Select Medical Holdings Corporation Announces Results For Its Second Quarter Ended June 30, 2017

I.  Condensed Consolidated Statements of Operations

For the Three Months Ended June 30, 2016 and 2017

(In thousands, except per share amounts, unaudited)

2016

2017

% Change

Net operating revenues

$     1,097,631

$      1,120,675

2.1%

Costs and expenses:

Cost of services

916,985

920,230

0.4

General and administrative

25,870

28,275

9.3

Bad debt expense

17,517

18,174

3.8

Depreciation and amortization

36,205

38,333

5.9

Income from operations

101,054

115,663

14.5

Equity in earnings of unconsolidated 
     subsidiaries

4,546

5,666

24.6

Non-operating gain

13,035

—

N/M  

Interest expense

(44,332)

(37,655)

(15.1)

Income before income taxes

74,303

83,674

12.6

Income tax expense

33,450

32,374

(3.2)

Net income

40,853

51,300

25.6

Less: Net income attributable to 
     non-controlling interests

6,918

9,245

33.6

Net income attributable to Select Medical 
     Holdings Corporation

$          33,935

$            42,055

23.9%

Weighted average shares outstanding⁽¹⁾:

     Basic

127,626

128,624

     Diluted

127,820

128,777

Income per common share⁽¹⁾:

     Basic

$              0.26

$               0.32

     Diluted

$              0.26

$               0.32

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 $1.3 million and $1.0 million for the three months ended June 30, 2017 and 2016, respectively.  Unvested restricted weighted average shares were 4,235 thousand and 3,764 thousand for the three months ended June 30, 2017 and 2016, respectively.

N/M = Not Meaningful

II.  Condensed Consolidated Statements of Operations

For the Six Months Ended June 30, 2016 and 2017

(In thousands, except per share amounts, unaudited)

2016

2017

% Change

Net operating revenues

$        2,185,961

$        2,232,036

2.1%

Costs and expenses:

Cost of services

1,839,247

1,848,587

0.5

General and administrative

54,138

56,350

4.1

Bad debt expense

33,914

38,799

14.4

Depreciation and amortization

70,722

80,872

14.4

Income from operations

187,940

207,428

10.4

Loss on early retirement of debt

(773)

(19,719)

N/M   

Equity in earnings of unconsolidated 
     subsidiaries

9,198

11,187

21.6

Non-operating gain (loss)

38,122

(49)

N/M   

Interest expense

(83,180)

(78,508)

(5.6)

Income before income taxes

151,307

120,339

(20.5)

Income tax expense

50,510

45,576

(9.8)

Net income

100,797

74,763

(25.8)

Less: Net income attributable to 
     non-controlling interests

12,029

16,838

40.0

Net income attributable to Select Medical 
     Holdings Corporation

$             88,768

$             57,925

Weighted average shares outstanding⁽¹⁾:

     Basic

127,563

128,544

     Diluted

127,709

128,703

Income per common share⁽¹⁾:

     Basic

$                 0.68

$                 0.44

     Diluted

$                 0.68

$                 0.44

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 $1.8 million and $2.6 million for the six months ended June 30, 2017 and 2016, respectively.  Unvested restricted weighted average shares were 4,238 thousand and 3,775 thousand for the six months ended June 30, 2017 and 2016, respectively.

N/M = Not Meaningful

III.  Condensed Consolidated Balance Sheets

(In thousands, unaudited)

December 31,
2016

June 30,
2017

Assets

Cash

$                99,029

$               73,799

Accounts receivable, net

573,752

714,236

Other current assets

90,122

83,211

Total Current Assets

762,903

871,246

Property and equipment, net

892,217

911,532

Goodwill

2,751,000

2,766,296

Identifiable intangible assets, net

340,562

335,704

Other assets

173,944

169,433

Total Assets

$            4,920,626

$           5,054,211

Liabilities and Equity

Payables and accruals

$               557,979

$              542,308

Current portion of long-term debt and notes payable

13,656

26,577

Total Current Liabilities

571,635

568,885

Long-term debt, net of current portion

2,685,333

2,734,132

Non-current deferred tax liability

199,078

197,411

Other non-current liabilities

136,520

141,279

Total Liabilities

3,592,566

3,641,707

Redeemable non-controlling interests

422,159

468,850

Total equity

905,901

943,654

Total Liabilities and Equity

$            4,920,626

$           5,054,211

IV.  Condensed Consolidated Statements of Cash Flows

For the Three Months Ended June 30, 2016 and 2017
(In thousands, unaudited)

2016

2017

Operating activities

Net income

$        40,853

$       51,300

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

     Distributions from unconsolidated subsidiaries

3,734

6,022

     Depreciation and amortization

36,205

38,333

     Provision for bad debts

17,517

18,174

     Equity in earnings of unconsolidated subsidiaries

(4,546)

(5,666)

     Gain on sale of assets and businesses

(13,068)

(4,914)

     Loss on disposal of assets

55

—

     Stock compensation expense

4,198

4,684

     Amortization of debt discount, premium and issuance costs

3,386

2,552

     Deferred income taxes

(9,811)

1,951

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

Accounts receivable

Other current assets

3,451

2,064

Other assets

5,399

4,669

Accounts payable and accrued expenses

(25,091)

13,943

Income taxes

9,720

3,979

Net cash provided by operating activities

67,070

96,201

Investing activities

Acquisition of businesses, net of cash acquired

(8,636)

(8,942)

Purchases of property and equipment

(33,490)

(54,649)

Investment in businesses

(967)

(9,374)

Proceeds from sale of assets and businesses

8,766

15,040

Net cash used in investing activities

(34,327)

(57,925)

Financing activities

Borrowings on revolving facilities

130,000

100,000

Payments on revolving facilities

(205,000)

(135,000)

Payments on term loans

(2,687)

(2,875)

Debt issuance costs

—

(840)

Borrowings of other debt

15,355

2,873

Principal payments on other debt

(5,462)

(5,162)

Proceeds from bank overdrafts

26,477

11,834

Repurchase of common stock

(506)

(444)

Proceeds from exercise of stock options

636

346

Proceeds from issuance of non-controlling interests

3,103

1,459

Purchase of non-controlling interests

—

(70)

Distributions to non-controlling interests

(1,647)

(1,809)

Net cash used in financing activities

(39,731)

(29,688)

Net increase (decrease) in cash and cash equivalents

(6,988)

8,588

Cash and cash equivalents at beginning of period

85,408

65,211

Cash and cash equivalents at end of period

$       78,420

$       73,799

Supplemental Information

     Cash paid for interest

$       47,771

$       38,085

     Cash paid for taxes

$       34,309

$       26,419

V.  Condensed Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2016 and 2017
(In thousands, unaudited)

2016

2017

Operating activities

Net income

$     100,797

$       74,763

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

     Distributions from unconsolidated subsidiaries

12,039

10,933

     Depreciation and amortization

70,722

80,872

     Provision for bad debts

33,914

38,799

     Equity in earnings of unconsolidated subsidiaries

(9,198)

(11,187)

     Loss on extinguishment of debt

773

6,527

     Gain on sale of assets and businesses

(43,461)

(9,523)

     Loss on disposal of assets

55

—

     Impairment of equity investment

5,339

—

     Stock compensation expense

8,174

9,270

     Amortization of debt discount, premium and issuance costs

7,077

5,974

     Deferred income taxes

(13,286)

(1,474)

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

Accounts receivable

(44,096)

(179,003)

Other current assets

11,011

(5,557)

Other assets

4,508

4,621

Accounts payable and accrued expenses

4,780

(4,074)

Income taxes

29,090

19,399

Net cash provided by operating activities

178,238

40,340

Investing activities

Acquisition of businesses, net of cash acquired

(421,519)

(18,508)

Purchases of property and equipment

(80,258)

(105,302)

Investment in businesses

(1,590)

(9,874)

Proceeds from sale of assets and businesses

71,366

34,552

Net cash used in investing activities

(432,001)

(99,132)

Financing activities

Borrowings on revolving facilities

320,000

630,000

Payments on revolving facilities

(380,000)

(550,000)

Proceeds from term loans

600,127

1,139,487

Payments on term loans

(229,649)

(1,173,692)

Revolving facility debt issuance costs

—

(4,392)

Borrowings of other debt

22,082

9,444

Principal payments on other debt

(9,926)

(10,437)

Repayments of bank overdrafts

(2,138)

(5,228)

Repurchase of common stock

(506)

(600)

Proceeds from exercise of stock options

657

963

Proceeds from issuance of non-controlling interests

3,103

3,553

Purchase of non-controlling interests

(1,294)

(120)

Distributions to non-controlling interests

(4,708)

(5,416)

Net cash provided by financing activities

317,748

33,562

Net increase (decrease) in cash and cash equivalents

63,985

(25,230)

Cash and cash equivalents at beginning of period

14,435

99,029

Cash and cash equivalents at end of period

$      78,420

$      73,799

Supplemental Information

     Cash paid for interest

$      69,315

$      76,650

     Cash paid for taxes

$      35,518

$      27,626

VI.  Key Statistics

For the Three Months Ended June 30, 2016 and 2017

 (unaudited)

2016

2017

% Change

Specialty Hospitals

Number of hospitals – end of period:

Long term acute care hospitals (a)

106

102

Rehabilitation hospitals (a)

18

21

Total specialty hospitals

124

123

Net operating revenues (,000)

$       585,816

$        600,960

2.6%

Number of patient days (b)

317,119

316,884

(0.1)%

Number of admissions (b)

13,094

13,691

4.6%

Net revenue per patient day (b)(c)

$           1,680

$            1,731

3.0%

Adjusted EBITDA (,000)

$         82,739

$          98,172

18.7%

Adjusted EBITDA margin

14.1%

16.3%

Outpatient Rehabilitation

Number of clinics – end of period (d)

1,600

1,608

Net operating revenues (,000)

$       256,928

$        258,106

0.5%

Number of visits (e)

2,122,330

2,106,760

(0.7)%

Revenue per visit (e)(f)

$              102

$               103

1.0%

Adjusted EBITDA (,000)

$         38,132

$          41,926

9.9%

Adjusted EBITDA margin

14.8%

16.2%

Concentra

Number of centers – end of period (g)

301

315

Net operating revenues (,000)

$       254,868

$       261,586

2.6%

Number of visits (g)

1,890,348

1,982,255

4.9%

Revenue per visit (g)(h)

$              118

$              116

(1.7)%

Adjusted EBITDA (,000)

$         43,039

$         43,061

0.1%

Adjusted EBITDA margin

16.9%

16.5%

(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 Six Months Ended June 30, 2016 and 2017

 (unaudited)

2016

2017

% Change

Specialty Hospitals

Number of hospitals – end of period:

Long term acute care hospitals (a)

106

102

Rehabilitation hospitals (a)

18

21

Total specialty hospitals

124

123

Net operating revenues (,000)

$    1,184,770

$    1,199,747

1.3%

Number of patient days (b)

655,090

634,249

(3.2)%

Number of admissions (b)

26,955

27,586

2.3%

Net revenue per patient day (b)(c)

$           1,655

$            1,723

4.1%

Adjusted EBITDA (,000)

$       169,495

$        186,837

10.2%

Adjusted EBITDA margin

14.3%

15.6%

Outpatient Rehabilitation

Number of clinics – end of period (d)

1,600

1,608

Net operating revenues (,000)

$       495,010

$       513,923

3.8%

Number of visits (e)

3,698,884

4,182,550

13.1%

Revenue per visit (e)(f)

$              102

$              102

0.0%

Adjusted EBITDA (,000)

$         67,011

$         73,277

9.4%

Adjusted EBITDA margin

13.5%

14.3%

Concentra

Number of centers – end of period (g)

301

315

Net operating revenues (,000)

$       505,745

$       517,735

2.4%

Number of visits (g)

3,736,063

3,869,070

3.6%

Revenue per visit (g)(h)

$              118

$              117

(0.8)%

Adjusted EBITDA (,000)

$         77,192

$         85,653

11.0%

Adjusted EBITDA margin

15.3%

16.5%

(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. 

VIII. Net Income to Adjusted EBITDA Reconciliation

For the Three and Six Months Ended June 30, 2016 and 2017

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

Non-GAAP Measure Reconciliation

Three Months Ended June 30,

Six Months Ended June 30,

2016

2017

2016

2017

Net income

$        40,853

$       51,300

$    100,797

$      74,763

Income tax expense

33,450

32,374

50,510

45,576

Interest expense

44,332

37,655

83,180

78,508

Non-operating loss (gain)

(13,035)

—

(38,122)

49

Equity in earnings of unconsolidated subsidiaries

(4,546)

(5,666)

(9,198)

(11,187)

Loss on early retirement of debt

—

—

773

19,719

Income from operations

$      101,054

$     115,663

$    187,940

$    207,428

Stock compensation expense:

   Included in general and administrative

3,399

3,775

6,839

7,524

   Included in cost of services

799

909

1,335

1,746

Depreciation and amortization

36,205

38,333

70,722

80,872

Physiotherapy acquisition costs

—

—

3,236

—

Adjusted EBITDA

$      141,457

$    158,680

$    270,072

$    297,570

Specialty hospitals

$        82,739

$      98,172

$    169,495

$    186,837

Outpatient rehabilitation

38,132

41,926

67,011

73,277

Concentra

43,039

43,061

77,192

85,653

Other (a)

(22,453)

(24,479)

(43,626)

(48,197)

Adjusted EBITDA

$      141,457

$    158,680

$    270,072

$    297,570

(a)     Other primarily includes general and administrative costs.

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

For the Three and Six Months Ended June 30, 2016 and 2017

(In thousands, except per share amounts, unaudited)

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

The following tables reconcile net income available to common stockholders and income per common share to adjusted net income available to common stockholders and adjusted income per common share – diluted shares for Select Medical.  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 June 30,

2016

Per share (a)

2017

Per share (a)

Net income attributable to Select Medical Holdings Corporation

$       33,935

$        42,055

Earnings allocated to unvested restricted stockholders

(972)

(1,341)

Net income available to common stockholders

32,963

$            0.26

40,714

$            0.32

Adjustments:

Non-operating gains:

Gain on sale of contract therapy

(3,500)

—

Other non-operating gains

(9,535)

—

Estimated income tax expense (b)

8,776

—

Earnings allocated to unvested restricted stockholders

97

—

Adjusted net income available to common stockholders

$      28,801

$            0.23

$        40,714

$            0.32

Adjustment for dilution

(0.00)

(0.00)

Adjusted income per common share – diluted shares

$            0.23

$            0.32

Weighted average common shares outstanding:

    Basic

127,626

128,624

    Diluted

127,820

128,777

(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.

Six Months Ended June 30,

2016

Per share (a)

2017

Per share (a)

Net income attributable to Select Medical Holdings Corporation

$       88,768

$        57,925

Earnings allocated to unvested  restricted stockholders

(2,552)

(1,849)

Net income available to common stockholders

$       86,216

$            0.68

$        56,076

$            0.44

Adjustments:

Non-operating losses (gains):

Gain on sale of contract therapy

(33,933)

—

Other non-operating losses (gains)

(4,196)

49

Loss on early retirement of debt

773

19,719

Estimated income tax expense (benefit) (b)

5,735

(7,796)

Earnings allocated to unvested restricted stockholders

860

(381)

Adjusted net income available to common stockholders

$       55,455

$            0.43

$        67,667

$            0.53

Adjustment for dilution

(0.00)

(0.00)

Adjusted income per common share – diluted shares

$            0.43

$            0.53

Weighted average common shares outstanding:

    Basic

127,563

128,544

    Diluted

127,709

128,703

(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 (benefit) 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 Select Medical'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

$                   121

$                   145

Income tax expense

91

107

Interest expense

159

159

Equity in earnings of unconsolidated subsidiaries

(23)

(23)

Loss on early retirement of debt

20

20

Income from operations

$                   368

$                   408

Stock compensation expense

15

15

Depreciation and amortization

157

157

Adjusted EBITDA

$                   540

$                   580