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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 September 30, 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
Delaware

 

20-1764048
23-2872718

(State or Other Jurisdiction of
Incorporation or Organization)

 

(I.R.S. Employer
Identification Number)

 

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

(Address of Principal Executive Offices and Zip code)

 

(717) 972-1100

(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 October 31, 2017, Select Medical Holdings Corporation had outstanding 133,824,559 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

6

 

 

 

 

Condensed consolidated statements of cash flows

7

 

 

 

 

Notes to condensed consolidated financial statements

8

 

 

 

ITEM 2.

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

31

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

52

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES

52

 

 

 

PART II

OTHER INFORMATION

53

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

53

 

 

 

ITEM 1A.

RISK FACTORS

55

 

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

57

 

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

57

 

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

57

 

 

 

ITEM 5.

OTHER INFORMATION

57

 

 

 

ITEM 6.

EXHIBITS

57

 

 

 

SIGNATURES

 

 



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,

 

September 30,

 

December 31,

 

September 30,

 

 

 

2016

 

2017

 

2016

 

2017

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

99,029

 

$

107,300

 

$

99,029

 

$

107,300

 

Accounts receivable, net of allowance for doubtful accounts of $63,787 and $70,574 at 2016 and 2017, respectively

 

573,752

 

716,426

 

573,752

 

716,426

 

Prepaid income taxes

 

12,423

 

 

12,423

 

 

Other current assets

 

77,699

 

80,324

 

77,699

 

80,324

 

Total Current Assets

 

762,903

 

904,050

 

762,903

 

904,050

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

892,217

 

946,063

 

892,217

 

946,063

 

Goodwill

 

2,751,000

 

2,767,896

 

2,751,000

 

2,767,896

 

Identifiable intangible assets, net

 

340,562

 

331,036

 

340,562

 

331,036

 

Other assets

 

173,944

 

174,762

 

173,944

 

174,762

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

4,920,626

 

$

5,123,807

 

$

4,920,626

 

$

5,123,807

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

Overdrafts

 

$

39,362

 

$

18,923

 

$

39,362

 

$

18,923

 

Current portion of long-term debt and notes payable

 

13,656

 

37,560

 

13,656

 

37,560

 

Accounts payable

 

126,558

 

133,321

 

126,558

 

133,321

 

Accrued payroll

 

146,397

 

139,402

 

146,397

 

139,402

 

Accrued vacation

 

83,261

 

89,171

 

83,261

 

89,171

 

Accrued interest

 

22,325

 

30,998

 

22,325

 

30,998

 

Accrued other

 

140,076

 

143,443

 

140,076

 

143,443

 

Income taxes payable

 

 

6,718

 

 

6,718

 

Total Current Liabilities

 

571,635

 

599,536

 

571,635

 

599,536

 

 

 

 

 

 

 

 

 

 

 

Long-term debt, net of current portion

 

2,685,333

 

2,752,742

 

2,685,333

 

2,752,742

 

Non-current deferred tax liability

 

199,078

 

191,441

 

199,078

 

191,441

 

Other non-current liabilities

 

136,520

 

138,118

 

136,520

 

138,118

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities

 

3,592,566

 

3,681,837

 

3,592,566

 

3,681,837

 

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable non-controlling interests

 

422,159

 

621,515

 

422,159

 

621,515

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

 

 

Common stock of Holdings, $0.001 par value, 700,000,000 shares authorized, 132,596,758 and 133,884,963 shares issued and outstanding at 2016 and 2017, respectively

 

132

 

133

 

 

 

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

 

 

 

0

 

0

 

Capital in excess of par

 

443,908

 

459,004

 

925,111

 

942,142

 

Retained earnings (accumulated deficit)

 

371,685

 

262,505

 

(109,386

)

(220,500

)

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

 

815,725

 

721,642

 

815,725

 

721,642

 

Non-controlling interests

 

90,176

 

98,813

 

90,176

 

98,813

 

Total Equity

 

905,901

 

820,455

 

905,901

 

820,455

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities and Equity

 

$

4,920,626

 

$

5,123,807

 

$

4,920,626

 

$

5,123,807

 

 

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 September 30,

 

For the Three Months Ended September 30,

 

 

 

2016

 

2017

 

2016

 

2017

 

 

 

 

 

 

 

 

 

 

 

Net operating revenues

 

$

1,053,795

 

$

1,097,166

 

$

1,053,795

 

$

1,097,166

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of services

 

915,703

 

938,910

 

915,703

 

938,910

 

General and administrative

 

27,088

 

27,065

 

27,088

 

27,065

 

Bad debt expense

 

17,677

 

20,321

 

17,677

 

20,321

 

Depreciation and amortization

 

37,165

 

38,772

 

37,165

 

38,772

 

Total costs and expenses

 

997,633

 

1,025,068

 

997,633

 

1,025,068

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

56,162

 

72,098

 

56,162

 

72,098

 

 

 

 

 

 

 

 

 

 

 

Other income and expense:

 

 

 

 

 

 

 

 

 

Loss on early retirement of debt

 

(10,853

)

 

(10,853

)

 

Equity in earnings of unconsolidated subsidiaries

 

5,268

 

4,431

 

5,268

 

4,431

 

Non-operating loss

 

(1,028

)

 

(1,028

)

 

Interest expense

 

(44,482

)

(37,688

)

(44,482

)

(37,688

)

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

5,067

 

38,841

 

5,067

 

38,841

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

1,075

 

14,017

 

1,075

 

14,017

 

Net income

 

3,992

 

24,824

 

3,992

 

24,824

 

 

 

 

 

 

 

 

 

 

 

Less: Net income (loss) attributable to non-controlling interests

 

(2,479

)

6,362

 

(2,479

)

6,362

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation

 

$

6,471

 

$

18,462

 

$

6,471

 

$

18,462

 

 

 

 

 

 

 

 

 

 

 

Income per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.05

 

$

0.14

 

 

 

 

 

Diluted

 

$

0.05

 

$

0.14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

127,848

 

129,142

 

 

 

 

 

Diluted

 

127,989

 

129,322

 

 

 

 

 

 

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

 

4



Table of Contents

 

Condensed Consolidated Statements of Operations

(unaudited)

(in thousands, except per share amounts)

 

 

 

Select Medical Holdings Corporation

 

Select Medical Corporation

 

 

 

For the Nine Months Ended September 30,

 

For the Nine Months Ended September 30,

 

 

 

2016

 

2017

 

2016

 

2017

 

 

 

 

 

 

 

 

 

 

 

Net operating revenues

 

$

3,239,756

 

$

3,329,202

 

$

3,239,756

 

$

3,329,202

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of services

 

2,754,950

 

2,787,497

 

2,754,950

 

2,787,497

 

General and administrative

 

81,226

 

83,415

 

81,226

 

83,415

 

Bad debt expense

 

51,591

 

59,120

 

51,591

 

59,120

 

Depreciation and amortization

 

107,887

 

119,644

 

107,887

 

119,644

 

Total costs and expenses

 

2,995,654

 

3,049,676

 

2,995,654

 

3,049,676

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

244,102

 

279,526

 

244,102

 

279,526

 

 

 

 

 

 

 

 

 

 

 

Other income and expense:

 

 

 

 

 

 

 

 

 

Loss on early retirement of debt

 

(11,626

)

(19,719

)

(11,626

)

(19,719

)

Equity in earnings of unconsolidated subsidiaries

 

14,466

 

15,618

 

14,466

 

15,618

 

Non-operating gain (loss)

 

37,094

 

(49

)

37,094

 

(49

)

Interest expense

 

(127,662

)

(116,196

)

(127,662

)

(116,196

)

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

156,374

 

159,180

 

156,374

 

159,180

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

51,585

 

59,593

 

51,585

 

59,593

 

Net income

 

104,789

 

99,587

 

104,789

 

99,587

 

 

 

 

 

 

 

 

 

 

 

Less: Net income attributable to non-controlling interests

 

9,550

 

23,200

 

9,550

 

23,200

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation

 

$

95,239

 

$

76,387

 

$

95,239

 

$

76,387

 

 

 

 

 

 

 

 

 

 

 

Income per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.72

 

$

0.57

 

 

 

 

 

Diluted

 

$

0.72

 

$

0.57

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

127,659

 

128,745

 

 

 

 

 

Diluted

 

127,804

 

128,916

 

 

 

 

 

 

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

 

5



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

 

 

 

 

 

 

 

 

 

 

76,387

 

76,387

 

 

 

76,387

 

Net income attributable to non-controlling interests

 

18,519

 

 

 

 

 

 

 

 

 

 

 

4,681

 

4,681

 

Issuance and vesting of restricted stock

 

 

 

 

1,323

 

1

 

13,445

 

 

 

13,446

 

 

 

13,446

 

Repurchase of common shares

 

 

 

 

(220

)

0

 

(1,934

)

(1,669

)

(3,603

)

 

 

(3,603

)

Exercise of stock options

 

 

 

 

185

 

0

 

1,634

 

 

 

1,634

 

 

 

1,634

 

Issuance of non-controlling interests

 

 

 

 

 

 

 

 

1,951

 

 

 

1,951

 

8,944

 

10,895

 

Purchase of non-controlling interests

 

(127

)

 

 

 

 

 

 

 

7

 

7

 

 

 

7

 

Distributions to non-controlling interests

 

(4,003

)

 

 

 

 

 

 

 

 

 

 

(5,153

)

(5,153

)

Redemption adjustment on non-controlling interests

 

184,294

 

 

 

 

 

 

 

 

(184,294

)

(184,294

)

 

 

(184,294

)

Other

 

673

 

 

 

 

 

 

 

 

389

 

389

 

165

 

554

 

Balance at September 30, 2017

 

$

621,515

 

 

133,885

 

$

133

 

$

459,004

 

$

262,505

 

$

721,642

 

$

98,813

 

$

820,455

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

76,387

 

76,387

 

 

 

76,387

 

Net income attributable to non-controlling interests

 

18,519

 

 

 

 

 

 

 

 

 

 

 

4,681

 

4,681

 

Additional investment by Holdings

 

 

 

 

 

 

 

 

1,634

 

 

 

1,634

 

 

 

1,634

 

Dividends declared and paid to Holdings

 

 

 

 

 

 

 

 

 

 

(3,603

)

(3,603

)

 

 

(3,603

)

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

 

 

 

 

 

 

 

 

13,446

 

 

 

13,446

 

 

 

13,446

 

Issuance of non-controlling interests

 

 

 

 

 

 

 

 

1,951

 

 

 

1,951

 

8,944

 

10,895

 

Purchase of non-controlling interests

 

(127

)

 

 

 

 

 

 

 

7

 

7

 

 

 

7

 

Distributions to non-controlling interests

 

(4,003

)

 

 

 

 

 

 

 

 

 

 

(5,153

)

(5,153

)

Redemption adjustment on non-controlling interests

 

184,294

 

 

 

 

 

 

 

 

(184,294

)

(184,294

)

 

 

(184,294

)

Other

 

673

 

 

 

 

 

 

 

 

389

 

389

 

165

 

554

 

Balance at September 30, 2017

 

$

621,515

 

 

0

 

$

0

 

$

942,142

 

$

(220,500

)

$

721,642

 

$

98,813

 

$

820,455

 

 

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

 

6



Table of Contents

 

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in thousands)

 

 

 

Select Medical Holdings Corporation

 

Select Medical Corporation

 

 

 

For the Nine Months Ended September 30,

 

For the Nine Months Ended September 30,

 

 

 

2016

 

2017

 

2016

 

2017

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

 

 

 

 

 

 

 

 

Net income

 

$

104,789

 

$

99,587

 

$

104,789

 

$

99,587

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

Distributions from unconsolidated subsidiaries

 

16,145

 

14,542

 

16,145

 

14,542

 

Depreciation and amortization

 

107,887

 

119,644

 

107,887

 

119,644

 

Provision for bad debts

 

51,591

 

59,120

 

51,591

 

59,120

 

Equity in earnings of unconsolidated subsidiaries

 

(14,466

)

(15,618

)

(14,466

)

(15,618

)

Loss on extinguishment of debt

 

11,626

 

6,527

 

11,626

 

6,527

 

Gain on sale or disposal of assets and businesses

 

(41,910

)

(9,499

)

(41,910

)

(9,499

)

Gain on sale of equity investment

 

(241

)

 

(241

)

 

Impairment of equity investment

 

5,339

 

 

5,339

 

 

Stock compensation expense

 

12,924

 

14,227

 

12,924

 

14,227

 

Amortization of debt discount, premium and issuance costs

 

11,845

 

8,546

 

11,845

 

8,546

 

Deferred income taxes

 

(13,088

)

(6,126

)

(13,088

)

(6,126

)

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

 

 

 

 

 

 

 

 

 

Accounts receivable

 

(40,776

)

(201,514

)

(40,776

)

(201,514

)

Other current assets

 

12,094

 

(2,677

)

12,094

 

(2,677

)

Other assets

 

5,146

 

1,407

 

5,146

 

1,407

 

Accounts payable

 

(17,752

)

3,913

 

(17,752

)

3,913

 

Accrued expenses

 

52,996

 

18,752

 

52,996

 

18,752

 

Due to third party payors

 

11,065

 

 

11,065

 

 

Income taxes

 

5,547

 

19,141

 

5,547

 

19,141

 

Net cash provided by operating activities

 

280,761

 

129,972

 

280,761

 

129,972

 

 

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

 

 

Business combinations, net of cash acquired

 

(414,231

)

(19,371

)

(414,231

)

(19,371

)

Purchases of property and equipment

 

(118,260

)

(173,800

)

(118,260

)

(173,800

)

Investment in businesses

 

(3,140

)

(11,374

)

(3,140

)

(11,374

)

Proceeds from sale of assets, businesses, and equity investment

 

72,629

 

34,555

 

72,629

 

34,555

 

Net cash used in investing activities

 

(463,002

)

(169,990

)

(463,002

)

(169,990

)

 

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

 

 

Borrowings on revolving facilities

 

420,000

 

805,000

 

420,000

 

805,000

 

Payments on revolving facilities

 

(545,000

)

(705,000

)

(545,000

)

(705,000

)

Proceeds from term loans

 

795,344

 

1,139,487

 

795,344

 

1,139,487

 

Payments on term loans

 

(434,842

)

(1,176,567

)

(434,842

)

(1,176,567

)

Revolving facility debt issuance costs

 

 

(4,392

)

 

(4,392

)

Borrowings of other debt

 

23,801

 

27,571

 

23,801

 

27,571

 

Principal payments on other debt

 

(15,477

)

(15,112

)

(15,477

)

(15,112

)

Repurchase of common stock

 

(1,939

)

(3,603

)

 

 

Dividends paid to Holdings

 

 

 

(1,939

)

(3,603

)

Proceeds from exercise of stock options

 

1,488

 

1,634

 

 

 

Equity investment by Holdings

 

 

 

1,488

 

1,634

 

Repayments of overdrafts

 

(8,464

)

(20,439

)

(8,464

)

(20,439

)

Proceeds from issuance of non-controlling interests

 

11,846

 

8,986

 

11,846

 

8,986

 

Purchase of non-controlling interests

 

(1,530

)

(120

)

(1,530

)

(120

)

Distributions to non-controlling interests

 

(9,198

)

(9,156

)

(9,198

)

(9,156

)

Net cash provided by financing activities

 

236,029

 

48,289

 

236,029

 

48,289

 

 

 

 

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

53,788

 

8,271

 

53,788

 

8,271

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

14,435

 

99,029

 

14,435

 

99,029

 

Cash and cash equivalents at end of period

 

$

68,223

 

$

107,300

 

$

68,223

 

$

107,300

 

 

 

 

 

 

 

 

 

 

 

Supplemental Information

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

92,928

 

$

101,341

 

$

92,928

 

$

101,341

 

Cash paid for taxes

 

$

59,937

 

$

46,553

 

$

59,937

 

$

46,553

 

 

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

 

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Table of Contents

 

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”) include the accounts of its wholly owned subsidiary, Select Medical Corporation (“Select”). Holdings conducts substantially all of its business through Select and its subsidiaries. Holdings and Select and its subsidiaries are collectively referred to as the “Company.” The unaudited condensed consolidated financial statements of the Company as of September 30, 2017, and for the three and nine month periods ended September 30, 2016 and 2017, have been prepared pursuant to the rules and regulations of the Securities Exchange Commission (the “SEC”) for interim reporting and accounting principles generally accepted in the United States of America (“GAAP”). Accordingly, certain information and disclosures required by GAAP, which are normally included in the notes to consolidated financial statements, have been condensed or omitted pursuant to those rules and regulations, although the Company believes the disclosure is adequate to make the information presented not misleading. In the opinion of management, such information contains all adjustments, which are normal and recurring in nature, necessary for a fair statement of the financial position, results of operations and cash flow for such periods. All significant intercompany transactions and balances have been eliminated.

 

The results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2017. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 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 contingencies, at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Recent Accounting Pronouncements

 

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 will be applied prospectively and is effective for annual periods beginning after December 15, 2017. Early adoption is permitted.

 

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 plans to adopt the guidance effective January 1, 2018. Adoption of the guidance will be applied on a modified retrospective approach through a cumulative effect adjustment to retained earnings as of the effective date. The Company is currently evaluating the standard to determine the impact it will have on its consolidated financial statements.

 

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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.

 

The Company will implement the new standard beginning January 1, 2019. The Company’s implementation efforts are focused on designing accounting processes, disclosure processes, and internal controls in order to account for its leases under the new standard.

 

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 standards require the selection of a retrospective or cumulative effect transition method.

 

The Company will implement the new standard 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 is not expected to materially change upon adoption of the new standards. The principal change is how the new standard requires healthcare providers to estimate the amount of variable consideration to be included in the transaction price up to an amount which is probable that a significant reversal will not occur. The most common form of variable consideration the Company experiences are amounts for services provided that are ultimately not realizable from a customer. Under the current standards, the Company’s estimate for unrealizable amounts was recorded to bad debt expense. Under the new standards, the Company’s estimate for unrealizable amounts will be recognized as a constraint to revenue and will be reflected as an allowance. Substantially all of the bad debt expense as of September 30, 2016 and September 30, 2017 will be reclassified as an allowance when the Company retrospectively applies the guidance in the standards on January 1, 2018.

 

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

 

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Table of Contents

 

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 condensed consolidated balance sheet at December 31, 2016 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 quarter 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

 

 

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Table of Contents

 

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.

 

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 September 30, 2016 and for the three and nine months ended September 30, 2017 include Physiotherapy for the entire period. There were no pro forma adjustments during these periods; therefore, no pro forma information is presented.

 

 

 

Nine Months Ended
September 30, 2016

 

 

 

(in thousands, except per
share amounts)

 

Net revenue

 

$

3,293,286

 

Net income attributable to Holdings

 

93,418

 

Income per common share:

 

 

 

Basic

 

$

0.71

 

Diluted

 

$

0.71

 

 

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 nine months ended September 30, 2016 were adjusted to exclude approximately $3.2 million of Physiotherapy acquisition costs.

 

Other Acquisitions

 

The Company completed acquisitions within our specialty hospitals, outpatient rehabilitation, and Concentra segments during the nine months ended September 30, 2017. The Company provided total consideration of $21.7 million, consisting principally of $19.4 million of cash and the issuance of non-controlling interests. The assets received in these acquisitions consisted principally of accounts receivable, property and equipment, identifiable intangible assets, and goodwill, of which $0.8 million, $1.8 million, and $14.5 million of goodwill was recognized in our specialty hospitals, outpatient rehabilitation, and Concentra reporting units, respectively.

 

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Table of Contents

 

4.          Intangible Assets and Liabilities

 

Goodwill

 

The following table shows changes in the carrying amounts of goodwill by reporting unit for the nine months ended September 30, 2017:

 

 

 

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

 

797

 

1,768

 

14,505

 

17,070

 

Measurement period adjustment

 

(342

)

168

 

 

(174

)

Balance as of September 30, 2017

 

$

1,447,861

 

$

645,493

 

$

674,542

 

$

2,767,896

 

 

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

 

Identifiable Intangible Assets and Liabilities

 

The following table provides the gross carrying amounts, accumulated amortization, and net carrying amounts for the Company’s identifiable intangible assets and liabilities:

 

 

 

December 31, 2016

 

September 30, 2017

 

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Amount

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Amount

 

 

 

(in thousands)

 

Indefinite-lived assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks

 

$

166,698

 

$

 

$

166,698

 

$

166,698

 

$

 

$

166,698

 

Certificates of need

 

17,026

 

 

17,026

 

19,166

 

 

19,166

 

Accreditations

 

2,235

 

 

2,235

 

1,965

 

 

1,965

 

Finite-lived assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

142,198

 

(23,185

)

119,013

 

143,953

 

(34,482

)

109,471

 

Favorable leasehold interests

 

13,089

 

(2,317

)

10,772

 

13,295

 

(3,745

)

9,550

 

Non-compete agreements

 

26,655

 

(1,837

)

24,818

 

27,555

 

(3,369

)

24,186

 

Total identifiable intangible assets

 

$

367,901

 

$

(27,339

)

$

340,562

 

$

372,632

 

$

(41,596

)

$

331,036

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Finite-lived liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unfavorable leasehold interests

 

$

5,139

 

$

(1,410

)

$

3,729

 

$

5,343

 

$

(2,529

)

$

2,814

 

 

The Company’s customer relationships and non-compete agreements amortize over their estimated useful lives. Amortization expense was $4.1 million and $4.4 million for the three months ended September 30, 2016 and 2017, respectively. Amortization expense was $12.2 million and $13.1 million for the nine months ended September 30, 2016 and 2017, respectively.

 

The Company’s favorable and unfavorable leasehold interests 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 not separately presented on the condensed consolidated balance sheets but are included as a component of accrued other and other non-current liabilities.

 

The Company’s accreditations and trademarks have renewal terms and the costs to renew these intangible assets are expensed as incurred. At September 30, 2017, the accreditations and trademarks have a weighted average time until next renewal of 1.5 years and 2.1 years, respectively.

 

12



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 as of September 30, 2017 are as follows (in thousands):

 

 

 

Principal
Outstanding

 

Unamortized
Premium
(Discount)

 

Unamortized
Issuance
Costs

 

Carrying
Value

 

 

Fair
Value

 

Select:

 

 

 

 

 

 

 

 

 

 

 

 

6.375% senior notes

 

$

710,000

 

$

835

 

$

(7,032

)

$

703,803

 

 

$

731,300

 

Credit facilities:

 

 

 

 

 

 

 

 

 

 

 

 

Revolving facility

 

320,000

 

 

 

320,000

 

 

294,400

 

Term loan

 

1,144,250

 

(12,962

)

(13,019

)

1,118,269

 

 

1,158,553

 

Other

 

35,184

 

 

 

35,184

 

 

35,184

 

Total Select debt

 

2,209,434

 

(12,127

)

(20,051

)

2,177,256

 

 

2,219,437

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Concentra:

 

 

 

 

 

 

 

 

 

 

 

 

Credit facilities:

 

 

 

 

 

 

 

 

 

 

 

 

Term loan

 

619,175

 

(2,385

)

(11,268

)

605,522

 

 

620,917

 

Other

 

7,524

 

 

 

7,524

 

 

7,524

 

Total Concentra debt

 

626,699

 

(2,385

)

(11,268

)

613,046

 

 

628,441

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total debt

 

$

2,836,133

 

$

(14,512

)

$

(31,319

)

$

2,790,302

 

 

$

2,847,878

 

 

Principal maturities of the Company’s long-term debt and notes payable are approximately as follows (in thousands):

 

 

 

2017

 

2018

 

2019

 

2020

 

2021

 

Thereafter

 

Total

 

Select:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6.375% senior notes

 

$

 

$

 

$

 

$

 

$

710,000

 

$

 

$

710,000

 

Credit facilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revolving facility

 

 

 

 

 

 

320,000

 

320,000

 

Term loan

 

2,875

 

11,500

 

11,500

 

11,500

 

11,500

 

1,095,375

 

1,144,250

 

Other

 

17,828

 

5,437

 

11,827

 

68

 

14

 

10

 

35,184

 

Total Select debt

 

20,703

 

16,937

 

23,327

 

11,568

 

721,514

 

1,415,385

 

2,209,434

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Concentra:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit facilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Term loan

 

 

 

 

3,016

 

6,520

 

609,639

 

619,175

 

Other

 

657

 

2,843

 

144

 

161

 

160

 

3,559

 

 

7,524

 

Total Concentra debt

 

657

 

2,843

 

144

 

3,177

 

6,680

 

613,198

 

626,699

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total debt

 

$

21,360

 

$

19,780

 

$

23,471

 

$

14,745

 

$

728,194

 

$

2,028,583

 

$

2,836,133

 

 

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The Company’s long-term debt and notes payable as of December 31, 2016 are as follows (in thousands):

 

 

 

Principal
Outstanding

 

Unamortized
Premium
(Discount)

 

Unamortized
Issuance
Costs

 

Carrying
Value

 

 

Fair
Value

 

Select:

 

 

 

 

 

 

 

 

 

 

 

 

6.375% senior notes

 

$

710,000

 

$

1,006

 

$

(8,461

)

$

702,545

 

 

$

710,000

 

Credit facilities:

 

 

 

 

 

 

 

 

 

 

 

 

Revolving facility

 

220,000

 

 

 

220,000

 

 

204,600

 

Term loans

 

1,147,751

 

(11,967

)

(13,581

)

1,122,203

 

 

1,165,860

 

Other

 

22,688

 

 

 

22,688

 

 

22,688

 

Total Select debt

 

2,100,439

 

(10,961

)

(22,042

)

2,067,436

 

 

2,103,148

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Concentra:

 

 

 

 

 

 

 

 

 

 

 

 

Credit facilities:

 

 

 

 

 

 

 

 

 

 

 

 

Term loan

 

642,239

 

(2,773

)

(13,091

)

626,375

 

 

644,648

 

Other

 

5,178

 

 

 

5,178

 

 

5,178

 

Total Concentra debt

 

647,417

 

(2,773

)

(13,091

)

631,553

 

 

649,826

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total debt

 

$

2,747,856

 

$

(13,734

)

$

(35,133

)

$

2,698,989

 

 

$

2,752,974

 

 

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) repay 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, which resulted in $6.5 million of debt extinguishment losses and $13.2 million of debt modification losses during the first quarter of 2017.

 

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 (iii) 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.

 

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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 September 30, 2017, Select’s leverage ratio was 5.82 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.

 

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, as defined in the Concentra credit facilities.

 

Fair Value

 

The Company considers the inputs in the valuation process to be Level 2 in the fair value hierarchy for Select’s 6.375% senior notes and for its credit facilities. Level 2 in the fair value hierarchy is defined as inputs that are observable for the asset or liability, either directly or indirectly, which includes quoted prices for identical assets or liabilities in markets that are not active.

 

The fair 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 was based on quoted market prices. The carrying amount of other debt, principally short-term notes payable, approximates fair value.

 

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6.  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 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 September 30,

 

Nine Months Ended September 30,

 

 

 

2016

 

2017

 

2016

 

2017

 

 

 

(in thousands)

 

Net operating revenues:

 

 

 

 

 

 

 

 

 

Specialty hospitals

 

$

544,491

 

$

585,288

 

$

1,729,261

 

$

1,785,035

 

Outpatient rehabilitation(1)

 

250,710

 

250,527

 

745,720

 

764,450

 

Concentra

 

258,507

 

261,295

 

764,252

 

779,030

 

Other

 

87

 

56