Select Medical Holdings Corporation Announces Results for Fourth Quarter and Year Ended December 31, 2016

I.  Condensed Consolidated Statements of Operations

For the Three Months Ended December 31, 2015 and 2016

(In thousands, except per share amounts, unaudited)

2015

2016

% Change

Net operating revenues

$    1,039,205

$    1,046,265

0.7%

Costs and expenses:

Cost of services

902,328

909,893

0.8

General and administrative

24,135

25,701

6.5

Bad debt expense

16,129

17,502

8.5

Depreciation and amortization

34,313

37,424

9.1

Income from operations

62,300

55,745

(10.5)

Equity in earnings of unconsolidated subsidiaries

4,023

5,477

36.1

Non-operating gain

-

5,557

       N/M

Interest expense

(33,088)

(42,419)

28.2

Income before income taxes

33,235

24,360

(26.7)

Income tax expense

7,388

3,879

(47.5)

Net income

25,847

20,481

(20.8)

Less:  Net income (loss) attributable to non-

     controlling interests

(3,480)

309

       N/M

Net income attributable to Select Medical

      Holdings Corporation

$        29,327

$        20,172

Weighted average shares outstanding⁽¹⁾:

     Basic

127,292

128,274

     Diluted

127,464

128,436

Income per common share⁽¹⁾:

     Basic

$0.22

$0.15

     Diluted

$0.22

$0.15

(1)     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 $0.6 million and $0.9 million for the three months ended December 31, 2016 and 2015, respectively.  Unvested restricted weighted average shares were 4,261 thousand and 4,021 thousand for the three months ended December 31, 2016 and 2015, respectively.

N/M = Not Meaningful

II.  Condensed Consolidated Statements of Operations

For the Years Ended December 31, 2015 and 2016

(In thousands, except per share amounts, unaudited)

2015

2016

Net operating revenues

$   3,742,736

$    4,286,021

14.5%

Costs and expenses:

Cost of services

3,211,541

3,664,843

14.1

General and administrative

92,052

106,927

16.2

Bad debt expense

59,372

69,093

16.4

Depreciation and amortization

104,981

145,311

38.4

Income from operations

274,790

299,847

9.1

Loss on early retirement of debt

-

(11,626)

   N/M  

Equity in earnings of unconsolidated subsidiaries

16,811

19,943

18.6

Non-operating gain

29,647

42,651

   N/M  

Interest expense

(112,816)

(170,081)

50.8

Income before income taxes

208,432

180,734

(13.3)

Income tax expense

72,436

55,464

(23.4)

Net income

135,996

125,270

(7.9)

Less:  Net income attributable to non-

     controlling interests

5,260

9,859

87.4

Net income attributable to Select Medical

      Holdings Corporation

$      130,736

115,411

Weighted average shares outstanding⁽¹⁾:

     Basic

127,478

127,813

     Diluted

127,752

127,968

Income per common share⁽¹⁾:

     Basic

$1.00

$0.88

     Diluted

$0.99

$0.87

Dividends paid per share

$0.10

-

(1)        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 $3.5 million and $3.8 million for the years ended December 31, 2016 and 2015, respectively.  Unvested restricted weighted average shares were 4,022 thousand and 3,847 thousand for the years ended December 31, 2016 and 2015, respectively.

N/M = Not Meaningful

III.  Condensed Consolidated Balance Sheets

(In thousands, unaudited)

December 31,
2015

December 31,
2016

Assets

Cash

$        14,435

$        99,029

Accounts receivable, net

603,558

573,752

Current deferred tax asset

28,688

45,165

Other current assets

102,473

90,122

Total Current Assets

749,154

808,068

Property and equipment, net

864,124

892,217

Goodwill

2,314,624

2,751,000

Other identifiable intangibles, net

318,675

340,562

Other assets

142,101

152,548

Total Assets

$   4,388,678

$    4,944,395

Liabilities and Equity

Payables and accruals

$      504,119

$      557,979

Current portion of long-term debt and notes payable

225,166

13,656

Total Current Liabilities

729,285

571,635

Long-term debt, net of current portion

2,160,730

2,685,333

Non-current deferred tax liability

218,705

222,847

Other non-current liabilities

133,220

136,520

Total Liabilities

3,241,940

3,616,335

Redeemable non-controlling interests

238,221

422,159

Total equity

908,517

905,901

Total Liabilities and Equity

$   4,388,678

$   4,944,395

IV.  Condensed Consolidated Statements of Cash Flows

For the Three Months Ended December 31, 2015 and 2016
(In thousands, unaudited)

2015

2016

Operating activities

Net income

$    25,847

$   20,481

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

Distributions from unconsolidated subsidiaries

2,155

4,331

      Depreciation and amortization

34,313

37,424

      Provision for bad debts

16,129

17,502

Equity in earnings of unconsolidated subsidiaries

(4,023)

(5,477)

      Loss (gain) on sale of assets and businesses

166

(4,578)

Gain on sale of equity investment

-

(2,538)

      Stock compensation expense

5,741

4,489

      Amortization of debt discount, premium and issuance costs

2,797

3,811

      Deferred income taxes

4,867

497

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

Accounts receivable

(43,794)

1,456

Other current assets

2,077

5,356

Other assets

173

4,144

Accounts payable and accrued expenses

(41,464)

(21,056)

Net cash provided by operating activities

4,984

65,842

Investing activities

Acquisition of businesses, net of cash acquired

(11,756)

(57,975)

Purchases of property and equipment

(68,650)

(43,373)

Investment in businesses

(644)

(1,583)

Proceeds from sale of equity investment

-

2,538

Proceeds from sale of assets and businesses

225

9,075

Net cash used in investing activities

(80,825)

(91,318)

Financing activities

Borrowings on revolving facilities

295,000

155,000

Payments on revolving facilities

(220,000)

(110,000)

Payments on term loans

(1,125)

(3,192)

Borrowings of other debt

2,333

3,920

Principal payments on other debt

(6,094)

(5,924)

Proceeds from bank overdrafts

4,516

19,210

Repurchase of common stock

(2,205)

(990)

Proceeds from exercise of stock options

45

184

Tax benefit from stock based awards

1,463

-

Purchase of non-controlling interests

(1,095)

(569)

Distributions to non-controlling interests

(5,197)

(1,357)

Net cash provided by financing activities

67,641

56,282

Net increase (decrease) in cash and cash equivalents

(8,200)

30,806

Cash and cash equivalents at beginning of period

22,635

68,223

Cash and cash equivalents at end of period

$    14,435

$     99,029

Supplemental Information

     Cash paid for interest

$    43,229

$     49,712

     Cash paid for taxes

$    23,515

$     10,819

V.  Condensed Consolidated Statements of Cash Flows

For the Years Ended December 31, 2015 and 2016
(In thousands, unaudited)

2015

2016

Operating activities

Net income

$    135,996

$   125,270

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

Distributions from unconsolidated subsidiaries

13,969

20,476

Depreciation and amortization

104,981

145,311

Provision for bad debts

59,372

69,093

Equity in earnings of unconsolidated subsidiaries

(16,811)

(19,943)

Loss on early retirement of debt

-

11,626

Gain on sale of assets and businesses

(1,098)

(46,488)

Gain on sale of equity investment

(29,647)

(2,779)

Impairment of equity investment

-

5,339

Stock compensation expense

14,985

17,413

Amortization of debt discount, premium, and issuance costs

9,543

15,656

      Deferred income taxes

(2,058)

(12,591)

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

Accounts receivable

(92,572)

(39,320)

Other current assets

(2,503)

17,450

Other assets

4,713

9,290

Accounts payable and accrued expenses

9,545

30,800

Net cash provided by operating activities

208,415

346,603

Investing activities

Acquisition of businesses, net of cash acquired

(1,061,628)

(472,206)

Purchases of property and equipment

(182,642)

(161,633)

Investment in businesses

(2,347)

(4,723)

Proceeds from sale of equity investment

33,096

3,779

Proceeds from sale of assets and businesses

1,767

80,463

Net cash used in investing activities

(1,211,754)

(554,320)

Financing activities

Borrowings on revolving facilities

1,135,000

575,000

Payments on revolving facilities

(895,000)

(655,000)

Net proceeds from term loans

623,575

795,344

Payments on term loans

(29,134)

(438,034)

Borrowings of other debt

13,374

27,721

Principal payments on other debt

(18,136)

(21,401)

Proceeds from bank overdrafts

6,869

10,746

Dividends paid to common stockholders

(13,129)

-

Repurchase of common stock

(15,827)

(2,929)

Proceeds from exercise of stock options

1,649

1,672

Tax benefit from stock based awards

1,846

-

Proceeds from issuance of non-controlling interests

217,065

11,846

Purchase of non-controlling interests

(1,095)

(2,099)

Distributions to non-controlling interests

(12,637)

(10,555)

Net cash provided by financing activities

1,014,420

292,311

Net increase in cash and cash equivalents

11,081

84,594

Cash and cash equivalents at beginning of period

3,354

14,435

Cash and cash equivalents at end of period

$      14,435

$      99,029

Supplemental Information

     Cash paid for interest

$    103,166

$    142,640

     Cash paid for taxes

$      79,420

$      70,756

VI.  Key Statistics

For the Three Months Ended December 31, 2015 and 2016

 (unaudited)

2015

2016

% Change

Specialty Hospitals

Number of hospitals – end of period:

Long term acute care hospitals (a)

109

103

Rehabilitation hospitals (a)

18

20

Total specialty hospitals

127

123

Net operating revenues (,000)

$    593,336

$    560,221

(5.6)%

Number of patient days (b)

339,614

306,776

(9.7)%

Number of admissions (b)

14,218

12,840

(9.7)%

Net revenue per patient day (b)(c)

$        1,588

$        1,651

4.0%

Adjusted EBITDA (,000)

$      86,048

$      63,752

(25.9)%

Adjusted EBITDA margin

14.5%

11.4%

Outpatient Rehabilitation

Number of clinics – end of period (d)

1,038

1,611

Net operating revenues (,000)

$    206,178

$    249,654

21.1%

Number of visits (e)

1,339,123

2,047,646

52.9%

Revenue per visit (e)(f)

$           103

$           102

(1.0)%

Adjusted EBITDA (,000)

$      23,558

$      30,824

30.8%

Adjusted EBITDA margin

11.4%

12.3%

Concentra

Number of centers – end of period (g)

300

300

Net operating revenues (,000)

$    239,424

$    236,372

(1.3)%

Number of visits (g)

1,782,647

1,731,446

(2.9)%

Revenue per visit (g)(h)

$           115

$           119

3.5%

Adjusted EBITDA (,000)

$      11,518

$      24,929

116.4%

Adjusted EBITDA margin

4.8%

10.5%

(a)     Includes managed hospitals.

(b)     Excludes managed hospitals.

(c)     Net revenue per patient day is calculated by dividing specialty hospitals direct patient service revenue by the total number of patient days.

(d)     Includes managed clinics.

(e)     Excludes managed clinics.

(f)      Net revenue per visit is calculated by dividing outpatient rehabilitation clinic direct patient service revenue by the total number of visits.  For purposes of this computation, outpatient rehabilitation clinic direct patient service revenue does not include managed clinics or contract therapy revenue.

(g)     Excludes onsite clinics and community-based outpatient clinics.

(h)     Net revenue per visit is calculated by dividing center direct patient service revenue by the total number of center visits. 

VII.  Key Statistics

For the Years Ended December 31, 2015 and 2016

 (unaudited)

2015

2016

% Change

Specialty Hospitals

Number of hospitals – end of period:

Long term acute care hospitals (a)

109

103

Rehabilitation hospitals (a)

18

20

Total specialty hospitals

127

123

Net operating revenues (,000)

$  2,346,781

$  2,289,482

(2.4)%

Number of patient days (b)

1,373,780

1,258,068

(8.4)%

Number of admissions (b)

56,570

52,381

(7.4)%

Net revenue per patient day (b)(c)

$         1,569

$         1,651

5.2%

Adjusted EBITDA (,000)

$     327,623

$     281,511

(14.1)%

Adjusted EBITDA margin

14.0%

12.3%

Outpatient Rehabilitation

Number of clinics – end of period: (d)

1,038

1,611

Net operating revenues (,000)

$     810,009

$     995,374

22.9%

Number of visits (e)

5,218,532

7,799,208

49.5%

Revenue per visit (e)(f)

$            103

$            102

(1.0)%

Adjusted EBITDA (,000)

$       98,220

$     129,830

32.2%

Adjusted EBITDA margin

12.1%

13.0%

Concentra

Number of centers – end of period (g)

300

300

Net operating revenues (,000)

$     585,222

$  1,000,624

N/M

Number of visits (g)

4,436,977

7,373,751

N/M

Revenue per visit (g)(h)

$            114

$            118

3.5%

Adjusted EBITDA (,000)

$       48,301

$     143,009

N/M

Adjusted EBITDA margin

8.3%

14.3%

(a)     Includes managed hospitals.

(b)     Excludes managed hospitals.

(c)     Net revenue per patient day is calculated by dividing specialty hospitals direct patient service revenue by the total number of patient days.

(d)     Includes managed clinics.

(e)     Excludes managed clinics.

(f)      Net revenue per visit is calculated by dividing outpatient rehabilitation clinic direct patient service revenue by the total number of visits.  For purposes of this computation, outpatient rehabilitation clinic direct patient service revenue does not include managed clinics or contract therapy revenue.

(g)     Excludes onsite clinics and community-based outpatient clinics.

(h)     Net revenue per visit is calculated by dividing center direct patient service revenue by the total number of center visits. 

N/M = Not Meaningful

VIII. Net Income to Adjusted EBITDA Reconciliation

For the Three Months and Years Ended December 31, 2015 and 2016

(In thousands, unaudited)

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, Concentra acquisition costs, Physiotherapy acquisition costs, non-operating gain (loss), and equity in earnings (losses) of unconsolidated subsidiaries.

Non-GAAP Measure Reconciliation

Three Months Ended

December 31,

Year Ended

December 31,

2015

2016

2015

2016

Net income

$      25,847

$       20,481

$    135,996

$    125,270

Income tax expense

7,388

3,879

72,436

55,464

Interest expense

33,088

42,419

112,816

170,081

Non-operating gain

-

(5,557)

(29,647)

(42,651)

Equity in earnings of unconsolidated subsidiaries

(4,023)

(5,477)

(16,811)

(19,943)

Loss on early retirement of debt

-

-

-

11,626

Income from operations

62,300

55,745

274,790

299,847

Stock compensation expense:

   Included in general and administrative

3,560

3,836

11,633

14,607

   Included in cost of services

644

653

3,046

2,806

Depreciation and amortization

34,313

37,424

104,981

145,311

Physiotherapy acquisition costs

-

-

-

3,236

Concentra acquisition costs

-

-

4,715

-

Adjusted EBITDA

$     100,817

$       97,658

$   399,165

$     465,807

Specialty hospitals

$       86,048

$       63,752

$   327,623

$      281,511

Outpatient rehabilitation

23,558

30,824

98,220

129,830

Concentra

11,518

24,929

48,301

143,009

Other (a)

(20,307)

(21,847)

(74,979)

(88,543)

Adjusted EBITDA

$     100,817

$       97,658

$   399,165

$      465,807

(a)     Other primarily includes general and administrative costs.

IX. Reconciliation of Income per Common Share to Adjusted Income per Common Share 

For the Three Months and Years Ended December 31, 2015 and 2016

(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. The Company believes that the presentation of adjusted net income available to common stockholders and adjusted income per common share – diluted shares is important to investors because it is reflective of the financial performance of our ongoing operations and provides 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 an alternative to, or substitute 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 is not a measurement determined in accordance with GAAP and is 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 table reconciles net income available to common stockholders and income per common share – diluted shares to adjusted net income available to common stockholders and adjusted income per common share – diluted shares for Select Medical.  Adjusted net income available to common stockholders is defined as net income available to common shareholders before non-operating gain (loss) and gain (loss) on early retirement of debt.

Three Months Ended December 31,

2015

Per share (a)

2016

Per share (a)

Net income attributable to Select Medical Holdings Corporation

$     29,327

$      20,172

Earnings allocated to unvested  restricted stockholders

898

649

Net income available to common stockholders

28,429

$            0.22

19,523

$            0.15

Adjustments:

   Non-operating gains

-

(5,557)

Estimated income tax expense (b)

-

941

Earnings allocated to unvested restricted stockholders

-

148

Adjusted net income available to common stockholders

$      28,429

$             0.22

$      15,055

$           0.12

Adjustment for dilution

(0.00)

(0.00)

Adjusted income per common share – diluted shares

$             0.22

$           0.12

Weighted average common shares outstanding:

    Basic

127,292

128,274

    Diluted

127,464

128,436

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

Refer to Reconciliation of Income per Common Share to Adjusted Income per Common Share for the years ended December 31, 2015 and 2016 on the next page. 

Year Ended December 31,

2015

Per share (a)

2016

Per share (a)

Net income attributable to Select Medical Holdings Corporation

$     130,736

$    115,411

Earnings allocated to unvested restricted stockholders

3,830

3,521

Net income available to common  stockholders

126,906

$           1.00

111,890

$           0.88

Adjustments:

   Non-operating gain:

      Gain on sale of contract therapy

-

(33,933)

      Other non-operating gains

(29,647)

(8,705)

   Loss on early retirement of debt (b)

-

6,211

Estimated income tax expense (c)

11,419

1,273

Earnings allocated to unvested restricted stockholders

534

1,072

Adjusted net income available to common stockholders

$    109,212

$            0.86

$      77,808

$            0.61

Adjustment for dilution

(0.01)

(0.00)

Adjusted income per common share – diluted shares

$            0.85

$            0.61

Weighted average common shares outstanding:

    Basic

127,478

127,813

    Diluted

127,752

127,968

(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)    Includes the loss on early retirement of Concentra's debt, net of non-controlling interest.

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

X.  Net Income to Adjusted EBITDA Reconciliation

Business Outlook for the Year Ending December 31, 2017

(In millions, unaudited)

The following is a reconciliation of full year 2017 Adjusted EBITDA expectations as computed at the low and high points of the range to the closest comparable GAAP financial measure. Refer to table VIII for the definition of Adjusted EBITDA and a discussion of the Company's use of Adjusted EBITDA in evaluating financial performance and determining resource allocation. Each item of expense presented in the table is an estimation of full year 2017 expectations.

Range

Non-GAAP Measure Reconciliation

Low

High

Net income

$                   135

$                    159

Income tax expense

90

106

Interest expense

173

173

Equity in earnings of unconsolidated subsidiaries

(23)

(23)

Income from operations

$                   375

$                   415

Stock compensation expense

15

15

Depreciation and amortization

150

150

Adjusted EBITDA

$                   540

$                   580