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EX-10.2 - EX-10.2 - SELECT MEDICAL HOLDINGS CORPa17-8902_1ex10d2.htm

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x                               QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended March 31, 2017

 

OR

 

o                                  TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to

 

Commission file numbers: 001-34465 and 001-31441

 

SELECT MEDICAL HOLDINGS CORPORATION

SELECT MEDICAL CORPORATION

(Exact name of Registrant as specified in its Charter)

 

Delaware

20-1764048

Delaware

23-2872718

(State or Other Jurisdiction of

(I.R.S. Employer

Incorporation or Organization)

Identification Number)

 

4714 Gettysburg Road, P.O. Box 2034
Mechanicsburg, PA 17055

(Address of Principal Executive Offices and Zip code)

 

(717) 972-1100

(Registrants’ telephone number, including area code)

 

Indicate by check mark whether the Registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods as such Registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days.   Yes x  No o

 

Indicate by check mark whether the Registrants have submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrants were required to submit and post such files).   Yes x  No o

 

Indicate by check mark whether the Registrant, Select Medical Holdings Corporation, is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

Emerging Growth Company o

 

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    o

 

Indicate by check mark whether the Registrant, Select Medical Corporation, is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer x

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

Emerging Growth Company o

 

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    o

 

Indicate by check mark whether the Registrants are shell companies (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

As of April 30, 2017, Select Medical Holdings Corporation had outstanding 132,759,535 shares of common stock.

 

This Form 10-Q is a combined quarterly report being filed separately by two Registrants: Select Medical Holdings Corporation and Select Medical Corporation. Unless the context indicates otherwise, any reference in this report to “Holdings” refers to Select Medical Holdings Corporation and any reference to “Select” refers to Select Medical Corporation, the wholly owned operating subsidiary of Holdings, and any of Select’s subsidiaries. Any reference to “Concentra” refers to Concentra Inc., the indirect operating subsidiary of Concentra Group Holdings, LLC (“Concentra Group Holdings”), and its subsidiaries. References to the “Company,” “we,” “us,” and “our” refer collectively to Holdings, Select, and Concentra Group Holdings and its subsidiaries.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

PART I

FINANCIAL INFORMATION

3

 

 

 

ITEM 1.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

Condensed consolidated balance sheets

3

 

 

 

 

Condensed consolidated statements of operations

4

 

 

 

 

Condensed consolidated statements of changes in equity and income

5

 

 

 

 

Condensed consolidated statements of cash flows

6

 

 

 

 

Notes to condensed consolidated financial statements

7

 

 

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

26

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

43

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES

44

 

 

 

PART II

OTHER INFORMATION

45

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

45

 

 

 

ITEM 1A.

RISK FACTORS

46

 

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

47

 

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

47

 

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

47

 

 

 

ITEM 5.

OTHER INFORMATION

47

 

 

 

ITEM 6.

EXHIBITS

47

 

 

 

SIGNATURES

 

 

2



Table of Contents

 

PART I FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Condensed Consolidated Balance Sheets

(unaudited)

(in thousands, except share and per share amounts)

 

 

 

Select Medical Holdings Corporation

 

Select Medical Corporation

 

 

 

December 31,

 

March 31,

 

December 31,

 

March 31,

 

 

 

2016

 

2017

 

2016

 

2017

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

99,029

 

$

65,211

 

$

99,029

 

$

65,211

 

Accounts receivable, net of allowance for doubtful accounts of $63,787 and $67,792 at 2016 and 2017, respectively

 

573,752

 

691,520

 

573,752

 

691,520

 

Prepaid income taxes

 

12,423

 

2,402

 

12,423

 

2,402

 

Other current assets

 

77,699

 

85,081

 

77,699

 

85,081

 

Total Current Assets

 

762,903

 

844,214

 

762,903

 

844,214

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

892,217

 

897,146

 

892,217

 

897,146

 

Goodwill

 

2,751,000

 

2,759,764

 

2,751,000

 

2,759,764

 

Identifiable intangible assets, net

 

340,562

 

337,076

 

340,562

 

337,076

 

Other assets

 

173,944

 

164,737

 

173,944

 

164,737

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

4,920,626

 

$

5,002,937

 

$

4,920,626

 

$

5,002,937

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

Bank overdrafts

 

$

39,362

 

$

22,299

 

$

39,362

 

$

22,299

 

Current portion of long-term debt and notes payable

 

13,656

 

22,013

 

13,656

 

22,013

 

Accounts payable

 

126,558

 

125,118

 

126,558

 

125,118

 

Accrued payroll

 

146,397

 

110,196

 

146,397

 

110,196

 

Accrued vacation

 

83,261

 

88,736

 

83,261

 

88,736

 

Accrued interest

 

22,325

 

21,558

 

22,325

 

21,558

 

Accrued other

 

140,076

 

143,180

 

140,076

 

143,180

 

Income taxes payable

 

 

5,399

 

 

5,399

 

Total Current Liabilities

 

571,635

 

538,499

 

571,635

 

538,499

 

 

 

 

 

 

 

 

 

 

 

Long-term debt, net of current portion

 

2,685,333

 

2,771,410

 

2,685,333

 

2,771,410

 

Non-current deferred tax liability

 

199,078

 

195,729

 

199,078

 

195,729

 

Other non-current liabilities

 

136,520

 

142,208

 

136,520

 

142,208

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities

 

3,592,566

 

3,647,846

 

3,592,566

 

3,647,846

 

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable non-controlling interests

 

422,159

 

462,680

 

422,159

 

462,680

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

 

 

Common stock of Holdings, $0.001 par value, 700,000,000 shares authorized, 132,596,758 and 132,753,444 shares issued and outstanding at 2016 and 2017, respectively

 

132

 

132

 

 

 

Common stock of Select, $0.01 par value, 100 shares issued and outstanding

 

 

 

0

 

0

 

Capital in excess of par

 

443,908

 

450,373

 

925,111

 

931,661

 

Retained earnings (accumulated deficit)

 

371,685

 

351,224

 

(109,386

)

(129,932

)

Total Select Medical Holdings Corporation and Select Medical Corporation Stockholders’ Equity

 

815,725

 

801,729

 

815,725

 

801,729

 

Non-controlling interest

 

90,176

 

90,682

 

90,176

 

90,682

 

Total Equity

 

905,901

 

892,411

 

905,901

 

892,411

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities and Equity

 

$

4,920,626

 

$

5,002,937

 

$

4,920,626

 

$

5,002,937

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3



Table of Contents

 

Condensed Consolidated Statements of Operations

(unaudited)

(in thousands, except per share amounts)

 

 

 

Select Medical Holdings Corporation

 

Select Medical Corporation

 

 

 

For the Three Months Ended March 31,

 

For the Three Months Ended March 31,

 

 

 

2016

 

2017

 

2016

 

2017

 

 

 

 

 

 

 

 

 

 

 

Net operating revenues

 

$

1,088,330

 

$

1,111,361

 

$

1,088,330

 

$

1,111,361

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of services

 

922,262

 

928,357

 

922,262

 

928,357

 

General and administrative

 

28,268

 

28,075

 

28,268

 

28,075

 

Bad debt expense

 

16,397

 

20,625

 

16,397

 

20,625

 

Depreciation and amortization

 

34,517

 

42,539

 

34,517

 

42,539

 

Total costs and expenses

 

1,001,444

 

1,019,596

 

1,001,444

 

1,019,596

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

86,886

 

91,765

 

86,886

 

91,765

 

 

 

 

 

 

 

 

 

 

 

Other income and expense:

 

 

 

 

 

 

 

 

 

Loss on early retirement of debt

 

(773

)

(19,719

)

(773

)

(19,719

)

Equity in earnings of unconsolidated subsidiaries

 

4,652

 

5,521

 

4,652

 

5,521

 

Non-operating gain (loss)

 

25,087

 

(49

)

25,087

 

(49

)

Interest expense

 

(38,848

)

(40,853

)

(38,848

)

(40,853

)

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

77,004

 

36,665

 

77,004

 

36,665

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

17,060

 

13,202

 

17,060

 

13,202

 

Net income

 

59,944

 

23,463

 

59,944

 

23,463

 

 

 

 

 

 

 

 

 

 

 

Less: Net income attributable to non-controlling interests

 

5,111

 

7,593

 

5,111

 

7,593

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Select Medical Holdings

 

 

 

 

 

 

 

 

 

Corporation and Select Medical Corporation

 

$

54,833

 

$

15,870

 

$

54,833

 

$

15,870

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.42

 

$

0.12

 

 

 

 

 

Diluted

 

$

0.42

 

$

0.12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

127,500

 

128,464

 

 

 

 

 

Diluted

 

127,581

 

128,628

 

 

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4



Table of Contents

 

Condensed Consolidated Statements of Changes in Equity and Income

(unaudited)

(in thousands)

 

 

 

 

 

 

Select Medical Holdings Corporation Stockholders

 

 

 

 

 

 

 

Redeemable
Non-controlling
interests

 

 

Common
Stock
Issued

 

Common
Stock
Par Value

 

Capital in
Excess
of Par

 

Retained
Earnings

 

Total
Stockholders’
Equity

 

Non-controlling
Interests

 

Total
Equity

 

Balance at December 31, 2016

 

$

422,159

 

 

132,597

 

$

132

 

$

443,908

 

$

371,685

 

$

815,725

 

$

90,176

 

$

905,901

 

Net income attributable to Select Medical Holdings Corporation

 

 

 

 

 

 

 

 

 

 

15,870

 

15,870

 

 

 

15,870

 

Net income attributable to non-controlling interests

 

6,090

 

 

 

 

 

 

 

 

 

 

 

1,503

 

1,503

 

Issuance and vesting of restricted stock

 

 

 

 

101

 

0

 

4,280

 

 

 

4,280

 

 

 

4,280

 

Repurchase of common shares

 

 

 

 

(12

)

0

 

(85

)

(71

)

(156

)

 

 

(156

)

Exercise of stock options

 

 

 

 

67

 

0

 

617

 

 

 

617

 

 

 

617

 

Issuance of non-controlling interests

 

 

 

 

 

 

 

 

1,653

 

 

 

1,653

 

441

 

2,094

 

Purchase of non-controlling interests

 

(57

)

 

 

 

 

 

 

 

7

 

7

 

 

 

7

 

Distributions to non-controlling interests

 

(2,075

)

 

 

 

 

 

 

 

 

 

 

(1,532

)

(1,532

)

Redemption adjustment on non-controlling interests

 

36,292

 

 

 

 

 

 

 

 

(36,292

)

(36,292

)

 

 

(36,292

)

Other

 

271

 

 

 

 

 

 

 

 

25

 

25

 

94

 

119

 

Balance at March 31, 2017

 

$

462,680

 

 

132,753

 

$

132

 

$

450,373

 

$

351,224

 

$

801,729

 

$

90,682

 

$

892,411

 

 

 

 

 

 

 

Select Medical Corporation Stockholders

 

 

 

 

 

 

 

Redeemable
Non-controlling
interests

 

 

Common
Stock
Issued

 

Common
Stock
Par Value

 

Capital in
Excess
of Par

 

Retained
Earnings

 

Total
Stockholders’
Equity

 

Non-controlling
Interests

 

Total
Equity

 

Balance at December 31, 2016

 

$

422,159

 

 

0

 

$

0

 

$

925,111

 

$

(109,386

)

$

815,725

 

$

90,176

 

$

905,901

 

Net income attributable to Select Medical Corporation

 

 

 

 

 

 

 

 

 

 

15,870

 

15,870

 

 

 

15,870

 

Net income attributable to non-controlling interests

 

6,090

 

 

 

 

 

 

 

 

 

 

 

1,503

 

1,503

 

Additional investment by Holdings

 

 

 

 

 

 

 

 

617

 

 

 

617

 

 

 

617

 

Dividends declared and paid to Holdings

 

 

 

 

 

 

 

 

 

 

(156

)

(156

)

 

 

(156

)

Contribution related to restricted stock awards and stock option issuances by Holdings

 

 

 

 

 

 

 

 

4,280

 

 

 

4,280

 

 

 

4,280

 

Issuance of non-controlling interests

 

 

 

 

 

 

 

 

1,653

 

 

 

1,653

 

441

 

2,094

 

Purchase of non-controlling interests

 

(57

)

 

 

 

 

 

 

 

7

 

7

 

 

 

7

 

Distributions to non-controlling interests

 

(2,075

)

 

 

 

 

 

 

 

 

 

 

(1,532

)

(1,532

)

Redemption adjustment on non-controlling interests

 

36,292

 

 

 

 

 

 

 

 

(36,292

)

(36,292

)

 

 

(36,292

)

Other

 

271

 

 

 

 

 

 

 

 

25

 

25

 

94

 

119

 

Balance at March 31, 2017

 

$

462,680

 

 

0

 

$

0

 

$

931,661

 

$

(129,932

)

$

801,729

 

$

90,682

 

$

892,411

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5



Table of Contents

 

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in thousands)

 

 

 

Select Medical Holdings Corporation

 

Select Medical Corporation

 

 

 

For the Three Months Ended March 31,

 

For the Three Months Ended March 31,

 

 

 

2016

 

2017

 

2016

 

2017

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

 

 

 

 

 

 

 

 

Net income

 

$

59,944

 

$

23,463

 

$

59,944

 

$

23,463

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

 

Distributions from unconsolidated subsidiaries

 

8,305

 

4,911

 

8,305

 

4,911

 

Depreciation and amortization

 

34,517

 

42,539

 

34,517

 

42,539

 

Provision for bad debts

 

16,397

 

20,625

 

16,397

 

20,625

 

Equity in earnings of unconsolidated subsidiaries

 

(4,652

)

(5,521

)

(4,652

)

(5,521

)

Loss on early retirement of debt

 

773

 

6,527

 

773

 

6,527

 

Gain on sale of assets and businesses

 

(30,393

)

(4,609

)

(30,393

)

(4,609

)

Impairment of equity investment

 

5,339

 

 

5,339

 

 

Stock compensation expense

 

3,976

 

4,586

 

3,976

 

4,586

 

Amortization of debt discount, premium and issuance costs

 

3,691

 

3,422

 

3,691

 

3,422

 

Deferred income taxes

 

(3,475

)

(3,425

)

(3,475

)

(3,425

)

Changes in operating assets and liabilities, net of effects of business combinations:

 

 

 

 

 

 

 

 

 

Accounts receivable

 

(39,164

)

(138,113

)

(39,164

)

(138,113

)

Other current assets

 

7,560

 

(7,621

)

7,560

 

(7,621

)

Other assets

 

(891

)

(48

)

(891

)

(48

)

Accounts payable

 

(21,322

)

412

 

(21,322

)

412

 

Accrued expenses

 

51,193

 

(18,429

)

51,193

 

(18,429

)

Income taxes

 

19,370

 

15,420

 

19,370

 

15,420

 

Net cash provided by (used in) operating activities

 

111,168

 

(55,861

)

111,168

 

(55,861

)

 

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

 

 

Acquisition of businesses, net of cash acquired

 

(412,883

)

(9,566

)

(412,883

)

(9,566

)

Purchases of property and equipment

 

(46,768

)

(50,653

)

(46,768

)

(50,653

)

Investment in businesses

 

(623

)

(500

)

(623

)

(500

)

Proceeds from sale of assets and businesses

 

62,600

 

19,512

 

62,600

 

19,512

 

Net cash used in investing activities

 

(397,674

)

(41,207

)

(397,674

)

(41,207

)

 

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

 

 

Borrowings on revolving facilities

 

190,000

 

530,000

 

190,000

 

530,000

 

Payments on revolving facilities

 

(175,000

)

(415,000

)

(175,000

)

(415,000

)

Proceeds from term loans

 

600,127

 

1,139,822

 

600,127

 

1,139,822

 

Payments on term loans

 

(226,962

)

(1,170,817

)

(226,962

)

(1,170,817

)

Revolving facility debt issuance costs

 

 

(3,887

)

 

(3,887

)

Borrowings of other debt

 

6,727

 

6,571

 

6,727

 

6,571

 

Principal payments on other debt

 

(4,464

)

(5,275

)

(4,464

)

(5,275

)

Repayments of bank overdrafts

 

(28,615

)

(17,062

)

(28,615

)

(17,062

)

Repurchase of common stock

 

 

(156

)

 

 

Dividends paid to Holdings

 

 

 

 

(156

)

Proceeds from exercise of stock options

 

21

 

617

 

 

 

Equity investment by Holdings

 

 

 

21

 

617

 

Proceeds from issuance of non-controlling interests

 

 

2,094

 

 

2,094

 

Purchase of non-controlling interests

 

(1,294

)

(50

)

(1,294

)

(50

)

Distributions to non-controlling interests

 

(3,061

)

(3,607

)

(3,061

)

(3,607

)

Net cash provided by financing activities

 

357,479

 

63,250

 

357,479

 

63,250

 

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

70,973

 

(33,818

)

70,973

 

(33,818

)

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

14,435

 

99,029

 

14,435

 

99,029

 

Cash and cash equivalents at end of period

 

$

85,408

 

$

65,211

 

$

85,408

 

$

65,211

 

 

 

 

 

 

 

 

 

 

 

Supplemental Information

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

21,544

 

$

38,565

 

$

21,544

 

$

38,565

 

Cash paid for taxes

 

$

1,209

 

$

1,207

 

$

1,209

 

$

1,207

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

1.              Basis of Presentation

 

The unaudited condensed consolidated financial statements of Select Medical Holdings Corporation (“Holdings”) and Select Medical Corporation (“Select”) as of March 31, 2017, and for the three month periods ended March 31, 2016 and 2017, have been prepared in accordance with generally accepted accounting principles (“GAAP”). In the opinion of management, such information contains all adjustments, which are normal and recurring in nature, necessary for a fair statement of the financial position, results of operations and cash flow for such periods. All significant intercompany transactions and balances have been eliminated. The results of operations for the three months ended March 31, 2017 are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2017. Holdings and Select and their subsidiaries are collectively referred to as the “Company.” The condensed consolidated financial statements of Holdings include the accounts of its wholly owned subsidiary, Select. Holdings conducts substantially all of its business through Select and its subsidiaries.

 

Certain information and disclosures normally included in the notes to consolidated financial statements have been condensed or omitted consistent with the rules and regulations of the Securities and Exchange Commission (the “SEC”), although the Company believes the disclosure is adequate to make the information presented not misleading. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2016 contained in the Company’s Annual Report on Form 10-K filed with the SEC on February 23, 2017.

 

2.              Accounting Policies

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including disclosure of contingent assets and liabilities, at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Recent Accounting Pronouncements

 

In February 2017, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2017-05, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20) —Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Asset.  The standard  provides guidance for recognizing gains and losses from the transfer of nonfinancial assets and in-substance non-financial assets in contracts with non-customers, unless other specific guidance applies. The standard requires a company to derecognize nonfinancial assets once it transfers control. Additionally, when a company transfers its controlling interest in a nonfinancial asset, but retains a noncontrolling ownership interest, the company is required to measure any non-controlling interest it receives or retains at fair value. The standard will be effective for fiscal years beginning after December 15, 2017. The standard requires the selection of a retrospective or cumulative effect transition method. The Company is currently evaluating the standard to determine the impact it will have on its consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. ASU 2017-01 states that if substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the transaction should be accounted for as an asset acquisition. In addition, the ASU clarifies the requirements for a set of activities to be considered a business and narrows the definition of an output. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. ASU 2017-01 is effective for annual periods beginning after December 15, 2017. Early adoption is permitted.

 

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In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory. Current GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. The ASU requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The standard will be effective for fiscal years beginning after December 15, 2017. The Company is currently evaluating the standard to determine the impact it will have on its consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases. This ASU includes a lessee accounting model that recognizes two types of leases; finance and operating. This ASU requires that a lessee recognize on the balance sheet assets and liabilities for all leases with lease terms of more than twelve months. Lessees will need to recognize almost all leases on the balance sheet as a right-of-use asset and a lease liability. For income statement purposes, the FASB retained the dual model, requiring leases to be classified as either operating or finance. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will depend on its classification as a finance or operating lease. For short-term leases of twelve months or less, lessees are permitted to make an accounting election by class of underlying asset not to recognize right-of-use assets or lease liabilities. If the alternative is elected, lease expense would be recognized generally on the straight-line basis over the respective lease term.

 

The amendments in ASU 2016-02 will take effect for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Earlier application is permitted as of the beginning of an interim or annual reporting period. A modified retrospective approach is required for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements.

 

Upon adoption, the Company will recognize significant assets and liabilities on the consolidated balance sheets as a result of the operating lease obligations of the Company. Operating lease expense will still be recognized as rent expense on a straight-line basis over the respective lease terms in the consolidated statements of operations.

 

In May 2014, March 2016, April 2016, and December 2016, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, ASU 2016-08, Revenue from Contracts with Customers, Principal versus Agent Considerations, ASU 2016-10, Revenue from Contracts with Customers, Identifying Performance Obligations and Licensing, ASU 2016-12, Revenue from Contracts with Customers, Narrow Scope Improvements and Practical Expedients, and ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customer (collectively “the standards”), respectively, which supersede most of the current revenue recognition requirements. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. New disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers are also required. The original standards were effective for fiscal years beginning after December 15, 2016; however, in July 2015, the FASB approved a one-year deferral of these standards, with a new effective date for fiscal years beginning after December 15, 2017. The standards require the selection of a retrospective or cumulative effect transition method.

 

The Company will be prepared to implement the new standards beginning January 1, 2018, using the retrospective transition method. Adoption of the new standard will result in material changes to the presentation of net operating revenues and bad debt expense in the consolidated statements of operations, but the presentation of the amount of income from operations and net income will be unchanged upon adoption of the new standards. The principal change the Company will experience under the new standards is how the Company accounts for amounts estimated as being realizable from a customer on the date which services have been provided. Under the current standards, the Company’s estimate for unrealizable amounts based upon historical experience was recorded to bad debt expense. Under the new standards, the Company’s estimate for unrealizable amounts based upon historical experience will be recognized as a direct reduction to revenue. Accounts receivable will continue to be subject to estimates of collectability, and bad debt expense and related allowances for doubtful accounts will continue to be recognized if estimates of collectability change in future periods. If accounts receivable become uncollectible due to bankruptcy, financial hardship or other factors that may arise and impact the Company’s ability to realize amounts owed to us, the Company will write-off these uncollectible accounts through the allowance for doubtful accounts.

 

The Company’s remaining implementation efforts will be focused principally on refining the accounting processes, disclosure processes, and internal controls.

 

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Recently Adopted Accounting Pronouncements

 

In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, which changed the presentation of deferred income taxes. The standard changed the presentation of deferred income taxes through the requirement that all deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The Company adopted the standard on January 1, 2017. The consolidated balance sheet at December 31, 2016 has been retrospectively adjusted. Adoption of the new standard impacted the Company’s previously reported results as follows:

 

 

 

December 31, 2016

 

 

 

As Reported

 

As Adjusted

 

 

 

(in thousands)

 

Current deferred tax asset

 

$

45,165

 

$

 

Total current assets

 

808,068

 

762,903

 

Other assets

 

152,548

 

173,944

 

Total assets

 

4,944,395

 

4,920,626

 

 

 

 

 

 

 

Non-current deferred tax liability

 

222,847

 

199,078

 

Total liabilities

 

3,616,335

 

3,592,566

 

Total liabilities and equity

 

4,944,395

 

4,920,626

 

 

Reclassifications

 

Certain reclassifications have been made to prior year amounts in order to conform to current year presentation. As discussed above, the prior year balance sheet presentation has been changed in order to conform to the current year balance sheet presentation for the adoption of ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes.

 

3.  Acquisitions

 

Physiotherapy Acquisition

 

On March 4, 2016, Select acquired 100% of the issued and outstanding equity securities of Physiotherapy Associates Holdings, Inc. (“Physiotherapy”) for $406.3 million, net of $12.3 million of cash acquired.

 

For the Physiotherapy acquisition, the Company allocated the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair value in accordance with the provisions of Accounting Standards Codification (“ASC”) 805, Business Combinations. During the three months ended March 31, 2017, the Company finalized the purchase price allocation.

 

The following table reconciles the allocation of the consideration given for identifiable net assets and goodwill acquired to the net cash paid for the acquired business (in thousands):

 

Cash and cash equivalents

 

$

12,340

 

Identifiable tangible assets, excluding cash and cash equivalents

 

87,832

 

Identifiable intangible assets

 

32,484

 

Goodwill

 

343,187

 

Total assets

 

475,843

 

Total liabilities

 

54,685

 

Acquired non-controlling interests

 

2,514

 

Net assets acquired

 

418,644

 

Less: Cash and cash equivalents acquired

 

(12,340

)

Net cash paid

 

$

406,304

 

 

Goodwill of $343.2 million has been recognized in the business combination, representing the excess of the consideration given over the fair value of identifiable net assets acquired. The value of goodwill is derived from Physiotherapy’s future earnings potential and its assembled workforce. Goodwill has been assigned to the outpatient rehabilitation reporting unit and is not deductible for tax purposes. However, prior to its acquisition by the Company, Physiotherapy completed certain acquisitions that resulted in tax deductible goodwill with an estimated value of $8.8 million, which the Company will deduct through 2030.

 

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Table of Contents

 

Due to the integration of Physiotherapy into our outpatient rehabilitation operations, it is not practicable to separately identify net revenue and earnings of Physiotherapy on a stand-alone basis.

 

The following pro forma unaudited results of operations have been prepared assuming the acquisition of Physiotherapy occurred on January 1, 2015. These results are not necessarily indicative of results of future operations nor of the results that would have actually occurred had the acquisition been consummated on the aforementioned date. The Company’s results of operations for the three months ended March 31, 2017 include Physiotherapy for the entire period and there are no pro forma adjustments; therefore, no pro forma information is presented for the period.

 

 

 

For the Three Months
Ended March 31, 2016

 

 

 

(in thousands, except per
share amounts)

 

Net revenue

 

$

1,141,860

 

Net income

 

53,014

 

Income per common share:

 

 

 

Basic

 

$

0.40

 

Diluted

 

$

0.40

 

 

The net income tax impact was calculated at a statutory rate, as if Physiotherapy had been a subsidiary of the Company as of January 1, 2015. Pro forma results for the three months ended March 31, 2016 were adjusted to exclude approximately $3.2 million of Physiotherapy acquisition costs.

 

Other Acquisitions

 

The Company completed acquisitions within our Concentra and outpatient rehabilitation segments during the three months ended March 31, 2017. Consideration given for these acquisitions consisted of $9.6 million of cash, net of cash received. The assets received in these acquisitions consisted principally of accounts receivable, property and equipment, identifiable intangible assets, and goodwill, of which $8.6 million and $0.3 million of goodwill was recognized in our Concentra and outpatient rehabilitation reporting units, respectively.

 

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Table of Contents

 

4.              Intangible Assets and Liabilities

 

The Company’s goodwill and identifiable intangible assets and liabilities consist of the following:

 

 

 

December 31,

 

March 31,

 

 

 

2016

 

2017

 

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Amount

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Amount

 

 

 

(in thousands)

 

Goodwill

 

$

2,751,000

 

$

 

$

2,751,000

 

$

2,759,764

 

$

 

$

2,759,764

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Identifiable intangibles—Indefinite lived assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks

 

166,698

 

 

166,698

 

166,698

 

 

166,698

 

Certificates of need

 

17,026

 

 

17,026

 

17,152

 

 

17,152

 

Accreditations

 

2,235

 

 

2,235

 

2,143

 

 

2,143

 

Identifiable intangibles—Finite lived assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

142,198

 

(23,185

)

119,013

 

142,890

 

(26,908

)

115,982

 

Favorable leasehold interests

 

13,089

 

(2,317

)

10,772

 

13,177

 

(2,796

)

10,381

 

Non-compete agreements

 

26,655

 

(1,837

)

24,818

 

27,057

 

(2,337

)

24,720

 

Total identifiable intangible assets

 

$

367,901

 

$

(27,339

)

$

340,562

 

$

369,117

 

$

(32,041

)

$

337,076

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Identifiable intangibles—Finite lived liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unfavorable leasehold interests

 

$

5,139

 

$

(1,410

)

$

3,729

 

$

5,343

 

$

(1,690

)

$

3,653

 

 

The Company’s customer relationships and non-compete agreements amortize over their estimated useful lives. Amortization expense was $3.8 million and $4.4 million for the three months ended March 31, 2016 and 2017, respectively. Estimated amortization expense of the Company’s customer relationships and non-compete agreements for each of the five succeeding years is $16.4 million annually.

 

The Company’s favorable leasehold interest assets and unfavorable leasehold interest liabilities are amortized to rent expense over the remaining term of their respective leases to reflect a market rent per period based upon the market conditions present at the acquisition date. The Company’s unfavorable leasehold interests are presented as part of accrued other and other non-current liabilities on the condensed consolidated balance sheets.

 

The Company’s accreditations and trademarks have renewal terms and the costs to renew these intangible assets are expensed as incurred. At March 31, 2017, the accreditations and trademarks have a weighted average time until next renewal of 1.5 years and 2.6 years, respectively.

 

The changes in goodwill for the three months ended March 31, 2017 are as follows:

 

 

 

Specialty
Hospitals

 

Outpatient
Rehabilitation

 

Concentra

 

Total

 

 

 

(in thousands)

 

Balance as of December 31, 2016

 

$

1,447,406

 

$

643,557

 

$

660,037

 

$

2,751,000

 

Acquired

 

 

311

 

8,627

 

8,938

 

Measurement period adjustment

 

(342

)

168

 

 

(174

)

Balance as of March 31, 2017

 

$

1,447,064

 

$

644,036

 

$

668,664

 

$

2,759,764

 

 

See Note 3 for details of the goodwill acquired during the period.

 

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Table of Contents

 

5.              Long-Term Debt and Notes Payable

 

For purposes of this indebtedness footnote, references to Select exclude Concentra because the Concentra credit facilities are non-recourse to Holdings and Select.

 

The Company’s long-term debt and notes payable consist of the following:

 

 

 

December 31,
2016

 

March 31,
2017

 

 

 

(in thousands)

 

Select 6.375% senior notes(1)

 

$

702,545

 

$

702,966

 

Select credit facilities:

 

 

 

 

 

Select revolving facility

 

220,000

 

335,000

 

Select term loan(2)

 

1,122,203

 

1,122,052

 

Other—Select

 

22,688

 

24,842

 

Total Select debt

 

2,067,436

 

2,184,860

 

Less: Select current maturities

 

8,996

 

21,641

 

Select long-term debt maturities

 

$

2,058,440

 

$

2,163,219

 

Concentra credit facilities:

 

 

 

 

 

Concentra term loans(3)

 

$

626,375

 

$

604,068

 

Other—Concentra

 

5,178

 

4,495

 

Total Concentra debt

 

631,553

 

608,563

 

Less: Concentra current maturities

 

4,660

 

372

 

Concentra long-term debt maturities

 

$

626,893

 

$

608,191

 

 

 

 

 

 

 

Total current maturities

 

$

13,656

 

$

22,013

 

Total long-term debt maturities

 

2,685,333

 

2,771,410

 

Total debt

 

$

2,698,989

 

$

2,793,423

 

 


(1)                                 Includes unamortized premium of $1.0 million and $0.9 million at December 31, 2016 and March 31, 2017, respectively. Includes unamortized debt issuance costs of $8.5 million and $8.0 million at December 31, 2016 and March 31, 2017, respectively.

 

(2)                                 Includes unamortized discounts of $12.0 million and $14.0 million at December 31, 2016 and March 31, 2017, respectively. Includes unamortized debt issuance costs of $13.6 million and $13.9 million at December 31, 2016 and March 31, 2017, respectively.

 

(3)                                 Includes unamortized discounts of $2.8 million and $2.6 million at December 31, 2016 and March 31, 2017, respectively. Includes unamortized debt issuance costs of $13.1 million and $12.5 million at December 31, 2016 and March 31, 2017, respectively.

 

Maturities of Long-Term Debt and Notes Payable

 

Maturities of the Company’s long-term debt and notes payable for the period April 1, 2017 through December 31, 2017 and for the years after 2017 are approximately as follows:

 

 

 

Select

 

Concentra

 

Total

 

 

 

(in thousands)

 

April 1, 2017 — December 31, 2017

 

$

18,072

 

$

343

 

$

18,415

 

2018

 

14,976

 

128

 

15,104

 

2019

 

23,327

 

144

 

23,471

 

2020

 

11,568

 

3,177

 

14,745

 

2021

 

721,514

 

6,680

 

728,194

 

2022 and beyond

 

1,430,385

 

613,198

 

2,043,583

 

Total principal

 

2,219,842

 

623,670

 

2,843,512

 

Unamortized discounts and premiums

 

(13,051

)

(2,641

)

(15,692

)

Unamortized debt issuance costs

 

(21,931

)

(12,466

)

(34,397

)

Total

 

$

2,184,860

 

$

608,563

 

$

2,793,423

 

 

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Table of Contents

 

Select Credit Facilities

 

On March 6, 2017, Select entered into a new senior secured credit agreement (the “Select credit agreement”) that provides for $1.6 billion in senior secured credit facilities comprising a $1.15 billion, seven-year term loan (the “Select term loan”) and a $450.0 million, five-year 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.

 

Select used borrowings under the Select credit facilities to: (i) refinance in full the series E tranche B term loans due June 1, 2018, the series F tranche B term loans due March 31, 2021, and the revolving facility maturing March 1, 2018 under its then existing credit facilities; and (ii) pay fees and expenses in connection with the refinancing.

 

Borrowings under the Select credit facilities bear interest at a rate equal to: (i) in the case of the Select term loan, Adjusted LIBO (as defined in the Select credit agreement) plus 3.50% (subject to an Adjusted LIBO floor of 1.00%), or Alternate Base Rate (as defined in the Select credit agreement) plus 2.50% (subject to an Alternate Base Rate floor of 2.00%); and (ii) in the case of the Select revolving facility, Adjusted LIBO plus a percentage ranging from 3.00% to 3.25% or Alternate Base Rate plus a percentage ranging from 2.00% to 2.25%, in each case based on Select’s leverage ratio.

 

The Select term loan amortizes in equal quarterly installments in amounts equal to 0.25% of the aggregate original principal amount of the Select term loan commencing on June 30, 2017.  The balance of the Select term loan will be payable on March 8, 2024; however, if the Select 6.375% senior notes, which are due June 1, 2021, are outstanding on March 1, 2021, the maturity date for the Select term loan will become March 1, 2021. The Select revolving facility will be payable on March 8, 2022; however, if the Select 6.375% senior notes are outstanding on February 1, 2021, the maturity date for the Select revolving facility will become February 1, 2021.

 

Select will be required to prepay borrowings under the Select credit facilities with (i) 100% of the net cash proceeds received from non-ordinary course asset sales or other dispositions, or as a result of a casualty or condemnation, subject to reinvestment provisions and other customary carveouts and, 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) 100% of the net cash proceeds received from the issuance of debt obligations other than certain permitted debt obligations, and (ii) 50% of excess cash flow (as defined in the Select credit agreement) if Select’s leverage ratio is greater than 4.50 to 1.00 and 25% of excess cash flow if Select’s leverage ratio is less than or equal to 4.50 to 1.00 and greater than 4.00 to 1.00, in each case, reduced by the aggregate amount of term loans, revolving loans and certain other debt optionally prepaid during the applicable fiscal year.  Select will not be required to prepay borrowings with excess cash flow if Select’s leverage ratio is less than or equal to 4.00 to 1.00.

 

The Select revolving facility requires Select to maintain a leverage ratio (as defined in the Select credit agreement), which is tested quarterly, not to exceed 6.25 to 1.00. After March 31, 2019, the leverage ratio must not exceed 6.00 to 1.00.  Failure to comply with this covenant would result in an event of default under the Select revolving facility and, absent a waiver or an amendment from the revolving lenders, preclude Select from making further borrowings under the Select revolving facility and permit the revolving lenders to accelerate all outstanding borrowings under the Select revolving facility. The termination of the Select revolving facility commitments and the acceleration of amounts outstanding thereunder would constitute an event of default with respect to the Select term loan. As of March 31, 2017, Select’s leverage ratio was 6.01 to 1.00.

 

The Select credit facilities also contain a number of other affirmative and restrictive covenants, including limitations on mergers, consolidations and dissolutions; sales of assets; investments and acquisitions; indebtedness; liens; affiliate transactions; and dividends and restricted payments. The Select credit facilities contain events of default for non-payment of principal and interest when due (subject, as to interest, to a grace period), cross-default and cross-acceleration provisions and an event of default that would be triggered by a change of control.

 

Borrowings under the Select credit facilities are guaranteed by Holdings and substantially all of Select’s current domestic subsidiaries and will be guaranteed by substantially all of Select’s future domestic subsidiaries and 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 and up to 65% of the capital stock of Select’s foreign subsidiaries held directly by Select or a domestic subsidiary.

 

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Loss on Early Retirement of Debt

 

During the three months ended March 31, 2017, the Company refinanced its senior secured credit facilities, which consisted of the series E tranche B term loans due June 1, 2018, the series F tranche B term loans due March 31, 2021, and the revolving facility maturing March 1, 2018, which resulted in losses on early retirement of debt of $19.7 million.

 

Excess Cash Flow Payment

 

On March 1, 2017, Concentra made a principal prepayment of $23.1 million associated with the Concentra first lien term loans in accordance with the provision in the Concentra credit facilities that requires mandatory prepayments of term loans as a result of annual excess cash flow.

 

6.  Fair Value

 

Financial instruments include cash and cash equivalents, notes payable, and long-term debt. The carrying amount of cash and cash equivalents approximates fair value because of the short-term maturity of these instruments.

 

The face values, carrying values, and fair values of the Company’s 6.375% senior notes and credit facilities are as follows:

 

 

 

December 31, 2016

 

March 31, 2017

 

 

 

Face
Value

 

Carrying
Value

 

Fair
Value

 

Face
Value

 

Carrying
Value

 

Fair
Value

 

 

 

(in thousands)

 

Select 6.375% senior notes(1)

 

$

710,000

 

$

702,545

 

$

710,000

 

$

710,000

 

$

702,966

 

$

715,325

 

Select credit facilities(2)

 

1,367,751

 

1,342,203

 

1,370,460

 

1,485,000

 

1,457,052

 

1,474,013

 

Concentra credit facilities(3)

 

642,239

 

626,375

 

644,648

 

619,175

 

604,068

 

622,271

 

 


(1)                                 The carrying value includes an unamortized premium of $1.0 million and $0.9 million at December 31, 2016 and March 31, 2017, respectively, and unamortized debt issuance costs of $8.5 million and $8.0 million at December 31, 2016 and March 31, 2017, respectively.

 

(2)                                 The carrying value includes unamortized discounts of $12.0 million and $14.0 million at December 31, 2016 and March 31, 2017, respectively, and unamortized debt issuance costs of $13.6 million and $13.9 million at December 31, 2016 and March 31, 2017, respectively.

 

(3)                                 The carrying value includes unamortized discounts of $2.8 million and $2.6 million at December 31, 2016 and March 31, 2017, respectively, and unamortized debt issuance costs of $13.1 million and $12.5 million at December 31, 2016 and March 31, 2017, respectively.

 

The fair values of the Select credit facilities and the Concentra credit facilities were based on quoted market prices for this debt in the syndicated loan market. The fair value of Select’s 6.375% senior notes debt was based on quoted market prices.

 

The Company considers the inputs in the valuation process to be Level 2 in the fair value hierarchy. Level 2 in the fair value hierarchy is defined as inputs that are observable for the asset or liability, either directly or indirectly, which includes quoted prices for identical assets or liabilities in markets that are not active.

 

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7.              Segment Information

 

The Company’s reportable segments consist of: specialty hospitals, outpatient rehabilitation, and Concentra. Other activities include the Company’s corporate shared services and certain other non-consolidating joint ventures and minority investments in other healthcare related businesses. The accounting policies of the segments are the same as those described in the Annual Report on Form 10-K for the year ended December 31, 2016. The Company evaluates performance of the segments based on Adjusted EBITDA. Adjusted EBITDA is defined as earnings excluding interest, income taxes, depreciation and amortization, gain (loss) on early retirement of debt, stock compensation expense, Physiotherapy acquisition costs, non-operating gain (loss), and equity in earnings (losses) of unconsolidated subsidiaries.

 

The following tables summarize selected financial data for the Company’s reportable segments. The segment results of Holdings are identical to those of Select.

 

 

 

Three Months Ended March 31, 2016

 

 

 

Specialty
Hospitals

 

Outpatient
Rehabilitation
(1)

 

Concentra

 

Other

 

Total

 

 

 

(in thousands)

 

Net revenue

 

$

598,954

 

$

238,082

 

$

250,877

 

$

417

 

$

1,088,330

 

Adjusted EBITDA

 

86,756

 

28,879

 

34,153

 

(21,173

)

128,615

 

Total assets(2)

 

2,434,405

 

974,264

 

1,310,317

 

103,878

 

4,822,864

 

Capital expenditures

 

33,675

 

4,974

 

3,210

 

4,909

 

46,768

 

 

 

 

Three Months Ended March 31, 2017

 

 

 

Specialty
Hospitals

 

Outpatient
Rehabilitation

 

Concentra

 

Other

 

Total

 

 

 

(in thousands)

 

Net revenue

 

$

598,787

 

$

255,817

 

$

256,149

 

$

608

 

$

1,111,361

 

Adjusted EBITDA

 

88,665

 

31,351

 

42,592

 

(23,718

)

138,890

 

Total assets

 

2,622,220

 

980,261

 

1,297,672

 

102,784

 

5,002,937

 

Capital expenditures

 

32,357

 

6,673

 

8,686

 

2,937

 

50,653

 

 

A reconciliation of Adjusted EBITDA to income before income taxes is as follows:

 

 

 

Three Months Ended March 31, 2016

 

 

 

Specialty
Hospitals

 

Outpatient
Rehabilitation
(1)

 

Concentra

 

Other

 

Total

 

 

 

(in thousands)

 

Adjusted EBITDA

 

$

86,756

 

$

28,879

 

$

34,153

 

$

(21,173

)

 

 

Depreciation and amortization

 

(13,893

)

(4,036

)

(15,376

)

(1,212

)

 

 

Stock compensation expense

 

 

 

(192

)

(3,784

)

 

 

Physiotherapy acquisition costs

 

 

 

 

(3,236

)

 

 

Income (loss) from operations

 

$

72,863

 

$

24,843

 

$

18,585

 

$

(29,405

)

$

86,886

 

Loss on early retirement of debt

 

 

 

 

 

 

 

 

 

(773

)

Equity in earnings of unconsolidated subsidiaries

 

 

 

 

 

 

 

 

 

4,652

 

Non-operating gain

 

 

 

 

 

 

 

 

 

25,087

 

Interest expense

 

 

 

 

 

 

 

 

 

(38,848

)

Income before income taxes

 

 

 

 

 

 

 

 

 

$

77,004

 

 

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Three Months Ended March 31, 2017

 

 

 

Specialty
Hospitals

 

Outpatient
Rehabilitation

 

Concentra

 

Other

 

Total

 

 

 

(in thousands)

 

Adjusted EBITDA

 

$

88,665

 

$

31,351

 

$

42,592

 

$

(23,718

)

 

 

Depreciation and amortization

 

(18,500

)

(6,340

)

(16,123

)

(1,576

)

 

 

Stock compensation expense

 

 

 

(306

)

(4,280

)

 

 

Income (loss) from operations

 

$

70,165

 

$

25,011

 

$

26,163

 

$

(29,574

)

$

91,765

 

Loss on early retirement of debt

 

 

 

 

 

 

 

 

 

(19,719

)

Equity in earnings of unconsolidated subsidiaries

 

 

 

 

 

 

 

 

 

5,521

 

Non-operating loss

 

 

 

 

 

 

 

 

 

(49

)

Interest expense

 

 

 

 

 

 

 

 

 

(40,853

)

Income before income taxes

 

 

 

 

 

 

 

 

 

$

36,665

 

 


(1)                                 The outpatient rehabilitation segment includes the operating results of the Company’s contract therapy businesses through March 31, 2016 and Physiotherapy beginning March 4, 2016. Total assets presented under outpatient rehabilitation at March 31, 2016 reflect the disposition of assets sold as a result of the sale of our contract therapy businesses.

 

(2)                                 Reflects the retrospective adoption of ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. Total assets as of March 31, 2016 were retrospectively conformed to reflect the adoption of the standard, resulting in a reduction to total assets of $25.1 million.

 

8.  Income per Common Share

 

Holdings applies the two-class method for calculating and presenting income per common share. The two-class method is an earnings allocation formula that determines earnings per share for each class of stock participation rights in undistributed earnings.

 

The following table sets forth the calculation of income per share in Holdings’ condensed consolidated statements of operations and the differences between basic weighted average shares outstanding and diluted weighted average shares outstanding used to compute basic and diluted earnings per share, respectively.

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

2017

 

 

 

(in thousands, except per share amounts)

 

Numerator:

 

 

 

 

 

Net income attributable to Select Medical Holdings Corporation

 

$

54,833

 

$

15,870

 

Less: Earnings allocated to unvested restricted stockholders

 

1,582

 

507

 

Net income available to common stockholders

 

$

53,251

 

$

15,363

 

Denominator:

 

 

 

 

 

Weighted average shares—basic

 

127,500

 

128,464

 

Effect of dilutive securities:

 

 

 

 

 

Stock options

 

81

 

164

 

Weighted average shares—diluted

 

127,581

 

128,628

 

 

 

 

 

 

 

Basic income per common share:

 

$

0.42

 

$

0.12

 

Diluted income per common share:

 

$

0.42

 

$

0.12

 

 

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9.             Commitments and Contingencies

 

Litigation

 

The Company is a party to various legal actions, proceedings, and claims (some of which are not insured), and regulatory and other governmental audits and investigations in the ordinary course of its business. The Company cannot predict the ultimate outcome of pending litigation, proceedings, and regulatory and other governmental audits and investigations. These matters could potentially subject the Company to sanctions, damages, recoupments, fines, and other penalties. The Department of Justice, Centers for Medicare & Medicaid Services (“CMS”), or other federal and state enforcement and regulatory agencies may conduct additional investigations related to the Company’s businesses in the future that may, either individually or in the aggregate, have a material adverse effect on the Company’s business, financial position, results of operations, and liquidity.

 

To address claims arising out of the Company’s operations, the Company maintains professional malpractice liability insurance and general liability insurance, subject to self-insured retention of $2.0 million per medical incident for professional liability claims and $2.0 million per occurrence for general liability claims. The Company also maintains umbrella liability insurance covering claims which, due to their nature or amount, are not covered by or not fully covered by the Company’s other insurance policies. These insurance policies also do not generally cover punitive damages and are subject to various deductibles and policy limits. Significant legal actions, as well as the cost and possible lack of available insurance, could subject the Company to substantial uninsured liabilities. In the Company’s opinion, the outcome of these actions, individually or in the aggregate, will not have a material adverse effect on its financial position, results of operations or cash flows.

 

Healthcare providers are subject to lawsuits under the qui tam provisions of the federal False Claims Act. Qui tam lawsuits typically remain under seal (hence, usually unknown to the defendant) for some time while the government decides whether or not to intervene on behalf of a private qui tam plaintiff (known as a relator) and take the lead in the litigation. These lawsuits can involve significant monetary damages and penalties and award bounties to private plaintiffs who successfully bring the suits. The Company is and has been a defendant in these cases in the past, and may be named as a defendant in similar cases from time to time in the future.

 

Evansville Litigation

 

On October 19, 2015, the plaintiff-relators filed a Second Amended Complaint in United States of America, ex rel. Tracy Conroy, Pamela Schenk and Lisa Wilson v. Select Medical Corporation, Select Specialty Hospital—Evansville, LLC (“SSH-Evansville”), Select Employment Services, Inc., and Dr. Richard Sloan. The case is a civil action filed in the United States District Court for the Southern District of Indiana by private plaintiff-relators on behalf of the United States under the federal False Claims Act. The plaintiff-relators are the former CEO and two former case managers at SSH-Evansville, and the defendants currently include the Company, SSH-Evansville, a subsidiary of the Company serving as common paymaster for its employees, and a physician who practices at SSH-Evansville. The plaintiff-relators allege that SSH-Evansville discharged patients too early or held patients too long, improperly discharged patients to and readmitted them from short stay hospitals, up-coded diagnoses at admission, and admitted patients for whom long-term acute care was not medically necessary. They also allege that the defendants engaged in retaliation in violation of federal and state law. The Second Amended Complaint replaces a prior complaint that was filed under seal on September 28, 2012 and served on the Company on February 15, 2013, after a federal magistrate judge unsealed it on January 8, 2013. All deadlines in the case had been stayed after the seal was lifted in order to allow the government time to complete its investigation and to decide whether or not to intervene. On June 19, 2015, the United States Department of Justice notified the District Court of its decision not to intervene in the case.

 

In December 2015, the defendants filed a Motion to Dismiss the Second Amended Complaint on multiple grounds, including that the action is disallowed by the False Claims Act’s public disclosure bar, which disqualifies qui tam actions that are based on fraud already publicly disclosed through enumerated sources, unless the relator is an original source, and that the plaintiff-relators did not plead their claims with sufficient particularity, as required by the Federal Rules of Civil Procedure.

 

Thereafter, the United States filed a notice asserting a veto of the defendants’ use of the public disclosure bar for claims arising from conduct from and after March 23, 2010, which was based on certain statutory changes to the public disclosure bar language included in the Affordable Care Act. On September 30, 2016, the District Court partially granted and partially denied the defendants’ Motion to Dismiss. It ruled that the plaintiff-relators alleged substantially the same conduct as had been publicly disclosed and that the plaintiff relators are not original sources, so that the public disclosure bar requires dismissal of all non-retaliation claims arising from conduct before March 23, 2010. The District Court also ruled that the statutory changes to the public disclosure bar gave the United States the power to veto its applicability to claims arising from conduct on and after March 23, 2010, and therefore did not dismiss those claims based on the public disclosure bar. However,

 

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the District Court ruled that the plaintiff-relators did not plead certain of their claims relating to interrupted stay manipulation and premature discharging of patients with the requisite particularity, and dismissed those claims. The District Court declined to dismiss the plaintiff relators’ claims arising from conduct from and after March 23, 2010 relating to delayed discharging of patients and up-coding and the plaintiff relators’ retaliation claims. The plaintiff-relators then proposed a case management plan seeking nationwide discovery involving all of the Company’s LTCHs for the period from March 23, 2010 through the present, which the defendants have opposed. The Company intends to vigorously defend this action, but at this time the Company is unable to predict the timing and outcome of this matter.

 

Knoxville Litigation

 

On July 13, 2015, the United States District Court for the Eastern District of Tennessee unsealed a qui tam Complaint in Armes v. Garman, et al, No. 3:14-cv-00172-TAV-CCS, which named as defendants Select, Select Specialty Hospital—Knoxville, Inc. (“SSH-Knoxville”), Select Specialty Hospital—North Knoxville, Inc. and ten current or former employees of these facilities. The Complaint was unsealed after the United States and the State of Tennessee notified the court on July 13, 2015 that each had decided not to intervene in the case. The Complaint is a civil action that was filed under seal on April 29, 2014 by a respiratory therapist formerly employed at SSH-Knoxville. The Complaint alleges violations of the federal False Claims Act and the Tennessee Medicaid False Claims Act based on extending patient stays to increase reimbursement and to increase average length of stay; artificially prolonging the lives of patients to increase Medicare reimbursements and decrease inspections; admitting patients who do not require medically necessary care; performing unnecessary procedures and services; and delaying performance of procedures to increase billing. The Complaint was served on some of the defendants during October 2015.

 

In November 2015, the defendants filed a Motion to Dismiss the Complaint on multiple grounds. The defendants first argued that False Claims Act’s first-to-file bar required dismissal of plaintiff-relator’s claims. Under the first-to-file bar, if a qui tam case is pending, no person may bring a related action based on the facts underlying the first action. The defendants asserted that the plaintiff-relator’s claims were based on the same underlying facts as were asserted in the Evansville litigation, discussed above. The defendants also argued that the plaintiff-relator’s claims must be dismissed under the public disclosure bar, and because the plaintiff-relator did not plead his claims with sufficient particularity.

 

In June 2016, the District Court granted the defendants’ Motion to Dismiss and dismissed the plaintiff-relator’s lawsuit in its entirety. The District Court ruled that the first-to-file bar precludes all but one of the plaintiff-relator’s claims, and that the remaining claim must also be dismissed because the plaintiff-relator failed to plead it with sufficient particularity. In July 2016, the plaintiff-relator filed a Notice of Appeal to the United States Court of Appeals for the Sixth Circuit. Then, on October 11, 2016, the plaintiff-relator filed a Motion to Remand the case to the District Court for further proceedings, arguing that the September 30, 2016 decision in the Evansville litigation, discussed above, undermines the basis for the District Court’s dismissal. After the Court of Appeals denied the Motion to Remand, the plaintiff-relator then sought an indicative ruling from the District Court that it would vacate its prior dismissal ruling and allow plaintiff-relator to supplement his Complaint, which the defendants have opposed. The Company intends to vigorously defend this action, but at this time the Company is unable to predict the timing and outcome of this matter.

 

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 on May 12, 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 on January 13, 2017. The corporate defendants were served on March 6, 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. The Company intends to vigorously defend this action if the plaintiff-relator pursues it, but at this time the Company is unable to predict the timing and outcome of this matter.

 

Construction Commitments

 

At March 31, 2017, the Company had outstanding commitments under construction contracts related to new construction, improvements, and renovations totaling approximately $69.9 million.

 

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10.  Financial Information for Subsidiary Guarantors and Non-Guarantor Subsidiaries under Select’s 6.375% Senior Notes

 

Select’s 6.375% senior notes are fully and unconditionally guaranteed, except for customary limitations, on a senior basis by all of Select’s wholly owned subsidiaries (the “Subsidiary Guarantors”) which is defined as a subsidiary where Select or a subsidiary of Select holds all of the outstanding ownership interests. Certain of Select’s subsidiaries did not guarantee the 6.375% senior notes (the “Non-Guarantor Subsidiaries” and Concentra Group Holdings and its subsidiaries, the “Non-Guarantor Concentra”).

 

Select conducts a significant portion of its business through its subsidiaries. Presented below is condensed consolidating financial information for Select, the Subsidiary Guarantors, the Non-Guarantor Subsidiaries, and Non-Guarantor Concentra at December 31, 2016 and March 31, 2017 and for the three months ended March 31, 2016 and March 31, 2017.

 

The equity method has been used by Select with respect to investments in subsidiaries. The equity method has been used by Subsidiary Guarantors with respect to investments in Non-Guarantor Subsidiaries. Separate financial statements for Subsidiary Guarantors are not presented.

 

Certain reclassifications have been made to prior reported amounts in order to conform to the current year guarantor structure.

 

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Table of Contents

 

Select Medical Corporation

Condensed Consolidating Balance Sheet

March 31, 2017

(unaudited)

 

 

 

Select (Parent
Company Only)

 

Subsidiary
Guarantors

 

Non-Guarantor
Subsidiaries

 

Non-Guarantor
Concentra

 

Eliminations

 

Consolidated
Select Medical
Corporation

 

 

 

(in thousands)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

72

 

$

6,836

 

$

3,405

 

$

54,898

 

$

 

$

65,211

 

Accounts receivable, net

 

 

442,132

 

125,079

 

124,309

 

 

691,520

 

Intercompany receivables

 

 

2,183,527

 

169,816

 

 

(2,353,343

) (a)

 

Prepaid income taxes

 

2,402

 

 

 

 

 

2,402

 

Other current assets

 

17,714

 

34,693

 

11,878

 

20,796

 

 

85,081

 

Total Current Assets

 

20,188

 

2,667,188

 

310,178

 

200,003

 

(2,353,343

)

844,214

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

49,309

 

609,822

 

54,118

 

183,897

 

 

897,146