may result in an estimated 8% decrease in payment. However, many providers have opposed the proposed cuts, and CMS has not yet determined the actual cuts to each code.
Modifiers to Identify Services of Physical Therapy Assistants or Occupational Therapy Assistants
In the Medicare Physician Fee Schedule final rule for calendar year 2019, CMS established two new modifiers (CQ and CO) to identify services furnished in whole or in part by physical therapy assistants (“PTAs”) or occupational therapy assistants (“OTAs”). These modifiers were mandated by the Bipartisan Budget Act 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. CMS intends to use these modifiers to implement a payment differential that would reimburse services provided by PTAs and OTAs at 85% of the fee schedule rate beginning on January 1, 2022.In the final 2020 Medicare physician fee schedule rule, CMS clarified that when the physical therapist is involved for the entire duration 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 standard 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.
Operating Statistics
The following table sets forth operating statistics for each of our 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 customers, 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 September 30, | | Nine Months Ended September 30, | | Three Months Ended March 31, |
| | 2018 | | 2019 | | 2018 | | 2019 | | 2019 | | 2020 |
Critical illness recovery hospital data: | | |
| | |
| | |
| | |
| | |
| | |
|
Number of hospitals owned—start of period | | 98 |
| | 99 |
| | 99 |
| | 96 |
| | 96 |
| | 100 |
|
Number of hospitals acquired | | — |
| | — |
| | — |
| | 3 |
| | — |
| | — |
|
Number of hospital start-ups | | — |
| | — |
| | 1 |
| | — |
| | — |
| | — |
|
Number of hospitals closed/sold | | (1 | ) | | — |
| | (3 | ) | | — |
| | — |
| | — |
|
Number of hospitals owned—end of period | | 97 |
| | 99 |
| | 97 |
| | 99 |
| | 96 |
| | 100 |
|
Number of hospitals managed—end of period | | — |
| | 1 |
| | — |
| | 1 |
| | 1 |
| | 1 |
|
Total number of hospitals (all)—end of period | | 97 |
| | 100 |
| | 97 |
| | 100 |
| | 97 |
| | 101 |
|
Available licensed beds(1) | | 4,095 |
| | 4,230 |
| | 4,095 |
| | 4,230 |
| | 4,071 |
| | 4,286 |
|
Admissions(1)(2) | | 8,651 |
| | 9,051 |
| | 27,605 |
| | 27,679 |
| | 9,456 |
| | 9,533 |
|
Patient days(1)(3) | | 243,891 |
| | 258,089 |
| | 765,863 |
| | 779,078 |
| | 258,129 |
| | 270,458 |
|
Average length of stay (days)(1)(4) | | 28 |
| | 28 |
| | 28 |
| | 28 |
| | 28 |
| | 29 |
|
Net revenue per patient day(2)(5) | | $ | 1,705 |
| | $ | 1,773 |
| | $ | 1,716 |
| | $ | 1,757 |
| | $ | 1,759 |
| | $ | 1,839 |
|
Occupancy rate(1)(6) | | 65 | % | | 67 | % | | 68 | % | | 69 | % | | 71 | % | | 70 | % |
Percent patient days—Medicare(1)(7) | | 53 | % | | 49 | % | | 53 | % | | 51 | % | | 53 | % | | 49 | % |
Rehabilitation hospital data: | | | | | | | | | | | | |
Number of hospitals owned—start of period | | 17 |
| | 19 |
| | 16 |
| | 17 |
| | 17 |
| | 19 |
|
Number of hospitals start-ups | | — |
| | — |
| | 1 |
| | 2 |
| |
Number of hospitals acquired | | | — |
| | — |
|
Number of hospital start-ups | | | 1 |
| | — |
|
Number of hospitals closed/sold | | | — |
| | — |
|
Number of hospitals owned—end of period | | 17 |
| | 19 |
| | 17 |
| | 19 |
| | 18 |
| | 19 |
|
Number of hospitals managed—end of period | | 9 |
| | 10 |
| | 9 |
| | 10 |
| | 9 |
| | 10 |
|
Total number of hospitals (all)—end of period | | 26 |
| | 29 |
| | 26 |
| | 29 |
| | 27 |
| | 29 |
|
Available licensed beds(1) | | 1,189 |
| | 1,309 |
| | 1,189 |
| | 1,309 |
| | 1,239 |
| | 1,309 |
|
Admissions(1) | | 5,370 |
| | 6,400 |
| | 16,219 |
| | 18,253 |
| |
Patient days(1) | | 79,232 |
| | 89,454 |
| | 233,537 |
| | 258,795 |
| |
Average length of stay (days)(1) | | 15 |
| | 14 |
| | 15 |
| | 14 |
| |
Net revenue per patient day(1)(2) | | $ | 1,582 |
| | $ | 1,724 |
| | $ | 1,604 |
| | $ | 1,665 |
| |
Occupancy rate(1) | | 72 | % | | 75 | % | | 73 | % | | 75 | % | |
Percent patient days—Medicare(1) | | 53 | % | | 53 | % | | 54 | % | | 51 | % | |
Admissions(1)(2) | | | 5,836 |
| | 6,333 |
|
Patient days(1)(3) | | | 82,816 |
| | 94,568 |
|
Average length of stay (days)(1)(4) | | | 14 |
| | 15 |
|
Net revenue per patient day(1)(5) | | | $ | 1,633 |
| | $ | 1,732 |
|
Occupancy rate(1)(6) | | | 76 | % | | 79 | % |
Percent patient days—Medicare(1)(7) | | | 52 | % | | 51 | % |
Outpatient rehabilitation data: | | |
| | |
| | | | | | | | |
Number of clinics owned—start of period | | 1,435 |
| | 1,419 |
| | 1,447 |
| | 1,423 |
| | 1,423 |
| | 1,461 |
|
Number of clinics acquired | | — |
| | 3 |
| | 14 |
| | 17 |
| | 4 |
| | 2 |
|
Number of clinic start-ups | | 8 |
| | 14 |
| | 26 |
| | 36 |
| | 11 |
| | 12 |
|
Number of clinics closed/sold | | (23 | ) | | (7 | ) | | (67 | ) | | (47 | ) | | (31 | ) | | (4 | ) |
Number of clinics owned—end of period | | 1,420 |
| | 1,429 |
| | 1,420 |
| | 1,429 |
| | 1,407 |
| | 1,471 |
|
Number of clinics managed—end of period | | 229 |
| | 278 |
| | 229 |
| | 278 |
| | 277 |
| | 282 |
|
Total number of clinics (all)—end of period | | 1,649 |
| | 1,707 |
| | 1,649 |
| | 1,707 |
| | 1,684 |
| | 1,753 |
|
Number of visits(1) | | 2,039,462 |
| | 2,204,328 |
| | 6,251,582 |
| | 6,462,316 |
| |
Net revenue per visit(1)(3) | | $ | 103 |
| | $ | 103 |
| | $ | 103 |
| | $ | 103 |
| |
Concentra data: | | | | | | |
| | |
| |
Number of centers owned—start of period | | 527 |
| | 526 |
| | 312 |
| | 524 |
| |
Number of centers acquired | | 1 |
| | 1 |
| | 220 |
| | 6 |
| |
Number of centers closed/sold | | (3 | ) | | (4 | ) | | (7 | ) | | (7 | ) | |
Number of centers owned—end of period | | 525 |
| | 523 |
| | 525 |
| | 523 |
| |
Number of onsite clinics operated—end of period | | 123 |
| | 131 |
| | 123 |
| | 131 |
| |
Number of CBOCs owned—end of period | | 30 |
| | 32 |
| | 30 |
| | 32 |
| |
Number of visits(1) | | 2,984,832 |
| | 3,150,903 |
| | 8,605,012 |
| | 9,165,599 |
| |
Net revenue per visit(1)(3) | | $ | 124 |
| | $ | 120 |
| | $ | 124 |
| | $ | 122 |
| |
Number of visits(1)(8) | | | 2,054,483 |
| | 2,122,665 |
|
Net revenue per visit(1)(9) | | | $ | 103 |
| | $ | 104 |
|
|
| | | | | | | | |
| | Three Months Ended March 31, |
| | 2019 | | 2020 |
Concentra data: | | | | |
Number of centers owned—start of period | | 524 |
| | 521 |
|
Number of centers acquired | | 1 |
| | 4 |
|
Number of center start-ups | | — |
| | — |
|
Number of centers closed/sold | | — |
| | (2 | ) |
Number of centers owned—end of period | | 525 |
| | 523 |
|
Number of onsite clinics operated—end of period | | 129 |
| | 128 |
|
Number of CBOCs owned—end of period | | 31 |
| | 33 |
|
Number of visits(1)(8) | | 2,911,607 |
| | 2,877,395 |
|
Net revenue per visit(1)(9) | | $ | 124 |
| | $ | 123 |
|
| |
(1) | Data excludes locations managed by the Company. For purposes of our Concentra segment, onsite clinics and community-based outpatient clinics are excluded. |
| |
(2) | Represents the number of patients admitted to our hospitals during the periods presented. |
| |
(3) | Each patient day represents one patient occupying one bed for one day during the periods presented. |
| |
(4) | 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. |
| |
(5) | Represents the average amount of revenue recognized for each patient day. Net revenue per patient day is calculated by dividing direct patient service revenues, excluding revenues from certain other ancillary and outpatient services provided at our hospitals, by the total number of patient days. |
| |
(3)(6) | 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. |
| |
(7) | 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. |
| |
(8) | Represents the number of visits in which patients were treated at our outpatient rehabilitation clinics and Concentra centers during the periods presented. |
| |
(9) | Represents the average amount of revenue recognized for each patient visit. Net revenue per visit is calculated by dividing direct 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, direct patient service revenue does not include onsite clinics and community-based outpatient clinics. |
Results of Operations
The following table outlines selected operating data as a percentage of net operating revenues for the periods indicated:
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended March 31, |
| | 2018 | | 2019 | | 2018 | | 2019 | | 2019 | | 2020 |
Net operating revenues | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Cost of services, exclusive of depreciation and amortization(1) | | 85.8 |
| | 84.9 |
| | 85.1 |
| | 84.9 |
| | 85.5 |
| | 84.9 |
|
General and administrative | | 2.4 |
| | 2.5 |
| | 2.4 |
| | 2.3 |
| | 2.2 |
| | 2.4 |
|
Depreciation and amortization | | 3.9 |
| | 3.8 |
| | 3.9 |
| | 4.0 |
| | 3.9 |
| | 3.6 |
|
Income from operations | | 7.9 |
| | 8.8 |
| | 8.6 |
| | 8.8 |
| | 8.4 |
| | 9.1 |
|
Loss on early retirement of debt | | — |
| | (1.3 | ) | | (0.3 | ) | | (0.5 | ) | |
Equity in earnings of unconsolidated subsidiaries | | 0.4 |
| | 0.5 |
| | 0.4 |
| | 0.5 |
| | 0.3 |
| | 0.2 |
|
Gain on sale of businesses | | 0.2 |
| | — |
| | 0.2 |
| | 0.2 |
| | 0.5 |
| | 0.5 |
|
Interest expense | | (4.0 | ) | | (3.9 | ) | | (3.8 | ) | | (3.9 | ) | | (3.8 | ) | | (3.3 | ) |
Income before income taxes | | 4.5 |
| | 4.1 |
| | 5.1 |
| | 5.1 |
| | 5.4 |
| | 6.5 |
|
Income tax expense | | 1.1 |
| | 0.9 |
| | 1.2 |
| | 1.2 |
| | 1.4 |
| | 1.5 |
|
Net income | | 3.4 |
| | 3.2 |
| | 3.9 |
| | 3.9 |
| | 4.0 |
| | 5.0 |
|
Net income attributable to non-controlling interests | | 0.8 |
| | 1.0 |
| | 0.9 |
| | 1.0 |
| | 0.9 |
| | 1.2 |
|
Net income attributable to Select Medical Holdings Corporation | | 2.6 | % | | 2.2 | % | | 3.0 | % | | 2.9 | % | | 3.1 | % | | 3.8 | % |
_______________________________________________________________________________ | |
(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 September 30, | | Nine Months Ended September 30, | | Three Months Ended March 31, |
| | 2018(2) | | 2019 | | % Change | | 2018(2) | | 2019 | | % Change | | 2019(2) | | 2020 | | % Change |
| | (in thousands) | | |
Net operating revenues: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Critical illness recovery hospital | | $ | 420,108 |
| | $ | 462,892 |
| | 10.2 | % | | $ | 1,327,236 |
| | $ | 1,381,569 |
| | 4.1 | % | | $ | 457,534 |
| | $ | 500,521 |
| | 9.4 | % |
Rehabilitation hospital | | 144,588 |
| | 173,369 |
| | 19.9 |
| | 432,675 |
| | 488,301 |
| | 12.9 |
| | 154,558 |
| | 182,019 |
| | 17.8 |
|
Outpatient rehabilitation | | 245,234 |
| | 265,330 |
| | 8.2 |
| | 743,379 |
| | 774,126 |
| | 4.1 |
| | 246,905 |
| | 255,249 |
| | 3.4 |
|
Concentra | | 404,481 |
| | 421,900 |
| | 4.3 |
| | 1,173,420 |
| | 1,231,672 |
| | 5.0 |
| | 396,321 |
| | 398,535 |
| | 0.6 |
|
Other(1) | | 52,990 |
| | 69,852 |
| | 31.8 |
| | 139,865 |
| | 203,670 |
| | 45.6 |
| | 69,313 |
| | 78,308 |
| | 13.0 |
|
Total Company | | $ | 1,267,401 |
| | $ | 1,393,343 |
| | 9.9 | % | | $ | 3,816,575 |
| | $ | 4,079,338 |
| | 6.9 | % | | $ | 1,324,631 |
| | $ | 1,414,632 |
| | 6.8 | % |
Income (loss) from operations: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Critical illness recovery hospital | | $ | 42,156 |
| | $ | 44,763 |
| | 6.2 | % | | $ | 152,843 |
| | $ | 155,953 |
| | 2.0 | % | | $ | 61,547 |
| | $ | 76,234 |
| | 23.9 | % |
Rehabilitation hospital | | 19,264 |
| | 29,546 |
| | 53.4 |
| | 62,498 |
| | 72,213 |
| | 15.5 |
| | 19,395 |
| | 31,682 |
| | 63.4 |
|
Outpatient rehabilitation | | 27,934 |
| | 33,153 |
| | 18.7 |
| | 87,065 |
| | 90,705 |
| | 4.2 |
| | 21,959 |
| | 19,904 |
| | (9.4 | ) |
Concentra | | 43,499 |
| | 52,922 |
| | 21.7 |
| | 123,776 |
| | 144,350 |
| | 16.6 |
| | 40,587 |
| | 37,812 |
| | (6.8 | ) |
Other(1) | | (33,016 | ) | | (37,478 | ) | | (13.5 | ) | | (97,186 | ) | | (103,709 | ) | | (6.7 | ) | | (31,764 | ) | | (36,954 | ) | | (16.3 | ) |
Total Company | | $ | 99,837 |
| | $ | 122,906 |
| | 23.1 | % | | $ | 328,996 |
| | $ | 359,512 |
| | 9.3 | % | | $ | 111,724 |
| | $ | 128,678 |
| | 15.2 | % |
Adjusted EBITDA: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Critical illness recovery hospital | | $ | 53,292 |
| | $ | 57,247 |
| | 7.4 | % | | $ | 186,989 |
| | $ | 194,383 |
| | 4.0 | % | | $ | 72,998 |
| | $ | 88,570 |
| | 21.3 | % |
Rehabilitation hospital | | 25,343 |
| | 36,780 |
| | 45.1 |
| | 80,314 |
| | 92,545 |
| | 15.2 |
| | 25,797 |
| | 38,569 |
| | 49.5 |
|
Outpatient rehabilitation | | 34,531 |
| | 40,040 |
| | 16.0 |
| | 107,003 |
| | 111,615 |
| | 4.3 |
| | 28,991 |
| | 27,122 |
| | (6.4 | ) |
Concentra | | 68,754 |
| | 77,679 |
| | 13.0 |
| | 199,119 |
| | 220,024 |
| | 10.5 |
| | 66,258 |
| | 61,466 |
| | (7.2 | ) |
Other(1) | | (25,292 | ) | | (29,081 | ) | | (15.0 | ) | | (75,337 | ) | | (79,552 | ) | | (5.6 | ) | | (23,927 | ) | | (28,394 | ) | | (18.7 | ) |
Total Company | | $ | 156,628 |
| | $ | 182,665 |
| | 16.6 | % | | $ | 498,088 |
| | $ | 539,015 |
| | 8.2 | % | | $ | 170,117 |
| | $ | 187,333 |
| | 10.1 | % |
Adjusted EBITDA margins: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Critical illness recovery hospital | | 12.7 | % | | 12.4 | % | | |
| | 14.1 | % | | 14.1 | % | | |
| | 16.0 | % | | 17.7 | % | | |
|
Rehabilitation hospital | | 17.5 |
| | 21.2 |
| | | | 18.6 |
| | 19.0 |
| | | | 16.7 |
| | 21.2 |
| | |
Outpatient rehabilitation | | 14.1 |
| | 15.1 |
| | |
| | 14.4 |
| | 14.4 |
| | |
| | 11.7 |
| | 10.6 |
| | |
|
Concentra | | 17.0 |
| | 18.4 |
| | |
| | 17.0 |
| | 17.9 |
| | |
| | 16.7 |
| | 15.4 |
| | |
|
Other(1) | | N/M |
| | N/M |
| | |
| | N/M |
| | N/M |
| | |
| | N/M |
| | N/M |
| | |
|
Total Company | | 12.4 | % | | 13.1 | % | | |
| | 13.1 | % | | 13.2 | % | | |
| | 12.8 | % | | 13.2 | % | | |
|
Total assets: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Critical illness recovery hospital | | $ | 1,785,336 |
| | $ | 2,116,512 |
| | |
| | $ | 1,785,336 |
| | $ | 2,116,512 |
| | |
| | $ | 2,062,659 |
| | $ | 2,148,779 |
| | |
|
Rehabilitation hospital | | 888,342 |
| | 1,121,260 |
| | | | 888,342 |
| | 1,121,260 |
| | | | 1,089,391 |
| | 1,127,267 |
| | |
Outpatient rehabilitation | | 991,105 |
| | 1,280,712 |
| | |
| | 991,105 |
| | 1,280,712 |
| | |
| | 1,250,015 |
| | 1,285,449 |
| | |
|
Concentra | | 2,201,869 |
| | 2,366,227 |
| | |
| | 2,201,869 |
| | 2,366,227 |
| | |
| | 2,464,317 |
| | 2,354,169 |
| | |
|
Other(1) | | 113,529 |
| | 270,045 |
| | |
| | 113,529 |
| | 270,045 |
| | |
| | 155,110 |
| | 199,903 |
| | |
|
Total Company | | $ | 5,980,181 |
| | $ | 7,154,756 |
| | |
| | $ | 5,980,181 |
| | $ | 7,154,756 |
| | |
| | $ | 7,021,492 |
| | $ | 7,115,567 |
| | |
|
Purchases of property and equipment: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Critical illness recovery hospital | | $ | 8,134 |
| | $ | 12,254 |
| | | | $ | 31,455 |
| | $ | 36,902 |
| | | | $ | 10,160 |
| | $ | 8,965 |
| | |
Rehabilitation hospital | | 8,769 |
| | 5,293 |
| | |
| | 29,766 |
| | 23,832 |
| | |
| | 13,183 |
| | 3,325 |
| | |
|
Outpatient rehabilitation | | 7,209 |
| | 7,476 |
| | |
| | 22,565 |
| | 23,221 |
| | |
| | 9,040 |
| | 8,384 |
| | |
|
Concentra | | 12,539 |
| | 8,240 |
| | |
| | 29,281 |
| | 36,178 |
| | |
| | 15,698 |
| | 15,586 |
| | |
|
Other(1) | | 2,740 |
| | 1,408 |
| | |
| | 7,972 |
| | 3,823 |
| | |
| | 992 |
| | 2,948 |
| | |
|
Total Company | | $ | 39,391 |
| | $ | 34,671 |
| | |
| | $ | 121,039 |
| | $ | 123,956 |
| | |
| | $ | 49,073 |
| | $ | 39,208 |
| | |
|
| |
(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) | For the three and nine months ended September 30, 2018,March 31, 2019, the financial results of our reportable segments have been changed to remove the net operating revenues and expenses associated with employee leasing services provided to our non-consolidating subsidiaries. These results are now reported as part of our other activities. We lease employees at cost to these non-consolidating subsidiaries. |
N/M — Not meaningful.
Three Months Ended September 30, 2019,March 31, 2020, Compared to Three Months Ended September 30, 2018March 31, 2019
In the following, we discuss our results of operations related to net operating revenues, operating expenses, Adjusted EBITDA, depreciation and amortization, income from operations, loss on early retirement of debt, equity in earnings of unconsolidated subsidiaries, gain on sale of businesses, interest expense, income taxes, and net income attributable to non-controlling interests.
Please refer to “Effects of the COVID-19 Pandemic on our Results of Operations” for further discussion regarding the impact of the COVID-19 pandemic on our operating results for the three months ended March 31, 2020.
Net Operating Revenues
Our net operating revenues increased 9.9%6.8% to $1,393.3$1,414.6 million for the three months ended September 30, 2019,March 31, 2020, compared to $1,267.4$1,324.6 million for the three months ended September 30, 2018.March 31, 2019.
Critical Illness Recovery Hospital Segment. Net operating revenues increased 10.2%9.4% to $462.9$500.5 million for the three months ended September 30, 2019,March 31, 2020, compared to $420.1$457.5 million for the three months ended September 30, 2018.March 31, 2019. The increase in net operating revenues was due to increases in both patient volume and net revenue per patient day. Our patient days increased 5.8%4.8% to 258,089270,458 days for the three months ended September 30, 2019,March 31, 2020, compared to 243,891258,129 days for the three months ended September 30, 2018.March 31, 2019. The increase in patient days was primarily attributable to the acquisition of three hospitals duringin April 2019 contributed to the increase in patient days. We also experienced a 2.9% increase in patient days in our existing hospitals, which was offset in part by a decrease in patient days from the temporary closure of ourand one hospital located in Panama City, Florida as a result of damage sustained from Hurricane Michael in October 2018. For the three months ended September 30, 2019, our net2019. Net revenue per patient day increased 4.0%4.5% to $1,773, as compared to $1,705$1,839 for the three months ended September 30, 2018. The increase is primarily driven by an increaseMarch 31, 2020, compared to $1,759 for the three months ended March 31, 2019. We experienced increases in both our Medicare and non-Medicare net revenue per patient day.
Rehabilitation Hospital Segment. Net operating revenues increased 19.9%17.8% to $173.4$182.0 million for the three months ended September 30, 2019,March 31, 2020, compared to $144.6$154.6 million for the three months ended September 30, 2018.March 31, 2019. The increase in net operating revenues resulted from increases in both patient volume and net revenue per patient day during the three months ended March 31, 2020. Our patient days increased 12.9%14.2% to 89,45494,568 days for the three months ended September 30, 2019,March 31, 2020, compared to 79,23282,816 days for the three months ended September 30, 2018.March 31, 2019. The increase in patient days was principally driven by our rehabilitation hospitals which recently commenced operations.operations during 2019. We also experienced a 4.0%5.7% increase in patient days withinin our existingremaining hospitals. Of the 11,752 day increase experienced during the three months ended March 31, 2020 compared to the three months ended March 31, 2019, 11,048 of those days occurred in January and February 2020. During the three months ended March 31, 2020, certain of our rehabilitation hospitals, particularly those operating in areas more significantly impacted by the spread of COVID-19, such as New Jersey, experienced lower patient volume. Further, our rehabilitation hospitals experienced overall lower patient volume during March 2020 due to the suspension of elective surgeries at hospitals and other facilities, which consequently reduced the demand for inpatient rehabilitation services. Our net revenue per patient day increased 9.0%6.1% to $1,724$1,732 for the three months ended September 30, 2019,March 31, 2020, compared to $1,582$1,633 for the three months ended September 30, 2018.March 31, 2019. We experienced increases in both our Medicare and non-Medicare net revenue per patient day.
Outpatient Rehabilitation Segment. Net operating revenues increased 8.2%3.4% to $265.3$255.2 million for the three months ended September 30, 2019,March 31, 2020, compared to $245.2$246.9 million for the three months ended September 30, 2018.March 31, 2019. The increase in net operating revenues was primarily attributable to an increase in visits, which increased 8.1%3.3% to 2,204,3282,122,665 for the three months ended September 30, 2019,March 31, 2020, compared to 2,039,4622,054,483 visits for the three months ended September 30, 2018. TheMarch 31, 2019. We experienced an increase of 150,615 visits during January and February 2020, as compared to the same period in visits was due to new2019. During March 2020, our outpatient rehabilitation clinics experienced a decrease of 82,433 visits, as compared to March 2019. The decline in volume during March 2020, which became more significant by mid-month, resulted from the actions taken by governmental authorities and a 7.2% increasethose in visits within our existing clinics. This growth was offset in part by the saleprivate sector to limit the spread of COVID-19, combined with recommendations to practice social distancing. Our outpatient rehabilitation clinics experienced less demand for services due to non-consolidating subsidiaries since September 30, 2018,a decline in patient referrals from physicians, a reduction in workers’ compensation injury visits due to the temporary closure of non-essential and non-life sustaining businesses, the suspension of elective surgeries at hospitals and other facilities, which contributed 24,146 visits duringhas resulted in less demand for outpatient rehabilitation services, as well as mandated social distancing measures. By the three months ended September 30, 2018. During the three months ended September 30, 2019,end of March 2020, we also experienced an increase in management fee revenues relatedhave temporarily closed 131 clinics. In many instances, we were able to services providedtransfer patients and our staff to our non-consolidating subsidiaries.other nearby outpatient rehabilitation clinics which remained open. Our net revenue per visit was $103$104 for both the three months ended September 30, 2019 and 2018.March 31, 2020, compared to $103 for the three months ended March 31, 2019.
Concentra Segment. Net operating revenues increased 4.3%0.6% to $421.9$398.5 million for the three months ended September 30, 2019,March 31, 2020, compared to $404.5$396.3 million for the three months ended September 30, 2018. The increaseMarch 31, 2019. Visits in net operating revenues was attributableour centers were 2,877,395 for the three months ended March 31, 2020, compared to an increase in visits, offset in part by a decrease in net revenue per visit. Visits increased 5.6% to 3,150,9032,911,607 visits for the three months ended September 30, 2019,March 31, 2019. We experienced an increase of 93,147 visits during January and February 2020, as compared to 2,984,832the same period in 2019. During March 2020, our Concentra centers experienced a decrease of 127,359 visits, as compared to March 2019. In March 2020, employers began to furlough their workforces and temporarily cease or significantly reduce their operations as a result of the actions of governmental authorities and those in the private sector to limit the spread of COVID-19. Consequently, our centers experienced a reduction in workers’ compensation and employer services visits. By the end of March 2020, we have temporarily closed 19 centers and reduced the operating hours of 159 centers. In many instances where we temporarily closed centers, we were able to transfer patients and our staff to other nearby centers which remained open. Net revenue per visit was $123 for the three months ended September 30, 2018. Net revenue per visit was $120 for the three months ended September 30, 2019,March 31, 2020, compared to $124 for the three months ended September 30, 2018.March 31, 2019. The decrease in net revenue per visit was principally due to an increasea decrease in employer servicesworkers’ compensation visits, which yield lowerhigher per visits rates.visit rates, and a decrease in our employer services per visit rate during the three months ended March 31, 2020.
Operating Expenses
Our operating expenses consist principally of cost of services and general and administrative expenses. Our operating expenses were $1,217.5$1,234.2 million, or 87.4%87.3% of net operating revenues, for the three months ended September 30, 2019,March 31, 2020, compared to $1,117.0$1,160.8 million, or 88.2%87.7% of net operating revenues, for the three months ended September 30, 2018.March 31, 2019. Our cost of services, a major component of which is labor expense, was $1,183.1$1,200.4 million, or 84.9% of net operating revenues, for the three months ended September 30, 2019,March 31, 2020, compared to $1,087.1$1,132.1 million, or 85.8%85.5% of net operating revenues, for the three months ended September 30, 2018. The decrease in our operating expenses relative to our net operating revenues was principally due to the improved operating performance of our rehabilitation hospital and Concentra segments during the three months ended September 30,March 31, 2019. General and administrative expenses were $34.4 million, or 2.5% of net operating revenues, for the three months ended September 30, 2019, compared to $30.0 million, or 2.4% of net operating revenues, for the three months ended September 30, 2018.
Adjusted EBITDA
Critical Illness Recovery Hospital Segment. Adjusted EBITDA increased 7.4% to $57.2 million for the three months ended September 30, 2019, compared to $53.3 million for the three months ended September 30, 2018. Our Adjusted EBITDA margin for the critical illness recovery hospital segment was 12.4% for the three months ended September 30, 2019, compared to 12.7% for the three months ended September 30, 2018. The increase in Adjusted EBITDA for our critical illness recovery hospital segment was primarily driven by increases in patient volumes and net revenue per patient day, as discussed above under “Net Operating Revenues.” The decrease in our Adjusted EBITDA margin resulted from our newly acquired hospitals operating at lower margins than our other critical illness recovery hospitals.
Rehabilitation Hospital Segment. Adjusted EBITDA increased 45.1% to $36.8 million for the three months ended September 30, 2019, compared to $25.3 million for the three months ended September 30, 2018. Our Adjusted EBITDA margin for the rehabilitation hospital segment was 21.2% for the three months ended September 30, 2019, compared to 17.5% for the three months ended September 30, 2018. The increases in Adjusted EBITDA and Adjusted EBITDA margin were primarily attributable to improved patient volume and net revenue per patient day within several of our existing hospitals, as discussed above under “Net Operating Revenues.”
Outpatient Rehabilitation Segment. Adjusted EBITDA increased 16.0% to $40.0 million for the three months ended September 30, 2019, compared to $34.5 million for the three months ended September 30, 2018. Our Adjusted EBITDA margin for the outpatient rehabilitation segment was 15.1% for the three months ended September 30, 2019, compared to 14.1% for the three months ended September 30, 2018. Our Adjusted EBITDA and Adjusted EBITDA margin increased principally from increased patient volumes in our existing outpatient rehabilitation clinics, allowing these clinics to operate at lower relative costs, as well as other cost reductions we have achieved.
Concentra Segment. Adjusted EBITDA increased 13.0% to $77.7 million for the three months ended September 30, 2019, compared to $68.8 million for the three months ended September 30, 2018. Our Adjusted EBITDA margin for the Concentra segment was 18.4% for the three months ended September 30, 2019, compared to 17.0% for the three months ended September 30, 2018. The increase in Adjusted EBITDA margin resulted principally from achieving lower relative operating costs across our combined Concentra and U.S. HealthWorks businesses.
Depreciation and Amortization
Depreciation and amortization expense was $52.9 million for the three months ended September 30, 2019, compared to $50.5 million for the three months ended September 30, 2018. The increase principally occurred within our critical illness recovery hospital and rehabilitation hospital segments.
Income from Operations
For the three months ended September 30, 2019, we had income from operations of $122.9 million, compared to $99.8 million for the three months ended September 30, 2018. The increase in income from operations resulted principally from our rehabilitation hospital and Concentra segments.
Loss on Early Retirement of Debt
The amendment to the Select credit agreement, the amendment to the Concentra first lien credit agreement, the repayment of term loans outstanding under the Concentra second lien credit agreement, and the redemption of the 6.375% senior notes resulted in losses on early retirement of debt totaling $18.6 million for the three months ended September 30, 2019.
Equity in Earnings of Unconsolidated Subsidiaries
Our equity in earnings of unconsolidated subsidiaries principally relates to rehabilitation businesses in which we are a minority owner. For the three months ended September 30, 2019, we had equity in earnings of unconsolidated subsidiaries of $7.0 million, compared to $5.4 million for the three months ended September 30, 2018. The increase in equity in earnings was principally attributable to the growth of certain of our non-consolidating subsidiaries, which resulted from our sales of outpatient rehabilitation clinics to these subsidiaries.
Gain on Sale of Businesses
We recognized a gain of $2.1 million during the three months ended September 30, 2018. The gain was principally attributable to the sale of outpatient rehabilitation clinics to a non-consolidating subsidiary.
Interest Expense
Interest expense was $54.3 million for the three months ended September 30, 2019, compared to $50.7 million for the three months ended September 30, 2018. The increase in interest expense was principally due to the recognition of interest expense on both the 6.250% senior notes and the 6.375% senior notes during August 2019, as the redemption of the 6.375% senior notes occurred on August 30, 2019, while the issuance of the $550.0 million 6.250% senior notes occurred on August 1, 2019.
Income Taxes
We recorded income tax expense of $12.8 million for the three months ended September 30, 2019, which represented an effective tax rate of 22.6%. We recorded income tax expense of $14.1 million for the three months ended September 30, 2018, which represented an effective tax rate of 24.8%. The decrease in the effective tax rate resulted from a lower estimate of state and local income taxes.
Net Income Attributable to Non-Controlling Interests
Net income attributable to non-controlling interests was $13.3 million for the three months ended September 30, 2019, compared to $9.8 million for the three months ended September 30, 2018. The increase was principally due to the improved operating performance of our Concentra segment.
Nine Months Ended September 30, 2019, Compared to Nine Months Ended September 30, 2018
In the following, we discuss our results of operations related to net operating revenues, operating expenses, Adjusted EBITDA, depreciation and amortization, income from operations, loss on early retirement of debt, equity in earnings of unconsolidated subsidiaries, gain on sale of businesses, interest expense, income taxes, and net income attributable to non-controlling interests.
Net Operating Revenues
Our net operating revenues increased 6.9% to $4,079.3 million for the nine months ended September 30, 2019, compared to $3,816.6 million for the nine months ended September 30, 2018.
Critical Illness Recovery Hospital Segment. Net operating revenues increased 4.1% to $1,381.6 million for the nine months ended September 30, 2019, compared to $1,327.2 million for the nine months ended September 30, 2018. The increase in net operating revenues was due to increases in both patient volume and net revenue per patient day. Our patient days increased 1.7% to 779,078 days for the nine months ended September 30, 2019, compared to 765,863 days for the nine months ended September 30, 2018. The acquisition of three hospitals during 2019 contributed to the increase in patient days. We also experienced an increase in patient days in our existing hospitals, which was offset by a decrease in patient days from hospital closures which occurred during 2018, including the temporary closure of our hospital located in Panama City, Florida as a result of damage sustained from Hurricane Michael in October 2018. Net revenue per patient day increased 2.4% to $1,757 for the nine months ended September 30, 2019, compared to $1,716 for the nine months ended September 30, 2018. We experienced increases in both our Medicare and non-Medicare net revenue per patient day.
Rehabilitation Hospital Segment. Net operating revenues increased 12.9% to $488.3 million for the nine months ended September 30, 2019, compared to $432.7 million for the nine months ended September 30, 2018. The increase in net operating revenues resulted from both an increase in patient volumes and net revenue per patient day during the nine months ended September 30, 2019. Our patient days increased 10.8% to 258,795 days for the nine months ended September 30, 2019, compared to 233,537 days for the nine months ended September 30, 2018. The increase in patient days was principally driven by our rehabilitation hospitals which recently commenced operations. We also experienced a 3.0% increase in patient days in our existing hospitals. Our net revenue per patient day increased 3.8% to $1,665 for the nine months ended September 30, 2019, compared to $1,604 for the nine months ended September 30, 2018. We experienced increases in both our Medicare and non-Medicare net revenue per patient day.
Outpatient Rehabilitation Segment. Net operating revenues increased 4.1% to $774.1 million for the nine months ended September 30, 2019, compared to $743.4 million for the nine months ended September 30, 2018. The increase in net operating revenues was attributable to an increase in visits, which increased 3.4% to 6,462,316 for the nine months ended September 30, 2019, compared to 6,251,582 visits for the nine months ended September 30, 2018. The increase in visits was due to new outpatient rehabilitation clinics and a 5.0% increase in visits within our existing clinics. This growth was offset in part by the sale of outpatient rehabilitation clinics to non-consolidating subsidiaries since September 30, 2018, which contributed 192,149 visits during the nine months ended September 30, 2018. During the nine months ended September 30, 2019, we also experienced an increase in management fee revenues related to services provided to our non-consolidating subsidiaries. These services have expanded as a result of our sales of clinics to these non-consolidating subsidiaries. Our net revenue per visit was $103 for both the nine months ended September 30, 2019 and 2018.
Concentra Segment. Net operating revenues increased 5.0% to $1,231.7 million for the nine months ended September 30, 2019, compared to $1,173.4 million for the nine months ended September 30, 2018. Visits in our centers increased 6.5% to 9,165,599 for the nine months ended September 30, 2019, compared to 8,605,012 visits for the nine months ended September 30, 2018. The increases in net operating revenues and visits were principally due to U.S. HealthWorks, which we acquired on February 1, 2018, and other newly acquired centers. Net revenue per visit was $122 for the nine months ended September 30, 2019, compared to $124 for the nine months ended September 30, 2018. The decrease in net revenue per visit was principally due to an increase in employer services visits, which yield lower per visits rates.
Operating Expenses
Our operating expenses consist principally of cost of services and general and administrative expenses. Our operating expenses were $3,559.8 million, or 87.2% of net operating revenues, for the nine months ended September 30, 2019, compared to $3,338.6 million, or 87.5% of net operating revenues, for the nine months ended September 30, 2018. Our cost of services, a major component of which is labor expense, was $3,465.4 million, or 84.9% of net operating revenues, for the nine months ended September 30, 2019, compared to $3,247.6 million, or 85.1% of net operating revenues, for the nine months ended September 30, 2018. The decrease in our operating expenses relative to our net operating revenues was principally due to the operating performance of our Concentrarehabilitation hospital and rehabilitationcritical illness recovery hospital segments. General and administrative expenses were $94.4 million, or 2.3% of net operating revenues, for the nine months ended September 30, 2019. General and administrative expenses were $91.0$33.8 million, or 2.4% of net operating revenues, for the ninethree months ended September 30, 2018. General and administrative expenses included $2.9March 31, 2020, compared to $28.7 million, or 2.2% of U.S. HealthWorks acquisition costsnet operating revenues, for the ninethree months ended September 30, 2018.March 31, 2019.
Adjusted EBITDA
Critical Illness Recovery Hospital Segment. Adjusted EBITDA increased 4.0%21.3% to $194.4$88.6 million for the ninethree months ended September 30, 2019,March 31, 2020, compared to $187.0$73.0 million for the ninethree months ended September 30, 2018.March 31, 2019. Our Adjusted EBITDA margin for the critical illness recovery hospital segment was 14.1%17.7% for both the ninethree months ended September 30, 2019 and 2018.March 31, 2020, compared to 16.0% for the three months ended March 31, 2019. The increaseincreases in Adjusted EBITDA and Adjusted EBITDA margin for our critical illness recovery hospital segment waswere primarily driven by increases in patient volumes andour net revenue per patient day and the acquisition of four hospitals during 2019, as discussed above under “Net Operating Revenues.”
Rehabilitation Hospital Segment. Adjusted EBITDA increased 15.2%49.5% to $92.5$38.6 million for the ninethree months ended September 30, 2019,March 31, 2020, compared to $80.3$25.8 million for the ninethree months ended September 30, 2018.March 31, 2019. Our Adjusted EBITDA margin for the rehabilitation hospital segment was 19.0%21.2% for the ninethree months ended September 30, 2019,March 31, 2020, compared to 18.6%16.7% for the ninethree months ended September 30, 2018.March 31, 2019. The increases in our Adjusted EBITDA and Adjusted EBITDA margin primarily occurred as a result of our operating performance in January and February 2020, as compared to the same period in 2019. Adjusted EBITDA increased 72.5% to $27.4 million for January and February 2020, compared to $15.9 million for the same period in 2019. Adjusted EBITDA margin increased to 22.4% for January and February 2020, compared to 16.1% for the same period in 2019. The increases in Adjusted EBITDA and Adjusted EBITDA margin are primarily attributable to increases in patient volume and net revenue per visitpatient day at severalmany of our existing hospitals. Additionally, we experienced an increase in Adjusted EBITDA from our hospitals which commenced operations during 2019. Though we experienced increases in Adjusted EBITDA and Adjusted EBITDA margin in March 2020, as compared to the prior year, these increases were offset, in part, by the effects of the COVID-19 pandemic on our operations, as discussed above. For the three months ended March 31, 2019, the Adjusted EBITDA results for the rehabilitation hospital segment include start-up losses were $8.8 million for the nine months ended September 30, 2019, compared to $3.8 million for the nine months ended September 30, 2018.of approximately $2.8 million.
Outpatient Rehabilitation Segment. Adjusted EBITDA increased 4.3% to $111.6was $27.1 million for the ninethree months ended September 30, 2019,March 31, 2020, compared to $107.0$29.0 million for the ninethree months ended September 30, 2018.March 31, 2019. Our Adjusted EBITDA margin for the outpatient rehabilitation segment was 14.4%10.6% for both the ninethree months ended September 30, 2019 and 2018.March 31, 2020, compared to 11.7% for the three months ended March 31, 2019. For the ninethree months ended September 30, 2019,March 31, 2020, the increasedecline in Adjusted EBITDA and Adjusted EBITDA margin were primarily caused by an 11.6% decrease in visits during March 2020, as compared to the same period in 2019. The decline in visits resulted principally from our start-upthe effects of the COVID-19 pandemic, as described above. In response to the decline in patient volume and newly developedin an effort to reduce operating expenses, we temporarily consolidated, where possible, the operations of clinics which operate within close proximity to one another and took other steps to reduce labor costs. Prior to our outpatient rehabilitation clinics.clinics becoming affected by the COVID-19 pandemic, our Adjusted EBITDA had increased 33.6% to $23.1 million for January and February 2020, compared to $17.3 million for the same period in 2019. Our Adjusted EBITDA margin increased to 12.9% for January and February 2020, compared to 10.7% for the same period in 2019.
Concentra Segment. Adjusted EBITDA increased 10.5% to $220.0was $61.5 million for the ninethree months ended September 30, 2019,March 31, 2020, compared to $199.1$66.3 million for the ninethree months ended September 30, 2018, which included the operating results of U.S. HealthWorks beginning February 1, 2018.March 31, 2019. Our Adjusted EBITDA margin for the Concentra segment was 17.9%15.4% for the ninethree months ended September 30, 2019,March 31, 2020, compared to 17.0%16.7% for the ninethree months ended September 30, 2018. The increasesMarch 31, 2019. For the three months ended March 31, 2020, the decline in Adjusted EBITDA and Adjusted EBITDA margin were primarily caused by a 12.6% decrease in visits during March 2020, as compared to the same period in 2019. The decline in visits resulted from achieving lower relativethe effects of the COVID-19 pandemic, as described above. In response to the decline in patient volume and in an effort to reduce operating costs acrossexpenses, we temporarily consolidated, where possible, the operations of centers which operate within close proximity to one another, reduced the operating hours of certain centers, and took other steps to reduce labor costs. Prior to our combined Concentracenters becoming affected by the COVID-19 pandemic, Adjusted EBITDA had increased 11.7% to $45.5 million for January and U.S. HealthWorks businesses.February 2020, compared to $40.8 million for the same period in 2019. Our Adjusted EBITDA margin increased to 16.6% for January and February 2020, compared to 15.7% for the same period in 2019.
Depreciation and Amortization
Depreciation and amortization expense was $160.1$51.8 million for the ninethree months ended September 30, 2019,March 31, 2020, compared to $149.0$52.1 million for the ninethree months ended September 30, 2018. The increase principally occurred within our Concentra and critical illness recovery hospital segments. The increase in our Concentra segment was principally due to the acquisition of U.S. HealthWorks, which we acquired on February 1, 2018. The increase in our critical illness recovery hospital segment was principally due to the repeal of certificate of need regulations in the state of Florida effective July 1, 2019; accordingly, the certificate of need intangible assets for our Florida critical illness recovery hospitals were fully amortized during the nine months ended September 30,March 31, 2019.
Income from Operations
For the ninethree months ended September 30, 2019,March 31, 2020, we had income from operations of $359.5$128.7 million, compared to $329.0$111.7 million for the ninethree months ended September 30, 2018.March 31, 2019. The increase in income from operations resulted principally fromoccurred within our Concentra and rehabilitation hospital segments.
Loss on Early Retirement of Debt
During the nine months ended September 30, 2019, the amendment to the Select credit agreement, the amendment to the Concentra first lien credit agreement, the repayment of term loans outstanding under the Concentra second lien credit agreement, and the redemption of the 6.375% senior notes resulted in losses on early retirement of debt totaling $18.6 million.
During the nine months ended September 30, 2018, we amended both the Select credit agreement and the Concentra first lien credit agreement which resulted in losses on early retirement of debt of $10.3 million.critical illness recovery hospital segments.
Equity in Earnings of Unconsolidated Subsidiaries
Our equity in earnings of unconsolidated subsidiaries principally relates to rehabilitation businesses and other healthcare-related businesses in which we are a minority owner. For the ninethree months ended September 30, 2019,March 31, 2020, we had equity in earnings of unconsolidated subsidiaries of $18.7$2.6 million, compared to $14.9$4.4 million for the ninethree months ended September 30, 2018.March 31, 2019. The increasedecrease in equity in earnings was principally attributable tocaused by a decline in performance of the growth of certain non-consolidating subsidiaries ashealthcare-related businesses in which we own a result of our sales of outpatient rehabilitation clinics to these subsidiaries.minority interest.
Gain on Sale of Businesses
We recognized gains of $6.5$7.2 million and $9.0$6.5 million during the ninethree months ended September 30,March 31, 2020 and 2019, and 2018, respectively. TheThese gains were principally attributable to the sales of outpatient rehabilitation clinics to non-consolidating subsidiaries.businesses.
Interest Expense
Interest expense was $156.6$46.1 million for the ninethree months ended September 30, 2019,March 31, 2020, compared to $148.0$50.8 million for the ninethree months ended September 30, 2018.March 31, 2019. The increasedecrease in interest expense was principally due an increasea decline in variable interest rates, associated withas well as the Concentrarefinancing of our Select credit facilities, Concentra-JPM credit facilities (as defined below), and an increase in our indebtedness as a result of the acquisition of U.S. HealthWorks on February 1, 2018. We also recognized interest expense on both the 6.250% senior notes and the 6.375% senior notes during August 2019, as the redemptionthird and fourth quarters of the 6.375% senior notes occurred on August 30, 2019, while the issuance of the $550.0 million 6.250% senior notes occurred on August 1, 2019.
Income Taxes
We recorded income tax expense of $52.1$21.9 million for the ninethree months ended September 30,March 31, 2020, which represented an effective tax rate of 23.7%. We recorded income tax expense of $18.5 million for the three months ended March 31, 2019, which represented an effective tax rate of 24.9%. We recorded income tax expense of $47.5 million for the nine months ended September 30, 2018, which represented an effective tax rate of 24.4%25.7%. For the ninethree months ended September 30, 2018,March 31, 2020, the lower effective tax rate resulted principallyprimarily from the discrete tax benefits realized from the exercise of certain equity options in connection with the purchase of additional membership interests redeemed atin Concentra Group Holdings Parent, as described under “Other Significant Events.” The impact of these tax benefits were offset, in part, by the sale of an outpatient rehabilitation business. The selling price for this business exceeded our Concentra subsidiary.tax basis, resulting in a taxable gain. This sale was treated as a discrete tax event for the three months ended March 31, 2020.
Net Income Attributable to Non-Controlling Interests
Net income attributable to non-controlling interests was $41.0$17.3 million for the ninethree months ended September 30, 2019,March 31, 2020, compared to $34.1$12.5 million for the ninethree months ended September 30, 2018.March 31, 2019. The increase was principally due to the improved operating performance of our Concentra segment and several of our joint venture rehabilitation hospitals.
Liquidity and Capital Resources
Cash Flows for the NineThree Months Ended September 30, 2019March 31, 2020 and NineThree Months Ended September 30, 2018March 31, 2019
In the following, we discuss cash flows from operating activities, investing activities, and financing activities.
| | | | Nine Months Ended September 30, | | Three Months Ended March 31, |
| | 2018 | | 2019 | | 2019 | | 2020 |
| | (in thousands) | | (in thousands) |
Cash flows provided by operating activities | | $ | 380,977 |
| | $ | 266,640 |
| | $ | 41,762 |
| | $ | 44,084 |
|
Cash flows used in investing activities | | (646,542 | ) | | (270,710 | ) | | (82,799 | ) | | (44,659 | ) |
Cash flows provided by (used in) financing activities | | 303,429 |
| | (35,145 | ) | | 13,674 |
| | (262,144 | ) |
Net increase (decrease) in cash and cash equivalents | | 37,864 |
| | (39,215 | ) | |
Net decrease in cash and cash equivalents | | | (27,363 | ) | | (262,719 | ) |
Cash and cash equivalents at beginning of period | | 122,549 |
| | 175,178 |
| | 175,178 |
| | 335,882 |
|
Cash and cash equivalents at end of period | | $ | 160,413 |
| | $ | 135,963 |
| | $ | 147,815 |
| | $ | 73,163 |
|
Operating activities provided $266.6$44.1 million of cash flows for the ninethree months ended September 30, 2019,March 31, 2020, compared to $381.0$41.8 million of cash flows for the ninethree months ended September 30, 2018. The lower operating cash flows for the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018, was principally driven by the change in our accounts receivable. We experienced an increase inMarch 31, 2019. Our days sales outstanding towas 53 days at September 30,March 31, 2020, compared to 51 days at December 31, 2019. Our days sales outstanding was 53 days at March 31, 2019, compared to 51 days at December 31, 2018. We experienced a decline in days sales outstanding to 54 days at September 30, 2018, compared to 58 days at December 31, 2017. Our days sales outstanding will fluctuate based upon variability in our collection cycles. Our days sales outstanding fell within our expected range at September 30, 2019 and December 31, 2018.range.
Investing activities used $270.7$44.7 million of cash flows for the ninethree months ended September 30, 2019.March 31, 2020. The principal uses of cash were $124.0$39.2 million for purchases of property and equipment and $146.9$16.7 million for investments in and acquisitions of businesses. This was offset in part by proceeds received from the sale of assets and businesses of $11.2 million. Investing activities used $646.5$82.8 million of cash flows for the ninethree months ended September 30, 2018.March 31, 2019. The principal uses of cash were $515.0 million related to the acquisition of U.S. HealthWorks and $121.0$49.1 million for purchases of property and equipment.equipment and $33.7 million for investments in and acquisitions of businesses.
Financing activities used $35.1$262.1 million of cash flows for the ninethree months ended September 30, 2019.March 31, 2020. The principal sourcesuse of cash were fromwas $366.2 million for the issuancepurchase of $550.0 million 6.250% senior notes, $500.0additional membership interests of Concentra Group Holdings Parent during the three months ended March 31, 2020, as discussed above under “OtherSignificant Events.” We also used $39.8 million of incrementalcash for the mandatory prepayment of term loan borrowingsloans under the Select credit facilities, and $100.0facilities. This was offset in part by net borrowings of $165.0 million of incremental term loan borrowings under the Concentra first lien credit agreement. These borrowings resulted in net proceeds of $1,132.9 million. A portion of the net proceeds of the senior notes, together with a portion of the proceeds from the incremental term loan borrowings under the Select credit facilities, were used to redeem in full Select’s $710.0revolving facility (as defined below) during the three months ended March 31, 2020.
Financing activities provided $13.7 million 6.375% senior notes at a redemption price of 100.000%cash flows for the three months ended March 31, 2019. The principal source of cash was net borrowings of $140.0 million on the principal amount. The proceeds from the incremental term loans under the Concentra first lien credit agreement were used,Select revolving facility. This was offset in part to repay the $240.0 million of term loans outstanding under the Concentra second lien credit agreement. We also usedby $98.8 million and $33.9 million of cash for mandatory prepayments of term loans under the Select credit facilities and ConcentraConcentra-JPM credit facilities, respectively. During the nine months ended September 30, 2019, we had net repayments of $20.0 million under the Select revolving facility.
Financing activities provided $303.4 million of cash flows for the nine months ended September 30, 2018. The principal source of cash was from the issuance of term loans under the Concentra credit facilities which resulted in net proceeds of $779.9 million. This was offset in part by $306.4 million of distributions to non-controlling interests, of which $294.9 million related to the redemption and reorganization transactions executed in connection with the acquisition of U.S. HealthWorks, and $165.0 million of net repayments under the Select revolving facility.
Capital Resources
Working capital. We had net working capital of $180.5$154.1 million at September 30, 2019,March 31, 2020, compared to $287.3$298.7 million at December 31, 2018.2019. The decrease in net working capital was principally due to a decrease in cash and cash equivalents as a result of the recognitionpurchase of current operating lease liabilities uponadditional membership interests of Concentra Group Holdings Parent during the adoption of ASC Topic 842, three months ended March 31, 2020, as discussed above under “LeasesOther Significant Events, on January 1, 2019, offset in part by an increase in our accounts receivable..”
Select credit facilities.
In February 2019,2020, Select made a principal prepayment of $98.8approximately $39.8 million associated with its term loans in accordance with the provision in the Select credit facilities that requires mandatory prepayments of term loans as a result of annual excess cash flow, as defined in the Select credit facilities.
On August 1, 2019, Select entered into Amendment No. 3 to the Select credit agreement datedAt March 6, 2017. Amendment No. 3, among other things, (i) provided for an additional $500.0 million in term loans that, along with the existing term loans, have a maturity date of March 6, 2025, (ii) extended the maturity date of the Select revolving facility from March 6, 2022 to March 6, 2024, and (iii) increased the total net leverage ratio permitted under the Select credit agreement.
At September 30, 2019,31, 2020, Select had outstanding borrowings under the Select credit facilities consisting of $1,531.1$2,103.4 million in Select term loans (excluding unamortized discounts and debt issuance costs of $22.2$20.7 million) (the “Select term loan”) and borrowings of $165.0 million (excluding letters of credit) under its revolving facility (the “Select revolving facility”). Select did not have any borrowings under the Select revolving facility. At September 30, 2019,March 31, 2020, Select had $411.7$245.7 million of availability under the Select revolving facility after giving effect to $38.3$39.3 million of outstanding letters of credit.
Select 6.250% senior notes.
On August 1, 2019, Select issued and sold $550.0 million aggregate principal amount of 6.250% senior notes due August 15, 2026. Select used a portion of the net proceeds of the 6.250% senior notes, together with a portion of the proceeds from the incremental term loan borrowings under the Select credit facilities (as described above) in part to (i) redeem in full the $710.0 million aggregate principal amount of the 6.375% senior notes on August 30, 2019 at the redemption price of 100.000% of the principal amount plus accrued and unpaid interest, (ii) repay in full the outstanding borrowings under Select’s revolving facility, and (iii) pay related fees and expenses associated with the financing.
Interest on the senior notes accrues at the rate of 6.250% per annum and is payable semi-annually in arrears on February 15 and August 15 of each year, commencing on February 15, 2020. The senior notes are Select’s senior unsecured obligations which are subordinated to all of Select’s existing and future secured indebtedness, including the Select credit facilities. The senior notes rank equally in right of payment with all of Select’s other existing and future senior unsecured indebtedness and senior in right of payment to all of Select’s existing and future subordinated indebtedness. The senior notes are unconditionally guaranteed on a joint and several basis by each of Select’s direct or indirect existing and future domestic restricted subsidiaries, other than certain non-guarantor subsidiaries.
Select may redeem some or all of the senior notes prior to August 15, 2022 by paying a “make-whole” premium. Select may redeem some or all of the senior notes on or after August 15, 2022 at specified redemption prices. In addition, prior to August 15, 2022, Select may redeem up to 40% of the principal amount of the senior notes with the net proceeds of certain equity offerings at a price of 106.250% plus accrued and unpaid interest, if any. Select is obligated to offer to repurchase the senior notes at a price of 101% of their principal amount plus accrued and unpaid interest, if any, as a result of certain change of control events. These restrictions and prohibitions are subject to certain qualifications and exceptions.
The terms of the senior notes contains covenants that, among other things, limit Select’s ability and the ability of certain of Select’s subsidiaries to (i) grant liens on its assets, (ii) make dividend payments, other distributions or other restricted payments, (iii) incur restrictions on the ability of Select’s restricted subsidiaries to pay dividends or make other payments, (iv) enter into sale and leaseback transactions, (v) merge, consolidate, transfer or dispose of substantially all of their assets, (vi) incur additional indebtedness, (vii) make investments, (viii) sell assets, including capital stock of subsidiaries, (ix) use the proceeds from sales of assets, including capital stock of restricted subsidiaries, and (x) enter into transactions with affiliates. These covenants are subject to a number of exceptions, limitations and qualifications.
Concentra credit facilities. Select and Holdings are not parties to the Concentra credit facilities and are not obligors with respect to Concentra’s debt under such agreements. While this debt is non-recourse to Select and Holdings, it is included in our consolidated financial statements.
In February 2019, Concentra Inc. made a principal prepayment of $33.9 million associated with its term loans in accordance with the provision in the Concentra credit facilities that requires mandatory prepayments of term loans as a result of annual excess cash flow, as defined in the Concentra credit facilities.
On April 8, 2019, Concentra Inc. entered into Amendment No. 5 to the Concentra first lien credit agreement. Amendment No. 5, among other things, (i) extended the maturity date of the Concentra revolving facility from June 1,At March 31, 2020, to June 1, 2021 and (ii) increased the aggregate commitments available under the Concentra revolving facility from $75.0 million to $100.0 million.
On September 20, 2019, Concentra Inc. entered into Amendment No. 6 to the Concentra first lien credit agreement. Amendment No. 6, among other things, (i) provided for an additional $100.0 million in term loans that, along with the existing Concentra first lien term loans, have a maturity date of June 1, 2022 and (ii) extended the maturity date of the revolving facility from June 1, 2021 to March 1, 2022. Concentra Inc. used the incremental borrowings under the Concentra first lien credit agreement to prepay in full all of its term loans outstanding under the Concentra second lien credit agreement on September 20, 2019.
At September 30, 2019, Concentra Inc. had outstanding borrowings under the Concentra credit facilities consisting of $1,240.3 million of Concentra term loans (excluding unamortized discounts and debt issuance costs of $12.7 million). Concentra Inc. did not have any term loan or revolving facility borrowings under its first lien credit agreement dated June 1, 2015 (together with any borrowings thereunder, the Concentra revolving facility.“Concentra-JPM credit facilities”). At September 30, 2019,March 31, 2020, Concentra Inc. had $87.3$85.7 million of availability under its revolving facility (the “Concentra-JPM revolving facility”) after giving effect to $12.7$14.3 million of outstanding letters of credit. Select and Holdings are not obligors with respect to Concentra Inc.’s debt under the Concentra-JPM credit facilities. At March 31, 2020, Concentra Inc. had outstanding borrowings under its intercompany loan agreement with Select of $1,199.8 million.
Stock Repurchase Program. Holdings’ board of directors has authorized a common stock repurchase program to repurchase up to $500.0 million worth of shares of its common stock. The program has been extended until December 31, 2020, and will remain in effect until then, unless further extended or earlier terminated by the board of directors. Stock repurchases under this program may be made in the open market or through privately negotiated transactions, and at times and in such amounts as Holdings deems appropriate. Holdings funds this program with cash on hand and borrowings under the Select revolving facility. During the ninethree months ended September 30, 2019,March 31, 2020, Holdings repurchased 2,165,221491,559 shares at a cost of approximately $33.2$8.7 million, an average cost per share of $15.32,$17.68, which includes transaction costs. Since the inception of the program through September 30, 2019,March 31, 2020, Holdings has repurchased 38,089,34938,580,908 shares at a cost of approximately $347.9$356.6 million, or $9.13$9.24 per share, which includes transaction costs.
Liquidity. WeThe COVID-19 pandemic adversely affected our operations during the three months ended March 31, 2020. 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, we believe our internally generated cash flows, and borrowing capacity under the Select and ConcentraConcentra-JPM credit facilities, and other measures to enhance our liquidity position that we have taken, as described below, will be sufficientallow us to finance our operations over the next twelve months. As of March 31, 2020, we had cash and cash equivalents of $73.2 million, availability of $245.7 million under the Select revolving facility after giving effect to $39.3 million of outstanding letters of credit, and availability of $85.7 million under the Concentra-JPM revolving facility after giving effect to $14.3 million of outstanding letters of credit.
In response to the COVID-19 pandemic, the CARES Act, which is described further under “Regulatory Changes,” was enacted on March 27, 2020. As part of the CARES Act, $100.0 billion was authorized in relief funds to hospitals and other healthcare providers to prevent, prepare, and respond to the COVID-19 pandemic. These funds are used to reimburse providers for lost revenue attributable to the COVID-19 pandemic and to provide support for related healthcare expenses. Further, these relief funds ensure uninsured patients are receiving testing and treatment for COVID-19. We received approximately $93.7 million of payments as part of this relief in April 2020. These are payments, rather than loans, and will not need to be repaid. Additionally, the CARES Act allows for qualified healthcare providers to receive advanced payments under the existing Medicare Accelerated and Advance Payments Program during the COVID-19 pandemic. Under this program, healthcare providers may receive advanced payments for future Medicare services provided. In order to improve our liquidity position, we applied for and received approval from CMS in April 2020 to receive advanced payments and, through April 30, 2020, we have received $316.1 million in payments. These advanced payments will be recouped by CMS from future Medicare claims billed by us, beginning 121 days after receipt of the advanced payment. After 120 days, any new Medicare claim we bill will reduce the amount owed to CMS. We are required to repay any advanced payments not recouped by CMS within 210 days from the date we originally received the payment.
In addition to applying for and receiving payments under the Medicare Accelerated and Advance Payments Program to enhance our liquidity in the short term, we have taken preemptive measures to reduce operating costs and expenses. Beginning in March and continuing into April 2020, we began reducing labor costs through employee furloughs, salary and wage reductions for certain employees, reducing the hours worked by part time employees, and limiting discretionary spending on capital expenditures. In April 2020, we began deferring payment on our share of payroll taxes owed, as allowed by the CARES Act through December 31, 2020, and negotiating with our landlords to receive temporary rent deferrals on certain of our facilities which have temporarily closed.
Additionally, the CARES Act included a technical correction to allow for bonus depreciation on certain types of qualified property for tax years beginning January 1, 2018, and provided for an increase in the amounts allowed for interest expense deductions for tax years beginning January 1, 2019. As a result of these provisions, we expect to reduce our estimated tax payments during 2020 by approximately $20.0 million.
At March 31, 2020, we were in compliance with each of our financial covenants. As of March 31, 2020, Select’s leverage ratio (its ratio of total indebtedness to consolidated EBITDA for the prior four consecutive fiscal quarters), which is required to be maintained at less than 7.00 to 1.00 under the terms of the Select revolving facility, was 4.76 to 1.00. As of March 31, 2020, we do not anticipate events or circumstances which would preclude us from complying with our financial covenants in the future or prevent us from making interest and principal payments when due. Select is not required to make further principal payments on the Select term loan until September 30, 2023 and its senior notes are due August 15, 2026. Concentra is not required to make further principal payments on its intercompany term loan with Select until its maturity on June 1, 2022. The Select and Concentra-JPM revolving credit facilities mature on March 6, 2024 and March 1, 2022, respectively. Our ability to comply with our financial covenants and obligations outlined within our debt agreements can be affected by various risks and uncertainties. Please refer to our risk factors discussed in Item 1A. Risk Factors of this Form 10-Q and as previously reported in our Annual Report on Form 10-K for the year ended December 31, 2019 for further discussion.
We may from time to time seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions, tender offers or otherwise. Such repurchases or exchanges, if any, may be funded from operating cash flows or other sources and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
Use of Capital Resources. We may from time to time pursue opportunities to develop new joint venture relationships with significant health systems and other healthcare providers. 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.
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 the Select credit facilities and Concentra credit facilities.Concentra-JPM revolving facility.
At September 30, 2019,March 31, 2020, Select had outstanding borrowings under the Select credit facilities consisting of $1,531.1the $2,103.4 million in Select term loansloan (excluding unamortized discounts and debt issuance costs of $22.2$20.7 million), and borrowings of $165.0 million (excluding letters of credit) under the Select revolving facility, which bear interest at variable rates. Select did not have any borrowings under the Select revolving facility.
At September 30, 2019, Concentra Inc. had outstanding borrowings under the Concentra credit facilities consisting of $1,240.3 million of Concentra term loans (excluding unamortized discounts and debt issuance costs of $12.7 million), which bear interest at variable rates.March 31, 2020, Concentra Inc. did not have any borrowings under the ConcentraConcentra-JPM revolving facility.
As of September 30, 2019,March 31, 2020, each 0.25% increase in market interest rates will impact the interest expense on Select’s and Concentra Inc.’sour variable rate debt by $6.9$5.7 million per annum.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) as of the end of the period covered in this report. Based on this evaluation, as of September 30, 2019,March 31, 2020, 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 thirdfirst quarter ended September 30, 2019,March 31, 2020, 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
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”),CMS, or other federal and state enforcement and regulatory agencies may conduct additional investigations related to the Company’s businesses in the future that may, either individually or in the aggregate, have a material adverse effect on the Company’s business, financial position, results of operations, and liquidity.
To address claims arising out of the Company’s operations, the Company maintains professional malpractice liability insurance and general liability insurance coverages through a number of different programs that are dependent upon such factors as the state where the Company is operating and whether the operations are wholly owned or are operated through a joint venture. For the Company’s wholly owned operations, the Company currently maintains insurance coverages under a combination of policies with a total annual aggregate limit of up to $40.0 million. The Company’s insurance for the professional liability coverage is written on a “claims-made” basis, and its commercial general liability coverage is maintained on an “occurrence” basis. These coverages apply after a self-insured retention limit is exceeded. For the Company’s joint venture operations, the Company has numerous programs that are designed to respond to the risks of the specific joint venture. The annual aggregate limit under these programs ranges from $5.0$6.0 million to $20.0 million. The policies are generally written on a “claims-made” basis. Each of these programs has either a deductible or self-insured retention limit. The Company reviews its insurance program annually and may make adjustments to the amount of insurance coverage and self-insured retentions in future years. The Company also maintains umbrella liability insurance covering claims which, due to their nature or amount, are not covered by or not fully covered by the Company’s other insurance policies. These insurance policies also do not generally cover punitive damages and are subject to various deductibles and policy limits. Significant legal actions, as well as the cost and possible lack of available insurance, could subject the Company to substantial uninsured liabilities. In the Company’s opinion, the outcome of these actions, individually or in the aggregate, will not have a material adverse effect on its financial position, results of operations, or cash flows.
Healthcare providers are subject to lawsuits under the qui tam provisions of the federal False Claims Act. Qui tam lawsuits typically remain under seal (hence, usually unknown to the defendant) for some time while the government decides whether or not to intervene on behalf of a private qui tam plaintiff (known as a relator) and take the lead in the litigation. These lawsuits can involve significant monetary damages and penalties and award bounties to private plaintiffs who successfully bring the suits. The Company is and has been a defendant in these cases in the past, and may be named as a defendant in similar cases from time to time in the future.
Evansville Litigation. On October 19, 2015, the plaintiff‑relators filed a Second Amended Complaint in United States of America, ex rel. Tracy Conroy, Pamela Schenk and Lisa Wilson v. Select Medical Corporation, Select Specialty Hospital-Evansville, LLC (“SSH‑Evansville”), Select Employment Services, Inc., and Dr. Richard Sloan. The case is a civil action filed in the United States District Court for the Southern District of Indiana by private plaintiff‑relators on behalf of the United States under the federal False Claims Act. The plaintiff‑relators are the former CEO and two former case managers at SSH‑Evansville, and the defendants currently include the Company, SSH‑Evansville, a subsidiary of the Company serving as common paymaster for its employees, and a physician who practices at SSH‑Evansville. The plaintiff‑relators allege that SSH‑Evansville discharged patients too early or held patients too long, improperly discharged patients to and readmitted them from short stay hospitals, up‑coded diagnoses at admission, and admitted patients for whom long‑term acute care was not medically necessary. They also allege that the defendants engaged in retaliation in violation of federal and state law. The Second Amended Complaint replaced a prior complaint that was filed under seal on September 28, 2012 and served on the Company on February 15, 2013, after a federal magistrate judge unsealed it on January 8, 2013. All deadlines in the case had been stayed after the seal was lifted in order to allow the government time to complete its investigation and to decide whether or not to intervene. On June 19, 2015, the United States Department of Justice notified the District Court of its decision not to intervene in the case.
In December 2015, the defendants filed a Motion to Dismiss the Second Amended Complaint on multiple grounds, including that the action is disallowed by the False Claims Act’s public disclosure bar, which disqualifies qui tam actions that are based on fraud already publicly disclosed through enumerated sources, unless the relator is an original source, and that the plaintiff‑relators did not plead their claims with sufficient particularity, as required by the Federal Rules of Civil Procedure.
Thereafter, the United States filed a notice asserting a veto of the defendants’ use of the public disclosure bar for claims arising from conduct from and after March 23, 2010, which was based on certain statutory changes to the public disclosure bar language included in the Affordable Care Act. On September 30, 2016, the District Court partially granted and partially denied the defendants’ Motion to Dismiss. It ruled that the plaintiff‑relators alleged substantially the same conduct as had been publicly disclosed and that the plaintiff-relators are not original sources, so that the public disclosure bar requires dismissal of all non‑retaliation claims arising from conduct before March 23, 2010. The District Court also ruled that the statutory changes to the public disclosure bar gave the United States the power to veto its applicability to claims arising from conduct on and after March 23, 2010, and therefore did not dismiss those claims based on the public disclosure bar. However, the District Court ruled that the plaintiff‑relators did not plead certain of their claims relating to interrupted stay manipulation and premature discharging of patients with the requisite particularity, and dismissed those claims. The District Court declined to dismiss the plaintiff-relators’ claims arising from conduct from and after March 23, 2010 relating to delayed discharging of patients and up-coding and the plaintiff-relators’ retaliation claims. The plaintiff-relators then proposed a case management plan seeking nationwide discovery involving all of the Company’s LTCHs for the period from March 23, 2010 through the present and allowing discovery that would facilitate the use of statistical sampling to prove liability, which the defendants opposed. In April 2018, a U.S. magistrate judge ruled that plaintiff‑relators’ discovery will be limited to only SSH-Evansville for the period from March 23, 2010 through September 30, 2016, and that the plaintiff‑relators will be required to prove the fraud that they allege on a claim-by-claim basis, rather than using statistical sampling. The plaintiff-relators appealed this decision to the district judge who, in March 2019, affirmed the decision of the magistrate judge regarding the geographic and temporal scope of the case, but ruled that the question of statistical sampling is not ripe for review.
In October 2019, the Company entered into a settlement agreement with the United States government and the plaintiff-relators. Under the terms of the settlement, the Company agreed to make payments to the government, the plaintiff-relators and their counsel. Such payments, in the aggregate, are immaterial to the Company’s financial statements. In the settlement agreement, the government and the plaintiff-relators released all defendants from liability for all conduct alleged in the complaint, and the Company admitted no liability or wrongdoing.
Wilmington Litigation. On January 19, 2017, the United States District Court for the District of Delaware unsealed a qui tam Complaint in United States of America and State of Delaware ex rel. Theresa Kelly v. Select Specialty Hospital-Wilmington, Inc. (“SSH‑Wilmington”), Select Specialty Hospitals, Inc., Select Employment Services, Inc., Select Medical Corporation, and Crystal Cheek, No. 16‑347‑LPS. The Complaint was initially filed under seal in May 2016 by a former chief nursing officer at SSH‑Wilmington and was unsealed after the United States filed a Notice of Election to Decline Intervention in January 2017. The corporate defendants were served in March 2017. In the complaint, the plaintiff‑relator alleges that the Select defendants and an individual defendant, who is a former health information manager at SSH‑Wilmington, violated the False Claims Act and the Delaware False Claims and Reporting Act based on allegedly falsifying medical practitioner signatures on medical records and failing to properly examine the credentials of medical practitioners at SSH‑Wilmington. In response to the Select defendants’ motion to dismiss the Complaint, in May 2017 the plaintiff-relator filed an Amended Complaint asserting the same causes of action. The Select defendants filed a Motion to Dismiss the Amended Complaint based on numerous grounds, including that the Amended Complaint did not plead any alleged fraud with sufficient particularity, failed to plead that the alleged fraud was material to the government’s payment decision, failed to plead sufficient facts to establish that the Select defendants knowingly submitted false claims or records, and failed to allege any reverse false claim. In March 2018, the District Court dismissed the plaintiff‑relator’s claims related to the alleged failure to properly examine medical practitioners’ credentials, her reverse false claims allegations, and her claim that defendants violated the Delaware False Claims and Reporting Act. It denied the defendants’ motion to dismiss claims that the allegedly falsified medical practitioner signatures violated the False Claims Act. Separately, the District Court dismissed the individual defendant due to plaintiff-relator’s failure to timely serve the amended complaint upon her.
In March 2017, the plaintiff-relator initiated a second action by filing a Complaint in the Superior Court of the State of Delaware in Theresa Kelly v. Select Medical Corporation, Select Employment Services, Inc., and SSH‑Wilmington, C.A. No. N17C-03-293 CLS. The Delaware Complaint alleges that the defendants retaliated against her in violation of the Delaware Whistleblowers’ Protection Act for reporting the same alleged violations that are the subject of the federal Amended Complaint. The defendants filed a motion to dismiss, or alternatively to stay, the Delaware Complaint based on the pending federal Amended Complaint and the failure to allege facts to support a violation of the Delaware Whistleblowers’ Protection Act. In January 2018, the Court stayed the Delaware Complaint pending the outcome of the federal case.
The Company intends to vigorously defend these actions, but at this time the Company is unable to predict the timing and outcome of this matter.
Contract Therapy Subpoena. On May 18, 2017, the Company received a subpoena from the U.S. Attorney’s Office for the District of New Jersey seeking various documents principally relating to the Company’s contract therapy division, which contracted to furnish rehabilitation therapy services to residents of skilled nursing facilities (“SNFs”) and other providers. The Company operated its contract therapy division through a subsidiary until March 31, 2016, when the Company sold the stock of the subsidiary. The subpoena seeks documents that appear to be aimed at assessing whether therapy services were furnished and billed in compliance with Medicare SNF billing requirements, including whether therapy services were coded at inappropriate levels and whether excessive or unnecessary therapy was furnished to justify coding at higher paying levels. The Company does not know whether the subpoena has been issued in connection with a qui tam lawsuit or in connection with possible civil, criminal or administrative proceedings by the government. The Company is producinghas produced documents in response to the subpoena and intends to fully cooperate with this investigation. At this time, the Company is unable to predict the timing and outcome of this matter.
ITEM 1A. RISK FACTORS
There have been no material changes from ourThe risk factors set forth in this report update, 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, 2019.
Risks Related to Our Business
The unpredictable effects of the COVID-19 pandemic, including the duration and extent of disruption on our operations, creates significant uncertainties about our future operating results and financial condition.
The extent to which the COVID-19 pandemic disrupts our business and results of operations, financial position, and cash flows will depend on a number of evolving factors and future developments that we are not able to predict, including, but not limited to, the duration of the outbreak; further actions by governmental authorities and the private sector to limit the spread of COVID-19; continued encouragement to social distance; and the economic impact on our patients and the communities we serve as previously reporteda result of containment efforts. The adverse impacts of COVID-19 on our business may also exacerbate other risks discussed in our Annual Report on Form 10-K for the year ended December 31, 2018.2019.
Our hospitals may experience declines in their occupancy in future months in order protect both our patients and staff members and to prevent the spread of COVID-19 within our hospitals. Our critical illness recovery hospitals and rehabilitation hospitals may experience constrained staffing levels and increased operating costs resulting from increased usage of contract clinical labor due to the overwhelming need for healthcare professionals during the pandemic. Our hospitals may also experience increased operating costs resulting from shortages of medical supplies, including personal protective equipment, and supply chain disruptions. In our outpatient rehabilitation clinics and Concentra centers, we may continue to experience declines in demand for our services as a result of actions taken by governmental authorities, which in some instances has led to the closure of non-essential and non-life sustaining businesses, as well as mandated social distancing measures. Our outpatient rehabilitation clinics have already experienced a reduction in patient volume due to hospitals and other facilities temporarily suspending elective surgeries which typically would result in a patient seeking outpatient services, a decline in patient referrals from physicians, and a reduction in workers’ compensation injury visits due to the temporary closure of businesses, as mentioned above. Our Concentra centers have also experienced a reduction in workers’ compensation and employer services visits due to furloughed workforces and temporarily ceased and reduced operations. As a result of reduced demand in some of our markets, we have adopted a strategy to temporarily consolidate the operations of certain clinics and centers which operate within close proximity to one another.
Our future results of operations and financial condition depend upon, among other things, the operating costs we face and the demand for our services. To the extent that we face increased operating costs and declines in demand for our services as a result of the adverse impacts of COVID-19, our ability to comply with financial covenants and obligations under the Select credit facilities, the Concentra-JPM credit facilities and the indenture governing our senior notes in future periods, as well as our ability to pay amounts due to WCAS and the other members of Concentra Group Holdings Parent or DHHC in connection with their Put Right (as defined below), if exercised, may be adversely affected. Risks related to our capital structure are described further herein and within our Annual Report on Form 10-K for the year ended December 31, 2019.
Adverse economic conditions in the U.S. or globally could adversely affect us.
We are subject to the risks arising from adverse conditions in the general economy. A U.S. or global recession or prolonged economic downturn could negatively impact our current and prospective patients, adversely affect the financial ability of health insurers to pay claims, adversely impact our ability to pay our expenses, and limit our ability to obtain financing for our operations. Healthcare spending in the U.S. could be negatively affected in the event of a downturn in economic conditions. For example, U.S. patients who have lost their jobs or healthcare coverage may no longer be covered by an employer-sponsored health insurance plan, and patients reducing their overall spending may elect to decrease the frequency of visits to our facilities or forgo elective treatments or procedures, thereby reducing demand for our services.
We could experience significant increases to our operating costs due to shortages of healthcare professionals or union activity.
Our critical illness recovery hospitals and our rehabilitation hospitals are highly dependent on nurses, our outpatient rehabilitation division is highly dependent on therapists for patient care, and Concentra is highly dependent upon the ability of its affiliated professional groups to recruit and retain qualified physicians and other licensed providers. The market for qualified healthcare professionals is highly competitive. We have sometimes experienced difficulties in attracting and retaining qualified healthcare personnel. We cannot assure you we will be able to attract and retain qualified healthcare professionals in the future. Additionally, the cost of attracting and retaining qualified healthcare personnel may be higher than we anticipate, and as a result, our profitability could decline. Furthermore, as a result of the heightened risk of infection related to the COVID-19 outbreak, we may be unable to attract and retain qualified healthcare personnel and may face staffing challenges resulting from infections among our personnel, which may result in an increase in labor and other costs.
In addition, United States healthcare providers are continuing to see an increase in the amount of union activity. Though we cannot predict the degree to which we will be affected by future union activity, there may be continuing legislative proposals that could result in increased union activity. We could experience an increase in labor and other costs from such union activity.
If the frequency of workplace injuries and illnesses continues to decline, Concentra’s results may be negatively affected.
Approximately 58% of Concentra’s revenue in 2019 was generated from the treatment of workers’ compensation claims. In the past decade, the number of workers’ compensation claims has decreased, which Concentra primarily attributes to improvements in workplace safety, improved risk management by employers, and changes in the type and composition of jobs. During the economic downturn between the years of 2007-2009, the number of employees with workers’ compensation insurance substantially decreased. A recession or prolonged economic contraction as a result of the COVID-19 pandemic could similarly cause the number of covered employees to decline, which may cause further declines in workers’ compensation claims. In addition, because of the greater access to health insurance and the fact that the United States economy has continued to shift from a manufacturing-based to a service-based economy along with general improvements in workplace safety, workers are generally healthier and less prone to work injuries. Increases in employer-sponsored wellness and health promotion programs, spurred in part by the ACA, have led to fitter and healthier employees who may be less likely to injure themselves on the job. Concentra’s business model is based, in part, on its ability to expand its relative share of the market for the treatment of claims for workplace injuries and illnesses. The COVID-19 pandemic has also resulted in a significant increase in unemployment in the United States, which may continue even after the pandemic. If workplace injuries and illnesses decline at a greater rate than the increase in total employment, or if total employment declines at a greater rate than the increase in incident rates, the number of claims in the workers’ compensation market will decrease and may adversely affect Concentra’s business.
If Concentra loses several significant employer customers or payor contracts, its results may be adversely affected.
Concentra’s results may decline if it loses several significant employer customers or payor contracts. One or more of Concentra’s significant employer customers could be acquired. Additionally, Concentra could lose significant employer customers or payor contracts due to competitive pricing pressures or other reasons. Our Concentra centers have also experienced a reduction in employer services visits due to furloughed workforces and temporarily ceased and reduced operations during the COVID-19 pandemic. The loss of several significant employer customers or payor contracts could cause a material decline in Concentra’s profitability and operating performance.
Risks Related to Our Capital Structure
If WCAS and the other members of Concentra Group Holdings Parent or DHHC exercise their Put Right, it may have an adverse effect on our liquidity. Additionally, we may not have adequate funds to pay amounts due in connection with the Put Right, if exercised, in which case we would be required to issue Holdings’ common stock to purchase interests of Concentra Group Holdings Parent and our stockholders’ ownership interest will be diluted.
Pursuant to the Concentra LLC Agreement, WCAS and the other members of Concentra Group Holdings Parent and DHHC have separate put rights (each, a “Put Right”) with respect to their equity interests in Concentra Group Holdings Parent. If a Put Right is exercised by WCAS or DHHC, Select will be obligated to purchase up to 33 1/3% of the equity interests of Concentra Group Holdings Parent that WCAS or DHHC, respectively, owned as of February 1, 2018, at a purchase price based on a valuation of Concentra Group Holdings Parent performed by an investment bank to be agreed between Select and one of WCAS or DHHC, which valuation will be based on certain precedent transactions using multiples of EBITDA (as defined in the Concentra LLC Agreement) and capped at an agreed upon multiple of EBITDA. Select has the right to elect to pay the purchase price in cash or in shares of Holdings’ common stock.
On January 1, 2020, Select, WCAS and DHHC agreed to a transaction in lieu of, and deemed to constitute, the exercise of WCAS’ and DHHC’s first Put Right (the “January Interest Purchase”), pursuant to which Select acquired an aggregate amount of approximately 17.2% of the outstanding membership interests, on a fully diluted basis, of Concentra Group Holdings Parent from WCAS, DHHC and the other equity holders of Concentra Group Holdings Parent, in exchange for an aggregate payment of approximately $338.4 million. On February 1, 2020, Select, WCAS and DHHC agreed to a transaction pursuant to which Select acquired an additional amount of approximately 1.4% of the outstanding membership interests of Concentra Group Holdings Parent on a fully diluted basis from WCAS, DHHC, and other equity holders of Concentra Group Holdings Parent for approximately $27.8 million (the “February Interest Purchase”). The February Interest Purchase was deemed to constitute an additional exercise of WCAS’ and DHHC’s first Put Right. Upon consummation of the January Interest Purchase and the February Interest Purchase, Select owns in the aggregate approximately 66.6% of the outstanding membership interests of Concentra Group Holdings Parent on a fully diluted basis and approximately 68.8% of the outstanding voting membership interests of Concentra Group Holdings Parent.
WCAS and DHHC may exercise their remaining respective Put Rights to sell up to an additional 33 1/3% of the equity interests in Concentra Group Holdings Parent that each, respectively, owned as of February 1, 2018, on an annual basis beginning in 2021 during the sixty-day period following the delivery of the audited financial statements for the immediately preceding fiscal year. If WCAS exercises future Put Rights, the other members of Concentra Group Holdings Parent, other than DHHC, may elect to sell to Select, on the same terms as WCAS, a percentage of their equity interests of Concentra Group Holdings Parent that such member owned as of the date of the Amended and Restated LLC Agreement, up to but not exceeding the percentage of equity interests owned by WCAS as of the date of the Amended and Restated LLC Agreement that WCAS has determined to sell to Select in the exercise of its Put Right.
Furthermore, WCAS, DHHC, and the other members of Concentra Group Holdings Parent have a put right with respect to their equity interest in Concentra Group Holdings Parent that may only be exercised in the event Holdings or Select experiences a change of control that has not been previously approved by WCAS and DHHC, and which results in change in the senior management of Select (an “SEM COC Put Right”). If an SEM COC Put Right is exercised by WCAS, Select will be obligated to purchase all (but not less than all) of the equity interests of WCAS and the other members of Concentra Group Holdings Parent (other than DHHC) offered by such members at a purchase price based on a valuation of Concentra Group Holdings Parent performed by an investment bank to be agreed between Select and one of WCAS or DHHC, which valuation will be based on certain precedent transactions using multiples of EBITDA and capped at an agreed upon multiple of EBITDA. Similarly, if an SEM COC Put Right is exercised by DHHC, Select will be obligated to purchase all (but not less than all) of the equity interests of DHHC at a purchase price based on a valuation of Concentra Group Holdings Parent performed by an investment bank to be agreed between Select and one of WCAS or DHHC, which valuation will be based on certain precedent transactions using multiples of EBITDA and capped at an agreed upon multiple of EBITDA.
We may not have sufficient funds, borrowing capacity, or other capital resources available to pay for the interests of Concentra Group Holdings Parent in cash if WCAS, DHHC, and the other members of Concentra Group Holdings Parent exercise the Put Right or the SEM COC Put Right, or may be prohibited from doing so under the terms of our debt agreements. To the extent that we face increased operating costs and declines in demand for our services as a result of the adverse impacts of COVID-19, our ability to pay amounts due to WCAS and the other members of Concentra Group Holdings Parent or DHHC in connection with their Put Right, if exercised, may be affected. Such lack of available funds upon the exercising of the Put Right or the SEM COC Put Right would force us to issue stock at a time we might not otherwise desire to do so in order to purchase the interests of Concentra Group Holdings Parent. To the extent that the interests of Concentra Group Holdings Parent are purchased by issuing shares of our common stock, the increase in the number of shares of our common stock issued and outstanding may depress the price of our common stock and our stockholders will experience dilution in their respective percentage ownership in us. In addition, shares issued to purchase the interests in Concentra Group Holdings Parent will be valued at the twenty-one trading day volume-weighted average sales price of such shares for the period beginning ten trading days immediately preceding the first public announcement of the Put Right or the SEM COC Put Right being exercised and ending ten trading days immediately following such announcement. Because the value of the common stock issued to purchase the interests in Concentra Group Holdings Parent is, in part, determined by the sales price of our common stock following the announcement that the Put Right or the SEM COC Put Right is being exercised, which may cause the sales price of our common stock to decline, the amount of common stock we may have to issue to purchase the interests in Concentra Group Holdings Parent may increase, resulting in further dilution to our existing stockholders.
Effects of the COVID-19 pandemic may result in our failure to comply with the financial covenant under the Select revolving facility.
The Select revolving facility requires Select to maintain a leverage ratio (based upon the ratio of indebtedness to consolidated EBITDA as defined in the Select credit facilities), which is tested quarterly. The effects of the COVID-19 pandemic may result in increased operating costs and reduced demand for our services, and to the extent such events were to occur, such events may result in our failure to comply with this covenant, which would result in an event of default under the Select revolving facility and, absent a waiver or an amendment from the revolving lenders, preclude Select from making further borrowings under the Select revolving facility and permit the revolving lenders to terminate their commitments and accelerate all outstanding revolving borrowings under the Select revolving facility. If the revolving lenders terminate their commitments and accelerate the revolving loans, a cross-default to the Select term loan would then occur. Such events may require us to pursue alternative financing. We have no assurance that any such alternative financing, if required, could be obtained on terms acceptable to us, or at all, particularly given the disruption of global financial markets due to the COVID-19 pandemic.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Purchases of Equity Securities by the Issuer
Holdings’ board of directors has authorized a common stock repurchase program to repurchase up to $500.0 million worth of shares of its common stock. The program, which has been extended until December 31, 2020, will remain in effect until then unless further extended or earlier terminated by the board of directors. Stock repurchases under this program may be made in the open market or through privately negotiated transactions, and at times and in such amounts as Holdings deems appropriate.
The following table provides information regarding repurchases of our common stock during the three months ended September 30, 2019.March 31, 2020.
|
| | | | | | | | | | | | | | |
| | Total Number of Shares Purchased(1) | | Average Price Paid Per Share(1) | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under Plans or Programs |
July 1 - July 31, 2019 | | — |
| | $ | — |
| | — |
| | $ | 172,124,038 |
|
August 1 - August 31, 2019 | | 1,473,676 |
| | 15.85 |
| | 1,242,256 |
| | 152,417,000 |
|
September 1 - September 30, 2019 | | 20,652 |
| | 16.01 |
| | 20,652 |
| | 152,086,459 |
|
Total | | 1,494,328 |
| | $ | 15.85 |
| | 1,262,908 |
| | $ | 152,086,459 |
|
|
| | | | | | | | | | | | | | |
| | 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, 2020 | | — |
| | $ | — |
| | — |
| | $ | 152,086,459 |
|
February 1 - February 29, 2020 | | — |
| | — |
| | — |
| | 152,086,459 |
|
March 1 - March 31, 2020 | | 491,559 |
| | 17.68 |
| | 491,559 |
| | 143,394,863 |
|
Total | | 491,559 |
| | $ | 17.68 |
| | 491,559 |
| | $ | 143,394,863 |
|
| |
(1) | Includes share repurchases under our common stock repurchase program and common stock surrendered to us to satisfy tax withholding obligations associated with the vesting of restricted shares issued to employees, pursuant to the provisions of our equity incentive plans. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
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| | |
Number | | Description |
4.1 | | |
4.2 | | |
10.1 | | Amendment No. 3, dated August 1, 2019, to the CreditInterest Purchase Agreement, dated March 6, 2017,January 1, 2020, by and among Select MedicalConcentra Group Holdings Corporation,Parent, LLC, Select Medical Corporation, JPMorgan Chase Bank, N.A.Welsh, Carson, Anderson & Stowe XII, L.P., as Administrative Agent and Collateral Agent,Dignity Health Holding Corporation and the other lenders and issuing banks partysignatories thereto as amended by Amendment No. 1, dated as of March 22, 2018, and Amendment No. 2, dated as of October 26, 2018 (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K, filed on August 1, 2019)January 2, 2020). |
10.2 | | Amendment No. 6, dated September 20, 2019, to the First Lien CreditInterest Purchase Agreement, dated as of JuneFebruary 1, 2015,2020, by and among Concentra Group Holdings Inc.Parent, LLC, Select Medical Corporation, Welsh, Carson, Anderson & Stowe XII, L.P., MJ AcquisitionDignity Health Holding Corporation Concentra Inc.,and the lenders partyother signatories thereto and JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, as amended by Amendment No. 1, dated as of September 26, 2016, Amendment No. 2, dated as of March 20, 2017, Amendment No. 3, dated as of February 1, 2018, Amendment No. 4, dated as of October 26, 2018, and Amendment No. 5, dated as of April 8, 2019 (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K, filed on September 24, 2019)February 3, 2020). |
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 | | XBRL Taxonomy Extension Schema Document. |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document. |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document. |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document. |
104 | | Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL 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.
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| | |
| SELECT MEDICAL HOLDINGS CORPORATION |
| |
| |
| By: | /s/ Martin F. Jackson |
| | Martin F. Jackson |
| | Executive Vice President and Chief Financial Officer |
| | (Duly Authorized Officer) |
| | |
| By: | /s/ Scott A. Romberger |
| | Scott A. Romberger |
| | Senior Vice President, Chief Accounting Officer and Controller |
| | (Principal Accounting Officer) |
Dated: October 31, 2019April 30, 2020