ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Select Medical Holdings Corporation
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2020
|
ASSETS
|
|
|
|
Current Assets:
|
|
|
|
Cash and cash equivalents
|
$
|
335,882
|
|
|
$
|
577,061
|
|
Accounts receivable
|
762,677
|
|
|
896,763
|
|
Prepaid income taxes
|
18,585
|
|
|
5,686
|
|
Other current assets
|
95,848
|
|
|
114,490
|
|
Total Current Assets
|
1,212,992
|
|
|
1,594,000
|
|
Operating lease right-of-use assets
|
1,003,986
|
|
|
1,032,217
|
|
Property and equipment, net
|
998,406
|
|
|
943,420
|
|
Goodwill
|
3,391,955
|
|
|
3,379,014
|
|
Identifiable intangible assets, net
|
409,068
|
|
|
387,541
|
|
Other assets
|
323,881
|
|
|
319,207
|
|
Total Assets
|
$
|
7,340,288
|
|
|
$
|
7,655,399
|
|
LIABILITIES AND EQUITY
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
Current operating lease liabilities
|
$
|
207,950
|
|
|
$
|
220,413
|
|
Current portion of long-term debt and notes payable
|
25,167
|
|
|
12,621
|
|
Accounts payable
|
145,731
|
|
|
177,087
|
|
Accrued payroll
|
183,754
|
|
|
224,876
|
|
Accrued vacation
|
124,111
|
|
|
132,811
|
|
Accrued interest
|
33,853
|
|
|
29,240
|
|
Accrued other
|
191,076
|
|
|
228,948
|
|
Government advances (Note 22)
|
—
|
|
|
321,807
|
|
Unearned government assistance (Note 22)
|
—
|
|
|
82,607
|
|
Income taxes payable
|
2,638
|
|
|
7,956
|
|
Total Current Liabilities
|
914,280
|
|
|
1,438,366
|
|
Non-current operating lease liabilities
|
852,897
|
|
|
875,367
|
|
Long-term debt, net of current portion
|
3,419,943
|
|
|
3,389,398
|
|
Non-current deferred tax liability
|
148,258
|
|
|
132,421
|
|
Other non-current liabilities
|
101,334
|
|
|
168,703
|
|
Total Liabilities
|
5,436,712
|
|
|
6,004,255
|
|
Commitments and contingencies (Note 21)
|
|
|
|
Redeemable non-controlling interests
|
974,541
|
|
|
398,171
|
|
Stockholders’ Equity:
|
|
|
|
Common stock, $0.001 par value, 700,000,000 shares authorized, 134,328,112 and 134,850,735 shares issued and outstanding at 2019 and 2020, respectively
|
134
|
|
|
135
|
|
Capital in excess of par
|
491,038
|
|
|
509,128
|
|
Retained earnings
|
279,800
|
|
|
553,244
|
|
Accumulated other comprehensive loss
|
—
|
|
|
(2,027)
|
|
Total Stockholders’ Equity
|
770,972
|
|
|
1,060,480
|
|
Non-controlling interests
|
158,063
|
|
|
192,493
|
|
Total Equity
|
929,035
|
|
|
1,252,973
|
|
Total Liabilities and Equity
|
$
|
7,340,288
|
|
|
$
|
7,655,399
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Select Medical Holdings Corporation
Consolidated Statements of Operations
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2018
|
|
2019
|
|
2020
|
|
Revenue
|
$
|
5,081,258
|
|
|
$
|
5,453,922
|
|
|
$
|
5,531,713
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
Cost of services, exclusive of depreciation and amortization
|
4,341,056
|
|
|
4,641,002
|
|
|
4,710,372
|
|
|
General and administrative
|
121,268
|
|
|
128,463
|
|
|
138,037
|
|
|
Depreciation and amortization
|
201,655
|
|
|
212,576
|
|
|
205,659
|
|
|
Total costs and expenses
|
4,663,979
|
|
|
4,982,041
|
|
|
5,054,068
|
|
|
Other operating income (Note 22)
|
—
|
|
|
—
|
|
|
90,012
|
|
|
Income from operations
|
417,279
|
|
|
471,881
|
|
|
567,657
|
|
|
Other income and expense:
|
|
|
|
|
|
|
Loss on early retirement of debt
|
(14,155)
|
|
|
(38,083)
|
|
|
—
|
|
|
Equity in earnings of unconsolidated subsidiaries
|
21,905
|
|
|
24,989
|
|
|
29,440
|
|
|
Gain on sale of businesses
|
9,016
|
|
|
6,532
|
|
|
12,387
|
|
|
Interest expense
|
(198,493)
|
|
|
(200,570)
|
|
|
(153,011)
|
|
|
Income before income taxes
|
235,552
|
|
|
264,749
|
|
|
456,473
|
|
|
Income tax expense
|
58,610
|
|
|
63,718
|
|
|
111,867
|
|
|
Net income
|
176,942
|
|
|
201,031
|
|
|
344,606
|
|
|
Less: Net income attributable to non-controlling interests
|
39,102
|
|
|
52,582
|
|
|
85,611
|
|
|
Net income attributable to Select Medical Holdings Corporation
|
$
|
137,840
|
|
|
$
|
148,449
|
|
|
$
|
258,995
|
|
|
Earnings per common share (Note 20):
|
|
|
|
|
|
|
Basic
|
$
|
1.02
|
|
|
$
|
1.10
|
|
|
$
|
1.93
|
|
|
Diluted
|
$
|
1.02
|
|
|
$
|
1.10
|
|
|
$
|
1.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Select Medical Holdings Corporation
Consolidated Statements of Comprehensive Income
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2018
|
|
2019
|
|
2020
|
|
Net income
|
176,942
|
|
|
201,031
|
|
|
344,606
|
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
Loss on interest rate cap cash flow hedge, net of tax effect of $705 thousand
|
—
|
|
|
—
|
|
|
(2,027)
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
176,942
|
|
|
201,031
|
|
|
342,579
|
|
|
Less: Comprehensive income attributable to non-controlling interests
|
39,102
|
|
|
52,582
|
|
|
85,611
|
|
|
Comprehensive income attributable to Select Medical Holdings Corporation
|
$
|
137,840
|
|
|
$
|
148,449
|
|
|
$
|
256,968
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Select Medical Holdings Corporation
Consolidated Statements of Changes in Equity and Income
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
Common
Stock
Issued
|
|
Common
Stock
Par Value
|
|
Capital in
Excess
of Par
|
|
Retained
Earnings
|
|
Accumulated Other Comprehensive Loss
|
|
Total
Stockholders’
Equity
|
|
Non-controlling
Interests
|
|
Total
Equity
|
Balance at December 31, 2017
|
|
|
|
|
134,115
|
|
|
$
|
134
|
|
|
$
|
463,499
|
|
|
$
|
359,735
|
|
|
$
|
—
|
|
|
$
|
823,368
|
|
|
$
|
109,236
|
|
|
$
|
932,604
|
|
Net income attributable to Select Medical Holdings Corporation
|
|
|
|
|
|
|
|
|
|
|
137,840
|
|
|
|
|
137,840
|
|
|
|
|
137,840
|
|
Net income attributable to non-controlling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
11,327
|
|
|
11,327
|
|
Issuance of restricted stock
|
|
|
|
|
1,491
|
|
|
1
|
|
|
(1)
|
|
|
|
|
|
|
—
|
|
|
|
|
—
|
|
Forfeitures of unvested restricted stock
|
|
|
|
|
(168)
|
|
|
0
|
|
|
0
|
|
|
|
|
|
|
—
|
|
|
|
|
—
|
|
Vesting of restricted stock
|
|
|
|
|
|
|
|
|
20,443
|
|
|
|
|
|
|
20,443
|
|
|
|
|
20,443
|
|
Repurchase of common shares
|
|
|
|
|
(357)
|
|
|
0
|
|
|
(3,728)
|
|
|
(3,109)
|
|
|
|
|
(6,837)
|
|
|
|
|
(6,837)
|
|
Exercise of stock options
|
|
|
|
|
185
|
|
|
0
|
|
|
1,722
|
|
|
|
|
|
|
1,722
|
|
|
|
|
1,722
|
|
Issuance and exchange of non-controlling interests
|
|
|
|
|
|
|
|
|
1,553
|
|
|
74,341
|
|
|
|
|
75,894
|
|
|
1,921
|
|
|
77,815
|
|
Distributions to and purchases of non-controlling interests
|
|
|
|
|
|
|
|
|
(932)
|
|
|
(83,617)
|
|
|
|
|
(84,549)
|
|
|
(10,839)
|
|
|
(95,388)
|
|
Redemption adjustment on non-controlling interests
|
|
|
|
|
|
|
|
|
|
|
(164,476)
|
|
|
|
|
(164,476)
|
|
|
|
|
(164,476)
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
(363)
|
|
|
|
|
(363)
|
|
|
1,553
|
|
|
1,190
|
|
Balance at December 31, 2018
|
|
|
|
|
135,266
|
|
|
$
|
135
|
|
|
$
|
482,556
|
|
|
$
|
320,351
|
|
|
$
|
—
|
|
|
$
|
803,042
|
|
|
$
|
113,198
|
|
|
$
|
916,240
|
|
Net income attributable to Select Medical Holdings Corporation
|
|
|
|
|
|
|
|
|
|
|
148,449
|
|
|
|
|
148,449
|
|
|
|
|
148,449
|
|
Net income attributable to non-controlling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
26,626
|
|
|
26,626
|
|
Issuance of restricted stock
|
|
|
|
|
1,500
|
|
|
2
|
|
|
(2)
|
|
|
|
|
|
|
—
|
|
|
|
|
—
|
|
Forfeitures of unvested restricted stock
|
|
|
|
|
(43)
|
|
|
0
|
|
|
0
|
|
|
|
|
|
|
—
|
|
|
|
|
—
|
|
Vesting of restricted stock
|
|
|
|
|
|
|
|
|
23,382
|
|
|
|
|
|
|
23,382
|
|
|
|
|
23,382
|
|
Repurchase of common shares
|
|
|
|
|
(2,500)
|
|
|
(3)
|
|
|
(22,565)
|
|
|
(15,963)
|
|
|
|
|
(38,531)
|
|
|
|
|
(38,531)
|
|
Exercise of stock options
|
|
|
|
|
105
|
|
|
0
|
|
|
964
|
|
|
|
|
|
|
964
|
|
|
|
|
964
|
|
Issuance of non-controlling interests
|
|
|
|
|
|
|
|
|
6,499
|
|
|
|
|
|
|
6,499
|
|
|
31,622
|
|
|
38,121
|
|
Distributions to and purchases of non-controlling interests
|
|
|
|
|
|
|
|
|
204
|
|
|
|
|
|
|
204
|
|
|
(15,065)
|
|
|
(14,861)
|
|
Redemption adjustment on non-controlling interests
|
|
|
|
|
|
|
|
|
|
|
(172,915)
|
|
|
|
|
(172,915)
|
|
|
|
|
(172,915)
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
(122)
|
|
|
|
|
(122)
|
|
|
1,682
|
|
|
1,560
|
|
Balance at December 31, 2019
|
|
|
|
|
134,328
|
|
|
$
|
134
|
|
|
$
|
491,038
|
|
|
$
|
279,800
|
|
|
$
|
—
|
|
|
$
|
770,972
|
|
|
$
|
158,063
|
|
|
$
|
929,035
|
|
Net income attributable to Select Medical Holdings Corporation
|
|
|
|
|
|
|
|
|
|
|
258,995
|
|
|
|
|
258,995
|
|
|
|
|
258,995
|
|
Net income attributable to non-controlling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
47,850
|
|
|
47,850
|
|
Issuance of restricted stock
|
|
|
|
|
1,478
|
|
|
1
|
|
|
(1)
|
|
|
|
|
|
|
—
|
|
|
|
|
—
|
|
Forfeitures of unvested restricted stock
|
|
|
|
|
(84)
|
|
|
0
|
|
|
0
|
|
|
|
|
|
|
—
|
|
|
|
|
—
|
|
Vesting of restricted stock
|
|
|
|
|
|
|
|
|
24,738
|
|
|
|
|
|
|
24,738
|
|
|
|
|
24,738
|
|
Repurchase of common shares
|
|
|
|
|
(872)
|
|
|
0
|
|
|
(8,996)
|
|
|
(7,038)
|
|
|
|
|
(16,034)
|
|
|
|
|
(16,034)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of non-controlling interests
|
|
|
|
|
|
|
|
|
3,042
|
|
|
|
|
|
|
3,042
|
|
|
5,020
|
|
|
8,062
|
|
Distributions to and purchases of non-controlling interests
|
|
|
|
|
|
|
|
|
102
|
|
|
(5,935)
|
|
|
|
|
(5,833)
|
|
|
(20,787)
|
|
|
(26,620)
|
|
Redemption adjustment on non-controlling interests
|
|
|
|
|
|
|
|
|
|
|
27,470
|
|
|
|
|
27,470
|
|
|
|
|
27,470
|
|
Loss on interest rate cap cash flow hedge, net of tax effect
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,027)
|
|
|
(2,027)
|
|
|
|
|
(2,027)
|
|
Other
|
|
|
|
|
|
|
|
|
(795)
|
|
|
(48)
|
|
|
|
|
(843)
|
|
|
2,347
|
|
|
1,504
|
|
Balance at December 31, 2020
|
|
|
|
|
134,850
|
|
|
$
|
135
|
|
|
$
|
509,128
|
|
|
$
|
553,244
|
|
|
$
|
(2,027)
|
|
|
$
|
1,060,480
|
|
|
$
|
192,493
|
|
|
$
|
1,252,973
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Select Medical Holdings Corporation
Consolidated Statements of Cash Flows
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2018
|
|
2019
|
|
2020
|
|
Operating activities
|
|
|
|
|
|
|
|
Net income
|
|
$
|
176,942
|
|
|
$
|
201,031
|
|
|
$
|
344,606
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
Distributions from unconsolidated subsidiaries
|
|
15,721
|
|
|
20,222
|
|
|
35,390
|
|
|
Depreciation and amortization
|
|
201,655
|
|
|
212,576
|
|
|
205,659
|
|
|
Provision for expected credit losses
|
|
(103)
|
|
|
3,038
|
|
|
604
|
|
|
Equity in earnings of unconsolidated subsidiaries
|
|
(21,905)
|
|
|
(24,989)
|
|
|
(29,440)
|
|
|
Loss on extinguishment of debt
|
|
2,999
|
|
|
22,130
|
|
|
—
|
|
|
Gain on sale of assets and businesses
|
|
(9,168)
|
|
|
(6,321)
|
|
|
(22,563)
|
|
|
Stock compensation expense
|
|
23,326
|
|
|
26,451
|
|
|
27,250
|
|
|
Amortization of debt discount, premium and issuance costs
|
|
13,112
|
|
|
11,566
|
|
|
2,184
|
|
|
Deferred income taxes
|
|
7,217
|
|
|
(7,435)
|
|
|
(14,715)
|
|
|
Changes in operating assets and liabilities, net of effects of business combinations:
|
|
|
|
|
|
|
|
Accounts receivable
|
|
54,575
|
|
|
(57,991)
|
|
|
(116,601)
|
|
|
Other current assets
|
|
(4,152)
|
|
|
(4,259)
|
|
|
(18,775)
|
|
|
Other assets
|
|
7,857
|
|
|
6,122
|
|
|
17,587
|
|
|
Accounts payable
|
|
(1,778)
|
|
|
5,743
|
|
|
27,325
|
|
|
Accrued expenses
|
|
27,896
|
|
|
37,298
|
|
|
168,839
|
|
|
Government advances
|
|
—
|
|
|
—
|
|
|
318,116
|
|
|
Unearned government assistance
|
|
—
|
|
|
—
|
|
|
82,607
|
|
|
Net cash provided by operating activities
|
|
494,194
|
|
|
445,182
|
|
|
1,028,073
|
|
|
Investing activities
|
|
|
|
|
|
|
|
Business combinations, net of cash acquired
|
|
(523,134)
|
|
|
(93,705)
|
|
|
(20,808)
|
|
|
Purchases of property and equipment
|
|
(167,281)
|
|
|
(157,126)
|
|
|
(146,440)
|
|
|
Investment in businesses
|
|
(13,482)
|
|
|
(66,090)
|
|
|
(31,425)
|
|
|
Proceeds from sale of assets and businesses
|
|
6,760
|
|
|
192
|
|
|
83,320
|
|
|
Net cash used in investing activities
|
|
(697,137)
|
|
|
(316,729)
|
|
|
(115,353)
|
|
|
Financing activities
|
|
|
|
|
|
|
|
Borrowings on revolving facilities
|
|
595,000
|
|
|
700,000
|
|
|
470,000
|
|
|
Payments on revolving facilities
|
|
(805,000)
|
|
|
(720,000)
|
|
|
(470,000)
|
|
|
Proceeds from term loans
|
|
779,823
|
|
|
1,208,106
|
|
|
—
|
|
|
Payments on term loans
|
|
(11,500)
|
|
|
(1,618,170)
|
|
|
(39,843)
|
|
|
Proceeds from 6.250% senior notes
|
|
—
|
|
|
1,244,987
|
|
|
—
|
|
|
Payment on 6.375% senior notes
|
|
—
|
|
|
(710,000)
|
|
|
—
|
|
|
Revolving facility debt issuance costs
|
|
(1,639)
|
|
|
(310)
|
|
|
—
|
|
|
Borrowings of other debt
|
|
42,218
|
|
|
24,225
|
|
|
40,108
|
|
|
Principal payments on other debt
|
|
(25,242)
|
|
|
(30,604)
|
|
|
(48,381)
|
|
|
Repurchase of common stock
|
|
(6,837)
|
|
|
(38,531)
|
|
|
(16,034)
|
|
|
Proceeds from exercise of stock options
|
|
1,722
|
|
|
964
|
|
|
—
|
|
|
Decrease in overdrafts
|
|
(4,380)
|
|
|
(25,083)
|
|
|
—
|
|
|
Proceeds from issuance of non-controlling interests
|
|
2,926
|
|
|
18,447
|
|
|
7,564
|
|
|
Distributions to and purchases of non-controlling interests
|
|
(311,519)
|
|
|
(21,780)
|
|
|
(38,589)
|
|
|
Purchase of membership interests of Concentra Group Holdings Parent (Note 2)
|
|
—
|
|
|
—
|
|
|
(576,366)
|
|
|
Net cash provided by (used in) financing activities
|
|
255,572
|
|
|
32,251
|
|
|
(671,541)
|
|
|
Net increase in cash and cash equivalents
|
|
52,629
|
|
|
160,704
|
|
|
241,179
|
|
|
Cash and cash equivalents at beginning of period
|
|
122,549
|
|
|
175,178
|
|
|
335,882
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
175,178
|
|
|
$
|
335,882
|
|
|
$
|
577,061
|
|
|
Supplemental information:
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
193,406
|
|
|
$
|
182,992
|
|
|
$
|
155,236
|
|
|
Cash paid for taxes
|
|
48,153
|
|
|
70,592
|
|
|
108,890
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
Liabilities for purchases of property and equipment
|
|
$
|
29,134
|
|
|
$
|
28,760
|
|
|
$
|
24,480
|
|
|
Non-cash equity exchange for acquisition of U.S. HealthWorks
|
|
238,000
|
|
|
—
|
|
|
—
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies
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, 2020, the Company had operations in 46 states and the District of Columbia. As of December 31, 2020, the Company operated 99 critical illness recovery hospitals, 30 rehabilitation hospitals, and 1,788 outpatient rehabilitation clinics. As of December 31, 2020, Concentra, a joint venture subsidiary, operated 517 occupational health centers. Concentra also operated 134 onsite clinics at employer worksites.
The Company operates 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.
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, liabilities, revenues, and expenses. Estimates and assumptions are used for, but not limited to: revenue recognition, allowances for expected credit losses, estimated useful lives of assets, the fair value of goodwill and 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, limited partnerships, and variable interest entities 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, which include 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)
1. Organization and Significant Accounting Policies (Continued)
Earnings per Share
The Company’s capital structure includes common stock and unvested restricted stock awards. To compute earnings per share (“EPS”), the Company applies the two-class method because the Company’s unvested restricted stock awards are participating securities which are entitled to participate equally with the Company’s common stock in undistributed earnings. Application of the Company’s two-class method is as follows:
(i)Net income attributable to the Company is reduced by the amount of dividends declared and by the contractual amount of dividends that must be paid for the current period for each class of stock, if any.
(ii)The remaining undistributed net income of the Company is then equally allocated to its common stock and unvested restricted stock awards, as if all of the earnings for the period had been distributed. The total net income allocated to each security is determined by adding both distributed and undistributed net income for the period.
(iii)The net income allocated to each security is then divided by the weighted average number of outstanding shares for the period to determine the EPS for each security considered in the two-class method.
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 services are paid for primarily by federal and state governmental authorities, managed care health plans, commercial insurance companies, workers’ compensation programs, and employer-directed programs. 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.
The Company performs periodic assessments to determine if an allowance for expected credit losses is necessary. The Company considers its incurred loss experience and adjusts for known and expected events and other circumstances. In estimating its expected credit losses, the Company may consider changes in the length of time its receivables have been outstanding, changes in credit ratings for its payors, requests from payors to alter payment terms due to financial difficulty, and notices of payor bankruptcies or payors entering receivership. Because the Company’s accounts receivable is typically paid for by highly-solvent, creditworthy payors, such as Medicare, other governmental programs, and highly-regulated commercial insurers on behalf of the patient, the Company’s credit losses have been infrequent and insignificant in nature. Amounts recognized for allowances for expected credit losses are immaterial to the consolidated financial statements.
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Organization and Significant Accounting Policies (Continued)
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.
Under ASC 842, 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 leases are classified as operating leases.
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. Right-of-use assets and 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 also include any prepaid lease payments and initial direct costs, less any lease incentive received, 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.
For the Company’s operating leases, lease expense, a component of cost of services and general and administrative expense on the consolidated statements of operations, is recognized on a straight-line basis over the lease term. For the Company’s finance leases, interest expense on the lease liability is recognized using the effective interest method and 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 also makes variable lease payments which are expensed as incurred. These payments relate to changes in indexes or rates after the lease commencement date, as well as property taxes, insurance, and common area maintenance which were not fixed at lease commencement. This expense is a component of cost of services and general and administrative expense on the consolidated statements of operations.
The Company may enter into arrangements to sublease portions of its facilities and the Company typically retains the obligation to the lessor under these arrangements. The Company’s subleases are classified as operating leases; accordingly, the Company continues to account for the original leases as it did prior to commencement of the subleases. Sublease income, a component of cost of services on the consolidated statements of operations, is recognized on a straight-line basis, as a reduction to lease expense, over the term of the sublease.
The Company elected the short-term lease exemption for equipment leases; accordingly, equipment leases with terms of 12 months or less are not recorded on the consolidated balance sheets. 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.
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Organization and Significant Accounting Policies (Continued)
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:
|
|
|
|
|
|
Land improvements
|
5 – 25 years
|
Leasehold improvements
|
1 – 20 years
|
Buildings
|
40 years
|
Building improvements
|
5 – 40 years
|
Furniture and equipment
|
1 – 20 years
|
The Company’s long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of those assets or asset groups may not be recoverable. If the expected undiscounted future cash flows are less than the carrying amount of such assets or asset groups, the Company recognizes an impairment loss to the extent the carrying amount exceeds its estimated 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.
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 whether goodwill is more likely than not impaired by considering relevant events or circumstances that affect the fair value or carrying amount of a reporting unit. If goodwill is more likely than not impaired, the Company is then required to complete a quantitative analysis. The Company considers both the income and market approach in determining the fair values of its reporting units when performing a quantitative analysis. If the carrying value of a reporting unit exceeds its fair value, an impairment charge is recognized equal to the difference between the carrying amount of the reporting unit and its fair value, not to exceed the carrying value of goodwill of the reporting unit.
At December 31, 2020, 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.
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Organization and Significant Accounting Policies (Continued)
The Company’s most recent impairment assessments were completed during the fourth quarter of 2020 utilizing information as of October 1, 2020. The Company did not identify any instances of impairment with respect to goodwill or other indefinite-lived intangible assets as of October 1, 2020.
Finite-lived identifiable intangible assets
At December 31, 2020, 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.
|
|
|
|
|
|
Customer relationships
|
5 – 15 years
|
Non-compete agreements
|
1 – 15 years
|
The Company’s finite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of those assets or asset groups may not be recoverable. If the expected undiscounted future cash flows are less than the carrying amount of such assets or asset groups, the Company recognizes an impairment loss to the extent the carrying amount exceeds its 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 their original cost and adjusted periodically to recognize the Company’s proportionate share of its 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.
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.
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Organization and Significant Accounting Policies (Continued)
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 service revenues are recognized at an amount equal to the consideration the Company expects to be entitled to in exchange for providing healthcare services to its patients. Amounts owed for services provided are the obligations of the Company’s patients and can be paid for by third-party payors, including health insurers, government programs, and other payors on the patient’s behalf. Most all of the Company’s patients are subject to healthcare coverage through a third party payor arrangement. Given the nature and extent of third party payor arrangements, the Company disaggregates its revenue by the following payor categories:
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. The Company determines the transaction price for services provided to patients who are Medicare beneficiaries using Medicare’s prospective payment systems and other payment methods. The expected payment is determined by the level of clinical services provided and is sensitive to the patient’s length of stay.
Non-Medicare: Non-Medicare payor sources include, but are not limited to, insurance companies (including Medicare Advantage plans), state Medicaid programs, workers’ compensation programs, health maintenance organizations, preferred provider organizations, other managed care companies and employers, as well as patients themselves. The transaction price for services provided to non-Medicare patients include amounts prescribed by state and federal fee schedules, negotiated contract amounts, or usual and customary amounts associated with the specific payor or based on the service provided. The Company applies the portfolio approach in determining revenues for certain homogeneous non-Medicare patient populations.
The Company’s principal revenue source comes from providing healthcare services to patients. For patients treated within the Company’s outpatient rehabilitation clinics and Concentra centers, performance obligations are generally satisfied upon completion of the patient’s visit. For patients treated within the Company’s critical illness recovery and rehabilitation hospitals, the Company’s performance obligation is satisfied over the duration of the patient’s stay. As such, the Company recognizes revenue over the patient’s stay in amounts which are commensurate with the level of services provided to the patient. Any differences between the Company’s estimates of the transaction price, which may be impacted by various factors as described further below, and the payment received upon a patient’s discharge would be recognized as revenue in the period in which this change becomes known; such adjustments are not significant. The Company has an obligation to continue delivering treatment to patients admitted in the Company’s critical illness recovery and rehabilitation hospitals at the end of each reporting period. These performance obligations are typically satisfied in the subsequent month following the reporting period. The Company has elected the optional exemption which allows for the exclusion of disclosures regarding the transaction price allocated to unsatisfied performance obligations of contracts with a duration of less than one year.
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Organization and Significant Accounting Policies (Continued)
Revenue earned from providing services to patients is variable in nature, as the Company is required to make judgments which impact the transaction price, such as a patient’s condition and length of stay. These factors, among others, impact the payment the Company expects to receive for providing services. Variable consideration included in the transaction price is inclusive of the Company’s estimates of implicit discounts and other adjustments related to timely filing and documentation denials, out of network adjustments, and medical necessity denials, which are estimated using the Company’s historical experience. The Company is also subject to regular post-payment inquiries, investigations, and audits of the claims it submits for services provided. Some claims can take several years for resolution and may result in adjustments to the transaction price. Management includes in its estimates of the transaction price its expectations for these types of adjustments such that the amount of cumulative revenue recognized will not be subject to significant reversal in future periods. Historically, adjustments arising from a change in the transaction price have not been significant.
Other Revenues
The Company recognizes revenue for other services which principally consist of management and employee leasing services under contractual arrangements with both related parties affiliated with the Company and non-affiliated healthcare institutions. The Company accounts for management and employee leasing services as single performance obligations satisfied over time. The transaction price is variable in nature and the Company recognizes revenue in amounts which are commensurate with the level of services provided during the period. The Company’s transaction price is determined such that the amount of cumulative revenue recognized will not be subject to significant reversal in future periods.
Recent Accounting Pronouncements
Reference Rate Reform
In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting and in January 2021, the FASB issued 2021-01, Reference Rate Reform (Topic 848), Scope, which further clarified the scope of the reference rate reform optional practical expedients and exceptions outlined in Topic 848. Topic 848 provides temporary relief from some of the existing rules governing contract modifications when the modification is related to the replacement of the London Interbank Offered Rate (“LIBOR”) or other reference rates discontinued as a result of reference rate reform. For eligible contract modifications, the update generally allows an entity to account for and present modifications as an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. That is, the modified contract is accounted for as a continuation of the existing contract. For cash flow hedging relationships affected by reference rate reform, Topic 848 provides expedients that allow an entity to (i) change the reference rate of either the forecasted transaction or hedging instrument due to reference rate reform without requiring dedesignation of the hedging relationship; (ii) assert that changes to the hedged forecasted transaction due to reference rate reform will not impact whether it remains probable of occurring; and (iii) for the purposes of assessment of hedge effectiveness assume that the reference rate will not be replaced for the remainder of the hedging relationship if both the hedged forecasted transaction and hedging instrument are expected to be impacted by reference rate reform. The standard was effective upon issuance on March 12, 2020, and the optional practical expedients can generally be applied to contract modifications made and hedging relationships entered into on or before December 31, 2022.
Borrowings under the Select credit agreement bear interest, at the election of Select, based on LIBOR or an alternate base rate. Provisions within the Select credit agreement currently provide the Company with the ability to agree with JPMorgan Chase Bank, N.A., as administrative agent to the lenders, to replace LIBOR with a different reference rate in the event that LIBOR ceases to exist. For the Company’s cash flow hedge, described further in Note 12 – Interest Rate Cap, the Company has elected to assert that the hedged forecasted transaction remains probable of occurring and for the purposes of assessment of hedge effectiveness assume that the reference rate will not be replaced for the remainder of the hedging relationship, as outlined by Topic 848. The Company is currently evaluating the other optional practical expedients provided under the standard and the effects they could have on the Company’s consolidated financial statements, if elected.
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Organization and Significant Accounting Policies (Continued)
Convertible Instruments and Contracts on an Entity’s Own Equity
In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The ASU simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. As part of this update, convertible instruments are to be included in diluted earnings per share using the if-converted method, rather than the treasury stock method. Further, contracts which can be settled in cash or shares, excluding liability-classified share-based payment awards, are to be included in diluted earnings per share on an if-converted basis if the effect is dilutive, regardless of whether the entity or the counterparty can choose between cash and share settlement. The share-settlement presumption may not be rebutted based on past experience or a stated policy.
This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2021. The Company plans to adopt this pronouncement as of January 1, 2022. The use of either the modified retrospective or fully retrospective method of transition is permitted. The Company is currently evaluating the impact ASU 2020-06 will have on the Company’s consolidated financial statements upon adoption.
Recently Adopted Accounting Pronouncements
Financial Instruments
On January 1, 2020, the Company adopted ASU 2016-13, Financial Instruments — Credit Losses: Measurement of Credit Losses on Financial Instruments (Topic 326), which replaced the incurred loss approach for recognizing credit losses on financial instruments with an expected loss approach. The expected loss approach is subject to management judgments using assessments of incurred credit losses, assessments of current conditions, and forecasts using reasonable and supportable assumptions. The standard was required to be applied using the modified retrospective approach with a cumulative-effect adjustment to retained earnings, if any, upon adoption.
The Company’s primary financial instrument subject to the standard is its accounts receivable derived from contracts with its patients. Historically, the Company has experienced infrequent, immaterial credit losses related to its accounts receivable and, based on its experience, believes the risk of material defaults is low. The Company experienced credit losses of $1.1 million for the year ended December 31, 2017, credit loss recoveries of $0.1 million for the year ended December 31, 2018, and credit losses of $3.0 million for the year ended December 31, 2019. The Company’s historical credit losses have been infrequent and immaterial largely because the Company’s accounts receivable are typically paid for by highly-solvent, creditworthy payors, such as Medicare, other governmental programs, and highly-regulated commercial insurers, on behalf of the patient.
In estimating the Company’s expected credit losses under Topic 326, the Company considers its incurred loss experience and adjusts for known and expected events and other circumstances, identified using periodic assessments implemented by the Company, which management believes are relevant in assessing the collectability of its accounts receivable. Because of the infrequent and insignificant nature of the Company’s historical credit losses, forecasts of expected credit losses are generally unnecessary. Expected credit losses are recognized by the Company through an allowance for credit losses and related credit loss expense.
As of January 1, 2020, the Company completed its expected credit loss assessment for its financial instruments subject to Topic 326. The Company’s estimate of expected credit losses as of January 1, 2020, resulted in no adjustments to the allowance for credit losses and no cumulative-effect adjustment to retained earnings on the adoption date of the standard.
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Organization and Significant Accounting Policies (Continued)
Goodwill
On January 1, 2020, the Company adopted ASU 2017-04, Intangibles—Goodwill and Other: Simplifying the Test for Goodwill Impairment. This amendment eliminates the requirement to calculate the implied fair value of goodwill, the second step of the quantitative goodwill impairment test, to measure a goodwill impairment charge. Instead, an impairment charge will be based on the excess of a reporting unit's carrying amount over its fair value. ASU 2017-04 did not impact the Company’s consolidated financial statements upon adoption.
2. Redeemable Non-Controlling Interests
The Company’s redeemable non-controlling interests are comprised primarily of the voting 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 $939.9 million and $368.9 million as of December 31, 2019 and 2020, respectively.
During the year ended December 31, 2020, Select, Welsh, Carson, Anderson & Stowe XII, L.P. (“WCAS”), Dignity Health Holding Corporation (“DHHC”), and other members of Concentra Group Holdings Parent entered into agreements pursuant to which Select acquired additional outstanding membership interests of Concentra Group Holdings Parent. The aggregate purchase price for these interests was $576.4 million. Following these purchases, Select owns approximately 78.0% of the outstanding membership interests of Concentra Group Holdings Parent on a fully diluted basis and approximately 79.8% of the outstanding voting membership interests of Concentra Group Holdings Parent.
The changes in redeemable non-controlling interests were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2018
|
|
2019
|
|
2020
|
|
(in thousands)
|
Balance as of January 1
|
$
|
640,818
|
|
|
$
|
780,488
|
|
|
$
|
974,541
|
|
Net income attributable to redeemable non-controlling interests
|
27,775
|
|
|
25,956
|
|
|
37,761
|
|
Issuance of redeemable non-controlling interests
|
163,659
|
|
|
—
|
|
|
—
|
|
Distributions to and purchases of redeemable non-controlling interests
|
(217,570)
|
|
|
(6,205)
|
|
|
(11,255)
|
|
Purchase of membership interests of Concentra Group Holdings Parent
|
—
|
|
|
—
|
|
|
(576,366)
|
|
Redemption adjustment on redeemable non-controlling interests
|
164,476
|
|
|
172,915
|
|
|
(27,470)
|
|
Other
|
1,330
|
|
|
1,387
|
|
|
960
|
|
Balance as of December 31
|
$
|
780,488
|
|
|
$
|
974,541
|
|
|
$
|
398,171
|
|
3. 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.
Because of the diversity in the Company’s non-governmental third-party payor base, as well as their geographic dispersion, accounts receivable due from the Medicare program represent the Company’s only significant concentration of credit risk. Approximately 15% and 18% of the Company’s accounts receivable is due from Medicare at December 31, 2019 and 2020, respectively.
Revenues from providing services to patients covered under the Medicare program represented approximately 27%, 26%, and 25% of the Company’s total revenue for the years ended December 31, 2018, 2019, and 2020, 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 the services it provides to its patients.
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Acquisitions
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 DHHC. 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.
U.S. HealthWorks contributed revenue of $488.8 million for the year ended December 31, 2018, which is reflected in the Company’s consolidated statement of operations. 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. Acquisition costs of $2.9 million were excluded from the pro forma results. These results are not necessarily indicative of the results of future operations nor of the results that would have occurred had the acquisition been consummated on the aforementioned date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2018
|
|
|
|
|
|
(in thousands)
|
Revenue
|
|
|
|
|
$
|
5,128,838
|
|
Net income attributable to the Company
|
|
|
|
|
140,488
|
|
Other Acquisitions
During the year ended December 31, 2019, the Company made acquisitions consisting of a critical illness recovery hospital, rehabilitation hospital, outpatient rehabilitation, and Concentra businesses. 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 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 to the Company’s consolidated financial statements.
During the year ended December 31, 2020, the Company made acquisitions consisting of critical illness recovery hospital, rehabilitation hospital, outpatient rehabilitation, and Concentra businesses. The consideration given for these acquired businesses consisted principally of $20.8 million of cash. The Company allocated the purchase price of these acquired businesses to assets acquired, principally accounts receivable and property and equipment, and liabilities assumed based on their estimated fair values. The Company recognized goodwill of $6.0 million, $2.5 million, $2.7 million, and $12.3 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 to the Company’s consolidated financial statements.
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Variable Interest Entities
Certain states prohibit the “corporate practice of medicine,” which restricts the Company from owning medical practices which directly employ physicians and from exercising control over medical decisions by physicians. In these states, the Company enters into long-term management agreements with medical practices 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 agreements provide for the Company to direct the transfer of ownership of the medical practices to new licensed physicians at any time. Based on the provisions of the management agreements, the medical practices are variable interest entities for which the Company is the primary beneficiary.
As of December 31, 2019 and 2020, the total assets of the Company’s variable interest entities were $178.4 million and $208.4 million, respectively, and are principally comprised of accounts receivable. As of December 31, 2019 and 2020, the total liabilities of these variable interest entities were $52.7 million and $55.1 million, respectively, and are principally comprised of accounts payable and accrued expenses. The Company’s variable interest entities have obligations payable for services received under the aforementioned management agreements of $124.1 million and $151.8 million as of December 31, 2019 and 2020, respectively; these intercompany balances are eliminated in consolidation.
6. Leases
The Company has operating and finance leases for its facilities. The Company leases its corporate office space from related parties. The Company’s 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.
The Company’s total lease cost was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2019
|
|
2020
|
|
Unrelated Parties
|
|
Related Parties
|
|
Total
|
|
Unrelated Parties
|
|
Related Parties
|
|
Total
|
|
(in thousands)
|
Operating lease cost
|
$
|
271,799
|
|
|
$
|
5,498
|
|
|
$
|
277,297
|
|
|
$
|
278,945
|
|
|
$
|
7,118
|
|
|
$
|
286,063
|
|
Finance lease cost:
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of right-of-use assets
|
258
|
|
|
—
|
|
|
258
|
|
|
452
|
|
|
—
|
|
|
452
|
|
Interest on lease liabilities
|
812
|
|
|
—
|
|
|
812
|
|
|
1,011
|
|
|
—
|
|
|
1,011
|
|
Short-term lease cost
|
2,171
|
|
|
—
|
|
|
2,171
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Variable lease cost
|
43,096
|
|
|
553
|
|
|
43,649
|
|
|
49,409
|
|
|
580
|
|
|
49,989
|
|
Sublease income
|
(9,822)
|
|
|
—
|
|
|
(9,822)
|
|
|
(9,814)
|
|
|
—
|
|
|
(9,814)
|
|
Total lease cost
|
$
|
308,314
|
|
|
$
|
6,051
|
|
|
$
|
314,365
|
|
|
$
|
320,003
|
|
|
$
|
7,698
|
|
|
$
|
327,701
|
|
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Leases (Continued)
Supplemental cash flow information related to leases was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2019
|
|
2020
|
|
(in thousands)
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
Operating cash flows for operating leases
|
$
|
274,095
|
|
|
$
|
280,263
|
|
Operating cash flows for finance leases
|
777
|
|
|
1,011
|
|
Financing cash flows for finance leases
|
225
|
|
|
140
|
|
Right-of-use assets obtained in exchange for lease liabilities:
|
|
|
|
Operating leases(1)
|
1,275,575
|
|
|
256,697
|
|
Finance leases
|
9,102
|
|
|
1,220
|
|
_______________________________________________________________________________
(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 during the year ended December 31, 2019.
Supplemental balance sheet information related to leases was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2020
|
|
Unrelated Parties
|
|
Related Parties
|
|
Total
|
|
Unrelated Parties
|
|
Related Parties
|
|
Total
|
Operating Leases
|
(in thousands)
|
Operating lease right-of-use assets
|
$
|
971,382
|
|
|
$
|
32,604
|
|
|
$
|
1,003,986
|
|
|
$
|
1,002,151
|
|
|
$
|
30,066
|
|
|
$
|
1,032,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current operating lease liabilities
|
$
|
202,506
|
|
|
$
|
5,444
|
|
|
$
|
207,950
|
|
|
$
|
214,377
|
|
|
$
|
6,036
|
|
|
$
|
220,413
|
|
Non-current operating lease liabilities
|
826,049
|
|
|
26,848
|
|
|
852,897
|
|
|
848,215
|
|
|
27,152
|
|
|
875,367
|
|
Total operating lease liabilities
|
$
|
1,028,555
|
|
|
$
|
32,292
|
|
|
$
|
1,060,847
|
|
|
$
|
1,062,592
|
|
|
$
|
33,188
|
|
|
$
|
1,095,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2020
|
|
Unrelated Parties
|
|
Related Parties
|
|
Total
|
|
Unrelated Parties
|
|
Related Parties
|
|
Total
|
Finance Leases
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
$
|
4,965
|
|
|
$
|
—
|
|
|
$
|
4,965
|
|
|
$
|
5,644
|
|
|
$
|
—
|
|
|
$
|
5,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt and notes payable
|
$
|
195
|
|
|
$
|
—
|
|
|
$
|
195
|
|
|
$
|
663
|
|
|
$
|
—
|
|
|
$
|
663
|
|
Long-term debt, net of current portion
|
13,088
|
|
|
—
|
|
|
13,088
|
|
|
13,491
|
|
|
—
|
|
|
13,491
|
|
Total finance lease liabilities
|
$
|
13,283
|
|
|
$
|
—
|
|
|
$
|
13,283
|
|
|
$
|
14,154
|
|
|
$
|
—
|
|
|
$
|
14,154
|
|
The weighted average remaining lease terms and discount rates were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2020
|
Weighted average remaining lease term (in years):
|
|
|
|
Operating leases
|
8.0
|
|
7.8
|
Finance leases
|
34.4
|
|
31.2
|
Weighted average discount rate:
|
|
|
|
Operating leases
|
5.9
|
%
|
|
5.6
|
%
|
Finance leases
|
7.3
|
%
|
|
7.2
|
%
|
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Leases (Continued)
As of December 31, 2020, maturities of lease liabilities were approximately as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Finance Leases
|
|
|
|
(in thousands)
|
|
|
2021
|
$
|
273,293
|
|
|
$
|
1,678
|
|
|
|
2022
|
232,876
|
|
|
1,663
|
|
|
|
2023
|
187,739
|
|
|
1,530
|
|
|
|
2024
|
149,340
|
|
|
1,195
|
|
|
|
2025
|
117,525
|
|
|
1,205
|
|
|
|
Thereafter
|
468,130
|
|
|
29,018
|
|
|
|
Total undiscounted cash flows
|
1,428,903
|
|
|
36,289
|
|
|
|
Less: Imputed interest
|
333,123
|
|
|
22,135
|
|
|
|
Total discounted lease liabilities
|
$
|
1,095,780
|
|
|
$
|
14,154
|
|
|
|
For the year ended December 31, 2018, the Company’s rent expense for facility and equipment operating leases, including cancellable leases, was $307.8 million. The Company made payments to related parties for office rent, leasehold improvements, and miscellaneous expenses of $6.3 million for the year ended December 31, 2018.
7. Property and Equipment
The Company’s property and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2020
|
|
(in thousands)
|
Land
|
$
|
95,549
|
|
|
$
|
93,756
|
|
Leasehold improvements
|
543,934
|
|
|
562,734
|
|
Buildings
|
553,701
|
|
|
552,796
|
|
Furniture and equipment
|
670,050
|
|
|
704,430
|
|
Construction-in-progress
|
52,467
|
|
|
62,748
|
|
Total property and equipment
|
1,915,701
|
|
|
1,976,464
|
|
Accumulated depreciation
|
(917,295)
|
|
|
(1,033,044)
|
|
Property and equipment, net
|
$
|
998,406
|
|
|
$
|
943,420
|
|
Depreciation expense was $171.7 million, $182.9 million, and $178.0 million for the years ended December 31, 2018, 2019, and 2020, respectively.
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Intangible Assets
Goodwill
The following table shows changes in the carrying amounts of goodwill by reporting unit for the years ended December 31, 2019 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Critical Illness Recovery Hospital
|
|
Rehabilitation Hospital
|
|
Outpatient
Rehabilitation
|
|
Concentra
|
|
Total
|
|
(in thousands)
|
Balance as of January 1, 2019
|
$
|
1,045,220
|
|
|
$
|
416,646
|
|
|
$
|
642,422
|
|
|
$
|
1,216,438
|
|
|
$
|
3,320,726
|
|
Acquisition of businesses
|
33,149
|
|
|
14,254
|
|
|
12,970
|
|
|
18,299
|
|
|
78,672
|
|
Measurement period adjustment
|
435
|
|
|
—
|
|
|
—
|
|
|
(2,249)
|
|
|
(1,814)
|
|
Sale of businesses
|
—
|
|
|
—
|
|
|
(5,629)
|
|
|
—
|
|
|
(5,629)
|
|
Balance as of December 31, 2019
|
1,078,804
|
|
|
430,900
|
|
|
649,763
|
|
|
1,232,488
|
|
|
3,391,955
|
|
Acquisition of businesses
|
5,957
|
|
|
2,481
|
|
|
2,704
|
|
|
12,287
|
|
|
23,429
|
|
Measurement period adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
(20)
|
|
|
(20)
|
|
Sale of businesses
|
—
|
|
|
(628)
|
|
|
(6,034)
|
|
|
(29,688)
|
|
|
(36,350)
|
|
Balance as of December 31, 2020
|
$
|
1,084,761
|
|
|
$
|
432,753
|
|
|
$
|
646,433
|
|
|
$
|
1,215,067
|
|
|
$
|
3,379,014
|
|
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,
|
|
2019
|
|
2020
|
|
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
|
17,157
|
|
|
—
|
|
|
17,157
|
|
|
18,392
|
|
|
—
|
|
|
18,392
|
|
Accreditations
|
1,874
|
|
|
—
|
|
|
1,874
|
|
|
1,874
|
|
|
—
|
|
|
1,874
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
5,000
|
|
|
(5,000)
|
|
|
—
|
|
|
5,000
|
|
|
(5,000)
|
|
|
—
|
|
Customer relationships
|
287,373
|
|
|
(87,346)
|
|
|
200,027
|
|
|
291,923
|
|
|
(113,346)
|
|
|
178,577
|
|
Non-compete agreements
|
32,114
|
|
|
(8,802)
|
|
|
23,312
|
|
|
33,771
|
|
|
(11,771)
|
|
|
22,000
|
|
Total identifiable intangible assets
|
$
|
510,216
|
|
|
$
|
(101,148)
|
|
|
$
|
409,068
|
|
|
$
|
517,658
|
|
|
$
|
(130,117)
|
|
|
$
|
387,541
|
|
The Company’s accreditations and trademarks have renewal terms and the costs to renew these intangible assets are expensed as incurred. At December 31, 2020, the accreditations and trademarks have a weighted average time until next renewal of 1.5 years and 6.8 years, respectively.
The Company’s finite-lived intangible assets amortize over their estimated useful lives. Amortization expense was $29.9 million, $29.6 million, and $27.6 million for the years ended December 31, 2018, 2019, and 2020, respectively.
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Intangible Assets (Continued)
Estimated amortization expense of the Company’s finite-lived intangible assets for each of the five succeeding years is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
2025
|
|
(in thousands)
|
Amortization expense
|
$
|
27,789
|
|
|
$
|
27,279
|
|
|
$
|
26,789
|
|
|
$
|
18,603
|
|
|
$
|
12,638
|
|
9. Equity Method Investments
The Company’s equity method investments consist principally of minority ownership interests in rehabilitation businesses. Equity method investments of $230.7 million and $251.1 million are presented as part of other assets on the consolidated balance sheets as of December 31, 2019 and 2020, respectively. At December 31, 2020, these businesses primarily consist of the following ownership interests:
|
|
|
|
|
|
BIR JV, LLP
|
49.0
|
%
|
OHRH, LLC
|
49.0
|
%
|
GlobalRehab—Scottsdale, LLC
|
49.0
|
%
|
|
|
ES Rehabilitation, LLC
|
49.0
|
%
|
Coastal Virginia Rehabilitation, LLC
|
49.0
|
%
|
BHSM Rehabilitation, LLC
|
49.0
|
%
|
|
|
The Company provides contracted services, principally employee leasing services, and charges management fees to related parties affiliated through its equity method investments. Revenue generated from contracted services provided and management fees charged to related parties affiliated through the Company’s equity method investments was $216.9 million, $308.2 million, and $337.6 million for the years ended December 31, 2018, 2019, and 2020, respectively.
The Company had receivables from related parties affiliated through its equity method investments 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 has receivables from related parties of $13.7 million and $2.5 million, which are included as part of other current assets and other assets on the consolidated balance sheet, respectively, as of December 31, 2020.
The Company had liabilities for the operating cash it holds on behalf of certain rehabilitation businesses in which it has an equity method investment. These liabilities were $31.2 million and $30.6 million as of December 31, 2019 and 2020, respectively, and are included as part of accrued other on the consolidated balance sheets.
Summarized combined financial information of the rehabilitation businesses in which the Company has a minority ownership interest is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2019
|
|
2020
|
|
|
(in thousands)
|
Current assets
|
|
$
|
178,674
|
|
|
$
|
189,571
|
|
Non-current assets
|
|
317,332
|
|
|
334,372
|
|
Total assets
|
|
$
|
496,006
|
|
|
$
|
523,943
|
|
Current liabilities
|
|
$
|
107,400
|
|
|
$
|
96,980
|
|
Non-current liabilities
|
|
127,976
|
|
|
118,312
|
|
Equity
|
|
260,630
|
|
|
308,651
|
|
Total liabilities and equity
|
|
$
|
496,006
|
|
|
$
|
523,943
|
|
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Equity Method Investments (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2018
|
|
2019
|
|
2020
|
|
|
(in thousands)
|
Revenues
|
|
$
|
393,034
|
|
|
$
|
536,464
|
|
|
$
|
562,031
|
|
Cost of services and other operating expenses
|
|
342,603
|
|
|
476,182
|
|
|
496,739
|
|
Net income
|
|
48,535
|
|
|
58,519
|
|
|
72,172
|
|
10. 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, 2019 and 2020, provisions for losses for professional liability risks retained by the Company have been discounted at 3%. The Company recorded a liability of $157.1 million and $173.6 million related to these programs at December 31, 2019 and 2020, 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 $162.0 million and $178.4 million at December 31, 2019 and 2020, respectively. At December 31, 2019 and 2020, the Company recorded insurance proceeds receivable of $15.5 million and $13.0 million, respectively, for liabilities which exceeded its deductibles and self-insured retention limits and are recoverable through its insurance policies.
11. Long-Term Debt and Notes Payable
For purposes of this indebtedness footnote, references to Select exclude Concentra Inc. because the Concentra-JPM revolving facility is non-recourse to Holdings and Select.
As of December 31, 2020, the Company’s long-term debt and notes payable were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Outstanding
|
|
Unamortized Premium (Discount)
|
|
Unamortized Issuance Costs
|
|
Carrying Value
|
|
|
Fair Value
|
|
(in thousands)
|
Select 6.250% senior notes
|
$
|
1,225,000
|
|
|
$
|
33,773
|
|
|
$
|
(16,953)
|
|
|
$
|
1,241,820
|
|
|
|
$
|
1,316,875
|
|
Select credit facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Select term loan
|
2,103,437
|
|
|
(8,393)
|
|
|
(9,149)
|
|
|
2,085,895
|
|
|
|
2,082,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other debt, including finance leases
|
74,606
|
|
|
—
|
|
|
(302)
|
|
|
74,304
|
|
|
|
74,304
|
|
Total debt
|
$
|
3,403,043
|
|
|
$
|
25,380
|
|
|
$
|
(26,404)
|
|
|
$
|
3,402,019
|
|
|
|
$
|
3,473,582
|
|
Principal maturities of the Company’s long-term debt and notes payable are approximately as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
2025
|
|
Thereafter
|
|
Total
|
|
(in thousands)
|
Select 6.250% senior notes
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,225,000
|
|
|
$
|
1,225,000
|
|
Select credit facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Select term loan
|
—
|
|
|
—
|
|
|
4,757
|
|
|
11,150
|
|
|
2,087,530
|
|
|
—
|
|
|
2,103,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other debt, including finance leases
|
12,621
|
|
|
3,662
|
|
|
22,891
|
|
|
23,533
|
|
|
334
|
|
|
11,565
|
|
|
74,606
|
|
Total debt
|
$
|
12,621
|
|
|
$
|
3,662
|
|
|
$
|
27,648
|
|
|
$
|
34,683
|
|
|
$
|
2,087,864
|
|
|
$
|
1,236,565
|
|
|
$
|
3,403,043
|
|
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Long-Term Debt and Notes Payable (Continued)
As of December 31, 2019, the Company’s long-term debt and notes payable were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Outstanding
|
|
Unamortized Premium (Discount)
|
|
Unamortized Issuance Costs
|
|
Carrying Value
|
|
|
Fair Value
|
|
(in thousands)
|
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
|
|
Select Credit Facilities
On March 6, 2017, Select entered into a senior secured credit agreement (the “Select credit agreement”). The Select credit agreement provides for $2,265.0 million in term loan borrowings (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. At December 31, 2020, Select had $410.7 million of availability under the Select revolving facility after giving effect to $39.3 million of outstanding letters of credit. The Select term loan and the Select revolving facility are due March 6, 2025 and March 6, 2024, respectively.
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.
As of December 31, 2020, the applicable interest rate for the Select term loan was the Adjusted LIBO Rate plus 2.25% or the Alternate Base Rate plus 1.25%. The applicable interest rate for the Select revolving facility was the Adjusted LIBO Rate plus 2.25% or the Alternate Base Rate plus 1.25%.
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, 2020, Select’s leverage ratio was 3.48 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.
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. The Company will not be required to make a prepayment of borrowings as a result of excess cash flow for the year ended December 31, 2020.
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Long-Term Debt and Notes Payable (Continued)
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. 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.
Concentra-JPM Revolving Facility
On June 1, 2015, Concentra Inc. entered into a first lien credit agreement (the “Concentra-JPM first lien credit agreement”). The Concentra-JPM first lien credit agreement currently provides for availability of up to $100.0 million under a revolving credit facility (the “Concentra-JPM revolving facility”), which matures March 1, 2022. At December 31, 2020, Concentra Inc. had $83.6 million of availability under the Concentra-JPM revolving facility after giving effect to $16.4 million of outstanding letters of credit.
The interest rate on amounts borrowed 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.
At December 31, 2020, 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 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.
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Long-Term Debt and Notes Payable (Continued)
Loss on Early Retirement of Debt
During the year ended December 31, 2018, the Company refinanced its Select credit facilities and the Concentra-JPM first lien credit agreement which resulted in losses on early retirement of debt of $14.2 million. The loss 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, Select credit facilities, the Concentra-JPM first and second lien credit agreements 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.
12. Interest Rate Cap
The Company is subject to market risk exposure arising from changes in interest rates on the Select term loan, which bears interest at a variable interest rate, as discussed further in Note 11 – Long-Term Debt and Notes Payable. The Company’s objective in using an interest rate derivative was to mitigate its exposure to increases in interest rates. To accomplish this objective, the Company entered into an interest rate cap agreement in October 2020. The interest rate cap will limit the Company’s exposure to increases in the reference rate to 1.0% on $2.0 billion of principal outstanding under the Select term loan, as the interest rate cap provides for payments from the counterparty when interest rates rise above 1.0%. The interest rate cap has a $2.0 billion notional amount and is effective March 31, 2021 for the monthly periods from and including April 30, 2021 through September 30, 2024. The interest rate cap has a deferred premium; accordingly, the Company will pay a monthly premium for the interest rate cap over the term of the agreement. The annual premium is equal to 0.0916% on the notional amount.
As of December 31, 2020, the interest rate cap has been designated as a cash flow hedge and is highly effective at offsetting the changes in cash outflows when the reference rate exceeds 1.0%. Changes in the fair value of the interest rate cap, net of tax, are recognized in other comprehensive income and are reclassified out of accumulated other comprehensive income and into interest expense when the hedged interest obligations affect earnings. During the year ended December 31, 2020, the Company recognized losses, net of tax, of $2.0 million related to changes in the fair value of the interest rate cap contract in other comprehensive income. The Company did not reclassify any amounts out of accumulated other comprehensive income into interest expense during the year ended December 31, 2020. Refer to Note 13 – Fair Value of Financial Instruments for information on the fair value of the Company’s interest rate cap contract and its balance sheet classification.
Based on the fair value of the interest rate cap contract December 31, 2020, the estimated pre-tax losses expected to be reclassified from accumulated other comprehensive income into interest expense within the next twelve months is approximately $1.3 million.
13. Fair Value of Financial Instruments
Financial instruments which are measured at fair value, or for which a fair value is disclosed, are classified in the fair value hierarchy, as outlined below, on the basis of the observability of the inputs used in the fair value measurement:
•Level 1 – inputs are based upon quoted prices for identical instruments in active markets.
•Level 2 – inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant inputs are observable in the market or can be corroborated by observable market data.
•Level 3 – inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the instrument.
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Fair Value of Financial Instruments (Continued)
The Company’s interest rate cap contract is recorded at its fair value in the consolidated balance sheets on a recurring basis. The fair value of the interest rate cap contract is based upon a model-derived valuation using observable market inputs, such as interest rates and interest rate volatility, and the strike price.
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December 31,
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Financial Instrument
|
|
Balance Sheet Classification
|
|
Level
|
|
2019
|
|
2020
|
|
|
|
|
|
|
(in thousands)
|
Interest rate cap contract, current portion
|
|
Accrued other
|
|
Level 2
|
|
$
|
—
|
|
|
$
|
1,339
|
|
Interest rate cap contract, non-current portion
|
|
Other non-current liabilities
|
|
Level 2
|
|
—
|
|
|
1,392
|
|
The Company does not measure its indebtedness at fair value in its consolidated balance sheets. The fair value of the Select credit facilities is based on quoted market prices for this debt in the syndicated loan market. The fair value of the senior notes is based on quoted market prices. The carrying value of the Company’s other debt, as disclosed in Note 11 – Long-Term Debt and Notes Payable, approximates fair value.
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December 31, 2019
|
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December 31, 2020
|
Financial Instrument
|
|
Level
|
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Carrying Value
|
|
Fair Value
|
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Carrying Value
|
|
Fair Value
|
|
|
|
|
(in thousands)
|
Select 6.250% senior notes
|
|
Level 2
|
|
$
|
1,245,044
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|
|
$
|
1,322,020
|
|
|
$
|
1,241,820
|
|
|
$
|
1,316,875
|
|
Select credit facilities:
|
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|
|
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|
|
|
|
|
|
|
|
|
Select term loan
|
|
Level 2
|
|
2,121,521
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|
|
2,145,959
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|
|
2,085,895
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|
|
2,082,403
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The Company’s other financial instruments, which primarily consist of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value because of the short-term maturities of these instruments.
14. 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, 2021, 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, 2018. During the year ended December 31, 2019, Holdings repurchased 2,165,221 shares at a cost of approximately $33.2 million. During the year ended December 31, 2020, Holdings repurchased 491,559 shares at a cost of approximately $8.7 million. The common stock repurchase program has available capacity of $143.4 million as of December 31, 2020.
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. Segment Information
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. For the year ended December 31, 2020, the Company’s other activities also include other operating income related to the recognition of payments received under the Provider Relief Fund for health care related expenses and loss of revenue attributable to the coronavirus disease 2019 (“COVID-19”). Refer to Note 22 – CARES Act for further information.
The Company evaluates the performance of its segments based on Adjusted EBITDA. For the years ended December 31, 2018, 2019, and 2020, Adjusted EBITDA is defined as earnings excluding interest, income taxes, depreciation and amortization, gain (loss) on early retirement of debt, stock compensation expense, acquisition costs associated with U.S. HealthWorks, gain (loss) on sale of businesses, and equity in earnings (losses) of unconsolidated subsidiaries. The Company has provided additional information regarding its reportable segments, such as total assets, which contributes to the understanding of the Company and provides useful information to the users of the consolidated financial statements.
The following tables summarize selected financial data for the Company’s reportable segments.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2018
|
|
Critical Illness Recovery Hospital
|
|
Rehabilitation Hospital
|
|
Outpatient
Rehabilitation
|
|
Concentra(1)
|
|
Other
|
|
Total
|
|
(in thousands)
|
Revenue
|
$
|
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 Hospital
|
|
Rehabilitation Hospital
|
|
Outpatient
Rehabilitation
|
|
Concentra
|
|
Other
|
|
Total
|
|
(in thousands)
|
Revenue
|
$
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2020
|
|
Critical Illness Recovery Hospitals
|
|
Rehabilitation Hospitals
|
|
Outpatient
Rehabilitation
|
|
Concentra
|
|
Other
|
|
Total
|
|
(in thousands)
|
Revenue
|
$
|
2,077,499
|
|
|
$
|
734,673
|
|
|
$
|
919,913
|
|
|
$
|
1,501,434
|
|
|
$
|
298,194
|
|
|
$
|
5,531,713
|
|
Adjusted EBITDA
|
342,427
|
|
|
153,203
|
|
|
79,164
|
|
|
252,892
|
|
|
(27,120)
|
|
|
800,566
|
|
Total assets
|
2,213,892
|
|
|
1,148,617
|
|
|
1,302,110
|
|
|
2,400,646
|
|
|
590,134
|
|
|
7,655,399
|
|
Capital expenditures
|
49,726
|
|
|
7,571
|
|
|
28,876
|
|
|
50,114
|
|
|
10,153
|
|
|
146,440
|
|
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. Segment Information (Continued)
A reconciliation of Adjusted EBITDA to income before income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2020
|
|
Critical Illness Recovery Hospital
|
|
Rehabilitation Hospital
|
|
Outpatient
Rehabilitation
|
|
Concentra
|
|
Other
|
|
Total
|
|
(in thousands)
|
Adjusted EBITDA
|
$
|
342,427
|
|
|
$
|
153,203
|
|
|
$
|
79,164
|
|
|
$
|
252,892
|
|
|
$
|
(27,120)
|
|
|
|
Depreciation and amortization
|
(51,531)
|
|
|
(27,727)
|
|
|
(29,009)
|
|
|
(87,865)
|
|
|
(9,527)
|
|
|
|
Stock compensation expense
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,512)
|
|
|
(24,738)
|
|
|
|
Income (loss) from operations
|
$
|
290,896
|
|
|
$
|
125,476
|
|
|
$
|
50,155
|
|
|
$
|
162,515
|
|
|
$
|
(61,385)
|
|
|
$
|
567,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of unconsolidated subsidiaries
|
|
|
|
|
|
|
|
|
|
|
29,440
|
|
Gain on sale of businesses
|
|
|
|
|
|
|
|
|
|
|
12,387
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(153,011)
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
$
|
456,473
|
|
_______________________________________________________________________________
(1) 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)
16. Revenue from Contracts with Customers
The following tables disaggregate the Company’s revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2018
|
|
Critical Illness Recovery Hospital
|
|
Rehabilitation Hospital
|
|
Outpatient
Rehabilitation
|
|
Concentra
|
|
Other
|
|
Total
|
|
(in thousands)
|
Patient service revenue:
|
|
|
|
|
|
|
|
|
|
|
|
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 revenue
|
1,740,876
|
|
|
548,128
|
|
|
923,301
|
|
|
1,548,020
|
|
|
—
|
|
|
4,760,325
|
|
Other revenue
|
12,708
|
|
|
35,617
|
|
|
72,493
|
|
|
9,653
|
|
|
190,462
|
|
|
320,933
|
|
Total revenue
|
$
|
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 revenue:
|
|
|
|
|
|
|
|
|
|
|
|
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 revenue
|
1,824,613
|
|
|
632,627
|
|
|
965,978
|
|
|
1,617,494
|
|
|
—
|
|
|
5,040,712
|
|
Other revenue
|
11,905
|
|
|
38,344
|
|
|
80,033
|
|
|
11,323
|
|
|
271,605
|
|
|
413,210
|
|
Total revenue
|
$
|
1,836,518
|
|
|
$
|
670,971
|
|
|
$
|
1,046,011
|
|
|
$
|
1,628,817
|
|
|
$
|
271,605
|
|
|
$
|
5,453,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2020
|
|
Critical Illness Recovery Hospital
|
|
Rehabilitation Hospital
|
|
Outpatient
Rehabilitation
|
|
Concentra
|
|
Other
|
|
Total
|
|
(in thousands)
|
Patient service revenue:
|
|
|
|
|
|
|
|
|
|
|
|
Medicare
|
$
|
900,593
|
|
|
$
|
345,642
|
|
|
$
|
137,447
|
|
|
$
|
1,284
|
|
|
$
|
—
|
|
|
$
|
1,384,966
|
|
Non-Medicare
|
1,164,410
|
|
|
349,530
|
|
|
719,600
|
|
|
1,488,976
|
|
|
—
|
|
|
3,722,516
|
|
Total patient services revenue
|
2,065,003
|
|
|
695,172
|
|
|
857,047
|
|
|
1,490,260
|
|
|
—
|
|
|
5,107,482
|
|
Other revenue
|
12,496
|
|
|
39,501
|
|
|
62,866
|
|
|
11,174
|
|
|
298,194
|
|
|
424,231
|
|
Total revenue
|
$
|
2,077,499
|
|
|
$
|
734,673
|
|
|
$
|
919,913
|
|
|
$
|
1,501,434
|
|
|
$
|
298,194
|
|
|
$
|
5,531,713
|
|
17. Sale of Businesses
The Company recognized gains of $9.0 million and $6.5 million during the years ended December 31, 2018 and 2019, respectively. These gains resulted principally from the sale of outpatient rehabilitation businesses to equity method investees.
During the year ended December 31, 2020, the Company sold three businesses, including Concentra’s Department of Veterans Affairs community-based outpatient clinic business, for a total selling price of approximately $87.0 million, which excludes transaction expenses and certain other adjustments set forth in each respective purchase agreement. These sales resulted in gains of approximately $21.4 million. During the year ended December 31, 2020, the Company also accrued a liability and incurred a loss of $9.0 million related to the indemnity provision associated with a previously sold business.
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. Stock-based Compensation
Holdings’ equity incentive plan provides for the issuance of various stock-based awards. Under its current plan, which was approved during the year ended December 31, 2020, Holdings has issued restricted stock awards. The equity plan currently allows for the issuance of 7,484,000 awards, as adjusted for cancelled or forfeited awards through December 31, 2020. As of December 31, 2020, Holdings has capacity to issue 6,005,786 stock-based awards under its 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 using the closing market price of Holdings’ stock on the date of grant. These restricted stock awards generally vest over three to four years. 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, 2020
|
4,607
|
|
|
$
|
17.03
|
|
Granted
|
1,478
|
|
|
17.17
|
|
Vested
|
(1,478)
|
|
|
14.99
|
|
Forfeited
|
(84)
|
|
|
17.03
|
|
Unvested balance, December 31, 2020
|
4,523
|
|
|
$
|
17.74
|
|
For the years ended December 31, 2018, 2019, and 2020, the weighted average grant date fair values of restricted stock awards granted were $19.72, $16.60, and $17.17, respectively. For the years ended December 31, 2018, 2019, and 2020, the fair values of restricted stock awards vested were $19.1 million, $15.6 million, and $22.2 million, respectively.
For the years ended December 31, 2018 and 2019, the intrinsic values of stock options exercised were $1.8 million and $0.7 million, respectively. Holdings did not have any stock options outstanding or exercisable during the year ended December 31, 2020.
Stock compensation expense recognized by the Company was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2018
|
|
2019
|
|
2020
|
|
(in thousands)
|
Stock compensation expense:
|
|
|
|
|
|
Included in general and administrative
|
$
|
17,604
|
|
|
$
|
20,334
|
|
|
$
|
22,053
|
|
Included in cost of services
|
5,722
|
|
|
6,117
|
|
|
5,197
|
|
Total
|
$
|
23,326
|
|
|
$
|
26,451
|
|
|
$
|
27,250
|
|
Future stock compensation expense based on current stock-based awards is estimated to be as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
|
|
(in thousands)
|
Stock compensation expense
|
$
|
23,589
|
|
|
$
|
15,143
|
|
|
$
|
6,229
|
|
|
$
|
1,312
|
|
|
|
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
19. Income Taxes
The components of the Company’s income tax expense for the years ended December 31, 2018, 2019, and 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2018
|
|
2019
|
|
2020
|
|
(in thousands)
|
Current income tax expense:
|
|
|
|
|
|
Federal
|
$
|
36,072
|
|
|
$
|
55,822
|
|
|
$
|
95,633
|
|
State and local
|
15,321
|
|
|
15,331
|
|
|
30,949
|
|
Total current income tax expense
|
51,393
|
|
|
71,153
|
|
|
126,582
|
|
Deferred income tax expense (benefit)
|
7,217
|
|
|
(7,435)
|
|
|
(14,715)
|
|
Total income tax expense
|
$
|
58,610
|
|
|
$
|
63,718
|
|
|
$
|
111,867
|
|
Reconciliations of the statutory federal income tax rate to the effective income tax rate are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2018
|
|
2019
|
|
2020
|
Federal income tax at statutory rate
|
21.0
|
%
|
|
21.0
|
%
|
|
21.0
|
%
|
State and local income taxes, less federal income tax benefit
|
5.0
|
|
|
4.2
|
|
|
5.8
|
|
Permanent differences
|
1.0
|
|
|
0.4
|
|
|
0.5
|
|
Deferred income taxes - state income tax rate adjustment
|
0.4
|
|
|
0.8
|
|
|
0.0
|
|
Uncertain tax positions
|
(0.8)
|
|
|
(0.1)
|
|
|
(0.1)
|
|
|
|
|
|
|
|
Valuation allowance
|
0.5
|
|
|
0.5
|
|
|
0.0
|
|
Limitation on Officers’ compensation
|
1.1
|
|
|
1.3
|
|
|
1.1
|
|
Stock-based compensation
|
(2.2)
|
|
|
(0.7)
|
|
|
(1.4)
|
|
Non-controlling interest
|
(2.1)
|
|
|
(2.9)
|
|
|
(3.3)
|
|
Other
|
1.0
|
|
|
(0.4)
|
|
|
0.9
|
|
Effective income tax rate
|
24.9
|
%
|
|
24.1
|
%
|
|
24.5
|
%
|
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
19. Income Taxes (Continued)
The Company’s deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2020
|
|
(in thousands)
|
Deferred tax assets
|
|
|
|
Implicit discounts and adjustments
|
$
|
13,097
|
|
|
$
|
13,825
|
|
Compensation and benefit-related accruals
|
55,300
|
|
|
54,464
|
|
Professional malpractice liability insurance
|
13,753
|
|
|
17,330
|
|
Deferred revenue
|
274
|
|
|
163
|
|
Federal and state net operating loss and state tax credit carryforwards
|
38,933
|
|
|
34,417
|
|
Interest limitation carryforward
|
4,943
|
|
|
686
|
|
Stock awards
|
6,251
|
|
|
3,638
|
|
Equity investments
|
2,914
|
|
|
4,627
|
|
Operating lease liabilities
|
267,513
|
|
|
223,875
|
|
CARES Act employer payroll tax deferral
|
—
|
|
|
23,001
|
|
Derivatives
|
—
|
|
|
705
|
|
Other
|
2,344
|
|
|
2,489
|
|
Deferred tax assets
|
$
|
405,322
|
|
|
$
|
379,220
|
|
Valuation allowance
|
(18,461)
|
|
|
(17,339)
|
|
Deferred tax assets, net of valuation allowance
|
$
|
386,861
|
|
|
$
|
361,881
|
|
Deferred tax liabilities
|
|
|
|
Deferred income
|
$
|
(9,190)
|
|
|
$
|
(4,595)
|
|
Investment in unconsolidated affiliates
|
(7,498)
|
|
|
(10,401)
|
|
Depreciation and amortization
|
(225,079)
|
|
|
(238,655)
|
|
Deferred financing costs
|
(6,250)
|
|
|
(5,003)
|
|
Operating lease right-of-use assets
|
(263,818)
|
|
|
(210,045)
|
|
Other
|
(3,546)
|
|
|
(4,844)
|
|
Deferred tax liabilities
|
$
|
(515,381)
|
|
|
$
|
(473,543)
|
|
Deferred tax liabilities, net of deferred tax assets
|
$
|
(128,520)
|
|
|
$
|
(111,662)
|
|
The Company’s deferred tax assets and liabilities are included in the consolidated balance sheet captions as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2020
|
|
(in thousands)
|
Other assets
|
$
|
19,738
|
|
|
$
|
20,759
|
|
Non-current deferred tax liability
|
(148,258)
|
|
|
(132,421)
|
|
|
$
|
(128,520)
|
|
|
$
|
(111,662)
|
|
The CARES Act, which was enacted on March 27, 2020, includes changes to certain tax law related to net operating losses and the deductibility of interest expense and depreciation. ASC 740, Income Taxes, requires the effects of changes in tax rates and laws on deferred tax balances to be recognized in the period in which the legislation is enacted. This legislation had the effect of increasing the Company’s deferred income taxes and decreasing its current income taxes payable by approximately $15.5 million and resulted from bonus depreciation on certain types of qualified property for tax years beginning January 1, 2018, and the provision for an increase in the amounts allowed for interest expense deductions for tax years beginning January 1, 2019. The legislation related to net operating losses did not impact the Company’s deferred tax balances. The CARES Act also allowed eligible employers to defer payment on their share of payroll taxes otherwise required to be deposited between March 27, 2020 and December 31, 2020, as described further in Note 22 – CARES Act. This legislation had the effect of decreasing the Company’s deferred income taxes and increasing its current income taxes payable by approximately $23.0 million as of December 31, 2020.
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
19. Income Taxes (Continued)
As of December 31, 2019 and 2020, 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, 2019, the Company recorded a net valuation allowance increase of $0.6 million. For the year ended December 31, 2020, the Company recorded a net valuation allowance decrease of $1.1 million. These changes resulted from net changes in state net operating losses, as well as the sale of a business. 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.
At December 31, 2019 and 2020, the Company’s net deferred tax liabilities of approximately $128.5 million and $111.7 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 $642.6 million. State net operating loss carryforwards expire and are subject to valuation allowances as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
State Net Operating Losses
|
|
Gross Valuation Allowance
|
|
(in thousands)
|
2021
|
$
|
12,285
|
|
|
$
|
9,571
|
|
2022
|
38,517
|
|
|
32,973
|
|
2023
|
23,036
|
|
|
17,659
|
|
2024
|
28,861
|
|
|
24,124
|
|
Thereafter through 2039
|
539,896
|
|
|
369,107
|
|
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
20. Earnings per Share
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, 2018, 2019, and 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
Diluted EPS
|
|
|
|
For the Year Ended December 31,
|
|
For the Year Ended December 31,
|
|
|
|
2018
|
|
2019
|
|
2020
|
|
2018
|
|
2019
|
|
2020
|
|
|
|
(in thousands)
|
|
Net income
|
|
$
|
176,942
|
|
|
$
|
201,031
|
|
|
$
|
344,606
|
|
|
$
|
176,942
|
|
|
$
|
201,031
|
|
|
$
|
344,606
|
|
|
Less: net income attributable to non-controlling interests
|
|
39,102
|
|
|
52,582
|
|
|
85,611
|
|
|
39,102
|
|
|
52,582
|
|
|
85,611
|
|
|
Net income attributable to the Company
|
|
137,840
|
|
|
148,449
|
|
|
258,995
|
|
|
137,840
|
|
|
148,449
|
|
|
258,995
|
|
|
Less: net income attributable to participating securities
|
|
4,551
|
|
|
4,995
|
|
|
8,896
|
|
|
4,548
|
|
|
4,994
|
|
|
8,896
|
|
|
Net income attributable to common shares
|
|
$
|
133,289
|
|
|
$
|
143,454
|
|
|
$
|
250,099
|
|
|
$
|
133,292
|
|
|
$
|
143,455
|
|
|
$
|
250,099
|
|
|
The following tables set forth the computation of EPS under the two-class method:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2020
|
|
|
Net Income Allocation
|
|
Shares(1)
|
|
Basic EPS
|
|
|
Net Income Allocation
|
|
Shares(1)
|
|
Diluted EPS
|
|
|
(in thousands, except for per share amounts)
|
Common shares
|
|
$
|
250,099
|
|
|
129,780
|
|
|
$
|
1.93
|
|
|
|
$
|
250,099
|
|
|
129,780
|
|
|
$
|
1.93
|
|
Participating securities
|
|
8,896
|
|
|
4,616
|
|
|
$
|
1.93
|
|
|
|
8,896
|
|
|
4,616
|
|
|
$
|
1.93
|
|
Total Company
|
|
$
|
258,995
|
|
|
|
|
|
|
|
$
|
258,995
|
|
|
|
|
|
_______________________________________________________________________________
(1) Represents the weighted average share count outstanding during the period.
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
21. Commitments and Contingencies
Construction Commitments
At December 31, 2020, the Company had outstanding commitments under construction contracts related to new construction, improvements, and renovations totaling approximately $13.2 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.
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 $37.0 million for professional malpractice liability insurance and $40.0 million for general liability insurance. The Company’s insurance for the professional liability coverage is written on a “claims-made” basis, and its commercial general liability coverage is maintained on an “occurrence” basis. These coverages apply after a self-insured retention limit is exceeded. For the Company’s joint venture operations, the Company has designed a separate insurance program that responds to the risks of specific joint ventures. Most of the Company’s joint ventures are insured under a master program with an annual aggregate limit of up to $80.0 million, subject to a sublimit aggregate ranging from $23.0 million to $33.0 million for most joint ventures. The policies are generally written on a “claims-made” basis. Each of these programs has either a deductible or self-insured retention limit. The Company 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.
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
21. Commitments and Contingencies (Continued)
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 the 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 the 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.
In January 2021, the Company entered into a settlement agreement with the plaintiff-relator. Under the terms of the settlement, the Company agreed to make payments to the government, the plaintiff-relator and her counsel. Such payments, in the aggregate, are immaterial to the Company’s financial statements. In the settlement agreement, the plaintiff-relator released all defendants from liability for all conduct alleged in the federal and state court complaints, and the Company admitted no liability or wrongdoing. In connection with the settlement, the Office of the United States Attorney for the District of Delaware issued a letter to the Company stating that it does not have any present intention, based on facts now known, to pursue an investigation and/or to file suit under the False Claims Act against the Company with respect to any of the allegations made in the federal litigation.
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 U.S. Attorney’s Office has indicated that the subpoena was issued in connection with a qui tam lawsuit. 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.
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
21. Commitments and Contingencies (Continued)
Ann Arbor Complaint. On May 12, 2020, the United States District Court for the Eastern District of Michigan unsealed qui tam complaints in United States of America and State of Michigan ex rel. Neal Elkin v. Select Medical Holdings Corp., Select Medical, and Select Specialty Hospital – Ann Arbor, Inc. (“SSH-Ann Arbor”), No. 12-cv-13984. An initial complaint was filed under seal in September 2012 and a first amended complaint was filed under seal in September 2019. Both complaints were unsealed after the United States and State of Michigan filed a Notice of Election to Decline Intervention in May 2020. In the first amended complaint, the plaintiff-relator, a physician formerly practicing at SSH-Ann Arbor, alleges that the defendants had a policy to keep respiratory patients on ventilators longer than medically necessary in order to increase reimbursement, and that, after he complained of this practice, SSH-Ann Arbor retaliated by refusing to assign new patients to him. The first amended complaint was never served on the defendants. On January 15, 2021, the District Court, at the request of the plaintiff-relator and with the consent of the United States and the State of Michigan, dismissed the action without prejudice.
Oklahoma City Subpoena. On August 24, 2020, the Company and Select Specialty Hospital – Oklahoma City, Inc. (“SSH–Oklahoma City”) received Civil Investigative Demands from the U.S. Attorney’s Office for the Western District of Oklahoma seeking responses to interrogatories and the production of various documents principally relating to the documentation, billing and reviews of medical services furnished to patients at SSH-Oklahoma City. The Company does not know whether the subpoena has been issued in connection with a qui tam lawsuit or in connection with possible civil, criminal or administrative proceedings by the government. The Company is producing documents in response to the subpoena and intends to fully cooperate with this investigation. At this time, the Company is unable to predict the timing and outcome of this matter.
Medicare Dual-Eligible Litigation
The Company’s critical illness recovery hospitals have pursued claims against CMS involving denied Medicare bad debt reimbursement for copayments and deductibles of dual-eligible Medicaid beneficiaries. One group of claims affects 75 hospitals in 26 states for cost reporting periods ending in 2005 through 2010. After appeals taken by the Company, a U.S. District Court, in August 2019, ruled in favor of the Company and ordered CMS to determine and pay the Medicare bad debt reimbursement plus interest. The Company and CMS agreed on the amounts of bad debts incurred, but CMS took the position that these amounts need to be reduced by what the state Medicaid programs would have paid. In December 2020, the Company filed a motion with the U.S. District Court to enforce the judgment and order CMS to pay the bad debt amounts without a Medicaid reduction. In January 2021, the Company received correspondence from CMS indicating that it was proceeding to effectuate the judgment based on its own computation of the Medicare bad debt reimbursement. In February 2021, the Company received reimbursement proceeds of $17.9 million plus accrued interest of $4.7 million. These amounts will be recognized as income during 2021. The Company believes that CMS owes it an additional $2.3 million; the Company’s motion with the U.S. District Court is still pending with regards to this disputed amount.
22. CARES Act
Provider Relief Funds
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted. The CARES Act provided additional waivers, reimbursement, grants and other funds to assist health care providers during the COVID-19 pandemic, including $100.0 billion in appropriations for the Public Health and Social Services Emergency Fund, also referred to as the Provider Relief Fund, to be used for preventing, preparing, and responding to COVID-19, and for reimbursing “eligible health care providers for health care related expenses or lost revenues that are attributable to coronavirus.” These health care related expenses could include costs associated with constructing temporary structures or emergency operation centers, retrofitting facilities, purchasing medical supplies and equipment including personal protective equipment and testing supplies, and increasing workforce and trainings. The Company is able to use payments received under the Provider Relief Fund through June 30, 2021.
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
22. CARES Act (Continued)
On December 27, 2020, the Coronavirus Response and Relief Supplemental Appropriations Act of 2021 (“CRRSA Act”) was signed into law. The CRRSA Act legislated certain provisions and reporting requirements associated with the payments received under the Provider Relief Fund, including provisions surrounding how an entity should calculate lost revenues and a provision specifying that a parent organization may allocate all or a portion of the General and Targeted Distributions it has received among its other subsidiaries. As discussed above, the payments received under the Provider Relief Fund are to be used for health care related expenses and lost revenues attributable to the COVID-19 pandemic. These amounts, which are to be calculated in accordance with the terms and conditions set forth by the Department of Health and Human Services (“HHS”), must be determined for each of the Company’s subsidiaries by taxpayer identification number. Further, the payments are to be applied first against health care related expenses and then applied to lost revenue attributable to the COVID-19 pandemic.
On January 15, 2021, HHS released an updated post-payment notice of reporting requirements which incorporates the provisions of the CRRSA Act. HHS continues to release updated guidance and new or modified responses to Frequently Asked Questions regarding the Provider Relief Fund payments. The Company believes that any changes made to the terms and conditions from those contained in the CRRSA Act are a change to, rather than clarification of, the terms and conditions which existed as of December 31, 2020. Further, the Company believes that the terms and conditions surrounding the Provider Relief Fund payments are subject to additional changes given the series of post-payment notices of reporting requirements and other guidance issued by HHS during the year ended December 31, 2020, which, in some instances, significantly altered the terms and conditions surrounding the Provider Relief Fund payments.
The Company’s consolidated subsidiaries received approximately $172.6 million of payments under the Provider Relief Fund as of December 31, 2020. Since December 31, 2020, the Company has received an additional $34.6 million of General Distributions. Under the Company’s accounting policy, payments are recognized on the books and records of the Company’s subsidiaries as other operating income when it is probable that it has complied with the terms and conditions of the funds. The Company evaluated its compliance with the terms and conditions set forth within the CRRSA Act and by HHS as of December 31, 2020, and recognized approximately $90.0 million as other operating income on the accompanying consolidated statement of operations.
The remaining Provider Relief Fund payments of approximately $82.6 million at December 31, 2020 are reported as “unearned government assistance” on the accompanying consolidated balance sheet. Of this amount, approximately $54.5 million relates to payments received where uncertainties exist related to the Company’s ability to recognize the payments as other operating income. Such funds may need to be repaid to the government to the extent that they cannot be utilized in accordance with the regulations promulgated by HHS. The remaining amounts are anticipated to be recognized through June 30, 2021 as healthcare expenses attributable to the COVID-19 pandemic are incurred.
Medicare Accelerated and Advance Payments Program
In accordance with the CARES Act, CMS temporarily expanded its current Accelerated and Advance Payment Program for Medicare providers. Under this program, qualified healthcare providers could receive advanced or accelerated payments from CMS. The Company’s consolidated subsidiaries received approximately $321.8 million of advanced payments under this program. The majority of these payments were received in April 2020.
On October 1, 2020, a short-term government funding bill was signed into law. This bill, among other things, extended the repayment terms for providers who received advanced payments under the Medicare Accelerated and Advance Payment Program. The bill modified the terms of repayment so that a provider can request no recoupment for one year after the advanced payment was issued, followed by a 25.0% recoupment of Medicare payments during the next 11 months, and 50.0% recoupment of Medicare payments during the last six months. Any amounts that remain unpaid after 29 months would be subject to a 4.0% interest rate.
Due to the mechanism in which the advanced payments are repaid, there is uncertainty surrounding when the Company will repay the advances it received under this program. Accordingly, amounts received under the Accelerated and Advance Payment Program are reflected as a current liability under “government advances” on the accompanying consolidated balance sheet.
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
22. CARES Act (Continued)
Employer Payroll Tax Deferral
In April 2020, the Company began deferring payment on its share of payroll taxes owed, as allowed by the CARES Act through December 31, 2020. The Company is able to defer half of its share of payroll taxes owed until December 31, 2021, with the remaining half due on December 31, 2022. As of December 31, 2020, the Company deferred approximately $106.2 million of payroll taxes. These amounts are reflected in “accrued payroll” and “other non-current liabilities” on the accompanying consolidated balance sheet.
SELECT MEDICAL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
23. 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, 2019
|
|
|
|
|
|
|
|
Revenue
|
$
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
(in thousands, except per share amounts)
|
For the year ended December 31, 2020
|
|
|
|
|
|
|
|
Revenue
|
$
|
1,414,632
|
|
|
$
|
1,232,718
|
|
|
$
|
1,423,869
|
|
|
$
|
1,460,494
|
|
Cost of services, exclusive of depreciation and amortization
|
1,200,371
|
|
|
1,082,456
|
|
|
1,180,951
|
|
|
1,246,594
|
|
Depreciation and amortization
|
51,752
|
|
|
52,271
|
|
|
50,110
|
|
|
51,526
|
|
Income from operations(2)
|
128,678
|
|
|
119,518
|
|
|
156,132
|
|
|
163,329
|
|
Net income
|
70,448
|
|
|
67,486
|
|
|
104,457
|
|
|
102,215
|
|
Net income attributable to Select Medical Holdings Corporation
|
53,125
|
|
|
51,650
|
|
|
76,946
|
|
|
77,274
|
|
Earnings per common share:(1)
|
|
|
|
|
|
|
|
Basic
|
$
|
0.40
|
|
|
$
|
0.39
|
|
|
$
|
0.57
|
|
|
$
|
0.57
|
|
Diluted
|
$
|
0.40
|
|
|
$
|
0.39
|
|
|
$
|
0.57
|
|
|
$
|
0.57
|
|
_______________________________________________________________________________
(1)Due to rounding, the summation of quarterly earnings per common share balances may not equal year to date equivalents.
(2)For the year ended December 31, 2020, the Company recognized payments received under the Provider Relief Fund for health care related expenses and loss of revenue attributable to COVID-19 as other operating income. Income from operations included $55.0 million and $36.2 million of other operating income for the second and fourth quarters ended December 31, 2020. Income from operations included a reduction to other operating income of $1.2 million for the third quarter ended December 31, 2020. Refer to Note 22 – CARES Act for further information.
The following Financial Statement Schedule along with the report thereon of PricewaterhouseCoopers LLP dated February 25, 2021, 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.
Schedule II—Valuation and Qualifying Accounts