Select Medical(SEM) - 2022 Q1 - Quarterly Report

PART I: FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Presents Select Medical Holdings Corporation's unaudited condensed consolidated financial statements and detailed notes for Q1 2022 and FY 2021 Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (in thousands) | Item | December 31, 2021 | March 31, 2022 | | :-------------------------------- | :------------------ | :--------------- | | ASSETS | | | | Cash and cash equivalents | $74,310 | $130,881 | | Accounts receivable | 889,303 | 941,434 | | Total Current Assets | 1,139,439 | 1,250,851 | | Total Assets | $7,360,171 | $7,535,944 | | LIABILITIES AND EQUITY | | | | Total Current Liabilities | 1,273,077 | 1,189,151 | | Long-term debt, net of current portion | 3,556,385 | 3,738,299 | | Total Liabilities | 5,995,236 | 6,127,378 | | Total Equity | 1,325,902 | 1,366,896 | | Total Liabilities and Equity | $7,360,171 | $7,535,944 | Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Operations (in thousands, except per share amounts) | Item | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2022 | | :--------------------------------------- | :-------------------------------- | :-------------------------------- | | Revenue | $1,546,463 | $1,599,547 | | Total costs and expenses | 1,378,472 | 1,495,562 | | Other operating income | 34,021 | — | | Income from operations | 202,012 | 103,985 | | Income before income taxes | 182,278 | 73,868 | | Net income | 137,214 | 55,926 | | Net income attributable to Select Medical Holdings Corporation | $110,546 | $49,117 | | Basic and diluted EPS | $0.82 | $0.37 | Condensed Consolidated Statements of Comprehensive Income Condensed Consolidated Statements of Comprehensive Income (in thousands) | Item | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2022 | | :------------------------------------------------ | :-------------------------------- | :-------------------------------- | | Net income | $137,214 | $55,926 | | Net change, net of tax benefit (expense) | 8,151 | 39,853 | | Comprehensive income | 145,365 | 95,779 | | Comprehensive income attributable to Select Medical Holdings Corporation | $118,697 | $88,970 | Condensed Consolidated Statements of Changes in Equity and Income - Total Equity increased from $1,325,902 thousand at December 31, 2021, to $1,366,896 thousand at March 31, 2022, driven by net income attributable to Select Medical Holdings Corporation and other comprehensive income, partially offset by cash dividends and share repurchases[16] Key Changes in Equity (in thousands) for Three Months Ended March 31, 2022 | Item | Amount | | :------------------------------------------------ | :------- | | Balance at December 31, 2021 | $1,325,902 | | Net income attributable to Select Medical Holdings Corporation | 49,117 | | Cash dividends declared for common stockholders | (16,691) | | Repurchase of common shares | (51,676) | | Other comprehensive income | 39,853 | | Balance at March 31, 2022 | $1,366,896 | Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (in thousands) | Activity | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2022 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Operating activities | $239,888 | $6,337 | | Investing activities | (52,585) | (55,331) | | Financing activities | (14,090) | 105,565 | | Net increase in cash and cash equivalents | 173,213 | 56,571 | | Cash and cash equivalents at end of period | $750,274 | $130,881 | Notes to Condensed Consolidated Financial Statements Note 1. Basis of Presentation - The unaudited condensed consolidated financial statements include Select Medical Holdings Corporation, its wholly-owned subsidiary Select Medical Corporation, and Select's subsidiaries (collectively, the "Company"). They are prepared in accordance with SEC rules for interim reporting and GAAP, with certain information condensed or omitted[21] - Results for the three months ended March 31, 2022, are not indicative of the full fiscal year, and should be read with the 2021 Annual Report on Form 10-K[22] Note 2. Accounting Policies - The preparation of financial statements requires management to make estimates and assumptions, and actual results may differ from these estimates[23] Note 3. Credit Risk Concentrations - The Company's primary credit risk concentrations are cash balances and accounts receivable, with Medicare representing approximately 15% of accounts receivable at both December 31, 2021, and March 31, 2022[24][25] Note 4. Redeemable Non-Controlling Interests - Redeemable non-controlling interests, representing ownership by outside parties with redemption rights, are classified and reported at their approximate redemption values[26] Changes in Redeemable Non-Controlling Interests (in thousands) | Item | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2022 | | :------------------------------------------------ | :-------------------------------- | :-------------------------------- | | Balance as of January 1 | $398,171 | $39,033 | | Net income attributable to redeemable non-controlling interests | 9,626 | 1,918 | | Distributions to and purchases of redeemable non-controlling interests | (614) | (1,198) | | Redemption value adjustment on redeemable non-controlling interests | 38,405 | 1,381 | | Balance as of March 31 | $445,931 | $41,670 | Note 5. Variable Interest Entities - The Company is the primary beneficiary of variable interest entities (medical practices owned by licensed physicians) due to long-term management agreements in states prohibiting the 'corporate practice of medicine'[29] Variable Interest Entities Financials (in millions) | Item | December 31, 2021 | March 31, 2022 | | :-------------------------------- | :------------------ | :--------------- | | Total assets | $225.1 | $242.0 | | Total liabilities | $74.8 | $79.1 | | Obligations payable to Company | $150.3 | $163.4 | Note 6. Leases Total Lease Cost (in thousands) | Type of Cost | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2022 | | :----------------------- | :-------------------------------- | :-------------------------------- | | Operating lease cost | $71,913 | $75,771 | | Finance lease cost | 286 | 687 | | Variable lease cost | 13,012 | 13,694 | | Sublease income | (2,234) | (1,966) | | Total lease cost | $82,977 | $88,221 | Supplemental Cash Flow Information Related to Leases (in thousands) | Item | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2022 | | :------------------------------------------------ | :-------------------------------- | :-------------------------------- | | Operating cash flows for operating leases | $72,437 | $77,689 | | Operating cash flows for finance leases | 251 | 340 | | Financing cash flows for finance leases | 58 | 344 | | Right-of-use assets obtained (Operating leases) | $79,987 | $88,636 | Weighted Average Lease Terms and Discount Rates | Item | December 31, 2021 | March 31, 2022 | | :-------------------------------- | :------------------ | :--------------- | | Weighted average remaining lease term (Operating leases) | 7.8 years | 7.6 years | | Weighted average remaining lease term (Finance leases) | 24.7 years | 24.8 years | | Weighted average discount rate (Operating leases) | 5.6% | 5.6% | | Weighted average discount rate (Finance leases) | 7.4% | 7.4% | Note 7. Intangible Assets Changes in Goodwill by Reporting Unit (in thousands) for Three Months Ended March 31, 2022 | Reporting Unit | Balance as of December 31, 2021 | Acquisition of businesses | Measurement period adjustment | Balance as of March 31, 2022 | | :-------------------------------- | :-------------------------------- | :------------------------ | :---------------------------- | :--------------------------- | | Critical Illness Recovery Hospital | $1,131,440 | — | $13,251 | $1,144,691 | | Outpatient Rehabilitation | 654,125 | 409 | — | 654,534 | | Concentra | 1,221,192 | 2,884 | — | 1,224,076 | | Total | $3,448,912 | $3,293 | $13,251 | $3,465,456 | Identifiable Intangible Assets, Net (in thousands) | Asset Type | December 31, 2021 | March 31, 2022 | | :------------------------ | :------------------ | :--------------- | | Indefinite-lived assets | $190,050 | $190,197 | | Finite-lived assets | 184,829 | 178,653 | | Total identifiable intangible assets | $374,879 | $368,850 | | Amortization expense (Q1 2022) | | $7,600 | | Amortization expense (Q1 2021) | | $7,100 | Note 8. Long-Term Debt and Notes Payable Long-Term Debt and Notes Payable (in thousands) as of March 31, 2022 | Debt Type | Principal Outstanding | Carrying Value | Fair Value | | :------------------------ | :-------------------- | :------------- | :--------- | | 6.250% senior notes | $1,225,000 | $1,237,919 | $1,262,118 | | Revolving facility | 340,000 | 340,000 | 338,725 | | Term loan | 2,103,437 | 2,091,126 | 2,079,773 | | Other debt | 93,961 | 93,767 | 93,767 | | Total debt | $3,762,398 | $3,762,812 | $3,774,383 | Principal Maturities of Long-Term Debt (in thousands) | Year | Amount | | :--- | :------- | | 2022 | $22,143 | | 2023 | 35,821 | | 2024 | 377,231 | | 2025 | 2,089,354 | | 2026 | 1,226,286 | | Thereafter | 11,563 | | Total | $3,762,398 | Note 9. Interest Rate Cap - The Company uses an interest rate cap to mitigate exposure to rising interest rates on its variable-rate term loan, limiting the one-month LIBOR rate to 1.0% on $2.0 billion of principal outstanding through September 30, 2024[41] - The interest rate cap is designated as a highly effective cash flow hedge, with changes in fair value recognized in other comprehensive income and reclassified to interest expense when hedged obligations affect earnings[42] Changes in Accumulated Other Comprehensive Income, Net of Tax (in thousands) | Item | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2022 | | :------------------------------------------------ | :-------------------------------- | :-------------------------------- | | Balance as of January 1 | $(2,027) | $12,282 | | Gain on interest rate cap cash flow hedge | 8,151 | 39,814 | | Balance as of March 31 | $6,124 | $52,135 | Note 10. Fair Value of Financial Instruments - The Company classifies financial instruments measured at fair value into a hierarchy (Level 1, 2, or 3) based on the observability of inputs. The interest rate cap contract is a Level 2 asset, valued using observable market inputs[45] Fair Value of Financial Instruments (in thousands) | Financial Instrument | Level | December 31, 2021 (Fair Value) | March 31, 2022 (Fair Value) | | :-------------------------------- | :---- | :------------------------------- | :---------------------------- | | Interest rate cap contract (current) | Level 2 | $— | $15,745 | | Interest rate cap contract (non-current) | Level 2 | 18,055 | 55,523 | | 6.250% senior notes | Level 2 | $1,297,104 | $1,262,118 | | Revolving facility | Level 2 | 159,400 | 338,725 | | Term loan | Level 2 | 2,087,661 | 2,079,773 | Note 11. Segment Information - The Company's reportable segments are Critical Illness Recovery Hospital, Rehabilitation Hospital, Outpatient Rehabilitation, and Concentra, with performance evaluated based on Adjusted EBITDA[48][49] Segment Revenue (in thousands) | Segment | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2022 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Critical illness recovery hospital | $594,872 | $601,755 | | Rehabilitation hospital | 207,804 | 220,634 | | Outpatient rehabilitation | 251,961 | 271,940 | | Concentra | 422,840 | 423,423 | | Other | 68,986 | 81,795 | | Total Company | $1,546,463 | $1,599,547 | Segment Adjusted EBITDA (in thousands) | Segment | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2022 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Critical illness recovery hospital | $113,272 | $35,967 | | Rehabilitation hospital | 50,534 | 42,379 | | Outpatient rehabilitation | 26,329 | 26,596 | | Concentra | 82,015 | 89,469 | | Other | (13,809) | (30,564) | | Total Company | $258,341 | $163,847 | Note 12. Revenue from Contracts with Customers Disaggregated Revenue by Segment and Payor (in thousands) | Segment | Payor Type | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2022 | | :-------------------------------- | :----------- | :-------------------------------- | :-------------------------------- | | Critical Illness Recovery Hospital | Medicare | $232,140 | $218,987 | | | Non-Medicare | 361,152 | 380,986 | | Rehabilitation Hospital | Medicare | 102,375 | 103,021 | | | Non-Medicare | 95,342 | 107,142 | | Outpatient Rehabilitation | Medicare | 36,291 | 41,904 | | | Non-Medicare | 200,819 | 214,113 | | Concentra | Medicare | 230 | 177 | | | Non-Medicare | 420,654 | 422,046 | | Total Patient Services Revenues | | $1,449,003 | $1,488,376 | | Other Revenue | | $97,460 | $111,171 | | Total Revenue | | $1,546,463 | $1,599,547 | Note 13. Earnings per Share - The Company applies the two-class method for EPS calculation due to unvested restricted stock awards being participating securities[55] Earnings per Common Share (Basic and Diluted) | Item | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2022 | | :------------------------------------------------ | :-------------------------------- | :-------------------------------- | | Net income attributable to Select Medical Holdings Corporation | $110,546 | $49,117 | | Distributed and undistributed income attributable to common shares | $106,848 | $47,474 | | Basic and Diluted EPS | $0.82 | $0.37 | Note 14. Commitments and Contingencies - The Company is involved in various legal actions, proceedings, and governmental audits in the ordinary course of business, including a Civil Investigative Demand from the U.S. Attorney's Office in Oklahoma City, a qui tam complaint in New Jersey, and a DOJ investigation into physical therapy billing[57][60][62][63] - The Company maintains professional malpractice and general liability insurance, but significant legal actions or lack of insurance could lead to substantial uninsured liabilities. Management believes the outcome of current actions will not materially adversely affect financial position, results of operations, or cash flows[58] Note 15. Subsequent Event - On May 5, 2022, the board of directors declared a cash dividend of $0.125 per share, payable on or about June 1, 2022[64] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management analyzes the Company's financial condition and operational results for Q1 2022, covering business, non-GAAP measures, and external impacts Forward-Looking Statements - The report contains forward-looking statements based on management's beliefs and assumptions, which are subject to known and unknown risks and uncertainties that could cause actual results to differ materially[66][67] - Key risk factors include developments related to the COVID-19 pandemic, changes in government reimbursement, failure to maintain Medicare certifications, government investigations, acquisition difficulties, competition, and shortages of qualified healthcare professionals[68] Overview - Select Medical is one of the largest operators of critical illness recovery hospitals, rehabilitation hospitals, outpatient rehabilitation clinics, and occupational health centers in the U.S., operating in 46 states and D.C. as of March 31, 2022[71] Revenue Breakdown by Segment (Three Months Ended March 31, 2022) | Segment | Revenue (in millions) | % of Total Revenue | | :-------------------------------- | :-------------------- | :----------------- | | Critical illness recovery hospital | $601.8 | 38% | | Rehabilitation hospital | $220.6 | 14% | | Outpatient rehabilitation | $271.9 | 17% | | Concentra | $423.4 | 26% | | Total Revenue | $1,599.5 | 100% | Non-GAAP Measure - Adjusted EBITDA is a non-GAAP measure used by management and investors to evaluate financial performance and allocate resources, 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[74][75] Reconciliation of Net Income to Adjusted EBITDA (in thousands) | Item | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2022 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net income | $137,214 | $55,926 | | Income from operations | 202,012 | 103,985 | | Stock compensation expense | 6,709 | 8,823 | | Depreciation and amortization | 49,620 | 51,039 | | Adjusted EBITDA | $258,341 | $163,847 | Effects of the COVID-19 Pandemic on our Results of Operations - The COVID-19 pandemic continues to create uncertainties about future operating results and financial condition, with its effects on operations and liquidity depending on future developments[77] Key Operating Statistics Comparison (Q1 2019 vs. Q1 2021 vs. Q1 2022) | Segment | Metric | Q1 2019 | Q1 2021 | Q1 2022 | | :-------------------------------- | :-------------------- | :------ | :------ | :------ | | Critical Illness Recovery Hospital | Revenue (in thousands) | $457,534 | $594,872 | $601,755 | | | Patient Days | 258,129 | 293,118 | 289,217 | | | Occupancy Rate | 71% | 75% | 71% | | Rehabilitation Hospital | Revenue (in thousands) | $154,558 | $207,804 | $220,634 | | | Patient Days | 82,816 | 102,439 | 103,802 | | | Occupancy Rate | 76% | 84% | 84% | | Outpatient Rehabilitation | Revenue (in thousands) | $246,905 | $251,961 | $271,940 | | | Visits | 2,054,483 | 2,100,154 | 2,310,086 | | Concentra | Revenue (in thousands) | $396,321 | $422,840 | $423,423 | | | Visits | 2,911,607 | 2,795,574 | 3,116,898 | Summary Financial Results Consolidated Financial Results (in thousands) for Three Months Ended March 31, 2022 vs. 2021 | Item | 2021 | 2022 | Change % | | :-------------------------------- | :------- | :------- | :------- | | Revenue | $1,546,463 | $1,599,547 | 3.4% | | Income from operations | $202,012 | $103,985 | (48.5%) | | Adjusted EBITDA | $258,341 | $163,847 | (36.6%) | | Net income | $137,214 | $55,926 | (59.2%) | Segment Performance Changes (Q1 2022 vs. Q1 2021) | Segment | Change in Revenue | Change in Income from Operations | Change in Adjusted EBITDA | | :-------------------------------- | :---------------- | :------------------------------- | :------------------------ | | Critical Illness Recovery Hospital | 1.2% | (78.7%) | (68.2%) | | Rehabilitation Hospital | 6.2% | (18.2%) | (16.1%) | | Outpatient Rehabilitation | 7.9% | (3.0%) | 1.0% | | Concentra | 0.1% | 13.9% | 9.1% | Regulatory Changes Medicare Reimbursement - Medicare program reimbursements represented approximately 23% of the Company's revenue for both the three months ended March 31, 2022, and the year ended December 31, 2021[86] Federal Health Care Program Changes in Response to the COVID-19 Pandemic - HHS declared a public health emergency for COVID-19, leading to CMS issuing blanket waivers for various Medicare requirements, including telehealth expansion, IRF/LTCH rule exemptions, and waivers under the Stark law and anti-kickback statute[87][88][89] - The CARES Act provided additional support, including appropriations for the Public Health and Social Services Emergency Fund, expansion of the Accelerated and Advance Payment Program, and temporary suspension of the 2% Medicare sequestration cut through March 31, 2022, with a reduced 1% cut until June 30, 2022[90] Medicare Reimbursement of LTCH Services LTCH-PPS Standard Federal Rate Updates | Fiscal Year | Standard Federal Rate | Increase from Prior Year | | :---------- | :-------------------- | :----------------------- | | 2021 | $43,755 | 2.5% | | 2022 | $44,714 | 2.2% | | 2023 (Proposed) | $45,953 | 2.8% | - Due to the CARES Act, all LTCH cases are paid at the standard federal rate during the public health emergency; if the emergency ends, CMS will revert to site-neutral payment rates for cases not meeting LTCH patient criteria[93][94] Medicare Reimbursement of IRF Services IRF-PPS Standard Payment Conversion Factor Updates | Fiscal Year | Standard Payment Conversion Factor | Increase from Prior Year | | :---------- | :--------------------------------- | :----------------------- | | 2021 | $16,856 | 2.2% | | 2022 | $17,240 | 2.3% | | 2023 (Proposed) | $17,698 | 2.7% | IRF Outlier Threshold Amount Updates | Fiscal Year | Outlier Threshold Amount | | :---------- | :----------------------- | | 2021 | $7,906 | | 2022 | $9,491 | | 2023 (Proposed) | $13,038 | Medicare Reimbursement of Outpatient Rehabilitation Clinic Services - Outpatient rehabilitation providers are reimbursed based on the Medicare physician fee schedule, with a 0.0% update from 2020-2025, subject to adjustments under MIPS and APMs[99] - In 2021, therapy services experienced an estimated 3.6% decrease in Medicare payment due to budget neutrality adjustments for E/M code revaluation, partially offset by a one-time 3.75% increase from the Consolidated Appropriations Act[102] - For 2022, Medicare payments for therapy are expected to decrease by 1%, but a one-time 3% increase from the Protecting Medicare and American Farmers from Sequester Cuts Act will offset most of the cut[103] Modifiers to Identify Services of Physical Therapy Assistants or Occupational Therapy Assistants - CMS implemented new modifiers (CQ and CO) for services furnished by physical therapy assistants (PTAs) or occupational therapy assistants (OTAs) starting January 1, 2020[104] - Effective January 1, 2022, Medicare will pay for physical therapy and occupational therapy services provided by PTAs and OTAs at 85% of the otherwise applicable Part B payment amount[104] Operating Statistics Critical Illness Recovery Hospital Operating Data | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2022 | | :------------------------ | :-------------------------------- | :-------------------------------- | | Number of consolidated hospitals—end of period | 99 | 105 | | Available licensed beds | 4,380 | 4,524 | | Admissions | 9,859 | 9,457 | | Patient days | 293,118 | 289,217 | | Average length of stay (days) | 30 | 30 | | Revenue per patient day | $2,024 | $2,075 | | Occupancy rate | 75% | 71% | | Percent patient days—Medicare | 40% | 37% | Rehabilitation Hospital Operating Data | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2022 | | :------------------------ | :-------------------------------- | :-------------------------------- | | Number of consolidated hospitals—end of period | 20 | 20 | | Total number of hospitals (all)—end of period | 30 | 30 | | Available licensed beds | 1,361 | 1,391 | | Admissions | 7,131 | 7,182 | | Patient days | 102,439 | 103,802 | | Average length of stay (days) | 15 | 15 | | Revenue per patient day | $1,853 | $1,943 | | Occupancy rate | 84% | 84% | | Percent patient days—Medicare | 49% | 47% | Outpatient Rehabilitation & Concentra Operating Data | Segment | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2022 | | :------------------------ | :-------------------- | :-------------------------------- | :-------------------------------- | | Outpatient Rehabilitation | Number of consolidated clinics—end of period | 1,517 | 1,584 | | | Total number of clinics (all)—end of period | 1,809 | 1,901 | | | Number of visits | 2,100,154 | 2,310,086 | | | Revenue per visit | $104 | $102 | | Concentra | Number of consolidated centers—end of period | 519 | 518 | | | Number of onsite clinics operated—end of period | 133 | 140 | | | Number of visits | 2,795,574 | 3,116,898 | | | Revenue per visit | $125 | $125 | Results of Operations Overall Financial Performance Selected Operating Data as a Percentage of Revenue | Item | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2022 | | :------------------------------------------------ | :-------------------------------- | :-------------------------------- | | Revenue | 100.0% | 100.0% | | Cost of services, exclusive of depreciation and amortization | 83.6% | 88.0% | | General and administrative | 2.3% | 2.3% | | Depreciation and amortization | 3.2% | 3.2% | | Total costs and expenses | 89.1% | 93.5% | | Other operating income | 2.2% | — | | Income from operations | 13.1% | 6.5% | | Net income attributable to Select Medical Holdings Corporation | 7.1% | 3.1% | Segment Adjusted EBITDA Margins | Segment | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2022 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Critical illness recovery hospital | 19.0% | 6.0% | | Rehabilitation hospital | 24.3% | 19.2% | | Outpatient rehabilitation | 10.4% | 9.8% | | Concentra | 19.4% | 21.1% | | Total Company | 16.7% | 10.2% | Revenue Analysis - Total revenue increased 3.4% to $1,599.5 million for Q1 2022, compared to $1,546.5 million for Q1 2021[117] - Critical Illness Recovery Hospital revenue increased 1.2% due to a 2.5% increase in revenue per patient day, despite a decline in patient days (289,217 in Q1 2022 vs. 293,118 in Q1 2021) attributed to decreased COVID-19 intensive care unit volumes and referrals[118] - Outpatient Rehabilitation revenue increased 7.9% due to a 10.0% increase in visits (2,310,086 visits in Q1 2022), driven by new clinics and improved volume, though revenue per visit decreased from $104 to $102 due to lower Medicare reimbursement rates and a higher proportion of Medicare visits[120] - Concentra revenue increased slightly, driven by an 11.5% increase in visits (3,116,898 visits in Q1 2022), partially offset by a significant decline in COVID-19 screening and testing revenue from $51.7 million in Q1 2021 to $9.1 million in Q1 2022[121] Operating Expenses - Operating expenses increased to $1,444.5 million (90.3% of revenue) in Q1 2022 from $1,328.9 million (85.9% of revenue) in Q1 2021, primarily due to increased labor costs in critical illness recovery and rehabilitation hospital segments[122] Other Operating Income - In Q1 2021, the Company recognized $34.0 million in other operating income, including $16.1 million from the Provider Relief Fund for COVID-19 related expenses and lost revenues, and $17.9 million from litigation with CMS[123] Adjusted EBITDA Analysis - Critical Illness Recovery Hospital Adjusted EBITDA decreased significantly to $36.0 million (6.0% margin) in Q1 2022 from $113.3 million (19.0% margin) in Q1 2021, primarily due to increased labor costs from staffing shortages, higher incentive/bonus pay, and greater dependence on more expensive contract clinical workers (27.0% of workforce in Q1 2022 vs. 21.0% in Q1 2021)[124] - Rehabilitation Hospital Adjusted EBITDA decreased to $42.4 million (19.2% margin) in Q1 2022 from $50.5 million (24.3% margin) in Q1 2021, also due to increased labor costs from staffing shortages and higher contract clinical labor rates, particularly in California and New Jersey[124] - Concentra Adjusted EBITDA increased 9.1% to $89.5 million (21.1% margin) in Q1 2022 from $82.0 million (19.4% margin) in Q1 2021, driven by an increase in patient visits[126] Depreciation and Amortization - Depreciation and amortization expense increased slightly to $51.0 million in Q1 2022 from $49.6 million in Q1 2021[127] Income from Operations - Income from operations decreased to $104.0 million in Q1 2022 from $202.0 million in Q1 2021, primarily due to increased labor costs and the absence of $34.0 million in other operating income recognized in Q1 2021[128] Equity in Earnings of Unconsolidated Subsidiaries - Equity in earnings of unconsolidated subsidiaries decreased to $5.4 million in Q1 2022 from $9.9 million in Q1 2021, mainly due to increased labor costs in minority-owned rehabilitation businesses and the absence of Provider Relief Fund income recognized in Q1 2021[129] Interest - Interest expense increased to $35.5 million in Q1 2022 from $34.4 million in Q1 2021, driven by borrowings under the revolving facility. Q1 2021 included $4.7 million in interest income related to CMS litigation[130] Income Taxes - Income tax expense was $17.9 million in Q1 2022 (effective tax rate of 24.3%) compared to $45.1 million in Q1 2021 (effective tax rate of 24.7%)[131] Net Income Attributable to Non-Controlling Interests - Net income attributable to non-controlling interests decreased to $6.8 million in Q1 2022 from $26.7 million in Q1 2021, primarily due to lower net income in less than wholly-owned hospitals (impacted by labor costs) and an increase in the Company's ownership interest in Concentra Group Holdings Parent[132] Liquidity and Capital Resources Cash Flows - Operating activities provided $6.3 million of cash flows in Q1 2022, a significant decrease from $239.9 million in Q1 2021, mainly due to financial performance and the repayment of $62.9 million in Medicare advance payments[135] - Investing activities used $55.3 million in Q1 2022, primarily for purchases of property and equipment ($46.8 million) and investments/acquisitions ($8.5 million)[137] - Financing activities provided $105.6 million in cash flows in Q1 2022, driven by net borrowings of $180.0 million under the revolving facility, partially offset by $51.7 million for common stock repurchases and $16.7 million in dividend payments[138] Capital Resources - Net working capital increased to $61.7 million at March 31, 2022, from a deficit of $133.6 million at December 31, 2021, due to increases in cash and accounts receivable and a reduction in Medicare advance payment liability[140] - As of March 31, 2022, the Company had $2,103.4 million outstanding on its term loan and $340.0 million borrowed under its revolving facility, with $252.8 million of availability remaining on the revolving facility[141] - Under its common stock repurchase program (authorized up to $1.0 billion until Dec 31, 2023), Holdings repurchased 2,128,494 shares for $51.7 million in Q1 2022[142] Liquidity - The Company believes its internally generated cash flows and revolving facility borrowing capacity ($130.9 million cash and $252.8 million availability as of March 31, 2022) will be sufficient to finance operations in the short and long term[144] Dividend - A cash dividend of $0.125 per share was declared on May 5, 2022, payable June 1, 2022, but future dividends are at the discretion of the board[146][147] Recent Accounting Pronouncements - No new accounting standards issued since December 31, 2021, are expected to have a material effect on the financial statements upon adoption[148] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Details the Company's market risk exposure, primarily from interest rate fluctuations on variable-rate debt, and mitigation strategies - The Company is exposed to interest rate risk on its variable-rate long-term debt, specifically the $2,103.4 million term loan and $340.0 million revolving facility outstanding as of March 31, 2022[149][150] - An interest rate cap limits the one-month LIBOR rate to 1.0% on $2.0 billion of the term loan principal through September 30, 2024, mitigating the impact of rising interest rates[151] - A 0.25% change in market interest rates would impact interest expense on variable-rate debt by $6.1 million until one-month LIBOR exceeds 1.0%[151] ITEM 4. CONTROLS AND PROCEDURES Assesses the effectiveness of the Company's disclosure controls and internal control over financial reporting as of March 31, 2022 - As of March 31, 2022, the principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures were effective to provide reasonable assurance that material information is recorded, processed, summarized, and reported timely[152] - There were no changes in internal control over financial reporting during the first quarter ended March 31, 2022, that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting[153] - Any system of controls, however well designed and operated, can provide only reasonable, not absolute, assurance that objectives will be met, and is based on assumptions about future events[154] PART II: OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Refers to Note 14 of the condensed consolidated financial statements for detailed information on legal proceedings and contingencies - For information on legal proceedings, refer to the 'Litigation' section within Note 14 – Commitments and Contingencies of the notes to the condensed consolidated financial statements[156] ITEM 1A. RISK FACTORS Directs readers to the Annual Report on Form 10-K for comprehensive risk factor discussions, noting updates herein - The risk factors in this report update and should be read in conjunction with the risk factors discussed in Item 1A of the Annual Report on Form 10-K for the year ended December 31, 2021[157] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS Details the Company's common stock repurchase program, including authorization, duration, and shares repurchased in Q1 2022 - Holdings' board of directors authorized a common stock repurchase program to repurchase up to $1.0 billion worth of shares, effective until December 31, 2023[158] Common Stock Repurchases (Three Months Ended March 31, 2022) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | Approximate Dollar Value of Shares that May Yet Be Purchased | | :-------------------------- | :------------------------------- | :--------------------------- | :----------------------------------------------------------- | | March 1 - March 31, 2022 | 2,128,494 | $24.28 | $533,120,670 | | Total | 2,128,494 | $24.28 | $533,120,670 | ITEM 3. DEFAULTS UPON SENIOR SECURITIES Confirms no applicable defaults upon senior securities for the current reporting period - Not applicable[161] ITEM 4. MINE SAFETY DISCLOSURES Confirms no applicable mine safety disclosures for the current reporting period - Not applicable[162] ITEM 5. OTHER INFORMATION Indicates no other information to report for the current period - None[163] ITEM 6. EXHIBITS Lists the exhibits filed with the Form 10-Q, including certifications and XBRL-related documents - Exhibits include certifications of the Chief Executive Officer and Chief Financial Officer (31.1, 31.2, 32.1) and various XBRL-related documents (101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE, 104)[166] SIGNATURES Contains signatures of authorized officers, Martin F. Jackson and Scott A. Romberger, certifying the report - The report is signed by Martin F. Jackson, Executive Vice President and Chief Financial Officer, and Scott A. Romberger, Senior Vice President, Chief Accounting Officer, on May 5, 2022[168][169]