sem-20200930

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 September 30, 2020


☐			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)

(717) 972-1100

(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 September 30, 2020, Select Medical Holdings Corporation had outstanding 134,762,890 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.

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TABLE OF CONTENTS


PART I	FINANCIAL INFORMATION	3

ITEM 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

	Condensed consolidated balance sheets	3

	Condensed consolidated statements of operations	4

	Condensed consolidated statements of changes in equity and income	6

	Condensed consolidated statements of cash flows	8

	Notes to condensed consolidated financial statements	9

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	25

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	54

ITEM 4.	CONTROLS AND PROCEDURES	54

PART II	OTHER INFORMATION	55

ITEM 1.	LEGAL PROCEEDINGS	55

ITEM 1A.	RISK FACTORS	56

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	57

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	57

ITEM 4.	MINE SAFETY DISCLOSURES	57

ITEM 5.	OTHER INFORMATION	57

ITEM 6.	EXHIBITS	58

SIGNATURES

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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		September 30, 2020
ASSETS
Current Assets:
Cash and cash equivalents	$	335,882	$	639,800
Accounts receivable	762,677		842,615
Prepaid income taxes	18,585		23,536
Other current assets	95,848		118,183
Total Current Assets	1,212,992		1,624,134
Operating lease right-of-use assets	1,003,986		1,005,689
Property and equipment, net	998,406		927,975
Goodwill	3,391,955		3,369,009
Identifiable intangible assets, net	409,068		392,506
Other assets	323,881		340,564
Total Assets	$	7,340,288	$	7,659,877
LIABILITIES AND EQUITY
Current Liabilities:

Current operating lease liabilities	$	207,950	$	215,235
Current portion of long-term debt and notes payable	25,167		11,031
Accounts payable	145,731		160,474
Accrued payroll	183,754		182,461
Accrued vacation	124,111		124,898
Accrued interest	33,853		10,152
Accrued other	191,076		239,201
Government advances (Note 14)	—		318,116
Unearned government assistance (Note 14)	—		66,938

Income taxes payable	2,638		16,980
Total Current Liabilities	914,280		1,345,486
Non-current operating lease liabilities	852,897		852,555
Long-term debt, net of current portion	3,419,943		3,390,945
Non-current deferred tax liability	148,258		131,423
Other non-current liabilities	101,334		178,967
Total Liabilities	5,436,712		5,899,376
Commitments and contingencies (Note 13)
Redeemable non-controlling interests	974,541		541,856
Stockholders’ Equity:
Common stock, $0.001 par value, 700,000,000 shares authorized, 134,328,112 and 134,762,890 shares issued and outstanding at 2019 and 2020, respectively	134		135
Capital in excess of par	491,038		500,972
Retained earnings	279,800		537,479
Total Stockholders’ Equity	770,972		1,038,586
Non-controlling interests	158,063		180,059
Total Equity	929,035		1,218,645
Total Liabilities and Equity	$	7,340,288	$	7,659,877

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

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Select Medical Holdings Corporation

Condensed Consolidated Statements of Operations

(unaudited)

(in thousands, except per share amounts)


	For the Three Months Ended September 30,
	2019		2020
Net operating revenues	$	1,393,343	$	1,423,869
Costs and expenses:
Cost of services, exclusive of depreciation and amortization	1,183,111		1,180,951
General and administrative	34,385		35,516
Depreciation and amortization	52,941		50,110
Total costs and expenses	1,270,437		1,266,577
Other operating income (Note 14)	—		(1,160)
Income from operations	122,906		156,132
Other income and expense:
Loss on early retirement of debt	(18,643)		—
Equity in earnings of unconsolidated subsidiaries	6,950		8,765
Gain on sale of businesses	—		5,143
Interest expense	(54,336)		(34,026)
Income before income taxes	56,877		136,014
Income tax expense	12,847		31,557
Net income	44,030		104,457
Less: Net income attributable to non-controlling interests	13,298		27,511
Net income attributable to Select Medical Holdings Corporation	$	30,732	$	76,946
Earnings per common share (Note 12):
Basic	$	0.23	$	0.57
Diluted	$	0.23	$	0.57

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

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Select Medical Holdings Corporation

Condensed Consolidated Statements of Operations

(unaudited)

(in thousands, except per share amounts)


	For the Nine Months Ended September 30,
	2019		2020
Net operating revenues	$	4,079,338	$	4,071,219
Costs and expenses:
Cost of services, exclusive of depreciation and amortization	3,465,353		3,463,778
General and administrative	94,401		102,808
Depreciation and amortization	160,072		154,133
Total costs and expenses	3,719,826		3,720,719
Other operating income (Note 14)	—		53,828
Income from operations	359,512		404,328
Other income and expense:
Loss on early retirement of debt	(18,643)		—
Equity in earnings of unconsolidated subsidiaries	18,710		19,677
Gain on sale of businesses	6,532		12,690
Interest expense	(156,611)		(117,499)
Income before income taxes	209,500		319,196
Income tax expense	52,140		76,805
Net income	157,360		242,391
Less: Net income attributable to non-controlling interests	40,978		60,670
Net income attributable to Select Medical Holdings Corporation	$	116,382	$	181,721
Earnings per common share (Note 12):
Basic	$	0.86	$	1.35
Diluted	$	0.86	$	1.35

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

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Select Medical Holdings Corporation

Condensed Consolidated Statements of Changes in Equity and Income

(unaudited)

(in thousands)


	For the Nine Months Ended September 30, 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
Net income attributable to Select Medical Holdings Corporation						51,650		51,650				51,650
Net income attributable to non-controlling interests								—		12,572		12,572
Issuance of restricted stock	200	0		0				—				—
Forfeitures of unvested restricted stock	(7)	0		0				—				—
Vesting of restricted stock				6,262				6,262				6,262
Repurchase of common shares	(46)	0		(441)		(283)		(724)				(724)
Issuance of non-controlling interests								—		7		7
Distributions to and purchases of non-controlling interests				(65)				(65)		(418)		(483)
Redemption adjustment on non-controlling interests						127,916		127,916				127,916
Other				(795)		1		(794)		1,205		411
Balance at June 30, 2020	133,970	$	134	$	496,785	$	495,964	$	992,883	$	179,547	$	1,172,430
Net income attributable to Select Medical Holdings Corporation						76,946		76,946				76,946
Net income attributable to non-controlling interests								—		10,183		10,183
Issuance of restricted stock	1,049	1		(1)				—				—
Forfeitures of unvested restricted stock	(2)	0		0				—				—
Vesting of restricted stock				6,456				6,456				6,456
Repurchase of common shares	(254)	0		(2,366)		(2,461)		(4,827)				(4,827)

Distributions to and purchases of non-controlling interests				98		(416)		(318)		(10,020)		(10,338)
Redemption adjustment on non-controlling interests						(32,555)		(32,555)				(32,555)
Other						1		1		349		350
Balance at September 30, 2020	134,763	$	135	$	500,972	$	537,479	$	1,038,586	$	180,059	$	1,218,645

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

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Select Medical Holdings Corporation

Condensed Consolidated Statements of Changes in Equity and Income

(unaudited)

(in thousands)


	For the Nine Months Ended September 30, 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
Net income attributable to Select Medical Holdings Corporation						44,816		44,816				44,816
Net income attributable to non-controlling interests								—		3,663		3,663
Issuance of restricted stock	187	0		0				—				—
Vesting of restricted stock				5,591				5,591				5,591
Repurchase of common shares	(936)	0		(8,164)		(5,456)		(13,620)				(13,620)
Exercise of stock options	50	0		459				459				459
Issuance of non-controlling interests				6,366				6,366		24,761		31,127
Distributions to and purchases of non-controlling interests				14				14		(1,430)		(1,416)
Redemption adjustment on non-controlling interests						270		270				270
Other						82		82		428		510
Balance at June 30, 2019	134,564	$	135	$	492,569	$	353,305	$	846,009	$	149,941	$	995,950
Net income attributable to Select Medical Holdings Corporation						30,732		30,732				30,732
Net income attributable to non-controlling interests								—		7,202		7,202
Issuance of restricted stock	1,069	1		(1)				—				—
Forfeitures of unvested restricted stock	(12)	0		0				—				—
Vesting of restricted stock				6,050				6,050				6,050
Repurchase of common shares	(1,494)	(2)		(13,616)		(10,071)		(23,689)				(23,689)
Exercise of stock options	45	0		413				413				413

Distributions to and purchases of non-controlling interests								—		(6,538)		(6,538)
Redemption adjustment on non-controlling interests						(104,553)		(104,553)				(104,553)
Other						(244)		(244)		420		176
Balance at September 30, 2019	134,172	$	134	$	485,415	$	269,169	$	754,718	$	151,025	$	905,743

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

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Select Medical Holdings Corporation

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in thousands)


	For the Nine Months Ended September 30,
	2019		2020
Operating activities
Net income	$	157,360	$	242,391
Adjustments to reconcile net income to net cash provided by operating activities:
Distributions from unconsolidated subsidiaries	13,609		21,720
Depreciation and amortization	160,072		154,133
Provision for expected credit losses	2,344		281
Equity in earnings of unconsolidated subsidiaries	(18,710)		(19,677)
Loss on extinguishment of debt	10,160		—
Gain on sale of assets and businesses	(6,349)		(24,723)
Stock compensation expense	19,431		20,828
Amortization of debt discount, premium and issuance costs	9,469		1,635
Deferred income taxes	(7,247)		(14,556)
Changes in operating assets and liabilities, net of effects of business combinations:
Accounts receivable	(93,425)		(91,413)
Other current assets	(6,016)		(22,815)
Other assets	1,259		16,335
Accounts payable	1,369		24,246
Accrued expenses	22,396		117,781
Government advances	—		318,116
Unearned government assistance	—		66,938

Income taxes	918		9,415
Net cash provided by operating activities	266,640		820,635
Investing activities
Business combinations, net of cash acquired	(86,269)		(14,076)
Purchases of property and equipment	(123,956)		(105,572)
Investment in businesses	(60,668)		(25,857)
Proceeds from sale of assets and businesses	183		83,320
Net cash used in investing activities	(270,710)		(62,185)
Financing activities
Borrowings on revolving facilities	700,000		470,000
Payments on revolving facilities	(720,000)		(470,000)
Proceeds from term loans	593,683		—
Payments on term loans	(375,084)		(39,843)
Proceeds from 6.250% senior notes	539,176		—
Payment on 6.375% senior notes	(710,000)		—
Revolving facility debt issuance costs	(310)		—
Borrowings of other debt	19,282		35,086
Principal payments on other debt	(22,628)		(42,820)
Repurchase of common stock	(37,309)		(14,242)
Proceeds from exercise of stock options	872		—
Decrease in overdrafts	(25,083)		—
Proceeds from issuance of non-controlling interests	18,288		1,686
Distributions to and purchases of non-controlling interests	(16,032)		(28,196)
Purchase of membership interests of Concentra Group Holdings Parent (Note 4)	—		(366,203)
Net cash used in financing activities	(35,145)		(454,532)
Net increase (decrease) in cash and cash equivalents	(39,215)		303,918
Cash and cash equivalents at beginning of period	175,178		335,882
Cash and cash equivalents at end of period	$	135,963	$	639,800
Supplemental Information
Cash paid for interest	$	149,090	$	140,174
Cash paid for taxes	58,472		81,945

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

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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 September 30, 2020, and for the three and nine month periods ended September 30, 2019 and 2020, have been prepared pursuant to the rules and regulations of the Securities Exchange Commission (the “SEC”) for interim reporting and the 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 the 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 and nine months ended September 30, 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 the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Recent Accounting Pronouncements

In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The ASU provides temporary relief from some of the existing rules governing contract modifications when the modification is related to the replacement of the London Interbank Offered Rate (“LIBOR”) or other reference rates discontinued as a result of reference rate reform. The ASU specifically provides optional practical expedients for contract modification accounting related to contracts subject to ASC 310, Receivables, ASC 470, Debt, ASC 842, Leases, and ASC 815, Derivatives and Hedging. The ASU also establishes a general contract modification principle that entities can apply in other areas that may be affected by reference rate reform and certain elective hedge accounting expedients. For eligible contract modifications, the principle generally allows an entity to account for and present modifications as an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. That is, the modified contract is accounted for as a continuation of the existing contract. The standard was effective upon issuance on March 12, 2020, and the optional practical expedients can generally be applied to contract modifications made and hedging relationships entered into on or before December 31, 2022.

Borrowings under the Company’s senior secured credit agreement bear interest, at the election of Select, based on LIBOR or an alternate base rate. Provisions within the senior secured credit agreement currently provide the Company with the ability to replace LIBOR with a different reference rate in the event that LIBOR ceases to exist.

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In August 2020, the FASB issued ASU 2020-06 Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. As part of this update, convertible instruments are to be included in diluted earnings per share using the if-converted method, rather than the treasury stock method. Further, contracts which can be settled in cash or shares, excluding liability-classified share-based payment awards, are to be included in diluted earnings per share on an if-converted basis if the effect is dilutive, regardless of whether the entity or the counterparty can choose between cash and share settlement. The share-settlement presumption may not be rebutted based on past experience or a stated policy.

This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2021. The Company plans to adopt this pronouncement as of January 1, 2022. The use of either the modified retrospective or fully retrospective method of transition is permitted. The Company is currently evaluating the impact of the adoption of ASU 2020-06 on the Company's consolidated financial statements.

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.

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.

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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 19% of the Company’s accounts receivable is from Medicare at December 31, 2019, and September 30, 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 were as follows (in thousands):


	Nine Months Ended September 30,
	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
Net income attributable to redeemable non-controlling interests	11,507		3,264
Distributions to and purchases of redeemable non-controlling interests	(395)		(30)
Redemption adjustment on redeemable non-controlling interests	(270)		(127,916)
Other	339		292
Balance as of June 30	$	844,422	$	495,987
Net income attributable to redeemable non-controlling interests	6,096		17,328
Distributions to and purchases of redeemable non-controlling interests	(1,721)		(4,171)
Redemption adjustment on redeemable non-controlling interests	104,553		32,555
Other	347		157
Balance as of September 30	$	953,697	$	541,856

Table of Contents

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 $180.7 million at December 31, 2019, and September 30, 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 $179.4 million at December 31, 2019, and September 30, 2020, respectively.

6. Leases

The Company has operating and finance leases for its facilities and certain equipment. The Company leases its corporate office space from related parties.

The Company’s total lease cost was as follows (in thousands):


	Three Months Ended September 30, 2019						Three Months Ended September 30, 2020
	Unrelated Parties		Related Parties		Total		Unrelated Parties		Related Parties		Total
Operating lease cost	$	68,046	$	1,342	$	69,388	$	69,308	$	1,799	$	71,107
Finance lease cost:
Amortization of right-of-use assets	73		—		73		147		—		147
Interest on lease liabilities	259		—		259		255		—		255
Short-term lease cost	592		—		592		—		—		—
Variable lease cost	11,789		156		11,945		12,121		156		12,277
Sublease income	(2,458)		—		(2,458)		(2,566)		—		(2,566)
Total lease cost	$	78,301	$	1,498	$	79,799	$	79,265	$	1,955	$	81,220


	Nine Months Ended September 30, 2019						Nine Months Ended September 30, 2020
	Unrelated Parties		Related Parties		Total		Unrelated Parties		Related Parties		Total
Operating lease cost	$	202,600	$	4,026	$	206,626	$	208,466	$	5,319	$	213,785
Finance lease cost:
Amortization of right-of-use assets	199		—		199		278		—		278
Interest on lease liabilities	555		—		555		743		—		743
Short-term lease cost	1,776		—		1,776		—		—		—
Variable lease cost	32,380		397		32,777		36,133		424		36,557
Sublease income	(7,388)		—		(7,388)		(7,742)		—		(7,742)
Total lease cost	$	230,122	$	4,423	$	234,545	$	237,878	$	5,743	$	243,621