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 March 31, 2023

OR

☐ 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 April 30, 2023, Select Medical Holdings Corporation had outstanding 127,126,909 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.

1

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 comprehensive income	5
	Condensed consolidated statements of changes in equity and income	6
	Condensed consolidated statements of cash flows	7
	Notes to condensed consolidated financial statements	8
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	19
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	35
ITEM 4.	CONTROLS AND PROCEDURES	35
PART II	OTHER INFORMATION	36
ITEM 1.	LEGAL PROCEEDINGS	36
ITEM 1A.	RISK FACTORS	36
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	36
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	36
ITEM 4.	MINE SAFETY DISCLOSURES	36
ITEM 5.	OTHER INFORMATION	36
ITEM 6.	EXHIBITS	37
SIGNATURES

2

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, 2022		March 31, 2023
ASSETS
Current Assets:
Cash and cash equivalents	$	97,906	$	83,703
Accounts receivable	941,312		997,274
Prepaid income taxes	31,868		16,893
Current portion of interest rate cap contract	74,857		72,127
Other current assets	125,370		143,736
Total Current Assets	1,271,313		1,313,733
Operating lease right-of-use assets	1,169,740		1,186,534
Property and equipment, net	1,001,440		987,283
Goodwill	3,484,200		3,484,594
Identifiable intangible assets, net	351,662		346,606
Interest rate cap contract, net of current portion	45,200		26,994
Other assets	341,738		353,992
Total Assets	$	7,665,293	$	7,699,736
LIABILITIES AND EQUITY
Current Liabilities:
Overdrafts	$	31,961	$	31,237
Current operating lease liabilities	236,784		239,713
Current portion of long-term debt and notes payable	44,351		113,894
Accounts payable	186,729		174,101
Accrued payroll	209,789		171,815
Accrued vacation	150,695		156,433
Accrued interest	29,837		10,241
Accrued other	264,525		274,654
Income taxes payable	480		13,618
Total Current Liabilities	1,155,151		1,185,706
Non-current operating lease liabilities	1,008,394		1,024,676
Long-term debt, net of current portion	3,835,211		3,766,838
Non-current deferred tax liability	169,793		163,024
Other non-current liabilities	106,137		106,652
Total Liabilities	6,274,686		6,246,896
Commitments and contingencies (Note 13)
Redeemable non-controlling interests	34,043		34,399
Stockholders’ Equity:
Common stock, $0.001 par value, 700,000,000 shares authorized, 127,173,871 and 127,176,279 shares issued and outstanding at 2022 and 2023, respectively	127		127
Capital in excess of par	452,183		462,185
Retained earnings	581,010		635,483
Accumulated other comprehensive income	88,602		72,654
Total Stockholders’ Equity	1,121,922		1,170,449
Non-controlling interests	234,642		247,992
Total Equity	1,356,564		1,418,441
Total Liabilities and Equity	$	7,665,293	$	7,699,736

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

3

Select Medical Holdings Corporation

Condensed Consolidated Statements of Operations

(unaudited)

(in thousands, except per share amounts)

	For the Three Months Ended March 31,
	2022		2023
Revenue	$	1,599,547	$	1,664,980
Costs and expenses:
Cost of services, exclusive of depreciation and amortization	1,407,010		1,418,819
General and administrative	37,513		42,279
Depreciation and amortization	51,039		52,425
Total costs and expenses	1,495,562		1,513,523
Income from operations	103,985		151,457
Other income and expense:
Equity in earnings of unconsolidated subsidiaries	5,397		8,556
Interest expense	(35,514)		(48,571)
Income before income taxes	73,868		111,442
Income tax expense	17,942		26,185
Net income	55,926		85,257
Less: Net income attributable to non-controlling interests	6,809		14,452
Net income attributable to Select Medical Holdings Corporation	$	49,117	$	70,805
Earnings per common share (Note 12):
Basic and diluted	$	0.37	$	0.56

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

4

Select Medical Holdings Corporation

Condensed Consolidated Statements of Comprehensive Income

(unaudited)

(in thousands)

	For the Three Months Ended March 31,
	2022		2023
Net income	$	55,926	$	85,257
Other comprehensive income (loss), net of tax:
Gain (loss) on interest rate cap contract	39,814		(2,696)
Reclassification adjustment for losses (gains) included in net income	39		(13,252)
Net change, net of tax benefit (expense) of $(13,284) and $5,175	39,853		(15,948)
Comprehensive income	95,779		69,309
Less: Comprehensive income attributable to non-controlling interests	6,809		14,452
Comprehensive income attributable to Select Medical Holdings Corporation	$	88,970	$	54,857

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

5

Select Medical Holdings Corporation

Condensed Consolidated Statements of Changes in Equity and Income

(unaudited)

(in thousands)

	For the Three Months Ended March 31, 2023
		Total Stockholders’ Equity
	Common Stock Issued	Common Stock Par Value		Capital in Excess of Par		Retained Earnings		Accumulated Other Comprehensive Income		Total Stockholders’ Equity		Non-controlling Interests		Total Equity
Balance at December 31, 2022	127,173	$	127	$	452,183	$	581,010	$	88,602	$	1,121,922	$	234,642	$	1,356,564
Net income attributable to Select Medical Holdings Corporation						70,805				70,805				70,805
Net income attributable to non-controlling interests										—		12,811		12,811
Cash dividends declared for common stockholders ($0.125 per share)						(15,897)				(15,897)				(15,897)
Issuance of restricted stock	3	0		0						—				—
Vesting of restricted stock				10,003						10,003				10,003
Issuance of non-controlling interests										—		2,731		2,731
Non-controlling interests acquired in business combination										—		3,877		3,877
Distributions to and purchases of non-controlling interests										—		(6,069)		(6,069)
Redemption value adjustment on non-controlling interests						(436)				(436)				(436)
Other comprehensive income								(15,948)		(15,948)				(15,948)
Other				(1)		1				—				—
Balance at March 31, 2023	127,176	$	127	$	462,185	$	635,483	$	72,654	$	1,170,449	$	247,992	$	1,418,441

	For the Three Months Ended March 31, 2022
		Total Stockholders’ Equity
	Common Stock Issued	Common Stock Par Value		Capital in Excess of Par		Retained Earnings		Accumulated Other Comprehensive Income		Total Stockholders’ Equity		Non-controlling Interests		Total Equity
Balance at December 31, 2021	133,884	$	134	$	504,314	$	593,251	$	12,282	$	1,109,981	$	215,921	$	1,325,902
Net income attributable to Select Medical Holdings Corporation						49,117				49,117				49,117
Net income attributable to non-controlling interests										—		4,891		4,891
Cash dividends declared for common stockholders ($0.125 per share)						(16,691)				(16,691)				(16,691)
Issuance of restricted stock	13	0		0						—				—
Vesting of restricted stock				8,288						8,288				8,288
Repurchase of common shares	(2,128)	(2)		(23,459)		(28,215)				(51,676)				(51,676)
Issuance of non-controlling interests				651						651		4,578		5,229
Non-controlling interests acquired in business combination, measurement period adjustment										—		12,463		12,463
Distributions to and purchases of non-controlling interests										—		(9,097)		(9,097)
Redemption value adjustment on non-controlling interests						(1,381)				(1,381)				(1,381)
Other comprehensive income								39,853		39,853				39,853
Other						(2)				(2)				(2)
Balance at March 31, 2022	131,769	$	132	$	489,794	$	596,079	$	52,135	$	1,138,140	$	228,756	$	1,366,896

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

6

Select Medical Holdings Corporation

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in thousands)

	For the Three Months Ended March 31,
	2022		2023
Operating activities
Net income	$	55,926	$	85,257
Adjustments to reconcile net income to net cash provided by operating activities:
Distributions from unconsolidated subsidiaries	7,486		2,566
Depreciation and amortization	51,039		52,425
Provision for expected credit losses	94		429
Equity in earnings of unconsolidated subsidiaries	(5,397)		(8,556)
Gain on sale or disposal of assets	(23)		(7)
Stock compensation expense	8,823		10,181
Amortization of debt discount, premium and issuance costs	558		565
Deferred income taxes	420		(2,601)
Changes in operating assets and liabilities, net of effects of business combinations:
Accounts receivable	(52,225)		(55,397)
Other current assets	(1,819)		(11,742)
Other assets	2,686		3,659
Accounts payable	16,074		(4,564)
Accrued expenses	(14,377)		(20,775)
Government advances	(62,928)		—
Net cash provided by operating activities	6,337		51,440
Investing activities
Business combinations, net of cash acquired	(5,186)		(397)
Purchases of property, equipment, and other assets	(46,845)		(58,885)
Investment in businesses	(3,337)		(9,800)
Proceeds from sale of assets	37		20
Net cash used in investing activities	(55,331)		(69,062)
Financing activities
Borrowings on revolving facilities	280,000		225,000
Payments on revolving facilities	(100,000)		(210,000)
Borrowings of other debt	15,794		21,448
Principal payments on other debt	(9,188)		(11,170)
Dividends paid to common stockholders	(16,691)		(15,897)
Repurchase of common stock	(51,676)		—
Decrease in overdrafts	(7,608)		(724)
Proceeds from issuance of non-controlling interests	5,229		2,731
Distributions to and purchases of non-controlling interests	(10,295)		(7,969)
Net cash provided by financing activities	105,565		3,419
Net increase (decrease) in cash and cash equivalents	56,571		(14,203)
Cash and cash equivalents at beginning of period	74,310		97,906
Cash and cash equivalents at end of period	$	130,881	$	83,703
Supplemental information
Cash paid for interest, excluding amounts received of $17,828 under the interest rate cap contract for the three months ended March 31, 2023	$	53,517	$	84,531
Cash paid for taxes	923		336

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

7

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, Select, and Select’s subsidiaries are collectively referred to as the “Company.” The unaudited condensed consolidated financial statements of the Company as of March 31, 2023, and for the three month periods ended March 31, 2022 and 2023, have been prepared pursuant to the rules and regulations of the Securities and 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 months ended March 31, 2023, are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2023. 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, 2022, contained in the Company’s Annual Report on Form 10-K filed with the SEC on February 23, 2023.

2.    Accounting Policies

Recent Accounting Guidance Not Yet Adopted

In March 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-01, Leases (Topic 842): Common Control Arrangements, which requires companies to amortize leasehold improvements associated with related party leases under common control over the useful life of the leasehold improvement to the common control group. The ASU is effective for annual reporting periods beginning on or after December 15, 2023, however, early adoption is permitted. The ASU can either be applied prospectively or retrospectively.

The Company is currently evaluating this ASU, but does not expect it to have a material impact on its consolidated financial statements upon adoption. The Company plans to adopt the ASU using the prospective method as of January 1, 2024.

Recently Adopted Accounting Guidance

Reference Rate Reform

In December 2022, FASB issued ASU 2022-06, Reference Rate Reform (Topic 848), Deferral of the Sunset Date of Topic 848, which extended the relief provided under Topic 848 to contract modifications made and hedging relationships entered into on or before December 31, 2024. The FASB had previously issued ASU 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting in March 2020, which provided temporary relief from some of the existing accounting 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.

For eligible contract modifications, the update 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. For cash flow hedging relationships affected by reference rate reform, Topic 848 provides expedients that allow an entity to (i) change the reference rate of either the forecasted transaction or hedging instrument without requiring dedesignation of the hedging relationship; (ii) assert that changes to the hedged forecasted transaction will not impact whether it remains probable of occurring; and (iii) for the purposes of assessment of hedge effectiveness assume that the reference rate will not be replaced for the remainder of the hedging relationship if both the hedged forecasted transaction and hedging instrument are expected to be impacted by reference rate reform.

8

In March 2021, the Financial Conduct Authority announced that the intended cessation date of the one-, three-, six-, and 12-month tenors of USD LIBOR is June 30, 2023. Borrowings under the Company’s credit agreement bear interest, at the election of Select, based on LIBOR or an alternate base rate. The Company currently elects for its term loan borrowings to bear interest at a rate that is indexed to one-month LIBOR. Provisions within the credit agreement provide the Company with the ability to agree with JPMorgan Chase Bank, N.A., as administrative agent to the lenders, to replace LIBOR with a different reference rate in the event that LIBOR ceases to exist. The Company has not yet agreed upon a different reference rate with JPMorgan Chase Bank, N.A.

For the Company’s cash flow hedge, which mitigates the Company’s exposure to increases in the one-month LIBOR rate above 1.0% on $2.0 billion of principal outstanding under the term loan, the Company has elected to assert that the hedged forecasted transaction remains probable of occurring, regardless of a modification or expected modification that may replace one-month LIBOR with a different reference rate. The Company intends to modify the cash flow hedge’s contractual terms related to the replacement of the reference rate, as necessary, to align with the reference rate specified for the Company’s term loan. For the purpose of the assessment of hedge effectiveness, the Company assumes that the reference rate will not be replaced for the remainder of the hedging relationship, as outlined by Topic 848. The Company’s cash flow hedge is described further in Note 8 – Interest Rate Cap.

These updates have not had, and the Company does not expect them to have in future periods, a material impact on the Company's consolidated financial statements.

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, liabilities, revenues, and expenses. Actual results could differ from those estimates.

3.     Credit Risk Concentrations

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash balances and accounts receivable. 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.

Because of the diversity in the Company’s non-governmental third-party payor base, as well as their geographic dispersion, accounts receivable due from the Medicare program represent the Company’s only significant concentration of credit risk. Approximately 19% and 20% of the Company’s accounts receivable is due from Medicare at December 31, 2022 and March 31, 2023, respectively.

4.     Redeemable Non-Controlling Interests

The ownership interests held by outside parties in subsidiaries, which include 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, after the attribution of net income or loss.

The changes in redeemable non-controlling interests are as follows:

	Three Months Ended March 31,
	2022		2023
	(in thousands)
Balance as of January 1	$	39,033	$	34,043
Net income attributable to redeemable non-controlling interests	1,918		1,641
Distributions to redeemable non-controlling interests	(1,198)		(1,900)
Redemption value adjustment on redeemable non-controlling interests	1,381		436
Other	536		179
Balance as of March 31	$	41,670	$	34,399

9

5.     Variable Interest Entities

Certain states prohibit the “corporate practice of medicine,” which restricts the Company from owning medical practices which directly employ physicians or therapists and from exercising control over medical decisions by physicians and therapists. In these states, the Company enters into long-term management agreements with medical practices that are owned by licensed physicians or therapists, which, in turn, employ or contract with physicians or therapists who provide professional medical services. The management agreements provide for the Company to direct the transfer of ownership of the medical practices. Based on the provisions of the management agreements, the medical practices are variable interest entities for which the Company is the primary beneficiary.

As of December 31, 2022, and March 31, 2023, the total assets of the Company’s variable interest entities were $232.1 million and $254.1 million, respectively, and are principally comprised of accounts receivable. As of December 31, 2022, and March 31, 2023, the total liabilities of the Company’s variable interest entities were $78.8 million and $82.2 million, respectively, and are principally comprised of accounts payable and accrued expenses. These variable interest entities have obligations payable for services received under their management agreements with the Company of $158.3 million and $178.4 million as of December 31, 2022, and March 31, 2023, respectively. These intercompany balances are eliminated in consolidation.

6.     Leases

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

The Company’s total lease cost is as follows:

	Three Months Ended March 31, 2022						Three Months Ended March 31, 2023
	Unrelated Parties		Related Parties		Total		Unrelated Parties		Related Parties		Total
	(in thousands)
Operating lease cost	$	73,962	$	1,809	$	75,771	$	76,632	$	1,834	$	78,466
Finance lease cost:
Amortization of right-of-use assets	347		—		347		394		—		394
Interest on lease liabilities	340		—		340		320		—		320
Short-term lease cost	35		—		35		—		—		—
Variable lease cost	13,655		39		13,694		15,761		84		15,845
Sublease income	(1,966)		—		(1,966)		(1,678)		—		(1,678)
Total lease cost	$	86,373	$	1,848	$	88,221	$	91,429	$	1,918	$	93,347

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7.     Long-Term Debt and Notes Payable

As of March 31, 2023, the Company’s long-term debt and notes payable are as follows:

	Principal Outstanding		Unamortized Premium (Discount)		Unamortized Issuance Costs		Carrying Value		Fair Value
	(in thousands)
6.250% senior notes	$	1,225,000	$	20,065	$	(10,206)	$	1,234,859	$	1,188,250
Credit facilities:
Revolving facility	460,000		—		—		460,000		458,275
Term loan	2,103,437		(3,881)		(4,230)		2,095,326		2,095,549
Other debt, including finance leases	90,664		—		(117)		90,547		90,547
Total debt	$	3,879,101	$	16,184	$	(14,553)	$	3,880,732	$	3,832,621

Principal maturities of the Company’s long-term debt and notes payable are approximately as follows:

	2023		2024		2025		2026		2027		Thereafter		Total
	(in thousands)
6.250% senior notes	$	—	$	—	$	—	$	1,225,000	$	—	$	—	$	1,225,000
Credit facilities:
Revolving facility	—		84,923		375,077		—		—		—		460,000
Term loan	4,757		11,150		2,087,530		—		—		—		2,103,437
Other debt, including finance leases	19,928		56,356		1,408		1,308		823		10,841		90,664
Total debt	$	24,685	$	152,429	$	2,464,015	$	1,226,308	$	823	$	10,841	$	3,879,101

As of December 31, 2022, the Company’s long-term debt and notes payable are as follows:

	Principal Outstanding		Unamortized Premium (Discount)		Unamortized Issuance Costs		Carrying Value		Fair Value
	(in thousands)
6.250% senior notes	$	1,225,000	$	21,555	$	(10,948)	$	1,235,607	$	1,163,689
Credit facilities:
Revolving facility	445,000		—		—		445,000		443,331
Term loan	2,103,437		(4,376)		(4,771)		2,094,290		2,056,110
Other debt, including finance leases	104,800		—		(135)		104,665		104,665
Total debt	$	3,878,237	$	17,179	$	(15,854)	$	3,879,562	$	3,767,795

Select Credit Facilities

On February 21, 2023, Select entered into Amendment No. 6 to its senior secured credit agreement (the “Select credit agreement”). Amendment No. 6 extended the maturity date on $530.0 million of the total borrowing capacity of $650.0 million under its revolving credit facility (the “Select revolving facility”) to March 6, 2025; however, in the event the Company’s term loan is not refinanced by January 3, 2025, the maturity date for those revolving borrowings will be January 3, 2025.

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8.     Interest Rate Cap

The Company is subject to market risk exposure arising from changes in interest rates on its term loan, which bears interest at a rate that is indexed to one-month LIBOR. The Company’s objective in using an interest rate derivative is to mitigate its exposure to increases in interest rates. The interest rate cap limits the Company’s exposure to increases in the one-month LIBOR rate to 1.0% on $2.0 billion of principal outstanding under the term loan, as the interest rate cap provides for payments from the counterparty when interest rates rise above 1.0%. The interest rate cap has a $2.0 billion notional amount and is effective through September 30, 2024. The Company will pay a monthly premium for the interest rate cap over the term of the agreement. The annual premium is equal to 0.0916% of the notional amount, or approximately $1.8 million.

The interest rate cap has been designated as a cash flow hedge and is highly effective at offsetting the changes in cash outflows when one-month LIBOR exceeds 1.0%. Changes in the fair value of the interest rate cap, net of tax, are recognized in other comprehensive income and are reclassified out of accumulated other comprehensive income and into interest expense when the hedged interest obligations affect earnings.

The following table outlines the changes in accumulated other comprehensive income (loss), net of tax, during the periods presented:

	Three Months Ended March 31,
	2022		2023
	(in thousands)
Balance as of January 1	$	12,282	$	88,602
Gain (loss) on interest rate cap cash flow hedge	39,814		(2,696)
Amounts reclassified from accumulated other comprehensive income	39		(13,252)
Balance as of March 31	$	52,135	$	72,654

The effects on net income of amounts reclassified from accumulated other comprehensive income are as follows:

	Three Months Ended March 31,
Statement of Operations	2022		2023
	(in thousands)
Gains (losses) included in interest expense	$	(51)	$	17,552
Income tax benefit (expense)	12		(4,300)
Amounts reclassified from accumulated other comprehensive income	$	(39)	$	13,252

The Company expects that approximately $71.1 million of estimated pre-tax gains will be reclassified from accumulated other comprehensive income into interest expense within the next twelve months.

Refer to Note 9 – Fair Value of Financial Instruments for information on the fair value of the Company’s interest rate cap contract and its balance sheet classification.

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9.     Fair Value of Financial Instruments

Financial instruments which are measured at fair value, or for which a fair value is disclosed, are classified in the fair value hierarchy, as outlined below, on the basis of the observability of the inputs used in the fair value measurement:

•Level 1 – inputs are based upon quoted prices for identical instruments in active markets.

•Level 2 – inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant inputs are observable in the market or can be corroborated by observable market data.

•Level 3 – inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the instrument.

The Company’s interest rate cap contract is recorded at its fair value in the condensed consolidated balance sheets on a recurring basis. The fair value of the interest rate cap contract is based upon a model-derived valuation using observable market inputs, such as interest rates and interest rate volatility, and the strike price.

Financial Instrument	Balance Sheet Classification	Level	December 31, 2022		March 31, 2023
Asset:			(in thousands)
Interest rate cap contract, current portion	Current portion of interest rate cap contract	Level 2	$	74,857	$	72,127
Interest rate cap contract, non-current portion	Interest rate cap contract, net of current portion	Level 2	45,200		26,994

The Company does not measure its indebtedness at fair value in its condensed consolidated balance sheets. The fair value of the credit facilities is based on quoted market prices for this debt in the syndicated loan market. The fair value of the senior notes is based on quoted market prices. The carrying value of the Company’s other debt, as disclosed in Note 7 – Long-Term Debt and Notes Payable, approximates fair value.

		December 31, 2022				March 31, 2023
Financial Instrument	Level	Carrying Value		Fair Value		Carrying Value		Fair Value
		(in thousands)
6.250% senior notes	Level 2	$	1,235,607	$	1,163,689	$	1,234,859	$	1,188,250
Credit facilities:
Revolving facility	Level 2	445,000		443,331		460,000		458,275
Term loan	Level 2	2,094,290		2,056,110		2,095,326		2,095,549

The Company’s other financial instruments, which primarily consist of cash and cash equivalents, accounts receivable, and accounts payable, approximate fair value because of the short-term maturities of these instruments.

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10.     Segment Information

The Company’s reportable segments consist of the critical illness recovery hospital segment, rehabilitation hospital segment, outpatient rehabilitation segment, and Concentra segment. Other activities include the Company’s corporate shared services, certain investments, and employee leasing services with non-consolidating subsidiaries.

The Company evaluates the performance of its segments based on Adjusted EBITDA. Adjusted EBITDA is 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. The Company has provided additional information regarding its reportable segments, such as total assets, which contributes to the understanding of the Company and provides useful information to the users of the consolidated financial statements.

The following tables summarize selected financial data for the Company’s reportable segments.

	Three Months Ended March 31,
	2022		2023
	(in thousands)
Revenue:
Critical illness recovery hospital	$	601,755	$	593,926
Rehabilitation hospital	220,634		231,462
Outpatient rehabilitation	271,940		295,903
Concentra	423,423		456,298
Other	81,795		87,391
Total Company	$	1,599,547	$	1,664,980
Adjusted EBITDA:
Critical illness recovery hospital	$	35,967	$	76,773
Rehabilitation hospital	42,379		47,216
Outpatient rehabilitation	26,596		30,199
Concentra	89,469		93,748
Other	(30,564)		(33,873)
Total Company	$	163,847	$	214,063
Total assets:
Critical illness recovery hospital	$	2,367,490	$	2,507,265
Rehabilitation hospital	1,187,118		1,203,069
Outpatient rehabilitation	1,350,374		1,397,823
Concentra	2,339,940		2,300,632
Other	291,022		290,947
Total Company	$	7,535,944	$	7,699,736
Purchases of property, equipment, and other assets:
Critical illness recovery hospital	$	19,569	$	23,658
Rehabilitation hospital	6,274		8,582
Outpatient rehabilitation	9,414		9,932
Concentra	10,240		14,400
Other	1,348		2,313
Total Company	$	46,845	$	58,885

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A reconciliation of Adjusted EBITDA to income before income taxes is as follows:

	Three Months Ended March 31, 2022
	Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation		Concentra		Other		Total
	(in thousands)
Adjusted EBITDA	$	35,967	$	42,379	$	26,596	$	89,469	$	(30,564)
Depreciation and amortization	(14,618)		(6,802)		(8,029)		(18,812)		(2,778)
Stock compensation expense	—		—		—		(535)		(8,288)
Income (loss) from operations	$	21,349	$	35,577	$	18,567	$	70,122	$	(41,630)	$	103,985
Equity in earnings of unconsolidated subsidiaries											5,397
Interest expense											(35,514)
Income before income taxes											$	73,868

	Three Months Ended March 31, 2023
	Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation		Concentra		Other		Total
	(in thousands)
Adjusted EBITDA	$	76,773	$	47,216	$	30,199	$	93,748	$	(33,873)
Depreciation and amortization	(16,637)		(6,888)		(8,457)		(18,310)		(2,133)
Stock compensation expense	—		—		—		(178)		(10,003)
Income (loss) from operations	$	60,136	$	40,328	$	21,742	$	75,260	$	(46,009)	$	151,457
Equity in earnings of unconsolidated subsidiaries											8,556
Interest expense											(48,571)
Income before income taxes