Select Medical(SEM) - 2024 Q3 - Quarterly Report

PART I FINANCIAL INFORMATION Condensed Consolidated Financial Statements This section presents Select Medical Holdings Corporation's unaudited condensed consolidated financial statements and accompanying notes Condensed Consolidated Balance Sheets The balance sheet as of September 30, 2024, reflects increased total assets and equity, with decreased total liabilities Condensed Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Item | September 30, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Total Current Assets | $1,404,197 | $1,257,646 | | Total Assets | $8,002,661 | $7,689,631 | | Total Current Liabilities | $1,245,704 | $1,248,465 | | Long-term debt, net | $3,098,957 | $3,587,675 | | Total Liabilities | $5,702,217 | $6,115,616 | | Total Equity | $2,269,989 | $1,547,718 | Condensed Consolidated Statements of Operations For Q3 and the nine-month period of 2024, the company reported revenue growth and increased net income attributable to shareholders year-over-year Statement of Operations Summary (in thousands) | Metric | Q3 2024 | Q3 2023 | YTD 2024 | YTD 2023 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $1,761,220 | $1,665,694 | $5,309,692 | $5,005,202 | | Income from operations | $141,133 | $129,960 | $492,900 | $440,621 | | Net income | $81,015 | $60,816 | $292,948 | $237,933 | | Net income attributable to Holdings | $55,628 | $48,180 | $230,088 | $197,222 | Condensed Consolidated Statements of Cash Flows For the nine months ended September 30, 2024, operating cash flow slightly decreased, with significant financing activities related to the Concentra IPO Cash Flow Summary for the Nine Months Ended Sep 30 (in thousands) | Cash Flow Category | 2024 | 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $392,432 | $402,616 | | Net cash used in investing activities | ($156,818) | ($198,893) | | Net cash used in financing activities | ($128,152) | ($224,189) | | Net increase (decrease) in cash | $107,462 | ($20,466) | | Cash and cash equivalents at end of period | $191,468 | $77,440 | Notes to Condensed Consolidated Financial Statements These notes provide critical context to the financial statements, detailing accounting policies, segment performance, debt, and legal contingencies - The company completed the Initial Public Offering (IPO) of its subsidiary, Concentra, on July 26, 2024, retaining 81.74% ownership and planning to distribute its remaining interest within twelve months[86][87] - The company is involved in several government investigations, including matters related to billing for respiratory and physical therapy services, and a data breach at a third-party vendor, with unpredictable outcomes[82][83][84][85] Long-Term Debt Breakdown as of Sep 30, 2024 (in thousands) | Debt Instrument | Carrying Value | | :--- | :--- | | Select 6.250% senior notes | $1,230,379 | | Select credit facilities | $380,820 | | Concentra 6.875% senior notes | $637,684 | | Concentra credit facilities | $837,048 | | Other debt | $55,811 | | Total Debt | $3,141,742 | Segment Revenue and Adjusted EBITDA - Nine Months Ended Sep 30, 2024 (in thousands) | Segment | Revenue | Adjusted EBITDA | | :--- | :--- | :--- | | Critical illness recovery hospital | $1,843,751 | $238,536 | | Rehabilitation hospital | $816,240 | $183,471 | | Outpatient rehabilitation | $930,696 | $82,016 | | Concentra | $1,435,151 | $299,313 | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses the company's financial performance, including revenue growth, operational drivers, the Concentra IPO, and liquidity Overview This overview details Select Medical's operational footprint, the Concentra IPO, and the impact of the Change Healthcare cybersecurity incident - On July 26, 2024, the company's subsidiary Concentra completed its IPO, with Select continuing to own 81.74% and planning a tax-free distribution of its remaining interest within twelve months[99][100] - The company's billing and collections were disrupted by the Change Healthcare cybersecurity incident in February 2024, leading to a temporary increase in days sales outstanding expected to normalize[101] Results of Operations The company's operating results showed broad improvement for Q3 and the first nine months of 2024, with significant revenue and Adjusted EBITDA growth Q3 2024 vs Q3 2023 Performance | Metric | Q3 2024 | Q3 2023 | % Change | | :--- | :--- | :--- | :--- | | Revenue | $1,761.2M | $1,665.7M | 5.7% | | Income from Operations | $141.1M | $130.0M | 8.6% | | Adjusted EBITDA | $205.5M | $193.8M | 6.0% | YTD 2024 vs YTD 2023 Performance | Metric | YTD 2024 | YTD 2023 | % Change | | :--- | :--- | :--- | :--- | | Revenue | $5,309.7M | $5,005.2M | 6.1% | | Income from Operations | $492.9M | $440.6M | 11.9% | | Adjusted EBITDA | $693.7M | $627.4M | 10.6% | Regulatory Changes This section details significant Medicare reimbursement updates for FY 2025, including increased rates for LTCHs and IRFs - For FY 2025, the LTCH-PPS standard federal rate will increase to $49,383 from $48,117 in FY 2024, with the fixed-loss amount for high-cost outlier cases increasing substantially to $77,048[119] - For FY 2025, the IRF-PPS standard payment conversion factor will increase to $18,907 from $18,541 in FY 2024[127] - CMS has changed the criteria for LTCH outlier reconciliations for cost reporting periods starting on or after October 1, 2024, expected to increase the number of reconciliations and potential recoupments[122][123] Liquidity and Capital Resources As of September 30, 2024, the company maintained strong liquidity with substantial cash and credit availability, bolstered by the Concentra IPO - Net cash from operations for the first nine months of 2024 was $392.4 million, a slight decrease from $402.6 million in the prior year, mainly due to higher accounts receivable[180] - The company had $191.5 million in cash and cash equivalents and $883.0 million of availability under its revolving facilities as of September 30, 2024[197] - The company's stock repurchase program has $399.7 million remaining capacity as of September 30, 2024, with no shares repurchased during the first nine months of 2024[195][213] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate fluctuations on its variable-rate long-term debt, particularly loans indexed to Term SOFR - The company's main market risk is interest rate risk associated with its variable-rate debt under the Select and Concentra credit facilities, which are indexed to Term SOFR[204] - As of September 30, 2024, a 0.25% increase in market interest rates would increase the company's annual interest expense by approximately $3.1 million[206] Controls and Procedures As of September 30, 2024, the company's disclosure controls and procedures were deemed effective, with no material changes to internal control over financial reporting - The principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective as of September 30, 2024[207] - No changes in internal control over financial reporting occurred during the third quarter of 2024 that have materially affected, or are reasonably likely to materially affect, these controls[208] PART II OTHER INFORMATION Legal Proceedings This section refers to Note 14 of the financial statements for detailed information on the company's ongoing legal actions and investigations - For information on legal proceedings, the report refers to the 'Litigation' section within Note 14 – Commitments and Contingencies[211] Risk Factors The company reports that there have been no material changes to the risk factors previously disclosed in its Annual Report on Form 10-K for the fiscal year ended December 31, 2023 - There have been no material changes from the risk factors set forth in the company's Annual Report on Form 10-K for the year ended December 31, 2023[212] Unregistered Sales of Equity Securities and Use of Proceeds The company did not repurchase shares during Q3 2024, with $399.7 million remaining available under its stock repurchase program - During the three months ended September 30, 2024, the company did not repurchase any shares under its common stock repurchase program[213] - The available capacity under the stock repurchase program was $399.7 million as of September 30, 2024[213] Other Information During the third quarter of 2024, none of the company's directors or executive officers adopted or terminated a Rule 10b5-1 trading plan or any non-Rule 10b5-1 trading arrangement - No directors or executive officers adopted or terminated any Rule 10b5-1 trading plans during the three months ended September 30, 2024[214] Exhibits This section lists the exhibits filed with the Form 10-Q, including agreements related to the Concentra separation and debt financing, as well as required officer certifications and XBRL data files - Exhibits filed include the Separation Agreement with Concentra, new Credit Agreements for both Select and Concentra, and officer certifications pursuant to the Sarbanes-Oxley Act[216]