SELECT MEDICAL HOLDINGS CORP (SEM)

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read this discussion together with the consolidated financial statements and accompanying notes included elsewhere herein.

Overview

We began operations in 1997 and, based on number of facilities, are one of the largest operators of critical illness recovery hospitals, rehabilitation hospitals, and outpatient rehabilitation clinics in the United States. As of December 31, 2024, we had operations in 40 states and the District of Columbia. We operated 104 critical illness recovery hospitals in 29 states, 35 rehabilitation hospitals in 14 states, and 1,914 outpatient rehabilitation clinics in 39 states and the District of Columbia as of December 31, 2024.

On July 26, 2024, Concentra Group Holdings Parent (“Concentra”), a then wholly-owned subsidiary of Select, completed an IPO of 22,500,000 shares of its common stock, par value $0.01 per share, at an initial public offering price of $23.50 per share for net proceeds of $499.7 million after deducting underwriting discounts and commission of $29.1 million. In addition, the underwriters exercised the option to purchase an additional 750,000 shares of Concentra’s common stock for net proceeds of $16.7 million after deducting discounts and commission of $1.0 million. Concentra shares began trading on the New York Stock Exchange under the symbol “CON” on July 25, 2024.

After the closing of the IPO and underwriters option, Select owned 81.74% of the total outstanding shares of Concentra common stock. On November 25, 2024, Select completed a tax-free distribution of 104,093,503 shares of common stock of Concentra to its stockholders. Holders of the Company’s common stock received 0.806971 shares of Concentra common stock for each outstanding share of the Company’s common stock they owned as of the Record Date. Following the completion of the distribution, the Company no longer owns any shares of Concentra common stock. The historical results of Concentra (which previously represented the Concentra business segment) are reflected as discontinued operations in the Company’s Consolidated Financial Statements through the date of the distribution.

Our reportable segments include the critical illness recovery hospital segment, the rehabilitation hospital segment, and the outpatient rehabilitation segment. We had revenue of $5,187.1 million for the year ended December 31, 2024. Of this total, we earned approximately 47% of our revenue from our critical illness recovery hospital segment, approximately 21% from our rehabilitation hospital segment, and approximately 24% from our outpatient rehabilitation segment. Our critical illness recovery hospital segment consists of hospitals designed to serve the needs of patients recovering from critical illnesses, often with complex medical needs, and our rehabilitation hospital segment consists of hospitals designed to serve patients that require intensive physical rehabilitation care. Patients are typically admitted to our critical illness recovery hospitals and rehabilitation hospitals from general acute care hospitals. Our outpatient rehabilitation segment consists of clinics that provide physical, occupational, and speech rehabilitation services.

Impact of the Change Healthcare Cybersecurity Incident

On February 22, 2024, UnitedHealth Group Incorporated indicated in a Form 8-K filing, that a cyber security threat actor had gained access to some of its Change Healthcare information technology systems. Upon receiving notification of the incident, we severed connectivity with all Change Healthcare-related systems and we are not aware of any impact on our own information technology systems. However, as a result of the incident, certain of our patient billing and collections processes were disrupted and alternative platforms needed to be enabled to resume normal patient billing and collections operations. As of and for the year ended December 31, 2024, the incident did not have a material impact on our financial condition or operations.

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Non-GAAP Measure

We believe that the presentation of Adjusted EBITDA, as defined below, is important to investors because Adjusted EBITDA is commonly used as an analytical indicator of performance by investors within the healthcare industry. Adjusted EBITDA is used by management to evaluate financial performance and determine resource allocation for each of our segments. Adjusted EBITDA is not a measure of financial performance under accounting principles generally accepted in the United States of America (“GAAP”). Items excluded from Adjusted EBITDA are significant components in understanding and assessing financial performance. Adjusted EBITDA should not be considered in isolation, or as an alternative to, or substitute for, income from continuing operations, income from continuing operations before other income and expense, cash flows generated by operations, investing or financing activities, or other financial statement data presented in the consolidated financial statements as indicators of financial performance or liquidity. Because Adjusted EBITDA is not a measurement determined in accordance with GAAP and is thus susceptible to varying definitions, Adjusted EBITDA as presented may not be comparable to other similarly titled measures of other companies.

We define Adjusted EBITDA as earnings from continuing operations 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. We will refer to Adjusted EBITDA throughout the remainder of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following table reconciles income from continuing operations, net of tax, to Adjusted EBITDA and should be referenced when we discuss Adjusted EBITDA.

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Summary Financial Results

Income from continuing operations, net of tax, was $130.0 million, $110.5 million, and $18.5 million for the years ended December 31, 2024, 2023, and 2022, respectively. Income from continuing operations, net of tax, included losses on early retirement of debt of $28.8 million and $14.7 million during the years ended December 31, 2024 and 2023, respectively.

The following tables reconcile our segment performance measures to our consolidated operating results for the years ended December 31, 2024, 2023, and 2022:

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The following tables summarize the changes in our segment performance measures for the year-to-date periods specified below.

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N/M    Not meaningful.

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Regulatory Changes

The Medicare program reimburses healthcare providers for services furnished to Medicare beneficiaries, which are generally persons age 65 and older, those who are chronically disabled, and those suffering from end stage renal disease. The program is governed by the Social Security Act of 1965 and is administered primarily by the Department of Health and Human Services and CMS. Revenues from providing services to patients covered under the Medicare program represented approximately 31%, 31%, and 29% of our revenue for the years ended December 31, 2022, 2023, and 2024, respectively.

The Medicare program reimburses various types of providers using different payment methodologies. Those payment methodologies are complex and are described elsewhere in this report under “Business—Government Regulations.” The following is a discussion of some of the more significant healthcare regulatory changes that have affected our financial performance in the periods covered by this report or are likely to affect our financial performance and financial condition in the future.

Federal Health Care Program Changes in Response to the COVID-19 Pandemic

On January 31, 2020, HHS declared a public health emergency under section 319 of the Public Health Service Act, 42 U.S.C. § 247d, in response to the COVID-19 outbreak in the United States. The HHS Secretary subsequently renewed the public health emergency determination for 90-day periods through May 11, 2023, the end of the public health emergency.

On March 13, 2020, President Trump declared a national emergency due to the COVID-19 pandemic and the HHS Secretary authorized the waiver or modification of certain requirements under Medicare, Medicaid, and the CHIP program pursuant to section 1135 of the Social Security Act. Under this authority, CMS issued a number of blanket waivers that excused health care providers and suppliers from specific program requirements. Our Annual Report on Form 10-K for the year ended December 31, 2023 contains a detailed discussion of blanket waivers and other actions by CMS in response to the COVID-19 pandemic that affected our operations in Part II — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Regulatory Changes.

One of the blanket waivers expanded the types of health care professionals who could furnish telehealth services to include all those who are eligible to bill Medicare for their professional services. This allowed health care professionals who were previously ineligible to furnish and bill for Medicare telehealth services, including physical therapists, occupational therapists, speech language pathologists, and others, to receive payment for Medicare telehealth services. Pursuant to the Coronavirus Preparedness and Response Supplemental Appropriations Act, Public Law 116-123, CMS also waived Medicare telehealth payment requirements during the emergency so that beneficiaries in all areas of the country (not just rural areas) could receive telehealth services, including in their homes. In the Health Extenders, Improving Access to Medicare, Medicaid, and CHIP, and Strengthening Public Health Act of 2022, Congress extended to December 31, 2024 several telehealth flexibilities that were scheduled to expire 151 days after the end of the COVID-19 public health emergency, including the expansion of permitted originating sites for telehealth, expansion of eligible practitioners for furnishing telehealth, and coverage of audio-only telehealth services. CMS issued additional waivers to permit more than 150 additional services to be furnished by telehealth, allow physicians to monitor patient services remotely, and fulfill face-to-face requirements in IRFs. In the calendar year 2025 MPFS final rule, CMS extended some of the telehealth flexibilities through December 31, 2025, including regulations that allow (1) the use of real-time audio and visual interactive telecommunications for compliance with the direct supervision requirement, and (2) a distant site practitioner to provide telehealth services from their home using their currently enrolled practice location. CMS also made a permanent change to the telehealth rules in the calendar year 2025 MPFS final rule to allow telehealth to be provided for any service using an audio-only communication technology in certain situations when the patient is not able to use video technology.

Pursuant to the Coronavirus Preparedness and Response Supplemental Appropriations Act, Public Law 116-123, CMS also waived Medicare telehealth payment requirements during the emergency so that beneficiaries in all areas of the country (not just rural areas) could receive telehealth services, including in their homes. In the Health Extenders, Improving Access to Medicare, Medicaid, and CHIP, and Strengthening Public Health Act of 2022, Congress extended to December 31, 2024 several telehealth flexibilities that were scheduled to expire 151 days after the end of the COVID-19 public health emergency, including the expansion of permitted originating sites for telehealth, expansion of eligible practitioners for furnishing telehealth, and coverage of audio-only telehealth services. CMS issued additional waivers to permit more than 150 additional services to be furnished by telehealth, allow physicians to monitor patient services remotely, and fulfill face-to-face requirements in IRFs. In the calendar year 2025 MPFS final rule, CMS extended some of the telehealth flexibilities through December 31, 2025, including regulations that allow (1) the use of real-time audio and visual interactive telecommunications for compliance with the direct supervision requirement, and (2) a distant site practitioner to provide telehealth services from their home using their currently enrolled practice location. CMS also made a permanent change to the telehealth rules in the calendar year 2025 MPFS final rule to allow telehealth to be provided for any service using an audio-only communication technology in certain situations when the patient is not able to use video technology.

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Medicare Reimbursement of LTCH Services

The following is a summary of significant regulatory changes to the Medicare prospective payment system for our critical illness recovery hospitals, which are certified by Medicare as LTCHs, which have affected our results of operations, as well as the policies and payment rates that may affect our future results of operations. Medicare payments to our critical illness recovery hospitals are made in accordance with LTCH-PPS.

Fiscal Year 2023. On August 10, 2022, CMS published the final rule updating policies and payment rates for the LTCH-PPS for fiscal year 2023 (affecting discharges and cost reporting periods beginning on or after October 1, 2022, through September 30, 2023). Certain errors in the final rule were corrected in documents published November 4, 2022, and December 13, 2022. The standard federal rate for fiscal year 2023 was set at $46,433, an increase from the standard federal rate applicable during fiscal year 2022 of $44,714. The update to the standard federal rate for fiscal year 2023 included a market basket increase of 4.1%, less a productivity adjustment of 0.3%. The standard federal rate also included an area wage budget neutrality factor of 1.0004304. As a result of the CARES Act, LTCH cases were paid at the standard federal rate during the public health emergency. When the public health emergency ended on May 11, 2023, CMS returned to using the site-neutral payment rate for reimbursement of cases that did not meet the LTCH patient criteria. The fixed-loss amount for high cost outlier cases paid under LTCH-PPS was set at $38,518, an increase from the fixed-loss amount in the 2022 fiscal year of $33,015. The fixed-loss amount for high cost outlier cases paid under the site-neutral payment rate was set at $38,788, an increase from the fixed-loss amount in the 2022 fiscal year of $30,988.

Fiscal Year 2024. On August 28, 2023, CMS published the final rule updating policies and payment rates for the LTCH-PPS for fiscal year 2024 (affecting discharges and cost reporting periods beginning on or after October 1, 2023, through September 30, 2024). Certain errors in the final rule were corrected in documents published October 4, 2023 and November 9, 2023. The standard federal rate for fiscal year 2024 was set at $48,117, an increase from the standard federal rate applicable during fiscal year 2023 of $46,433. The update to the standard federal rate for fiscal year 2024 included a market basket increase of 3.5%, less a productivity adjustment of 0.2%. The standard federal rate also included an area wage budget neutrality factor of 1.0031599. The fixed-loss amount for high cost outlier cases paid under LTCH-PPS was set at $59,873, an increase from the fixed-loss amount in the 2023 fiscal year of $38,518. The fixed-loss amount for high cost outlier cases paid under the site-neutral payment rate was set at $42,750, an increase from the fixed-loss amount in the 2023 fiscal year of $38,788.

Fiscal Year 2025. On August 28, 2024, CMS published a final rule updating policies and payment rates for the LTCH-PPS for fiscal year 2025 (affecting discharges and cost reporting periods beginning on or after October 1, 2024, through September 30, 2025). Certain errors in the final rule were corrected in a document published on October 2, 2024. In an interim final action document published on October 3, 2024, CMS also made modifications to the fiscal year 2025 policies and payment rates as a result of a recent decision issued by the United States Court of Appeals for the District of Columbia Circuit. The standard federal rate for fiscal year 2025 is $49,383, an increase from the standard federal rate applicable during fiscal year 2024 of $48,117. The update to the standard federal rate for fiscal year 2025 includes a market basket increase of 3.5%, less a productivity adjustment of 0.5%. The standard federal rate also includes an area wage budget neutrality factor of 0.9964315. The fixed-loss amount for high cost outlier cases paid under LTCH-PPS is $77,048, an increase from the fixed-loss amount in the 2024 fiscal year of $59,873. The fixed-loss amount for high cost outlier cases paid under the site-neutral payment rate is $46,217, an increase from the fixed-loss amount in the 2024 fiscal year of $42,750. See high cost outlier risk factor within “Item 1A.    Risk Factors.

Criteria for Reconciliation of Outlier Payments

Under the LTCH PPS, CMS makes two types of outlier payments to LTCHs. First, CMS makes additional payments to LTCHs for high cost outlier cases that have extraordinarily high costs relative to the costs of most discharges. For these cases, CMS sets a fixed loss amount each year that represents the maximum loss an LTCH will incur for a case before qualifying for a high cost outlier payment. A high cost outlier threshold equal to the LTCH PPS adjusted Federal payment for the case plus the fixed loss amount determines when Medicare pays a high cost outlier payment. Such payments are based on 80% of the estimated cost of the case above the high cost outlier threshold. Second, CMS reduces payments to LTCHs for patients with a relatively short stay, which is defined as a length of stay less than or equal to five-sixths of the geometric average length of stay for that particular MS-LTC-DRG. Short stay outlier cases are paid using a per diem rate based on 120% of the MS-LTC-DRG specific per diem amount and an IPPS per diem amount.

Outlier payments made to LTCHs during the cost reporting year may be reconciled at cost report settlement by the Medicare Administrative Contractor (“MAC”) if certain criteria are met. According to CMS, the reconciliation of outlier payments is intended to account for the fact that the LTCH’s cost-to-charge ratio (“CCR”) used to pay Medicare claims during the cost reporting year may differ from the LTCH’s final CCR for the year calculated by the MAC at cost report settlement. The outlier reconciliation criteria were: (1) a change in the LTCH’s CCR of 10 percentage points or more when comparing the actual CCR to the CCR used during the cost reporting period to make outlier payments; and (2) the LTCH received at least

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$500,000 in outlier payments during the cost reporting period. If the criteria for outlier reconciliation are met, the MAC will conduct an outlier reconciliation to determine whether the LTCH was overpaid or underpaid for outlier cases. If the LTCH was overpaid, the LTCH must repay Medicare in the amount of the overpayment plus the time value of money (i.e., interest). If the LTCH was underpaid, Medicare must pay the LTCH in the amount of the underpayment plus the time value of money.

On April 26, 2024, CMS issued new guidance in Transmittal 12594 changing the criteria for LTCH outlier reconciliations. CMS modified the first criterion to a change in the LTCH’s CCR of 20 percent or more from the CCR used to make outlier payments during the cost reporting period. CMS did not change the second criterion for reconciliation that the LTCH must have received at least $500,000 in outlier payments during the cost reporting period. The revised policy is effective for cost reporting periods beginning on or after October 1, 2024. However, CMS notes that MACs would receive the first cost reports subject to the revised policy in March 2026.

Setting the threshold at 20 percent for changes in the hospital’s CCR will result in more outlier reconciliations. This increases the likelihood that LTCHs will have a portion of their outlier payments recouped by the MAC at cost report settlement. Because outlier reconciliations often delay the final settlement of cost reports, and providers cannot appeal disputed reimbursement amounts until the cost report is settled, this new policy will likely result in additional delays of reimbursement appeals related to LTCH cost reports.

Medicare Reimbursement of IRF Services

The following is a summary of significant regulatory changes to the Medicare prospective payment system for our rehabilitation hospitals, which are certified by Medicare as IRFs, which have affected our results of operations, as well as the policies and payment rates that may affect our future results of operations. Medicare payments to our rehabilitation hospitals are made in accordance with IRF-PPS.

Fiscal Year 2023. On August 1, 2022, CMS published the final rule updating policies and payment rates for the IRF-PPS for fiscal year 2023 (affecting discharges and cost reporting periods beginning on or after October 1, 2022, through September 30, 2023). The standard payment conversion factor for discharges for fiscal year 2023 was set at $17,878, an increase from the standard payment conversion factor applicable during fiscal year 2022 of $17,240. The update to the standard payment conversion factor for fiscal year 2023 included a market basket increase of 4.2%, less a productivity adjustment of 0.3%. CMS increased the outlier threshold amount for fiscal year 2023 to $12,526 from $9,491 established in the final rule for fiscal year 2022.

Fiscal Year 2024. On August 2, 2023, CMS published the final rule updating policies and payment rates for the IRF-PPS for fiscal year 2024 (affecting discharges and cost reporting periods beginning on or after October 1, 2023, through September 30, 2024). Certain errors in the final rule were corrected in a document published on October 4, 2023. The standard payment conversion factor for discharges for fiscal year 2024 was set at $18,541, an increase from the standard payment conversion factor applicable during fiscal year 2022 of $17,878. The update to the standard payment conversion factor for fiscal year 2024 included a market basket increase of 3.6%, less a productivity adjustment of 0.2%. CMS decreased the outlier threshold amount for fiscal year 2024 to $10,423 from $12,526 established in the final rule for fiscal year 2023.

Fiscal Year 2025. On August 6, 2024, CMS published the final rule to update policies and payment rates for the IRF-PPS for fiscal year 2025 (affecting discharges and cost reporting periods beginning on or after October 1, 2024, through September 30, 2025). Certain errors in the final rule were corrected in a document published on October 2, 2024. The standard payment conversion factor for discharges for fiscal year 2025 was set at $18,907, an increase from the standard payment conversion factor applicable during fiscal year 2024 of $18,541. The update to the standard payment conversion factor for fiscal year 2025 included a market basket increase of 3.5%, less a productivity adjustment of 0.5%. CMS increased the outlier threshold amount for fiscal year 2025 to $12,043 from $10,423 established in the final rule for fiscal year 2024.

Medicare Reimbursement of Outpatient Rehabilitation Clinic Services

The Medicare program reimburses outpatient rehabilitation providers based on the MPFS. Outpatient rehabilitation providers may enroll in Medicare as institutional outpatient rehabilitation facilities (i.e., rehab agencies) or individual physical or occupational therapists in private practice. The majority of our providers are reimbursed through enrolled rehab agencies while the remaining balance of our clinicians are enrolled as individual physical or occupational therapists in private practice. The following is a summary of significant regulatory changes which have affected our results of operations as well as the policies and payment rates that may affect our future results of operations.

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For calendar years 2021 and 2022, CMS’s expected decreases in Medicare reimbursement were mostly offset by one-time increases in payments as a result of other legislation passed by Congress. Payments under the 2023 MPFS physician fee schedule decreased by 2%, and for calendar year 2024, CMS expected that its final policies for 2024 would result in a 3% decrease in Medicare payments for the therapy specialty. In the calendar year 2025 MPFS final rule, CMS calculated the payment rates without the one-time increases provided for in legislation. CMS expects that its policies for 2025 will not result in any increase or decrease in Medicare payments for the therapy specialty. However, the policies CMS announced in the calendar year 2025 MPFS final rule will reduce Medicare payments for the physical and occupational therapy services we provide by approximately 3%.

Modifiers to Identify Services of Physical Therapy Assistants or Occupational Therapy Assistants

In the final 2020 MPFS rule, CMS clarified that when the physical therapist is involved for the entire duration of the service and the PTA provides skilled therapy alongside the physical therapist, the CQ modifier is not required. Also, when the same service (code) is furnished separately by the physical therapist and PTA, CMS applies the de minimis standard to each 15-minute unit of codes, not on the total physical therapist and PTA time of the service. For dates of service on and after January 1, 2022, CMS pays for physical therapy and occupational therapy services provided by PTAs and OTAs at 85% of the otherwise applicable Part B payment amount. CMS allows a timed service to be billed without the CQ or CO modifier when a PTA or OTA participates in providing care, but the physical therapist or occupational therapist meets the Medicare billing requirements without including the PTA’s or OTA’s minutes. This occurs when the physical therapist or occupational therapist provides more minutes than the 15-minute midpoint. The calendar year 2025 MPFS final rule did not contain any policy changes concerning the modifiers for services provided by physical therapy and occupational therapy assistants.

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Critical Accounting Estimates

Revenue Recognition and Accounts Receivable

Our principal revenue source comes from providing healthcare services to patients. Patient service revenues are recognized at an amount equal to the consideration we expect to be entitled to in exchange for providing healthcare services to our patients. Revenue earned from these services is variable in nature, as we are required to make judgments that impact the transaction price.

We determine the transaction price for services provided to patients who are Medicare beneficiaries using Medicare’s prospective payment systems and other payment methods. The expected payment is determined by the level of clinical services provided and is sensitive to the patient’s length of stay. Additionally, we are paid by various other non-Medicare payor sources including, but not limited to, insurance companies (including Medicare Advantage plans), state Medicaid programs, workers’ compensation programs, health maintenance organizations, preferred provider organizations, other managed care companies and employers, as well as patients themselves. The transaction price for services provided to non-Medicare patients include amounts prescribed by state and federal fee schedules, negotiated contracted amounts, or usual and customary amounts associated with the specific payor or based on the service provided. We apply a portfolio approach in determining revenues for certain homogeneous non-Medicare patient populations.

There is variability in the transaction price for services provided to our patients, as the transaction price is impacted by several factors, such as the patient’s condition and length of stay, which in turn impact the payment we expect to receive for providing such services. Variable consideration included in the transaction price is inclusive of our estimates of implicit discounts and other adjustments related to timely filing and documentation denials, out of network adjustments, and medical necessity denials, which are estimated using our historical experience. We are also subject to regular post-payment inquiries, investigations, and audits of the claims we submit for services provided. Some claims can take several years for resolution and may result in adjustments to the transaction price. Management includes in its estimates of the transaction price its expectations for these types of adjustments such that the amount of cumulative revenue recognized will not be subject to significant reversal in future periods. Historically, adjustments arising from a change in the transaction price have not been significant.

Our accounts receivable is reported at an amount equal to the amount we expect to collect for providing healthcare services to our patients. Because our accounts receivable is typically paid for by highly-solvent, creditworthy payors, such as Medicare, other governmental programs, and highly-regulated commercial insurers on behalf of the patient, our credit losses are infrequent and insignificant in nature; as such, we generally do not recognize allowances for expected credit losses.

Insurance Risk Programs

Under a number of our insurance programs, which include our employee health insurance, workers’ compensation, and professional malpractice liability, we are liable for a portion of our losses before we can attempt to recover from the applicable insurance carrier. We accrue for losses under an occurrence-based approach, whereby we estimate the losses that will be incurred in a respective accounting period. The estimate of losses includes actuarial loss projections of both known claims and incurred but not reported claims. These estimates are based on specific claim facts, claim frequency and severity, payment patterns for historical claims, and estimates of fees for outside counsel. In addition to the actuarial loss projections, insurance premiums and out-of-pocket expenses for the administration and analysis of claims are included in the estimate of losses accrued in a respective accounting period.

We monitor these programs quarterly and revise our estimates as necessary to take into account additional information. We recorded a liability of $132.1 million and $141.6 million for our estimated losses under these insurance programs at December 31, 2023 and 2024, respectively. We also recorded insurance proceeds receivable of $8.1 million and $8.5 million, respectively, at December 31, 2023 and 2024, for liabilities which exceed our deductibles and self-insured retention limits and are recoverable through our insurance policies.

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Goodwill

We operate three reporting units which include the critical illness recovery hospital reporting unit, the rehabilitation hospital reporting unit, and the outpatient rehabilitation reporting unit. We assign goodwill to our reporting units based upon the specific nature of the business acquired or, when a business combination contains business components related to more than one reporting unit, goodwill is assigned to each reporting unit based upon an allocation determined by the relative fair values of the business acquired. When we dispose of a business, we allocate a portion of the reporting unit’s goodwill to that business based on the relative fair values of the portion of the reporting unit being disposed of and the portion of the reporting unit remaining. We evaluate our reporting units on an annual basis and, if our reporting units are reorganized, we reassign goodwill based on the relative fair values of the new reporting units.

We have elected to perform our annual goodwill impairment assessments as of October 1. We also test goodwill for impairment when events or conditions occur that might suggest a possible impairment. These events or conditions could include a significant change in the business environment, the regulatory environment, or legal factors; a current period operating or cash flow loss combined with a history of such losses or a projection of continuing losses; or a sale or disposition of a significant portion of a reporting unit.

As of October 1, 2024, we performed a qualitative impairment assessment for the rehabilitation hospital reporting unit, the critical illness recovery hospital reporting unit, and the former Concentra reporting unit. When performing the qualitative assessment, we apply judgement in determining the events and circumstances that most affect the fair value of the reporting unit and in evaluating the significance of those identified events and circumstances in order to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. As part of our qualitative assessments, we considered (i) the magnitude of the reporting unit’s excess fair value over its carrying amount from the most recent quantitative impairment test, (ii) industry and market conditions, including the impacts of the interest rate environment, (iii) historical financial performance, including our revenue, earnings, and operating cash flow growth trends, (iv) our forecasts of revenue, earnings, and operating cash flows, (v) cost factors, including the effects of inflation and rising prices, (vi) the regulatory environment, including reimbursement and compliance requirements such as those that exist under the Medicare program, (vii) other factors specific to each reporting unit, such as a change in strategy, a change in management, or acquisitions and divestitures affecting the composition of the reporting unit and its future operating results, and (viii) consideration of changes in our market capitalization. Historically, each reporting unit’s fair value has significantly exceeded its carrying amount.

We performed a quantitative impairment assessment for the outpatient rehabilitation reporting unit as of October 1, 2024, to assess the impact of the current operating performance as compared to historical operating trends on the estimated fair value of the reporting unit. We used the income approach in determining the fair value of the outpatient rehabilitation reporting unit. Included in the income approach are assumptions regarding revenue growth rates, future Adjusted EBITDA margin estimates, future capital expenditure requirements, the industry’s weighted average cost of capital, and industry specific, market observable implied Adjusted EBITDA multiples. We also include estimated residual values at the end of the forecast period. In establishing our assumptions, we consider current industry and market conditions; historical financial performance, including our revenue, earnings, and operating cash flow growth trends; cost factors, including the effects of inflation and rising prices; and the regulatory environment, including reimbursement and compliance requirements such as those that exist under the Medicare program. If any one of the above assumptions or judgments used to estimate the fair value of the reporting unit fails to materialize, the resulting decline in our estimated fair value could result in an impairment charge to the goodwill associated with the outpatient rehabilitation reporting unit.

Our annual assessment did not indicate that goodwill impairment was likely for any of our reporting units. We did not identify any goodwill impairment events during the quarter ended December 31, 2024.

We have recorded total goodwill of $2.3 billion at December 31, 2024, of which $1.2 billion related to our critical illness recovery hospital reporting unit, $497.1 million related to our rehabilitation hospital reporting unit, and $668.9 million related to our outpatient rehabilitation reporting unit.

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Operating Statistics

The following table sets forth operating statistics for each of our segments for the periods presented. The operating statistics reflect data for the period of time we managed these operations. Our operating statistics include metrics we believe provide relevant insight about the number of facilities we operate, volume of services we provide to our patients, and average payment rates for services we provide. These metrics are utilized by management to monitor trends and performance in our businesses and therefore may be important to investors because management may assess our performance based in part on such metrics. Other healthcare providers may present similar statistics, and these statistics are susceptible to varying definitions. Our statistics as presented may not be comparable to other similarly titled statistics of other companies.

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(1)Represents the number of hospitals included in our consolidated financial results at the end of each period presented.

(2)Represents the number of hospitals which are managed by us at the end of each period presented. We have minority ownership interests in these businesses.

(3)Data excludes locations managed by the Company.

(4)Represents the number of patients admitted to our hospitals during the periods presented.

(5)Each patient day represents one patient occupying one bed for one day during the periods presented.

(6)Represents the average number of days in which patients were admitted to our hospitals. Average length of stay is calculated by dividing the number of patient days, as presented above, by the number of patients discharged from our hospitals during the periods presented.

(7)Represents the average amount of revenue recognized for each patient day. Revenue per patient day is calculated by dividing patient service revenues, excluding revenues from certain other ancillary and outpatient services provided at our hospitals, by the total number of patient days.

(8)Represents the portion of our hospitals being utilized for patient care during the periods presented. Occupancy rate is calculated using the number of patient days, as presented above, divided by the total number of bed days available during the period. Bed days available is derived by adding the daily number of available licensed beds for each of the periods presented.

(9)Represents the portion of our patient days which are paid by Medicare. The Medicare patient day percentage is calculated by dividing the total number of patient days which are paid by Medicare by the total number of patient days, as presented above.

(10)Represents the number of visits in which patients were treated at our outpatient rehabilitation clinics during the periods presented.

(11)Represents the average amount of revenue recognized for each patient visit. Revenue per visit is calculated by dividing patient service revenue, excluding revenues from certain other ancillary services, by the total number of visits.

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Results of Operations

The following table outlines selected operating data as a percentage of revenue for the periods indicated:

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(1)Cost of services includes personnel expense, facilities expense, and other operating costs.

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The following table summarizes selected financial data by segment for the periods indicated:

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(1)Other includes our corporate administration and shared services, as well as employee leasing services with our non-consolidating subsidiaries. Total assets include certain non-consolidating joint ventures and minority investments in other healthcare related businesses.

(2)For the years ended December 31, 2024, 2023, and 2022, we recognized other operating income of $3.4 million, $1.5 million, and $28.5 million, respectively. The impact of this income on the operating results of our segments and other activities is outlined within the tables presented under “Summary Financial Results.”

N/M     Not meaningful.

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Year Ended December 31, 2024 Compared to Year Ended December 31, 2023

For the year ended December 31, 2024, we had revenue of $5,187.1 million and income from continuing operations before other income and expense of $268.3 million, as compared to revenue of $4,826.0 million and income from continuing operations before other income and expense of $267.2 million for the year ended December 31, 2023. For the year ended December 31, 2024, Adjusted EBITDA was $510.4 million, with an Adjusted EBITDA margin of 9.8%, as compared to Adjusted EBITDA of $446.1 million and an Adjusted EBITDA margin of 9.2% in the prior year.

The improvement in our financial performance for the year ended December 31, 2024, as compared to the year ended December 31, 2023, was principally attributable to the increase in revenue in our Critical Illness Recovery Hospital and Rehabilitation Hospital segments, as discussed below under “Revenue.”

Revenue

Critical Illness Recovery Hospital Segment. Revenue increased 6.3% to $2,444.2 million for the year ended December 31, 2024, compared to $2,299.8 million for the year ended December 31, 2023. The increase was attributable to revenue per patient day, which increased 5.3% to $2,177 for the year ended December 31, 2024, compared to $2,067 for the year ended December 31, 2023. Our patient days increased 0.9% to 1,118,757 for the year ended December 31, 2024, compared to 1,108,492 patient days for the year ended December 31, 2023. Occupancy in our critical illness recovery hospitals was 68% for the years ended December 31, 2024 and 2023.

Rehabilitation Hospital Segment. Revenue increased 13.4% to $1,110.6 million for the year ended December 31, 2024, compared to $979.6 million for the year ended December 31, 2023. Our revenue per patient day increased 5.8% to $2,134 for the year ended December 31, 2024, compared to $2,017 for the year ended December 31, 2023. Our patient days increased 5.5% to 470,594 days for the year ended December 31, 2024, compared to 446,145 days for the year ended December 31, 2023. Occupancy in our rehabilitation hospitals was 84% for the year ended December 31, 2024, compared to 85% for the year ended December 31, 2023.

Outpatient Rehabilitation Segment. Revenue increased 5.2% to $1,250.3 million for the year ended December 31, 2024, compared to $1,188.9 million for the year ended December 31, 2023. The increase was principally attributable to patient visits, which increased 4.6% to 11,147,920 for the year ended December 31, 2024, compared to 10,657,558 visits for the year ended December 31, 2023. Our revenue per visit increased 1.0% to $101 for the year ended December 31, 2024, compared to $100 for the year ended December 31, 2023.

Operating Expenses

Our operating expenses consist principally of cost of services and general and administrative expenses. Our operating expenses were $4,779.3 million, or 92.2% of revenue, for the year ended December 31, 2024, compared to $4,424.6 million, or 91.7% of revenue, for the year ended December 31, 2023. Our cost of services, a major component of which is labor expense, was $4,553.5 million, or 87.8% of revenue, for the year ended December 31, 2024, compared to $4,254.4 million, or 88.2% of revenue, for the year ended December 31, 2023. General and administrative expenses were $225.9 million, or 4.4% of revenue, for the year ended December 31, 2024, compared to $170.2 million, or 3.5% of revenue, for the year ended December 31, 2023. The increase in general and administrative expenses relative to our revenue was principally attributable to the accelerated recognition of $33.4 million of stock compensation expense recognized as a result of modifications to the restricted stock awards, as described in Note 17 - Stock-based Compensation.

Other Operating Income

For the year ended December 31, 2024, we had other operating income of $3.4 million, compared to $1.5 million for the year ended December 31, 2023.

Adjusted EBITDA

Critical Illness Recovery Hospital Segment. Adjusted EBITDA increased 22.6% to $301.6 million for the year ended December 31, 2024, compared to $246.0 million for the year ended December 31, 2023. Our Adjusted EBITDA margin for the critical illness recovery hospital segment was 12.3% for the year ended December 31, 2024, compared to 10.7% for the year ended December 31, 2023. The increases in our Adjusted EBITDA and Adjusted EBITDA margin during the year ended December 31, 2024, as compared to the year ended December 31, 2023, were principally attributable an increase in net revenue.

Rehabilitation Hospital Segment. Adjusted EBITDA increased 10.8% to $245.7 million for the year ended December 31, 2024, compared to $221.9 million for the year ended December 31, 2023. Our Adjusted EBITDA margin for the rehabilitation hospital segment was 22.1% for the year ended December 31, 2024, compared to 22.6% for the year ended December 31, 2023. The increase in Adjusted EBITDA was principally due to an increase in revenue.

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Outpatient Rehabilitation Segment. Adjusted EBITDA was $108.6 million for the year ended December 31, 2024, compared to $111.9 million for the year ended December 31, 2023. Our Adjusted EBITDA margin for the outpatient rehabilitation segment was 8.7% for the year ended December 31, 2024, compared to 9.4% for the year ended December 31, 2023. The decreases in our Adjusted EBITDA and Adjusted EBITDA margin for the year ended December 31, 2024, as compared to the year ended December 31, 2023, were principally attributable to higher labor costs, partially offset by an increase in revenue.

Depreciation and Amortization

Depreciation and amortization expense was $142.9 million for the year ended December 31, 2024, compared to $135.7 million for the year ended December 31, 2023.

Income from Continuing Operations before Other Income and Expense

For the year ended December 31, 2024, we had income from operations from continuing operations before other income and expense of $268.3 million, compared to $267.2 million for the year ended December 31, 2023.

Loss on Early Retirement of Debt

For the year ended December 31, 2024, we had a loss on early retirement of debt of $28.8 million related to the prepayment on our term loan, the amendments to the Select credit agreement, and the refinancing of our senior notes, as described in Note 12 - Long-Term Debt and Notes Payable. For the year ended December 31, 2023, we had a loss on early retirement of debt of $14.7 million related to an amendment to the Select credit agreement.

Equity in Earnings of Unconsolidated Subsidiaries

For the year ended December 31, 2024, we had equity in earnings of unconsolidated subsidiaries of $63.9 million, compared to $41.3 million for the year ended December 31, 2023. The increase in equity in earnings of unconsolidated subsidiaries is principally due to a gain of $14.6 million recognized upon gaining a controlling financial interest in a previously unconsolidated entity. Additionally, we had improved operating performance of our rehabilitation businesses in which we are a minority owner.

Interest

Interest expense was $128.6 million for the year ended December 31, 2024, compared to $154.2 million for the year ended December 31, 2023. The decrease in interest expense was principally due to the reduction in total debt as a result of the financing transactions, as described in Note 12. Long-Term Debt and Notes Payable.

Income Tax Expense from Continuing Operations

We recorded income tax expense of $44.8 million for the year ended December 31, 2024, which represented an effective tax rate of 25.6%. We recorded income tax expense of $29.3 million for the year ended December 31, 2023, which represented an effective tax rate of 20.9%. For the year ended December 31, 2024, the higher effective tax rate primarily resulted from a limitation on deductibility of officer’s compensation associated with the restricted stock award modifications as described in Note 17 - Stock-based Compensation. Additionally, our effective tax rate for the year ended December 31, 2023 was lower partially due to a reduction in the state tax rates used in evaluating our net deferred tax liabilities.

Refer to Note 18 – Income Taxes of the notes to our consolidated financial statements included herein for the reconciliations of the statutory federal income tax rate to our effective income rate for the years ended December 31, 2024 and 2023.

Income from Discontinued Operations, Net of Tax

For the year ended December 31, 2024, we had income from discontinued operations, net of tax, of $166.7 million, compared to $189.3 million for the year ended December 31, 2023. Discontinued operations for both periods represent the operations of Concentra. The common stock of Concentra was distributed to Select stockholders on November 25, 2024, as discussed in “Overview.” The decrease in income from discontinued operations, net of tax, was primarily due to the $16.3 million of transaction costs included within discontinued operations, as discussed in Note 2 - Acquisitions and Dispositions.

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Year Ended December 31, 2023 Compared to Year Ended December 31, 2022

For the year ended December 31, 2023, we had revenue of $4,826.0 million and income from continuing operations before other income and expense of $267.2 million, as compared to revenue of $4,609.2 million and income from continuing operations before other income and expense of $144.8 million for the year ended December 31, 2022. For the year ended December 31, 2023, Adjusted EBITDA was $446.1 million, with an Adjusted EBITDA margin of 9.2%, as compared to Adjusted EBITDA of $312.5 million and an Adjusted EBITDA margin of 6.8% in the prior year.

A significant contributor to the improvement in our financial performance for the year ended December 31, 2023, as compared to the year ended December 31, 2022, was a decrease in labor costs and an increase in revenue in our critical illness recovery hospital segment, as the investments we made in recruitment, hiring, and retention of full-time staff in 2022 resulted in a significant decrease in contract labor utilization in 2023. Additionally, reduced demand in the marketplace resulted in lower contract labor rates, which further contributed to the decrease in total contract labor costs. We believe the ratio of personnel expense to net revenue for the critical illness recovery hospital segment for the year ended December 31, 2023, is indicative of a more stabilized labor environment. Revenue, Adjusted EBITDA, and Adjusted EBITDA margin increased for the year ended December 31, 2023, as compared to the year ended December 31, 2022, in each of our other operating segments. Other operating income during the year ended December 31, 2023, was $1.5 million. Other operating income during the year ended December 31, 2022, was $28.5 million, principally related to the recognition of payments received under the Provider Relief Fund for health care related expenses and lost revenues attributable to COVID-19.

Revenue

Critical Illness Recovery Hospital Segment. Revenue increased 2.9% to $2,299.8 million for the year ended December 31, 2023, compared to $2,234.1 million for the year ended December 31, 2022. The increase was attributable to revenue per patient day, which increased 4.8% to $2,067 for the year ended December 31, 2023, compared to $1,973 for the year ended December 31, 2022. Our patient days were 1,108,492 for the year ended December 31, 2023, compared to 1,127,911 patient days for the year ended December 31, 2022. Occupancy in our critical illness recovery hospitals was 68% for the year ended December 31, 2023, compared to 69% for the year ended December 31, 2022.

Rehabilitation Hospital Segment. Revenue increased 6.9% to $979.6 million for the year ended December 31, 2023, compared to $916.8 million for the year ended December 31, 2022. Our revenue per patient day increased 3.3% to $2,017 for the year ended December 31, 2023, compared to $1,953 for the year ended December 31, 2022. Our patient days increased 3.6% to 446,145 days for the year ended December 31, 2023, compared to 430,547 days for the year ended December 31, 2022. Occupancy in our rehabilitation hospitals was 85% for the years ended December 31, 2023 and 2022.

Outpatient Rehabilitation Segment. Revenue increased 5.7% to $1,188.9 million for the year ended December 31, 2023, compared to $1,125.3 million for the year ended December 31, 2022. The increase was attributable to patient visits, which increased 11.3% to 10,657,558 for the year ended December 31, 2023, compared to 9,573,980 visits for the year ended December 31, 2022. Our revenue per visit was $100 for the year ended December 31, 2023, compared to $103 for the year ended December 31, 2022, principally attributable to a decrease in Medicare reimbursement, changes in payor mix, and an increase in variable discounts.

Operating Expenses

Our operating expenses consist principally of cost of services and general and administrative expenses. Our operating expenses were $4,424.6 million, or 91.7% of revenue, for the year ended December 31, 2023, compared to $4,360.7 million, or 94.6% of revenue, for the year ended December 31, 2022. Our cost of services, a major component of which is labor expense, was $4,254.4 million, or 88.2% of revenue, for the year ended December 31, 2023, compared to $4,207.7 million, or 91.3% of revenue, for the year ended December 31, 2022. The decrease in our operating expenses relative to our revenue was principally attributable to the decreased labor costs within our critical illness recovery hospital segment, as explained further within the “Adjusted EBITDA” discussion. General and administrative expenses were $170.2 million, or 3.5% of revenue, for the year ended December 31, 2023, compared to $153.0 million, or 3.3% of revenue, for the year ended December 31, 2022.

Other Operating Income

For the year ended December 31, 2023, we had other operating income of $1.5 million, compared to $28.5 million for the year ended December 31, 2022. The other operating income for the year ended December 31, 2022, is included within the operating results of our other activities, and is principally related to the recognition of payments received under the Provider Relief Fund for health care related expenses and lost revenues attributable to COVID-19.

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Adjusted EBITDA

Critical Illness Recovery Hospital Segment. Adjusted EBITDA increased 121.0% to $246.0 million for the year ended December 31, 2023, compared to $111.3 million for the year ended December 31, 2022. Our Adjusted EBITDA margin for the critical illness recovery hospital segment was 10.7% for the year ended December 31, 2023, compared to 5.0% for the year ended December 31, 2022. The increases in our Adjusted EBITDA and Adjusted EBITDA margin during the year ended December 31, 2023, as compared to the year ended December 31, 2022, were attributable to lower labor costs as well as an increase in net revenue. The decrease in labor costs resulted from our efforts in 2022 to hire additional full-time nursing staff, improve retention among our employees, and decrease our reliance on contract labor, as well as the lower contract labor rates attributable to reduced demand in the marketplace. Our total contract labor costs decreased by approximately 62% during the year ended December 31, 2023, as compared to the year ended December 31, 2022, which was driven by an approximate 41% decrease in utilization of contract registered nurses and an approximate 32% decrease in the rate per hour for contract registered nurses.

Rehabilitation Hospital Segment. Adjusted EBITDA increased 12.0% to $221.9 million for the year ended December 31, 2023, compared to $198.0 million for the year ended December 31, 2022. Our Adjusted EBITDA margin for the rehabilitation hospital segment was 22.6% for the year ended December 31, 2023, compared to 21.6% for the year ended December 31, 2022. The increases in Adjusted EBITDA and Adjusted EBITDA margin were principally attributable to an increase in revenue.

Outpatient Rehabilitation Segment. Adjusted EBITDA increased 9.8% to $111.9 million for the year ended December 31, 2023, compared to $101.9 million for the year ended December 31, 2022. Our Adjusted EBITDA margin for the outpatient rehabilitation segment was 9.4% for the year ended December 31, 2023, compared to 9.1% for the year ended December 31, 2022. The increases in Adjusted EBITDA and Adjusted EBITDA margin were principally attributable to an increase in revenue.

Depreciation and Amortization

Depreciation and amortization expense was $135.7 million for the year ended December 31, 2023, compared to $132.2 million for the year ended December 31, 2022.

Income from Continuing Operations before Other Income and Expense

For the year ended December 31, 2023, we had income from operations of $267.2 million, compared to $144.8 million for the year ended December 31, 2022. The decline in labor costs and increase in revenue experienced within our critical illness recovery hospital segment was the primary cause of the increase in income from operations, as discussed above under “Adjusted EBITDA.” We recognized other operating income of $1.5 million during the year ended December 31, 2023, compared to $28.5 million for the year ended December 31, 2022, as described further under “Other Operating Income.”

Loss on Early Retirement of Debt

For the year ended December 31, 2023, we had a loss on early retirement of debt of $14.7 million related to an amendment to the Select credit agreement, as described in Note 12. Long-Term Debt and Notes Payable.

Equity in Earnings of Unconsolidated Subsidiaries

For the year ended December 31, 2023, we had equity in earnings of unconsolidated subsidiaries of $41.3 million, compared to $28.0 million for the year ended December 31, 2022. The increase in equity in earnings is principally attributable to the improved operating performance of our rehabilitation businesses in which we are a minority owner.

Interest

Our term loan was subject to an interest rate cap, which limited the variable interest rate index to 1.0% on $2.0 billion of principal outstanding under the term loan. The Term SOFR rate was 5.35% at December 31, 2023, compared to the one-month LIBOR rate of 4.39% at December 31, 2022. The one-month LIBOR rate first exceeded 1.0% in June 2022 and the interest rate cap mitigated our exposure to increases in the one-month LIBOR and Term SOFR rates on the term loan. Interest expense was $154.2 million for the year ended December 31, 2023, compared to $137.5 million for the year ended December 31, 2022. The increase was attributable to higher average outstanding borrowings under our revolving facility during the year ended December 31, 2023, as well as an increase in the variable interest rate to the extent not mitigated by the interest rate cap.

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Income Tax Expense from Continuing Operations

We recorded income tax expense of $29.3 million for the year ended December 31, 2023, which represented an effective tax rate of 20.9%. We recorded income tax expense of $16.7 million for the year ended December 31, 2022, which represented an effective tax rate of 47.4%. For the year ended December 31, 2023, the decrease in our effective tax rate was partially due to a reduction in the state tax rates used in evaluating our net deferred tax liabilities. Additionally, our effective tax rate for the year ended December 31, 2022 was higher due to our lower income from continuing operations, the mix of states in which the income was earned, valuation allowances recorded as a result of an inability to recognize net operating losses in future periods and the effect of permanent tax differences.

Refer to Note 18.    Income Taxes of the notes to our consolidated financial statements included herein for the reconciliations of the statutory federal income tax rate to our effective income rate for the years ended December 31, 2023 and 2022.

Income from Discontinued Operations, Net of Tax

For the year ended December 31, 2023, we had income from discontinued operations, net of tax, of $189.3 million, compared to $179.5 million for the year ended December 31, 2022. Discontinued operations for both periods represent the operations of Concentra. The common stock of Concentra was distributed to Select stockholders on November 25, 2024, as discussed in “Overview.” The increase in income from discontinued operations, net of tax, was principally attributable to an increase in revenue for Concentra.

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Liquidity and Capital Resources

Cash Flows for the Years Ended December 31, 2022, 2023, and 2024

In the following, we discuss cash flows from operating activities, investing activities, and financing activities.

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(1) The Company had and $37.7 million and $31.4 million of cash and cash equivalents from discontinued operations at December 31, 2022 and 2023, respectively.

Operating activities provided $517.9 million, $582.1 million, and $284.8 million of cash flows during the years ended December 31, 2024, 2023, and 2022, respectively. The decrease in cash flows from operating activities for the year ended December 31, 2024, as compared to the year ended December 31, 2023, was principally due to a increase in accounts receivable, which was principally driven by an increase in revenue and an increase in days sales outstanding, and partially offset by an increase in cash flows from operating performance. The increase in cash flows from operating activities for the year ended December 31, 2023, as compared to the year ended December 31, 2022, was principally due to a increase in our operating income and routine changes in net working capital.

Our days sales outstanding was 58 days at December 31, 2024, 60 days at September 30, 2024, 55 days at December 31, 2023, and 58 days at December 31, 2022. Our days sales outstanding will fluctuate based upon variability in our collection cycles and patient volumes.

Investing activities used $231.0 million, $268.5 million, and $226.3 million of cash flows for the years ended December 31, 2024, 2023, and 2022, respectively. For the year ended December 31, 2024, the principal uses of cash were $222.2 million for purchases of property, equipment, and other assets, and $13.1 million for investments in and acquisitions of businesses. For the year ended December 31, 2023, the principal uses of cash were $229.2 million for purchases of property and equipment, and other assets, and $39.4 million for investments in and acquisitions of businesses. For the year ended December 31, 2022, the principal uses of cash were $190.4 million for purchases of property, equipment, and other assets, and $44.3 million for investments in and acquisitions of businesses. The cash outflows were offset in part by proceeds received from the sale of assets and business of $8.3 million.

Financing activities used $311.2 million of cash flows for the year ended December 31, 2024. The principal uses of cash were net payments of $212.4 million on our term loans, $182.1 million of cash transferred to Concentra upon separation, net payments of $175.0 million under our revolving facility, $64.6 million of dividend payments to common stockholders, $61.2 million of net payments as a result of the payoff of our 6.250% senior notes due 2026, and subsequent issuance of our 6.250% senior notes due 2032, and $60.0 million for distributions to and purchases of non-controlling interests. The cash outflows were partially offset by proceeds from the Concentra IPO of $511.2 million.

Financing activities used $327.5 million of cash flows for the year ended December 31, 2023. The principal use of cash were net payments of $165.0 million under our revolving facility, $63.9 million of dividend payments to common stockholders, and $63.5 million for distributions to and purchases of non-controlling interests.

Financing activities used $34.9 million of cash flows for the year ended December 31, 2022. The principal use of cash were $195.5 million for repurchases of common stock, $64.6 million of dividend payments to common stockholders, and $43.1 million for distributions to and purchases of non-controlling interests. We had net borrowings of $285.0 million under our revolving facility.

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Capital Resources

Working capital.  We had net working capital of $42.1 million at December 31, 2024, compared to a net working capital of $9.2 million at December 31, 2023. The change in net working capital was primarily due to an increase in accounts receivable, partially offset by the decrease in net working capital as a result of the distribution of our ownership interest in Concentra.

A significant component of our net working capital is our accounts receivable. Collection of these accounts receivable is our primary source of cash and is critical to our liquidity and capital resources. Most of our patients are subject to healthcare coverage through third party payor arrangements, including Medicare and Medicaid. It is our general policy to verify healthcare coverage prior to providing services. We have credit risk associated with our accounts receivable; however, we believe there is a remote possibility of default with these payors.

Credit facilities.  On July 26, 2024, the Company entered into Amendment No. 10 to the credit agreement. Amendment No. 10 reduced the revolving credit facility commitments available under the credit agreement from $770.0 million to $550.0 million. Select also made a voluntary prepayment of $1,640.4 million on its term loan and a $300.0 million repayment on its revolving credit facility using the proceeds derived from the Concentra IPO and related debt transactions.

On December 3, 2024, the Company entered into Amendment No. 11 to the credit agreement. Amendment No. 11 established a new incremental term loan in the aggregate amount of $1,050.0 million to replace the existing term loans. The maturity date of the term loan is December 3, 2031. In addition, Amendment No. 11 extended the maturity date of the revolving credit facility to December 3, 2029 and increased the revolving credit facility commitments from $550.0 million to $600.0 million.

At December 31, 2024, Select had outstanding borrowings under its credit facilities consisting of a $1,050.0 million term loan (excluding unamortized original issue discounts and debt issuance costs of $8.3 million) and borrowings of $105.0 million under its revolving facility. At December 31, 2024, Select had $453.3 million of availability under its revolving facility after giving effect to $105.0 million of outstanding borrowings and $41.7 million of outstanding letters of credit.

Each calendar quarter, Select is required to pay each lender a commitment fee in respect of any unused commitments under the revolving facility, which is currently 0.375% per annum and subject to adjustment based on Select’s leverage ratio, as specified in the credit agreement.

As of December 31, 2024, Select’s leverage ratio (its ratio of total indebtedness to consolidated EBITDA for the prior four consecutive fiscal quarters), which is required to be maintained at less than 7.00 to 1.00 under the terms of the revolving facility, was 3.18 to 1.00.

Our credit facilities also contain a number of other affirmative and restrictive covenants, including limitations on mergers, consolidations and dissolutions; sales of assets; investments and acquisitions; indebtedness; liens; affiliate transactions; and dividends and restricted payments. Our credit facilities contain events of default for non-payment of principal and interest when due (subject, as to interest, to a grace period), cross-default and cross-acceleration provisions and an event of default that would be triggered by a change of control.

6.250% senior notes. On December 3, 2024, Select issued and sold $550.0 million aggregate principal amount of 6.250% senior notes due December 1, 2032. Select used the net proceeds of the 6.250% senior notes due 2032, together with the proceeds from the incremental term loan borrowings (as described above) and cash on hand, to redeem in full the $1,225.0 million of senior notes due 2026 and pay related fees and expenses associated with the financing.

At December 31, 2024, Select had $550.0 million of 6.250% senior notes outstanding (excluding debt issuance costs of $10.6 million).

The terms of the senior notes contains covenants that, among other things, limit Select’s ability and the ability of certain of Select’s subsidiaries to (i) grant liens on its assets, (ii) make dividend payments, other distributions or other restricted payments, (iii) incur restrictions on the ability of Select’s restricted subsidiaries to pay dividends or make other payments, (iv) enter into sale and leaseback transactions, (v) merge, consolidate, transfer or dispose of substantially all of their assets, (vi) incur additional indebtedness, (vii) make investments, (viii) sell assets, including capital stock of subsidiaries, (ix) use the proceeds from sales of assets, including capital stock of restricted subsidiaries, and (x) enter into transactions with affiliates. These covenants are subject to a number of exceptions, limitations and qualifications.

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Stock Repurchase Program.  Holdings’ Board of Directors has authorized a common stock repurchase program to repurchase up to $1.0 billion worth of shares of its common stock. The common stock repurchase program will remain in effect until December 31, 2025, unless further extended or earlier terminated by the Board of Directors. Stock repurchases under this program may be made in the open market or through privately negotiated transactions, and at times and in such amounts as Holdings deems appropriate. Holdings funds this program with cash on hand and borrowings under its revolving facility. During the year ended December 31, 2024, Holdings did not repurchase shares under the program. Since the inception of the program through December 31, 2024, Holdings has repurchased 48,234,823 shares at a cost of approximately $600.3 million, or $12.45 per share, which includes transaction costs. On August 16, 2022, Congress passed the Inflation Reduction Act of 2022, which enacted a 1% excise tax on stock repurchases that exceed $1.0 million, effective January 1, 2023.

Use of Capital Resources.  We may from time to time pursue opportunities to develop new joint venture relationships with large, regional health systems and other healthcare providers. We also intend to open new outpatient rehabilitation clinics in local areas that we currently serve where we can benefit from existing referral relationships and brand awareness to produce incremental growth. In addition to our development activities, we may grow through opportunistic acquisitions.

Liquidity

We believe our internally generated cash flows and borrowing capacity under our revolving facility will allow us to finance our operations in both the short and long term. As of December 31, 2024, we had cash and cash equivalents of $59.7 million and $453.3 million of availability under our revolving facility, after giving effect to $105.0 million of outstanding borrowings and $41.7 million of outstanding letters of credit.

Our material cash requirements from known contractual and other obligations include:

i.Debt payments, including finance lease payments – Our expected principal payments total $1,731.3 million, with $20.3 million payable within the next twelve months. Refer to Note 12 – Long-Term Debt and Notes Payable of the notes to our consolidated financial statements included herein for additional information.

ii.Interest payments – Our expected interest payments on the 6.250% senior notes, term loan, and revolving facility total $763.7 million, with $111.6 million payable within the next twelve months. Interest payments for the 6.250% senior notes were calculated using the stated interest rate. Interest payments for the term loan and revolving facility were calculated using interest rates of 6.5% and 8.7%, respectively.

iii.Operating lease payments – Our expected operating lease payments total $1,374.2 million, with $235.5 million payable within the next twelve months. Refer to Note 4 – Leases of the notes to our consolidated financial statements included herein for additional information.

iv.Purchase, construction, and other commitments – Our expected payments related to purchase, construction, and other obligations total $282.8 million, with $237.7 million payable within the next twelve months. Our purchase obligations primarily relate to software licensing and support agreements which specify all significant contractual terms and are legally binding and enforceable. Our construction commitments are described further in Note 20 – Commitments and Contingencies.

v.Insurance liabilities – Our expected payments related to our insurance liabilities, including those for workers’ compensation and professional malpractice liabilities, total $141.6 million, with $69.3 million payable within the next twelve months. The amounts payable within the next twelve months are recorded in accrued other in the consolidated balance sheet as of December 31, 2024. The remaining amounts are recorded in other non-current liabilities.

vi.Other current liabilities recorded in the consolidated balance sheet as of December 31, 2024, such as accounts payable and accrued expenses, which are not specifically identified above.

We may from time to time seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions, tender offers or otherwise. Such repurchases or exchanges, if any, may be funded from operating cash flows or other sources and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

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Dividend

On February 13, 2024, May 1, 2024, July 31, 2024, and October 30, 2024, our Board of Directors declared a cash dividend of $0.125 per share. On March 13, 2024, May 30, 2024, August 30, 2024, and November 26, 2024, cash dividends totaling $16.0 million, $16.3 million, $16.2 million, and $16.1 million were paid.

On February 13, 2025, our Board of Directors declared a cash dividend of $0.0625 per share. The dividend will be payable on or about March 13, 2025, to stockholders of record as of the close of business on March 3, 2025.

Effects of Inflation

The healthcare industry is labor intensive and our largest expenses are labor related costs. Wage and other expenses increase during periods of inflation and when labor shortages occur in the marketplace. We have recently experienced higher labor costs related to the current inflationary environment and competitive labor market. In addition, suppliers have passed along rising costs to us in the form of higher prices. We cannot predict our ability to pass along cost increases to our customers.

Recent Accounting Pronouncements

Refer to Note 1 – Organization and Significant Accounting Policies of the notes to our consolidated financial statements included herein for information regarding recent accounting pronouncements.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read this discussion together with the consolidated financial statements and accompanying notes included elsewhere herein.

This section of this 10-K generally discusses 2023 and 2022 items and year-to-year comparisons between 2023 and 2022. Discussions of 2021 items and year-to-year comparisons between 2022 and 2021 that are not included in this Form 10-K can be found in “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

Overview

We began operations in 1997 and, based on number of facilities, are one of the largest operators of critical illness recovery hospitals, rehabilitation hospitals, outpatient rehabilitation clinics, and occupational health centers in the United States. As of December 31, 2023, we had operations in 46 states and the District of Columbia. We operated 107 critical illness recovery hospitals in 28 states, 33 rehabilitation hospitals in 13 states, 1,933 outpatient rehabilitation clinics in 39 states and the District of Columbia, 544 occupational health centers in 41 states, and 150 onsite clinics at employer worksites as of December 31, 2023.

Our reportable segments include the critical illness recovery hospital segment, the rehabilitation hospital segment, the outpatient rehabilitation segment, and the Concentra segment. We had revenue of $6,664.1 million for the year ended December 31, 2023. Of this total, we earned approximately 35% of our revenue from our critical illness recovery hospital segment, approximately 15% from our rehabilitation hospital segment, approximately 18% from our outpatient rehabilitation segment, and approximately 28% from our Concentra segment. Our critical illness recovery hospital segment consists of hospitals designed to serve the needs of patients recovering from critical illnesses, often with complex medical needs, and our rehabilitation hospital segment consists of hospitals designed to serve patients that require intensive physical rehabilitation care. Patients are typically admitted to our critical illness recovery hospitals and rehabilitation hospitals from general acute care hospitals. Our outpatient rehabilitation segment consists of clinics that provide physical, occupational, and speech rehabilitation services. Our Concentra segment consists of occupational health centers that provide workers’ compensation injury care, physical therapy, and consumer health services as well as onsite clinics located at employer worksites that deliver occupational health services.

On January 3, 2024, the Company announced its intention to separate our Concentra segment, with the intention to create a new, publicly traded company by the end of the fiscal year 2024. The planned separation is intended to qualify as a tax-free transaction for U.S. federal income tax purposes. Completion of the potential separation will be subject to satisfaction of certain conditions, including, among others, completion of financing transactions, the receipt and continuing effectiveness and validity of the Company's private letter ruling from the Internal Revenue Service, and receipt of favorable opinions of the Company's U.S. tax advisors with respect to the tax-free nature of the transaction and final approval by our Board of Directors. There can be no assurance regarding the ultimate timing of the planned separation or that such separation will be completed.

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Non-GAAP Measure

We believe that the presentation of Adjusted EBITDA, as defined below, is important to investors because Adjusted EBITDA is commonly used as an analytical indicator of performance by investors within the healthcare industry. Adjusted EBITDA is used by management to evaluate financial performance and determine resource allocation for each of our segments. Adjusted EBITDA is not a measure of financial performance under accounting principles generally accepted in the United States of America (“GAAP”). Items excluded from Adjusted EBITDA are significant components in understanding and assessing financial performance. Adjusted EBITDA should not be considered in isolation, or as an alternative to, or substitute for, net income, income from operations, cash flows generated by operations, investing or financing activities, or other financial statement data presented in the consolidated financial statements as indicators of financial performance or liquidity. Because Adjusted EBITDA is not a measurement determined in accordance with GAAP and is thus susceptible to varying definitions, Adjusted EBITDA as presented may not be comparable to other similarly titled measures of other companies.

We define Adjusted EBITDA 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. We will refer to Adjusted EBITDA throughout the remainder of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following table reconciles net income and income from operations to Adjusted EBITDA and should be referenced when we discuss Adjusted EBITDA.

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Summary Financial Results

Net income was $299.7 million, $198.0 million, and $499.9 million for the years ended December 31, 2023, 2022, and 2021, respectively. Net income included loss on early retirement of debt of $14.7 million during the year ended December 31, 2023, and pre-tax gain on sale of business of $2.2 million during the year ended December 31, 2021.

The following tables reconcile our segment performance measures to our consolidated operating results for the years ended December 31, 2023, 2022, and 2021: