Attached files
file | filename |
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EX-31.1 - EXHIBIT 31.1 - SELECT MEDICAL HOLDINGS CORP | c16406exv31w1.htm |
EX-10.8 - EXHIBIT 10.8 - SELECT MEDICAL HOLDINGS CORP | c16406exv10w8.htm |
EX-31.2 - EXHIBIT 31.2 - SELECT MEDICAL HOLDINGS CORP | c16406exv31w2.htm |
EX-32.1 - EXHIBIT 32.1 - SELECT MEDICAL HOLDINGS CORP | c16406exv32w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange act of 1934 |
For the Quarterly Period Ended March 31, 2011
o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange act of 1934 |
For the Transition Period From to .
Commission File Numbers: 001 34465 and 001 31441
SELECT MEDICAL HOLDINGS CORPORATION
SELECT MEDICAL CORPORATION
(Exact name of Registrants as specified in their charters)
Delaware Delaware (State or other jurisdiction of |
20-1764048 23-2872718 (I.R.S. employer identification number) |
|
incorporation or organization) |
4714 Gettysburg Road, P.O. Box 2034, Mechanicsburg, Pennsylvania 17055
(Address of principal executive offices and zip code)
(Address of principal executive offices and zip code)
(717) 972-1100
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the Registrants (1) have filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter periods as the Registrants were required to file such reports), and (2) have been
subject to such filing requirements for the past 90 days.
YES þ NO o
Indicate by check mark whether the Registrants have submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the Registrants were required to submit and post such files).
YES o NO o
Indicate by check mark whether the Registrants are large accelerated filers, accelerated
filers, non-accelerated filers, or smaller reporting companies. See definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filers o | Accelerated filers þ | Non-accelerated filers o | Smaller reporting company o |
Indicate by check mark whether the Registrants are shell companies (as defined in
Rule 12b-2 of the Exchange Act).
YES o NO þ
As of April 30, 2011, Select Medical Holdings Corporation had outstanding 154,273,150 shares
of common stock.
This Form 10-Q is a combined quarterly report being filed separately by two Registrants:
Select Medical Holdings Corporation and Select Medical Corporation. Unless the context indicates
otherwise, any reference in this report to Holdings refers to Select Medical Holdings Corporation
and any reference to Select refers to Select Medical Corporation, the wholly-owned operating
subsidiary of Holdings. References to the Company, we, us, and our refer collectively to
Select Medical Holdings Corporation and Select Medical Corporation.
TABLE OF CONTENTS
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Exhibit 10.8 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 |
Table of Contents
PART
I FINANCIAL INFORMATION
ITEM
1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
(unaudited)
(in thousands, except share and per share amounts)
(unaudited)
(in thousands, except share and per share amounts)
Select Medical Holdings Corporation | Select Medical Corporation | |||||||||||||||
December 31, | March 31, | December 31, | March 31, | |||||||||||||
2010 | 2011 | 2010 | 2011 | |||||||||||||
ASSETS |
||||||||||||||||
Current Assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 4,365 | $ | 15,068 | $ | 4,365 | $ | 15,068 | ||||||||
Accounts receivable, net of allowance for doubtful accounts
of $44,416 and $51,457 in 2010 and 2011,
respectively |
353,432 | 439,310 | 353,432 | 439,310 | ||||||||||||
Current deferred tax asset |
30,654 | 29,644 | 30,654 | 29,644 | ||||||||||||
Prepaid income taxes |
12,699 | | 12,699 | | ||||||||||||
Other current assets |
28,176 | 31,264 | 28,176 | 31,264 | ||||||||||||
Total Current Assets |
429,326 | 515,286 | 429,326 | 515,286 | ||||||||||||
Property and equipment, net |
532,100 | 526,905 | 532,100 | 526,905 | ||||||||||||
Goodwill |
1,631,252 | 1,640,535 | 1,631,252 | 1,640,535 | ||||||||||||
Other identifiable intangibles |
80,119 | 73,102 | 80,119 | 73,102 | ||||||||||||
Assets held for sale |
11,342 | 11,342 | 11,342 | 11,342 | ||||||||||||
Other assets |
37,947 | 36,649 | 35,433 | 34,273 | ||||||||||||
Total Assets |
$ | 2,722,086 | $ | 2,803,819 | $ | 2,719,572 | $ | 2,801,443 | ||||||||
LIABILITIES AND EQUITY |
||||||||||||||||
Current Liabilities: |
||||||||||||||||
Bank overdrafts |
$ | 18,792 | $ | 9,374 | $ | 18,792 | $ | 9,374 | ||||||||
Current portion of long-term debt and notes payable |
149,379 | 150,323 | 149,379 | 150,323 | ||||||||||||
Accounts payable |
74,193 | 86,642 | 74,193 | 86,642 | ||||||||||||
Accrued payroll |
63,760 | 75,357 | 63,760 | 75,357 | ||||||||||||
Accrued vacation |
46,588 | 49,057 | 46,588 | 49,057 | ||||||||||||
Accrued interest |
30,937 | 12,889 | 21,586 | 9,898 | ||||||||||||
Accrued restructuring |
6,754 | 6,293 | 6,754 | 6,293 | ||||||||||||
Accrued other |
103,856 | 96,732 | 116,456 | 96,732 | ||||||||||||
Income taxes payable |
| 6,698 | | 6,698 | ||||||||||||
Due to third party payors |
5,299 | 4,825 | 5,299 | 4,825 | ||||||||||||
Total Current Liabilities |
499,558 | 498,190 | 502,807 | 495,199 | ||||||||||||
Long-term debt, net of current portion |
1,281,390 | 1,324,393 | 974,913 | 1,017,409 | ||||||||||||
Non-current deferred tax liability |
59,074 | 63,653 | 59,074 | 63,653 | ||||||||||||
Other non-current liabilities |
66,650 | 69,526 | 66,650 | 69,526 | ||||||||||||
Total Liabilities |
1,906,672 | 1,955,762 | 1,603,444 | 1,645,787 | ||||||||||||
Stockholders Equity: |
||||||||||||||||
Common stock of Holdings, $0.001par value, 700,000,000
shares authorized, 154,519,025 shares and
154,273,150 shares
issued and outstanding in 2010 and 2011, respectively |
155 | 154 | | | ||||||||||||
Common stock of Select, $0.01par value, 100 shares issued
and outstanding |
| | 0 | 0 | ||||||||||||
Capital in excess of par |
535,628 | 535,239 | 834,894 | 838,305 | ||||||||||||
Retained earnings |
248,097 | 281,094 | 249,700 | 285,781 | ||||||||||||
Total Select Medical Holdings Corporation and Select Medical |
||||||||||||||||
Corporation Stockholders Equity |
783,880 | 816,487 | 1,084,594 | 1,124,086 | ||||||||||||
Non-controlling interest |
31,534 | 31,570 | 31,534 | 31,570 | ||||||||||||
Total Equity |
815,414 | 848,057 | 1,116,128 | 1,155,656 | ||||||||||||
Total Liabilities and Equity |
$ | 2,722,086 | $ | 2,803,819 | $ | 2,719,572 | $ | 2,801,443 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
3
Table of Contents
Consolidated Statements of Operations
(unaudited)
(in thousands, except per share amounts)
(unaudited)
(in thousands, except per share amounts)
Select Medical Holdings Corporation | Select Medical Corporation | |||||||||||||||
For the Quarter Ended March 31, | For the Quarter Ended March 31, | |||||||||||||||
2010 | 2011 | 2010 | 2011 | |||||||||||||
Net operating revenues |
$ | 584,813 | $ | 693,186 | $ | 584,813 | $ | 693,186 | ||||||||
Costs and expenses: |
||||||||||||||||
Cost of services |
472,377 | 557,416 | 472,377 | 557,416 | ||||||||||||
General and administrative |
12,789 | 16,566 | 12,789 | 16,566 | ||||||||||||
Bad debt expense |
9,287 | 14,350 | 9,287 | 14,350 | ||||||||||||
Depreciation and amortization |
17,711 | 17,222 | 17,711 | 17,222 | ||||||||||||
Total costs and expenses |
512,164 | 605,554 | 512,164 | 605,554 | ||||||||||||
Income from operations |
72,649 | 87,632 | 72,649 | 87,632 | ||||||||||||
Other income and expense: |
||||||||||||||||
Equity in
losses of unconsolidated subsidiaries |
| (73 | ) | | (73 | ) | ||||||||||
Other income |
134 | | 134 | | ||||||||||||
Interest income |
| 56 | | 56 | ||||||||||||
Interest expense |
(30,042 | ) | (25,664 | ) | (23,038 | ) | (18,662 | ) | ||||||||
Income before income taxes |
42,741 | 61,951 | 49,745 | 68,953 | ||||||||||||
Income tax expense |
17,109 | 26,564 | 19,560 | 29,014 | ||||||||||||
Net income |
25,632 | 35,387 | 30,185 | 39,939 | ||||||||||||
Less: Net income attributable to
non-controlling interests |
1,406 | 1,715 | 1,406 | 1,715 | ||||||||||||
Net income attributable to Select Medical Holdings Corporation and Select
Medical Corporation |
$ | 24,226 | $ | 33,672 | $ | 28,779 | $ | 38,224 | ||||||||
Income per common share: |
||||||||||||||||
Basic |
$ | 0.15 | $ | 0.22 | ||||||||||||
Diluted |
$ | 0.15 | $ | 0.22 |
The accompanying notes are an integral part of these consolidated financial statements.
4
Table of Contents
Select Medical Holdings Corporation
Consolidated Statement of Changes in Equity and Income
(unaudited)
(in thousands)
Select Medical Holdings Corporation Stockholders | ||||||||||||||||||||||||||||
Common | ||||||||||||||||||||||||||||
Comprehensive | Common | Stock Par | Capital in | Retained | Non-controlling | |||||||||||||||||||||||
Total | Income | Stock Issued | Value | Excess of Par | Earnings | Interests | ||||||||||||||||||||||
Balance at December 31, 2010 |
$ | 815,414 | 154,519 | $ | 155 | $ | 535,628 | $ | 248,097 | $ | 31,534 | |||||||||||||||||
Net income |
35,387 | $ | 35,387 | 33,672 | 1,715 | |||||||||||||||||||||||
Issuance and vesting of restricted stock |
593 | 593 | ||||||||||||||||||||||||||
Exercise of stock options |
81 | 24 | 0 | 81 | ||||||||||||||||||||||||
Stock option expense |
287 | 287 | ||||||||||||||||||||||||||
Repurchase of common shares |
(2,026 | ) | (270 | ) | (1 | ) | (1,350 | ) | (675 | ) | ||||||||||||||||||
Distributions to non-controlling
interests |
(1,671 | ) | (1,671 | ) | ||||||||||||||||||||||||
Other |
(8 | ) | (8 | ) | ||||||||||||||||||||||||
Balance at March 31, 2011 |
$ | 848,057 | 154,273 | $ | 154 | $ | 535,239 | $ | 281,094 | $ | 31,570 | |||||||||||||||||
Select Medical Corporation
Consolidated Statement of Changes in Equity and Income
(unaudited)
(in thousands)
Consolidated Statement of Changes in Equity and Income
(unaudited)
(in thousands)
Select Medical Corporation Stockholders | ||||||||||||||||||||||||||||
Common | ||||||||||||||||||||||||||||
Comprehensive | Common | Stock Par | Capital in | Retained | Non-controlling | |||||||||||||||||||||||
Total | Income | Stock Issued | Value | Excess of Par | Earnings | Interests | ||||||||||||||||||||||
Balance at December 31, 2010 |
$ | 1,116,128 | 0 | $ | 0 | $ | 834,894 | $ | 249,700 | $ | 31,534 | |||||||||||||||||
Net income |
39,939 | $ | 39,939 | 38,224 | 1,715 | |||||||||||||||||||||||
Federal tax benefit of losses contributed by
Holdings |
2,450 | 2,450 | ||||||||||||||||||||||||||
Additional investment by Holdings |
81 | 81 | ||||||||||||||||||||||||||
Net change in dividends payable to Holdings |
12,600 | 12,600 | ||||||||||||||||||||||||||
Dividends declared and paid to Holdings |
(14,743 | ) | (14,743 | ) | ||||||||||||||||||||||||
Distributions to non-controlling interests |
(1,671 | ) | (1,671 | ) | ||||||||||||||||||||||||
Other |
(8 | ) | (8 | ) | ||||||||||||||||||||||||
Contribution related to restricted stock awards
and stock option issuances by Holdings |
880 | 880 | ||||||||||||||||||||||||||
Balance at March 31, 2011 |
$ | 1,155,656 | 0 | $ | 0 | $ | 838,305 | $ | 285,781 | $ | 31,570 | |||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
5
Table of Contents
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
(unaudited)
(in thousands)
Select Medical Holdings Corporation | Select Medical Corporation | |||||||||||||||
For the Three Months Ended March 31, | For the Three Months Ended March 31, | |||||||||||||||
2010 | 2011 | 2010 | 2011 | |||||||||||||
Operating activities |
||||||||||||||||
Net income |
$ | 25,632 | $ | 35,387 | $ | 30,185 | $ | 39,939 | ||||||||
Adjustments to reconcile net income to net cash
provided by (used in) operating activities: |
||||||||||||||||
Depreciation and amortization |
17,711 | 17,222 | 17,711 | 17,222 | ||||||||||||
Provision for bad debts |
9,287 | 14,350 | 9,287 | 14,350 | ||||||||||||
Loss from disposal of assets |
133 | 188 | 133 | 188 | ||||||||||||
Non-cash gain from interest rate swaps |
(134 | ) | | (134 | ) | | ||||||||||
Non-cash stock compensation expense |
508 | 880 | 508 | 880 | ||||||||||||
Amortization of debt discount |
450 | 507 | | | ||||||||||||
Changes in operating assets and
liabilities, net of
effects from acquisition of businesses: |
||||||||||||||||
Accounts receivable |
(63,205 | ) | (100,135 | ) | (63,205 | ) | (100,135 | ) | ||||||||
Other current assets |
(2,066 | ) | (3,076 | ) | (2,066 | ) | (3,076 | ) | ||||||||
Other assets |
2,130 | 2,052 | 1,992 | 1,914 | ||||||||||||
Accounts payable |
(1,802 | ) | 11,777 | (1,802 | ) | 11,777 | ||||||||||
Due to third-party payors |
57 | (474 | ) | 57 | (474 | ) | ||||||||||
Accrued expenses |
(20,633 | ) | (9,948 | ) | (14,172 | ) | (3,588 | ) | ||||||||
Income and deferred taxes |
16,136 | 26,238 | 18,587 | 28,688 | ||||||||||||
Net cash provided by (used in) operating activities |
(15,796 | ) | (5,032 | ) | (2,919 | ) | 7,685 | |||||||||
Investing activities |
||||||||||||||||
Purchases of property and equipment |
(13,047 | ) | (12,920 | ) | (13,047 | ) | (12,920 | ) | ||||||||
Proceeds from sale of business |
| 250 | | 250 | ||||||||||||
Acquisition of businesses, net of cash acquired |
| (2,000 | ) | | (2,000 | ) | ||||||||||
Net cash used in investing activities |
(13,047 | ) | (14,670 | ) | (13,047 | ) | (14,670 | ) | ||||||||
Financing activities |
||||||||||||||||
Borrowings on revolving credit facility |
| 205,000 | | 205,000 | ||||||||||||
Payments on revolving credit facility |
| (105,000 | ) | | (105,000 | ) | ||||||||||
Payment on credit facility term loans |
| (59,563 | ) | | (59,563 | ) | ||||||||||
Borrowings of other debt |
5,015 | 5,496 | 5,015 | 5,496 | ||||||||||||
Principal payments on seller and other debt |
(2,357 | ) | (2,494 | ) | (2,357 | ) | (2,494 | ) | ||||||||
Dividends paid to Holdings |
| | (12,877 | ) | (14,743 | ) | ||||||||||
Repurchase of common stock |
| (2,026 | ) | | | |||||||||||
Proceeds from issuance of common stock |
110 | 81 | | | ||||||||||||
Equity investment by Holdings |
| | 110 | 81 | ||||||||||||
Proceeds from (repayment of) bank overdrafts |
17,314 | (9,418 | ) | 17,314 | (9,418 | ) | ||||||||||
Distributions to non-controlling interests |
(1,746 | ) | (1,671 | ) | (1,746 | ) | (1,671 | ) | ||||||||
Net cash provided by financing activities |
18,336 | 30,405 | 5,459 | 17,688 | ||||||||||||
Net increase (decrease in) cash and cash equivalents |
(10,507 | ) | 10,703 | (10,507 | ) | 10,703 | ||||||||||
Cash and cash equivalents at beginning of period |
83,680 | 4,365 | 83,680 | 4,365 | ||||||||||||
Cash and cash equivalents at end of period |
$ | 73,173 | $ | 15,068 | $ | 73,173 | $ | 15,068 | ||||||||
Supplemental Cash Flow Information |
||||||||||||||||
Cash paid for interest |
$ | 46,038 | $ | 41,365 | $ | 33,162 | $ | 28,648 | ||||||||
Cash paid for taxes |
$ | 980 | $ | 103 | $ | 980 | $ | 103 |
The accompanying notes are an integral part of these consolidated financial statements.
6
Table of Contents
SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
Select Medical Corporation (Select) was formed in December 1996 and commenced operations
during February 1997 upon the completion of its first acquisition. Select Medical Holdings
Corporation (Holdings) was formed in October 2004 for the purpose of affecting a leveraged buyout
of Select, which was a publicly traded entity. Holdings was originally owned by an investor group
that includes Welsh, Carson, Anderson, & Stowe, IX, LP (Welsh Carson), Thoma Cressey Bravo
(Thoma Cressey) and members of the Companys senior management. On February 24, 2005, Select
merged with a subsidiary of Holdings, which resulted in Select becoming a wholly-owned subsidiary
of Holdings (the Merger). On September 30, 2009 Holdings completed its initial public offering of
common stock at a price to the public of $10.00 per share. Generally accepted accounting
principles (GAAP) require that any amounts recorded or incurred (such as goodwill and
compensation expense) by the parent as a result of the Merger or for the benefit of the subsidiary
be pushed down and recorded in Selects consolidated financial statements. Holdings and Select
and their subsidiaries are collectively referred to as the Company. The consolidated financial
statements of Holdings include the accounts of its wholly-owned subsidiary Select. Holdings
conducts substantially all of its business through Select and its subsidiaries.
The unaudited condensed consolidated financial statements of the Company as of March 31, 2011
and for the three month period ended March 31, 2010 and 2011 have been prepared in accordance with
generally accepted accounting principles. In the opinion of management, such information contains
all adjustments, which are normal and recurring in nature, necessary for a fair statement of the financial position,
results of operations and cash flow for such periods. All significant intercompany transactions
and balances have been eliminated. The results of operations for the three months ended March 31,
2011 are not necessarily indicative of the results to be expected for the full fiscal year ending
December 31, 2011.
Certain information and disclosures normally included in the notes to consolidated financial
statements have been condensed or omitted consistent with the rules and regulations of the
Securities and Exchange Commission (the SEC), although the Company believes the disclosure is
adequate to make the information presented not misleading. The accompanying unaudited condensed
consolidated financial statements should be read in conjunction with the consolidated financial
statements and notes thereto for the year ended December 31, 2010 contained in the Companys Annual
Report on Form 10-K filed with the Securities and Exchange Commission on March 9, 2011.
2. Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and reported amounts
of revenues and expenses during the reporting period. Actual results could differ materially from
those estimates.
7
Table of Contents
Recent Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) 2010-06, Fair Value Measurements and Disclosures (Topic 820) Improving
Disclosures about Fair Value Measurements (Update 2010-06), which amends the guidance on fair
value to add new requirements for disclosures about transfers into and out of Levels 1 and 2 and
separate disclosures about purchases, sales, issuances, and settlements relating to Level 3
measurements. It also clarifies existing fair value disclosures about the level of disaggregation
and about inputs and valuation techniques used to measure fair value. The Company adopted update
2010-06 on January 1, 2010, except for the requirement to provide the Level 3 activity of
purchases, sales, issuances, and settlements on a gross basis, which
was effective for fiscal
years beginning after December 15, 2010. The
adoption of Update 2010-06 did not have an impact on the Companys consolidated financial
statements. The Company currently has no Level 3 measurements.
3. Intangible Assets
The Companys intangible assets consist of the following:
As of March 31, 2011 | ||||||||
Gross Carrying | Accumulated | |||||||
Amount | Amortization | |||||||
(in thousands) | ||||||||
Amortized intangible assets: |
||||||||
Non-compete agreements |
$ | 25,909 | $ | (24,589 | ) | |||
Indefinite-lived intangible assets: |
||||||||
Goodwill |
$ | 1,640,535 | ||||||
Trademarks |
57,709 | |||||||
Certificates of need |
11,913 | |||||||
Accreditations |
2,160 | |||||||
Total |
$ | 1,712,317 | ||||||
The Companys accreditations and trademarks have renewal terms. The costs to renew these
intangibles are expensed as incurred. At March 31, 2011, the accreditations and trademarks have a
weighted average time until next renewal of approximately 1.5 years and 9.1 years, respectively.
Amortization expense for the Companys intangible assets with finite lives follows:
Three Months Ended March 31, | ||||||||
2010 | 2011 | |||||||
(in thousands) | ||||||||
Amortization expense |
$ | 1,867 | $ | 326 |
8
Table of Contents
Amortization expense for the Companys intangible assets primarily relates to the amortization
of the value associated with the non-compete agreements entered into in connection with the
acquisitions of the outpatient rehabilitation division of HealthSouth Corporation and SemperCare,
Inc. The useful lives of the outpatient rehabilitation division of HealthSouth Corporations
non-compete and the SemperCare, Inc. non-compete are five and seven years, respectively.
Amortization expense related to these intangible assets for each of the next five years commencing
January 1, 2011 is approximately as follows (in thousands):
2011 |
$ | 1,306 | ||
2012 |
340 | |||
2013 |
0 | |||
2014 |
0 | |||
2015 |
0 |
The changes in the carrying amount of goodwill for the Companys reportable segments for the
three months ended March 31, 2011 are as follows:
Specialty | Outpatient | |||||||||||
Hospitals | Rehabilitation | Total | ||||||||||
(in thousands) | ||||||||||||
Balance as of December 31, 2010 |
$ | 1,330,609 | $ | 300,643 | $ | 1,631,252 | ||||||
Goodwill revision (1) |
7,114 | | 7,114 | |||||||||
Goodwill acquired during quarter |
2,169 | | 2,169 | |||||||||
Balance as of March 31, 2011 |
$ | 1,339,892 | $ | 300,643 | $ | 1,640,535 | ||||||
(1.) | During the three months ended March 31, 2011 the Company made a revision to the Regency Hospital Company, L.L.C. purchase price allocation resulting from the finalization of the intangible asset valuations. |
4. Restructuring Reserves
In connection with the acquisition of substantially all of the outpatient rehabilitation
division of HealthSouth Corporation, the Company recorded an estimated liability of $18.7 million
in 2007 for business restructuring which was accounted for as additional purchase price. This
reserve primarily included costs associated with workforce reductions and lease termination costs
in accordance with the Companys restructuring plan.
In connection with the acquisition of all the issued and outstanding equity securities of
Regency Hospital Company, L.L.C. (Regency), an operator of long term acute care hospitals, the
Company recorded an estimated liability of $4.3 million in 2010 for business restructuring related
to lease termination costs.
9
Table of Contents
The following summarizes the Companys restructuring activity:
Lease Termination Costs | ||||
(in thousands) | ||||
December 31, 2010 |
$ | 6,754 | ||
Amounts paid in 2011 |
(595 | ) | ||
Accretion expense |
134 | |||
March 31, 2011 |
$ | 6,293 | ||
The Company expects to pay out the remaining lease termination costs through 2014 for the
acquisition of the outpatient rehabilitation division of HealthSouth Corporation and through 2015
for the lease termination costs related to the Regency acquisition.
5. Fair Value
Financial instruments include cash and cash equivalents, notes payable and long-term debt.
The carrying amount of cash and cash equivalents approximates fair value because of the short-term
maturity of these instruments.
The carrying value of Selects senior secured credit facility was $506.8 million and $547.3
million at December 31, 2010 and March 31, 2011, respectively. The fair value of Selects senior
secured credit facility was $497.7 million and $535.3 million at December 31, 2010 and March 31,
2011, respectively. The fair value of Selects senior secured credit facility was based on quoted
market prices for this debt in the syndicated loan market.
The carrying value of the 7 5/8% senior subordinated notes was $611.5 million at both December
31, 2010 and March 31, 2011. The fair value of the 7 5/8% senior subordinated notes was $616.1
million and $622.2 million at December 31, 2010 and March 31, 2011, respectively. The fair value
of this registered debt was based on quoted market prices.
The carrying value of the senior floating rate notes was $167.3 million at both December 31,
2010 and March 31, 2011. The fair value of the senior floating rate notes was $156.0 million and
$164.4 million at December 31, 2010 and March 31, 2011, respectively. The fair value of this
registered debt was based on quoted market prices.
6. Segment Information
The Companys reportable segments consist of (i) specialty hospitals and (ii) outpatient
rehabilitation. All other represents amounts associated with corporate activities and
non-healthcare related services. The outpatient rehabilitation reportable segment has two operating
segments: outpatient rehabilitation clinics and contract therapy. These operating segments are
aggregated for reporting purposes as they have common economic characteristics and provide a
similar service to a similar patient base. The accounting policies of the segments are the same as
those described in the summary of significant accounting policies. The Company evaluates
performance of the segments based on Adjusted EBITDA. Adjusted EBITDA is defined as net income
before interest, income taxes, depreciation and amortization, stock compensation expense, equity in
losses of unconsolidated subsidiaries and other income.
10
Table of Contents
The following tables summarize selected financial data for the Companys reportable segments
for the three months ended March 31, 2010 and 2011. The segment results of Holdings are identical
to those of Select with the exception of total assets:
Three Months Ended March 31, 2010 | ||||||||||||||||
Specialty | Outpatient | |||||||||||||||
Hospitals | Rehabilitation | All Other | Total | |||||||||||||
(in thousands) | ||||||||||||||||
Net operating revenue |
$ | 411,685 | $ | 173,065 | $ | 63 | $ | 584,813 | ||||||||
Adjusted EBITDA |
82,897 | 20,518 | (12,547 | ) | 90,868 | |||||||||||
Total assets: |
||||||||||||||||
Select Medical Corporation |
1,991,456 | 502,346 | 132,252 | 2,626,054 | ||||||||||||
Select Medical Holdings Corporation |
1,991,456 | 502,346 | 135,168 | 2,628,970 | ||||||||||||
Capital expenditures |
10,598 | 2,035 | 414 | 13,047 |
Three Months Ended March 31, 2011 | ||||||||||||||||
Specialty | Outpatient | |||||||||||||||
Hospitals | Rehabilitation | All Other | Total | |||||||||||||
(in thousands) | ||||||||||||||||
Net operating revenue |
$ | 519,924 | $ | 173,191 | $ | 71 | $ | 693,186 | ||||||||
Adjusted EBITDA |
100,353 | 21,406 | (16,025 | ) | 105,734 | |||||||||||
Total assets: |
||||||||||||||||
Select Medical Corporation |
2,140,798 | 482,444 | 178,201 | 2,801,443 | ||||||||||||
Select Medical Holdings Corporation |
2,140,798 | 482,444 | 180,577 | 2,803,819 | ||||||||||||
Capital expenditures |
10,487 | 2,181 | 252 | 12,920 |
11
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A
reconciliation of Adjusted EBITDA to income before income taxes is as
follows (in thousands):
Three Months Ended March 31, 2010 | ||||||||||||
Specialty | Outpatient | |||||||||||
Hospitals | Rehabilitation | All Other | ||||||||||
Adjusted EBITDA |
$ | 82,897 | $ | 20,518 | $ | (12,547 | ) | |||||
Depreciation and amortization |
(10,959 | ) | (5,856 | ) | (896 | ) | ||||||
Stock compensation expense |
| | (508 | ) | ||||||||
Select Medical | ||||||||||||||||||||
Holdings | Select Medical | |||||||||||||||||||
Corporation | Corporation | |||||||||||||||||||
Income (loss) from operations |
$ | 71,938 | $ | 14,662 | $ | (13,951 | ) | $ | 72,649 | $ | 72,649 | |||||||||
Other income |
134 | 134 | ||||||||||||||||||
Interest expense, net |
(30,042 | ) | (23,038 | ) | ||||||||||||||||
Income before income taxes |
$ | 42,741 | $ | 49,745 | ||||||||||||||||
Three Months Ended March 31, 2011 | ||||||||||||
Specialty | Outpatient | |||||||||||
Hospitals | Rehabilitation | All Other | ||||||||||
Adjusted EBITDA |
$ | 100,353 | $ | 21,406 | $ | (16,025 | ) | |||||
Depreciation and amortization |
(12,046 | ) | (4,459 | ) | (717 | ) | ||||||
Stock compensation expense |
| | (880 | ) | ||||||||
Select Medical | ||||||||||||||||||||
Holdings | Select Medical | |||||||||||||||||||
Corporation | Corporation | |||||||||||||||||||
Income (loss) from operations |
$ | 88,307 | $ | 16,947 | $ | (17,622 | ) | $ | 87,632 | $ | 87,632 | |||||||||
Equity in
losses of
unconsolidated subsidiaries |
(73 | ) | (73 | ) | ||||||||||||||||
Interest expense, net |
(25,608 | ) | (18,606 | ) | ||||||||||||||||
Income before income taxes |
$ | 61,951 | $ | 68,953 | ||||||||||||||||
7. Income per Common Share
The Company applies the two-class method for calculating and presenting income per common
share. The two-class method is an earnings allocation formula that determines earnings per share
for each class of stock participation rights in undistributed earnings. Effective January 1, 2009
the Financial Accounting Standards Board (FASB) clarified that share based payment awards that
have not yet vested meet the definition of a participating security provided the right to receive
the dividend is non-forfeitable and non-contingent. Participating securities are defined as
securities that participate in dividends with common stock according to a predetermined formula.
These participating securities should be included in the computation of basic earnings per share
under the two class method. Based upon the clarification made by FASB, the Company concluded that
its non-vested restricted stock awards meet the definition of a participating security and should
be included in the Companys computation of basic earnings per share.
12
Table of Contents
The following table sets forth for the periods indicated the calculation of net income per
share in the Companys consolidated statement of operations and the differences between basic
weighted average shares outstanding and diluted weighted average shares outstanding used to compute
basic and diluted earnings per share, respectively:
For the Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2011 | |||||||
(in thousands, except per share data) | ||||||||
Numerator: |
||||||||
Net income attributable to Select Medical Holdings Corporation |
$ | 24,226 | $ | 33,672 | ||||
Less: Earnings allocated to unvested restricted stockholders |
50 | 361 | ||||||
Net income available to common stockholders |
$ | 24,176 | $ | 33,311 | ||||
Denominator: |
||||||||
Weighted average shares basic |
159,670 | 152,838 | ||||||
Effect of dilutive securities: |
||||||||
Stock options |
351 | 218 | ||||||
Weighted average shares diluted |
160,021 | 153,056 | ||||||
Basic income per common share |
$ | 0.15 | $ | 0.22 | ||||
Diluted income per common share |
$ | 0.15 | $ | 0.22 |
The following share amounts are shown here for informational and comparative purposes only
since their inclusion would be anti-dilutive:
Three Months Ended March 31, | ||||||||
2010 | 2011 | |||||||
(in thousands) | ||||||||
Stock options |
1,581 | 2,372 |
8. Commitments and Contingencies
Litigation
To cover claims arising out of the operations of the Companys specialty hospitals and
outpatient rehabilitation facilities, the Company maintains professional malpractice liability
insurance and general liability insurance. The Company also maintains umbrella liability insurance
covering claims which, due to their nature or amount, are not covered by or not fully covered by
the Companys other insurance policies. These insurance policies also do not generally cover
punitive damages and are subject to various deductibles and policy limits. Significant legal
actions as well as the cost and possible lack of available insurance could subject the Company to
substantial uninsured liabilities.
13
Table of Contents
The Company is subject to legal proceedings and claims that arise in the ordinary course of
business, which include malpractice claims covered under insurance policies, subject to
self-insured retention of $2.0 million per medical incident for professional liability claims and
$2.0 million per occurrence for general liability claims. In the Companys opinion, the outcome of these actions will not have a
material adverse effect on its financial position or results of operations.
Healthcare providers are subject to lawsuits under the qui tam provisions of the federal
False Claims Act. Qui tam lawsuits typically remain under seal (hence, usually unknown to the
defendant) for some time while the government decides whether or not to intervene on behalf of a
private qui tam plaintiff (known as a relator) and take the lead in the litigation. These lawsuits
can involve significant monetary damages and penalties and award bounties to private plaintiffs who
successfully bring the suits. The Company has been a defendant in these cases in the past, and may
be named as a defendant in similar cases from time to time in the future.
During July 2009, the Company received a subpoena from the Office of Inspector General of the
U.S. Department of Health and Human Services seeking various documents concerning the Companys
financial relationships with certain physicians practicing at its hospitals in Columbus, Ohio. The
Company understands that the subpoena was issued in connection with a qui tam lawsuit and that the
government has been investigating the matter to determine whether to intervene. The Company has
produced documents in response to the subpoena and has fully cooperated with the governments
investigation. The Company is in discussions with the government to attempt to resolve this matter
in a manner satisfactory to the Company and the government. Any settlement is not expected to be
material to the Companys financial position.
Construction Commitments
At March 31, 2011, the Company had outstanding commitments under construction contracts
related to new construction, improvements and renovations at the Companys long term acute care
properties and inpatient rehabilitation facilities totaling approximately $4.6 million.
9. Refinancing
On April 25, 2011, Select commenced a cash tender offer and consent solicitation for any and
all of Selects 7 5/8% senior subordinated notes. The tender offer is scheduled to expire at 11:59
p.m. on May 20, 2011. The tender offer and consent solicitation are being conducted in connection
with Selects negotiations to refinance its senior secured credit facility. The tender offer and
consent solicitation are conditioned on Selects entry into a new senior secured credit facility.
The Company expects to use a portion of the proceeds from such new senior secured credit facility
to purchase the tendered and accepted 7 5/8% senior subordinated notes and to retire Holdings 10%
senior subordinated notes.
10. | Financial Information for Subsidiary Guarantors and Non-Guarantor Subsidiaries under Selects 7 5/8% Senior Subordinated Notes |
Selects 7 5/8% Senior Subordinated Notes are fully and unconditionally guaranteed on a senior
subordinated basis by all of Selects wholly-owned subsidiaries (the Subsidiary Guarantors).
Certain of Selects subsidiaries did not guarantee the 7 5/8% Senior Subordinated Notes
(the Non-Guarantor Subsidiaries).
Select conducts a significant portion of its business through its subsidiaries. Presented
below is condensed consolidating financial information for Select, the Subsidiary Guarantors and
the Non-Guarantor Subsidiaries at December 31, 2010 and March 31, 2011 and for the three months
ended March 31, 2010 and 2011.
14
Table of Contents
The equity method has been used by Select with respect to investments in subsidiaries.
The equity method has been used by Subsidiary Guarantors with respect to investments in
Non-Guarantor Subsidiaries. Separate financial statements for Subsidiary Guarantors are not
presented.
The following table sets forth the Non-Guarantor Subsidiaries at March 31, 2011:
Caritas Rehab Services, LLC
Elizabethtown Physical Therapy, P.S.C.
Great Lakes Specialty Hospital Hackley, LLC
Great Lakes Specialty Hospital Oak, LLC
Jeffersontown Physical Therapy, LLC
Kentucky Orthopedic Rehabilitation, LLC
Kessler Core PT, OT and Speech Therapy at New York, LLC
Louisville Physical Therapy, P.S.C.
Metropolitan West Physical Therapy and Sports Medicine Services, Inc.
MKJ Physical Therapy, Inc.
New York Physician Services, P.C.
North Andover Physical Therapy, P.C
Penn State Hershey Rehabilitation, LLC
Philadelphia Occupational Health, P.C.
Rehabilitation Physician Services, P.C.
Regency Hospital of Fort Worth, L.L.P.
Select LifeCare Western Michigan, LLC
Select Physical Therapy of Las Vegas Limited Partnership
Select Specialty Downriver, LLC
Select Specialty Hospital Akron, LLC
Select Specialty Hospital Evansville, LLC
Select Specialty Hospital Central Pennsylvania, L.P.
Select Specialty Hospital Houston, L.P.
Select Specialty Hospital Gulf Coast, Inc.
SSM Select Rehab St. Louis, LLC
Therex, P.C.
TJ Corporation I, LLC
U.S. Regional Occupational Health II, P.C.
U.S. Regional Occupational Health II of New Jersey, P.C.
Elizabethtown Physical Therapy, P.S.C.
Great Lakes Specialty Hospital Hackley, LLC
Great Lakes Specialty Hospital Oak, LLC
Jeffersontown Physical Therapy, LLC
Kentucky Orthopedic Rehabilitation, LLC
Kessler Core PT, OT and Speech Therapy at New York, LLC
Louisville Physical Therapy, P.S.C.
Metropolitan West Physical Therapy and Sports Medicine Services, Inc.
MKJ Physical Therapy, Inc.
New York Physician Services, P.C.
North Andover Physical Therapy, P.C
Penn State Hershey Rehabilitation, LLC
Philadelphia Occupational Health, P.C.
Rehabilitation Physician Services, P.C.
Regency Hospital of Fort Worth, L.L.P.
Select LifeCare Western Michigan, LLC
Select Physical Therapy of Las Vegas Limited Partnership
Select Specialty Downriver, LLC
Select Specialty Hospital Akron, LLC
Select Specialty Hospital Evansville, LLC
Select Specialty Hospital Central Pennsylvania, L.P.
Select Specialty Hospital Houston, L.P.
Select Specialty Hospital Gulf Coast, Inc.
SSM Select Rehab St. Louis, LLC
Therex, P.C.
TJ Corporation I, LLC
U.S. Regional Occupational Health II, P.C.
U.S. Regional Occupational Health II of New Jersey, P.C.
15
Table of Contents
Select Medical Corporation | ||||||||||||||||||||
Condensed Consolidating Balance Sheet | ||||||||||||||||||||
March 31, 2011 | ||||||||||||||||||||
(unaudited) | ||||||||||||||||||||
Select Medical | ||||||||||||||||||||
Corporation (Parent | Subsidiary | Non-Guarantor | ||||||||||||||||||
Company Only) | Guarantors | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Assets |
||||||||||||||||||||
Current Assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 8,864 | $ | 5,590 | $ | 614 | $ | | $ | 15,068 | ||||||||||
Accounts receivable, net |
| 396,170 | 43,140 | | 439,310 | |||||||||||||||
Current deferred tax asset |
7,648 | 18,449 | 3,547 | | 29,644 | |||||||||||||||
Other current assets |
9,040 | 18,872 | 3,352 | | 31,264 | |||||||||||||||
Total Current Assets |
25,552 | 439,081 | 50,653 | | 515,286 | |||||||||||||||
Property and equipment, net |
6,410 | 463,952 | 56,543 | | 526,905 | |||||||||||||||
Investment in affiliates |
2,708,891 | 76,947 | | (2,785,838 | )(a) (b) | | ||||||||||||||
Goodwill |
| 1,640,535 | | | 1,640,535 | |||||||||||||||
Other identifiable intangibles |
| 73,102 | | | 73,102 | |||||||||||||||
Assets held for sale |
11,342 | | | | 11,342 | |||||||||||||||
Other assets |
21,617 | 11,602 | 1,054 | | 34,273 | |||||||||||||||
Total Assets |
$ | 2,773,812 | $ | 2,705,219 | $ | 108,250 | $ | (2,785,838 | ) | $ | 2,801,443 | |||||||||
Liabilities and Equity |
||||||||||||||||||||
Current Liabilities: |
||||||||||||||||||||
Bank overdrafts |
$ | 9,374 | $ | | $ | | $ | | $ | 9,374 | ||||||||||
Current portion of long-term debt
and notes payable |
148,988 | 605 | 730 | | 150,323 | |||||||||||||||
Accounts payable |
7,805 | 68,188 | 10,649 | | 86,642 | |||||||||||||||
Intercompany accounts |
933,922 | (850,321 | ) | (83,601 | ) | | | |||||||||||||
Accrued payroll |
729 | 74,341 | 287 | | 75,357 | |||||||||||||||
Accrued vacation |
3,515 | 39,790 | 5,752 | | 49,057 | |||||||||||||||
Accrued interest |
9,447 | 451 | | | 9,898 | |||||||||||||||
Accrued restructuring |
| 6,293 | | | 6,293 | |||||||||||||||
Accrued other |
35,190 | 55,788 | 5,754 | | 96,732 | |||||||||||||||
Income taxes payable |
6,698 | | | | 6,698 | |||||||||||||||
Due to (from) third party payors |
| 20,647 | (15,822 | ) | | 4,825 | ||||||||||||||
Total Current Liabilities |
1,155,668 | (584,218 | ) | (76,251 | ) | | 495,199 | |||||||||||||
Long-term debt, net of current portion |
439,958 | 510,748 | 66,703 | | 1,017,409 | |||||||||||||||
Non-current deferred tax liability |
1,582 | 53,938 | 8,133 | | 63,653 | |||||||||||||||
Other non-current liabilities |
52,518 | 17,008 | | | 69,526 | |||||||||||||||
Total Liabilities |
1,649,726 | (2,524 | ) | (1,415 | ) | | 1,645,787 | |||||||||||||
Stockholders Equity: |
||||||||||||||||||||
Common stock |
0 | | | | 0 | |||||||||||||||
Capital in excess of par |
838,305 | | | | 838,305 | |||||||||||||||
Retained earnings |
285,781 | 541,983 | 21,691 | (563,674 | )(b) | 285,781 | ||||||||||||||
Subsidiary investment |
| 2,165,760 | 56,404 | (2,222,164 | )(a) | | ||||||||||||||
Total Select Medical Corporation
Stockholders Equity |
1,124,086 | 2,707,743 | 78,095 | (2,785,838 | ) | 1,124,086 | ||||||||||||||
Non-controlling interest |
| | 31,570 | | 31,570 | |||||||||||||||
Total Equity |
1,124,086 | 2,707,743 | 109,665 | (2,785,838 | ) | 1,155,656 | ||||||||||||||
Total Liabilities and Equity |
$ | 2,773,812 | $ | 2,705,219 | $ | 108,250 | $ | (2,785,838 | ) | $ | 2,801,443 | |||||||||
(a) | Elimination of investments in subsidiaries. | |
(b) | Elimination of investments in subsidiaries retained earnings. |
16
Table of Contents
Select Medical Corporation | ||||||||||||||||||||
Condensed Consolidating Statement of Operations | ||||||||||||||||||||
For the Quarter Ended March 31, 2011 | ||||||||||||||||||||
(unaudited) | ||||||||||||||||||||
Select Medical | ||||||||||||||||||||
Corporation (Parent | Subsidiary | Non-Guarantor | ||||||||||||||||||
Company Only) | Guarantors | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Net operating revenues |
$ | 71 | $ | 600,253 | $ | 92,862 | $ | | $ | 693,186 | ||||||||||
Costs and expenses: |
||||||||||||||||||||
Cost of services |
638 | 481,222 | 75,556 | | 557,416 | |||||||||||||||
General and administrative |
16,455 | 111 | | | 16,566 | |||||||||||||||
Bad debt expense |
| 13,001 | 1,349 | | 14,350 | |||||||||||||||
Depreciation and amortization |
646 | 14,356 | 2,220 | | 17,222 | |||||||||||||||
Total costs and expenses |
17,739 | 508,690 | 79,125 | | 605,554 | |||||||||||||||
Income (loss) from operations |
(17,668 | ) | 91,563 | 13,737 | | 87,632 | ||||||||||||||
Other income and expense: |
||||||||||||||||||||
Intercompany interest and royalty fees |
(995 | ) | 986 | 9 | | | ||||||||||||||
Intercompany management fees |
23,472 | (19,230 | ) | (4,242 | ) | | | |||||||||||||
Equity in earnings (losses) of unconsolidated
subsidiaries |
| (88 | ) | 15 | | (73 | ) | |||||||||||||
Interest income |
31 | 24 | 1 | | 56 | |||||||||||||||
Interest expense |
(7,365 | ) | (9,949 | ) | (1,348 | ) | | (18,662 | ) | |||||||||||
Income (loss) before income taxes |
(2,525 | ) | 63,306 | 8,172 | | 68,953 | ||||||||||||||
Income tax expense |
926 | 27,820 | 268 | | 29,014 | |||||||||||||||
Equity in earnings of subsidiaries |
41,675 | 5,797 | | (47,472) | (a) | | ||||||||||||||
Net income |
38,224 | 41,283 | 7,904 | (47,472 | ) | 39,939 | ||||||||||||||
Less: Net income attributable to non-controlling interests |
| | 1,715 | | 1,715 | |||||||||||||||
Net income attributable to Select Medical Corporation |
$ | 38,224 | $ | 41,283 | $ | 6,189 | $ | (47,472 | ) | $ | 38,224 | |||||||||
(a) | Elimination of equity in earnings of subsidiaries. |
17
Table of Contents
Select Medical Corporation | ||||||||||||||||||||
Condensed Consolidating Statement of Cash Flows | ||||||||||||||||||||
For the Quarter Ended March 31, 2011 | ||||||||||||||||||||
(unaudited) | ||||||||||||||||||||
Select Medical | Non- | |||||||||||||||||||
Corporation (Parent | Subsidiary | Guarantor | ||||||||||||||||||
Company Only) | Guarantors | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Operating activities |
||||||||||||||||||||
Net income |
$ | 38,224 | $ | 41,283 | $ | 7,904 | $ | (47,472) | (a) | $ | 39,939 | |||||||||
Adjustments to reconcile net income to net cash
provided by (used in) operating activities: |
||||||||||||||||||||
Depreciation and amortization |
646 | 14,356 | 2,220 | | 17,222 | |||||||||||||||
Provision for bad debts |
| 13,001 | 1,349 | | 14,350 | |||||||||||||||
Loss from disposal of assets |
2 | 181 | 5 | | 188 | |||||||||||||||
Non-cash stock compensation expense |
880 | | | | 880 | |||||||||||||||
Changes in operating assets and
liabilities, net of
effects from acquisition of businesses: |
||||||||||||||||||||
Equity in earnings of subsidiaries |
(41,675 | ) | (5,797 | ) | | 47,472 | (a) | | ||||||||||||
Intercompany |
3,234 | (3,781 | ) | 547 | | | ||||||||||||||
Accounts receivable |
| (94,955 | ) | (5,180 | ) | | (100,135 | ) | ||||||||||||
Other current assets |
(4,480 | ) | 1,267 | 137 | | (3,076 | ) | |||||||||||||
Other assets |
676 | 1,174 | 64 | | 1,914 | |||||||||||||||
Accounts payable |
1,778 | 8,352 | 1,647 | | 11,777 | |||||||||||||||
Due to third-party payors |
| 8,422 | (8,896 | ) | | (474 | ) | |||||||||||||
Accrued expenses |
(6,487 | ) | 4,096 | (1,197 | ) | | (3,588 | ) | ||||||||||||
Income and deferred taxes |
28,688 | | | | 28,688 | |||||||||||||||
Net cash provided by (used in) operating activities |
21,486 | (12,401 | ) | (1,400 | ) | | 7,685 | |||||||||||||
Investing activities |
||||||||||||||||||||
Purchases of property and equipment |
(288 | ) | (11,561 | ) | (1,071 | ) | | (12,920 | ) | |||||||||||
Proceeds from sale of business |
| 250 | | | 250 | |||||||||||||||
Acquisition of businesses, net of cash acquired |
| (2,000 | ) | | | (2,000 | ) | |||||||||||||
Net cash used in investing activities |
(288 | ) | (13,311 | ) | (1,071 | ) | | (14,670 | ) | |||||||||||
Financing activities |
||||||||||||||||||||
Equity investment by Holdings |
81 | | | | 81 | |||||||||||||||
Borrowings on revolving credit facility |
205,000 | | | | 205,000 | |||||||||||||||
Payments on revolving credit facility |
(105,000 | ) | | | | (105,000 | ) | |||||||||||||
Payments on credit facility term loans |
(59,563 | ) | | | | (59,563 | ) | |||||||||||||
Borrowings of other debt |
5,496 | | | | 5,496 | |||||||||||||||
Principal payments on seller and other debt |
(1,880 | ) | (279 | ) | (335 | ) | | (2,494 | ) | |||||||||||
Dividends paid to Holdings |
(14,743 | ) | | | | (14,743 | ) | |||||||||||||
Proceeds from bank overdrafts |
(9,418 | ) | | | | (9,418 | ) | |||||||||||||
Intercompany debt reallocation |
(32,456 | ) | 28,014 | 4,442 | | | ||||||||||||||
Distributions to non-controlling interests |
| | (1,671 | ) | | (1,671 | ) | |||||||||||||
Net cash provided by (used in) financing activities |
(12,483 | ) | 27,735 | 2,436 | | 17,688 | ||||||||||||||
Net increase (decrease) in cash and cash equivalents |
8,715 | 2,023 | (35 | ) | | 10,703 | ||||||||||||||
Cash and cash equivalents at beginning of period |
149 | 3,567 | 649 | | 4,365 | |||||||||||||||
Cash and cash equivalents at end of period |
$ | 8,864 | $ | 5,590 | $ | 614 | $ | | $ | 15,068 | ||||||||||
(a) | Elimination of equity in earnings of subsidiaries. |
18
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Select Medical Corporation | ||||||||||||||||||||
Condensed Consolidating Balance Sheet | ||||||||||||||||||||
December 31, 2010 | ||||||||||||||||||||
(unaudited) | ||||||||||||||||||||
Select Medical | ||||||||||||||||||||
Corporation (Parent | Subsidiary | Non-Guarantor | ||||||||||||||||||
Company Only) | Guarantors | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Assets |
||||||||||||||||||||
Current Assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 149 | $ | 3,567 | $ | 649 | $ | | $ | 4,365 | ||||||||||
Accounts receivable, net |
| 314,123 | 39,309 | | 353,432 | |||||||||||||||
Current deferred tax asset |
8,007 | 19,226 | 3,421 | | 30,654 | |||||||||||||||
Prepaid income taxes |
12,699 | | | | 12,699 | |||||||||||||||
Other current assets |
4,560 | 20,127 | 3,489 | | 28,176 | |||||||||||||||
Total Current Assets |
25,415 | 357,043 | 46,868 | | 429,326 | |||||||||||||||
Property and equipment, net |
6,806 | 467,554 | 57,740 | | 532,100 | |||||||||||||||
Investment in affiliates |
2,667,767 | 81,839 | | (2,749,606 | )(a) (b) | | ||||||||||||||
Goodwill |
| 1,631,252 | | | 1,631,252 | |||||||||||||||
Other identifiable intangibles |
| 80,119 | | | 80,119 | |||||||||||||||
Assets held for sale |
11,342 | | | | 11,342 | |||||||||||||||
Other assets |
22,293 | 12,022 | 1,118 | | 35,433 | |||||||||||||||
Total Assets |
$ | 2,733,623 | $ | 2,629,829 | $ | 105,726 | $ | (2,749,606 | ) | $ | 2,719,572 | |||||||||
Liabilities and Equity |
||||||||||||||||||||
Current Liabilities: |
||||||||||||||||||||
Bank overdrafts |
$ | 18,792 | $ | | $ | | $ | | $ | 18,792 | ||||||||||
Current portion of long-term debt
and notes payable |
147,609 | 758 | 1,012 | | 149,379 | |||||||||||||||
Accounts payable |
6,027 | 59,164 | 9,002 | | 74,193 | |||||||||||||||
Intercompany accounts |
925,741 | (832,683 | ) | (93,058 | ) | | | |||||||||||||
Accrued payroll |
967 | 62,539 | 254 | | 63,760 | |||||||||||||||
Accrued vacation |
3,255 | 37,948 | 5,385 | | 46,588 | |||||||||||||||
Accrued interest |
21,198 | 388 | | | 21,586 | |||||||||||||||
Accrued restructuring |
| 6,754 | | | 6,754 | |||||||||||||||
Accrued other |
29,948 | 79,157 | 7,351 | | 116,456 | |||||||||||||||
Due to third party payors |
| 12,225 | (6,926 | ) | | 5,299 | ||||||||||||||
Total Current Liabilities |
1,153,537 | (573,750 | ) | (76,980 | ) | | 502,807 | |||||||||||||
Long-term debt, net of current portion |
429,743 | 482,858 | 62,312 | | 974,913 | |||||||||||||||
Non-current deferred tax liability |
2,266 | 48,976 | 7,832 | | 59,074 | |||||||||||||||
Other non-current liabilities |
63,483 | 3,167 | | | 66,650 | |||||||||||||||
Total Liabilities |
1,649,029 | (38,749 | ) | (6,836 | ) | | 1,603,444 | |||||||||||||
Stockholders Equity: |
||||||||||||||||||||
Common stock |
0 | | | | 0 | |||||||||||||||
Capital in excess of par |
834,894 | | | | 834,894 | |||||||||||||||
Retained earnings |
249,700 | 500,700 | 24,587 | (525,287 | )(b) | 249,700 | ||||||||||||||
Subsidiary investment |
| 2,167,878 | 56,441 | (2,224,319 | )(a) | | ||||||||||||||
Total Select Medical Corporation
Stockholders Equity |
1,084,594 | 2,668,578 | 81,028 | (2,749,606 | ) | 1,084,594 | ||||||||||||||
Non-controlling interest |
| | 31,534 | | 31,534 | |||||||||||||||
Total Equity |
1,084,594 | 2,668,578 | 112,562 | (2,749,606 | ) | 1,116,128 | ||||||||||||||
Total Liabilities and Equity |
$ | 2,733,623 | $ | 2,629,829 | $ | 105,726 | $ | (2,749,606 | ) | $ | 2,719,572 | |||||||||
(a) | Elimination of investments in subsidiaries. | |
(b) | Elimination of investments in subsidiaries retained earnings. |
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Select Medical Corporation | ||||||||||||||||||||
Condensed Consolidating Statement of Operations | ||||||||||||||||||||
For the Quarter Ended March 31, 2010 | ||||||||||||||||||||
(unaudited) | ||||||||||||||||||||
Select Medical | Non- | |||||||||||||||||||
Corporation (Parent | Subsidiary | Guarantor | ||||||||||||||||||
Company Only) | Guarantors | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Net operating revenues |
$ | 63 | $ | 502,327 | $ | 82,423 | $ | | $ | 584,813 | ||||||||||
Costs and expenses: |
||||||||||||||||||||
Cost of services |
328 | 405,265 | 66,784 | | 472,377 | |||||||||||||||
General and administrative |
12,774 | 15 | | | 12,789 | |||||||||||||||
Bad debt expense |
| 7,671 | 1,616 | | 9,287 | |||||||||||||||
Depreciation and amortization |
818 | 14,650 | 2,243 | | 17,711 | |||||||||||||||
Total costs and expenses |
13,920 | 427,601 | 70,643 | | 512,164 | |||||||||||||||
Income (loss) from operations |
(13,857 | ) | 74,726 | 11,780 | | 72,649 | ||||||||||||||
Other income and expense: |
||||||||||||||||||||
Intercompany interest and royalty fees |
(1,074 | ) | 1,070 | 4 | | | ||||||||||||||
Intercompany management fees |
22,816 | (19,311 | ) | (3,505 | ) | | | |||||||||||||
Other income |
134 | | | | 134 | |||||||||||||||
Interest expense |
(13,448 | ) | (8,527 | ) | (1,063 | ) | | (23,038 | ) | |||||||||||
Income (loss) before income taxes |
(5,429 | ) | 47,958 | 7,216 | | 49,745 | ||||||||||||||
Income tax expense (benefit) |
88 | 19,492 | (20 | ) | | 19,560 | ||||||||||||||
Equity in earnings of subsidiaries |
34,296 | 5,596 | | (39,892) | (a) | | ||||||||||||||
Net income |
28,779 | 34,062 | 7,236 | (39,892 | ) | 30,185 | ||||||||||||||
Less: Net income attributable to non-controlling interests |
| | 1,406 | | 1,406 | |||||||||||||||
Net income attributable to Select Medical Corporation |
$ | 28,779 | $ | 34,062 | $ | 5,830 | $ | (39,892 | ) | $ | 28,779 | |||||||||
(a) | Elimination of equity in earnings of subsidiaries. |
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Select Medical Corporation | ||||||||||||||||||||
Condensed Consolidating Statement of Cash Flows | ||||||||||||||||||||
For the Quarter Ended March 31, 2010 | ||||||||||||||||||||
(unaudited) | ||||||||||||||||||||
Select Medical | ||||||||||||||||||||
Corporation | Non- | |||||||||||||||||||
(Parent Company | Subsidiary | Guarantor | ||||||||||||||||||
Only) | Guarantors | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Operating activities |
||||||||||||||||||||
Net income |
$ | 28,779 | $ | 34,062 | $ | 7,236 | $ | (39,892 | )(a) | $ | 30,185 | |||||||||
Adjustments to reconcile net income to net cash
provided by (used in) operating activities: |
||||||||||||||||||||
Depreciation and amortization |
818 | 14,650 | 2,243 | | 17,711 | |||||||||||||||
Provision for bad debts |
| 7,671 | 1,616 | | 9,287 | |||||||||||||||
Loss from disposal of assets |
| 96 | 37 | | 133 | |||||||||||||||
Non-cash gain from interest rate swaps |
(134 | ) | | | | (134 | ) | |||||||||||||
Non-cash stock compensation expense |
508 | | | | 508 | |||||||||||||||
Changes in operating assets and
liabilities, net of
effects from acquisition of businesses: |
||||||||||||||||||||
Equity in earnings of subsidiaries |
(34,296 | ) | (5,596 | ) | | 39,892 | (a) | | ||||||||||||
Intercompany |
2,808 | (6,753 | ) | 3,945 | | | ||||||||||||||
Accounts receivable |
| (51,648 | ) | (11,557 | ) | | (63,205 | ) | ||||||||||||
Other current assets |
(1,394 | ) | (2,977 | ) | 2,305 | | (2,066 | ) | ||||||||||||
Other assets |
1,754 | 794 | (556 | ) | | 1,992 | ||||||||||||||
Accounts payable |
3,107 | (5,070 | ) | 161 | | (1,802 | ) | |||||||||||||
Due to third-party payors |
| 8,606 | (8,549 | ) | | 57 | ||||||||||||||
Accrued expenses |
(22,991 | ) | 11,603 | (2,784 | ) | | (14,172 | ) | ||||||||||||
Income and deferred taxes |
18,587 | | | | 18,587 | |||||||||||||||
Net cash provided by (used in) operating activities |
(2,454 | ) | 5,438 | (5,903 | ) | | (2,919 | ) | ||||||||||||
Investing activities |
||||||||||||||||||||
Purchases of property and equipment |
(413 | ) | (11,146 | ) | (1,488 | ) | | (13,047 | ) | |||||||||||
Net cash used in investing activities |
(413 | ) | (11,146 | ) | (1,488 | ) | | (13,047 | ) | |||||||||||
Financing activities |
||||||||||||||||||||
Borrowings of other debt |
5,015 | | | | 5,015 | |||||||||||||||
Principal payments on seller and other debt |
(1,798 | ) | (270 | ) | (289 | ) | | (2,357 | ) | |||||||||||
Dividends paid to Holdings |
(12,877 | ) | | | | (12,877 | ) | |||||||||||||
Equity investment by Holdings |
110 | | | | 110 | |||||||||||||||
Proceeds from bank overdrafts |
17,314 | | | | 17,314 | |||||||||||||||
Intercompany debt reallocation |
(17,433 | ) | 7,962 | 9,471 | | | ||||||||||||||
Distributions to non-controlling interests |
| | (1,746 | ) | | (1,746 | ) | |||||||||||||
Net cash provided by (used in) financing activities |
(9,669 | ) | 7,692 | 7,436 | | 5,459 | ||||||||||||||
Net increase (decrease) in cash and cash equivalents |
(12,536 | ) | 1,984 | 45 | | (10,507 | ) | |||||||||||||
Cash and cash equivalents at beginning of period |
80,940 | 2,298 | 442 | | 83,680 | |||||||||||||||
Cash and cash equivalents at end of period |
$ | 68,404 | $ | 4,282 | $ | 487 | $ | | $ | 73,173 | ||||||||||
(a) | Elimination of equity in earnings of subsidiaries. |
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ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
You should read this discussion together with our unaudited consolidated financial statements
and accompanying notes.
Forward Looking Statements
This report contains forward-looking statements within the meaning of the federal securities
laws. Statements that are not historical facts, including statements about our beliefs and
expectations, are forward-looking statements. Forward-looking statements include statements
preceded by, followed by or that include the words may, could, would, should, believe,
expect, anticipate, plan, target, estimate, project, intend, and similar
expressions. These statements include, among others, statements regarding our expected business
outlook, anticipated financial and operating results, our business strategy and means to implement
our strategy, our objectives, the amount and timing of capital expenditures, the likelihood of our
success in expanding our business, financing plans, budgets, working capital needs and sources of
liquidity.
Forward-looking statements are only predictions and are not guarantees of performances. These
statements are based on our managements beliefs and assumptions, which in turn are based on
currently available information. Important assumptions relating to the forward-looking statements
include, among others, assumptions regarding our services, the expansion of our services,
competitive conditions and general economic conditions. These assumptions could prove inaccurate.
Forward-looking statements also involve known and unknown risks and uncertainties, which could
cause actual results to differ materially from those contained in any forward-looking statement.
Many of these factors are beyond our ability to control or predict. Such factors include, but are
not limited to, the following:
| additional changes in government reimbursement for our services, including changes that will result from the expiration of the moratorium for long term acute care hospitals established by the Medicare, Medicaid and SCHIP Extension Act of 2007, the American Recovery and Reinvestment Act, and the Patient Protection and Affordable Care Act may result in a reduction in net operating revenues, an increase in costs and a reduction in profitability; |
| the failure of our specialty hospitals to maintain their Medicare certifications may cause our net operating revenues and profitability to decline; |
| the failure of our 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; |
| private third-party payors for our services may undertake future cost containment initiatives that limit our future net operating revenues and profitability; |
| the failure to maintain established relationships with the physicians in the areas we serve could reduce our net operating revenues and profitability; |
| shortages in qualified nurses or therapists could increase our operating costs significantly; |
| competition may limit our ability to grow and result in a decrease in our net operating revenues and profitability; |
| the loss of key members of our management team could significantly disrupt our operations; |
| the effect of claims asserted against us could subject us to substantial uninsured liabilities and in the future we may not be able to obtain insurance at a reasonable price;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 our annual report on Form 10-K for the year ended December 31, 2010. |
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Table of Contents
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.
Investors should also be aware that while we do, from time to time, communicate with
securities analysts, it is against our policy to disclose to security analysts any material
non-public information or other confidential commercial information. Accordingly, stockholders
should not assume that we agree with any statement or report issued by any analyst irrespective of
the content of the statement or report. Thus, to the extent that reports issued by securities
analysts contain any projections, forecasts or opinions, such reports are not the responsibility of
the Company.
Overview
We believe that we are one of the largest operators of both specialty hospitals and outpatient
rehabilitation clinics in the United States based on number of facilities. As of March 31, 2011,
we operated 110 long term acute care hospitals and eight inpatient rehabilitation facilities in 28
states, and 945 outpatient rehabilitation clinics in 35 states and the District of Columbia. We
also provide medical rehabilitation services on a contracted basis to nursing homes, hospitals,
assisted living and senior care centers, schools and work sites. We began operations in 1997 under
the leadership of our current management team.
We manage our Company through two business segments, our specialty hospital segment and our
outpatient rehabilitation segment. We had net operating revenues of $693.2 million for the three
months ended March 31, 2011. Of this total, we earned approximately 75% of our net operating
revenues from our specialty hospitals and approximately 25% from our outpatient rehabilitation
business, compared to 70% and 30% respectively in the comparable period in 2010. The increase in
the relative portion of our net operating revenues generated from our specialty hospitals resulted
from the hospitals added through our Regency Hospital Company, L.L.C (Regency) acquisition on
September 1, 2010. Our specialty hospital segment consists of hospitals designed to serve the
needs of long term stay acute patients and hospitals designed to serve patients that require
intensive inpatient medical rehabilitation care. Patients are typically admitted to our long term
acute care hospitals from general acute care hospitals. These patients have specialized needs, and
serious and often complex medical conditions such as respiratory failure, neuromuscular disorders,
traumatic brain and spinal cord injuries, strokes, non-healing wounds, cardiac disorders, renal
disorders and cancer. Our outpatient rehabilitation segment consists of clinics and contract
services that provide physical, occupational and speech rehabilitation services. Our outpatient
rehabilitation patients are typically diagnosed with musculoskeletal impairments that restrict
their ability to perform normal activities of daily living.
23
Table of Contents
Significant 2011 Events
Refinancing
On April 25, 2011, Select commenced a cash tender offer and consent solicitation for any and
all of its 7 5/8% senior subordinated notes. The tender offer is scheduled to expire at 11:59 p.m.
on May 20, 2011. The tender offer and consent solicitation are being conducted in connection with
Selects negotiations to refinance its senior secured credit facility. The tender offer and
consent solicitation are conditioned on Selects entry into a new senior secured credit facility.
Select expects to use a portion of the proceeds from such new senior secured credit facility to
purchase the tendered and accepted 7 5/8% senior subordinated notes and to retire Holdings 10%
senior subordinated notes.
Summary Financial Results
First Quarter Ended March 31, 2011
For the three months ended March 31, 2011, our net operating revenues increased 18.5% to
$693.2 million compared to $584.8 million for the three months ended March 31, 2010. This increase
in net operating revenues resulted principally from a 26.3% increase in our specialty hospital net
operating revenue. The increase in our specialty hospital net operating revenue is primarily due
to the Regency hospitals acquired on September 1, 2010. We had income from operations for the three
months ended March 31, 2011 of $87.6 million compared to $72.6 million for the three months ended
March 31, 2010. The increase in income from operations is primarily due to the Regency hospitals
acquired on September 1, 2010. Holdings interest expense for the three months ended March 31,
2011 was $25.7 million compared to $30.0 million for the three months ended March 31, 2010.
Selects interest expense for the three months ended March 31, 2011 was $18.7 million compared to
$23.0 million for the three months ended March 31, 2010. The decrease in interest expense for both
Holdings and Select was attributable to a reduction in our average interest rate that resulted from
the expiration of interest rate swaps in 2010 that carried higher fixed interest rates.
Cash flow from operations used $5.0 million of cash for the three months ended March 31, 2011
for Holdings and provided $7.7 million of cash for the three months ended March 31, 2011 for
Select. The difference between Holdings and Select primarily relates to interest payments on
Holdings senior subordinated notes and senior floating rate notes.
Regulatory Changes
In the past few years, there have been significant regulatory changes that have affected our
net operating revenues and, in some cases, caused us to change our operating models and strategies.
The following is a discussion of recent regulatory changes that have affected our results of
operations for the three months ended March 31, 2011. Our Annual Report on Form 10-K for the year
ended December 31, 2010 filed with the Securities and Exchange Commission (SEC) on March 9, 2011
contains a more detailed discussion of the regulations that affect our business in Part I
Business Government Regulations, and the information below should be read in connection with
that more detailed discussion.
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Table of Contents
Health Reform Legislation
Federal agencies, including the Centers for Medicare & Medicaid Services (CMS), continue to
implement provisions of the Patient Protection and Affordable Care Act (PPACA). The PPACA
expands access to health insurance through subsidies, coverage mandates and other insurance market reforms. In
addition, PPACA makes dramatic changes to the Medicare and Medicaid programs by adopting numerous
initiatives addressing, among other things, reductions in healthcare spending, patient safety
incentives and protections against fraud and abuse of federal healthcare programs. The PPACA
adopts significant changes to the Medicare program that are particularly relevant to long term
acute care hospitals (LTCHs), inpatient rehabilitation facilities (IRFs) and outpatient
rehabilitation services. As part of health reform legislation, President Obama also signed the
Health Care and Education Affordability Reconciliation Act of 2010, which made some limited but
important changes to the PPACA.
We have included in our Annual Report on Form 10-K for the year ended December 31, 2010 a
detailed discussion of the PPACA provisions that affect our business, as well as regulatory
initiatives adopted by CMS in response to particular provisions of the PPACA.
Medicare Payment of Long Term Acute Care Hospitals during Fiscal Year 2011
On August 16, 2010, CMS published the policies and payment rates for long term care hospital
prospective payment system (LTCH-PPS) for fiscal year 2011 (affecting discharges and cost
reporting periods beginning on or after October 1, 2010 through September 30, 2011). The standard
federal rate for fiscal year 2011 is $39,600, which is a decrease from the fiscal year 2010 federal
rate of $39,897 in effect from October 1, 2009 to March 31, 2010 and $39,795 in effect from April
1, 2010 to September 30, 2010. The final rule establishes a fixed-loss amount for high cost
outlier cases for fiscal year 2011 of $18,785, which is higher than the fiscal year 2010 fixed-loss
amount of $18,425 in effect from October 1, 2009 to March 31, 2010 and $18,615 in effect from April
1, 2010 to September 31, 2010. The final rule included revisions to the relative weights for the
MS-LTC-DRGs for fiscal year 2011.
Medicare Payment of Long Term Acute Care Hospitals during Fiscal Year 2012
On April 19, 2011, CMS released an advanced copy of the proposed policies and payment rates
for LTCH-PPS for fiscal year 2012 (affecting discharges and cost reporting periods beginning on or
after October 1, 2011 through September 30, 2012). The standard federal rate for fiscal
year 2012 would be set at $40,083, an increase from $39,600 applicable during fiscal year 2011. The
increase, if adopted, would be based on a market basket increase estimate of 2.8% minus a
productivity adjustment of 1.2% and minus an additional 0.1% mandated by the PPACA. The fixed loss
amount for high cost outlier cases would be set at $19,270. This is an increase from the fixed loss
amount in the 2011 fiscal year of $18,785.
Medicare Payment of Inpatient Rehabilitation Facilities during Fiscal Year 2011
On July 22, 2010, CMS published an update to the payment rates for inpatient rehabilitation
facility prospective payment system (IRF-PPS) for fiscal year 2011 (affecting discharges and cost
reporting periods beginning on or after October 1, 2010 through September 30, 2011). The standard
federal rate for discharges during fiscal year 2011 is $13,860 which is an increase from $13,661 in
effect from October 1, 2009 to March 31, 2010 and $13,627 in effect from April 1, 2010 to September
30, 2010. CMS also increased the outlier threshold amount for fiscal year 2011 to $11,410 from
$10,721 in fiscal year 2010.
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Medicare Payment of Inpatient Rehabilitation Facilities during Fiscal Year 2012
On April 22, 2011, CMS released an advanced copy of the proposed policies and payment rates
for IRF-PPS for fiscal year 2012 (affecting discharges and cost reporting periods beginning on or
after October 1, 2011 and through September 30, 2012). The standard payment conversion factor
for fiscal year 2012 would be set at $14,528, an increase from $13,860 applicable during fiscal
year 2011. The increase, if adopted, would be based on a market basket increase estimate of 2.8%
minus a productivity adjustment of 1.2% and minus an additional 0.1% mandated by the PPACA. CMS
proposes to increase the outlier threshold amount for FY 2012 to $11,822 from $11,410.
Reductions to the Medicare Physician Fee Schedule
The Medicare program reimburses outpatient rehabilitation providers based on the Medicare
physician fee schedule. The Medicare physician fee schedule rates are automatically updated
annually based on a formula, called the sustainable growth rate (SGR) formula, contained in
legislation. The SGR formula has resulted in automatic reductions in rates in every year since
2002; however, for each year through 2011 CMS or Congress has taken action to prevent the SGR
formula reductions. On December 15, 2010, President Obama signed into law the Medicare and
Medicaid Extenders Act of 2010. This law averts a 25.5% cut in the Medicare physician fee schedule
that was scheduled to take effect January 1, 2011 under the SGR formula. An additional reduction
will occur on January 1, 2012, unless Congress prevents the SGR formula reductions from going into
effect.
Medicare Payment of Outpatient Rehabilitation Services
Beginning on January 1, 1999, the Balanced Budget Act of 1997 subjected certain outpatient
therapy providers reimbursed under the Medicare Physician Fee Schedule to annual limits for therapy
expenses. Effective January 1, 2011, the annual limit on outpatient therapy services is $1,870 for
combined physical and speech language pathology services and $1,870 for occupational therapy
services. The per beneficiary caps were $1,860 for calendar year 2010. In the Deficit Reduction
Act of 2005, Congress implemented an exceptions process to the annual limit for therapy expenses.
Under this process, a Medicare enrollee (or person acting on behalf of the Medicare enrollee) is
able to request an exception from the therapy caps if the provision of therapy services was deemed
to be medically necessary. Therapy cap exceptions have been available automatically for certain
conditions and on a case-by-case basis upon submission of documentation of medical necessity. The
Medicare and Medicaid Extenders Act of 2010 extended the exceptions process for outpatient
therapy caps through December 31, 2011. Unless Congress extends the exceptions process, the therapy
caps will apply to all outpatient therapy services beginning on January 1, 2012, except those
services furnished and billed by outpatient hospital departments. In the 2011 final Medicare
Physician Fee Schedule rule CMS indicated they are also evaluating alternative payment
methodologies that would provide appropriate payment for medically necessary and effective therapy
services furnished to Medicare beneficiaries based on patient needs rather than the current therapy
caps.
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Table of Contents
CMS adopted a multiple procedure payment reduction for therapy services in the final update to
the Medicare Physician Fee Schedule for calendar year 2011. Under the policy, the Medicare program
pays 100% of the practice expense component of the therapy procedure or unit of service with the
highest Relative Value Unit (RVU), and then reduces the payment for the practice expense
component by the 20% in office and other non-institutional settings and 25% in institutional
settings for the second and subsequent therapy procedures or units of service furnished during the same day for the same patient, regardless of whether
those therapy services are furnished in separate sessions. This multiple procedure payment
reduction policy was effective January 1, 2011 and applies to all outpatient therapy services paid
under Medicare Part B. Furthermore, the multiple procedure payment reduction policy applies across
all therapy disciplines occupational therapy, physical therapy, and speech-language pathology.
Our outpatient rehabilitation therapy services are primarily offered in institutional settings and,
as such, will be subject to the applicable 25% payment reduction in the practice expense component
for the second and subsequent therapy services furnished by us to the same patient on the same day.
Medicare Quality Reporting Program for LTCHs and IRFs
The PPACA requires that CMS establish new quality data reporting programs for LTCHs and IRFs
by rate year 2014. Under the PPACA, if an LTCH or IRF fails to report on the selected quality
measures, it will see its reimbursement reduced by 2% of the annual market basket update. The
reduction can result in payment rates less than the prior year. However, the reduction will not
carry over into the subsequent rate years. CMS is required to establish the quality measures
applicable to rate year 2014 no later than October 1, 2012.
In its proposed update to the payment rates for LTCH-PPS for fiscal year 2012 CMS proposes to
implement a quality data reporting program requiring LTCHs to submit data from three quality
measures in order to receive the full payment update in fiscal year 2014, including measures
related to (1) catheter-associated urinary tract infections, (2) central line catheter-associated
blood stream infection, and (3) pressure ulcers that are new or have worsened. CMS has requested
public comment on the three proposed quality measures and may change the particular measures or the
data collection and reporting requirements for the quality measures in its final rule.
In its proposed update to the payment rates for IRF-PPS for fiscal year 2012, CMS proposes to
implement quality data reporting program by requiring IRFs to submit data from two quality measures
in order to receive the full payment update in FY 2014, including measures related to (1)
catheter-associated urinary tract infections and (2) pressure ulcers that are new or have worsened.
CMS has requested public comment on the two proposed quality measures and may change the
particular measures or the data collection and reporting requirements for the quality measures in
its final rule.
Facility Licensure, Certification and Accreditation
Our specialty hospitals and outpatient rehabilitation clinics are subject to extensive and
changing federal, state and local regulations and private accreditation standards. Hospitals are
required to comply with state hospital standards setting requirements related to patient rights,
composition and responsibilities of the hospital governing body, medical staff, quality
improvement, infection control, nursing services, food and nutrition, medical records, drug
distribution, diagnostic and treatment services, surgical services, emergency services and social
work. Our specialty hospitals are also required to meet conditions of participation under Medicare
programs in order to qualify to receive reimbursement under these programs. In addition, all of
our specialty hospitals are currently accredited by The Joint Commission, previously known as The
Joint Commission on Accreditation of Healthcare Organizations, by voluntarily complying with a
specific set of accreditation standards.
Our specialty hospitals and outpatient rehabilitation clinics are subject to inspections,
surveys and other reviews by governmental and private regulatory authorities, not only at scheduled
intervals but also in response to complaints from patients and others. While our specialty
hospitals and outpatient rehabilitation clinics intend to comply with existing licensing, Medicare
certification requirements and accreditation standards, there can be no assurance that regulatory authorities will determine that all applicable requirements are
fully met at any given time. A determination by an applicable regulatory authority that a facility
is not in compliance with these requirements could lead to the imposition of requirements that the
facility takes corrective action, assessment of fines and penalties or loss of licensure, Medicare
certification or accreditation. These consequences could have a material adverse effect on the
Company.
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Operating Statistics
The following tables set forth operating statistics for our specialty hospitals and our
outpatient rehabilitation clinics for each of the periods presented. The data in the tables reflect
the changes in the number of specialty hospitals and outpatient rehabilitation clinics we operate
that resulted from acquisitions, start-up activities, closures and sales. The operating statistics
reflect data for the period of time these operations were managed by us.
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2011 | |||||||
Specialty hospital data(1): |
||||||||
Number of hospitals owned start of period |
94 | 116 | ||||||
Number of hospitals acquired |
| 1 | ||||||
Number of hospitals closed/sold |
| (1 | ) | |||||
Number of hospitals owned end of period |
94 | 116 | ||||||
Number of hospitals managed end of period |
1 | 2 | ||||||
Total number of hospitals (all) end of period |
95 | 118 | ||||||
Available licensed beds |
4,245 | 5,153 | ||||||
Admissions |
11,101 | 13,810 | ||||||
Patient days |
267,848 | 333,856 | ||||||
Average length of stay (days) |
25 | 25 | ||||||
Net revenue per patient day(2) |
$ | 1,491 | $ | 1,514 | ||||
Occupancy rate |
70 | % | 72 | % | ||||
Percent patient days Medicare |
65 | % | 64 | % | ||||
Outpatient rehabilitation data: |
||||||||
Number of clinics owned start of period |
883 | 875 | ||||||
Number of clinic start-ups |
5 | 8 | ||||||
Number of clinics closed/sold |
(3 | ) | (9 | ) | ||||
Number of clinics owned end of period |
885 | 874 | ||||||
Number of clinics managed end of period |
74 | 71 | ||||||
Total number of clinics (all) end of period |
959 | 945 | ||||||
Number of visits |
1,125,958 | 1,138,700 | ||||||
Net revenue per visit (3) |
$ | 101 | $ | 103 |
(1) | Specialty hospitals consist of long term acute care hospitals and inpatient rehabilitation facilities. | |
(2) | Net revenue per patient day is calculated by dividing specialty hospital direct patient service revenues by the total number of patient days. | |
(3) | Net revenue per visit is calculated by dividing outpatient rehabilitation clinic revenue by the total number of visits. For purposes of this computation, outpatient rehabilitation clinic revenue does not include managed clinics or contract services revenue. |
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Results of Operations
The following table outlines, for the periods indicated, selected operating data as a
percentage of net operating revenues:
Select Medical Holdings | ||||||||||||||||
Corporation | Select Medical Corporation | |||||||||||||||
Three Months | Three Months | |||||||||||||||
Ended | Ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2010 | 2011 | 2010 | 2011 | |||||||||||||
Net operating revenues |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Cost of services(1) |
80.8 | 80.4 | 80.8 | 80.4 | ||||||||||||
General and administrative |
2.2 | 2.4 | 2.2 | 2.4 | ||||||||||||
Bad debt expense |
1.6 | 2.1 | 1.6 | 2.1 | ||||||||||||
Depreciation and amortization |
3.0 | 2.5 | 3.0 | 2.5 | ||||||||||||
Income from operations |
12.4 | 12.6 | 12.4 | 12.6 | ||||||||||||
Equity in losses of unconsolidated
subsidiaries |
| (0.0 | ) | | (0.0 | ) | ||||||||||
Other income |
0.0 | | 0.0 | | ||||||||||||
Interest expense, net |
(5.1 | ) | (3.7 | ) | (4.0 | ) | (2.7 | ) | ||||||||
Income before income taxes |
7.3 | 8.9 | 8.4 | 9.9 | ||||||||||||
Income tax expense |
2.9 | 3.8 | 3.3 | 4.2 | ||||||||||||
Net income |
4.4 | 5.1 | 5.1 | 5.7 | ||||||||||||
Net income attributable to
non-controlling interest |
0.2 | 0.2 | 0.2 | 0.2 | ||||||||||||
Net income attributable to
Holdings and Select |
4.2 | % | 4.9 | % | 4.9 | % | 5.5 | % | ||||||||
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The following tables summarize selected financial data by business segment, for the periods
indicated:
Select Medical Holdings Corporation | Select Medical Corporation | |||||||||||||||||||||||
Three Months Ended March 31, | Three Months Ended March 31, | |||||||||||||||||||||||
% | % | |||||||||||||||||||||||
2010 | 2011 | Change | 2010 | 2011 | Change | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Net operating revenues: |
||||||||||||||||||||||||
Specialty hospitals |
$ | 411,685 | $ | 519,924 | 26.3 | % | $ | 411,685 | $ | 519,924 | 26.3 | % | ||||||||||||
Outpatient
rehabilitation |
173,065 | 173,191 | 0.1 | 173,065 | 173,191 | 0.1 | ||||||||||||||||||
Other(3) |
63 | 71 | 12.7 | 63 | 71 | 12.7 | ||||||||||||||||||
Total company |
$ | 584,813 | $ | 693,186 | 18.5 | % | $ | 584,813 | $ | 693,186 | 18.5 | % | ||||||||||||
Income (loss) from
operations: |
||||||||||||||||||||||||
Specialty hospitals |
$ | 71,938 | $ | 88,307 | 22.8 | % | $ | 71,938 | $ | 88,307 | 22.8 | % | ||||||||||||
Outpatient
rehabilitation |
14,662 | 16,947 | 15.6 | 14,662 | 16,947 | 15.6 | ||||||||||||||||||
Other(3) |
(13,951 | ) | (17,622 | ) | (26.3 | ) | (13,951 | ) | (17,622 | ) | (26.3 | ) | ||||||||||||
Total company |
$ | 72,649 | $ | 87,632 | 20.6 | % | $ | 72,649 | $ | 87,632 | 20.6 | % | ||||||||||||
Adjusted EBITDA: (2) |
||||||||||||||||||||||||
Specialty hospitals |
$ | 82,897 | $ | 100,353 | 21.1 | % | $ | 82,897 | $ | 100,353 | 21.1 | % | ||||||||||||
Outpatient
rehabilitation |
20,518 | 21,406 | 4.3 | 20,518 | 21,406 | 4.3 | ||||||||||||||||||
Other(3) |
(12,547 | ) | (16,025 | ) | (27.7 | ) | (12,547 | ) | (16,025 | ) | (27.7 | ) | ||||||||||||
Adjusted EBITDA
margins: (2) |
||||||||||||||||||||||||
Specialty hospitals |
20.1 | % | 19.3 | % | 20.1 | % | 19.3 | % | ||||||||||||||||
Outpatient
rehabilitation |
11.9 | 12.4 | 11.9 | 12.4 | ||||||||||||||||||||
Other(3) |
N/M | N/M | N/M | N/M | ||||||||||||||||||||
Total assets: |
||||||||||||||||||||||||
Specialty hospitals |
$ | 1,991,456 | $ | 2,140,798 | $ | 1,991,456 | $ | 2,140,798 | ||||||||||||||||
Outpatient
rehabilitation |
502,346 | 482,444 | 502,346 | 482,444 | ||||||||||||||||||||
Other(3) |
135,168 | 180,577 | 132,252 | 178,201 | ||||||||||||||||||||
Total company |
$ | 2,628,970 | $ | 2,803,819 | $ | 2,626,054 | $ | 2,801,443 | ||||||||||||||||
Purchases of property
and equipment, net: |
||||||||||||||||||||||||
Specialty hospitals |
$ | 10,598 | $ | 10,487 | $ | 10,598 | $ | 10,487 | ||||||||||||||||
Outpatient
rehabilitation |
2,035 | 2,181 | 2,035 | 2,181 | ||||||||||||||||||||
Other(3) |
414 | 252 | 414 | 252 | ||||||||||||||||||||
Total company |
$ | 13,047 | $ | 12,920 | $ | 13,047 | $ | 12,920 | ||||||||||||||||
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N/M Not Meaningful. | ||
(1) | Cost of services includes salaries, wages and benefits, operating supplies, lease and rent expense and other operating costs. | |
(2) | We define Adjusted EBITDA as net income before interest, income taxes, depreciation and amortization, stock compensation expense, equity in losses of unconsolidated subsidiaries and other income. We believe that 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 by management to evaluate financial performance and determine resource allocation for each of our operating units. Adjusted EBITDA is not a measure of financial performance under generally accepted accounting principles. 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, 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 generally accepted accounting principles and is thus susceptible to varying calculations, Adjusted EBITDA as presented may not be comparable to other similarly titled measures of other companies. See Note 6 to our interim unaudited consolidated financial statements for the period ended March 31, 2011 for a reconciliation of net income to Adjusted EBITDA as utilized by us in reporting our segment performance. | |
(3) | Other includes our general and administrative services and non-healthcare services. |
Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010
In the following discussion, we address the results of operations of Select and Holdings. With
the exception of incremental interest expense and income taxes, the results of operations of
Holdings are identical to those of Select. Therefore, discussion related to net operating revenue,
operating expenses, Adjusted EBITDA, income from operations and non-controlling interest is
identical for Holdings and Select.
Net Operating Revenues
Our net operating revenues increased by 18.5% to $693.2 million for the three months ended
March 31, 2011 compared to $584.8 million for the three months ended March 31, 2010.
Specialty Hospitals. Our specialty hospital net operating revenues increased by 26.3% to
$519.9 million for the three months ended March 31, 2011 compared to $411.7 million for the three
months ended March 31, 2010. The Regency hospitals acquired on September 1, 2010 contributed $90.1
million of the increased net operating revenues. Our patient days increased 24.6% to 333,856 days
for the three months ended March 31, 2011, which was principally related to the addition of the
Regency hospitals. The Regency hospitals contributed over 54,500 patient days, and excluding the
effect of the Regency hospitals, patient days would have increased 4.3% compared to the same
period, prior year. The occupancy percentage increased to 72% for the three months ended March 31,
2011 from 70% for the three months ended March 31, 2010 which was primarily due to an increase in
our non-Medicare patient days. Our average net revenue per patient day was $1,514 for the three
months ended March 31, 2011 compared to $1,491 for the three months ended March 31, 2010. The
increase in our net revenue per patient day was due to increases in our average Medicare net
revenue per patient day, offset by a decline in our average non-Medicare net revenue per patient
day. The decrease in our average non-Medicare rate resulted from a decline in the severity of patients we treated
covered under Medicare HMO plans and a reduction in Medicaid reimbursements.
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Outpatient Rehabilitation. Our outpatient rehabilitation net operating revenues for the
segment increased slightly to $173.2 million for the three months ended March 31, 2011 compared to
$173.1 million for the three months ended March 31, 2010. The net operating revenues generated by
our outpatient rehabilitation clinics grew approximately 2.5% as compared to the three months ended
March 31, 2010. The number of patient visits in our owned outpatient rehabilitation clinics increased
1.1% for the three months ended March 31, 2011 to 1,138,700 visits compared to 1,125,958 visits for
the three months ended March 31, 2010. Net revenue per visit in our clinics increased 2.0% to $103
for the three months ended March 31, 2011, compared to $101 for the three months ended March 31,
2010. Our contract services business experienced a decline in net operating revenues of
approximately 7.3% as compared to the three months ended March 31, 2010 as the result of a loss of
a significant group of locations during the second quarter of 2010 where our contract was cancelled
when our customer sold its business. We were able to partially offset some of the lost net revenue
through the addition of new contracts.
Operating Expenses
Our operating expenses include our cost of services, general and administrative expense and
bad debt expense. Our operating expenses increased by $93.8 million to $588.3 million for the
three months ended March 31, 2011 compared to $494.5 million for the three months ended March 31,
2010. As a percentage of our net operating revenues, our operating expenses were 84.9% for the
three months ended March 31, 2011 compared to 84.6% for the three months ended March 31, 2010. Our
cost of services, a major component of which is labor expense, were $557.4 million for the three
months ended March 31, 2011 compared to $472.4 million for the three months ended March 31, 2010.
The principal cause of this increase was increased costs associated with the Regency hospitals.
Additionally, our facility rent expense, which is a component of cost of services, was $30.0
million for the three months ended March 31, 2011 compared to $29.1 million for the three months
ended March 31, 2010. General and administrative expenses were $16.6 million for three months
ended March 31, 2011, compared to $12.8 million for three months ended March 31, 2010. The
increase in our general and administrative expenses resulted primarily from higher legal expenses
and executive compensation costs in the three months ended March 31, 2011 then in the same period
in the prior year and additional corporate administrative costs to support the Regency hospitals.
Our bad debt expense as a percentage of net operating revenues was 2.1% for the three months ended
March 31, 2011 compared to 1.6% for the three months ended March 31, 2010. We experienced an
increase in our bad debt expense in both our business segments that resulted from aging of some of
our accounts receivable. We do not believe our experience in the first quarter of 2011 is
indicative of any new trend and we expect our bad debt expense will decline to historical levels
over the remainder of the year.
Adjusted EBITDA
Specialty Hospitals. Our specialty hospital Adjusted EBITDA increased by 21.1% to $100.4
million for the three months ended March 31, 2011 compared to $82.9 million for the three months
ended March 31, 2010. Adjusted EBITDA margins decreased to 19.3% for the three months ended March
31, 2011 from 20.1% for the three months ended March 31, 2010. For the three months ended March 31,
2010, the Regency hospitals acquired on September 1, 2010 contributed $14.5 million of the increase
in specialty hospital Adjusted EBITDA. Excluding the effect of the Regency hospitals, the Adjusted
EBITDA margin would have been 20.0% for the three months ended March 31, 2011. In addition to the
contribution from the Regency hospitals, the increase in the Adjusted EBITDA for the remainder of
our specialty hospitals was primarily the result of the increase in patient days described above
under Net Operating Revenues Specialty Hospitals.
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Outpatient Rehabilitation. Our outpatient rehabilitation Adjusted EBITDA for the segment
increased by 4.3% to $21.4 million for the three months ended March 31, 2011 compared to $20.5
million for the three months ended March 31, 2010. Our outpatient rehabilitation Adjusted EBITDA
margins for the segment increased to 12.4% for the three months ended March 31, 2011 from 11.9% for
the three months ended March 31, 2010. The principal reason for the increase in Adjusted EBITDA and
the Adjusted EBITDA margin for the segment was related to our outpatient rehabilitation clinics.
Our Adjusted EBITDA in our outpatient rehabilitation clinics increased by $3.8 million for the
three months ended March 31, 2011 compared to the three months ended March 31, 2010. Additionally,
our Adjusted EBITDA margins for our outpatient rehabilitation clinics grew to 13.4% for the three
months ended March 31, 2011 from 10.9% for the three months ended March 31, 2010. The increase in
our Adjusted EBITDA and Adjusted EBITDA margin in our rehabilitation clinics was principally due to
an improvement in the performance in the clinics acquired in 2007 from HealthSouth Corporation and
the increase in our net revenue per visit. We experienced a decline in the Adjusted EBITDA and
Adjusted EBITDA margin of our contract services business that resulted from the a loss of a
significant group of locations as described under Net Operating Revenues Outpatient
Rehabilitation.
Other. The Adjusted EBITDA loss was $16.0 million for the three months ended March 31, 2011
compared to an Adjusted EBITDA loss of $12.5 million for the three months ended March 31, 2010 and
is primarily related to our general and administrative expenses.
Income from Operations
For the three months ended March 31, 2011 we had income from operations of $87.6 million
compared to $72.6 million for the three months ended March 31, 2010. The increase in income from
operations resulted primarily from the Regency hospitals acquired on September 1, 2010, which
contributed $12.7 million of income from operations for the quarter.
Interest Expense
Select Medical Corporation. Interest expense was $18.7 million for the three months ended
March 31, 2011 compared to $23.0 million for the three months ended March 31, 2010. The decrease in
interest expense has resulted primarily from the expiration of interest rate swaps that carried
higher fixed interest rates.
Select Medical Holdings Corporation. Interest expense was $25.7 million for the three months
ended March 31, 2011 compared to $30.0 million for the three months ended March 31, 2010. The
decrease in interest expense has resulted primarily from the expiration of interest rate swaps that
carried higher fixed interest rates.
Income Taxes
Select Medical Corporation. We recorded income tax expense of $29.0 million for the three
months ended March 31, 2011. The expense represented an effective tax rate of 42.1%. We recorded
income tax expense of $19.6 million for the three months ended March 31, 2010. The expense
represented an effective tax rate of 39.3%. The increase in our effective tax rate has resulted
from a difference between the tax accounting basis and the financial accounting basis associated
with a hospital exchange that occurred in 2011.
Select Medical Holdings Corporation. We recorded income tax expense of $26.6 million for the
three months ended March 31, 2011. The expense represented an effective tax rate of 42.9%. We
recorded income tax expense of $17.1 million for the three months ended March 31, 2010. The expense
represented an effective tax rate of 40.0%. The increase in our effective tax rate has resulted from a difference between
the tax accounting basis and the financial accounting basis associated with a hospital exchange
that occurred in 2011.
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Non-Controlling Interests
Non-controlling interests in consolidated earnings were $1.7 million for the three months
ended March 31, 2011 compared to $1.4 million for the three months ended March 31, 2010.
Liquidity and Capital Resources
Cash Flows for the Three Months Ended March 31, 2011 and Three Months Ended March 31, 2010
Select Medical Holdings | ||||||||||||||||
Corporation | Select Medical Corporation | |||||||||||||||
Three Months Ended | Three Months Ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2010 | 2011 | 2010 | 2011 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Cash flows provided by (used in) operating
activities |
$ | (15,796 | ) | $ | (5,032 | ) | $ | (2,919 | ) | $ | 7,685 | |||||
Cash flows used in investing activities |
(13,047 | ) | (14,670 | ) | (13,047 | ) | (14,670 | ) | ||||||||
Cash flows provided by financing activities |
18,336 | 30,405 | 5,459 | 17,688 | ||||||||||||
Net increase (decrease) in cash and cash
equivalents |
(10,507 | ) | 10,703 | (10,507 | ) | 10,703 | ||||||||||
Cash and cash equivalents at beginning of
period |
83,680 | 4,365 | 83,680 | 4,365 | ||||||||||||
Cash and cash equivalents at end of period |
$ | 73,173 | $ | 15,068 | $ | 73,173 | $ | 15,068 | ||||||||
Operating activities for Select provided $7.7 million of cash flows for the three months ended
March 31, 2011. Our days sales outstanding were 57 days at March 31, 2011 compared to 56 days at
March 31, 2010 and 51 days at December 31, 2010. The increase in days sales outstanding between
December 31, 2010 and March 31, 2011 is primarily related to the timing of the periodic interim
payments we receive from Medicare for the services provided at our specialty hospitals. Our
periodic interim payments were delayed during the current quarter as the result of a change in our
Medicare fiscal intermediary that was mandated by CMS. Our bi-weekly payment date was pushed back
five days. We will recoup the five lost days of Medicare reimbursement over future months as our
hospitals cycle through their semi-annual payment reviews.
The operating cash flows of Select exceeded the operating cash flows of Holdings by $12.7
million for the three months ended March 31, 2011 and by $12.9 million for the three months ended
March 31, 2010. The difference relates to interest payments on Holdings indebtedness.
Investing activities used $14.7 million of cash flow for the three months ended March 31,
2011. The principal use of cash included $12.9 million related to the purchase of property and
equipment and $2.0 million related to a hospital exchange. Investing activities used $13.0 million
of cash flow for the three months ended March 31, 2010. The use of cash was related to the
purchase of property and equipment.
Financing activities for Select provided $17.7 million of cash flow for the three months ended
March 31, 2011. The primary sources of cash related to proceeds from net borrowings under our
revolving credit facility of $100.0 million and net borrowings of other debt of $3.0 million.
These borrowings were offset by aggregate payments on our term loans of $59.6 million, dividends
paid to Holdings to fund interest payments and stock repurchases of $14.7 million, reduction in
bank overdrafts of $9.4 million and $1.7 million in distributions to non-controlling interests. Financing activities for Select provided $5.5 million of cash flow
for the three months ended March 31, 2010. The primary sources of cash related to proceeds from
bank overdrafts of $17.3 million and net borrowings of other debt of $2.7 million, offset by
dividends paid to Holdings to fund interest payments of $12.9 million and $1.7 million in
distributions to non-controlling interests.
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The difference in cash flows provided by financing activities of Holdings compared to Select
of $12.7 million for the three months ended March 31, 2011 and $12.9 million for the three months
ended March 31, 2010 relates to dividends paid by Select to Holdings to service Holdings interest
obligations related to indebtedness.
Capital Resources
Select Medical Corporation. Select had net working capital of $20.1 million at March 31, 2011
compared to net working capital deficit of $73.5 million at December 31, 2010. The increase in net
working capital is primarily due to an increase in our accounts receivable.
Select Medical Holdings Corporation. Holdings had net working capital of $17.1 million at
March 31, 2011 compared to net working capital deficit of $70.2 million at December 31, 2010. The
increase in net working capital is primarily due to an increase in our accounts receivable.
At March 31, 2011 our senior secured credit facility (as described below), consists of:
| a $300.0 million revolving loan facility that will terminate on August 22, 2013, including both a letter of credit sub-facility and a swingline loan sub-facility, and |
| $143.5 million in term loans that mature on February 24, 2012 (the Tranche B Term Loans), and |
| $278.8 million in term loans that mature on August 22, 2014 (the Tranche B-1 Term Loans). |
The interest rates per annum applicable to loans, other than swingline loans and Tranche B-1
Term Loans, under our senior secured credit facility are, at our option, equal to either an
alternate base rate or an adjusted LIBOR rate for a one, two, three or six month interest period,
or a nine or twelve month period if available, in each case, plus an applicable margin percentage.
The interest rates per annum applicable to the Tranche B-1 Term Loans under our senior credit
facility are, at our option, equal to either an alternate base rate or an adjusted LIBOR rate for a
three or six month interest period, or a nine or twelve month period if available, in each case,
plus an applicable margin percentage. The alternate base rate is the greater of (1) JPMorgan Chase
Bank, N.A.s prime rate and (2) one-half of 1% over the weighted average of rates on overnight
Federal funds as published by the Federal Reserve Bank of New York. The adjusted LIBOR rate is
determined by reference to settlement rates established for deposits in dollars in the London
interbank market for a period equal to the interest period of the loan and the maximum reserve
percentages established by the Board of Governors of the United States Federal Reserve to which our
lenders are subject. The applicable margin percentage for borrowings under our revolving loans is
subject to change based upon the ratio of Selects leverage ratio (as defined in the credit
agreement). The applicable margin percentage for revolving loans is currently (1) 2.75% for
alternate base rate loans and (2) 3.75% for adjusted LIBOR loans. The applicable margin percentages
for the Tranche B Term Loans are (1) 1.00% for alternate base rate loans and (2) 2.00% for adjusted
LIBOR loans. The applicable margin percentages for the Tranche B-1 Term Loans are (1) 2.75% for
alternate base rate loans and (2) 3.75% for adjusted LIBOR loans.
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Our senior secured credit facility requires Select to maintain certain interest expense
coverage ratios and leverage ratios (both as defined in our senior secured credit facility). For
the four consecutive fiscal quarters ended March 31, 2011, Select was required to maintain an
interest expense coverage ratio (its ratio of consolidated EBITDA (as defined in our senior secured
credit facility) to cash interest expense) for the prior four consecutive fiscal quarters of at
least 2.25 to 1.00. Selects interest expense coverage ratio was 3.32 to 1.00 for such period. As
of March 31, 2011, Select was required to maintain its leverage ratio (its ratio of total
indebtedness to consolidated EBITDA for the prior four consecutive fiscal quarters) at less than
4.50 to 1.00. Selects leverage ratio was 3.42 to 1.00 as of March 31, 2011.
Also, as of March 31, 2011, we had $147.2 million of availability under our revolving loan
facility (after giving effect to $27.8 million of outstanding letters of credit).
On April 25, 2011, Select commenced a cash tender offer and consent solicitation for any and
all of its $611.5 million of outstanding 7 5/8% senior subordinated notes due 2015. The tender
offer is scheduled to expire at 11:59 p.m. on May 20, 2011. The tender offer and consent
solicitation are being conducted in connection with Selects negotiations to refinance its senior
secured credit facility. The tender offer and consent solicitation are conditioned on Selects
entry into a new senior secured credit facility. Select expects to use a portion of the proceeds
from such new senior secured credit facility to purchase the tendered and accepted 7 5/8% senior
subordinated notes and to retire Holdings $150.0 million principal value outstanding 10% senior
subordinated notes due 2015. We can provide no assurance that we will be able to successfully
refinance either our current senior secured credit facility or the 7 5/8% senior subordinated
notes, or that the refinancing, if it occurs, will not be delayed beyond the second quarter of
2011, or that the terms of any new indebtedness will be as favorable as the terms of our existing
indebtedness.
We may also from time to time seek to retire or purchase our outstanding debt through cash
purchases and/or exchanges for equity securities, in open market purchases, in tender offers,
privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, may be
funded from operating cash flows or other sources and will depend on prevailing market conditions,
our liquidity requirements, contractual restrictions and other factors. The amounts involved may be
material.
Holdings has authorized a program to repurchase up to $100.0 million worth of shares of our
common stock. The program will remain in effect until January 31, 2012, unless extended by the
board of directors. Through March 31, 2011, Select has repurchased 7,175,691 shares at a cost of
$46.2 million, which includes related transaction costs. We anticipate funding this program through
available operating cash flow and borrowings under our senior secured credit facility.
We believe our internally generated cash flows and borrowing capacity under our senior secured
credit facility will be sufficient to finance operations over the next twelve months.
As a result of the SCHIP Extension Act as amended by PPACA, which prohibits the establishment
and classification of new LTCHs or satellites during the five calendar years commencing on December
29, 2007, we have stopped all new LTCH development with the exception of one new hospital under
development that we acquired in the Regency acquisition. However, we continue to evaluate
opportunities to develop new joint venture relationships with significant health systems, and from
time to time we may also develop new inpatient rehabilitation hospitals. We also intend to open new
outpatient rehabilitation clinics in local areas that we currently serve where we can benefit from
existing referral relationships and brand awareness to produce incremental growth. In addition to our development activities, we may grow our network of
specialty hospitals through opportunistic acquisitions.
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Inflation
The healthcare industry is labor intensive. Wages and other expenses increase during periods
of inflation and when labor shortages occur in the marketplace. In addition, suppliers pass along
rising costs to us in the form of higher prices. We have implemented cost control measures,
including our case and resource management program, to curtail increases in operating costs and
expenses. We cannot predict our ability to cover or offset future cost increases.
Recent Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) 2010-06, Fair Value Measurements and Disclosures (Topic 820) Improving
Disclosures about Fair Value Measurements (Update 2010-06), which amends the guidance on fair
value to add new requirements for disclosures about transfers into and out of Levels 1 and 2 and
separate disclosures about purchases, sales, issuances, and settlements relating to Level 3
measurements. It also clarifies existing fair value disclosures about the level of disaggregation
and about inputs and valuation techniques used to measure fair value. We adopted update 2010-06 on
January 1, 2010, except for the requirement to provide the Level 3 activity of purchases, sales,
issuances, and settlements on a gross basis, which was effective for fiscal years beginning after
December 15, 2010. The adoption of Update
2010-06 did not have an impact on our consolidated financial statements. We currently have no
Level 3 measurements.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Quantitative and Qualitative Disclosures About Market Risk
We are subject to interest rate risk in connection with our long-term indebtedness. Our
principal interest rate exposure relates to the loans outstanding under Selects senior secured
credit facility and Holdings senior floating rate notes. As of March 31, 2011, Select had $547.3
million in term and revolving loans outstanding under its senior secured credit facility and $167.3
million in senior floating rate notes outstanding, which bear interest at variable rates. Each
eighth point change in interest rates on the variable rate portion of our long-term indebtedness
would result in a $0.9 million annual change in interest expense on our term loans.
ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our
principal executive officer and principal financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities
Exchange Act of 1934) as of the end of the period covered in this report. Based on this evaluation,
our principal executive officer and principal financial officer concluded that our disclosure
controls and procedures, including the accumulation and communication of disclosure to our
principal executive officer and principal financial officer as appropriate to allow timely
decisions regarding disclosure, are effective as of March 31, 2011 to provide reasonable assurance
that material information required to be included in our periodic SEC reports is recorded,
processed, summarized and reported within the time periods specified in the relevant SEC rules and
forms.
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Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rule
13a-15(f) of the Securities Exchange Act of 1934) identified in connection with the evaluation
required by Rule 13a-15(d) of the Securities Exchange Act of 1934 that occurred during the first
quarter ended March 31, 2011 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
On September 1, 2010, Select completed the acquisition of all the issued and outstanding
equity securities of Regency Hospital Company, L.L.C. (Regency). During 2010, we transferred all
accounting for Regency to our headquarters and began integrating Regency into our existing internal
control procedures. The Regency integration may lead us to change our controls in future periods,
but we do not expect changes to significantly affect our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
It should be noted that any system of controls, however well designed and operated, can
provide only reasonable, and not absolute, assurance that the objectives of the system will be met.
In addition, the design of any control system is based in part upon certain assumptions about the
likelihood of future events. Because of these and other inherent limitations of control systems,
there is only reasonable assurance that our controls will succeed in achieving their goals under
all potential future conditions.
PART II OTHER INFORMATION
ITEM 1. | LEGAL PROCEEDINGS |
To cover claims arising out of the operations of the Companys specialty hospitals and
outpatient rehabilitation facilities, the Company maintains professional malpractice liability
insurance and general liability insurance. The Company also maintains umbrella liability insurance
covering claims which, due to their nature or amount, are not covered by or not fully covered by
the Companys other insurance policies. These insurance policies also do not generally cover
punitive damages and are subject to various deductibles and policy limits. Significant legal
actions as well as the cost and possible lack of available insurance could subject the Company to
substantial uninsured liabilities.
The Company is subject to legal proceedings and claims that arise in the ordinary course of
business, which include malpractice claims covered under insurance policies, subject to
self-insured retention of $2.0 million per medical incident for professional liability claims and
$2.0 million per occurrence for general liability claims. In the Companys opinion, the outcome of
these actions will not have a material adverse effect on its financial position or results of
operations.
Healthcare providers are subject to lawsuits under the qui tam provisions of the federal False
Claims Act. Qui tam lawsuits typically remain under seal (hence, usually unknown to the defendant)
for some time while the government decides whether or not to intervene on behalf of a private qui
tam plaintiff (known as a relator) and take the lead in the litigation. These lawsuits can involve
significant monetary damages and penalties and award bounties to private plaintiffs who
successfully bring the suits. The Company has been a defendant in these cases in the past, and may
be named as a defendant in similar cases from time to time in the future.
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During July 2009, the Company received a subpoena from the Office of Inspector General of the
U.S. Department of Health and Human Services seeking various documents concerning the Companys
financial relationships with certain physicians practicing at its hospitals in Columbus, Ohio. The
Company understands that the subpoena was issued in connection with a qui tam lawsuit and that the government has
been investigating the matter to determine whether to intervene. The Company has produced documents
in response to the subpoena and has fully cooperated with the governments investigation. The
Company is in discussions with the government to attempt to resolve this matter in a manner
satisfactory to the Company and the government. Any settlement is not expected to be material to
our financial position.
ITEM 1A. | RISK FACTORS. |
There have been no material changes from our risk factors as previously reported in our Annual
Report on Form 10-K for the year ended December 31, 2010.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Purchases of Equity Securities by the Issuer
In November 2010, our board of directors authorized a stock repurchase program pursuant to which we
may purchase up to $100.0 million worth of our common stock. The program will remain in effect until
January 31, 2012, unless extended by our board of directors. In the quarter ended March 31, 2011,
we purchased a total of 269,991 shares of our common stock at an average purchase price of $7.48.
The following table sets forth the monthly purchases made under this program during the quarter
ended March 31, 2011:
Approximate | ||||||||||||||||
Total Number | Dollar Value of | |||||||||||||||
of Shares | Shares that | |||||||||||||||
Purchased as | May Yet Be | |||||||||||||||
Part of Publicly | Purchased | |||||||||||||||
Total Number | Announced | Under the | ||||||||||||||
of Shares | Average Price | Plans or | Plans or | |||||||||||||
Period | Purchased | Paid Per Share | Programs | Programs | ||||||||||||
January 1,
2011 to January 31, 2011 |
| | | $ | 55,856,585 | |||||||||||
February 1,
2011 to February 28, 2011 |
| | | $ | 55,856,585 | |||||||||||
March 1, 2011
to March 31, 2011 |
269,991 | $ | 7.48 | 269,991 | $ | 53,831,437 |
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
Not applicable.
ITEM 4. | REMOVED AND RESERVED |
ITEM 5. | OTHER INFORMATION |
None.
ITEM 6. | EXHIBITS |
The
exhibits to this report are listed in the Exhibit Index appearing on page 41 hereof.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
SELECT MEDICAL CORPORATION |
||||
By: | /s/ Martin F. Jackson | |||
Martin F. Jackson | ||||
Executive Vice President and Chief Financial Officer (Duly Authorized Officer) |
||||
By: | /s/ Scott A. Romberger | |||
Scott A. Romberger | ||||
Senior Vice President, Chief Accounting Officer and
Controller (Principal Accounting Officer) |
Dated:
May 5, 2011
SELECT MEDICAL HOLDINGS CORPORATION |
||||
By: | /s/ Martin F. Jackson | |||
Martin F. Jackson | ||||
Executive Vice President and Chief Financial Officer (Duly Authorized Officer) |
||||
By: | /s/ Scott A. Romberger | |||
Scott A. Romberger | ||||
Senior Vice President, Chief Accounting Officer and
Controller (Principal Accounting Officer) |
Dated: May
5, 2011
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EXHIBIT INDEX
Exhibit | Description | |||
10.1 | Fourth Amendment to Change of Control Agreement, dated March 8, 2011, between Select Medical
Corporation and Martin F. Jackson, incorporated herein by reference to Exhibit 10.111 of the
Annual Report on Form 10-K of Select Medical Holdings Corporation and Select Medical
Corporation filed on March 9, 2011 (Reg. Nos. 001-34465 and 001-31441). |
|||
10.2 | Amendment No. 8 to Employment Agreement, dated March 8, 2011, between Select Medical
Corporation and Robert A. Ortenzio, incorporated herein by reference to Exhibit 10.112 of the
Annual Report on Form 10-K of Select Medical Holdings Corporation and Select Medical
Corporation filed on March 9, 2011 (Reg. Nos. 001-34465 and 001-31441). |
|||
10.3 | Amendment No. 8 to Employment Agreement, dated March 8, 2011, between Select Medical
Corporation and Rocco A. Ortenzio, incorporated herein by reference to Exhibit 10.113 of the
Annual Report on Form 10-K of Select Medical Holdings Corporation and Select Medical
Corporation filed on March 9, 2011 (Reg. Nos. 001-34465 and 001-31441). |
|||
10.4 | Amendment No. 9 to Employment Agreement, dated March 8, 2011, between Select Medical
Corporation and Patricia A. Rice, incorporated herein by reference to Exhibit 10.114 of the
Annual Report on Form 10-K of Select Medical Holdings Corporation and Select Medical
Corporation filed on March 9, 2011 (Reg. Nos. 001-34465 and 001-31441). |
|||
10.5 | Fourth Amendment to Change of Control Agreement, dated March 8, 2011, between Select Medical
Corporation and Scott A. Romberger, incorporated herein by reference to Exhibit 10.115 of the
Annual Report on Form 10-K of Select Medical Holdings Corporation and Select Medical
Corporation filed on March 9, 2011 (Reg. Nos. 001-34465 and 001-31441). |
|||
10.6 | Fourth Amendment to Change of Control Agreement, dated March 8, 2011, between Select Medical
Corporation and James J. Talalai, incorporated herein by reference to Exhibit 10.116 of the
Annual Report on Form 10-K of Select Medical Holdings Corporation and Select Medical
Corporation filed on March 9, 2011 (Reg. Nos. 001-34465 and 001-31441). |
|||
10.7 | Fourth Amendment to Change of Control Agreement, dated March 8, 2011, between Select Medical
Corporation and Michael E. Tarvin, incorporated herein by reference to Exhibit 10.117 of the
Annual Report on Form 10-K of Select Medical Holdings Corporation and Select Medical
Corporation filed on March 9, 2011 (Reg. Nos. 001-34465 and 001-31441). |
|||
10.8 | Amendment No. 1 to Employment Agreement, dated March 21, 2011, between Select Medical
Corporation and David S. Chernow. |
|||
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. |
|||
31.2 | Certification of Executive Vice President and Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|||
32.1 | Certification of Chief Executive Officer, and Executive Vice
President and Chief Financial Officer pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
41