Select Medical Holdings Corporation Announces Results For Its Fourth Quarter and Year Ended December 31, 2018

I.  Condensed Consolidated Statements of Operations

For the Three Months Ended December 31, 2017 and 2018

(In thousands, except per share amounts, unaudited)

2017⁽¹⁾

2018

% Change

Net operating revenues

$

1,094,249

$

1,264,683

15.6

%

Costs and expenses:

Cost of services

946,898

1,093,450

15.5

General and administrative

30,632

30,317

(1.0)

Depreciation and amortization

40,367

52,633

30.4

Income from operations

76,352

88,283

15.6

Loss on early retirement of debt

—

(3,900)

N/M

Equity in earnings of unconsolidated subsidiaries

5,436

6,991

28.6

Interest expense

(38,507)

(50,502)

31.2

Income before income taxes

43,281

40,872

(5.6)

Income tax expense (benefit)

(77,777)

11,150

N/M

Net income

121,058

29,722

N/M

Less: Net income attributable to non-controlling interests

20,261

5,049

N/M

Net income attributable to Select Medical

$

100,797

$

24,673

N/M

Diluted earnings per common share:⁽²⁾

$

0.75

$

0.18

(1)

For the three months ended December 31, 2017, the financial results were retrospectively conformed to reflect the adoption of Topic 606, Revenue from Contracts with Customers.

(2)

Refer to table III for calculation of earnings per common share.

N/M — Not Meaningful

II.  Condensed Consolidated Statements of Operations

For the Years Ended December 31, 2017 and 2018

(In thousands, except per share amounts, unaudited)

2017⁽¹⁾

2018

% Change

Net operating revenues

$

4,365,245

$

5,081,258

16.4

%

Costs and expenses:

Cost of services

3,735,309

4,341,056

16.2

General and administrative

114,047

121,268

6.3

Depreciation and amortization

160,011

201,655

26.0

Income from operations

355,878

417,279

17.3

Loss on early retirement of debt

(19,719)

(14,155)

N/M

Equity in earnings of unconsolidated subsidiaries

21,054

21,905

4.0

Non-operating gain (loss)

(49)

9,016

N/M

Interest expense

(154,703)

(198,493)

28.3

Income before income taxes

202,461

235,552

16.3

Income tax expense (benefit)

(18,184)

58,610

N/M

Net income

220,645

176,942

N/M

Less: Net income attributable to non-controlling interests

43,461

39,102

N/M

Net income attributable to Select Medical

$

177,184

$

137,840

N/M

Diluted earnings per common share:⁽²⁾

$

1.33

$

1.02

(1)

For the year ended December 31, 2017, the financial results were retrospectively conformed to reflect the adoption of Topic 606, Revenue from Contracts with Customers.

(2)

Refer to table III for calculation of earnings per common share.

N/M — Not Meaningful

III.  Earnings per Share

For the Three Months and Years Ended December 31, 2017 and 2018

(In thousands, except per share amounts, unaudited)

The Company's capital structure includes common stock and unvested restricted stock awards. To compute earnings per share ("EPS"), the Company applies the two-class method because the Company's unvested restricted stock awards are participating securities which are entitled to participate equally with the Company's common stock in undistributed earnings.

The following table sets forth the net income attributable to the Company, its common shares outstanding, and its participating securities outstanding for the three months and years ended December 31, 2017 and 2018:

Diluted EPS

Three Months Ended
December 31,

Year Ended
December 31,

2017

2018

2017

2018

Net income

$

121,058

$

29,722

$

220,645

$

176,942

Less: net income attributable to non-controlling interests

20,261

5,049

43,461

39,102

Net income attributable to the Company

100,797

24,673

177,184

137,840

Less: net income attributable to participating securities

3,344

817

5,751

4,548

Net income attributable to common shares

$

97,453

$

23,856

$

171,433

$

133,292

The following tables set forth the computation of EPS under the two-class method for the three months and years ended December 31, 2017 and 2018:

Three Months Ended December 31,

2017

2018

Net Income Allocation

Shares⁽¹⁾

Diluted EPS

Net Income Allocation

Shares⁽¹⁾

Diluted EPS

Common shares

$

97,453

129,731

$

0.75

$

23,856

130,820

$

0.18

Participating securities

3,344

4,452

$

0.75

817

4,480

$

0.18

Total Company

$

100,797

$

24,673

Year Ended December 31,

2017

2018

Net Income Allocation

Shares⁽¹⁾

Diluted EPS

Net Income Allocation

Shares⁽¹⁾

Diluted EPS

Common shares

$

171,433

129,126

$

1.33

$

133,292

130,256

$

1.02

Participating securities

5,751

4,332

$

1.33

4,548

4,444

$

1.02

Total Company

$

177,184

$

137,840

(1)

Represents the weighted average share count outstanding during the period.

IV.  Condensed Consolidated Balance Sheets

(In thousands, unaudited)

December 31,
2017

December 31,
2018

Assets

Current Assets:

Cash

$

122,549

$

175,178

Accounts receivable

691,732

706,676

Other current assets

106,545

110,670

Total Current Assets

920,826

992,524

Property and equipment, net

912,591

979,810

Goodwill

2,782,812

3,320,726

Identifiable intangible assets, net

326,519

437,693

Other assets

184,418

233,512

Total Assets

$

5,127,166

$

5,964,265

Liabilities and Equity

Current Liabilities:

Payables and accruals

$

583,216

$

661,321

Current portion of long-term debt and notes payable

22,187

43,865

Total Current Liabilities

605,403

705,186

Long-term debt, net of current portion

2,677,715

3,249,516

Non-current deferred tax liability

124,917

153,895

Other non-current liabilities

145,709

158,940

Total Liabilities

3,553,744

4,267,537

Redeemable non-controlling interests

640,818

780,488

Total equity

932,604

916,240

Total Liabilities and Equity

$

5,127,166

$

5,964,265

V.  Condensed Consolidated Statements of Cash Flows

For the Three Months Ended December 31, 2017 and 2018

(In thousands, unaudited)

2017

2018

Operating activities

Net income

$

121,058

$

29,722

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

Distributions from unconsolidated subsidiaries

5,464

4,987

Depreciation and amortization

40,367

52,633

Provision for bad debts

219

270

Equity in earnings of unconsolidated subsidiaries

(5,436)

(6,991)

Loss on extinguishment of debt

—

2,515

Gain on sale of assets and businesses

(850)

(39)

Stock compensation expense

5,057

6,151

Amortization of debt discount, premium and issuance costs

2,584

3,267

Deferred income taxes

(66,198)

9,309

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

Accounts receivable

24,475

31,080

Other current assets

4,274

6,122

Other assets

(2,293)

3,029

Accounts payable and accrued expenses

(20,562)

(28,838)

Net cash provided by operating activities

108,159

113,217

Investing activities

Business combinations, net of cash acquired

(8,019)

(3,876)

Purchases of property and equipment

(59,443)

(46,242)

Investment in businesses

(1,308)

(546)

Proceeds from sale of assets and businesses

45,795

69

Net cash used in investing activities

(22,975)

(50,595)

Financing activities

Borrowings on revolving facilities

165,000

175,000

Payments on revolving facilities

(255,000)

(220,000)

Payments on term loans

(2,875)

(2,875)

Debt issuance costs

—

(387)

Borrowings of other debt

19,050

12,084

Principal payments on other debt

(5,535)

(7,271)

Repurchase of common stock

(1,150)

(1,197)

Proceeds from exercise of stock options

383

89

Increase in overdrafts

10,540

1,792

Proceeds from issuance of non-controlling interests

996

—

Distributions to non-controlling interests

(1,344)

(5,092)

Net cash used in financing activities

(69,935)

(47,857)

Net increase in cash and cash equivalents

15,249

14,765

Cash and cash equivalents at beginning of period

107,300

160,413

Cash and cash equivalents at end of period

$

122,549

$

175,178

Supplemental information

Cash paid for interest

$

47,815

$

59,028

Cash paid for taxes

$

18,438

$

7,693

VI.  Condensed Consolidated Statements of Cash Flows

For the Years Ended December 31, 2017 and 2018

(In thousands, unaudited)

2017

2018

Operating activities

Net income

$

220,645

$

176,942

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

Distributions from unconsolidated subsidiaries

20,006

15,721

Depreciation and amortization

160,011

201,655

Provision for bad debts

1,133

(103)

Equity in earnings of unconsolidated subsidiaries

(21,054)

(21,905)

Loss on extinguishment of debt

6,527

2,999

Gain on sale of assets and businesses

(10,349)

(9,168)

Stock compensation expense

19,284

23,326

Amortization of debt discount, premium and issuance costs

11,130

13,112

Deferred income taxes

(72,324)

7,217

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

Accounts receivable

(118,833)

54,575

Other current assets

1,597

(4,152)

Other assets

(886)

7,857

Accounts payable and accrued expenses

21,244

26,118

Net cash provided by operating activities

238,131

494,194

Investing activities

Business combinations, net of cash acquired

(27,390)

(523,134)

Purchases of property and equipment

(233,243)

(167,281)

Investment in businesses

(12,682)

(13,482)

Proceeds from sale of assets and businesses

80,350

6,760

Net cash used in investing activities

(192,965)

(697,137)

Financing activities

Borrowings on revolving facilities

970,000

595,000

Payments on revolving facilities

(960,000)

(805,000)

Proceeds from term loans

1,139,487

779,823

Payments on term loans

(1,179,442)

(11,500)

Debt issuance costs

(4,392)

(1,639)

Borrowings of other debt

46,621

42,218

Principal payments on other debt

(20,647)

(25,242)

Repurchase of common stock

(4,753)

(6,837)

Proceeds from exercise of stock options

2,017

1,722

Decrease in overdrafts

(9,899)

(4,380)

Proceeds from issuance of non-controlling interests

9,982

2,926

Distributions to and purchases of non-controlling interests

(10,620)

(311,519)

Net cash provided by (used in) financing activities

(21,646)

255,572

Net increase in cash and cash equivalents

23,520

52,629

Cash and cash equivalents at beginning of period

99,029

122,549

Cash and cash equivalents at end of period

$

122,549

$

175,178

Supplemental information

Cash paid for interest

$

149,156

$

193,406

Cash paid for taxes

$

64,991

$

48,153

Non-cash equity exchange for acquisition of U.S. HealthWorks

$

—

$

238,000

VII.  Key Statistics

For the Three Months Ended December 31, 2017 and 2018

(unaudited)

2017^(f)

2018

% Change

Critical Illness Recovery Hospital^(a)

Number of hospitals – end of period^(b)

100

96

Net operating revenues (,000)

$

423,771

$

426,348

0.6

%

Number of patient days^(c)

248,760

246,505

(0.9)

%

Number of admissions^(c)

8,913

8,869

(0.5)

%

Net revenue per patient day^(c)(d)

$

1,691

$

1,717

1.5

%

Adjusted EBITDA (,000)

$

58,426

$

56,026

(4.1)

%

Adjusted EBITDA margin

13.8

%

13.1

%

Rehabilitation Hospital^(a)

Number of hospitals – end of period^(b)

24

26

Net operating revenues (,000)

$

168,767

$

182,086

7.9

%

Number of patient days^(c)

73,887

81,931

10.9

%

Number of admissions^(c)

5,079

5,594

10.1

%

Net revenue per patient day^(c)(d)

$

1,639

$

1,610

(1.8)

%

Adjusted EBITDA (,000)

$

28,003

$

28,613

2.2

%

Adjusted EBITDA margin

16.6

%

15.7

%

Outpatient Rehabilitation

Number of clinics – end of period^(b)

1,616

1,662

Net operating revenues (,000)

$

251,831

$

271,996

8.0

%

Number of visits^(c)

2,063,773

2,104,436

2.0

%

Revenue per visit^(c)(e)

$

102

$

103

1.0

%

Adjusted EBITDA (,000)

$

29,958

$

35,002

16.8

%

Adjusted EBITDA margin

11.9

%

12.9

%

Concentra

Number of centers – end of period^(b)

312

524

Net operating revenues (,000)

$

249,867

$

384,253

53.8

%

Number of visits^(c)

1,860,957

2,821,928

51.6

%

Revenue per visit^(c)(e)

$

117

$

124

6.0

%

Adjusted EBITDA (,000)

$

31,905

$

52,858

65.7

%

Adjusted EBITDA margin

12.8

%

13.8

%

(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)

For the three months ended December 31, 2017,  the financial results have been recast to conform to the current segment reporting structure and to reflect the adoption of Topic 606, Revenue from Contracts with Customers.

(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)

For the year ended December 31, 2017, the financial results have been recast to conform to the current segment reporting structure and to reflect the adoption of Topic 606, Revenue from Contracts with Customers.

IX.  Net Income to Adjusted EBITDA Reconciliation

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

Year Ended
December 31,

2017

2018

2017

2018

Net income

$

121,058

$

29,722

$

220,645

$

176,942

Income tax expense (benefit)

(77,777)

11,150

(18,184)

58,610

Interest expense

38,507

50,502

154,703

198,493

Non-operating loss (gain)

—

—

49

(9,016)

Equity in earnings of unconsolidated subsidiaries

(5,436)

(6,991)

(21,054)

(21,905)

Loss on early retirement of debt

—

3,900

19,719

14,155

Income from operations

76,352

88,283

355,878

417,279

Stock compensation expense:

Included in general and administrative

4,103

4,884

15,706

17,604

Included in cost of services

954

1,267

3,578

5,722

Depreciation and amortization

40,367

52,633

160,011

201,655

U.S. HealthWorks acquisition costs

2,819

—

2,819

2,895

Adjusted EBITDA

$

124,595

$

147,067

$

537,992

$

645,155

Critical illness recovery hospital^(a)

$

58,426

$

56,026

$

252,679

$

243,015

Rehabilitation hospital^(a)

28,003

28,613

90,041

108,927

Outpatient rehabilitation

29,958

35,002

132,533

142,005

Concentra

31,905

52,858

157,561

251,977

Other^(b)

(23,697)

(25,432)

(94,822)

(100,769)

Adjusted EBITDA

$

124,595

$

147,067

$

537,992

$

645,155

(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.

X.  Reconciliation of Earnings per Common Share to Adjusted Earnings per Common Share

For the Three Months and Years Ended December 31, 2017 and 2018

(In thousands, except per share amounts, unaudited)

Adjusted net income attributable to common shares and adjusted earnings per common share are not measures of financial performance under GAAP.  Items excluded from adjusted net income attributable to common shares and adjusted earnings per common share are significant components in understanding and assessing financial performance. Select Medical believes that the presentation of adjusted net income attributable to common shares and adjusted earnings 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 attributable to common shares and adjusted earnings 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 attributable to common shares and adjusted earnings per common share are not measurements determined in accordance with GAAP and are thus susceptible to varying calculations, adjusted net income attributable to common shares and adjusted earnings per common share as presented may not be comparable to other similarly titled measures of other companies.

The following tables reconcile net income attributable to common shares and earnings per common share on a fully diluted basis to adjusted net income attributable to common shares and adjusted earnings per common share on a fully diluted basis.

Three Months Ended December 31,

2017

Per Share^(a)

2018

Per Share^(a)

Net income attributable to common shares^(a)

$

97,453

$

0.75

$

23,856

$

0.18

Adjustments:^(b)

Income tax benefit resulting from tax reform legislation

(57,666)

(0.44)

—

—

Loss on early retirement of debt

—

—

2,284

0.02

U.S. HealthWorks acquisition costs

1,353

0.01

—

—

Adjusted net income attributable to common shares

$

41,140

$

0.32

$

26,140

$

0.20

Year Ended December 31,

2017

Per Share^(a)

2018

Per Share^(a)

Net income attributable to common shares^(a)

$

171,433

$

1.33

$

133,292

$

1.02

Adjustments:^(b)

Income tax benefit resulting from tax reform legislation

(57,709)

(0.45)

—

—

Loss on early retirement of debt

11,536

0.09

6,674

0.05

Non-operating losses (gains)

47

0.00

(6,432)

(0.05)

U.S. HealthWorks acquisition costs

1,354

0.01

1,002

0.01

Adjusted net income attributable to common shares

$

126,661

$

0.98

$

134,536

$

1.03

(a)

Net income attributable to common shares and earnings per common share are calculated based on the diluted weighted average common shares outstanding, as presented in table III.

(b)

Adjustments to net income attributable to common shares include estimated income tax and non-controlling interest impacts and are calculated based on the diluted weighted average common shares outstanding.

XI.  Net Income to Adjusted EBITDA Reconciliation

Business Outlook for the Year Ending December 31, 2019

(In millions, unaudited)

The following is a reconciliation of full year 2019 Adjusted EBITDA expectations as computed at the low and high points of the range to the closest comparable GAAP financial measure. Refer to table IX for the definition of Adjusted EBITDA and a discussion of Select Medical's use of Adjusted EBITDA in evaluating financial performance. Each item presented in the below table is an estimation of full year 2019 expectations.

Range

Non-GAAP Measure Reconciliation

Low

High

Net income attributable to Select Medical

$

132

$

153

Net income attributable to non-controlling interests

56

65

Net income

188

218

Income tax expense

64

74

Interest expense

200

200

Equity in earnings of unconsolidated subsidiaries

(25)

(25)

Income from operations

427

467

Stock compensation expense

27

27

Depreciation and amortization

206

206

Adjusted EBITDA

$

660

$

700