Select Medical Announces Results for Third Quarter Ended September 30, 2010 and Stock Repurchase Program

MECHANICSBURG, Pa., Nov. 4, 2010 /PRNewswire-FirstCall/ -- Select Medical Holdings Corporation (“Select”) (NYSE: SEM), today announced results for its third quarter ended September 30, 2010.

For the third quarter ended September 30, 2010, net operating revenues increased 7.8% to $588.3 million compared to $545.6 million for the same quarter, prior year. Income from operations increased 27.5% to $42.0 million compared to $32.9 million for the same quarter, prior year. Net income attributable to Select increased to $8.0 million compared to $0.6 million for the same quarter, prior year. Net income before interest, income taxes, depreciation and amortization, gain on early retirement of debt, stock compensation expense, other income, equity in losses and long term incentive compensation (“Adjusted EBITDA”) for the third quarter decreased 18.6% to $59.4 million compared to $73.0 million for the same quarter, prior year. The decrease in Adjusted EBITDA was principally related to higher operating costs in the Specialty Hospital segment and an increase in general and administrative costs included in the Adjusted EBITDA computation. A reconciliation of net income to Adjusted EBITDA is attached to this release.

Income per common share for the third quarter ended September 30, 2010 was $0.05 on a fully diluted basis. Select’s loss per common share for the quarter ended September 30, 2009 was $0.09, which included non-recurring charges related to Select’s initial public offering (“IPO”) for long term incentive compensation and stock compensation expense, and gains related to the early retirement of debt. Excluding the early retirement of debt and the expenses related to the IPO, on an adjusted basis income available to common stockholders was $0.09 per diluted share for the quarter ended September 30, 2009. A reconciliation of net income (loss) per share to adjusted net income per share is attached to this release.

On September 30, 2010, Select’s weighted average diluted common shares outstanding were 159,955,000, compared to 62,078,000 at the end of the same quarter, prior year. Such increase in common share count was primarily due to (1) the issuance of 30,000,000 shares upon the completion of Select’s IPO on September 30, 2009, (2) the conversion of Select’s participating preferred stock into 64,277,000 shares upon completion of the IPO, and (3) the issuance of 3,603,000 shares after the IPO underwriters exercised an over-allotment option on October 28, 2009.

For the nine months ended September 30, 2010, net operating revenues increased 5.2% to $1,752.9 million compared to $1,666.3 million for the same period, prior year. Income from operations increased 12.8% to $187.2 million compared to $165.9 million for the same period, prior year. Net income attributable to Select increased 25.0% to $56.7 million compared to $45.4 million for the same period, prior year. Adjusted EBITDA for the nine months ended September 30, 2010 decreased 1.0% to $239.9 million compared to $242.3 million for the same period, prior year. A reconciliation of net income to Adjusted EBITDA is attached to this release. Income per common share for the nine months ended September 30, 2010 was $0.35 on a fully diluted basis.

Select’s income per common share for the nine months ended September 30, 2009 was $0.37, which included non-recurring charges related to Select’s IPO for long term incentive compensation and stock compensation expense, and gains related to the early retirement of debt. Excluding the early retirement of debt and the expenses related to the IPO, on an adjusted basis income available to common stockholders was $0.42 per diluted share for the nine months ended September 30, 2009. A reconciliation of net income per share to adjusted net income per share is attached to this release.

Specialty Hospitals

At September 30, 2010, Select operated 111 long term acute care hospitals and six acute medical rehabilitation hospitals. This compares to 89 long term acute care hospitals and five acute medical rehabilitation hospitals operated at September 30, 2009. For the third quarter of 2010, net operating revenues for all of Select’s hospitals increased 11.4% to $419.8 million compared to $376.9 million for the same quarter, prior year. Total patient days for the third quarter of 2010 were 275,387, admissions were 11,305 and net revenue per patient day was $1,478. This compares to 248,504 days, 10,466 admissions and net revenue per patient day of $1,479 for the same quarter, prior year.

For the hospitals opened as of January 1, 2009 and operated by Select throughout both periods, patient days in the third quarter of 2010 were 251,799 and admissions were 10,267, compared to 245,899 days and 10,331 admissions in the same quarter, prior year. Adjusted EBITDA for the specialty hospital segment decreased 9.5% to $58.3 million compared to $64.4 million for the same quarter, prior year. The Adjusted EBITDA margin for the segment was 13.9% for the third quarter of 2010, compared to 17.1% for the same quarter, prior year. The Adjusted EBITDA margin for the hospitals opened as of January 1, 2009 and operated by Select throughout both periods was 15.7% for the third quarter of 2010, compared to 17.7% for the same quarter, prior year. The principal reason for the decline in Adjusted EBITDA for these same store hospitals was an increase in cost of services. Select’s labor costs in these hospitals were 154 basis points higher and other operating costs were 83 basis points higher for the three months ended September 30, 2010 when compared to the three months ended September 30, 2009. Select’s labor costs were primarily higher due to increased patient care hours that resulted from a higher acuity patient population in the current quarter compared to the same quarter in the prior year. Net revenue per patient day was adversely affected because the hospitals experienced a higher volume of high cost outlier cases in the current quarter compared to the same period in the prior year. Additionally, the labor costs included a $4.0 million charge due to an increase in Select’s workers compensation program costs during the quarter. The increase in Select’s other operating costs was caused by increasing onsite physician services at certain hospitals, increased equipment leasing costs and increased purchases of minor equipment and supplies. These increases in cost of services were partially offset by a reduction in bad debt expense in these hospitals.

For the nine months ended September 30, 2010, net operating revenues for all of Select’s hospitals increased 6.8% to $1,234.6 million compared to $1,156.4 million for the same period, prior year. Total patient days for the nine months ended September 30, 2010 were 808,133, admissions were 33,022 and net revenue per patient day was $1,481. This compares to 757,487 days, 31,775 admissions and net revenue per patient day of $1,489 for the same period, prior year. For the hospitals opened as of January 1, 2009 and operated by Select throughout both periods, patient days for the nine months ended September 30, 2010 were 771,078, and admissions were 31,203, compared to 749,558 days and 31,358 admissions in the same period, prior year. Adjusted EBITDA for the segment for the nine months ended September 30, 2010 increased 1.1% to $214.5 million compared to $212.1 million for the same period, prior year. The Adjusted EBITDA margin for the segment for the nine months ended September 30, 2010 was 17.4%, compared to 18.3% for the same period, prior year. The Adjusted EBITDA margin for the hospitals opened as of January 1, 2009 and operated by Select throughout both periods was 18.5% for the nine months ended September 30, 2010, compared to 18.8% for the same period, prior year. The 30 basis point decline in the Adjusted EBITDA margin resulted from the factors which caused the decline in Adjusted EBITDA in the third quarter which are described above.

Outpatient Rehabilitation

At September 30, 2010, Select operated 950 outpatient clinics. This compares to 947 outpatient clinics at September 30, 2009. For the third quarter of 2010, net operating revenues for the outpatient rehabilitation segment decreased 0.2% to $168.4 million compared to $168.8 million for the same quarter, prior year. Adjusted EBITDA for the segment for the third quarter decreased 2.7% to $20.3 million compared to $20.9 million for the same quarter, prior year. The Adjusted EBITDA margin for the segment for the quarter was 12.1% compared to 12.4% in the same quarter, prior year. Patient visits in the clinics owned by Select for the quarter were 1,144,096 compared to 1,126,096 for the same quarter, prior year. Net revenue per visit was $101 in both quarters. The decline in the Adjusted EBITDA and Adjusted EBITDA margin for the quarter was primarily due to the termination of a significant therapy services contract.

For the nine months ended September 30, 2010, net operating revenues were $518.3 million compared to $509.8 million for the same period, prior year. Adjusted EBITDA for the nine months ended September 30, 2010 decreased 1.0% to $66.8 million compared to $67.5 million for the same period, prior year. The Adjusted EBITDA margin for the nine months ended September 30, 2010 was 12.9% compared to 13.2% in the same period, prior year. Patient visits in the clinics owned by Select for the nine months ended September 30, 2010 were 3,442,266 compared to 3,385,733 for the same period, prior year. Net revenue per visit was $101 for the nine months ended September 30, 2010 compared to $102 for the same period, prior year. The decline in the Adjusted EBITDA and Adjusted EBITDA margin for nine month period was primarily due to the termination of a significant therapy services contract.

General and Administrative Costs

For the three months ended September 30, 2010, general and administrative costs were $19.2 million compared to $34.6 million for the three months ended September 30, 2009. The decrease was related to a number of factors. The 2009 period includes non-recurring charges related to Select’s IPO of $18.3 million in long-term incentive compensation and $3.7 million in stock compensation expense related to the grant of restricted stock that vested in connection with the Select’s IPO. The 2010 period includes approximately $2.1 million of costs related to the transition of management functions and closing of the Regency corporate office and a $4.8 million charge due to an increase in Select’s self insurance health program costs. The 2010 increase was offset by a reduction in incentive compensation for executive officers of $1.8 million.

For the nine months ended September 30, 2010, general and administrative costs were $41.8 million compared to $60.3 million for the nine months ended September 30, 2009. The decrease was related to a number of factors. The 2009 period includes non-recurring charges related to Select’s IPO of $18.3 million in long-term incentive compensation and $3.7 million in stock compensation expense related to the grant of restricted stock that vested in connection with the Select’s IPO. The 2010 period includes approximately $2.1 million of costs related to the transition of management functions and closing of the Regency corporate office and a $4.8 million charge due to an increase in Select’s self insurance health program costs. The 2010 increase was offset by a reduction in incentive compensation for executive officers of $5.2 million.

Purchase of Regency Hospital Company, L.L.C.

On September 1, 2010, Select completed the acquisition of all the issued and outstanding equity securities of Regency Hospital Company, L.L.C. (“Regency”) an operator of long-term acute care hospitals, for $210 million, including certain assumed liabilities. The amount paid at closing was reduced by $33 million for certain assumed liabilities, payments to employees, payments for the repurchase of minority interests and an estimated working capital adjustment. The purchase price is subject to a final settlement of net working capital. Regency operated a network of 23 long-term acute care hospitals, located in 9 states.

The Regency hospitals operating results are included in Select’s Specialty Hospital segment beginning on September 1, 2010. For the month, Regency provided $23.4 million of net operating revenue and generated a total Adjusted EBITDA loss of $3.4 million which includes the $2.1 million in increased general and administrative costs. Regency’s Adjusted EBITDA loss during September was primarily due to transition costs.

Stock Repurchase Program

Select has authorized a program to repurchase up to $100 million worth of shares of its common stock. The program will remain in effect until January 31, 2012, unless extended 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 Select deems appropriate. The timing of purchases of stock will be based upon market conditions and other factors. Select anticipates funding for this program to come from cash on hand or borrowings under its credit facility. Select anticipates that it will have sufficient borrowing capacity to continue executing its growth strategy.

Business Outlook

Select expects consolidated revenue for its fourth quarter of 2010 to be in the range of $628 million to $642 million, Adjusted EBITDA to be in the range of $84 million to $91 million and income per common share to be in the range of $0.14 to $0.17. Select expects to provide its business outlook for 2011 in late December 2010 or early January 2011.

Conference Call

Select will host a conference call regarding its third quarter results and its business outlook on Friday, November 5, 2010, at 9:00am EDT. The domestic dial in number for the call is 1-866-788-0540. The international dial in number is 1-857-350-1678. The passcode for the call is 83372879. The conference call will be webcast simultaneously and can be accessed at Select Medical Holdings Corporation’s website http://www.selectmedicalholdings.com.

For those unable to participate in the conference call, a replay will be available until 11:59pm EST, Friday, November 12, 2010. The replay number is 1-888-286-8010 (domestic) or 1-617-801-6888 (international). The passcode for the replay will be 57319689. The replay can also be accessed at Select Medical Holdings Corporation’s website, http://www.selectmedicalholdings.com.

Select Medical Holdings Corporation is a leading operator of specialty hospitals in the United States. As of September 30, 2010, Select operated 111 long term acute care hospitals and six acute medical rehabilitation hospitals in 28 states. Select is also a leading operator of outpatient rehabilitation clinics in the United States, with approximately 950 locations in 36 states and the District of Columbia. Select also provides medical rehabilitation services on a contract basis at nursing homes, hospitals, assisted living and senior care centers, schools and worksites. Information about Select is available at http://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:

• additional changes in government reimbursement for our services, including changes that will result from the expiration of the moratorium for long term acute care hospitals established by the SCHIP Extension Act of 2007, the American Recovery and Reinvestment Act, and the Patient Protection and Affordable Care Act may result in a reduction in net operating revenues, an increase in costs and a reduction in profitability;
• the failure of our specialty hospitals to maintain their Medicare certifications as such may cause our net operating revenues and profitability to decline;
• the failure of our facilities operated as “hospitals within hospitals” or HIHs, 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;
• future acquisitions or joint ventures may prove difficult or unsuccessful, use significant resources or expose us to unforeseen liabilities;
• private third-party payors for our services may undertake future cost containment initiatives that 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 or therapists could increase our operating costs significantly;
• 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 or lack of adequate available insurance could subject us to substantial uninsured liabilities;
• other factors discussed from time to time in our filings with the Securities and Exchange Commission, including factors under the heading “Risk Factors” in our annual report on Form 10-K.