NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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1.
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Organization and Significant Accounting Policies
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Business Description
The 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 Company is, based on number of facilities, 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 December 31, 2019, the Company had operations in 47 states and the District of Columbia. As of December 31, 2019, the Company operated 101 critical illness recovery hospitals, 29 rehabilitation hospitals, and 1,740 outpatient rehabilitation clinics. As of December 31, 2019, Concentra, a joint venture subsidiary, operated 521 occupational health centers. Concentra also operated 131 onsite clinics at employer worksites and 32 Department of Veterans Affairs CBOCs.
The Company is managed through four business segments: the critical illness recovery hospital segment, the rehabilitation hospital segment, the outpatient rehabilitation segment, and the Concentra segment. The Company’s 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 the rehabilitation hospital segment consists of hospitals designed to serve patients that require intensive physical rehabilitation care. Patients are typically admitted to the Company’s critical illness recovery hospitals and rehabilitation hospitals from general acute care hospitals. The Company’s outpatient rehabilitation segment consists of clinics that provide physical, occupational, and speech rehabilitation services. The Company’s Concentra segment consists of occupational health centers that provide workers’ compensation injury care, physical therapy, and consumer health services and onsite clinics located at employer worksites that deliver occupational medicine services. Additionally, the Company’s Concentra segment includes Department of Veterans Affairs community-based outpatient clinics (“CBOCs”) that deliver occupational medicine, physical therapy, veteran’s healthcare, and consumer health services.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“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 the reported amounts of revenues and expenses during the reporting period. Estimates and assumptions are used for, but not limited to: amounts realizable for services performed, estimated useful lives of assets, the valuation of intangible assets, amounts payable for self-insured losses, and the computation of income taxes. Future events and their effects cannot be predicted with certainty; accordingly, the Company’s accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of the financial statements will change as new events occur, as more experience is acquired, as additional information is obtained, and as the Company’s operating environment changes. The Company’s management evaluates and updates assumptions and estimates on an ongoing basis. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of Holdings, Select, and the subsidiaries, limited liability companies, and limited partnerships in which the Company has a controlling financial interest. All intercompany balances and transactions are eliminated in consolidation.
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. Net income or loss is attributed to the Company’s non-controlling interests. Some of the Company’s non-controlling ownership interests consist of outside parties that have certain redemption rights that, if exercised, require the Company to purchase the parties’ ownership interests. These interests are classified and reported as redeemable non-controlling interests and have been adjusted to their approximate redemption values, after the attribution of net income or loss.
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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1.
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Organization and Significant Accounting Policies (Continued)
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The Company’s redeemable non-controlling interests are comprised primarily of the Class A membership interests owned by outside members of Concentra Group Holdings Parent, LLC (“Concentra Group Holdings Parent”), each which have put rights with respect to their interests in Concentra Group Holdings Parent. The redemption value of these membership interests is approximately $750.6 million and $939.9 million as of December 31, 2018 and 2019, respectively. On January 1, 2020 and February 1, 2020, Select purchased portions of the outstanding membership interests owned by outside members of Concentra Group Holdings Parent. Refer to Note 17 for discussion related to this transaction.
Earnings per Share
The Company’s capital structure includes common stock and unvested restricted stock awards. To compute earnings per share (“EPS”), the Company applies the two-class method because the Company’s unvested restricted stock awards are participating securities which are entitled to participate equally with the Company’s common stock in undistributed earnings. Application of the Company’s two-class method is as follows:
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(i)
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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, if any.
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(ii)
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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.
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(iii)
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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.
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Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash equivalents are stated at cost which approximates fair value.
Accounts Receivable
Substantially all of the Company’s accounts receivable is related to providing healthcare services to patients. These healthcare services are primarily paid for by federal and state governmental authorities, managed care health plans, commercial insurance companies, and workers’ compensation and employer programs. The Company reports accounts receivable at an amount equal to the consideration the Company expects to receive in exchange for providing healthcare services to its patients, which is estimated using contractual provisions associated with specific payors, historical reimbursement rates, and an analysis of past reimbursement experience to estimate contractual allowances. Amounts that have been deemed to be uncollectible because of circumstances that affect the ability of payors to make payments are written-off as bad debt expense as they occur.
Credit Risk and Payor Concentrations
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash balances and accounts receivable. The Company’s excess cash is held with large financial institutions. The Company grants unsecured credit to its patients, most of whom reside in the service area of the Company’s facilities and are insured under third-party payor agreements.
Accounts receivable from the Medicare program represents the only significant third-party payor concentration for the Company. The Company does not believe there is significant credit risk associated with this governmental program. Medicare receivables comprise approximately 16% and 15% of the Company’s accounts receivable at December 31, 2018 and 2019, respectively.
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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1.
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Organization and Significant Accounting Policies (Continued)
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The Company’s primary collection risks for its accounts receivable relate to non-governmental payors who insure the Company’s patients and deductibles, co-payments, and self-insured amounts owed by the patient. The Company believes its credit risk with its non-governmental payors is limited due to the diversity in the Company’s non-governmental third-party payor base, as well as their geographic dispersion. Further, deductibles, co-payments, and self-insured amounts owed by the patient are an immaterial portion of the Company’s accounts receivable balance at both December 31, 2018 and 2019. The Company’s general policy is to verify insurance coverage prior to the date of admission for patients admitted to its critical illness recovery hospitals and rehabilitation hospitals. Within the Company’s outpatient rehabilitation clinics, insurance coverage is verified prior to the patient’s visit. Within the Company’s Concentra centers, insurance coverage is verified or an authorization is received from the patient’s employer prior to the patient’s visit.
Net operating revenues generated directly from the Medicare program represented approximately 30%, 27%, and 26% of the Company’s total net operating revenues for the years ended December 31, 2017, 2018, and 2019, respectively. As a provider of services under the Medicare program, the Company is subject to extensive regulations. The inability of any of the Company’s critical illness recovery hospitals, rehabilitation hospitals, or outpatient rehabilitation clinics to comply with Medicare regulations can result in the Company receiving significantly less Medicare payments than the Company currently receives for its services provided to patients.
Financial Instruments
The Company’s financial instruments consist principally of cash and cash equivalents, accounts receivable, accounts payable, and indebtedness. The carrying amount of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value because of the short-term maturities of these instruments. The principal outstanding, carrying values, and fair values of the Company’s indebtedness are presented in Note 9.
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 terms 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. As most of the Company’s leases do not specify an implicit rate, the Company uses its incremental borrowing rate, which coincides with the lease term at the commencement of a lease, 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 are accounted for as lease payments and are included in the measurement of the Company’s right-of-use asset and lease liability.
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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1.
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Organization and Significant Accounting Policies (Continued)
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Statement of Operations and Comprehensive Income
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 and comprehensive income, 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 and comprehensive income, 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 and comprehensive income.
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 and comprehensive income.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation. Maintenance and repairs of property and equipment are expensed as incurred. Improvements that increase the estimated useful life of an asset are capitalized. Direct internal and external costs of developing software for internal use, including programming and enhancements, are capitalized and depreciated over the estimated useful lives once the software is placed in service. Capitalized software costs are included within furniture and equipment. Software training costs, maintenance, and repairs are expensed as incurred. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets or the term of the lease, as appropriate. The general range of useful lives is as follows:
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Land improvements
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5 – 25 years
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Leasehold improvements
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1 – 20 years
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Buildings
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40 years
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Building improvements
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5 – 40 years
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Furniture and equipment
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1 – 20 years
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The Company reviews the realizability of long-lived assets whenever events or circumstances occur which indicate recorded costs may not be recoverable. If it is determined that a long-lived asset or asset group is not recoverable, an impairment charge is recognized based on the excess of the carrying amount of the long-lived asset or asset group over its fair value.
Intangible Assets
Goodwill and indefinite-lived identifiable intangible assets
Goodwill and other indefinite-lived intangible assets are recognized primarily as the result of business combinations. Goodwill is assigned to reporting units based upon the specific nature of the business acquired. When a business combination contains business components related to more than one reporting unit, goodwill is assigned to each reporting unit based upon an allocation determined by the relative fair values of the business acquired. When the Company disposes of a business, the Company allocates a portion of the reporting unit’s goodwill to that business using the relative fair value methodology.
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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1.
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Organization and Significant Accounting Policies (Continued)
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Goodwill and other indefinite-lived intangible assets are not amortized, but instead are subject to periodic impairment evaluations. Impairment tests are required to be conducted at least annually or when events or conditions occur that might suggest a possible impairment. These events or conditions include, but are not limited to: a significant adverse change in the business environment, regulatory environment, or legal factors; a current period operating or cash flow loss combined with a history of such losses or a projection of continuing losses; or a sale or disposition of a significant portion of a reporting unit. The occurrence of one of these events or conditions could significantly impact an impairment assessment, necessitating an impairment charge.
The Company may first assess qualitatively if it can conclude whether goodwill is more likely than not impaired. If goodwill is more likely than not impaired, the Company is then required to complete a quantitative analysis of whether a reporting unit’s fair value is less than its carrying amount. In evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company considers relevant events or circumstances that affect the fair value or carrying amount of a reporting unit. The Company considers both the income and market approach in determining the fair value of its reporting units when performing a quantitative analysis.
At December 31, 2019, the Company’s other indefinite-lived intangible assets consist of trademarks, certificates of need, and accreditations. To determine the fair values of its trademarks, the Company uses a relief from royalty income approach. For the Company’s certificates of need and accreditations, the Company performs qualitative assessments. As part of these assessments, the Company evaluates the current business environment, regulatory environment, legal and other company-specific factors. If it is more likely than not that the fair values are less than the carrying values, the Company performs a quantitative impairment test.
The Company’s most recent impairment assessments were completed during the fourth quarter of 2019 utilizing information as of October 1, 2019. The Company did not identify any instances of impairment with respect to goodwill or other indefinite-lived intangible assets as of October 1, 2019.
Finite-lived identifiable intangible assets
At December 31, 2019, the Company’s finite-lived intangible assets consist of customer relationships and non-compete agreements. Finite-lived intangible assets are amortized based on the pattern in which the economic benefits are consumed or otherwise depleted. If such a pattern cannot be reliably determined, finite-lived intangible assets are amortized on a straight-line basis over their estimated lives. Management believes that the below estimated useful lives are reasonable based on the economic factors applicable to each class of finite-lived intangible asset.
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Customer relationships
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5 – 17 years
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Non-compete agreements
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1 – 15 years
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The Company reviews the realizability of finite-lived intangible assets whenever events or circumstances occur which indicate recorded amounts may not be recoverable. If the expected undiscounted future cash flows are less than the carrying amount of such assets, the Company recognizes an impairment loss to the extent the carrying amount of the assets exceeds their estimated fair value.
Equity Method Investments
The Company applies the equity method of accounting for investments in which the Company has the ability to exercise significant influence over the operating and financial policies of the investee, but does not possess a controlling financial interest in the investee. Investments of this nature are recorded at original cost and adjusted periodically to recognize the Company’s proportionate share of the investees’ net income or losses after the date of investment. When net losses from an investment accounted for under the equity method exceed the carrying amount, the investment balance is reduced to zero. The Company resumes accounting for the investment under the equity method if the investee subsequently reports net income and the Company’s share of that net income exceeds the share of the net losses not recognized during the period the equity method was suspended. Investments are written down only when there is clear evidence that a decline in value that is other than temporary has occurred. The Company evaluates its equity method investments for impairment when there is evidence or indicators that a loss in value may be other than temporary.
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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1.
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Organization and Significant Accounting Policies (Continued)
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Income Taxes
The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s financial statements. Deferred tax assets and liabilities are determined on the basis of the differences between the book and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company also recognizes the future tax benefits from net operating loss carryforwards as deferred tax assets. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The Company evaluates the realizability of deferred tax assets and reduces those assets using a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized. Among the factors used to assess the likelihood of realization are projections of future taxable income streams, the expected timing of the reversals of existing temporary differences, and the impact of tax planning strategies that could be implemented to avoid the potential loss of future tax benefits.
Reserves for uncertain tax positions are established for exposure items related to various federal and state tax matters. Income tax reserves are recorded when an exposure is identified and when, in the opinion of management, it is more likely than not that a tax position will not be sustained and the amount of the liability can be estimated.
Insurance Risk Programs
Under a number of the Company’s insurance programs, which include the Company’s employee health insurance, workers’ compensation, and professional malpractice liability insurance programs, the Company is liable for a portion of its losses before it can attempt to recover from the applicable insurance carrier. The Company accrues for losses under an occurrence-based approach whereby the Company estimates the losses that will be incurred in a respective accounting period and accrues that estimated liability using actuarial methods. These programs are monitored quarterly and estimates are revised as necessary to take into account additional information. The Company also records insurance proceeds receivable for liabilities which exceed the Company’s deductibles and self-insured retention limits and are recoverable through its insurance policies.
Revenue Recognition
Patient Services Revenue
Patient services revenue is recognized when obligations under the terms of the contract are satisfied; generally, this occurs as the Company provides healthcare services to its patients, as each service provided is distinct and future services rendered are not dependent on previously rendered services. Patient service revenues are recognized at an amount equal to the consideration the Company expects to receive in exchange for providing healthcare services to its patients. These amounts are due from third-party payors, including health insurers and government programs; other payors; and patients.
Medicare: Medicare is a federal program that provides medical insurance benefits to persons age 65 and over, some disabled persons, and persons with end stage renal disease. Amounts the Company receives for treatment of patients covered by the Medicare program are generally less than the standard billing rates; accordingly, the Company recognizes revenue based on amounts which are payable by Medicare under prospective payment systems and other payment methods. The expected payment is derived based on the level of clinical services provided.
Non-Medicare: The Company is reimbursed for healthcare services provided from various other payor sources which include insurance companies, state Medicaid programs, workers’ compensation programs, health maintenance organizations, preferred provider organizations, other managed care companies and employers, as well as patients. The Company is reimbursed by these payors using a variety of payment methodologies and the amounts the Company receives are generally less than its standard billing rates.
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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1.
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Organization and Significant Accounting Policies (Continued)
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In the critical illness recovery hospital and rehabilitation hospital segments, the Company recognizes revenue based on known contractual provisions associated with the specific payor or, where the Company has a relatively homogeneous patient population, the Company will monitor individual payor historical reimbursement rates to derive a per diem rate which is used to determine the amount of revenue to be recognized for services rendered. In the outpatient rehabilitation and Concentra segments, the Company recognizes revenue from payors based on known contractual provisions, negotiated amounts, or usual and customary amounts associated with the specific payor or based on the service provided. The Company performs provision testing, using internally developed systems, whereby the Company monitors historical reimbursement rates and compares them against the associated gross charges for the service provided. The percentage of historical reimbursed claims to gross charges is utilized to determine the amount of revenue to be recognized for services rendered.
The Company is subject to potential adjustments to net operating revenues in future periods for administrative matters and other price concessions. These adjustments, which are estimated based on an analysis of historical experience by payor source, are accounted for as a constraint to the amount of revenue recognized by the Company in the period services are rendered.
Other Revenues
The Company recognizes revenue for services provided to healthcare institutions, principally for providing management and employee leasing services, under contractual arrangements with related parties affiliated with the Company and with other non-affiliated healthcare institutions. Revenue is recognized when the obligations under the terms of the contract are satisfied. Revenues from these services are measured as the amount of consideration the Company expects to receive for those services.
Recent Accounting Pronouncements
Financial Instruments
In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments — Credit Losses: Measurement of Credit Losses on Financial Instruments. The current standard delays the recognition of a credit loss on a financial asset until the loss is probable of occurring. The new standard removes the requirement that a credit loss be probable of occurring for it to be recognized and requires entities to use historical experience, current conditions, and reasonable and supportable forecasts to estimate their future expected credit losses. The standard is required to be applied using the modified retrospective approach with a cumulative-effect adjustment to retained earnings, if any, upon adoption.
The Company has completed the adoption of the standard as of January 1, 2020. The Company’s primary financial instrument subject to the standard is its accounts receivable derived from contracts with customers. A significant portion of the Company’s accounts receivable is from highly-solvent, creditworthy payors including governmental programs, principally Medicare and Medicaid, and highly-regulated commercial insurers. The Company’s estimate of expected credit losses as of January 1, 2020, using its expected credit loss evaluation processes, resulted in no adjustments to the allowance for credit losses and no cumulative-effect adjustment to retained earnings on the adoption date of the standard.
Recently Adopted Accounting Pronouncements
Leases
The Company adopted Accounting Standards Codification (“ASC”) Topic 842, Leases as of January 1, 2019. The Company used the modified retrospective approach 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.
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
U.S. HealthWorks Acquisition
On February 1, 2018, Concentra acquired all of the issued and outstanding shares of stock of U.S. HealthWorks, Inc. (“U.S. HealthWorks”), an occupational medicine and urgent care provider, from Dignity Health Holding Corporation (“DHHC”). For the years ended December 31, 2017 and 2018, the Company recognized $2.8 million and $2.9 million of U.S. HealthWorks acquisition costs, respectively, which are included in general and administrative expense.
Concentra acquired U.S. HealthWorks for $753.6 million. DHHC, a subsidiary of Dignity Health, was issued a 20.0% equity interest in Concentra Group Holdings Parent, which was valued at $238.0 million. The remainder of the purchase price was paid in cash. Select retained a majority voting interest in Concentra Group Holdings Parent following the closing of the transaction.
For the U.S. HealthWorks acquisition, the Company allocated the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values in accordance with the provisions of ASC Topic 805, Business Combinations. During the year ended December 31, 2018, the Company finalized the purchase accounting related to this acquisition.
The following table reconciles the fair values of identifiable net assets and goodwill to the consideration given for the acquired business (in thousands):
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Accounts receivable
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$
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68,934
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|
Other current assets
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10,810
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|
Property and equipment
|
69,712
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Identifiable intangible assets
|
140,406
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|
Other assets
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25,435
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Goodwill
|
540,067
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Total assets
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855,364
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|
Accounts payable and other current liabilities
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49,925
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Deferred income taxes and other long-term liabilities
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51,851
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Total liabilities
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101,776
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Consideration given
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$
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753,588
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The following table outlines the identifiable intangible assets acquired:
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Fair Value
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|
Weighted Average
Amortization Period
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(in thousands)
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|
(in years)
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Customer relationships
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$
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135,000
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|
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15 years
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Trademark
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5,000
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|
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1 year
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Favorable leasehold interests
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406
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|
|
3 years
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Identifiable intangible assets
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$
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140,406
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|
|
|
The customer relationships and trademarks are amortized on a straight-line basis over their expected useful lives. Favorable leasehold interests, which are now a component of the operating lease right-of-use assets upon adoption of ASC Topic 842, Leases, are amortized to rent expense over the remaining lease terms at the time of acquisition.
Goodwill of $540.1 million was recognized for the business combination. The value of goodwill was derived from U.S. HealthWorks’ future earnings potential and its assembled workforce. Goodwill was assigned to the Concentra reporting unit and is not deductible for tax purposes. However, prior to its acquisition, U.S. HealthWorks completed certain acquisitions that resulted in tax deductible goodwill with a value of $83.1 million, which the Company will deduct through 2032.
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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2.
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Acquisitions (Continued)
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U.S. HealthWorks contributed net operating revenues of $488.8 million for the year ended December 31, 2018, which is reflected in the Company’s consolidated statement of operations and comprehensive income. Due to the integrated nature of the Company’s operations, the Company believes it is not practicable to separately identify earnings of U.S. HealthWorks on a stand-alone basis.
Pro Forma Results
The following pro forma unaudited results of operations have been prepared assuming the acquisition of U.S. HealthWorks occurred on January 1, 2017. These results are not necessarily indicative of the results of future operations nor of the results that would have occurred had the acquisition been consummated on the aforementioned date.
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For the Year Ended December 31,
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2017
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2018
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|
(in thousands, except per share amounts)
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Net operating revenues
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$
|
4,903,612
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|
|
$
|
5,128,838
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|
Net income attributable to the Company
|
170,689
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|
|
140,488
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|
The Company’s pro forma results were adjusted to recognize $2.9 million of U.S. HealthWorks acquisition costs as of January 1, 2017. These acquisition costs were excluded from the pro forma results for the year ended December 31, 2018.
Other Acquisitions
The Company made acquisitions consisting of critical illness recovery hospital, rehabilitation hospital, outpatient rehabilitation, and Concentra businesses during the year ended December 31, 2019. The consideration given for these acquired businesses consisted principally of $93.7 million of cash and the issuance of $15.1 million of non-controlling interests. The Company allocated the purchase price of these acquired businesses to assets acquired, principally property and equipment, and liabilities assumed based on their estimated fair values in accordance with the provisions of ASC Topic 805, Business Combinations. The Company recognized goodwill of $33.6 million, $14.3 million, $13.0 million, and $16.1 million in our critical illness recovery hospital, rehabilitation hospital, outpatient rehabilitation, and Concentra reporting units, respectively. These acquired businesses are not material individually or collectively.
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3.
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Variable Interest Entities
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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 states which prohibit the corporate practice of medicine, Concentra typically enters into long-term management agreements with professional corporations or associations that are owned by licensed physicians, which, in turn, employ or contract with physicians who provide professional medical services in its occupational health centers.
The management agreements have terms that provide for Concentra to conduct, supervise, and manage the day-to-day non-medical operations of the occupational health centers and provide all management and administrative services. Concentra receives a management fee for these services, which is based, in part, on the performance of the professional corporation or association. Additionally, the outstanding voting equity interests of the professional corporations or associations are typically owned by licensed physicians appointed at Concentra’s discretion. Concentra has the ability to direct the transfer of ownership of the professional corporation or association to a new licensed physician at any time.
Based on the provisions of these agreements, Concentra has the ability to direct the activities which most significantly impact the performance of these professional corporations and associations and has an obligation to absorb losses or receive benefits which could potentially be significant to the professional corporations and associations. Accordingly, the professional corporations and associations are variable interest entities for which Concentra is the primary beneficiary.
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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3.
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Variable Interest Entities (Continued)
|
As of December 31, 2018 and 2019, the total assets of Concentra’s variable interest entities were $166.2 million and $178.4 million, respectively, and are principally comprised of accounts receivable. As of December 31, 2018 and 2019, the total liabilities of Concentra’s variable interest entities were $164.4 million and $176.7 million, respectively, and are principally comprised of accounts payable, accrued expenses, and obligations payable for services received under the aforementioned management agreements.
The Company has operating and finance leases for its facilities and certain equipment. The Company leases its corporate office space from related parties. The Company’s critical illness recovery hospitals and rehabilitation hospitals generally have lease terms of 10 years with two, five year renewal options. These renewal options vary for hospitals which operate as a hospital within a hospital, or “HIH.” The Company’s outpatient rehabilitation clinics generally have lease terms of five years with two, three to five year renewal options. The Company’s Concentra centers generally have lease terms of 10 years with two, five year renewal options.
For the year ended December 31, 2019, the Company’s total lease cost was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2019
|
|
Unrelated Parties
|
|
Related Parties
|
|
Total
|
Operating lease cost
|
$
|
271,799
|
|
|
$
|
5,498
|
|
|
$
|
277,297
|
|
Finance lease cost:
|
|
|
|
|
|
Amortization of right-of-use assets
|
258
|
|
|
—
|
|
|
258
|
|
Interest on lease liabilities
|
812
|
|
|
—
|
|
|
812
|
|
Short-term lease cost
|
2,171
|
|
|
—
|
|
|
2,171
|
|
Variable lease cost
|
43,096
|
|
|
553
|
|
|
43,649
|
|
Sublease income
|
(9,822
|
)
|
|
—
|
|
|
(9,822
|
)
|
Total lease cost
|
$
|
308,314
|
|
|
$
|
6,051
|
|
|
$
|
314,365
|
|
For the year ended December 31, 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
|
$
|
274,095
|
|
Operating cash flows for finance leases
|
777
|
|
Financing cash flows for finance leases
|
225
|
|
Right-of-use assets obtained in exchange for lease liabilities:
|
|
Operating leases(1)
|
1,275,575
|
|
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.
|
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 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
|
$
|
971,382
|
|
|
$
|
32,604
|
|
|
$
|
1,003,986
|
|
|
|
|
|
|
|
Current operating lease liabilities
|
$
|
202,506
|
|
|
$
|
5,444
|
|
|
$
|
207,950
|
|
Non-current operating lease liabilities
|
826,049
|
|
|
26,848
|
|
|
852,897
|
|
Total operating lease liabilities
|
$
|
1,028,555
|
|
|
$
|
32,292
|
|
|
$
|
1,060,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance Leases
|
|
Unrelated Parties
|
|
Related Parties
|
|
Total
|
Property and equipment, net
|
$
|
4,965
|
|
|
$
|
—
|
|
|
$
|
4,965
|
|
|
|
|
|
|
|
Current portion of long-term debt and notes payable
|
$
|
195
|
|
|
$
|
—
|
|
|
$
|
195
|
|
Long-term debt, net of current portion
|
13,088
|
|
|
—
|
|
|
13,088
|
|
Total finance lease liabilities
|
$
|
13,283
|
|
|
$
|
—
|
|
|
$
|
13,283
|
|
As of December 31, 2019, the weighted average remaining lease terms and discount rates were as follows:
|
|
|
|
Weighted average remaining lease term (in years):
|
|
Operating leases
|
8.0
|
|
Finance leases
|
34.4
|
|
Weighted average discount rate:
|
|
Operating leases
|
5.9
|
%
|
Finance leases
|
7.3
|
%
|
As of December 31, 2019, maturities of lease liabilities were approximately as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Finance Leases
|
|
Total
|
2020
|
$
|
263,085
|
|
|
$
|
1,182
|
|
|
$
|
264,267
|
|
2021
|
227,202
|
|
|
1,193
|
|
|
228,395
|
|
2022
|
187,053
|
|
|
1,203
|
|
|
188,256
|
|
2023
|
143,878
|
|
|
1,214
|
|
|
145,092
|
|
2024
|
110,835
|
|
|
1,225
|
|
|
112,060
|
|
Thereafter
|
483,162
|
|
|
30,404
|
|
|
513,566
|
|
Total undiscounted cash flows
|
1,415,215
|
|
|
36,421
|
|
|
1,451,636
|
|
Less: Imputed interest
|
354,368
|
|
|
23,138
|
|
|
377,506
|
|
Total discounted lease liabilities
|
$
|
1,060,847
|
|
|
$
|
13,283
|
|
|
$
|
1,074,130
|
|
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 2018, the Company’s future minimum lease obligations on long-term, non-cancelable operating leases were approximately as follows (in thousands):
|
|
|
|
|
2019
|
$
|
267,846
|
|
2020
|
231,711
|
|
2021
|
193,155
|
|
2022
|
150,155
|
|
2023
|
107,759
|
|
Thereafter
|
484,038
|
|
|
$
|
1,434,664
|
|
For the years ended December 31, 2017 and 2018, the Company’s rent expense for facility and equipment operating leases, including cancelable leases, was $267.4 million and $307.8 million, respectively. The Company made payments to related parties for office rent, leasehold improvements, and miscellaneous expenses of $6.2 million and $6.3 million for the years ended December 31, 2017 and 2018, respectively.
|
|
5.
|
Property and Equipment
|
The Company’s property and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2019
|
|
(in thousands)
|
Land
|
$
|
87,358
|
|
|
$
|
95,549
|
|
Leasehold improvements
|
498,520
|
|
|
543,934
|
|
Buildings
|
481,375
|
|
|
553,701
|
|
Furniture and equipment
|
609,805
|
|
|
670,050
|
|
Construction-in-progress
|
67,333
|
|
|
52,467
|
|
Total property and equipment
|
1,744,391
|
|
|
1,915,701
|
|
Accumulated depreciation
|
(764,581
|
)
|
|
(917,295
|
)
|
Property and equipment, net
|
$
|
979,810
|
|
|
$
|
998,406
|
|
Depreciation expense was $142.6 million, $171.7 million, and $182.9 million for the years ended December 31, 2017, 2018, and 2019, respectively.
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Goodwill
The following table shows changes in the carrying amounts of goodwill by reporting unit for the years ended December 31, 2018 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Critical Illness Recovery Hospital
|
|
Rehabilitation Hospital
|
|
Outpatient
Rehabilitation
|
|
Concentra
|
|
Total
|
|
(in thousands)
|
Balance as of January 1, 2018
|
$
|
1,045,220
|
|
|
$
|
415,528
|
|
|
$
|
647,522
|
|
|
$
|
674,542
|
|
|
$
|
2,782,812
|
|
Acquired
|
—
|
|
|
1,118
|
|
|
4,309
|
|
|
537,424
|
|
|
542,851
|
|
Measurement period adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
4,472
|
|
|
4,472
|
|
Sold
|
—
|
|
|
—
|
|
|
(9,409
|
)
|
|
—
|
|
|
(9,409
|
)
|
Balance as of December 31, 2018
|
1,045,220
|
|
|
416,646
|
|
|
642,422
|
|
|
1,216,438
|
|
|
3,320,726
|
|
Acquired
|
33,149
|
|
|
14,254
|
|
|
12,970
|
|
|
18,299
|
|
|
78,672
|
|
Measurement period adjustment
|
435
|
|
|
—
|
|
|
—
|
|
|
(2,249
|
)
|
|
(1,814
|
)
|
Sold
|
—
|
|
|
—
|
|
|
(5,629
|
)
|
|
—
|
|
|
(5,629
|
)
|
Balance as of December 31, 2019
|
$
|
1,078,804
|
|
|
$
|
430,900
|
|
|
$
|
649,763
|
|
|
$
|
1,232,488
|
|
|
$
|
3,391,955
|
|
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
|
|
2019
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
(in thousands)
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
$
|
166,698
|
|
|
$
|
—
|
|
|
$
|
166,698
|
|
|
$
|
166,698
|
|
|
$
|
—
|
|
|
$
|
166,698
|
|
Certificates of need
|
19,174
|
|
|
—
|
|
|
19,174
|
|
|
17,157
|
|
|
—
|
|
|
17,157
|
|
Accreditations
|
1,857
|
|
|
—
|
|
|
1,857
|
|
|
1,874
|
|
|
—
|
|
|
1,874
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
5,000
|
|
|
(4,583
|
)
|
|
417
|
|
|
5,000
|
|
|
(5,000
|
)
|
|
—
|
|
Customer relationships
|
280,710
|
|
|
(61,900
|
)
|
|
218,810
|
|
|
287,373
|
|
|
(87,346
|
)
|
|
200,027
|
|
Favorable leasehold interests(1)
|
13,553
|
|
|
(6,064
|
)
|
|
7,489
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Non-compete agreements
|
29,400
|
|
|
(6,152
|
)
|
|
23,248
|
|
|
32,114
|
|
|
(8,802
|
)
|
|
23,312
|
|
Total identifiable intangible assets
|
$
|
516,392
|
|
|
$
|
(78,699
|
)
|
|
$
|
437,693
|
|
|
$
|
510,216
|
|
|
$
|
(101,148
|
)
|
|
$
|
409,068
|
|
_______________________________________________________________________________
|
|
(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 trademarks have renewal terms and the costs to renew these intangible assets are expensed as incurred. At December 31, 2019, the accreditations and trademarks have a weighted average time until next renewal of 1.5 years and 7.2 years, respectively.
The Company’s finite-lived intangible assets amortize over their estimated useful lives. Amortization expense was $17.4 million, $29.9 million, and $29.6 million for the years ended December 31, 2017, 2018, and 2019, respectively.
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
6.
|
Intangible Assets (Continued)
|
Estimated amortization expense of the Company’s finite-lived intangible assets for each of the five succeeding years is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
(in thousands)
|
Amortization expense
|
$
|
26,943
|
|
|
$
|
26,624
|
|
|
$
|
26,295
|
|
|
$
|
26,019
|
|
|
$
|
18,057
|
|
|
|
7.
|
Equity Method Investments
|
The Company’s equity method investments consist principally of minority ownership interests in rehabilitation businesses. Equity method investments of $146.9 million and $230.7 million are presented as part of other assets on the consolidated balance sheets as of December 31, 2018 and 2019, respectively. At December 31, 2019, these businesses consist primarily of the following ownership interests:
|
|
|
|
BIR JV, LLP
|
49.0
|
%
|
OHRH, LLC
|
49.0
|
%
|
GlobalRehab—Scottsdale, LLC
|
49.0
|
%
|
Rehabilitation Institute of Denton, LLC
|
50.0
|
%
|
ES Rehabilitation, LLC
|
49.0
|
%
|
Coastal Virginia Rehabilitation, LLC
|
49.0
|
%
|
BHSM Rehabilitation, LLC
|
49.0
|
%
|
Vibra Hospital of San Diego, LLC
|
39.0
|
%
|
The Company provides contracted services, principally employee leasing services, and charges management fees to related parties affiliated through its equity method investments. Net operating revenues generated from contracted services provided and management fees charged to related parties affiliated through the Company’s equity method investments were $178.1 million, $216.9 million, and $308.2 million for the years ended December 31, 2017, 2018, and 2019, respectively.
The Company had receivables from related parties affiliated through its equity method investments of $8.7 million and $11.5 million, which are included as part of other current assets and other assets on the consolidated balance sheet, respectively, as of December 31, 2018. The Company has related party receivables of $5.7 million and $28.7 million which are included as part of other current assets and other assets on the consolidated balance sheet, respectively, as of December 31, 2019.
The Company had liabilities to related parties affiliated through the Company’s equity method investments of $15.1 million and $31.2 million, which are included as part of accrued other on the consolidated balance sheets, as of December 31, 2018 and 2019, respectively.
Summarized combined financial information of the entities in which the Company has a minority ownership interest is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2018
|
|
2019
|
|
|
(in thousands)
|
Current assets
|
|
$
|
125,435
|
|
|
$
|
178,674
|
|
Non-current assets
|
|
118,270
|
|
|
317,332
|
|
Total assets
|
|
$
|
243,705
|
|
|
$
|
496,006
|
|
Current liabilities
|
|
$
|
43,792
|
|
|
$
|
107,400
|
|
Non-current liabilities
|
|
16,338
|
|
|
127,976
|
|
Equity
|
|
183,575
|
|
|
260,630
|
|
Total liabilities and equity
|
|
$
|
243,705
|
|
|
$
|
496,006
|
|
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
7.
|
Equity Method Investments (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2017
|
|
2018
|
|
2019
|
|
|
(in thousands)
|
Revenues
|
|
$
|
336,349
|
|
|
$
|
393,034
|
|
|
$
|
536,464
|
|
Cost of services and other operating expenses
|
|
289,224
|
|
|
342,603
|
|
|
476,182
|
|
Net income
|
|
45,648
|
|
|
48,535
|
|
|
58,519
|
|
|
|
8.
|
Insurance Risk Programs
|
Under a number of the Company’s insurance programs, which include the Company’s employee health insurance, workers’ compensation, and professional malpractice liability insurance programs, the Company is liable for a portion of its losses before it can attempt to recover from the applicable insurance carrier. The Company accrues for losses under an occurrence-based approach whereby the Company estimates the losses that will be incurred in a respective accounting period and accrues that estimated liability using actuarial methods. At December 31, 2018 and 2019, provisions for losses for professional liability risks retained by the Company have been discounted at 3%. The Company recorded a liability of $175.2 million and $157.1 million related to these programs at December 31, 2018 and 2019, respectively. If the Company did not discount the provisions for losses for professional liability risks, the aggregate liability for all of the insurance risk programs would be approximately $180.7 million and $162.0 million at December 31, 2018 and 2019, respectively. At December 31, 2018 and 2019, the Company recorded insurance proceeds receivable of $32.4 million and $15.5 million, respectively, for liabilities which exceeded its deductibles and self-insured retention limits and are recoverable through its insurance policies.
|
|
9.
|
Long-Term Debt and Notes Payable
|
For purposes of this indebtedness footnote, references to Select exclude Concentra Inc. because the Concentra-JPM credit facilities are non-recourse to Holdings and Select.
As of December 31, 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 6.250% senior notes
|
$
|
1,225,000
|
|
|
$
|
39,988
|
|
|
$
|
(19,944
|
)
|
|
$
|
1,245,044
|
|
|
|
$
|
1,322,020
|
|
Select credit facilities:
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Principal maturities of the Company’s long-term debt and notes payable are approximately as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
Thereafter
|
|
Total
|
Select 6.250% senior notes
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,225,000
|
|
|
$
|
1,225,000
|
|
Select credit facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Select term loan
|
11,150
|
|
|
11,150
|
|
|
11,150
|
|
|
11,150
|
|
|
11,150
|
|
|
2,087,530
|
|
|
2,143,280
|
|
Other debt, including finance leases
|
14,017
|
|
|
7,255
|
|
|
18,715
|
|
|
3,364
|
|
|
23,550
|
|
|
12,040
|
|
|
78,941
|
|
Total debt
|
$
|
25,167
|
|
|
$
|
18,405
|
|
|
$
|
29,865
|
|
|
$
|
14,514
|
|
|
$
|
34,700
|
|
|
$
|
3,324,570
|
|
|
$
|
3,447,221
|
|
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
9.
|
Long-Term Debt and Notes Payable (Continued)
|
As of December 31, 2018, 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
|
|
Select credit facilities:
|
|
|
|
|
|
|
|
|
|
|
|
Select revolving facility
|
20,000
|
|
|
—
|
|
|
—
|
|
|
20,000
|
|
|
|
18,400
|
|
Select term loan
|
1,129,875
|
|
|
(9,690
|
)
|
|
(9,321
|
)
|
|
1,110,864
|
|
|
|
1,076,206
|
|
Concentra-JPM credit facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Concentra term loans
|
1,414,175
|
|
|
(2,765
|
)
|
|
(18,648
|
)
|
|
1,392,762
|
|
|
|
1,357,802
|
|
Other debt, including finance leases
|
64,331
|
|
|
—
|
|
|
(484
|
)
|
|
63,847
|
|
|
|
63,847
|
|
Total debt
|
$
|
3,338,381
|
|
|
$
|
(11,905
|
)
|
|
$
|
(33,095
|
)
|
|
$
|
3,293,381
|
|
|
|
$
|
3,222,705
|
|
Select Credit Facilities
On March 6, 2017, Select entered into a senior secured credit agreement (the “Select credit agreement”) that provided for $1.6 billion in senior secured credit facilities comprised of a $1.15 billion term loan (the “Select term loan”) and a $450.0 million revolving credit facility (the “Select revolving facility” and, together with the Select term loan, the “Select credit facilities”), including a $75.0 million sublimit for the issuance of standby letters of credit.
On August 1, 2019, Select entered into Amendment No. 3 to the Select credit agreement. Among other things, Amendment No. 3 (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 provisions of the Select revolving facility.
On December 10, 2019, Select entered into Amendment No. 4 to the Select credit agreement. Among other things, Amendment No. 4 provided for an additional $615.0 million in term loans that, along with the existing term loans, have a maturity date of March 6, 2025.
The interest rate on the Select term loan is equal to the Adjusted LIBO Rate (as defined in the Select credit agreement) plus a percentage ranging from 2.25% to 2.50%, or the Alternate Base Rate (as defined in the Select credit agreement) plus a percentage ranging from 1.25% to 1.50%, in each case subject to a specified leverage ratio. The interest rate on the loans outstanding under the Select revolving facility is equal to the Adjusted LIBO Rate plus a percentage ranging from 2.25% to 2.50%, or the Alternate Base Rate plus a percentage ranging from 1.25% to 1.50%, in each case subject to a specified leverage ratio.
The Select revolving facility requires Select to maintain a leverage ratio, as specified in the Select credit agreement, not to exceed 7.00 to 1.00. As of December 31, 2019, Select’s leverage ratio was 4.31 to 1.00.
Borrowings under the Select credit facilities are guaranteed by Holdings and substantially all of Select’s current domestic subsidiaries, other than certain non-guarantor subsidiaries including Concentra and its subsidiaries, and will be guaranteed by substantially all of Select’s future domestic subsidiaries. Borrowings under the Select credit facilities are secured by substantially all of Select’s existing and future property and assets and by a pledge of Select’s capital stock, the capital stock of Select’s domestic subsidiaries, other than certain non-guarantor subsidiaries including Concentra and its subsidiaries, and up to 65% of the capital stock of Select’s foreign subsidiaries held directly by Select or a domestic subsidiary.
At December 31, 2019, Select had $411.7 million of availability under the Select revolving facility after giving effect to $38.3 million of outstanding letters of credit. The Select revolving facility is due March 6, 2024. As of December 31, 2019, the applicable interest rate for the Select term loan was the Adjusted LIBO Rate plus 2.50% or the Alternate Base Rate plus 1.50%. The applicable interest rate for the Select revolving facility was the Adjusted LIBO Rate plus 2.50% or the Alternate Base Rate plus 1.50%.
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
9.
|
Long-Term Debt and Notes Payable (Continued)
|
Prepayment of Borrowings
Select will be required to prepay borrowings under the Select credit facilities with (i) the net cash proceeds received from non-ordinary course asset sales or other dispositions, or as a result of a casualty or condemnation, subject to reinvestment provisions and other customary carveouts and, to the extent required, the payment of certain indebtedness secured by liens having priority over the debt under the Select credit facilities or subject to a first lien intercreditor agreement, (ii) the net cash proceeds received from the issuance of debt obligations other than certain permitted debt obligations, and (iii) a percentage of excess cash flow (as defined in the Select credit agreement) based on Select’s leverage ratio, as specified in the Select credit agreement.
For the year ended December 31, 2019, the Select credit agreement will require a prepayment of borrowings of 25% of excess cash flow. This will result in a prepayment of approximately $40.0 million. The Company expects to have the borrowing capacity and intends to use borrowings under the Select revolving facility, which has a maturity date of March 6, 2024, to make all or a portion of the required prepayment during the quarter ended March 31, 2020; accordingly, the prepayment is reflected in long-term debt, net of current portion on the consolidated balance sheet as of December 31, 2019. Upon prepayment, Select will not be required to make the quarterly amortization payments on the Select term loan, as specified in the Select credit agreement, until September 30, 2023.
For the year ended December 31, 2018, the Select credit agreement required a prepayment of borrowings of approximately $98.8 million as a result of excess cash flow. The prepayment was made in February 2019. The Company was not required to make a prepayment of borrowings as a result of excess cash flow for the year ended December 31, 2017.
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 received on August 1, 2019 (as described above), in part to (i) redeem in full the $710.0 million aggregate principal amount of the 6.375% senior notes at the redemption price of 100.0% of the principal amount plus accrued and unpaid interest on August 30, 2019, (ii) repay in full the outstanding borrowings under the Select revolving facility, and (iii) pay related fees and expenses associated with the financing.
On December 10, 2019, Select issued and sold $675.0 million aggregate principal amount of 6.250% senior notes, due August 15, 2026, as additional notes under the indenture pursuant to which it previously issued $550.0 million aggregate principal amount of senior notes. The additional senior notes were issued at 106.00% of the aggregate principal amount.
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, including Concentra and its subsidiaries.
Prior to August 15, 2022, Select may redeem some or all of the senior notes by paying a “make-whole” premium. On or after August 15, 2022, Select may redeem some or all of the senior notes 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.
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
9.
|
Long-Term Debt and Notes Payable (Continued)
|
Concentra-JPM Credit Facilities
On June 1, 2015, Concentra Inc. entered into a first lien credit agreement (the “Concentra-JPM first lien credit agreement”) that provided for first lien term loans (the “Concentra-JPM first lien term loan”) and a revolving credit facility (the “Concentra-JPM revolving facility” and, together with the Concentra-JPM first lien term loan, the “Concentra-JPM credit facilities”).
On April 8, 2019, Concentra Inc. entered into Amendment No. 5 to the Concentra-JPM first lien credit agreement. Among other things, Amendment No. 5 (i) extended the maturity date of the Concentra-JPM revolving facility from June 1, 2020 to June 1, 2021 and (ii) increased the aggregate commitments available under the Concentra-JPM revolving facility from $75.0 million to $100.0 million.
On September 20, 2019, Concentra Inc. entered into Amendment No. 6 to the Concentra-JPM first lien credit agreement. Among other things, Amendment No. 6 (i) provided for an additional $100.0 million in term loans that, along with the existing first lien term loans, had a maturity date of June 1, 2022 and (ii) extended the maturity date of the Concentra-JPM revolving facility from June 1, 2021 to March 1, 2022. Concentra Inc. used the incremental borrowings under the Concentra-JPM first lien credit agreement to prepay in full the $240.0 million term loan outstanding under Concentra Inc.’s then-outstanding second lien credit agreement, plus a prepayment premium equal to 1.00% of the principal amount prepaid, on September 20, 2019.
On December 10, 2019, Concentra Inc. repaid in full the $1,240.3 million Concentra-JPM first lien term loan outstanding under the Concentra-JPM first lien credit agreement. Concentra Inc. continues to have availability of up to $100.0 million under the Concentra-JPM revolving facility, which matures March 1, 2022.
The interest rate on the loans outstanding under the Concentra-JPM revolving facility is equal to the Adjusted LIBO Rate (as defined in the Concentra-JPM first lien credit agreement) plus a percentage ranging from 2.25% to 2.50%, or the Alternate Base Rate (as defined in the Concentra-JPM first lien credit agreement) plus a percentage ranging from 1.25% to 1.50%, in each case subject to a first lien net leverage ratio, as specified in the Concentra-JPM first lien credit agreement.
The Concentra-JPM first lien credit agreement requires Concentra Inc. to maintain a leverage ratio, as specified in the Concentra-JPM first lien credit agreement, of 5.75 to 1.00 which is tested quarterly, but only if Revolving Exposure (as defined in the Concentra-JPM first lien credit agreement) exceeds 30% of Revolving Commitments (as defined in the Concentra-JPM first lien credit agreement) on such day.
The borrowings under the Concentra-JPM first lien credit agreement are guaranteed, on a first lien basis by Concentra Holdings, Inc., Concentra Inc., and certain domestic subsidiaries of Concentra Inc. (subject, in each case, to permitted liens). These borrowings will also be guaranteed by certain of Concentra Inc.’s future domestic subsidiaries. The borrowings are secured by substantially all of Concentra Inc.’s and its domestic subsidiaries’ existing and future property and assets and by a pledge of Concentra Inc.’s capital stock, the capital stock of certain of Concentra Inc.’s domestic subsidiaries and up to 65% of the voting capital stock and 100% of the non-voting capital stock of Concentra Inc.’s foreign subsidiaries, if any.
At December 31, 2019, Concentra Inc. had $85.7 million of availability under the Concentra-JPM revolving facility after giving effect to $14.3 million of outstanding letters of credit. At December 31, 2019, the applicable interest rate for the Concentra-JPM revolving facility was the Adjusted LIBO Rate plus 2.50% or the Alternate Base Rate plus 1.50%. The Concentra-JPM revolving facility matures on March 1, 2022.
Prepayment of Borrowings
For the year ended December 31, 2018, the Concentra-JPM first lien credit agreement required a prepayment of borrowings of $33.9 million as a result of excess cash flow. The prepayment was made in February 2019. Concentra Inc. was not required to make a prepayment of borrowings as a result of excess cash flow from the year ended December 31, 2017.
Fair Value
The Company considers the inputs in the valuation process to be Level 2 in the fair value hierarchy for its senior notes and the Select and Concentra-JPM 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.
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
9.
|
Long-Term Debt and Notes Payable (Continued)
|
The fair values of the Select and Concentra-JPM credit facilities were based on quoted market prices for this debt in the syndicated loan market. The fair value of the senior notes was based on quoted market prices. The carrying amount of other debt, principally short-term notes payable, approximates fair value.
Loss on Early Retirement of Debt
During the year ended December 31, 2017, the Company refinanced the Select credit facilities which resulted in a loss on early retirement of debt of $19.7 million. The loss on early retirement of debt consisted of $6.5 million of debt extinguishment losses and $13.2 million of debt modification losses.
During the year ended December 31, 2018, the Company refinanced the Select and Concentra-JPM credit facilities which resulted in losses on early retirement of debt of $14.2 million. The losses on early retirement of debt consisted of $3.0 million of debt extinguishment losses and $11.2 million of debt modification losses.
During the year ended December 31, 2019, the Company refinanced its senior notes and the Select and Concentra-JPM credit facilities which resulted in losses on early retirement of debt of $38.1 million. The losses on early retirement of debt consisted of $22.1 million of debt extinguishment losses and $16.0 million of debt modification losses.
|
|
10.
|
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 is funding this program with cash on hand and borrowings under the Select revolving facility.
Holdings did not repurchase shares under the common stock repurchase program during the years ended December 31, 2017 and 2018. During the year ended December 31, 2019, Holdings repurchased 2,165,221 shares at a cost of approximately $33.2 million. The common stock repurchase program has available capacity of $152.1 million as of December 31, 2019.
The Company identifies its segments according to how the chief operating decision maker evaluates financial performance and allocates resources. The Company’s reportable segments consist of the critical illness recovery hospital segment, rehabilitation hospital segment, outpatient rehabilitation segment, and Concentra segment. Other activities include the Company’s corporate shared services, certain investments, and employee leasing services provided to related parties affiliated through the Company’s equity method investments. The accounting policies of the segments are the same as those described in the summary of significant accounting policies.
The Company evaluates performance of the segments based on Adjusted EBITDA. For the years ended December 31, 2017, 2018, and 2019, 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.
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
11.
|
Segment Information (Continued)
|
The following tables summarize selected financial data for the Company’s reportable segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2017
|
|
Critical Illness Recovery Hospital
|
|
Rehabilitation Hospital
|
|
Outpatient
Rehabilitation
|
|
Concentra
|
|
Other
|
|
Total
|
|
(in thousands)
|
Net operating revenues(1)
|
$
|
1,725,022
|
|
|
$
|
509,108
|
|
|
$
|
960,902
|
|
|
$
|
1,013,224
|
|
|
$
|
156,989
|
|
|
$
|
4,365,245
|
|
Adjusted EBITDA
|
252,679
|
|
|
90,041
|
|
|
132,533
|
|
|
157,561
|
|
|
(94,822
|
)
|
|
537,992
|
|
Total assets
|
1,848,783
|
|
|
868,517
|
|
|
954,661
|
|
|
1,340,919
|
|
|
114,286
|
|
|
5,127,166
|
|
Capital expenditures
|
49,720
|
|
|
96,477
|
|
|
27,721
|
|
|
28,912
|
|
|
30,413
|
|
|
233,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2018
|
|
Critical Illness Recovery Hospital
|
|
Rehabilitation Hospital
|
|
Outpatient
Rehabilitation
|
|
Concentra(2)
|
|
Other
|
|
Total
|
|
(in thousands)
|
Net operating revenues(1)
|
$
|
1,753,584
|
|
|
$
|
583,745
|
|
|
$
|
995,794
|
|
|
$
|
1,557,673
|
|
|
$
|
190,462
|
|
|
$
|
5,081,258
|
|
Adjusted EBITDA
|
243,015
|
|
|
108,927
|
|
|
142,005
|
|
|
251,977
|
|
|
(100,769
|
)
|
|
645,155
|
|
Total assets
|
1,771,605
|
|
|
894,192
|
|
|
1,002,819
|
|
|
2,178,868
|
|
|
116,781
|
|
|
5,964,265
|
|
Capital expenditures
|
40,855
|
|
|
42,389
|
|
|
30,553
|
|
|
42,205
|
|
|
11,279
|
|
|
167,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2019
|
|
Critical Illness Recovery Hospitals
|
|
Rehabilitation Hospitals
|
|
Outpatient
Rehabilitation
|
|
Concentra
|
|
Other
|
|
Total
|
|
(in thousands)
|
Net operating revenues
|
$
|
1,836,518
|
|
|
$
|
670,971
|
|
|
$
|
1,046,011
|
|
|
$
|
1,628,817
|
|
|
$
|
271,605
|
|
|
$
|
5,453,922
|
|
Adjusted EBITDA
|
254,868
|
|
|
135,857
|
|
|
151,831
|
|
|
276,482
|
|
|
(108,130
|
)
|
|
710,908
|
|
Total assets
|
2,099,833
|
|
|
1,127,028
|
|
|
1,289,190
|
|
|
2,372,187
|
|
|
452,050
|
|
|
7,340,288
|
|
Capital expenditures
|
45,573
|
|
|
27,216
|
|
|
33,628
|
|
|
44,101
|
|
|
6,608
|
|
|
157,126
|
|
A reconciliation of Adjusted EBITDA to income before income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2017
|
|
Critical Illness Recovery Hospital
|
|
Rehabilitation Hospital
|
|
Outpatient
Rehabilitation
|
|
Concentra
|
|
Other
|
|
Total
|
|
(in thousands)
|
Adjusted EBITDA
|
$
|
252,679
|
|
|
$
|
90,041
|
|
|
$
|
132,533
|
|
|
$
|
157,561
|
|
|
$
|
(94,822
|
)
|
|
|
|
Depreciation and amortization
|
(45,743
|
)
|
|
(20,176
|
)
|
|
(24,607
|
)
|
|
(61,945
|
)
|
|
(7,540
|
)
|
|
|
|
Stock compensation expense
|
—
|
|
|
—
|
|
|
—
|
|
|
(993
|
)
|
|
(18,291
|
)
|
|
|
|
U.S. HealthWorks acquisition costs
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,819
|
)
|
|
—
|
|
|
|
Income (loss) from operations
|
$
|
206,936
|
|
|
$
|
69,865
|
|
|
$
|
107,926
|
|
|
$
|
91,804
|
|
|
$
|
(120,653
|
)
|
|
$
|
355,878
|
|
Loss on early retirement of debt
|
|
|
|
|
|
|
|
|
|
|
(19,719
|
)
|
Equity in earnings of unconsolidated subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,054
|
|
Loss on sale of businesses
|
|
|
|
|
|
|
|
|
|
|
(49
|
)
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(154,703
|
)
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
202,461
|
|
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
11.
|
Segment Information (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2018
|
|
Critical Illness Recovery Hospital
|
|
Rehabilitation Hospital
|
|
Outpatient
Rehabilitation
|
|
Concentra(2)
|
|
Other
|
|
Total
|
|
(in thousands)
|
Adjusted EBITDA
|
$
|
243,015
|
|
|
$
|
108,927
|
|
|
$
|
142,005
|
|
|
$
|
251,977
|
|
|
$
|
(100,769
|
)
|
|
|
|
Depreciation and amortization
|
(45,797
|
)
|
|
(24,101
|
)
|
|
(27,195
|
)
|
|
(95,521
|
)
|
|
(9,041
|
)
|
|
|
|
Stock compensation expense
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,883
|
)
|
|
(20,443
|
)
|
|
|
|
U.S. HealthWorks acquisition costs
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,895
|
)
|
|
—
|
|
|
|
|
Income (loss) from operations
|
$
|
197,218
|
|
|
$
|
84,826
|
|
|
$
|
114,810
|
|
|
$
|
150,678
|
|
|
$
|
(130,253
|
)
|
|
$
|
417,279
|
|
Loss on early retirement of debt
|
|
|
|
|
|
|
|
|
|
|
(14,155
|
)
|
Equity in earnings of unconsolidated subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,905
|
|
Gain on sale of businesses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,016
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(198,493
|
)
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
235,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2019
|
|
Critical Illness Recovery Hospital
|
|
Rehabilitation Hospital
|
|
Outpatient
Rehabilitation
|
|
Concentra
|
|
Other
|
|
Total
|
|
(in thousands)
|
Adjusted EBITDA
|
$
|
254,868
|
|
|
$
|
135,857
|
|
|
$
|
151,831
|
|
|
$
|
276,482
|
|
|
$
|
(108,130
|
)
|
|
|
|
Depreciation and amortization
|
(50,763
|
)
|
|
(27,322
|
)
|
|
(28,301
|
)
|
|
(96,807
|
)
|
|
(9,383
|
)
|
|
|
|
Stock compensation expense
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,069
|
)
|
|
(23,382
|
)
|
|
|
|
Income (loss) from operations
|
$
|
204,105
|
|
|
$
|
108,535
|
|
|
$
|
123,530
|
|
|
$
|
176,606
|
|
|
$
|
(140,895
|
)
|
|
$
|
471,881
|
|
Loss on early retirement of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(38,083
|
)
|
Equity in earnings of unconsolidated subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,989
|
|
Gain on sale of businesses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,532
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(200,570
|
)
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
264,749
|
|
_______________________________________________________________________________
|
|
(1)
|
Prior to 2019, the financial results of employee leasing services provided to related parties affiliated through the Company’s equity method investments were included with the Company’s reportable segments. These results are now reported as part of the Company’s other activities. For the years ended December 31, 2017 and 2018, net operating revenues were conformed to reflect the current presentation.
|
(2) The Concentra segment includes the operating results of U.S. HealthWorks beginning February 1, 2018.
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
12.
|
Revenue from Contracts with Customers
|
The following tables disaggregate the Company’s net operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2017
|
|
Critical Illness Recovery Hospital
|
|
Rehabilitation Hospital
|
|
Outpatient
Rehabilitation
|
|
Concentra
|
|
Other
|
|
Total
|
|
(in thousands)
|
Patient service revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Medicare
|
$
|
903,503
|
|
|
$
|
259,221
|
|
|
$
|
148,403
|
|
|
$
|
2,128
|
|
|
$
|
—
|
|
|
$
|
1,313,255
|
|
Non-Medicare
|
810,723
|
|
|
207,196
|
|
|
739,531
|
|
|
1,002,787
|
|
|
—
|
|
|
2,760,237
|
|
Total patient services revenues
|
1,714,226
|
|
|
466,417
|
|
|
887,934
|
|
|
1,004,915
|
|
|
—
|
|
|
4,073,492
|
|
Other revenues
|
10,796
|
|
|
42,691
|
|
|
72,968
|
|
|
8,309
|
|
|
156,989
|
|
|
291,753
|
|
Total net operating revenues
|
$
|
1,725,022
|
|
|
$
|
509,108
|
|
|
$
|
960,902
|
|
|
$
|
1,013,224
|
|
|
$
|
156,989
|
|
|
$
|
4,365,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2018
|
|
Critical Illness Recovery Hospital
|
|
Rehabilitation Hospital
|
|
Outpatient
Rehabilitation
|
|
Concentra
|
|
Other
|
|
Total
|
|
(in thousands)
|
Patient service revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Medicare
|
$
|
893,429
|
|
|
$
|
293,913
|
|
|
$
|
161,054
|
|
|
$
|
2,168
|
|
|
$
|
—
|
|
|
$
|
1,350,564
|
|
Non-Medicare
|
847,447
|
|
|
254,215
|
|
|
762,247
|
|
|
1,545,852
|
|
|
—
|
|
|
3,409,761
|
|
Total patient services revenues
|
1,740,876
|
|
|
548,128
|
|
|
923,301
|
|
|
1,548,020
|
|
|
—
|
|
|
4,760,325
|
|
Other revenues
|
12,708
|
|
|
35,617
|
|
|
72,493
|
|
|
9,653
|
|
|
190,462
|
|
|
320,933
|
|
Total net operating revenues
|
$
|
1,753,584
|
|
|
$
|
583,745
|
|
|
$
|
995,794
|
|
|
$
|
1,557,673
|
|
|
$
|
190,462
|
|
|
$
|
5,081,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2019
|
|
Critical Illness Recovery Hospital
|
|
Rehabilitation Hospital
|
|
Outpatient
Rehabilitation
|
|
Concentra
|
|
Other
|
|
Total
|
|
(in thousands)
|
Patient service revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Medicare
|
$
|
907,963
|
|
|
$
|
332,514
|
|
|
$
|
171,690
|
|
|
$
|
1,965
|
|
|
$
|
—
|
|
|
$
|
1,414,132
|
|
Non-Medicare
|
916,650
|
|
|
300,113
|
|
|
794,288
|
|
|
1,615,529
|
|
|
—
|
|
|
3,626,580
|
|
Total patient services revenues
|
1,824,613
|
|
|
632,627
|
|
|
965,978
|
|
|
1,617,494
|
|
|
—
|
|
|
5,040,712
|
|
Other revenues
|
11,905
|
|
|
38,344
|
|
|
80,033
|
|
|
11,323
|
|
|
271,605
|
|
|
413,210
|
|
Total net operating revenues
|
$
|
1,836,518
|
|
|
$
|
670,971
|
|
|
$
|
1,046,011
|
|
|
$
|
1,628,817
|
|
|
$
|
271,605
|
|
|
$
|
5,453,922
|
|
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
13.
|
Stock-based Compensation
|
Holdings’ equity incentive plan provides for the issuance of stock options and restricted stock awards. The equity plan allows for the issuance of 7,735,628 awards, as adjusted for forfeited restricted stock and stock options awards through December 31, 2019. As of December 31, 2019, Holdings has capacity to issue 1,727,405 restricted stock and stock option awards under the equity plan. The equity plan allows for authorized but previously unissued shares or shares previously issued and outstanding and reacquired by Holdings to satisfy these awards.
The Company measures the compensation costs of stock-based compensation arrangements based on the grant-date fair value and recognizes the costs over the period during which employees are required to provide services. Restricted stock awards are valued by using the closing market price of its stock on the date of grant. These restricted stock awards generally vest over three to four years. Stock options are valued using the Black-Scholes option-pricing model. Forfeitures are recognized as they occur.
Transactions related to restricted stock awards are as follows:
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average
Grant Date
Fair Value
|
|
(share amounts in thousands)
|
Unvested balance, January 1, 2019
|
4,450
|
|
|
$
|
15.68
|
|
Granted
|
1,500
|
|
|
16.60
|
|
Vested
|
(1,300
|
)
|
|
11.97
|
|
Forfeited
|
(43
|
)
|
|
16.09
|
|
Unvested balance, December 31, 2019
|
4,607
|
|
|
$
|
17.03
|
|
For the years ended December 31, 2017, 2018, and 2019, the weighted average grant date fair values of restricted stock awards granted were $15.84, $19.72, and $16.60, respectively. For the years ended December 31, 2017, 2018, and 2019, the fair values of restricted stock awards vested were $17.1 million, $19.1 million, and $15.6 million, respectively.
As of December 31, 2019, the Company did not have any stock options outstanding or exercisable. There were no options granted or canceled during the year ended December 31, 2019. During the year ended December 31, 2019, 105,000 options were exercised, which had a weighted average exercise price of $9.18. For the years ended December 31, 2017, 2018, and 2019, the intrinsic values of options exercised were $1.6 million, $1.8 million, and $0.7 million, respectively.
Stock compensation expense recognized by the Company was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2017
|
|
2018
|
|
2019
|
|
(in thousands)
|
Stock compensation expense:
|
|
|
|
|
|
|
|
|
Included in general and administrative
|
$
|
15,706
|
|
|
$
|
17,604
|
|
|
$
|
20,334
|
|
Included in cost of services
|
3,578
|
|
|
5,722
|
|
|
6,117
|
|
Total
|
$
|
19,284
|
|
|
$
|
23,326
|
|
|
$
|
26,451
|
|
Stock compensation expense based on current stock-based awards for each of the next five years is estimated to be as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
(in thousands)
|
Stock compensation expense
|
$
|
24,381
|
|
|
$
|
16,031
|
|
|
$
|
8,117
|
|
|
$
|
1,267
|
|
|
$
|
19
|
|
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The components of the Company’s income tax expense for the years ended December 31, 2017, 2018, and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2017
|
|
2018
|
|
2019
|
|
(in thousands)
|
Current income tax expense:
|
|
|
|
|
|
|
|
|
Federal
|
$
|
45,809
|
|
|
$
|
36,072
|
|
|
$
|
55,822
|
|
State and local
|
8,331
|
|
|
15,321
|
|
|
15,331
|
|
Total current income tax expense
|
54,140
|
|
|
51,393
|
|
|
71,153
|
|
Deferred income tax expense (benefit)
|
(72,324
|
)
|
|
7,217
|
|
|
(7,435
|
)
|
Total income tax expense (benefit)
|
$
|
(18,184
|
)
|
|
$
|
58,610
|
|
|
$
|
63,718
|
|
Reconciliations of the statutory federal income tax rate to the effective income tax rate are as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2017
|
|
2018
|
|
2019
|
Federal income tax at statutory rate
|
35.0
|
%
|
|
21.0
|
%
|
|
21.0
|
%
|
State and local income taxes, less federal income tax benefit
|
3.7
|
|
|
5.0
|
|
|
4.2
|
|
Permanent differences
|
1.7
|
|
|
2.1
|
|
|
1.7
|
|
Valuation allowance
|
(7.3
|
)
|
|
0.5
|
|
|
0.5
|
|
Uncertain tax positions
|
(0.6
|
)
|
|
(0.8
|
)
|
|
(0.1
|
)
|
Non-controlling interest
|
0.5
|
|
|
(2.1
|
)
|
|
(2.9
|
)
|
Stock-based compensation
|
(1.3
|
)
|
|
(2.2
|
)
|
|
(0.7
|
)
|
Deferred income taxes - state income tax rate adjustment
|
(2.8
|
)
|
|
0.4
|
|
|
0.8
|
|
Deferred income taxes - tax legislation rate adjustment
|
(37.5
|
)
|
|
—
|
|
|
—
|
|
Other
|
(0.4
|
)
|
|
1.0
|
|
|
(0.4
|
)
|
Effective income tax rate
|
(9.0
|
)%
|
|
24.9
|
%
|
|
24.1
|
%
|
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
14.
|
Income Taxes (Continued)
|
The Company’s deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2019
|
|
(in thousands)
|
Deferred tax assets
|
|
|
|
|
|
Allowance for doubtful accounts
|
$
|
10,313
|
|
|
$
|
13,097
|
|
Compensation and benefit-related accruals
|
51,900
|
|
|
55,300
|
|
Professional malpractice liability insurance
|
13,644
|
|
|
13,753
|
|
Deferred revenue
|
209
|
|
|
274
|
|
Federal and state net operating loss and state tax credit carryforwards
|
40,163
|
|
|
38,933
|
|
Interest limitation carryforward
|
4,675
|
|
|
4,943
|
|
Stock awards
|
5,695
|
|
|
6,251
|
|
Equity investments
|
2,055
|
|
|
2,914
|
|
Operating lease liabilities
|
—
|
|
|
267,513
|
|
Other
|
3,271
|
|
|
2,344
|
|
Deferred tax assets
|
$
|
131,925
|
|
|
$
|
405,322
|
|
Valuation allowance
|
(17,893
|
)
|
|
(18,461
|
)
|
Deferred tax assets, net of valuation allowance
|
$
|
114,032
|
|
|
$
|
386,861
|
|
Deferred tax liabilities
|
|
|
|
|
|
Deferred income
|
$
|
(13,891
|
)
|
|
$
|
(9,190
|
)
|
Investment in unconsolidated affiliates
|
(5,653
|
)
|
|
(7,498
|
)
|
Depreciation and amortization
|
(217,950
|
)
|
|
(225,079
|
)
|
Deferred financing costs
|
(8,324
|
)
|
|
(6,250
|
)
|
Operating lease right-of-use assets
|
—
|
|
|
(263,818
|
)
|
Other
|
(3,488
|
)
|
|
(3,546
|
)
|
Deferred tax liabilities
|
$
|
(249,306
|
)
|
|
$
|
(515,381
|
)
|
Deferred tax liabilities, net of deferred tax assets
|
$
|
(135,274
|
)
|
|
$
|
(128,520
|
)
|
The Company’s deferred tax assets and liabilities are included in the consolidated balance sheet captions as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2019
|
|
(in thousands)
|
Other assets
|
$
|
18,621
|
|
|
$
|
19,738
|
|
Non-current deferred tax liability
|
(153,895
|
)
|
|
(148,258
|
)
|
|
$
|
(135,274
|
)
|
|
$
|
(128,520
|
)
|
As of December 31, 2018 and 2019, the Company’s valuation allowance is primarily attributable to the uncertainty regarding the realization of state net operating losses and other net deferred tax assets of loss entities. The state net deferred tax assets have a full valuation allowance recorded for entities that have a cumulative history of pre-tax losses (current year in addition to the two prior years).
For the year ended December 31, 2018, the Company recorded a net valuation allowance increase of $4.9 million. This increase was comprised of a $3.9 million valuation allowance recognized on net operating losses acquired and recorded as part of U.S. HealthWorks’ opening balance sheet, and a $1.0 million valuation allowance recognized as a result of a net change in state net operating losses for the year ended December 31, 2018. For the year ended December 31, 2019, the Company recorded a net valuation allowance increase of $0.6 million which was the result of a net change in state net operating losses. The changes in the Company’s valuation allowance were recognized as a result of management’s reassessment of the amount of its deferred tax assets that are more likely than not to be realized.
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
14.
|
Income Taxes (Continued)
|
At December 31, 2018 and 2019, the Company’s net deferred tax liabilities of approximately $135.3 million and $128.5 million, respectively, consist of items which have been recognized for tax reporting purposes, but which will increase tax on returns to be filed in the future. The Company has performed an assessment of positive and negative evidence regarding the realization of the net deferred tax assets. This assessment included a review of legal entities with three years of cumulative losses, estimates of projected future taxable income, the effects on future taxable income resulting from the reversal of existing deferred tax liabilities in future periods, and the impact of tax planning strategies that management would and could implement in order to keep deferred tax assets from expiring unused. Although realization is not assured, based on the Company’s assessment, it has concluded that it is more likely than not that such assets, net of the determined valuation allowance, will be realized.
The total state net operating losses are approximately $719.6 million. State net operating loss carryforwards expire and are subject to valuation allowances as follows:
|
|
|
|
|
|
|
|
|
|
State Net Operating Losses
|
|
Gross Valuation Allowance
|
|
(in thousands)
|
2020
|
$
|
17,297
|
|
|
$
|
14,100
|
|
2021
|
11,772
|
|
|
8,806
|
|
2022
|
39,319
|
|
|
33,790
|
|
2023
|
20,743
|
|
|
15,367
|
|
Thereafter through 2038
|
630,506
|
|
|
413,916
|
|
The following table sets forth the net income attributable to the Company, its common shares outstanding, and its participating securities outstanding. There were no dividends declared or contractual dividends paid for the years ended December 31, 2017, 2018, and 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
Diluted EPS
|
|
|
|
For the Year Ended December 31,
|
|
For the Year Ended December 31,
|
|
|
|
2017
|
|
2018
|
|
2019
|
|
2017
|
|
2018
|
|
2019
|
|
|
|
(in thousands)
|
|
Net income
|
|
$
|
220,645
|
|
|
$
|
176,942
|
|
|
$
|
201,031
|
|
|
$
|
220,645
|
|
|
$
|
176,942
|
|
|
$
|
201,031
|
|
|
Less: net income attributable to non-controlling interests
|
|
43,461
|
|
|
39,102
|
|
|
52,582
|
|
|
43,461
|
|
|
39,102
|
|
|
52,582
|
|
|
Net income attributable to the Company
|
|
177,184
|
|
|
137,840
|
|
|
148,449
|
|
|
177,184
|
|
|
137,840
|
|
|
148,449
|
|
|
Less: net income attributable to participating securities
|
|
5,758
|
|
|
4,551
|
|
|
4,995
|
|
|
5,751
|
|
|
4,548
|
|
|
4,994
|
|
|
Net income attributable to common shares
|
|
$
|
171,426
|
|
|
$
|
133,289
|
|
|
$
|
143,454
|
|
|
$
|
171,433
|
|
|
$
|
133,292
|
|
|
$
|
143,455
|
|
|
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
15.
|
Earnings per Share (Continued)
|
The following tables set forth the computation of EPS under the two-class method:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2017
|
|
|
Net Income Allocation
|
|
Shares(1)
|
|
Basic EPS
|
|
|
Net Income Allocation
|
|
Shares(1)
|
|
Diluted EPS
|
|
|
(in thousands, except for per share amounts)
|
Common shares
|
|
$
|
171,426
|
|
|
128,955
|
|
|
$
|
1.33
|
|
|
|
$
|
171,433
|
|
|
129,126
|
|
|
$
|
1.33
|
|
Participating securities
|
|
5,758
|
|
|
4,332
|
|
|
1.33
|
|
|
|
5,751
|
|
|
4,332
|
|
|
1.33
|
|
Total Company
|
|
$
|
177,184
|
|
|
|
|
|
|
|
$
|
177,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2018
|
|
|
Net Income Allocation
|
|
Shares(1)
|
|
Basic EPS
|
|
|
Net Income Allocation
|
|
Shares(1)
|
|
Diluted EPS
|
|
|
(in thousands, except for per share amounts)
|
Common shares
|
|
$
|
133,289
|
|
|
130,172
|
|
|
$
|
1.02
|
|
|
|
$
|
133,292
|
|
|
130,256
|
|
|
$
|
1.02
|
|
Participating securities
|
|
4,551
|
|
|
4,444
|
|
|
1.02
|
|
|
|
4,548
|
|
|
4,444
|
|
|
1.02
|
|
Total Company
|
|
$
|
137,840
|
|
|
|
|
|
|
|
$
|
137,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2019
|
|
|
Net Income Allocation
|
|
Shares(1)
|
|
Basic EPS
|
|
|
Net Income Allocation
|
|
Shares(1)
|
|
Diluted EPS
|
|
|
(in thousands, except for per share amounts)
|
Common shares
|
|
$
|
143,454
|
|
|
130,248
|
|
|
$
|
1.10
|
|
|
|
$
|
143,455
|
|
|
130,276
|
|
|
$
|
1.10
|
|
Participating securities
|
|
4,995
|
|
|
4,535
|
|
|
$
|
1.10
|
|
|
|
4,994
|
|
|
4,535
|
|
|
$
|
1.10
|
|
Total Company
|
|
$
|
148,449
|
|
|
|
|
|
|
|
$
|
148,449
|
|
|
|
|
|
_______________________________________________________________________________
(1) Represents the weighted average share count outstanding during the period.
|
|
16.
|
Commitments and Contingencies
|
Construction Commitments
At December 31, 2019, the Company had outstanding commitments under construction contracts related to new construction, improvements, and renovations totaling approximately $16.2 million.
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.
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
16.
|
Commitments and Contingencies (Continued)
|
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 $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.
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.
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
16.
|
Commitments and Contingencies (Continued)
|
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 has 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.
On January 1, 2020, Select, Welsh, Carson, Anderson & Stowe XII, L.P. (“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 for approximately $27.8 million.
These purchases were in lieu of, and 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. 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.
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
18.
|
Selected Quarterly Financial Data (Unaudited)
|
The tables below sets forth selected unaudited financial data for each quarter of the last two years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
(in thousands, except per share amounts)
|
For the year ended December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Net operating revenues
|
$
|
1,252,964
|
|
|
$
|
1,296,210
|
|
|
$
|
1,267,401
|
|
|
$
|
1,264,683
|
|
Cost of services, exclusive of depreciation and amortization
|
1,065,813
|
|
|
1,094,731
|
|
|
1,087,062
|
|
|
1,093,450
|
|
Depreciation and amortization
|
46,771
|
|
|
51,724
|
|
|
50,527
|
|
|
52,633
|
|
Income from operations
|
108,598
|
|
|
120,561
|
|
|
99,837
|
|
|
88,283
|
|
Net income
|
43,982
|
|
|
60,559
|
|
|
42,679
|
|
|
29,722
|
|
Net income attributable to Select Medical Holdings Corporation
|
33,739
|
|
|
46,511
|
|
|
32,917
|
|
|
24,673
|
|
Earnings per common share:(1)
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.25
|
|
|
$
|
0.35
|
|
|
$
|
0.24
|
|
|
$
|
0.18
|
|
Diluted
|
$
|
0.25
|
|
|
$
|
0.35
|
|
|
$
|
0.24
|
|
|
$
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
(in thousands, except per share amounts)
|
For the year ended December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Net operating revenues
|
$
|
1,324,631
|
|
|
$
|
1,361,364
|
|
|
$
|
1,393,343
|
|
|
$
|
1,374,584
|
|
Cost of services, exclusive of depreciation and amortization
|
1,132,092
|
|
|
1,150,150
|
|
|
1,183,111
|
|
|
1,175,649
|
|
Depreciation and amortization
|
52,138
|
|
|
54,993
|
|
|
52,941
|
|
|
52,504
|
|
Income from operations
|
111,724
|
|
|
124,882
|
|
|
122,906
|
|
|
112,369
|
|
Net income
|
53,344
|
|
|
59,986
|
|
|
44,030
|
|
|
43,671
|
|
Net income attributable to Select Medical Holdings Corporation
|
40,834
|
|
|
44,816
|
|
|
30,732
|
|
|
32,067
|
|
Earnings per common share:(1)
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.30
|
|
|
$
|
0.33
|
|
|
$
|
0.23
|
|
|
$
|
0.24
|
|
Diluted
|
$
|
0.30
|
|
|
$
|
0.33
|
|
|
$
|
0.23
|
|
|
$
|
0.24
|
|
_______________________________________________________________________________
|
|
(1)
|
Due to rounding, the summation of quarterly earnings per common share balances may not equal year to date equivalents.
|
The following Financial Statement Schedule along with the report thereon of PricewaterhouseCoopers LLP dated February 20, 2020, should be read in conjunction with the consolidated financial statements. Financial Statement Schedules not included in this filing have been omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.