Select Medical(SEM) - 2023 Q2 - Quarterly Report

PART I: FINANCIAL INFORMATION ITEM 1. Condensed Consolidated Financial Statements This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, and cash flows, reporting $3.34 billion revenue and $177.1 million net income for the six months ended June 30, 2023 Condensed Consolidated Financial Statements This section presents the core financial statements, showing total assets of $7.70 billion, Q2 2023 revenue of $1.67 billion, and $286.3 million in operating cash flow for the first six months of 2023 Condensed Consolidated Balance Sheet Data (in thousands) | Account | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Current Assets | $1,304,484 | $1,271,313 | | Total Assets | $7,701,869 | $7,665,293 | | Total Current Liabilities | $1,188,212 | $1,155,151 | | Long-term debt, net | $3,695,341 | $3,835,211 | | Total Liabilities | $6,165,915 | $6,274,686 | | Total Equity | $1,501,579 | $1,356,564 | Condensed Consolidated Statements of Operations (in thousands, except per share amounts) | Metric | Q2 2023 | Q2 2022 | Six Months 2023 | Six Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $1,674,528 | $1,584,741 | $3,339,508 | $3,184,288 | | Income from operations | $159,204 | $120,967 | $310,661 | $224,952 | | Net income | $91,860 | $66,262 | $177,117 | $122,188 | | Net income attributable to Holdings | $78,237 | $55,207 | $149,042 | $104,324 | | Basic and diluted EPS | $0.61 | $0.43 | $1.17 | $0.79 | Condensed Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $286,278 | $178,018 | | Net cash used in investing activities | ($135,875) | ($114,094) | | Net cash used in financing activities | ($147,142) | ($43,565) | | Net increase in cash and cash equivalents | $3,261 | $20,359 | Notes to Condensed Consolidated Financial Statements This section provides detailed disclosures on accounting policies, credit risk, $3.75 billion in long-term debt, ongoing legal proceedings, and subsequent events like a dividend declaration and credit facility refinancing - Medicare represents the company's only significant concentration of credit risk, accounting for approximately 19% of accounts receivable as of both June 30, 2023, and December 31, 2022[32] - As of June 30, 2023, total long-term debt and notes payable had a carrying value of $3.75 billion, a decrease from $3.88 billion at the end of 2022[41] - The company is cooperating with a U.S. Department of Justice investigation into potential False Claims Act violations related to billing for physical therapy services[67] - Subsequent to the quarter's end, on July 31, 2023, the company refinanced its credit agreement, securing a new $2.1 billion term loan and a $710.0 million revolving credit facility[69] - On August 2, 2023, the Board of Directors declared a cash dividend of $0.125 per share[68] ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses financial performance, highlighting a 5.7% revenue increase and 21.3% Adjusted EBITDA rise for Q2 2023, driven by reduced labor costs and detailing segment performance, regulatory changes, and liquidity Overview and Regulatory Changes This section outlines the company's operational footprint and details significant regulatory changes, including the end of the COVID-19 public health emergency and updates to Medicare payment rates for LTCHs and IRFs - As of June 30, 2023, the company operated 108 critical illness recovery hospitals, 32 rehabilitation hospitals, 1,944 outpatient rehabilitation clinics, and 540 occupational health centers across 46 states and the District of Columbia[77] - The COVID-19 public health emergency ended on May 11, 2023, terminating most related Medicare waivers, including the waiver of the IRF 60% Rule and site-neutral payment requirements for LTCHs[95][96] - For fiscal year 2024, CMS finalized an increase in the LTCH standard federal payment rate to $48,117 (from $46,433) and the IRF standard payment conversion factor to $18,541 (from $17,878)[102][106] Results of Operations This section analyzes Q2 2023 financial results, showing 5.7% revenue growth and 31.6% income from operations increase, with Critical Illness Recovery Hospital segment's Adjusted EBITDA surging 227.2% due to reduced labor costs Q2 2023 vs Q2 2022 Performance Changes | Segment | Revenue Change | Adj. EBITDA Change | | :--- | :--- | :--- | | Critical Illness Recovery Hospital | +5.3% | +227.2% | | Rehabilitation Hospital | +5.2% | +9.7% | | Outpatient Rehabilitation | +5.5% | -2.2% | | Concentra | +5.8% | +8.4% | | Total | +5.7% | +21.3% | - The Critical Illness Recovery Hospital segment's Adjusted EBITDA margin improved dramatically from 3.7% to 11.4% YoY for the quarter, primarily due to a significant decrease in labor costs, with total contract labor costs falling by approximately 62% due to lower utilization and rates[130] - The Outpatient Rehabilitation segment's Adjusted EBITDA margin decreased from 11.7% to 10.8% YoY for the quarter, primarily due to increased labor costs and a decrease in revenue per visit from $103 to $100[124][132] - The Concentra segment's revenue increased 5.8% YoY for the quarter, driven by a 5.5% increase in revenue per visit to $134, while revenue from COVID-19 screening and testing services was nil in Q2 2023, compared to $7.7 million in Q2 2022[125] Liquidity and Capital Resources The company's liquidity is strong, with operating cash flow increasing to $286.3 million for the first six months of 2023, supported by $101.2 million cash and $248.8 million revolving credit facility availability - Net cash provided by operating activities for the first six months of 2023 was $286.3 million, a significant increase from $178.0 million in the same period of 2022, which included a $77.3 million repayment of Medicare advance payments[160] - As of June 30, 2023, the company had $101.2 million in cash and cash equivalents and $248.8 million of availability under its revolving facility[171] - The company maintains a $1.0 billion stock repurchase program, effective until December 31, 2023, with no shares repurchased under this program during the six months ended June 30, 2023[169] ITEM 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate exposure on variable-rate debt, mitigated by an interest rate cap on $2.0 billion of its term loan, with a 0.25% rate increase impacting annual interest expense by $1.1 million - The company is exposed to interest rate risk on its variable-rate debt, primarily its term loan and revolving credit facility indexed to SOFR[177] - An interest rate cap agreement mitigates risk by limiting the variable interest rate to 1.0% on $2.0 billion of the term loan's principal through September 30, 2024[179] - A hypothetical 0.25% increase in market interest rates would impact the company's annual interest expense by approximately $1.1 million on its unhedged variable-rate debt[180] ITEM 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2023, with no material changes to internal control over financial reporting during Q2 2023 - Based on an evaluation as of June 30, 2023, the principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures are effective[181] - No changes in internal control over financial reporting were identified during the second quarter of 2023 that have materially affected, or are reasonably likely to materially affect, these controls[182] PART II: OTHER INFORMATION ITEM 1. Legal Proceedings This section refers to Note 13 for details on ongoing legal proceedings, including governmental audits and Department of Justice investigations related to billing practices - The report directs readers to Note 13 – Commitments and Contingencies for information on legal proceedings, detailing ongoing investigations by the Department of Justice regarding billing practices[184][65][67] ITEM 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2022 - There have been no material changes from the risk factors set forth in the Annual Report on Form 10-K for the year ended December 31, 2022[185] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds The company maintains a $1.0 billion stock repurchase program, with $399.7 million remaining available, and acquired 49,370 shares in Q2 2023 for tax withholding purposes, not under the public plan - The company has a common stock repurchase program authorized for up to $1.0 billion, which remains in effect until December 31, 2023[186] Equity Purchases in Q2 2023 | Month | Total Shares Purchased | Average Price Paid Per Share | Remaining Program Value | | :--- | :--- | :--- | :--- | | April 2023 | 49,370 | $30.50 | $399,677,961 | | May 2023 | 0 | N/A | $399,677,961 | | June 2023 | 0 | N/A | $399,677,961 | - The shares purchased during the quarter were surrendered by employees to satisfy tax withholding obligations and were not part of the publicly announced repurchase plan[188] Other Items (3, 4, 5, 6) This section confirms no defaults on senior securities, non-applicability of mine safety disclosures, no Rule 10b5-1 plan changes by officers, and lists filed exhibits - Item 3 (Defaults Upon Senior Securities) and Item 4 (Mine Safety Disclosures) are not applicable[189][190] - During the quarter, no directors or executive officers adopted or terminated any Rule 10b5-1 trading plans[191] - Item 6 lists exhibits filed with the report, including Amendment No. 7 to the Credit Agreement and required CEO/CFO certifications[192]