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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended March 31, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from              to              
Commission file numbers: 001-34465
 
SELECT MEDICAL HOLDINGS CORPORATION
(Exact name of Registrant as specified in its Charter)
Delaware
 
20-1764048
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification Number)
 
4714 Gettysburg Road, P.O. Box 2034
Mechanicsburg, PA 17055
(Address of Principal Executive Offices and Zip code)
(717972-1100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.001 per share
SEM
New York Stock Exchange
 
 
(NYSE)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods as such Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  ☒  No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).   Yes ☒ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
Emerging Growth Company
 If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No ☒
As of April 30, 2020, Select Medical Holdings Corporation had outstanding 133,977,064 shares of common stock.
Unless the context indicates otherwise, any reference in this report to “Holdings” refers to Select Medical Holdings Corporation and any reference to “Select” refers to Select Medical Corporation, the wholly owned operating subsidiary of Holdings, and any of Select’s subsidiaries. Any reference to “Concentra” refers to Concentra Group Holdings Parent, LLC (“Concentra Group Holdings Parent”) and its subsidiaries, including Concentra Inc. References to the “Company,” “we,” “us,” and “our” refer collectively to Holdings, Select, and Concentra.


Table of Contents

TABLE OF CONTENTS
 
3
 
 
 
 
 
 
 
 
3
 
 
 
 
4
 
 
 
 
5
 
 
 
 
6
 
 
 
 
7
 
 
 
18
 
 
 
39
 
 
 
39
 
 
 
40
 
 
 
40
 
 
 
41
 
 
 
45
 
 
 
45
 
 
 
45
 
 
 
45
 
 
 
46
 
 
 
 



Table of Contents

PART I: FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Select Medical Holdings Corporation
Condensed Consolidated Balance Sheets
(unaudited)
(in thousands, except share and per share amounts)

 
December 31, 2019
 
March 31, 2020
 
ASSETS
 

 
 

 
Current Assets:
 

 
 

 
Cash and cash equivalents
$
335,882

 
$
73,163

 
Accounts receivable
762,677

 
816,405

 
Prepaid income taxes
18,585

 
12,634

 
Other current assets
95,848

 
95,828

 
Total Current Assets
1,212,992

 
998,030

 
Operating lease right-of-use assets
1,003,986

 
1,014,969

 
Property and equipment, net
998,406

 
978,547

 
Goodwill
3,391,955

 
3,391,078

 
Identifiable intangible assets, net
409,068

 
405,374

 
Other assets
323,881

 
327,569

 
Total Assets
$
7,340,288

 
$
7,115,567

 
LIABILITIES AND EQUITY
 

 
 

 
Current Liabilities:
 

 
 

 
Current operating lease liabilities
$
207,950

 
$
212,884

 
Current portion of long-term debt and notes payable
25,167

 
17,161

 
Accounts payable
145,731

 
131,601

 
Accrued payroll
183,754

 
140,009

 
Accrued vacation
124,111

 
128,705

 
Accrued interest
33,853

 
11,339

 
Accrued other
191,076

 
194,165

 
Income taxes payable
2,638

 
8,090

 
Total Current Liabilities
914,280

 
843,954

 
Non-current operating lease liabilities
852,897

 
860,796

 
Long-term debt, net of current portion
3,419,943

 
3,553,056

 
Non-current deferred tax liability
148,258

 
158,782

 
Other non-current liabilities
101,334

 
103,783

 
Total Liabilities
5,436,712

 
5,520,371

 
Commitments and contingencies (Note 11)


 


 
Redeemable non-controlling interests
974,541

 
620,377

 
Stockholders’ Equity:
 

 
 

 
Common stock, $0.001 par value, 700,000,000 shares authorized, 134,328,112 and 133,823,713 shares issued and outstanding at 2019 and 2020, respectively
134

 
134

 
Capital in excess of par
491,038

 
491,824

 
Retained earnings
279,800

 
316,680

 
Total Stockholders’ Equity
770,972

 
808,638

 
Non-controlling interests
158,063

 
166,181

 
Total Equity
929,035

 
974,819

 
Total Liabilities and Equity
$
7,340,288

 
$
7,115,567

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

3


Select Medical Holdings Corporation
Condensed Consolidated Statements of Operations
(unaudited)
(in thousands, except per share amounts)

 
For the Three Months Ended March 31,
 
 
2019
 
2020
 
Net operating revenues
$
1,324,631

 
$
1,414,632

 
Costs and expenses:
 

 
 

 
Cost of services, exclusive of depreciation and amortization
1,132,092

 
1,200,371

 
General and administrative
28,677

 
33,831

 
Depreciation and amortization
52,138

 
51,752

 
Total costs and expenses
1,212,907

 
1,285,954

 
Income from operations
111,724

 
128,678

 
Other income and expense:
 

 
 

 
Equity in earnings of unconsolidated subsidiaries
4,366

 
2,588

 
Gain on sale of businesses
6,532

 
7,201

 
Interest expense
(50,811
)
 
(46,107
)
 
Income before income taxes
71,811

 
92,360

 
Income tax expense
18,467

 
21,912

 
Net income
53,344

 
70,448

 
Less: Net income attributable to non-controlling interests
12,510

 
17,323

 
Net income attributable to Select Medical Holdings Corporation
$
40,834

 
$
53,125

 
Earnings per common share (Note 10):
 

 
 

 
Basic
$
0.30

 
$
0.40

 
Diluted
$
0.30

 
$
0.40

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



4


Select Medical Holdings Corporation
Condensed Consolidated Statements of Changes in Equity and Income
(unaudited)
(in thousands)

 
For the Three Months Ended March 31, 2020
 
 
 
 
 
 
 
 
 
Total Stockholders’ Equity
 
 
 
 
 
Common
Stock
Issued
 
Common
Stock
Par Value
 
Capital in
Excess
of Par
 
Retained
Earnings
 
Total Stockholders’ Equity
 
Non-controlling
Interests
 
Total
Equity
Balance at December 31, 2019
134,328

 
$
134

 
$
491,038

 
$
279,800

 
$
770,972

 
$
158,063

 
$
929,035

Net income attributable to Select Medical Holdings Corporation
 

 
 

 
 

 
53,125

 
53,125

 


 
53,125

Net income attributable to non-controlling interests
 

 
 

 
 

 
 

 

 
10,067

 
10,067

Issuance of restricted stock
2

 
0

 
0

 
 

 

 


 

Forfeitures of unvested restricted stock
(15
)
 
0

 
0

 
 
 

 
 
 

Vesting of restricted stock
 
 
 
 
6,136

 
 
 
6,136

 
 
 
6,136

Repurchase of common shares
(492
)
 
0

 
(5,350
)
 
(3,341
)
 
(8,691
)
 
 
 
(8,691
)
Issuance of non-controlling interests
 
 
 
 
 
 
 
 

 
1,679

 
1,679

Distributions to and purchases of non-controlling interests
 

 
 

 


 
(2,726
)
 
(2,726
)
 
(4,048
)
 
(6,774
)
Redemption adjustment on non-controlling interests
 

 
 

 
 

 
(10,123
)
 
(10,123
)
 


 
(10,123
)
Other
 

 
 

 
 

 
(55
)
 
(55
)
 
420

 
365

Balance at March 31, 2020
133,823

 
$
134

 
$
491,824

 
$
316,680

 
$
808,638

 
$
166,181

 
$
974,819

 
For the Three Months Ended March 31, 2019
 
 
 
 
 
 
 
 
 
Total Stockholders’ Equity
 
 
 
 
 
Common
Stock
Issued
 
Common
Stock
Par Value
 
Capital in
Excess
of Par
 
Retained
Earnings
 
Total Stockholders’ Equity
 
Non-controlling
Interests
 
Total
Equity
Balance at December 31, 2018
135,266

 
$
135

 
$
482,556

 
$
320,351

 
$
803,042

 
$
113,198

 
$
916,240

Net income attributable to Select Medical Holdings Corporation
 
 
 
 
 
 
40,834

 
40,834

 
 
 
40,834

Net income attributable to non-controlling interests
 
 
 
 
 
 
 
 

 
4,810

 
4,810

Issuance of restricted stock
21

 
0

 
0

 
 
 

 
 
 

Forfeitures of unvested restricted stock
(24
)
 
0

 
0

 
 
 

 
 
 

Vesting of restricted stock
 
 
 
 
5,488

 
 
 
5,488

 
 
 
5,488

Issuance of non-controlling interests
 
 
 
 
 
 
 
 

 
6,837

 
6,837

Distributions to and purchases of non-controlling interests
 
 
 
 
259

 
 
 
259

 
(2,739
)
 
(2,480
)
Redemption adjustment on non-controlling interests
 
 
 
 
 
 
(47,470
)
 
(47,470
)
 
 
 
(47,470
)
Other
 
 
 
 
 
 
(122
)
 
(122
)
 
413

 
291

Balance at March 31, 2019
135,263

 
$
135

 
$
488,303

 
$
313,593

 
$
802,031

 
$
122,519

 
$
924,550


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

5


Select Medical Holdings Corporation
Condensed Consolidated Statements of Cash Flows
(unaudited)
(in thousands)

 
For the Three Months Ended March 31,
 
 
2019
 
2020
 
Operating activities
 

 
 

 
Net income
$
53,344

 
$
70,448

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

 
 

 
Distributions from unconsolidated subsidiaries
7,872

 
8,479

 
Depreciation and amortization
52,138

 
51,752

 
Provision for expected credit losses
1,567

 
199

 
Equity in earnings of unconsolidated subsidiaries
(4,366
)
 
(2,588
)
 
Gain on sale of assets and businesses
(6,233
)
 
(7,339
)
 
Stock compensation expense
6,255

 
6,903

 
Amortization of debt discount, premium and issuance costs
3,231

 
553

 
Deferred income taxes
(81
)
 
9,364

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

 
 

 
Accounts receivable
(74,752
)
 
(53,928
)
 
Other current assets
(7,523
)
 
27

 
Other assets
57,319

 
2,248

 
Accounts payable
4,324

 
(8,992
)
 
Accrued expenses
(69,163
)
 
(44,455
)
 
Income taxes
17,830

 
11,413

 
Net cash provided by operating activities
41,762

 
44,084

 
Investing activities
 

 
 

 
Business combinations, net of cash acquired
(6,120
)
 
(6,833
)
 
Purchases of property and equipment
(49,073
)
 
(39,208
)
 
Investment in businesses
(27,608
)
 
(9,848
)
 
Proceeds from sale of assets and businesses
2

 
11,230

 
Net cash used in investing activities
(82,799
)
 
(44,659
)
 
Financing activities
 

 
 

 
Borrowings on revolving facilities
360,000

 
460,000

 
Payments on revolving facilities
(220,000
)
 
(295,000
)
 
Payments on term loans
(132,685
)
 
(39,843
)
 
Borrowings of other debt
8,290

 
6,487

 
Principal payments on other debt
(6,155
)
 
(8,099
)
 
Repurchase of common stock

 
(8,691
)
 
Increase in overdrafts
6,050

 

 
Proceeds from issuance of non-controlling interests
3,425

 
1,679

 
Distributions to and purchases of non-controlling interests
(5,251
)
 
(12,474
)
 
Purchase of membership interests of Concentra Group Holdings Parent (Note 4)

 
(366,203
)
 
Net cash provided by (used in) financing activities
13,674

 
(262,144
)
 
Net decrease in cash and cash equivalents
(27,363
)
 
(262,719
)
 
Cash and cash equivalents at beginning of period
175,178

 
335,882

 
Cash and cash equivalents at end of period
$
147,815

 
$
73,163

 
Supplemental Information
 

 
 

 
Cash paid for interest
$
37,199

 
$
67,885

 
Cash paid for taxes
718

 
1,135

 
Operating lease right-of-use assets obtained in exchange for lease liabilities, excluding adoption impact of ASC Topic 842 at January 1, 2019
24,176

 
67,894

 
 

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

6


SELECT MEDICAL HOLDINGS 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 March 31, 2020, and for the three month periods ended March 31, 2019 and 2020, have been prepared pursuant to the rules and regulations of the Securities Exchange Commission (the “SEC”) for interim reporting and accounting principles generally accepted in the United States of America (“GAAP”). Accordingly, certain information and disclosures required by GAAP, which are normally included in the notes to consolidated financial statements, have been condensed or omitted pursuant to those rules and regulations, although the Company believes the disclosure is adequate to make the information presented not misleading. In the opinion of management, such information contains all adjustments, which are normal and recurring in nature, necessary for a fair statement of the financial position, results of operations and cash flow for such periods. All significant intercompany transactions and balances have been eliminated.
The results of operations for the three months ended March 31, 2020, are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2020. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2019, contained in the Company’s Annual Report on Form 10-K filed with the SEC on February 20, 2020.
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.
Recently Adopted Accounting Pronouncements
Financial Instruments
On January 1, 2020, the Company adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (Topic 326), which replaced the incurred loss approach for recognizing credit losses on financial instruments with an expected loss approach. The expected loss approach is subject to management judgments using assessments of incurred credit losses, assessments of current conditions, and forecasts using reasonable and supportable assumptions. The standard was required to be applied using the modified retrospective approach with a cumulative-effect adjustment to retained earnings, if any, upon adoption.
The Company’s primary financial instrument subject to the standard is its accounts receivable derived from contracts with patients. Historically, the Company has experienced infrequent, immaterial credit losses related to its accounts receivable and, based on its experience, believes the risk of material defaults is low. The Company experienced credit losses of $1.1 million for the year ended December 31, 2017, credit loss recoveries of $0.1 million for the year ended December 31, 2018, and credit losses of $3.0 million for the year ended December 31, 2019. The Company’s historical credit losses have been infrequent and immaterial largely because the Company’s accounts receivable are typically paid for by highly-solvent, creditworthy payors such as Medicare, other governmental programs, and highly-regulated commercial insurers, on behalf of the patient. The Company believes it has moderate credit risk related to defaults on self-pay amounts in accounts receivable; however, these amounts represented less than 1.0% of the Company’s accounts receivable at January 1, 2020.
In estimating the Company’s expected credit losses under Topic 326, the Company considers its incurred loss experience and adjusts for known and expected events and other circumstances, identified using periodic assessments implemented by the Company, which management believes are relevant in assessing the collectability of its accounts receivable. Because of the infrequent and insignificant nature of the Company’s historical credit losses, forecasts of expected credit losses are generally unnecessary. Expected credit losses are recognized by the Company through an allowance for credit losses and related credit loss expense.

7


As of January 1, 2020, the Company completed its expected credit loss assessment for its financial instruments subject to Topic 326. The Company’s estimate of expected credit losses as of January 1, 2020, resulted in no adjustments to the allowance for credit losses and no cumulative-effect adjustment to retained earnings on the adoption date of the standard.
3.
Credit Risk Concentrations
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash balances and accounts receivables. The Company’s excess cash is held with large financial institutions. The Company grants unsecured credit to its patients, most of whom reside in the service area of the Company’s facilities and are insured under third-party payor agreements. The Company’s general policy is to verify insurance coverage prior to the date of admission for patients admitted to its critical illness recovery hospitals and rehabilitation hospitals. Within the Company’s outpatient rehabilitation clinics, insurance coverage is verified prior to the patient’s visit. Within the Company’s Concentra centers, insurance coverage is verified or an authorization is received from the patient’s employer prior to the patient’s visit.
Because of the diversity in the Company’s non-governmental third-party payor base, as well as their geographic dispersion, patient accounts receivable which are due from the Medicare program represent the Company’s only significant concentration of credit risk. Approximately 15% and 18% of the Company’s accounts receivable is from Medicare at December 31, 2019, and March 31, 2020, respectively.
4.
Redeemable Non-Controlling Interests
The ownership interests held by outside parties in subsidiaries, limited liability companies, and limited partnerships controlled by the Company are classified as non-controlling interests. Some of the Company’s non-controlling ownership interests consist of outside parties that have certain redemption rights that, if exercised, require the Company to purchase the parties’ ownership interests. These interests are classified and reported as redeemable non-controlling interests and have been adjusted to their approximate redemption values.
On January 1, 2020, Select acquired approximately 17.2% of the outstanding membership interests of Concentra Group Holdings Parent on a fully diluted basis from Welsh, Carson, Anderson & Stowe XII, L.P. (“WCAS”), Dignity Health Holding Corporation (“DHHC”), and certain other sellers in exchange for an aggregate purchase price of approximately $338.4 million. On February 1, 2020, Select acquired an additional 1.4% of the outstanding membership interests of Concentra Group Holdings Parent on a fully diluted basis from WCAS, DHHC, and certain other sellers in exchange for an aggregate purchase price of approximately $27.8 million. These purchases were in lieu of, and are considered to be, the exercise of the first put right provided to certain equity holders under the terms of the Amended and Restated Limited Liability Company Agreement of Concentra Group Holdings Parent, dated as of February 1, 2018, as amended (the “Concentra LLC Agreement”).
Following these purchases, Select owns approximately 66.6% of the outstanding membership interests of Concentra Group Holdings Parent on a fully diluted basis and approximately 68.8% of the outstanding Class A membership interests of Concentra Group Holdings Parent.
The changes in redeemable non-controlling interests are as follows (in thousands):
 
Three Months Ended March 31,
 
2019
 
2020
Balance as of January 1
$
780,488

 
$
974,541

Net income attributable to redeemable non-controlling interests
7,700

 
7,256

Distributions to and purchases of redeemable non-controlling interests
(2,771
)
 
(5,687
)
Purchase of membership interests of Concentra Group Holdings Parent

 
(366,203
)
Redemption adjustment on redeemable non-controlling interests
47,470

 
10,123

Other
354

 
347

Balance as of March 31
$
833,241

 
$
620,377



8


5.
Variable Interest Entities
Concentra does not own many of its medical practices, as certain states prohibit the “corporate practice of medicine,” which restricts business corporations from practicing medicine through the direct employment of physicians or from exercising control over medical decisions by physicians. In these states, Concentra typically enters into long-term management agreements with professional corporations or associations that are owned by licensed physicians, which, in turn, employ or contract with physicians who provide professional medical services in Concentra’s occupational health centers.
The management agreements have terms that provide for Concentra to conduct, supervise, and manage the day-to-day non-medical operations of the occupational health centers and provide all management and administrative services. Concentra receives a management fee for these services, which is based, in part, on the performance of the professional corporation or association. Additionally, the outstanding voting equity interests of the professional corporations or associations are typically owned by licensed physicians appointed at Concentra’s discretion. Concentra has the ability to direct the transfer of ownership of the professional corporation or association to a new licensed physician at any time.
The total assets of Concentra’s variable interest entities, which are comprised principally of accounts receivable, were $178.4 million and $173.7 million at December 31, 2019, and March 31, 2020, respectively. The total liabilities of Concentra’s variable interest entities, which are comprised principally of accounts payable, accrued expenses, and obligations payable for services received under the aforementioned management agreements, were $176.7 million and $172.1 million at December 31, 2019, and March 31, 2020, respectively.
6. 
Intangible Assets
Goodwill
The following table shows changes in the carrying amounts of goodwill by reporting unit for the three months ended March 31, 2020:
 
Critical Illness Recovery Hospital
 
Rehabilitation Hospital
 
Outpatient
Rehabilitation
 
Concentra
 
Total
 
(in thousands)
Balance as of December 31, 2019
$
1,078,804

 
$
430,900

 
$
649,763

 
$
1,232,488

 
$
3,391,955

Acquired

 

 
610

 
4,567

 
5,177

Sold

 

 
(6,034
)
 

 
(6,034
)
Measurement period adjustment

 

 

 
(20
)
 
(20
)
Balance as of March 31, 2020
$
1,078,804

 
$
430,900

 
$
644,339

 
$
1,237,035

 
$
3,391,078


Identifiable Intangible Assets
The following table provides the gross carrying amounts, accumulated amortization, and net carrying amounts for the Company’s identifiable intangible assets:
 
 
December 31, 2019
 
March 31, 2020
 
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
 
(in thousands)
Indefinite-lived intangible assets:
 
 

 
 

 
 

 
 

 
 

 
 

Trademarks
 
$
166,698

 
$

 
$
166,698

 
$
166,698

 
$

 
$
166,698

Certificates of need
 
17,157

 

 
17,157

 
18,348

 

 
18,348

Accreditations
 
1,874

 

 
1,874

 
1,874

 

 
1,874

Finite-lived intangible assets:
 
 

 
 

 
 

 
 

 
 

 
 

Trademarks
 
5,000

 
(5,000
)
 

 
5,000

 
(5,000
)
 

Customer relationships
 
287,373

 
(87,346
)
 
200,027

 
288,963

 
(93,814
)
 
195,149

Non-compete agreements
 
32,114

 
(8,802
)
 
23,312

 
32,845

 
(9,540
)
 
23,305

Total identifiable intangible assets
 
$
510,216


$
(101,148
)

$
409,068


$
513,728


$
(108,354
)

$
405,374



9


The Company’s accreditations and indefinite-lived trademarks have renewal terms and the costs to renew these intangible assets are expensed as incurred. At March 31, 2020, the accreditations and indefinite-lived trademarks have a weighted average time until next renewal of 1.5 years and 6.9 years, respectively.
The Company’s finite-lived intangible assets amortize over their estimated useful lives. Amortization expense was $7.1 million and $6.9 million for the three months ended March 31, 2019 and 2020, respectively.
7. 
Long-Term Debt and Notes Payable
As of March 31, 2020, the Company’s long-term debt and notes payable were as follows (in thousands):
 
Principal
Outstanding
 
Unamortized
Premium
(Discount)
 
Unamortized
Issuance
Costs
 
Carrying
Value
 
 
Fair
Value
Select 6.250% senior notes
$
1,225,000

 
$
38,437

 
$
(19,200
)
 
$
1,244,237

 
 
$
1,222,673

Select credit facilities:
 

 
 

 
 

 
 

 
 
 

Select revolving facility
165,000

 

 

 
165,000

 
 
164,381

Select term loan
2,103,437

 
(9,905
)
 
(10,796
)
 
2,082,736

 
 
1,987,748

Other debt, including finance leases
78,617

 

 
(373
)
 
78,244

 
 
78,244

Total debt
$
3,572,054

 
$
28,532

 
$
(30,369
)
 
$
3,570,217

 
 
$
3,453,046


Principal maturities of the Company’s long-term debt and notes payable were approximately as follows (in thousands):
 
2020
 
2021
 
2022
 
2023
 
2024
 
Thereafter
 
Total
Select 6.250% senior notes
$

 
$

 
$

 
$

 
$

 
$
1,225,000

 
$
1,225,000

Select credit facilities:
 

 
 

 
 

 
 

 
 

 
 

 
 

Select revolving facility

 

 

 

 
165,000

 

 
165,000

Select term loan

 

 

 
4,757

 
11,150

 
2,087,530

 
2,103,437

Other debt, including finance leases
14,318

 
8,130

 
17,215

 
3,364

 
23,550

 
12,040

 
78,617

Total debt
$
14,318

 
$
8,130

 
$
17,215

 
$
8,121

 
$
199,700

 
$
3,324,570

 
$
3,572,054


As of December 31, 2019, the Company’s long-term debt and notes payable were as follows (in thousands):
 
Principal
Outstanding
 
Unamortized
Premium
(Discount)
 
Unamortized
Issuance
Costs
 
Carrying
Value
 
 
Fair
Value
Select 6.250% senior notes
$
1,225,000

 
$
39,988

 
$
(19,944
)
 
$
1,245,044

 
 
$
1,322,020

Select credit facilities:
 

 
 

 
 

 
 

 
 
 

Select revolving facility

 

 

 

 
 

Select term loan
2,143,280

 
(10,411
)
 
(11,348
)
 
2,121,521

 
 
2,145,959

Other debt, including finance leases
78,941

 

 
(396
)
 
78,545

 
 
78,545

Total debt
$
3,447,221

 
$
29,577

 
$
(31,688
)
 
$
3,445,110

 
 
$
3,546,524


Excess Cash Flow Payment
In February 2020, Select made a principal prepayment of approximately $39.8 million associated with its term loans in accordance with the provision in its senior secured credit agreement, dated March 6, 2017 (together with any borrowings thereunder, the “Select credit facilities”) that requires mandatory prepayments of term loans as a result of annual excess cash flow, as defined in the Select credit facilities.
Fair Value
The Company considers the inputs in the valuation process to be Level 2 in the fair value hierarchy for its 6.250% senior notes due August 15, 2026 (the “senior notes”) and the Select 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 value of the Select credit facilities was based on quoted market prices for this debt in the syndicated loan market. The fair value of the senior notes was based on quoted market prices. The carrying amount of other debt, principally short-term notes payable, approximates fair value.

10


8.
Segment Information
The Company’s reportable segments include the critical illness recovery hospital segment, rehabilitation hospital segment, outpatient rehabilitation segment, and Concentra segment. Other activities include the Company’s corporate shared services, certain investments, and employee leasing services with non-consolidating subsidiaries.
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, gain (loss) on sale of businesses, and equity in earnings (losses) of unconsolidated subsidiaries. The Company has provided additional information regarding its reportable segments, such as total assets, which contributes to the understanding of the Company and provides useful information to the users of the consolidated financial statements.
The following tables summarize selected financial data for the Company’s reportable segments. Prior year results presented herein have been changed to conform to the current presentation.
 
 
Three Months Ended March 31,
 
 
2019
 
2020
 
(in thousands)
Net operating revenues:(1)
 
 

 
 

Critical illness recovery hospital
 
$
457,534

 
$
500,521

Rehabilitation hospital
 
154,558

 
182,019

Outpatient rehabilitation
 
246,905

 
255,249

Concentra
 
396,321

 
398,535

Other
 
69,313

 
78,308

Total Company
 
$
1,324,631

 
$
1,414,632

Adjusted EBITDA:
 
 

 
 

Critical illness recovery hospital
 
$
72,998

 
$
88,570

Rehabilitation hospital
 
25,797

 
38,569

Outpatient rehabilitation
 
28,991

 
27,122

Concentra
 
66,258

 
61,466

Other
 
(23,927
)
 
(28,394
)
Total Company
 
$
170,117

 
$
187,333

Total assets:
 
 

 
 

Critical illness recovery hospital
 
$
2,062,659

 
$
2,148,779

Rehabilitation hospital
 
1,089,391

 
1,127,267

Outpatient rehabilitation
 
1,250,015

 
1,285,449

Concentra
 
2,464,317

 
2,354,169

Other
 
155,110

 
199,903

Total Company
 
$
7,021,492

 
$
7,115,567

Purchases of property and equipment:
 
 

 
 

Critical illness recovery hospital
 
$
10,160

 
$
8,965

Rehabilitation hospital
 
13,183

 
3,325

Outpatient rehabilitation
 
9,040

 
8,384

Concentra
 
15,698

 
15,586

Other
 
992

 
2,948

Total Company
 
$
49,073

 
$
39,208


_______________________________________________________________________________
(1)
Prior to the quarter ended June 30, 2019, the financial results of employee leasing services provided to non-consolidating subsidiaries were included with the Company’s reportable segments. These results are now reported as part of the Company’s other activities. Net operating revenues have been conformed to the current presentation for the three months ended March 31, 2019.





11


A reconciliation of Adjusted EBITDA to income before income taxes is as follows:
 
Three Months Ended March 31, 2019
 
Critical Illness Recovery Hospital
 
Rehabilitation Hospital
 
Outpatient
Rehabilitation
 
Concentra
 
Other
 
Total
 
(in thousands)
Adjusted EBITDA
$
72,998

 
$
25,797

 
$
28,991

 
$
66,258

 
$
(23,927
)
 
 

Depreciation and amortization
(11,451
)
 
(6,402
)
 
(7,032
)
 
(24,904
)
 
(2,349
)
 
 

Stock compensation expense

 

 

 
(767
)
 
(5,488
)
 
 

Income (loss) from operations
$
61,547

 
$
19,395

 
$
21,959

 
$
40,587

 
$
(31,764
)
 
$
111,724

Equity in earnings of unconsolidated subsidiaries
 

 
 
 
 

 
 

 
 

 
4,366

Gain on sale of businesses
 
 
 
 
 
 
 
 
 
 
6,532

Interest expense
 

 
 
 
 

 
 

 
 

 
(50,811
)
Income before income taxes
 

 
 
 
 

 
 

 
 

 
$
71,811

 
Three Months Ended March 31, 2020
 
Critical Illness Recovery Hospital
 
Rehabilitation Hospital
 
Outpatient
Rehabilitation
 
Concentra
 
Other
 
Total
 
(in thousands)
Adjusted EBITDA
$
88,570

 
$
38,569

 
$
27,122

 
$
61,466

 
$
(28,394
)
 
 

Depreciation and amortization
(12,336
)
 
(6,887
)
 
(7,218
)
 
(22,887
)
 
(2,424
)
 
 

Stock compensation expense

 

 

 
(767
)
 
(6,136
)
 
 

Income (loss) from operations
$
76,234

 
$
31,682

 
$
19,904

 
$
37,812

 
$
(36,954
)
 
$
128,678

Equity in earnings of unconsolidated subsidiaries
 

 
 
 
 

 
 

 
 

 
2,588

Gain on sale of businesses
 

 
 
 
 

 
 

 
 

 
7,201

Interest expense
 

 
 
 
 

 
 

 
 

 
(46,107
)
Income before income taxes
 

 
 
 
 

 
 

 
 

 
$
92,360



12


9.
Revenue from Contracts with Customers
Net operating revenues consist primarily of revenues generated from services provided to patients and other revenues for services provided to healthcare institutions under contractual arrangements. The following tables disaggregate the Company’s net operating revenues for the three months ended March 31, 2019 and 2020:
 
Three Months Ended March 31, 2019
 
Critical Illness Recovery Hospital
 
Rehabilitation Hospital
 
Outpatient
Rehabilitation
 
Concentra
 
Other
 
Total
 
(in thousands)
Patient service revenues:
 
 
 
 
 
 
 
 
 
 
 
Medicare
$
238,169

 
$
74,579

 
$
40,278

 
$
555

 
$

 
$
353,581

Non-Medicare
216,959

 
70,642

 
187,914

 
393,236

 

 
868,751

Total patient services revenues
455,128

 
145,221

 
228,192

 
393,791

 

 
1,222,332

Other revenues(1)
2,406

 
9,337

 
18,713

 
2,530

 
69,313

 
102,299

Total net operating revenues
$
457,534

 
$
154,558

 
$
246,905

 
$
396,321

 
$
69,313

 
$
1,324,631

 
Three Months Ended March 31, 2020
 
Critical Illness Recovery Hospital
 
Rehabilitation Hospital
 
Outpatient
Rehabilitation
 
Concentra
 
Other
 
Total
 
(in thousands)
Patient service revenues:
 
 
 
 
 
 
 
 
 
 
 
Medicare
$
241,509

 
$
90,752

 
$
40,832

 
$
472

 
$

 
$
373,565

Non-Medicare
255,947

 
81,436

 
196,890

 
395,033

 

 
929,306

Total patient services revenues
497,456

 
172,188

 
237,722

 
395,505

 

 
1,302,871

Other revenues
3,065

 
9,831

 
17,527

 
3,030

 
78,308

 
111,761

Total net operating revenues
$
500,521

 
$
182,019

 
$
255,249

 
$
398,535

 
$
78,308

 
$
1,414,632

_______________________________________________________________________________
(1)
Prior to the quarter ended June 30, 2019, the financial results of employee leasing services provided to non-consolidating subsidiaries were included with the Company’s reportable segments. These results are now reported as part of the Company’s other activities. Net operating revenues have been conformed to the current presentation for the three months ended March 31, 2019.
10.
Earnings per Share
The Company’s capital structure includes common stock and unvested restricted stock awards. To compute earnings per share (“EPS”), the Company applies the two-class method because the Company’s unvested restricted stock awards are participating securities which are entitled to participate equally with the Company’s common stock in undistributed earnings. Application of the Company’s two-class method is as follows:
(i)
Net income attributable to the Company is reduced by the amount of dividends declared and by the contractual amount of dividends that must be paid for the current period for each class of stock. There were no dividends declared or contractual dividends paid for the three months ended March 31, 2019 and 2020.
(ii)
The remaining undistributed net income of the Company is then equally allocated to its common stock and unvested restricted stock awards, as if all of the earnings for the period had been distributed. The total net income allocated to each security is determined by adding both distributed and undistributed net income for the period.
(iii)
The net income allocated to each security is then divided by the weighted average number of outstanding shares for the period to determine the EPS for each security considered in the two-class method.

13


The following table sets forth the net income attributable to the Company, its common shares outstanding, and its participating securities outstanding.
 
 
Basic EPS
 
Diluted EPS
 
 
 
Three Months Ended March 31,
 
Three Months Ended March 31,
 
 
 
2019
 
2020
 
2019
 
2020
 
 
 
(in thousands)
 
Net income
 
$
53,344

 
$
70,448

 
$
53,344

 
$
70,448

 
Less: net income attributable to non-controlling interests
 
12,510

 
17,323

 
12,510

 
17,323

 
Net income attributable to the Company
 
40,834

 
53,125

 
40,834

 
53,125

 
Less: net income attributable to participating securities
 
1,343

 
1,818

 
1,343

 
1,818

 
Net income attributable to common shares
 
$
39,491

 
$
51,307

 
$
39,491

 
$
51,307

 
 
 
Three Months Ended March 31, 2019
 
 
Net Income Allocation
 
Shares(1)
 
Basic EPS
 
 
Net Income Allocation
 
Shares(1)
 
Diluted EPS
 
 
(in thousands, except for per share amounts)
Common shares
 
$
39,491

 
130,821

 
$
0.30

 
 
$
39,491

 
130,861

 
$
0.30

Participating securities
 
1,343

 
4,449

 
$
0.30

 
 
1,343

 
4,449

 
$
0.30

Total Company
 
$
40,834

 
 
 
 
 
 
$
40,834

 
 
 
 
 
 
Three Months Ended March 31, 2020
 
 
Net Income Allocation
 
Shares(1)
 
Basic EPS
 
 
Net Income Allocation
 
Shares(1)
 
Diluted EPS
 
 
(in thousands, except for per share amounts)
Common shares
 
$
51,307

 
129,638

 
$
0.40

 
 
$
51,307

 
129,638

 
$
0.40

Participating securities
 
1,818

 
4,594

 
$
0.40

 
 
1,818

 
4,594

 
$
0.40

Total Company
 
$
53,125

 
 
 
 
 
 
$
53,125

 
 
 
 
_______________________________________________________________________________
(1)    Represents the weighted average share count outstanding during the period.

14


11.
Commitments and Contingencies
Litigation
The Company is a party to various legal actions, proceedings, and claims (some of which are not insured), and regulatory and other governmental audits and investigations in the ordinary course of its business. The Company cannot predict the ultimate outcome of pending litigation, proceedings, and regulatory and other governmental audits and investigations. These matters could potentially subject the Company to sanctions, damages, recoupments, fines, and other penalties. The Department of Justice, Centers for Medicare & Medicaid Services (“CMS”), or other federal and state enforcement and regulatory agencies may conduct additional investigations related to the Company’s businesses in the future that may, either individually or in the aggregate, have a material adverse effect on the Company’s business, financial position, results of operations, and liquidity.
To address claims arising out of the Company’s operations, the Company maintains professional malpractice liability insurance and general liability insurance coverages through a number of different programs that are dependent upon such factors as the state where the Company is operating and whether the operations are wholly owned or are operated through a joint venture. For the Company’s wholly owned operations, the Company currently maintains insurance coverages under a combination of policies with a total annual aggregate limit of up to $40.0 million. The Company’s insurance for the professional liability coverage is written on a “claims-made” basis, and its commercial general liability coverage is maintained on an “occurrence” basis. These coverages apply after a self-insured retention limit is exceeded. For the Company’s joint venture operations, the Company has numerous programs that are designed to respond to the risks of the specific joint venture. The annual aggregate limit under these programs ranges from $6.0 million to $20.0 million. The policies are generally written on a “claims-made” basis. Each of these programs has either a deductible or self-insured retention limit. The Company reviews its insurance program annually and may make adjustments to the amount of insurance coverage and self-insured retentions in future years. The Company also maintains umbrella liability insurance covering claims which, due to their nature or amount, are not covered by or not fully covered by the Company’s other insurance policies. These insurance policies also do not generally cover punitive damages and are subject to various deductibles and policy limits. Significant legal actions, as well as the cost and possible lack of available insurance, could subject the Company to substantial uninsured liabilities. In the Company’s opinion, the outcome of these actions, individually or in the aggregate, will not have a material adverse effect on its financial position, results of operations, or cash flows.
Healthcare providers are subject to lawsuits under the qui tam provisions of the federal False Claims Act. Qui tam lawsuits typically remain under seal (hence, usually unknown to the defendant) for some time while the government decides whether or not to intervene on behalf of a private qui tam plaintiff (known as a relator) and take the lead in the litigation. These lawsuits can involve significant monetary damages and penalties and award bounties to private plaintiffs who successfully bring the suits. The Company is and has been a defendant in these cases in the past, and may be named as a defendant in similar cases from time to time in the future.
Wilmington Litigation.    On January 19, 2017, the United States District Court for the District of Delaware unsealed a qui tam Complaint in United States of America and State of Delaware ex rel. Theresa Kelly v. Select Specialty Hospital-Wilmington, Inc. (“SSH‑Wilmington”), Select Specialty Hospitals, Inc., Select Employment Services, Inc., Select Medical Corporation, and Crystal Cheek, No. 16‑347‑LPS. The Complaint was initially filed under seal in May 2016 by a former chief nursing officer at SSH‑Wilmington and was unsealed after the United States filed a Notice of Election to Decline Intervention in January 2017. The corporate defendants were served in March 2017. In the complaint, the plaintiff‑relator alleges that the Select defendants and an individual defendant, who is a former health information manager at SSH‑Wilmington, violated the False Claims Act and the Delaware False Claims and Reporting Act based on allegedly falsifying medical practitioner signatures on medical records and failing to properly examine the credentials of medical practitioners at SSH‑Wilmington. In response to the Select defendants’ motion to dismiss the Complaint, in May 2017 the plaintiff-relator filed an Amended Complaint asserting the same causes of action. The Select defendants filed a Motion to Dismiss the Amended Complaint based on numerous grounds, including that the Amended Complaint did not plead any alleged fraud with sufficient particularity, failed to plead that the alleged fraud was material to the government’s payment decision, failed to plead sufficient facts to establish that the Select defendants knowingly submitted false claims or records, and failed to allege any reverse false claim. In March 2018, the District Court dismissed the plaintiff‑relator’s claims related to the alleged failure to properly examine medical practitioners’ credentials, her reverse false claims allegations, and her claim that defendants violated the Delaware False Claims and Reporting Act. It denied the defendants’ motion to dismiss claims that the allegedly falsified medical practitioner signatures violated the False Claims Act. Separately, the District Court dismissed the individual defendant due to plaintiff-relator’s failure to timely serve the amended complaint upon her.



15


In March 2017, the plaintiff-relator initiated a second action by filing a Complaint in the Superior Court of the State of Delaware in Theresa Kelly v. Select Medical Corporation, Select Employment Services, Inc., and SSH‑Wilmington, C.A. No. N17C-03-293 CLS. The Delaware Complaint alleges that the defendants retaliated against her in violation of the Delaware Whistleblowers’ Protection Act for reporting the same alleged violations that are the subject of the federal Amended Complaint. The defendants filed a motion to dismiss, or alternatively to stay, the Delaware Complaint based on the pending federal Amended Complaint and the failure to allege facts to support a violation of the Delaware Whistleblowers’ Protection Act.  In January 2018, the Court stayed the Delaware Complaint pending the outcome of the federal case.
The Company intends to vigorously defend these actions, but at this time the Company is unable to predict the timing and outcome of this matter.
Contract Therapy Subpoena. On May 18, 2017, the Company received a subpoena from the U.S. Attorney’s Office for the District of New Jersey seeking various documents principally relating to the Company’s contract therapy division, which contracted to furnish rehabilitation therapy services to residents of skilled nursing facilities (“SNFs”) and other providers. The Company operated its contract therapy division through a subsidiary until March 31, 2016, when the Company sold the stock of the subsidiary. The subpoena seeks documents that appear to be aimed at assessing whether therapy services were furnished and billed in compliance with Medicare SNF billing requirements, including whether therapy services were coded at inappropriate levels and whether excessive or unnecessary therapy was furnished to justify coding at higher paying levels. The Company does not know whether the subpoena has been issued in connection with a qui tam lawsuit or in connection with possible civil, criminal or administrative proceedings by the government. The Company has produced documents in response to the subpoena and intends to fully cooperate with this investigation. At this time, the Company is unable to predict the timing and outcome of this matter.
12.
Income Taxes
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted. The CARES Act includes changes to certain tax law related to net operating losses and the deductibility of interest expense and depreciation. ASC 740, Income Taxes, requires the effects of changes in tax rates and laws on deferred tax balances to be recognized in the period in which the legislation is enacted. This legislation had the effect of increasing the Company’s deferred income taxes and decreasing its current income taxes payable by approximately $15.5 million during the three months ended March 31, 2020.
13.
Subsequent Events
Title VIII in Division B of the CARES Act established the Public Health and Social Services Emergency Fund, also referred to as the Cares Act Provider Relief Fund, which set aside $100.0 billion to be administered through grants and other mechanisms to hospitals, public entities, not-for-profit entities, and Medicare- and Medicaid-enrolled suppliers and institutional providers. The purpose of these funds is to reimburse providers for lost revenue attributable to the coronavirus disease 2019 (“COVID-19”) pandemic, such as forgone revenues from canceled procedures, and to provide support for related healthcare expenses, such as constructing temporary structures or emergency operation centers, retrofitting facilities, purchasing medical supplies and equipment including personal protective equipment and testing supplies, and increasing workforce. Further, these relief funds ensure uninsured patients are receiving testing and treatment for COVID-19. On April 10, 2020, the U.S. Department of Health & Human Services began making payments to healthcare providers from the $100.0 billion appropriation. These are payments, rather than loans, to healthcare providers, and will not need to be repaid. The Company received approximately $93.7 million of payments as part of the Cares Act Provider Relief Fund. The Company concluded that the receipt of these payments would be accounted for in periods subsequent to March 31, 2020, as the Company was not able to determine eligibility for the assistance or the amounts that would be distributed until April 2020.
Additionally, the CARES Act allows for qualified healthcare providers to receive advanced payments under the existing Medicare Accelerated and Advance Payments Program during the COVID-19 pandemic. Under this program, healthcare providers may receive advanced payments for future Medicare services provided. The Company applied for and received approval from CMS in April 2020 to receive advanced payments and, through April 30, 2020, the Company has received $316.1 million under this program. Because these payments are made on behalf of patients before services are provided, the Company will record these payments as a contract liability until all performance obligations have been met. These advanced payments will be recouped by CMS through future Medicare claims billed by the Company, beginning 121 days after receipt of the advanced payment. After 120 days, any new Medicare claim billed by the Company will reduce the liability owed to CMS. The Company is required to repay any advanced payments not recouped by CMS within 210 days from the date the Company originally received the payment. Failure to repay the advanced payments when due will result in interest charges on the outstanding balance owed.

16


In April 2020, the Company began deferring payment on its share of payroll taxes owed, as allowed by the CARES Act through December 31, 2020. The Company is able to defer half of its share of payroll taxes owed until December 31, 2021, with the remaining half due on December 31, 2022.

17


ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read this discussion together with our unaudited condensed consolidated financial statements and accompanying notes.
Forward-Looking Statements
This report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements include statements preceded by, followed by or that include the words “may,” “could,” “would,” “should,” “believe,” “expect,” “anticipate,” “plan,” “target,” “estimate,” “project,” “intend,” and similar expressions. These statements include, among others, statements regarding our expected business outlook, anticipated financial and operating results, including the potential impact of the COVID-19 pandemic on those financial and operating results, our business strategy and means to implement our strategy, our objectives, the amount and timing of capital expenditures, the likelihood of our success in expanding our business, financing plans, budgets, working capital needs, and sources of liquidity.
Forward-looking statements are only predictions and are not guarantees of performance. These statements are based on our management’s beliefs and assumptions, which in turn are based on currently available information. Important assumptions relating to the forward-looking statements include, among others, assumptions regarding our services, the expansion of our services, competitive conditions, and general economic conditions. These assumptions could prove inaccurate. Forward-looking statements also involve known and unknown risks and uncertainties, which could cause actual results to differ materially from those contained in any forward-looking statement. Many of these factors are beyond our ability to control or predict. Such factors include, but are not limited to, the following:
developments related to the COVID-19 pandemic including, but not limited to, the duration and severity of the pandemic, additional measures taken by government authorities and the private sector to limit the spread of COVID-19, and further legislative and regulatory actions which impact healthcare providers, including actions that may impact the Medicare program;
changes in government reimbursement for our services and/or new payment policies may result in a reduction in net operating revenues, an increase in costs, and a reduction in profitability;
the failure of our Medicare-certified long term care hospitals or inpatient rehabilitation facilities to maintain their Medicare certifications may cause our net operating revenues and profitability to decline;
the failure of our Medicare-certified long term care hospitals and inpatient rehabilitation facilities operated as “hospitals within hospitals” to qualify as hospitals separate from their host hospitals may cause our net operating revenues and profitability to decline;
a government investigation or assertion that we have violated applicable regulations may result in sanctions or reputational harm and increased costs;
acquisitions or joint ventures may prove difficult or unsuccessful, use significant resources, or expose us to unforeseen liabilities;
our plans and expectations related to our acquisitions and our ability to realize anticipated synergies;
private third-party payors for our services may adopt payment policies that could limit our future net operating revenues and profitability;
the failure to maintain established relationships with the physicians in the areas we serve could reduce our net operating revenues and profitability;
shortages in qualified nurses, therapists, physicians, or other licensed providers, or the inability to attract or retain healthcare professionals due to the heightened risk of infection related to the COVID-19 pandemic, could increase our operating costs significantly or limit our ability to staff our facilities;
competition may limit our ability to grow and result in a decrease in our net operating revenues and profitability;
the loss of key members of our management team could significantly disrupt our operations;
the effect of claims asserted against us could subject us to substantial uninsured liabilities;
a security breach of our or our third-party vendors’ information technology systems may subject us to potential legal and reputational harm and may result in a violation of the Health Insurance Portability and Accountability Act of 1996 or the Health Information Technology for Economic and Clinical Health Act; and

18


other factors discussed from time to time in our filings with the SEC, including factors discussed under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019, as such risk factors may be updated from time to time in our periodic filings with the SEC, including the risk factors discussed in Item 1A. Risk Factors on this Form 10-Q.
Except as required by applicable law, including the securities laws of the United States and the rules and regulations of the SEC, we are under no obligation to publicly update or revise any forward-looking statements, whether as a result of any new information, future events, or otherwise. You should not place undue reliance on our forward-looking statements. Although we believe that the expectations reflected in forward-looking statements are reasonable, we cannot guarantee future results or performance.
Investors should also be aware that while we do, from time to time, communicate with securities analysts, it is against our policy to disclose to securities analysts any material non-public information or other confidential commercial information. Accordingly, stockholders should not assume that we agree with any statement or report issued by any securities analyst irrespective of the content of the statement or report. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of the Company.
Overview
 We began operations in 1997 and, based on number of facilities, are one of the largest operators of critical illness recovery hospitals, rehabilitation hospitals, outpatient rehabilitation clinics, and occupational health centers in the United States. As of March 31, 2020, we had operations in 47 states and the District of Columbia. We operated 101 critical illness recovery hospitals in 28 states, 29 rehabilitation hospitals in 12 states, and 1,753 outpatient rehabilitation clinics in 37 states and the District of Columbia. Concentra, a joint venture subsidiary, operated 523 occupational health centers in 41 states as of March 31, 2020. Concentra also provides contract services at employer worksites and Department of Veterans Affairs community-based outpatient clinics (“CBOCs”).
Our reportable segments include the critical illness recovery hospital segment, the rehabilitation hospital segment, the outpatient rehabilitation segment, and the Concentra segment. We had net operating revenues of $1,414.6 million for the three months ended March 31, 2020. Of this total, we earned approximately 35% of our net operating revenues from our critical illness recovery hospital segment, approximately 13% from our rehabilitation hospital segment, approximately 18% from our outpatient rehabilitation segment, and approximately 28% from our Concentra segment. Our critical illness recovery hospital segment consists of hospitals designed to serve the needs of patients recovering from critical illnesses, often with complex medical needs, and our rehabilitation hospital segment consists of hospitals designed to serve patients that require intensive physical rehabilitation care. Patients are typically admitted to our critical illness recovery hospitals and rehabilitation hospitals from general acute care hospitals. Our outpatient rehabilitation segment consists of clinics that provide physical, occupational, and speech rehabilitation services. Our Concentra segment consists of occupational health centers that provide workers’ compensation injury care, physical therapy, and consumer health services as well as onsite clinics located at employer worksites that deliver occupational medicine services. Additionally, our Concentra segment delivers veteran’s healthcare through its Department of Veterans Affairs CBOCs.
During the quarter ended June 30, 2019, we began reporting the net operating revenues and expenses associated with employee leasing services provided to our non-consolidating subsidiaries as part of our other activities. Previously, these services were reflected in the financial results of our reportable segments. Under these employee leasing arrangements, actual labor costs are passed through to our non-consolidating subsidiaries, resulting in our recognition of net operating revenues equal to the actual labor costs incurred. Prior year results presented herein have been changed to conform to the current presentation.

19


Non-GAAP Measure
We believe that the presentation of Adjusted EBITDA, as defined below, is important to investors because Adjusted EBITDA is commonly used as an analytical indicator of performance by investors within the healthcare industry. Adjusted EBITDA is used by management to evaluate financial performance and determine resource allocation for each of our operating segments. Adjusted EBITDA is not a measure of financial performance under GAAP. Items excluded from Adjusted EBITDA are significant components in understanding and assessing financial performance. Adjusted EBITDA should not be considered in isolation or as an alternative to, or substitute for, net income, income from operations, cash flows generated by operations, investing or financing activities, or other financial statement data presented in the consolidated financial statements as indicators of financial performance or liquidity. Because Adjusted EBITDA is not a measurement determined in accordance with GAAP and is thus susceptible to varying definitions, Adjusted EBITDA as presented may not be comparable to other similarly titled measures of other companies.
We define Adjusted EBITDA as earnings excluding interest, income taxes, depreciation and amortization, gain (loss) on early retirement of debt, stock compensation expense, gain (loss) on sale of businesses, and equity in earnings (losses) of unconsolidated subsidiaries. We will refer to Adjusted EBITDA throughout the remainder of Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The table below reconciles net income and income from operations to Adjusted EBITDA and should be referenced when we discuss Adjusted EBITDA:
 
 
Three Months Ended March 31,
 
 
 
2019
 
2020
 
 
 
(in thousands)
Net income
 
$
53,344

 
$
70,448

 
Income tax expense
 
18,467

 
21,912

 
Interest expense
 
50,811

 
46,107

 
Gain on sale of businesses
 
(6,532
)
 
(7,201
)
 
Equity in earnings of unconsolidated subsidiaries
 
(4,366
)
 
(2,588
)
 
Income from operations
 
111,724

 
128,678

 
Stock compensation expense:
 
 

 
 

 
Included in general and administrative
 
4,748

 
5,437

 
Included in cost of services
 
1,507

 
1,466

 
Depreciation and amortization
 
52,138

 
51,752

 
Adjusted EBITDA
 
$
170,117

 
$
187,333

 
Effects of the COVID-19 Pandemic on our Results of Operations
The broader implications of the COVID-19 pandemic on our results of operations and overall financial performance remain uncertain. We are a healthcare service provider that provides patient care services in both inpatient and outpatient settings. We have provided certain additional performance metrics to assist readers in understanding how the COVID-19 pandemic impacted each of our segments during the one month ended March 31, 2020, including our (i) net operating revenues and Adjusted EBITDA for the two months ended February 29, 2020 and February 28, 2019, (ii) net operating revenues and Adjusted EBITDA for the one month ended March 31, 2020 and 2019, (iii) net operating revenues and Adjusted EBITDA for the three months ended March 31, 2020 and 2019, and (iv) certain operating statistics for each of the aforementioned periods. Please refer to our risk factors discussed in Item 1A “Risk Factors” of this Form 10-Q and as previously reported in our Annual Report on Form 10-K for the year ended December 31, 2019 for further discussion.
Critical Illness Recovery Hospital Segment. Our critical illness recovery hospitals are a key part of the inpatient hospital continuum of care. Both CMS and Congress acted to temporarily suspend certain regulations concerning length of stay requirements, which impact our critical illness recovery hospitals, in order to facilitate the transfer of patients from general acute care hospitals (see “Regulatory Changes” for further discussion of the temporary suspension of regulations). This was done in order to expand hospital bed capacity to care for COVID-19 patients. As COVID-19 has spread in the general acute care hospitals in many markets where we operate, we have admitted patients with COVID-19 and have faced the challenging task of treating them while attempting to protect our patients and staff members who do not have COVID-19. We have followed CDC guidelines, directives and recommendations with regard to the use of personal protective equipment and the isolation and treatment of patients with COVID-19. The pandemic has caused, and will continue to cause, disruptions in our critical illness recovery hospitals, which include, in some cases, the addition or reduction of beds, the creation of isolated units and spaces, temporary increases or restrictions on admissions, the incurrence of additional costs, staff illnesses, and the increased use of contract clinical labor.

20


Rehabilitation Hospital Segment. Our rehabilitation hospitals receive most of their admissions from general acute care hospitals. Both CMS and Congress acted to temporarily suspend certain regulations that govern admissions into our rehabilitation hospitals to facilitate the transfer of patients from general acute care hospitals and critical illness recovery hospitals (see “Regulatory Changes” for further discussion of the temporary suspension of regulations). This was done in order to expand hospital bed capacity to care for COVID-19 patients. As COVID-19 has spread in the general acute care hospitals in many markets where we operate, we have admitted patients with COVID-19 and have faced the challenging task of treating them while attempting to protect our patients and staff members who do not have COVID-19. We have followed CDC guidelines, directives and recommendations with regard to the use of personal protective equipment and the isolation and treatment of patients with COVID-19. The pandemic has caused, and will continue to cause, disruptions in our rehabilitation hospitals, which include, in some cases, the addition or reduction of beds, the creation of isolated units and spaces, temporary restrictions on admissions, the incurrence of additional costs, staff illnesses, and the increased use of contract clinical labor. Additionally, elective surgeries at hospitals and other facilities have been suspended which is reducing the need for inpatient rehabilitation services.
Outpatient Rehabilitation Segment. Beginning in mid-March, hospitals and other facilities began to suspend elective surgeries. Additionally, state governments in the areas experiencing the most significant growth of COVID-19 infections began implementing mandatory closures of non-essential or non-life sustaining businesses, restrictions on individual activities outside of the home, restrictions on travel, and closures of schools. These actions continued to expand throughout March and by the end of March, most states implemented significant restrictions on businesses and individuals. The suspension of elective surgeries at hospitals and other facilities and the reduction of physician office visits combined with recommendations of social distancing and the other items noted above have had significant effects on our patient visit volumes. As a result, we have temporarily consolidated the operations of some of our clinics by transferring staff and patients.
Concentra Segment. Beginning in mid-March, state governments in the areas experiencing the most significant growth of COVID-19 infections began implementing mandatory closures of non-essential or non-life sustaining businesses. These actions continued to expand throughout March. By the end of March, most states implemented significant restrictions on businesses. These actions have had significant effects on our patient visit volumes as employers have furloughed workforces and temporarily ceased operations or have significantly reduced their operations. As a result, we have temporarily consolidated the operations of some of our centers by transferring staff and patients.
We provided below certain performance measures and operating statistics used by management to help illustrate the impact of the COVID-19 pandemic on our operating results. For the quarter ended March 31, 2020, we defined the pre-COVID-19 outbreak period as the two months ended February 29, 2020, and the post-COVID-19 outbreak period as the one month ended March 31, 2020. We provided prior year comparative data for the pre-COVID-19 and post-COVID-19 outbreak periods presented. The following performance measures and operating statistics should be considered in conjunction with the operating results for the full quarter ended March 31, 2020. The performance measures and operating statistics presented for the two months ended February 29, 2020 and the one month ended March 31, 2020 are, when combined, equal to the performance measures and operating statistics presented for the full quarter ended March 31, 2020. The same is true for the prior year comparative data.

21


 
 
Two Months Ended February
 
 
One Month Ended March
 
 
Three Months Ended March
 
 
2019
 
2020
 
%
 Change
 
 
2019
 
2020
 
%
 Change
 
 
2019
 
2020
Selected financial data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net operating revenues:
 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Critical illness recovery hospital
 
$
295,385

 
$
328,613

 
11.2
 %
 
 
$
162,149

 
$
171,908

 
6.0
 %
 
 
$
457,534

 
$
500,521

Rehabilitation hospital
 
98,695

 
122,363

 
24.0

 
 
55,863

 
59,656

 
6.8

 
 
154,558

 
182,019

Outpatient rehabilitation
 
161,758

 
179,163

 
10.8

 
 
85,147

 
76,086

 
(10.6
)
 
 
246,905

 
255,249

Concentra
 
259,816

 
274,926

 
5.8

 
 
136,505

 
123,609

 
(9.4
)
 
 
396,321

 
398,535

Other(1)
 
38,532

 
54,283

 
40.9

 
 
30,781

 
24,025

 
(21.9
)
 
 
69,313

 
78,308

Total Company
 
$
854,186

 
$
959,348

 
12.3
 %
 
 
$
470,445

 
$
455,284

 
(3.2
)%
 
 
$
1,324,631

 
$
1,414,632

Income (loss) from operations: