Select Medical Holdings Corporation Announces Results For Its Second Quarter Ended June 30, 2018

Published: Aug 02, 2018

 

MECHANICSBURG, Pa., Aug. 2, 2018 /PRNewswire/ -- Select Medical Holdings Corporation ("Select Medical") (NYSE: SEM) today announced results for its second quarter ended June 30, 2018.

For the second quarter ended June 30, 2018, net operating revenues increased 17.6% to $1,296.2 million, compared to $1,102.5 million for the same quarter, prior year. Income from operations increased 4.2% to $120.6 million for the second quarter ended June 30, 2018, compared to $115.7 million for the same quarter, prior year. Net income increased 18.0% to $60.6 million for the second quarter ended June 30, 2018, compared to $51.3 million for the same quarter, prior year. Net income for the second quarter ended June 30, 2018 included pre-tax non-operating gains of $6.5 million. Adjusted EBITDA increased 12.3% to $178.2 million for the second quarter ended June 30, 2018, compared to $158.7 million for the same quarter, prior year. Income per common share increased to $0.35 on a fully diluted basis for the second quarter ended June 30, 2018, compared to $0.32 for the same quarter, prior year. Adjusted income per common share was $0.31 per diluted share for the second quarter ended June 30, 2018, compared to $0.32 for the same quarter, prior year. Adjusted income per common share excludes the non-operating gains and their related tax effects for the second quarter ended June 30, 2018. The definition of Adjusted EBITDA and a reconciliation of net income to Adjusted EBITDA are presented in table VIII of this release. A reconciliation of income per common share to adjusted income per common share is presented in table IX of this release.

For the six months ended June 30, 2018, net operating revenues increased 16.2% to $2,549.2 million, compared to $2,194.0 million for the same period, prior year. Income from operations increased 10.5% to $229.2 million for the six months ended June 30, 2018, compared to $207.4 million for the same period, prior year. Net income increased 39.8% to $104.5 million for the six months ended June 30, 2018, compared to $74.8 million for the same period, prior year. Net income for the six months ended June 30, 2018 included a pre-tax loss on early retirement of debt of $10.3 million and pre-tax non-operating gains of $6.9 million. Net income for the six months ended June 30, 2017 included a pre-tax loss on early retirement of debt of $19.7 million. Adjusted EBITDA increased 14.7% to $341.5 million for the six months ended June 30, 2018, compared to $297.6 million for the same period, prior year. Income per common share increased to $0.60 on a fully diluted basis for the six months ended June 30, 2018, compared to $0.44 for the same period, prior year. Adjusted income per common share was $0.60 per diluted share for the six months ended June 30, 2018, compared to $0.53 for the same period, prior year. Adjusted income per common share excludes the loss on early retirement of debt, non-operating gains, and U.S. HealthWorks acquisition costs and their related tax effects for the six months ended June 30, 2018. Adjusted income per common share excludes the loss on early retirement of debt and its related tax effects for the six months ended June 30, 2017. The definition of Adjusted EBITDA and a reconciliation of net income to Adjusted EBITDA are presented in table VIII of this release. A reconciliation of income per common share to adjusted income per common share is presented in table IX of this release.

Company Overview

Select Medical is one of the largest operators of critical illness recovery hospitals (previously referred to as long term acute care hospitals), rehabilitation hospitals (previously referred to as inpatient rehabilitation facilities), outpatient rehabilitation clinics, and occupational health centers in the United States based on the number of facilities. Our reportable segments include the critical illness recovery hospital segment, rehabilitation hospital segment, outpatient rehabilitation segment, and Concentra segment. As of June 30, 2018, Select Medical operated 98 critical illness recovery hospitals in 27 states, 26 rehabilitation hospitals in 11 states, and 1,638 outpatient rehabilitation clinics in 37 states and the District of Columbia. Select Medical's joint venture subsidiary Concentra operated 527 occupational health centers in 41 states. Concentra also provides contract services at employer worksites and Department of Veterans Affairs community-based outpatient clinics. At June 30, 2018, Select Medical had operations in 47 states and the District of Columbia. Information about Select Medical is available at www.selectmedical.com.

Critical Illness Recovery Hospital Segment

For the second quarter ended June 30, 2018, net operating revenues for the critical illness recovery hospital segment (previously referred to as the long term acute care segment) increased 0.7% to $442.5 million, compared to $439.2 million for the same quarter, prior year. Adjusted EBITDA for the critical illness recovery hospital segment was $60.7 million for the second quarter ended June 30, 2018, compared to $75.0 million for the same quarter, prior year. The Adjusted EBITDA margin for the critical illness recovery hospital segment was 13.7% for the second quarter ended June 30, 2018, compared to 17.1% for the same quarter, prior year. Certain critical illness recovery hospital key statistics for both the second quarters ended June 30, 2018 and 2017 are presented in table VI of this release.

For the six months ended June 30, 2018, net operating revenues for the critical illness recovery hospital segment increased 2.6% to $907.1 million, compared to $884.3 million for the same period, prior year. Adjusted EBITDA for the critical illness recovery hospital segment was $133.7 million for the six months ended June 30, 2018, compared to $147.4 million for the same period, prior year. The Adjusted EBITDA margin for the critical illness recovery hospital segment was 14.7% for the six months ended June 30, 2018, compared to 16.7% for the same period, prior year. Certain critical illness recovery hospital key statistics for both the six months ended June 30, 2018 and 2017 are presented in table VII of this release.

Rehabilitation Hospital Segment

For the second quarter ended June 30, 2018, net operating revenues for the rehabilitation hospital segment (previously referred to as the inpatient rehabilitation segment) increased 14.8% to $173.8 million, compared to $151.4 million for the same quarter, prior year. Adjusted EBITDA for the rehabilitation hospital segment increased 21.9% to $28.2 million for the second quarter ended June 30, 2018, compared to $23.1 million for the same quarter, prior year. The Adjusted EBITDA margin for the rehabilitation hospital segment was 16.2% for the second quarter ended June 30, 2018, compared to 15.3% for the same quarter, prior year. The Adjusted EBITDA results for the rehabilitation hospital segment include start-up losses of approximately $2.1 million for the second quarter ended June 30, 2018, compared to approximately $1.2 million for the same quarter, prior year. Certain rehabilitation hospital key statistics for both the second quarters ended June 30, 2018 and 2017 are presented in table VI of this release.

For the six months ended June 30, 2018, net operating revenues for the rehabilitation hospital segment increased 17.7% to $348.5 million, compared to $296.2 million for the same period, prior year. Adjusted EBITDA for the rehabilitation hospital segment increased 39.3% to $55.0 million for the six months ended June 30, 2018, compared to $39.5 million for the same period, prior year. The Adjusted EBITDA margin for the rehabilitation hospital segment was 15.8% for the six months ended June 30, 2018, compared to 13.3% for the same period, prior year. The Adjusted EBITDA results for the rehabilitation hospital segment include start-up losses of approximately $3.0 million for the six months ended June 30, 2018, compared to approximately $3.2 million for the same period, prior year. Certain rehabilitation hospital key statistics for both the six months ended June 30, 2018 and 2017 are presented in table VII of this release.

Outpatient Rehabilitation Segment

For the second quarter ended June 30, 2018, net operating revenues for the outpatient rehabilitation segment increased 4.8% to $267.2 million, compared to $255.0 million for the same quarter, prior year. Adjusted EBITDA for the outpatient rehabilitation segment was $41.9 million for both the second quarters ended June 30, 2018 and 2017. The Adjusted EBITDA margin for the outpatient rehabilitation segment was 15.7% for the second quarter ended June 30, 2018, compared to 16.4% for the same quarter, prior year. Certain outpatient rehabilitation key statistics for both the second quarters ended June 30, 2018 and 2017 are presented in table VI of this release.

For the six months ended June 30, 2018, net operating revenues for the outpatient rehabilitation segment increased 3.8% to $524.6 million, compared to $505.4 million for the same period, prior year. Adjusted EBITDA for the outpatient rehabilitation segment was $72.5 million for the six months ended June 30, 2018, compared to $73.3 million for the same period, prior year. The Adjusted EBITDA margin for the outpatient rehabilitation segment was 13.8% for the six months ended June 30, 2018, compared to 14.5% for the same period, prior year. Certain outpatient rehabilitation key statistics for both the six months ended June 30, 2018 and 2017 are presented in table VII of this release.

Concentra Segment

The financial results of the Concentra segment include U.S. HealthWorks beginning February 1, 2018.

For the second quarter ended June 30, 2018, net operating revenues for the Concentra segment increased 60.7% to $412.8 million, compared to $256.9 million for the same quarter, prior year. For the second quarter ended June 30, 2018, U.S. HealthWorks contributed net operating revenues of $139.4 million. Adjusted EBITDA for the Concentra segment increased 68.5% to $72.6 million for the second quarter ended June 30, 2018, compared to $43.1 million for the same quarter, prior year. The Adjusted EBITDA margin for the Concentra segment was 17.6% for the second quarter ended June 30, 2018, compared to 16.8% for the same quarter, prior year. Certain Concentra key statistics for both the second quarters ended June 30, 2018 and 2017 are presented in table VI of this release.

For the six months ended June 30, 2018, net operating revenues for the Concentra segment increased 51.5% to $768.9 million, compared to $507.5 million for the same period, prior year. For the period February 1, 2018 through June 30, 2018, U.S. HealthWorks contributed net operating revenues of $229.4 million. Adjusted EBITDA for the Concentra segment increased 52.2% to $130.4 million for the six months ended June 30, 2018, compared to $85.7 million for the same period, prior year. The Adjusted EBITDA margin for the Concentra segment was 17.0% for the six months ended June 30, 2018, compared to 16.9% for the same period, prior year. Certain Concentra key statistics for both the six months ended June 30, 2018 and 2017 are presented in table VII of this release.

Stock Repurchase Program

Select Medical did not repurchase shares during the second quarter ended June 30, 2018 under its authorized $500.0 million stock repurchase program. The program has been extended until December 31, 2018, and will remain in effect until then, unless further extended or earlier terminated by the board of directors. Since the inception of the program through June 30, 2018, Select Medical has repurchased 35,924,128 shares at a cost of approximately $314.7 million, or $8.76 per share, which includes transaction costs.

Business Outlook

Select Medical reaffirms its 2018 business outlook, most recently provided in its May 3, 2018 first quarter earnings press release, for net operating revenues, Adjusted EBITDA, and adjusted income per common share. Select Medical continues to expect consolidated net operating revenues for the full year 2018 to be in the range of $5.0 billion to $5.2 billion. Select Medical continues to expect Adjusted EBITDA for the full year 2018 to be in the range of $630.0 million to $660.0 million. Select Medical is adjusting its 2018 business outlook for fully diluted income per common share to include the second quarter 2018 non-operating gains and its related tax effects. Select Medical now expects fully diluted income per common share for the full year 2018 to be in the range of $0.97 to $1.12. Select Medical also continues to expect adjusted income per common share to be in the range of $0.97 to $1.12. Adjusted income per common share excludes the loss on early retirement of debt, U.S. HealthWorks acquisition costs, and non-operating gain (loss) and their related tax effects.

Conference Call

Select Medical will host a conference call regarding its second quarter results, as well as its business outlook, on Friday, August 3, 2018, at 9:00am ET. The domestic dial in number for the call is 1-866-440-2669. The international dial in number is 1-409-220-9844. The conference ID for the call is 9372416. The conference call will be webcast simultaneously and can be accessed at Select Medical Holdings Corporation's website www.selectmedicalholdings.com.

For those unable to participate in the conference call, a replay will be available until 11:59pm ET, August 10, 2018. The replay number is 1-855-859-2056 (domestic) or 1-404-537-3406 (international). The passcode for the replay will be 9372416. The replay can also be accessed at Select Medical Holdings Corporation's website, www.selectmedicalholdings.com.

* * * * *

Certain statements contained herein that are not descriptions of historical facts are "forward-looking" statements (as such term is defined in the Private Securities Litigation Reform Act of 1995). Because such statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements due to factors including the following:

  • changes in government reimbursement for our services and/or new payment policies (including, for example, the expiration of the moratorium limiting the full application of the 25 Percent Rule that would reduce our Medicare payments for those patients admitted to a Medicare-certified long term care hospital from a referring hospital in excess of an applicable percentage admissions threshold) may result in a reduction in net operating revenues, an increase in costs, and a reduction in profitability;
  • the failure of our Medicare-certified long term care hospitals or inpatient rehabilitation facilities to maintain their Medicare certifications may cause our net operating revenues and profitability to decline;
  • the failure of our Medicare-certified long term care hospitals and inpatient rehabilitation facilities operated as "hospitals within hospitals" to qualify as hospitals separate from their host hospitals may cause our net operating revenues and profitability to decline;
  • a government investigation or assertion that we have violated applicable regulations may result in sanctions or reputational harm and increased costs;
  • acquisitions or joint ventures may prove difficult or unsuccessful, use significant resources or expose us to unforeseen liabilities;
  • our plans and expectations related to the acquisition of U.S. HealthWorks by Concentra and our ability to realize anticipated synergies;
  • private third-party payors for our services may adopt payment policies that could limit our future net operating revenues and profitability;
  • the failure to maintain established relationships with the physicians in the areas we serve could reduce our net operating revenues and profitability;
  • shortages in qualified nurses, therapists, physicians, or other licensed providers could increase our operating costs significantly or limit our ability to staff our facilities;
  • competition may limit our ability to grow and result in a decrease in our net operating revenues and profitability;
  • the loss of key members of our management team could significantly disrupt our operations;
  • the effect of claims asserted against us could subject us to substantial uninsured liabilities;
  • a security breach of our or our third-party vendors' information technology systems may subject us to potential legal and reputational harm and may result in a violation of the Health Insurance Portability and Accountability Act of 1996 or the Health Information Technology for Economic and Clinical Health Act; and
  • other factors discussed from time to time in our filings with the Securities and Exchange Commission (the "SEC"), including factors discussed under the heading "Risk Factors" of the quarterly reports on Form 10-Q and of the annual report on Form 10-K for the year ended December 31, 2017.

Except as required by applicable law, including the securities laws of the United States and the rules and regulations of the SEC, we are under no obligation to publicly update or revise any forward-looking statements, whether as a result of any new information, future events, or otherwise. You should not place undue reliance on our forward-looking statements. Although we believe that the expectations reflected in forward-looking statements are reasonable, we cannot guarantee future results or performance.

Investor inquiries:

Joel T. Veit
Senior Vice President and Treasurer
717-972-1100
ir@selectmedical.com

    I.  Condensed Consolidated Statements of Operations

    For the Three Months Ended June 30, 2017 and 2018
    (In thousands, except per share amounts, unaudited)


                                                         2017(1)                 2018   % Change
                                                          ------                 ----   --------

    Net operating revenues                                       $1,102,465           $1,296,210  17.6%


    Costs and expenses:

    Cost of services                                     920,194            1,094,731        19.0

    General and
     administrative                                       28,275               29,194         3.3

    Depreciation and
     amortization                                         38,333               51,724        34.9
                                                          ------               ------        ----


    Income from operations                               115,663              120,561         4.2


    Equity in earnings of
     unconsolidated
     subsidiaries                                          5,666                4,785      (15.5)

    Non-operating gain                                         -               6,478         N/M

    Interest expense                                    (37,655)            (50,159)       33.2
                                                         -------              -------


    Income before income
     taxes                                                83,674               81,665       (2.4)


    Income tax expense                                    32,374               21,106      (34.8)
                                                          ------               ------


    Net income                                            51,300               60,559        18.0


    Less: Net income
     attributable to non-
     controlling interests                                 9,245               14,048        52.0
                                                           -----               ------


    Net income
     attributable to
     Select Medical                                                 $42,055              $46,511  10.6%
                                                                    =======              =======


    Weighted average
     shares
     outstanding(2):

    Basic                                                128,624              129,830

    Diluted                                              128,777              129,924


    Income per common
     share(2):

    Basic                                                             $0.32                $0.35

    Diluted                                                           $0.32                $0.35

             (1)    The financial results for the second
                     quarter ended June 30, 2017 were
                     retrospectively conformed to reflect
                     the adoption of Topic 606, Revenue
                     from Contracts with Customers.

             (2)    Under the two-class method for
                     calculating income per common share,
                     unvested restricted stock is a
                     separate, participating class.
                     Income per common share and weighted
                     average common shares outstanding
                     exclude amounts attributed to the
                     unvested restricted class of
                     stockholders. Net income allocated
                     to the unvested restricted
                     stockholders was $1.5 million and
                     $1.3 million for the three months
                     ended June 30, 2018 and 2017,
                     respectively.  Unvested restricted
                     weighted average shares were 4,379
                     thousand and 4,235 thousand for the
                     three months ended June 30, 2018 and
                     2017, respectively.

    N/M -  Not Meaningful

 

    II.  Condensed Consolidated Statements of Operations

    For the Six Months Ended June 30, 2017 and 2018
    (In thousands, except per share amounts, unaudited)


                                                           2017(1)                 2018   % Change
                                                            ------                 ----   --------

    Net operating
     revenues                                                      $2,193,982           $2,549,174  16.2%


    Costs and expenses:

    Cost of services                                     1,849,332            2,160,544        16.8

    General and
     administrative                                         56,350               60,976         8.2

    Depreciation and
     amortization                                           80,872               98,495        21.8
                                                            ------               ------        ----


    Income from
     operations                                            207,428              229,159        10.5


    Loss on early
     retirement of debt                                   (19,719)            (10,255)        N/M

    Equity in earnings
     of unconsolidated
     subsidiaries                                           11,187                9,482      (15.2)

    Non-operating gain
     (loss)                                                   (49)               6,877         N/M

    Interest expense                                      (78,508)            (97,322)       24.0
                                                           -------              -------        ----


    Income before income
     taxes                                                 120,339              137,941        14.6


    Income tax expense                                      45,576               33,400      (26.7)
                                                            ------               ------       -----


    Net income                                              74,763              104,541        39.8


    Less: Net income
     attributable to
     non-controlling
     interests                                              16,838               24,291        44.3
                                                            ------               ------        ----


    Net income
     attributable to
     Select Medical                                                   $57,925              $80,250  38.5%
                                                                      =======              =======


    Weighted average
     shares
     outstanding(2):

    Basic                                                  128,544              129,761

    Diluted                                                128,703              129,871


    Income per common
     share(2):

    Basic                                                               $0.44                $0.60

    Diluted                                                             $0.44                $0.60

             (1)    The financial results for the six
                     months ended June 30, 2017 were
                     retrospectively conformed to reflect
                     the adoption of Topic 606, Revenue
                     from Contracts with Customers.

             (2)    Under the two-class method for
                     calculating income per common share,
                     unvested restricted stock is a
                     separate, participating class.
                     Income per common share and weighted
                     average common shares outstanding
                     exclude amounts attributed to the
                     unvested restricted class of
                     stockholders. Net income allocated
                     to the unvested restricted
                     stockholders was $2.6 million and
                     $1.8 million for the six months
                     ended June 30, 2018 and 2017,
                     respectively.  Unvested restricted
                     weighted average shares were 4,397
                     thousand and 4,238 thousand for the
                     six months ended June 30, 2018 and
                     2017, respectively.

    N/M -  Not Meaningful

 

    III.  Condensed Consolidated Balance
     Sheets
    (In thousands, unaudited)


                                         December 31, 2017            June 30, 2018
                                         -----------------            -------------

    Assets


    Cash                                                     $122,549                     $141,029


    Accounts receivable                            691,732                      775,610


    Other current assets                           106,545                      102,703


    Total Current Assets                           920,826                    1,019,342


    Property and equipment, net                    912,591                      965,844


    Goodwill                                     2,782,812                    3,314,606


    Identifiable intangible assets, net            326,519                      451,932


    Other assets                                   184,418                      213,076


    Total Assets                                           $5,127,166                   $5,964,800
                                                           ==========                   ==========


    Liabilities and Equity


    Payables and accruals                                    $583,216                     $602,832


    Current portion of long-term debt
     and notes payable                              22,187                       24,479


    Total Current Liabilities                      605,403                      627,311


    Long-term debt, net of current
     portion                                     2,677,715                    3,386,209


    Non-current deferred tax liability             124,917                      150,694


    Other non-current liabilities                  145,709                      172,427


    Total Liabilities                            3,553,744                    4,336,641


    Redeemable non-controlling interests           640,818                      616,232


    Total equity                                   932,604                    1,011,927
                                                   -------                    ---------


    Total Liabilities and Equity                           $5,127,166                   $5,964,800
                                                           ==========                   ==========

 

 

    IV.  Condensed Consolidated
     Statements of Cash Flows

    For the Three Months Ended June
     30, 2017 and 2018
    (In thousands, unaudited)


                                         2017               2018
                                         ----               ----

    Operating activities

    Net income                                $51,300             $60,559

    Adjustments to reconcile net
     income to net cash provided by
     operating activities:

    Distributions from
     unconsolidated subsidiaries        6,022              6,466

    Depreciation and amortization      38,333             51,724

    Provision for bad debts              (36)                17

    Equity in earnings of
     unconsolidated subsidiaries      (5,666)           (4,785)

    Loss on extinguishment of debt          -                72

    Gain on sale of assets and
     businesses                       (4,914)           (6,467)

    Stock compensation expense          4,684              5,984

    Amortization of debt discount,
     premium and issuance costs         2,552              3,350

    Deferred income taxes               1,951            (1,769)

    Changes in operating assets and
     liabilities, net of effects of
     business combinations:

    Accounts receivable              (22,680)            40,037

    Other current assets                2,064              5,934

    Other assets                        4,669            (9,949)

    Accounts payable and accrued
     expenses                          13,943             14,278

    Income taxes                        3,979                772
                                        -----                ---

    Net cash provided by operating
     activities                        96,201            166,223
                                       ------            -------

    Investing activities

    Business combinations, net of
     cash acquired                    (8,942)           (2,345)

    Purchases of property and
     equipment                       (54,649)          (42,031)

    Investment in businesses          (9,374)           (1,537)

    Proceeds from sale of assets
     and businesses                    15,040              5,981
                                       ------              -----

    Net cash used in investing
     activities                      (57,925)          (39,932)
                                      -------            -------

    Financing activities

    Borrowings on revolving
     facilities                       100,000            100,000

    Payments on revolving
     facilities                     (135,000)         (195,000)

    Payments on term loans            (2,875)           (2,875)

    Debt issuance costs                 (840)                 -

    Borrowings of other debt            2,873              8,328

    Principal payments on other
     debt                             (5,162)           (5,612)

    Repurchase of common stock          (444)             (767)

    Proceeds from exercise of stock
     options                              346                882

    Increase in overdrafts             11,834              1,745

    Proceeds from issuance of non-
     controlling interests              1,459              2,926

    Distributions to non-
     controlling interests            (1,879)          (14,572)
                                       ------            -------

    Net cash used in financing
     activities                      (29,688)         (104,945)
                                      -------           --------

    Net increase in cash and cash
     equivalents                        8,588             21,346

    Cash and cash equivalents at
     beginning of period               65,211            119,683
                                       ------            -------

    Cash and cash equivalents at
     end of period                            $73,799            $141,029
                                              =======            ========

    Supplemental Information

    Cash paid for interest                    $38,085             $62,105

    Cash paid for taxes                       $26,419             $22,104

 

 

    V.  Condensed Consolidated
     Statements of Cash Flows

    For the Six Months Ended
     June 30, 2017 and 2018
    (In thousands, unaudited)


                                        2017               2018
                                        ----               ----

    Operating activities

    Net income                               $74,763             $104,541

    Adjustments to reconcile net
     income to net cash provided
     by operating activities:

    Distributions from
     unconsolidated subsidiaries      10,933              7,830

    Depreciation and
     amortization                     80,872             98,495

    Provision for bad debts              745                102

    Equity in earnings of
     unconsolidated subsidiaries    (11,187)           (9,482)

    Loss on extinguishment of
     debt                              6,527                484

    Gain on sale of assets and
     businesses                      (9,523)           (6,980)

    Stock compensation expense         9,270             10,911

    Amortization of debt
     discount, premium and
     issuance costs                    5,974              6,486

    Deferred income taxes            (1,474)           (1,691)

    Changes in operating assets
     and liabilities, net of
     effects of business
     combinations:

    Accounts receivable            (140,949)           (5,774)

    Other current assets             (5,557)           (3,011)

    Other assets                       4,621              6,684

    Accounts payable and accrued
     expenses                        (4,074)           (4,255)

    Income taxes                      19,399             12,610
                                      ------             ------

    Net cash provided by
     operating activities             40,340            216,950
                                      ------            -------

    Investing activities

    Business combinations, net
     of cash acquired               (18,508)         (517,704)

    Purchases of property and
     equipment                     (105,302)          (81,648)

    Investment in businesses         (9,874)           (3,291)

    Proceeds from sale of assets
     and businesses                   34,552              6,672
                                      ------              -----

    Net cash used in investing
     activities                     (99,132)         (595,971)
                                     -------           --------

    Financing activities

    Borrowings on revolving
     facilities                      630,000            265,000

    Payments on revolving
     facilities                    (550,000)         (345,000)

    Proceeds from term loans       1,139,487            779,904

    Payments on term loans       (1,173,692)            (5,750)

    Debt issuance costs              (4,392)           (1,333)

    Borrowings of other debt           9,444             19,928

    Principal payments on other
     debt                           (10,437)          (11,521)

    Repurchase of common stock         (600)             (889)

    Proceeds from exercise of
     stock options                       963              1,620

    Decrease in overdrafts           (5,228)           (6,171)

    Proceeds from issuance of
     non-controlling interests         3,553              2,926

    Distributions to non-
     controlling interests           (5,536)         (301,213)
                                      ------           --------

    Net cash provided by
     financing activities             33,562            397,501
                                      ------            -------

    Net increase (decrease) in
     cash and cash equivalents      (25,230)            18,480

    Cash and cash equivalents at
     beginning of period              99,029            122,549
                                      ------            -------

    Cash and cash equivalents at
     end of period                           $73,799             $141,029
                                             =======             ========

    Supplemental Information

    Cash paid for interest                   $76,650              $97,338

    Cash paid for taxes                      $27,626              $22,480

    Non-cash equity exchange
     for acquisition of U.S.
     HealthWorks                           $       -            $238,000

 

 

    VI.  Key Statistics

    For the Three Months Ended June 30, 2017 and 2018
    (unaudited)


                                                       2017(f)           2018           % Change
                                                       ------            ----           --------

    Critical Illness Recovery Hospital(a)

    Number of hospitals - end of
     period(b)                                              102                      98

    Net operating revenues (,000)                               $439,194                         $442,452          0.7%

    Number of patient days(c)                           251,302                 256,132                    1.9%

    Number of admissions(c)                               8,901                   9,121                    2.5%

    Net revenue per patient day(c)(d)                             $1,733                           $1,710        (1.3)%

    Adjusted EBITDA (,000)                                       $75,043                          $60,725       (19.1)%

    Adjusted EBITDA margin                                17.1%                  13.7%

    Rehabilitation Hospital(a)

    Number of hospitals - end of
     period(b)                                               21                      26

    Net operating revenues (,000)                               $151,378                         $173,769         14.8%

    Number of patient days(c)                            65,582                  77,415                   18.0%

    Number of admissions(c)                               4,570                   5,455                   19.4%

    Net revenue per patient day(c)(d)                             $1,569                           $1,608          2.5%

    Adjusted EBITDA (,000)                                       $23,129                          $28,195         21.9%

    Adjusted EBITDA margin                                15.3%                  16.2%

    Outpatient Rehabilitation

    Number of clinics - end of
     period(b)                                            1,608                   1,638

    Net operating revenues (,000)                               $254,984                         $267,183          4.8%

    Number of visits(c)                               2,106,760               2,144,655                    1.8%

    Revenue per visit(c)(e)                                         $101                             $103          2.0%

    Adjusted EBITDA (,000)                                       $41,926                          $41,947          0.1%

    Adjusted EBITDA margin                                16.4%                  15.7%

    Concentra

    Number of centers - end of
     period(b)                                              315                     527

    Net operating revenues (,000)                               $256,887                         $412,823         60.7%

    Number of visits(c)                               1,982,255               3,024,121                   52.6%

    Revenue per visit(c)(e)                                         $114                             $125          9.6%

    Adjusted EBITDA (,000)                                       $43,061                          $72,568         68.5%

    Adjusted EBITDA margin                                16.8%                  17.6%

    (a)              The critical illness recovery
                     hospital segment was previously
                     referred to as the long term
                     acute care segment. The
                     rehabilitation hospital segment
                     was previously referred to as
                     the inpatient rehabilitation
                     segment.

    (b)             Includes managed locations.

    (c)              Excludes managed locations. For
                     purposes of our Concentra
                     segment, onsite clinics and
                     community-based outpatient
                     clinics are excluded.

    (d)              Net revenue per patient day is
                     calculated by dividing direct
                     patient service revenues by the
                     total number of patient days.

    (e)              Net revenue per visit is
                     calculated by dividing direct
                     patient service revenue by the
                     total number of visits.  For
                     purposes of this computation
                     for our outpatient
                     rehabilitation segment, direct
                     patient service revenue does
                     not include managed clinics.
                     For purposes of this
                     computation for our Concentra
                     segment, direct patient service
                     revenue does not include onsite
                     clinics and community-based
                     outpatient clinics.

    (f)              The financial results for the
                     second quarter ended June 30,
                     2017 have been recast to
                     conform to the current segment
                     reporting structure and to
                     reflect the adoption of Topic
                     606, Revenue from Contracts
                     with Customers.

 

    VII.  Key Statistics

    For the Six Months Ended June 30, 2017 and 2018
    (unaudited)


                                                     2017(f)           2018           % Change
                                                     ------            ----           --------

    Critical Illness Recovery Hospital(a)

    Number of hospitals - end of
     period(b)                                            102                      98

    Net operating revenues (,000)                             $884,317                         $907,128         2.6%

    Number of patient days(c)                         506,399                 521,972                    3.1%

    Number of admissions(c)                            18,210                  18,954                    4.1%

    Net revenue per patient day(c)(d)                           $1,732                           $1,721       (0.6)%

    Adjusted EBITDA (,000)                                    $147,380                         $133,697       (9.3)%

    Adjusted EBITDA margin                              16.7%                  14.7%

    Rehabilitation Hospital(a)

    Number of hospitals - end of
     period(b)                                             21                      26

    Net operating revenues (,000)                             $296,203                         $348,543        17.7%

    Number of patient days(c)                         127,850                 154,305                   20.7%

    Number of admissions(c)                             8,946                  10,849                   21.3%

    Net revenue per patient day(c)(d)                           $1,544                           $1,615         4.6%

    Adjusted EBITDA (,000)                                     $39,457                          $54,971        39.3%

    Adjusted EBITDA margin                              13.3%                  15.8%

    Outpatient Rehabilitation

    Number of clinics - end of
     period(b)                                          1,608                   1,638

    Net operating revenues (,000)                             $505,355                         $524,564         3.8%

    Number of visits(c)                             4,182,550               4,212,120                    0.7%

    Revenue per visit(c)(e)                                       $100                             $103         3.0%

    Adjusted EBITDA (,000)                                     $73,277                          $72,472       (1.1)%

    Adjusted EBITDA margin                              14.5%                  13.8%

    Concentra

    Number of centers - end of
     period(b)                                            315                     527

    Net operating revenues (,000)                             $507,476                         $768,939        51.5%

    Number of visits(c)                             3,869,070               5,620,180                   45.3%

    Revenue per visit(c)(e)                                       $115                             $125         8.7%

    Adjusted EBITDA (,000)                                     $85,653                         $130,365        52.2%

    Adjusted EBITDA margin                              16.9%                  17.0%

    (a)              The critical illness recovery
                     hospital segment was previously
                     referred to as the long term
                     acute care segment. The
                     rehabilitation hospital segment
                     was previously referred to as
                     the inpatient rehabilitation
                     segment.

    (b)             Includes managed locations.

    (c)              Excludes managed locations. For
                     purposes of our Concentra
                     segment, onsite clinics and
                     community-based outpatient
                     clinics are excluded.

    (d)              Net revenue per patient day is
                     calculated by dividing direct
                     patient service revenues by the
                     total number of patient days.

    (e)              Net revenue per visit is
                     calculated by dividing direct
                     patient service revenue by the
                     total number of visits.  For
                     purposes of this computation
                     for our outpatient
                     rehabilitation segment, direct
                     patient service revenue does
                     not include managed clinics.
                     For purposes of this
                     computation for our Concentra
                     segment, direct patient service
                     revenue does not include onsite
                     clinics and community-based
                     outpatient clinics.

    (f)              The financial results for the
                     six months ended June 30, 2017
                     have been recast to conform to
                     the current segment reporting
                     structure and to reflect the
                     adoption of Topic 606, Revenue
                     from Contracts with Customers.

 

VIII. Net Income to Adjusted EBITDA Reconciliation
For the Three and Six Months Ended June 30, 2017 and 2018
(In thousands, unaudited)

The presentation of Adjusted EBITDA 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 to evaluate financial performance and determine resource allocation for each of Select Medical's operating segments. Adjusted EBITDA is not a measure of financial performance under generally accepted accounting principles ("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.

The following table reconciles net income to Adjusted EBITDA for Select Medical. Adjusted EBITDA is used by Select Medical to report its segment performance. Adjusted EBITDA is defined as earnings excluding interest, income taxes, depreciation and amortization, gain (loss) on early retirement of debt, stock compensation expense, acquisition costs associated with U.S. HealthWorks, non-operating gain (loss), and equity in earnings (losses) of unconsolidated subsidiaries.

                                      Three Months Ended June 30,                       Six Months Ended June 30,

                                   2017                     2018            2017                   2018
                                   ----                     ----            ----                   ----

    Net income                              $51,300                               $60,559                            $74,763  $104,541

    Income tax expense           32,374                              21,106                     45,576                 33,400

    Interest expense             37,655                              50,159                     78,508                 97,322

    Non-operating loss (gain)         -                            (6,478)                        49                (6,877)

    Equity in earnings of
     unconsolidated
     subsidiaries               (5,666)                            (4,785)                  (11,187)               (9,482)

    Loss on early retirement
     of debt                          -                                  -                    19,719                 10,255
                                    ---                                ---                    ------                 ------

    Income from operations      115,663                             120,561                    207,428                229,159

    Stock compensation
     expense:

    Included in general and
     administrative               3,775                               4,047                      7,524                  8,037

    Included in cost of
     services                       909                               1,937                      1,746                  2,874

    Depreciation and
     amortization                38,333                              51,724                     80,872                 98,495

    U.S. HealthWorks
     acquisition costs                -                               (41)                         -                 2,895
                                    ---                                ---                        ---                 -----

    Adjusted EBITDA                        $158,680                              $178,228                           $297,570  $341,460
                                           ========                              ========                           ========  ========


    Critical illness recovery
     hospital(a)                            $75,043                               $60,725                           $147,380  $133,697

    Rehabilitation hospital(a)   23,129                              28,195                     39,457                 54,971

    Outpatient rehabilitation    41,926                              41,947                     73,277                 72,472

    Concentra                    43,061                              72,568                     85,653                130,365

    Other(b)                   (24,479)                           (25,207)                  (48,197)              (50,045)
                                -------                             -------                    -------                -------

    Adjusted EBITDA                        $158,680                              $178,228                           $297,570  $341,460
                                           ========                              ========                           ========  ========

    (a)               The critical illness recovery
                      hospital segment was previously
                      referred to as the long term
                      acute care segment. The
                      rehabilitation hospital segment
                      was previously referred to as the
                      inpatient rehabilitation segment.

    (b)               Other primarily includes general
                      and administrative costs.

 

IX. Reconciliation of Income per Common Share to Adjusted Income per Common Share
For the Three and Six Months Ended June 30, 2017 and 2018
(In thousands, except per share amounts, unaudited)

Adjusted net income available to common stockholders and adjusted income per common share - diluted shares are not measures of financial performance under GAAP. Items excluded from adjusted net income available to common stockholders and adjusted income per common share - diluted shares are significant components in understanding and assessing financial performance. Select Medical believes that the presentation of adjusted net income available to common stockholders and adjusted income per common share - diluted shares are important to investors because they are reflective of the financial performance of our ongoing operations and provide better comparability of our results of operations between periods. Adjusted net income available to common stockholders and adjusted income per common share - diluted shares should not be considered in isolation or as alternatives to, or substitutes for, net income, 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 net income available to common stockholders and adjusted income per common share - diluted shares are not measurements determined in accordance with GAAP and are thus susceptible to varying calculations, adjusted net income available to common stockholders and adjusted income per common share - diluted shares as presented may not be comparable to other similarly titled measures of other companies.

The following tables reconcile net income available to common stockholders and income per common share to adjusted net income available to common stockholders and adjusted income per common share - diluted shares for Select Medical.

                                             Three Months Ended June 30,

                                2017           Per Share(a)                          2018 Per Share(a)
                                ----           -----------                           ---- -----------

    Net income attributable to
     Select Medical                  $42,055                                                  $46,511

    Earnings allocated to
     unvested restricted
     stockholders              1,341                                                1,517

    Net income available to
     common stockholders             $40,714                                        $0.32               $44,994                 $0.35


    Adjustments:

    Non-operating gain             -                                             (6,478)

    U.S. HealthWorks
     acquisition costs(b)          -                                                (25)

    Estimated income tax
     expense(c)                    -                                               1,749

    Earnings allocated to
     unvested restricted
     stockholders                  -                                                 155
                                                                                     ---

    Adjusted net income
     available to common
     stockholders                    $40,714                                        $0.32               $40,395                 $0.31
                                     =======                                                           =======

    Adjustment for dilution                           0.00                                                         0.00
                                                      ----                                                         ----

    Adjusted income per common
     share - diluted shares                                              $0.32                                            $0.31
                                                                         =====                                          =====


    Weighted average common
     shares outstanding:

    Basic                                          128,624                                    129,830

    Diluted                                                                    128,777                          129,924

    (a)                 Per share amounts for each
                        period presented are basic
                        weighted average common shares
                        outstanding for all amounts
                        except adjusted income per
                        common share -diluted shares,
                        which is based on diluted
                        shares outstanding.

    (b)                 For the three months ended June
                        30, 2018, the U.S. HealthWorks
                        acquisition costs recognized by
                        Concentra are net of non-
                        controlling interest.

    (c)                 Represents the estimated income
                        tax impacts on the adjustments
                        to net income.

 

                                                Six Months Ended June 30,

                                   2017          Per Share(a)                    2018(b) Per Share(a)
                                   ----          -----------                     ------   -----------

    Net income attributable to
     Select Medical                     $57,925                                                $80,250

    Earnings allocated to
     unvested restricted
     stockholders                 1,849                                            2,630

    Net income available to
     common stockholders                $56,076                                    $0.44                $77,620         $0.60


    Adjustments:

    Loss on early retirement of
     debt                        19,719                                            7,324

    Non-operating loss (gain)        49                                          (6,877)

    U.S. HealthWorks
     acquisition costs(c)             -                                           1,720

    Estimated income tax
     benefit(d)                 (7,796)                                         (1,623)

    Earnings allocated to
     unvested restricted
     stockholders                 (381)                                            (18)
                                                                                    ---

    Adjusted net income
     available to common
     stockholders                       $67,667                                    $0.53                $78,146         $0.60
                                        =======                                                        =======

    Adjustment for dilution                             0.00                                      0.00
                                                        ----                                      ----

    Adjusted income per common
     share - diluted shares                                               $0.53                                   $0.60
                                                                          =====                                 =====


    Weighted average common
     shares outstanding:

    Basic                                            128,544                                   129,761

    Diluted                                          128,703                                   129,871

    (a)               Per share amounts for each
                      period presented are basic
                      weighted average common shares
                      outstanding for all amounts
                      except adjusted income per
                      common share -diluted shares,
                      which is based on diluted
                      shares outstanding.

    (b)               For the six months ended June
                      30, 2018, the loss on early
                      retirement is comprised of
                      losses related to both the
                      Select credit facilities and
                      Concentra credit facilities.
                      The loss on early retirement of
                      debt related to the Concentra
                      credit facilities is net of
                      non-controlling interest.

    (c)               For the six months ended June
                      30, 2018, the U.S. HealthWorks
                      acquisition costs recognized by
                      Concentra are net of non-
                      controlling interest.

    (d)               Represents the estimated income
                      tax impacts on the adjustments
                      to net income.

 

X. Net Income to Adjusted EBITDA and Income per Common Share to Adjusted Income per Common Share Reconciliations
Business Outlook for the Year Ending December 31, 2018
(In millions, unaudited)

The following are reconciliations of full year 2018 Adjusted EBITDA and adjusted income per common share - diluted shares expectations as computed at the low and high points of the range to the closest comparable GAAP financial measure. Refer to table VIII and table IX for a discussion of Select Medical's use of Adjusted EBITDA and adjusted income per common share - diluted shares in evaluating financial performance. Refer to table VIII for the definition of Adjusted EBITDA. Each item presented in the below tables are estimations of full year 2018 expectations.

                                                Range

    Non-GAAP Measure Reconciliation    Low             High
                                       ---             ----

    Net income attributable to Select
     Medical                                      $130               $151

    Net income attributable to non-
     controlling interests                 41                    43
                                          ---                   ---

    Net income                            171                   194

    Income tax expense                     57                    64

    Interest expense                      198                   198

    Equity in earnings of
     unconsolidated subsidiaries         (21)                 (21)

    Loss on early retirement of debt       10                    10

    Non-operating loss (gain)             (7)                  (7)
                                          ---                   ---

    Income from operations                408                   438

    Stock compensation expense             21                    21

    Depreciation and amortization         198                   198

    U.S. HealthWorks acquisition costs      3                     3

    Adjusted EBITDA                               $630               $660
                                                  ====               ====


                                              Range

    Non-GAAP Measure Reconciliation    Low             High
                                       ---             ----

    Income per common share -diluted
     shares                                      $0.97              $1.12

    Adjustments:

    Loss on early retirement of debt     0.03                  0.03

    U.S. HealthWorks acquisition costs   0.01                  0.01

    Non-operating loss (gain)          (0.04)               (0.04)
                                                             -----

    Adjusted income per common share -
     diluted shares                              $0.97              $1.12
                                                 =====              =====

 

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SOURCE Select Medical Holdings Corporation

Company Codes: NYSE:SEM

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