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, 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 October 31, 2023, Select Medical Holdings Corporation had outstanding 128,213,538 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	8
	Notes to condensed consolidated financial statements	9
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	21
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	41
ITEM 4.	CONTROLS AND PROCEDURES	41
PART II	OTHER INFORMATION	42
ITEM 1.	LEGAL PROCEEDINGS	42
ITEM 1A.	RISK FACTORS	42
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	42
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	42
ITEM 4.	MINE SAFETY DISCLOSURES	42
ITEM 5.	OTHER INFORMATION	42
ITEM 6.	EXHIBITS	43
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		September 30, 2023
ASSETS
Current Assets:
Cash and cash equivalents	$	97,906	$	77,440
Accounts receivable	941,312		944,219
Prepaid income taxes	31,868		22,716
Current portion of interest rate cap contract	74,857		85,896
Other current assets	125,370		145,816
Total Current Assets	1,271,313		1,276,087
Operating lease right-of-use assets	1,169,740		1,180,907
Property and equipment, net	1,001,440		1,006,842
Goodwill	3,484,200		3,504,654
Identifiable intangible assets, net	351,662		336,639
Interest rate cap contract, net of current portion	45,200		—
Other assets	341,738		378,879
Total Assets	$	7,665,293	$	7,684,008
LIABILITIES AND EQUITY
Current Liabilities:
Overdrafts	$	31,961	$	29,994
Current operating lease liabilities	236,784		242,594
Current portion of long-term debt and notes payable	44,351		35,085
Accounts payable	186,729		183,086
Accrued payroll	209,789		210,088
Accrued vacation	150,695		154,655
Accrued interest	29,837		12,044
Accrued other	264,525		297,931
Income taxes payable	480		579
Total Current Liabilities	1,155,151		1,166,056
Non-current operating lease liabilities	1,008,394		1,019,185
Long-term debt, net of current portion	3,835,211		3,695,244
Non-current deferred tax liability	169,793		146,919
Other non-current liabilities	106,137		106,216
Total Liabilities	6,274,686		6,133,620
Commitments and contingencies (Note 13)
Redeemable non-controlling interests	34,043		26,999
Stockholders’ Equity:
Common stock, $0.001 par value, 700,000,000 shares authorized, 127,173,871 and 128,287,211 shares issued and outstanding at 2022 and 2023, respectively	127		128
Capital in excess of par	452,183		482,290
Retained earnings	581,010		722,665
Accumulated other comprehensive income	88,602		62,727
Total Stockholders’ Equity	1,121,922		1,267,810
Non-controlling interests	234,642		255,579
Total Equity	1,356,564		1,523,389
Total Liabilities and Equity	$	7,665,293	$	7,684,008

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 September 30,				For the Nine Months Ended September 30,
	2022		2023		2022		2023
Revenue	$	1,567,794	$	1,665,694	$	4,752,082	$	5,005,202
Costs and expenses:
Cost of services, exclusive of depreciation and amortization	1,393,817		1,442,509		4,191,377		4,284,931
General and administrative	39,491		41,316		114,272		126,103
Depreciation and amortization	51,459		52,394		153,579		154,758
Total costs and expenses	1,484,767		1,536,219		4,459,228		4,565,792
Other operating income	8,440		485		23,565		1,211
Income from operations	91,467		129,960		316,419		440,621
Other income and expense:
Loss on early retirement of debt	—		(14,692)		—		(14,692)
Equity in earnings of unconsolidated subsidiaries	8,084		11,561		19,648		30,618
Interest expense	(45,204)		(50,271)		(121,770)		(147,839)
Income before income taxes	54,347		76,558		214,297		308,708
Income tax expense	16,221		15,742		53,983		70,775
Net income	38,126		60,816		160,314		237,933
Less: Net income attributable to non-controlling interests	10,960		12,636		28,824		40,711
Net income attributable to Select Medical Holdings Corporation	$	27,166	$	48,180	$	131,490	$	197,222
Earnings per common share (Note 12):
Basic and diluted	$	0.21	$	0.38	$	1.01	$	1.55

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 September 30,				For the Nine Months Ended September 30,
	2022		2023		2022		2023
Net income	$	38,126	$	60,816	$	160,314	$	237,933
Other comprehensive income (loss), net of tax:
Gain on interest rate cap contract	31,079		3,895		82,726		18,726
Reclassification adjustment for gains included in net income	(4,485)		(16,215)		(4,452)		(44,601)
Net change, net of tax benefit (expense) of $(8,865), $3,998, $(26,092), and $8,397	26,594		(12,320)		78,274		(25,875)
Comprehensive income	64,720		48,496		238,588		212,058
Less: Comprehensive income attributable to non-controlling interests	10,960		12,636		28,824		40,711
Comprehensive income attributable to Select Medical Holdings Corporation	$	53,760	$	35,860	$	209,764	$	171,347

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 Nine Months Ended September 30, 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 (loss)								(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
Net income attributable to Select Medical Holdings Corporation						78,237				78,237				78,237
Net income attributable to non-controlling interests										—		11,539		11,539
Cash dividends declared for common stockholders ($0.125 per share)						(15,924)				(15,924)				(15,924)
Issuance of restricted stock	261	0		0						—				—
Vesting of restricted stock				10,326						10,326				10,326
Repurchase of common shares	(49)	0		(634)		(872)				(1,506)				(1,506)
Issuance of non-controlling interests				1,870						1,870		10,211		12,081
Distributions to and purchases of non-controlling interests				195						195		(14,201)		(14,006)
Redemption value adjustment on non-controlling interests						(2)				(2)				(2)
Other comprehensive income								2,393		2,393				2,393
Balance at June 30, 2023	127,388	$	127	$	473,942	$	696,922	$	75,047	$	1,246,038	$	255,541	$	1,501,579
Net income attributable to Select Medical Holdings Corporation						48,180				48,180				48,180
Net income attributable to non-controlling interests										—		10,316		10,316
Cash dividends declared for common stockholders ($0.125 per share)						(16,035)				(16,035)				(16,035)
Issuance of restricted stock	1,217	1		(1)						—				—
Vesting of restricted stock				11,483						11,483				11,483
Repurchase of common shares	(318)	0		(3,866)		(5,678)				(9,544)				(9,544)
Issuance of non-controlling interests										—		5,651		5,651
Non-controlling interests acquired in business combination										—		5,130		5,130
Distributions to and purchases of non-controlling interests				732		(2,672)				(1,940)		(21,059)		(22,999)
Redemption value adjustment on non-controlling interests						1,912				1,912				1,912
Other comprehensive income								(12,320)		(12,320)				(12,320)
Other						36				36				36
Balance at September 30, 2023	128,287	$	128	$	482,290	$	722,665	$	62,727	$	1,267,810	$	255,579	$	1,523,389

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

6

	For the Nine Months Ended September 30, 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
Net income attributable to Select Medical Holdings Corporation						55,207				55,207				55,207
Net income attributable to non-controlling interests										—		9,155		9,155
Cash dividends declared for common stockholders ($0.125 per share)						(16,108)				(16,108)				(16,108)
Issuance of restricted stock	211	0		0						—				—
Forfeitures of unvested restricted stock	(6)	0		0		3				3				3
Vesting of restricted stock				8,406						8,406				8,406
Repurchase of common shares	(5,483)	(6)		(56,965)		(69,976)				(126,947)				(126,947)
Issuance of non-controlling interests										—		1,725		1,725
Distributions to and purchases of non-controlling interests				534						534		(7,348)		(6,814)
Redemption value adjustment on non-controlling interests						355				355				355
Other comprehensive loss								11,827		11,827				11,827
Other						(4)				(4)				(4)
Balance at June 30, 2022	126,491	$	126	$	441,769	$	565,556	$	63,962	$	1,071,413	$	232,288	$	1,303,701
Net income attributable to Select Medical Holdings Corporation						27,166				27,166				27,166
Net income attributable to non-controlling interests										—		8,720		8,720
Cash dividends declared for common stockholders ($0.125 per share)						(15,893)				(15,893)				(15,893)
Issuance of restricted stock	1,228	1		(1)						—				—
Forfeitures of unvested restricted stock	(6)	0		0		3				3				3
Vesting of restricted stock				9,649						9,649				9,649
Repurchase of common shares	(569)	0		(6,574)		(8,417)				(14,991)				(14,991)
Issuance of non-controlling interests										—		142		142
Distributions to and purchases of non-controlling interests						(2,450)				(2,450)		(12,226)		(14,676)
Redemption value adjustment on non-controlling interests						4,108				4,108				4,108
Other comprehensive loss								26,594		26,594				26,594
Other						(4)				(4)				(4)
Balance at September 30, 2022	127,144	$	127	$	444,843	$	570,069	$	90,556	$	1,105,595	$	228,924	$	1,334,519

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

7

Select Medical Holdings Corporation

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in thousands)

	For the Nine Months Ended September 30,
	2022		2023
Operating activities
Net income	$	160,314	$	237,933
Adjustments to reconcile net income to net cash provided by operating activities:
Distributions from unconsolidated subsidiaries	16,892		9,896
Depreciation and amortization	153,579		154,758
Provision for expected credit losses	(41)		1,101
Equity in earnings of unconsolidated subsidiaries	(19,648)		(30,618)
Loss on extinguishment of debt	—		175
Gain on sale or disposal of assets	(1,593)		(7)
Stock compensation expense	27,956		31,991
Amortization of debt discount, premium and issuance costs	1,696		1,899
Deferred income taxes	(7,080)		(17,049)
Changes in operating assets and liabilities, net of effects of business combinations:
Accounts receivable	(19,686)		(3,014)
Other current assets	2,923		(17,276)
Other assets	9,650		7,028
Accounts payable	(22,185)		4,788
Accrued expenses	52,352		21,011
Government advances	(82,848)		—
Net cash provided by operating activities	272,281		402,616
Investing activities
Business combinations, net of cash acquired	(22,027)		(20,482)
Purchases of property, equipment, and other assets	(135,119)		(168,597)
Investment in businesses	(17,323)		(9,874)
Proceeds from sale of assets	5,364		60
Net cash used in investing activities	(169,105)		(198,893)
Financing activities
Borrowings on revolving facilities	845,000		635,000
Payments on revolving facilities	(625,000)		(740,000)
Proceeds from term loans	—		2,092,232
Payments on term loans	—		(2,108,694)
Borrowings of other debt	20,866		30,849
Principal payments on other debt	(25,165)		(38,298)
Dividends paid to common stockholders	(48,692)		(47,856)
Repurchase of common stock	(193,614)		(11,050)
Decrease in overdrafts	(9,091)		(1,967)
Proceeds from issuance of non-controlling interests	7,096		20,463
Distributions to and purchases of non-controlling interests	(40,663)		(54,868)
Net cash used in financing activities	(69,263)		(224,189)
Net increase (decrease) in cash and cash equivalents	33,913		(20,466)
Cash and cash equivalents at beginning of period	74,310		97,906
Cash and cash equivalents at end of period	$	108,223	$	77,440
Supplemental information
Cash paid for interest, excluding amounts received of $6,232 and $60,353 under the interest rate cap contract	$	143,455	$	221,697
Cash paid for taxes	24,844		78,502

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

8

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 September 30, 2023, and for the three and nine month periods ended September 30, 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 and nine months ended September 30, 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.

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 15% of the Company’s accounts receivable is due from Medicare at both December 31, 2022, and September 30, 2023, respectively.

9

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:

	Nine Months Ended September 30,
	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
Net income attributable to redeemable non-controlling interests	1,900		2,084
Distributions to and purchases of redeemable non-controlling interests	(1,553)		(2,110)
Redemption value adjustment on redeemable non-controlling interests	(355)		2
Other	535		—
Balance as of June 30	$	42,197	$	34,375
Net income attributable to redeemable non-controlling interests	2,240		2,320
Distributions to and purchases of redeemable non-controlling interests	(7,325)		(7,784)
Redemption value adjustment on redeemable non-controlling interests	(4,108)		(1,912)
Other	536		—
Balance as of September 30	$	33,540	$	26,999

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 September 30, 2023, the total assets of the Company’s variable interest entities were $232.1 million and $273.4 million, respectively, and are principally comprised of accounts receivable. As of December 31, 2022, and September 30, 2023, the total liabilities of the Company’s variable interest entities were $78.8 million and $85.8 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 $195.1 million as of December 31, 2022, and September 30, 2023, respectively. These intercompany balances are eliminated in consolidation.

10

6.     Leases

The Company’s total lease cost is as follows:

	Three Months Ended September 30, 2022						Three Months Ended September 30, 2023
	Unrelated Parties		Related Parties		Total		Unrelated Parties		Related Parties		Total
	(in thousands)
Operating lease cost	$	73,795	$	1,810	$	75,605	$	78,147	$	1,834	$	79,981
Finance lease cost:
Amortization of right-of-use assets	381		—		381		387		—		387
Interest on lease liabilities	335		—		335		352		—		352
Short-term lease cost	24		—		24		—		—		—
Variable lease cost	14,855		141		14,996		16,562		—		16,562
Sublease income	(1,963)		—		(1,963)		(1,633)		—		(1,633)
Total lease cost	$	87,427	$	1,951	$	89,378	$	93,815	$	1,834	$	95,649

	Nine Months Ended September 30, 2022						Nine Months Ended September 30, 2023
	Unrelated Parties		Related Parties		Total		Unrelated Parties		Related Parties		Total
	(in thousands)
Operating lease cost	$	221,726	$	5,428	$	227,154	$	231,671	$	5,501	$	237,172
Finance lease cost:
Amortization of right-of-use assets	1,105		—		1,105		1,185		—		1,185
Interest on lease liabilities	1,011		—		1,011		1,059		—		1,059
Short-term lease cost	74		—		74		—		—		—
Variable lease cost	42,917		321		43,238		48,854		84		48,938
Sublease income	(5,869)		—		(5,869)		(5,027)		—		(5,027)
Total lease cost	$	260,964	$	5,749	$	266,713	$	277,742	$	5,585	$	283,327

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7.     Long-Term Debt and Notes Payable

As of September 30, 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	$	17,046	$	(8,697)	$	1,233,349	$	1,193,126
Credit facilities:
Revolving facility	340,000		—		—		340,000		331,500
Term loan	2,097,743		(12,999)		(3,487)		2,081,257		2,087,254
Other debt, including finance leases	75,804		—		(81)		75,723		75,723
Total debt	$	3,738,547	$	4,047	$	(12,265)	$	3,730,329	$	3,687,603

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	—		—		—		—		340,000		—		340,000
Term loan	5,258		21,030		21,030		21,030		2,029,395		—		2,097,743
Other debt, including finance leases	5,962		50,988		2,527		2,427		1,941		11,959		75,804
Total debt	$	11,220	$	72,018	$	23,557	$	1,248,457	$	2,371,336	$	11,959	$	3,738,547

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 July 31, 2023, the Company entered into Amendment No. 8 to the Select credit agreement. Amendment No. 8 provides for a new tranche of term loans in an aggregate principal amount of $2,103.0 million to replace the existing term loans and a $710.0 million new revolving credit facility to replace the $650.0 million existing revolving credit facility. The term loans and the extended revolving credit facility will mature on March 6, 2027, with an early springing maturity 90 days prior to the senior notes maturity, triggered if more than $300.0 million of senior notes remain outstanding on May 15, 2026. The term loans have an interest rate of Term SOFR plus 3.00% and the revolving credit facility has an interest rate of Adjusted Term SOFR (which includes a 0.10% credit spread adjustment) plus 2.50%, subject to a leverage-based pricing grid. During the three months ended September 30, 2023, the Company recognized a $14.7 million loss on early retirement of debt as a result of the amendment to the Select credit agreement.

On August 31, 2023, the Company entered into Amendment No. 9 to the Select credit agreement. Amendment No. 9 increased the revolving credit facility commitments from $710.0 million to $770.0 million.

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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. The term loan bears interest at a variable rate that is indexed to a benchmark which changed from LIBOR to SOFR on May 31, 2023. 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 variable rate index 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 the variable rate index 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:

	Nine Months Ended September 30,
	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
Gain on interest rate cap cash flow hedge	11,833		17,527
Amounts reclassified from accumulated other comprehensive income	(6)		(15,134)
Balance as of June 30	$	63,962	$	75,047
Gain on interest rate cap cash flow hedge	31,079		3,895
Amounts reclassified from accumulated other comprehensive income	(4,485)		(16,215)
Balance as of September 30	$	90,556	$	62,727

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

	Three Months Ended September 30,				Nine Months Ended September 30,
Statement of Operations	2022		2023		2022		2023
	(in thousands)
Gains included in interest expense	$	5,980	$	21,477	$	5,936	$	59,074
Income tax expense	(1,495)		(5,262)		(1,484)		(14,473)
Amounts reclassified from accumulated other comprehensive income	$	4,485	$	16,215	$	4,452	$	44,601

The Company expects that approximately $83.0 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.

13

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		September 30, 2023
Asset:			(in thousands)
Interest rate cap contract, current portion	Current portion of interest rate cap contract	Level 2	$	74,857	$	85,896
Interest rate cap contract, non-current portion	Interest rate cap contract, net of current portion	Level 2	45,200		—

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				September 30, 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	$	1,233,349	$	1,193,126
Credit facilities:
Revolving facility	Level 2	445,000		443,331		340,000		331,500
Term loan	Level 2	2,094,290		2,056,110		2,081,257		2,087,254

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 September 30,				Nine Months Ended September 30,
	2022		2023		2022		2023
	(in thousands)
Revenue:
Critical illness recovery hospital	$	524,584	$	563,628	$	1,672,247	$	1,732,645
Rehabilitation hospital	229,387		247,101		678,908		719,419
Outpatient rehabilitation	284,993		291,804		844,191		890,679
Concentra	444,576		473,964		1,309,356		1,397,341
Other	84,254		89,197		247,380		265,118
Total Company	$	1,567,794	$	1,665,694	$	4,752,082	$	5,005,202
Adjusted EBITDA:
Critical illness recovery hospital	$	11,013	$	46,362	$	66,999	$	188,631
Rehabilitation hospital	49,772		53,626		141,996		155,531
Outpatient rehabilitation	25,715		26,346		85,912		89,395
Concentra	90,025		98,907		272,101		293,046
Other(1)	(23,412)		(31,404)		(69,054)		(99,234)
Total Company	$	153,113	$	193,837	$	497,954	$	627,369
Total assets:
Critical illness recovery hospital	$	2,368,968	$	2,454,578	$	2,368,968	$	2,454,578
Rehabilitation hospital	1,189,486		1,222,853		1,189,486		1,222,853
Outpatient rehabilitation	1,377,010		1,401,148		1,377,010		1,401,148
Concentra	2,309,392		2,321,671		2,309,392		2,321,671
Other	310,120		283,758		310,120		283,758
Total Company	$