Select Medical(SEM) - 2022 Q2 - Quarterly Report

PART I: FINANCIAL INFORMATION Condensed Consolidated Financial Statements The unaudited statements show a significant year-over-year decline in net income and EPS for Q2 and H1 2022 Condensed Consolidated Balance Sheets Total assets grew to $7.55 billion while total equity slightly decreased to $1.30 billion as of June 30, 2022 Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total Current Assets | $1,221,048 | $1,139,439 | | Total Assets | $7,551,658 | $7,360,171 | | Total Current Liabilities | $1,241,739 | $1,273,077 | | Total Liabilities | $6,205,760 | $5,995,236 | | Total Equity | $1,303,701 | $1,325,902 | Condensed Consolidated Statements of Operations Profitability declined significantly in Q2 and H1 2022, with Q2 net income falling to $66.3 million Statement of Operations Highlights (in thousands, except per share amounts) | Metric | Q2 2022 | Q2 2021 | Six Months 2022 | Six Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $1,584,741 | $1,564,020 | $3,184,288 | $3,110,483 | | Income from operations | $120,967 | $283,968 | $224,952 | $485,980 | | Net income | $66,262 | $196,208 | $122,188 | $333,422 | | Basic and diluted EPS | $0.43 | $1.22 | $0.79 | $2.04 | Condensed Consolidated Statements of Comprehensive Income Comprehensive income fell sharply to $67.0 million in Q2 2022 from $163.5 million in Q2 2021 Comprehensive Income (in thousands) | Metric | Q2 2022 | Q2 2021 | Six Months 2022 | Six Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Net income | $66,262 | $196,208 | $122,188 | $333,422 | | Comprehensive income attributable to Select Medical | $67,034 | $163,497 | $156,004 | $282,194 | Condensed Consolidated Statements of Changes in Equity and Income Total equity decreased to $1.30 billion, impacted by $178.6 million in share repurchases in H1 2022 - The company repurchased common shares totaling $127.0 million in Q2 2022 and $51.7 million in Q1 2022[16] - Cash dividends of $0.125 per share were declared and paid in both Q1 and Q2 2022, totaling $32.8 million for the six-month period[16] Condensed Consolidated Statements of Cash Flows Net cash from operations for H1 2022 was $178.0 million, a significant drop from $363.0 million in H1 2021 Cash Flow Summary for Six Months Ended June 30 (in thousands) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $178,018 | $363,026 | | Net cash used in investing activities | ($114,094) | ($88,245) | | Net cash used in financing activities | ($43,565) | ($48,349) | | Net increase in cash and cash equivalents | $20,359 | $226,432 | Notes to Condensed Consolidated Financial Statements The notes detail segment revenues, $3.77 billion in long-term debt, and ongoing DOJ investigations Revenue by Segment - Six Months Ended June 30, 2022 (in thousands) | Segment | Revenue | | :--- | :--- | | Critical illness recovery hospital | $1,147,663 | | Rehabilitation hospital | $449,521 | | Outpatient rehabilitation | $559,198 | | Concentra | $864,780 | - As of June 30, 2022, total long-term debt and notes payable stood at a carrying value of $3.77 billion[42] - The company is under investigation by the U.S. Department of Justice regarding potential violations of the False Claims Act related to its billing for physical therapy services[67] - On August 2, 2022, the board of directors declared a cash dividend of $0.125 per share[68] Management's Discussion and Analysis of Financial Condition and Results of Operations A 57.4% drop in Q2 operating income is attributed to severe labor cost pressures despite a slight revenue increase - As of June 30, 2022, the company operated 105 critical illness recovery hospitals, 31 rehabilitation hospitals, 1,920 outpatient rehabilitation clinics, and 518 Concentra occupational health centers[75] Adjusted EBITDA Reconciliation (in thousands) | Metric | Q2 2022 | Q2 2021 | Six Months 2022 | Six Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Net income | $66,262 | $196,208 | $122,188 | $333,422 | | Adjusted EBITDA | $180,994 | $342,021 | $344,841 | $600,362 | - The company's stock repurchase program has authorization to repurchase up to $1.0 billion in shares through December 31, 2023, with $407.2 million remaining available[199][201] Results of Operations Q2 revenue grew 1.3% to $1.58 billion, but operating income fell 57.4% due to surging labor costs Segment Performance Changes - Q2 2022 vs Q2 2021 | Segment | Change in Revenue | Change in Adjusted EBITDA | | :--- | :--- | :--- | | Critical Illness Recovery Hospital | 0.3% | (72.5)% | | Rehabilitation Hospital | 7.6% | (1.8)% | | Outpatient Rehabilitation | 2.4% | (26.4)% | | Concentra | (3.3)% | (32.4)% | | Total Company | 1.3% | (47.1)% | - The Critical Illness Recovery Hospital segment's Adjusted EBITDA was severely impacted by a shortage of healthcare workers, leading to increased contract labor, sign-on bonuses, and orientation costs[136] - Concentra's revenue decline was primarily due to a significant drop in COVID-19 screening and testing services, which generated only $7.7 million in Q2 2022 compared to $55.0 million in Q2 2021[132] Liquidity and Capital Resources H1 2022 operating cash flow fell to $178.0 million, with liquidity supported by cash and a revolving credit facility Cash Flow Summary - Six Months Ended June 30 (in thousands) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Cash flows provided by operating activities | $178,018 | $363,026 | | Cash flows used in investing activities | ($114,094) | ($88,245) | | Cash flows used in financing activities | ($43,565) | ($48,349) | - As of June 30, 2022, the company had $94.7 million in cash and cash equivalents and $243.1 million of availability under its revolving facility[182] - During the six months ended June 30, 2022, the company repurchased 7,567,433 shares of common stock at a cost of approximately $177.6 million[180] Quantitative and Qualitative Disclosures About Market Risk Interest rate risk on variable-rate debt is mitigated by a cap on $2.0 billion of the company's term loan - The company has an interest rate cap transaction to limit its 1-month LIBOR rate exposure to 1.0% on $2.0 billion of principal outstanding under the term loan[190] - As of June 30, 2022, each 0.25% increase in market interest rates will impact the annual interest expense on the company's variable rate debt by $1.1 million[191] Controls and Procedures Disclosure controls and procedures were deemed effective as of June 30, 2022, with no material changes reported - The principal executive officer and principal financial officer concluded that disclosure controls and procedures were effective as of June 30, 2022[192] - There were no changes in internal control over financial reporting during the second quarter ended June 30, 2022, that materially affected, or are reasonably likely to materially affect, internal controls[193] PART II: OTHER INFORMATION Legal Proceedings The company is involved in ongoing DOJ investigations regarding billing practices with unpredictable outcomes - The company is cooperating with a U.S. Department of Justice investigation into potential violations of the False Claims Act related to its billing for physical therapy services[67][196] - The company received a Civil Investigative Demand from the U.S. Attorney's Office for the Western District of Oklahoma regarding billing for services at its Oklahoma City facility[66][196] Risk Factors Rising inflation is identified as a key risk that could increase labor and other operating costs - The company identifies rising inflation in the U.S. economy as a key risk that could negatively impact business and results of operations by increasing the prices of labor and other costs[198] Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 5.4 million shares in Q2 2022, with $407.2 million remaining under its buyback program Share Repurchases - Q2 2022 | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | April 2022 | 1,137,963 | $23.04 | | May 2022 | 2,376,593 | $22.89 | | June 2022 | 1,968,012 | $23.54 | | Total Q2 | 5,482,568 | $23.15 | - As of June 30, 2022, the approximate dollar value of shares that may yet be purchased under the plan is $407,160,219[201] Exhibits This section lists filed exhibits, including Sarbanes-Oxley certifications and Inline XBRL financial data - The filing includes CEO and CFO certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[206] - The filing contains various Inline XBRL documents, including the instance, schema, calculation, definition, label, and presentation linkbase files[206]