Select Medical Holdings Corporation Announces Results For Its Third Quarter Ended September 30, 2018

November 1, 2018 |

36 min read

Select Medical Holdings Corporation (“Select Medical”) (NYSE: SEM) today announced results for its third quarter ended September 30, 2018

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

For the third quarter ended September 30, 2018, net operating revenues increased 17.7% to $1,267.4 million, compared to $1,077.0 million for the same quarter, prior year. Income from operations increased 38.5% to $99.8 million for the third quarter ended September 30, 2018, compared to $72.1 million for the same quarter, prior year. Net income increased 71.9% to $42.7 million for the third quarter ended September 30, 2018, compared to $24.8 million for the same quarter, prior year. Net income for the third quarter ended September 30, 2018 included a pre-tax non-operating gain of $2.1 million. Adjusted EBITDA increased 35.2% to $156.6 million for the third quarter ended September 30, 2018, compared to $115.8 million for the same quarter, prior year. Income per common share increased to $0.24 on a fully diluted basis for the third quarter ended September 30, 2018, compared to $0.14 for the same quarter, prior year. Adjusted income per common share was $0.23 per diluted share for the third quarter ended September 30, 2018, compared to $0.14 for the same quarter, prior year. Adjusted income per common share excludes the non-operating gain and its related tax effects for the third quarter ended September 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 nine months ended September 30, 2018, net operating revenues increased 16.7% to $3,816.6 million, compared to $3,271.0 million for the same period, prior year. Income from operations increased 17.7% to $329.0 million for the nine months ended September 30, 2018, compared to $279.5 million for the same period, prior year. Net income increased 47.8% to $147.2 million for the nine months ended September 30, 2018, compared to $99.6 million for the same period, prior year. Net income for the nine months ended September 30, 2018 included a pre-tax loss on early retirement of debt of $10.3 million, pre-tax non-operating gains of $9.0 million, and pre-tax U.S. HealthWorks acquisition costs of $2.9 million. Net income for the nine months ended September 30, 2017 included a pre-tax loss on early retirement of debt of $19.7 million. Adjusted EBITDA increased 20.5% to $498.1 million for the nine months ended September 30, 2018, compared to $413.4 million for the same period, prior year. Income per common share increased to $0.84 on a fully diluted basis for the nine months ended September 30, 2018, compared to $0.57 for the same period, prior year. Adjusted income per common share was $0.83 per diluted share for the nine months ended September 30, 2018, compared to $0.66 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 nine months ended September 30, 2018. Adjusted income per common share excludes the loss on early retirement of debt and its related tax effects for the nine months ended September 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 September 30, 2018, Select Medical operated 97 critical illness recovery hospitals in 27 states, 26 rehabilitation hospitals in 11 states, and 1,649 outpatient rehabilitation clinics in 37 states and the District of Columbia. Select Medical's joint venture subsidiary Concentra operated 525 occupational health centers in 41 states. Concentra also provides contract services at employer worksites and Department of Veterans Affairs community-based outpatient clinics. At September 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 third quarter ended September 30, 2018, net operating revenues for the critical illness recovery hospital segment (previously referred to as the long term acute care segment) increased 0.8% to $420.1 million, compared to $416.9 million for the same quarter, prior year. Adjusted EBITDA for the critical illness recovery hospital segment increased 13.7% to $53.3 million for the third quarter ended September 30, 2018, compared to $46.9 million for the same quarter, prior year. The Adjusted EBITDA margin for the critical illness recovery hospital segment was 12.7% for the third quarter ended September 30, 2018, compared to 11.2% for the same quarter, prior year. Certain critical illness recovery hospital key statistics for both the third quarters ended September 30, 2018 and 2017 are presented in table VI of this release.

For the nine months ended September 30, 2018, net operating revenues for the critical illness recovery hospital segment increased 2.0% to $1,327.2 million, compared to $1,301.3 million for the same period, prior year. Adjusted EBITDA for the critical illness recovery hospital segment was $187.0 million for the nine months ended September 30, 2018, compared to $194.3 million for the same period, prior year. The Adjusted EBITDA margin for the critical illness recovery hospital segment was 14.1% for the nine months ended September 30, 2018, compared to 14.9% for the same period, prior year. Certain critical illness recovery hospital key statistics for both the nine months ended September 30, 2018 and 2017 are presented in table VII of this release.

Rehabilitation Hospital Segment

For the third quarter ended September 30, 2018, net operating revenues for the rehabilitation hospital segment (previously referred to as the inpatient rehabilitation segment) increased 12.3% to $176.9 million, compared to $157.5 million for the same quarter, prior year. Adjusted EBITDA for the rehabilitation hospital segment increased 12.2% to $25.3 million for the third quarter ended September 30, 2018, compared to $22.6 million for the same quarter, prior year. The Adjusted EBITDA margin for the rehabilitation hospital segment was 14.3% for both the third quarters ended September 30, 2018 and 2017. The Adjusted EBITDA results for the rehabilitation hospital segment include start-up losses of approximately $0.8 million for the third quarter ended September 30, 2018, compared to approximately $1.3 million for the same quarter, prior year. Certain rehabilitation hospital key statistics for both the third quarters ended September 30, 2018 and 2017 are presented in table VI of this release.

For the nine months ended September 30, 2018, net operating revenues for the rehabilitation hospital segment increased 15.8% to $525.4 million, compared to $453.7 million for the same period, prior year. Adjusted EBITDA for the rehabilitation hospital segment increased 29.5% to $80.3 million for the nine months ended September 30, 2018, compared to $62.0 million for the same period, prior year. The Adjusted EBITDA margin for the rehabilitation hospital segment was 15.3% for the nine months ended September 30, 2018, compared to 13.7% for the same period, prior year. The Adjusted EBITDA results for the rehabilitation hospital segment include start-up losses of approximately $3.8 million for the nine months ended September 30, 2018, compared to approximately $4.5 million for the same period, prior year. Certain rehabilitation hospital key statistics for both the nine months ended September 30, 2018 and 2017 are presented in table VII of this release.

Outpatient Rehabilitation Segment

For the third quarter ended September 30, 2018, net operating revenues for the outpatient rehabilitation segment increased 7.8% to $265.9 million, compared to $246.6 million for the same quarter, prior year. Adjusted EBITDA for the outpatient rehabilitation segment increased 17.9% to $34.5 million for the third quarter ended September 30, 2018, compared to $29.3 million for the same quarter, prior year. The Adjusted EBITDA margin for the outpatient rehabilitation segment was 13.0% for the third quarter ended September 30, 2018, compared to 11.9% for the same quarter, prior year. Certain outpatient rehabilitation key statistics for both the third quarters ended September 30, 2018 and 2017 are presented in table VI of this release.

For the nine months ended September 30, 2018, net operating revenues for the outpatient rehabilitation segment increased 5.1% to $790.5 million, compared to $752.0 million for the same period, prior year. Adjusted EBITDA for the outpatient rehabilitation segment increased 4.3% to $107.0 million for the nine months ended September 30, 2018, compared to $102.6 million for the same period, prior year. The Adjusted EBITDA margin for the outpatient rehabilitation segment was 13.5% for the nine months ended September 30, 2018, compared to 13.6% for the same period, prior year. Certain outpatient rehabilitation key statistics for both the nine months ended September 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 third quarter ended September 30, 2018, net operating revenues for the Concentra segment increased 58.1% to $404.5 million, compared to $255.9 million for the same quarter, prior year. For the third quarter ended September 30, 2018, U.S. HealthWorks contributed net operating revenues of $133.3 million. Adjusted EBITDA for the Concentra segment increased 71.9% to $68.8 million for the third quarter ended September 30, 2018, compared to $40.0 million for the same quarter, prior year. The Adjusted EBITDA margin for the Concentra segment was 17.0% for the third quarter ended September 30, 2018, compared to 15.6% for the same quarter, prior year. Certain Concentra key statistics for both the third quarters ended September 30, 2018 and 2017 are presented in table VI of this release.

For the nine months ended September 30, 2018, net operating revenues for the Concentra segment increased 53.7% to $1,173.4 million, compared to $763.4 million for the same period, prior year. For the period February 1, 2018 through September 30, 2018, U.S. HealthWorks contributed net operating revenues of $362.7 million. Adjusted EBITDA for the Concentra segment increased 58.5% to $199.1 million for the nine months ended September 30, 2018, compared to $125.7 million for the same period, prior year. The Adjusted EBITDA margin for the Concentra segment was 17.0% for the nine months ended September 30, 2018, compared to 16.5% for the same period, prior year. Certain Concentra key statistics for both the nine months ended September 30, 2018 and 2017 are presented in table VII of this release.

Stock Repurchase Program

Select Medical did not repurchase shares during the third quarter ended September 30, 2018 under its authorized $500.0 million stock repurchase program. The program has been extended until December 31, 2019, 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 September 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.

Refinancing

Amendment to the Select Credit Facilities

On October 26, 2018, Select Medical entered into Amendment No. 2 to its senior secured credit agreement ("Amendment No. 2"). Among other things, Amendment No. 2: (i) decreased the applicable interest rate on its term loans from the Adjusted LIBO Rate (as defined in the senior secured credit agreement) plus a percentage ranging from 2.50% to 2.75% to the Adjusted LIBO Rate plus a percentage ranging from 2.25% to 2.50%, or from the Alternative Base Rate (as defined in the senior secured credit agreement) plus a percentage ranging from 1.50% to 1.75% to the Alternative Base Rate plus a percentage ranging from 1.25% to 1.50%, in each case subject to a specified total net leverage ratio (as defined in the senior secured credit agreement), and (ii) decreased the applicable interest rate on the loans outstanding under the revolving credit facility from the Adjusted LIBO Rate plus a percentage ranging from 2.50% to 2.75% to the Adjusted LIBO Rate plus a percentage ranging from 2.25% to 2.50%, or from the Alternative Base Rate (as defined in the senior secured credit agreement) plus a percentage ranging from 1.50% to 1.75% to the Alternative Base Rate plus a percentage ranging from 1.25% to 1.50%, in each case subject to a specified total net leverage ratio. As amended, the Adjusted LIBO Rate and Alternate Base Rate under the senior secured credit agreement are no longer subject to the currently applicable floor.

Amendment to the Concentra Credit Facilities

On October 26, 2018, Concentra entered into Amendment No. 4 to the Concentra first lien credit agreement ("Amendment No. 4"). Among other things, Amendment No. 4 (i) provided the applicable interest rate on the tranche B term loans under the Concentra first lien credit agreement is the Adjusted LIBO Rate (as defined in the Concentra first lien credit agreement) plus a percentage ranging from 2.50% to 2.75% (with 2.75% being the initial rate), or the Alternate Base Rate (as defined in the Concentra first lien credit agreement) plus a percentage ranging from 1.50% to 1.75% (with 1.75% being the initial rate), in each case subject to a specified credit rating, and (ii) decreased the applicable interest rate on the loans outstanding under the Concentra revolving credit facility from the Adjusted LIBO Rate plus a percentage ranging from 2.75% to 3.00% to the Adjusted LIBO Rate plus a percentage ranging from 2.25% to 2.50%, or from the Alternate Base Rate plus a percentage ranging from 1.75% to 2.00% to the Alternate Base Rate plus a percentage ranging from 1.25% to 1.50%, in each case subject to Concentra's first lien net leverage ratio (as defined in the Concentra first lien credit agreement). As amended, the Adjusted LIBO Rate and Alternate Base Rate under the Concentra first lien credit agreement are no longer subject to the currently applicable floor.

Business Outlook

Select Medical is updating its business outlook following the reporting of its third quarter 2018 results. Select Medical now expects for the full year of 2018 consolidated net operating revenues to be in the range of $5.05 billion to $5.10 billion and Adjusted EBITDA for the full year of 2018 to be in the range of $640.0 million to $655.0 million. Select Medical now expects fully diluted income per common share for the full year 2018 to be in the range of $1.02 to $1.08 and adjusted income per common share for the full year 2018 to be in the range of $1.01 to $1.07 per diluted share. The above estimates do not include any negative impact from the expected loss on early retirement of debt incurred in the fourth quarter of 2018 resulting from the repricing amendments to both the Select credit facilities and Concentra first lien credit facilities which closed on October 26, 2018. Adjusted income per common share - diluted shares excludes the non-operating loss (gain), loss on early retirement of debt, and U.S. HealthWorks acquisition costs and their related tax effects.

Conference Call

Select Medical will host a conference call regarding its third quarter results, as well as its business outlook, on Friday, November 2, 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 7578418. 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, November 9, 2018. The replay number is 1-855-859-2056 (domestic) or 1-404-537-3406 (international). The passcode for the replay will be 7578418. 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 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 September 30, 2017 and 2018 (In thousands, except per share amounts, unaudited)
	2017⁽¹⁾		2018		% Change
Net operating revenues	$	1,077,014	$	1,267,401	17.7	%

Costs and expenses:
Cost of services	939,079		1,087,062		15.8
General and administrative	27,065		29,975		10.8
Depreciation and amortization	38,772		50,527		30.3

Income from operations	72,098		99,837		38.5

Equity in earnings of unconsolidated subsidiaries	4,431		5,432		22.6
Non-operating gain	—		2,139		N/M
Interest expense	(37,688)		(50,669)		34.4

Income before income taxes	38,841		56,739		46.1

Income tax expense	14,017		14,060		0.3

Net income	24,824		42,679		71.9

Less: Net income attributable to non-controlling interests	6,362		9,762		53.4

Net income attributable to Select Medical	$	18,462	$	32,917	78.3	%

Weighted average shares outstanding⁽²⁾:
Basic	129,142		130,387
Diluted	129,322		130,447

Income per common share⁽²⁾:
Basic	$	0.14	$	0.24
Diluted	$	0.14	$	0.24

_______________________________________________________________________________
(1)	The financial results for the third quarter ended September 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 $1.1 million and $0.6 million for the three months ended September 30, 2018 and 2017, respectively. Unvested restricted weighted average shares were 4,501 thousand and 4,395 thousand for the three months ended September 30, 2018 and 2017, respectively.
N/M — Not Meaningful

II. Condensed Consolidated Statements of Operations For the Nine Months Ended September 30, 2017 and 2018 (In thousands, except per share amounts, unaudited)

	2017⁽¹⁾		2018		% Change
Net operating revenues	$	3,270,996	$	3,816,575	16.7	%

Costs and expenses:
Cost of services	2,788,411		3,247,606		16.5
General and administrative	83,415		90,951		9.0
Depreciation and amortization	119,644		149,022		24.6

Income from operations	279,526		328,996		17.7

Loss on early retirement of debt	(19,719)		(10,255)		N/M
Equity in earnings of unconsolidated subsidiaries	15,618		14,914		(4.5)
Non-operating gain (loss)	(49)		9,016		N/M
Interest expense	(116,196)		(147,991)		27.4

Income before income taxes	159,180		194,680		22.3

Income tax expense	59,593		47,460		(20.4)

Net income	99,587		147,220		47.8

Less: Net income attributable to non-controlling interests	23,200		34,053		46.8

Net income attributable to Select Medical	$	76,387	$	113,167	48.1	%

Weighted average shares outstanding⁽²⁾:
Basic	128,745		129,972
Diluted	128,916		130,066

Income per common share⁽²⁾:
Basic	$	0.57	$	0.84
Diluted	$	0.57	$	0.84

_______________________________________________________________________________
(1)	The financial results for the nine months ended September 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 $3.7 million and $2.5 million for the nine months ended September 30, 2018 and 2017, respectively. Unvested restricted weighted average shares were 4,432 thousand and 4,291 thousand for the nine months ended September 30, 2018 and 2017, respectively.
N/M — Not Meaningful

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

	December 31, 2017		September 30, 2018
Assets

Cash	$	122,549	$	160,413

Accounts receivable	691,732		746,816

Other current assets	106,545		116,066

Total Current Assets	920,826		1,023,295

Property and equipment, net	912,591		965,390

Goodwill	2,782,812		3,311,459

Identifiable intangible assets, net	326,519		444,847

Other assets	184,418		235,190

Total Assets	$	5,127,166	$	5,980,181

Liabilities and Equity

Payables and accruals	$	583,216	$	660,934

Current portion of long-term debt and notes payable	22,187		24,175

Total Current Liabilities	605,403		685,109

Long-term debt, net of current portion	2,677,715		3,305,533

Non-current deferred tax liability	124,917		148,227

Other non-current liabilities	145,709		174,170

Total Liabilities	3,553,744		4,313,039

Redeemable non-controlling interests	640,818		779,574

Total equity	932,604		887,568

Total Liabilities and Equity	$	5,127,166	$	5,980,181

IV. Condensed Consolidated Statements of Cash Flows For the Three Months Ended September 30, 2017 and 2018 (In thousands, unaudited)

	2017		2018
Operating activities
Net income	$	24,824	$	42,679
Adjustments to reconcile net income to net cash provided by operating activities:
Distributions from unconsolidated subsidiaries	3,609		2,904
Depreciation and amortization	38,772		50,527
Provision for bad debts	169		(475)
Equity in earnings of unconsolidated subsidiaries	(4,431)		(5,432)
Loss (gain) on sale of assets and businesses	24		(2,149)
Stock compensation expense	4,957		6,264
Amortization of debt discount, premium and issuance costs	2,572		3,359
Deferred income taxes	(4,652)		(401)
Changes in operating assets and liabilities, net of effects of business combinations:
Accounts receivable	(2,359)		29,269
Other current assets	2,880		(7,263)
Other assets	(3,214)		(1,856)
Accounts payable and accrued expenses	26,739		50,139
Income taxes	(258)		(3,538)
Net cash provided by operating activities	89,632		164,027
Investing activities
Business combinations, net of cash acquired	(863)		(1,554)
Purchases of property and equipment	(68,498)		(39,391)
Investment in businesses	(1,500)		(9,645)
Proceeds from sale of assets and businesses	3		19
Net cash used in investing activities	(70,858)		(50,571)
Financing activities
Borrowings on revolving facilities	175,000		155,000
Payments on revolving facilities	(155,000)		(240,000)
Payments on term loans	(2,875)		(2,875)
Borrowings of other debt	18,127		10,206
Principal payments on other debt	(4,675)		(6,450)
Repurchase of common stock	(3,003)		(4,751)
Proceeds from exercise of stock options	671		13
Decrease in overdrafts	(15,211)		(1)
Proceeds from issuance of non-controlling interests	5,433		—
Distributions to non-controlling interests	(3,740)		(5,214)
Net cash provided by (used in) financing activities	14,727		(94,072)
Net increase in cash and cash equivalents	33,501		19,384
Cash and cash equivalents at beginning of period	73,799		141,029
Cash and cash equivalents at end of period	$	107,300	$	160,413
Supplemental Information
Cash paid for interest	$	24,691	$	37,040
Cash paid for taxes	$	18,927	$	17,980

V. Condensed Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 2017 and 2018 (In thousands, unaudited)

	2017		2018
Operating activities
Net income	$	99,587	$	147,220
Adjustments to reconcile net income to net cash provided by operating activities:
Distributions from unconsolidated subsidiaries	14,542		10,734
Depreciation and amortization	119,644		149,022
Provision for bad debts	914		(373)
Equity in earnings of unconsolidated subsidiaries	(15,618)		(14,914)
Loss on extinguishment of debt	6,527		484
Gain on sale of assets and businesses	(9,499)		(9,129)
Stock compensation expense	14,227		17,175
Amortization of debt discount, premium and issuance costs	8,546		9,845
Deferred income taxes	(6,126)		(2,092)
Changes in operating assets and liabilities, net of effects of business combinations:
Accounts receivable	(143,308)		23,495
Other current assets	(2,677)		(10,274)
Other assets	1,407		4,828
Accounts payable and accrued expenses	22,665		45,884
Income taxes	19,141		9,072
Net cash provided by operating activities	129,972		380,977
Investing activities
Business combinations, net of cash acquired	(19,371)		(519,258)
Purchases of property and equipment	(173,800)		(121,039)
Investment in businesses	(11,374)		(12,936)
Proceeds from sale of assets and businesses	34,555		6,691
Net cash used in investing activities	(169,990)		(646,542)
Financing activities
Borrowings on revolving facilities	805,000		420,000
Payments on revolving facilities	(705,000)		(585,000)
Proceeds from term loans	1,139,487		779,904
Payments on term loans	(1,176,567)		(8,625)
Debt issuance costs	(4,392)		(1,333)
Borrowings of other debt	27,571		30,134
Principal payments on other debt	(15,112)		(17,971)
Repurchase of common stock	(3,603)		(5,640)
Proceeds from exercise of stock options	1,634		1,633
Decrease in overdrafts	(20,439)		(6,172)
Proceeds from issuance of non-controlling interests	8,986		2,926
Distributions to non-controlling interests	(9,276)		(306,427)
Net cash provided by financing activities	48,289		303,429
Net increase in cash and cash equivalents	8,271		37,864
Cash and cash equivalents at beginning of period	99,029		122,549
Cash and cash equivalents at end of period	$	107,300	$	160,413
Supplemental Information
Cash paid for interest	$	101,341	$	134,378
Cash paid for taxes	$	46,553	$	40,460
Non-cash equity exchange for acquisition of U.S. HealthWorks	$	—	$	238,000

VI. Key Statistics For the Three Months Ended September 30, 2017 and 2018 (unaudited)

	2017^(f)			2018			% Change
Critical Illness Recovery Hospital^(a)
Number of hospitals – end of period^(b)	101			97
Net operating revenues (,000)	$	416,934		$	420,108		0.8	%
Number of patient days^(c)	248,002			243,891			(1.7)	%
Number of admissions^(c)	8,670			8,651			(0.2)	%
Net revenue per patient day^(c)(d)	$	1,661		$	1,705		2.6	%
Adjusted EBITDA (,000)	$	46,873		$	53,292		13.7	%
Adjusted EBITDA margin	11.2		%	12.7		%
Rehabilitation Hospital^(a)
Number of hospitals – end of period^(b)	22			26
Net operating revenues (,000)	$	157,499		$	176,885		12.3	%
Number of patient days^(c)	68,168			79,232			16.2	%
Number of admissions^(c)	4,816			5,370			11.5	%
Net revenue per patient day^(c)(d)	$	1,573		$	1,582		0.6	%
Adjusted EBITDA (,000)	$	22,581		$	25,343		12.2	%
Adjusted EBITDA margin	14.3		%	14.3		%
Outpatient Rehabilitation
Number of clinics – end of period^(b)	1,604			1,649
Net operating revenues (,000)	$	246,644		$	265,927		7.8	%
Number of visits^(c)	1,986,213			2,039,462			2.7	%
Revenue per visit^(c)(e)	$	102		$	103		1.0	%
Adjusted EBITDA (,000)	$	29,298		$	34,531		17.9	%
Adjusted EBITDA margin	11.9		%	13.0		%
Concentra
Number of centers – end of period^(b)	312			525
Net operating revenues (,000)	$	255,881		$	404,481		58.1	%
Number of visits^(c)	1,979,481			2,984,832			50.8	%
Revenue per visit^(c)(e)	$	113		$	124		9.7	%
Adjusted EBITDA (,000)	$	40,003		$	68,754		71.9	%
Adjusted EBITDA margin	15.6		%	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 third quarter ended September 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 Nine Months Ended September 30, 2017 and 2018 (unaudited)

	2017^(f)			2018			% Change
Critical Illness Recovery Hospital^(a)
Number of hospitals – end of period^(b)	101			97
Net operating revenues (,000)	$	1,301,251		$	1,327,236		2.0	%
Number of patient days^(c)	754,401			765,863			1.5	%
Number of admissions^(c)	26,880			27,605			2.7	%
Net revenue per patient day^(c)(d)	$	1,708		$	1,716		0.5	%
Adjusted EBITDA (,000)	$	194,253		$	186,989		(3.7)	%
Adjusted EBITDA margin	14.9		%	14.1		%
Rehabilitation Hospital^(a)
Number of hospitals – end of period^(b)	22			26
Net operating revenues (,000)	$	453,702		$	525,428		15.8	%
Number of patient days^(c)	196,018			233,537			19.1	%
Number of admissions^(c)	13,762			16,219			17.9	%
Net revenue per patient day^(c)(d)	$	1,554		$	1,604		3.2	%
Adjusted EBITDA (,000)	$	62,038		$	80,314		29.5	%
Adjusted EBITDA margin	13.7		%	15.3		%
Outpatient Rehabilitation
Number of clinics – end of period^(b)	1,604			1,649
Net operating revenues (,000)	$	751,999		$	790,491		5.1	%
Number of visits^(c)	6,168,763			6,251,582			1.3	%
Revenue per visit^(c)(e)	$	101		$	103		2.0	%
Adjusted EBITDA (,000)	$	102,575		$	107,003		4.3	%
Adjusted EBITDA margin	13.6		%	13.5		%
Concentra
Number of centers – end of period^(b)	312			525
Net operating revenues (,000)	$	763,357		$	1,173,420		53.7	%
Number of visits^(c)	5,848,551			8,605,012			47.1	%
Revenue per visit^(c)(e)	$	114		$	124		8.8	%
Adjusted EBITDA (,000)	$	125,656		$	199,119		58.5	%
Adjusted EBITDA margin	16.5		%	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 nine months ended September 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 Nine Months Ended September 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 September 30,				Nine Months Ended September 30,
	2017		2018		2017		2018
Net income	$	24,824	$	42,679	$	99,587	$	147,220
Income tax expense	14,017		14,060		59,593		47,460
Interest expense	37,688		50,669		116,196		147,991
Non-operating loss (gain)	—		(2,139)		49		(9,016)
Equity in earnings of unconsolidated subsidiaries	(4,431)		(5,432)		(15,618)		(14,914)
Loss on early retirement of debt	—		—		19,719		10,255
Income from operations	72,098		99,837		279,526		328,996
Stock compensation expense:
Included in general and administrative	4,079		4,683		11,603		12,720
Included in cost of services	878		1,581		2,624		4,455
Depreciation and amortization	38,772		50,527		119,644		149,022
U.S. HealthWorks acquisition costs	—		—		—		2,895
Adjusted EBITDA	$	115,827	$	156,628	$	413,397	$	498,088

Critical illness recovery hospital^(a)	$	46,873	$	53,292	$	194,253	$	186,989
Rehabilitation hospital^(a)	22,581		25,343		62,038		80,314
Outpatient rehabilitation	29,298		34,531		102,575		107,003
Concentra	40,003		68,754		125,656		199,119
Other^(b)	(22,928)		(25,292)		(71,125)		(75,337)
Adjusted EBITDA	$	115,827	$	156,628	$	413,397	$	498,088

_______________________________________________________________________________
(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 Nine Months Ended September 30, 2017 and 2018
(In thousands, except per share amounts, unaudited)

Adjusted net income available to common stockholders and adjusted income per common share are not measures of financial performance under GAAP. Items excluded from adjusted net income available to common stockholders and adjusted income per common share 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 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 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 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 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 for Select Medical.

	Three Months Ended September 30,
	2017		Per Share^(a)		2018		Per Share^(a)
Net income attributable to Select Medical	$	18,462			$	32,917
Earnings allocated to unvested restricted stockholders	608				1,098
Net income available to common stockholders	$	17,854	$	0.14	$	31,819	$	0.24

Adjustments:^(b)
Non-operating gain	—		—		(1,564)		(0.01)
Adjusted net income available to common stockholders	$	17,854	$	0.14	$	30,255	$	0.23

Weighted average common shares outstanding - diluted			129,322				130,447


	Nine Months Ended September 30,
	2017		Per Share^(a)		2018		Per Share^(a)
Net income attributable to Select Medical	$	76,387			$	113,167
Earnings allocated to unvested restricted stockholders	2,464				3,732
Net income available to common stockholders	$	73,923	$	0.57	$	109,435	$	0.84

Adjustments:^(b)
Loss on early retirement of debt	11,538		0.09		4,390		0.03
Non-operating loss (gain)	49		0.00		(6,432)		(0.05)
U.S. HealthWorks acquisition costs	—		—		1,002		0.01
Adjusted net income available to common stockholders	$	85,510	$	0.66	$	108,395	$	0.83

Weighted average common shares outstanding - diluted			128,916				130,066

_______________________________________________________________________________
(a)	Income per common share and adjusted income per common share are based on diluted shares outstanding.
(b)	Adjustments to net income include estimated income tax and non-controlling interest impacts.

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	$	137	$	145
Net income attributable to non-controlling interests	43		45
Net income	180		190
Income tax expense	59		64
Interest expense	195		195
Equity in earnings of unconsolidated subsidiaries	(21)		(21)
Loss on early retirement of debt^(a)	10		10
Non-operating loss (gain)	(9)		(9)
Income from operations	414		429
Stock compensation expense	23		23
Depreciation and amortization	200		200
U.S. HealthWorks acquisition costs	3		3
Adjusted EBITDA	$	640	$	655


	Range
Non-GAAP Measure Reconciliation	Low		High
Income per common share - diluted shares^(a)	$	1.02	$	1.08
Adjustments:
Loss on early retirement of debt^(a)	0.03		0.03
U.S. HealthWorks acquisition costs	0.01		0.01
Non-operating loss (gain)	(0.05)		(0.05)
Adjusted income per common share - diluted shares	$	1.01	$	1.07

_______________________________________________________________________________
(a)	Amounts exclude any negative impact from the expected loss on early retirement of debt incurred in the fourth quarter of 2018 resulting from the repricing amendments to both the Select credit facilities and Concentra first lien credit facilities which closed on October 26, 2018.

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SOURCE Select Medical Holdings Corporation

Company Codes: NYSE:SEM

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