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EXCEL - IDEA: XBRL DOCUMENT - SELECT MEDICAL HOLDINGS CORP | Financial_Report.xls |
EX-31.1 - EXHIBIT 31.1 - SELECT MEDICAL HOLDINGS CORP | c23158exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - SELECT MEDICAL HOLDINGS CORP | c23158exv31w2.htm |
EX-32.1 - EXHIBIT 32.1 - SELECT MEDICAL HOLDINGS CORP | c23158exv32w1.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 September 30, 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 | 20-1764048 | |
Delaware | 23-2872718 | |
(State or other jurisdiction of | (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 þ 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 October 31, 2011, Select Medical Holdings Corporation had outstanding 148,108,130
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 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT | ||||||||
EX-101 DEFINITION LINKBASE DOCUMENT |
2
Table of Contents
PART I FINANCIAL INFORMATION
ITEM 1. | CONSOLIDATED FINANCIAL STATEMENTS |
Consolidated Balance Sheets
(unaudited)
(in thousands, except share and per share amounts)
Select Medical Holdings Corporation | Select Medical Corporation | |||||||||||||||
December 31, | September 30, | December 31, | September 30, | |||||||||||||
2010 | 2011 | 2010 | 2011 | |||||||||||||
ASSETS |
||||||||||||||||
Current Assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 4,365 | $ | 10,213 | $ | 4,365 | $ | 10,213 | ||||||||
Accounts receivable, net of allowance for doubtful accounts
of $44,416 and $50,597 in 2010 and 2011, respectively |
353,432 | 394,989 | 353,432 | 394,989 | ||||||||||||
Current deferred tax asset |
30,654 | 19,834 | 30,654 | 19,834 | ||||||||||||
Prepaid income taxes |
12,699 | 10,340 | 12,699 | 10,340 | ||||||||||||
Other current assets |
28,176 | 28,106 | 28,176 | 28,106 | ||||||||||||
Total Current Assets |
429,326 | 463,482 | 429,326 | 463,482 | ||||||||||||
Property and equipment, net |
532,100 | 505,894 | 532,100 | 505,894 | ||||||||||||
Goodwill |
1,631,252 | 1,627,509 | 1,631,252 | 1,627,509 | ||||||||||||
Other identifiable intangibles |
80,119 | 72,448 | 80,119 | 72,448 | ||||||||||||
Assets held for sale |
11,342 | 11,342 | 11,342 | 11,342 | ||||||||||||
Other assets |
37,947 | 70,435 | 35,433 | 68,937 | ||||||||||||
Total Assets |
$ | 2,722,086 | $ | 2,751,110 | $ | 2,719,572 | $ | 2,749,612 | ||||||||
LIABILITIES AND EQUITY |
||||||||||||||||
Current Liabilities: |
||||||||||||||||
Bank overdrafts |
$ | 18,792 | $ | 14,618 | $ | 18,792 | $ | 14,618 | ||||||||
Current portion of long-term debt and notes payable |
149,379 | 10,268 | 149,379 | 10,268 | ||||||||||||
Accounts payable |
74,193 | 88,942 | 74,193 | 88,942 | ||||||||||||
Accrued payroll |
63,760 | 70,917 | 63,760 | 70,917 | ||||||||||||
Accrued vacation |
46,588 | 48,243 | 46,588 | 48,243 | ||||||||||||
Accrued interest |
30,937 | 5,590 | 21,586 | 5,153 | ||||||||||||
Accrued restructuring |
6,754 | 5,608 | 6,754 | 5,608 | ||||||||||||
Accrued other |
103,856 | 105,053 | 116,456 | 105,053 | ||||||||||||
Due to third party payors |
5,299 | 4,249 | 5,299 | 4,249 | ||||||||||||
Total Current Liabilities |
499,558 | 353,488 | 502,807 | 353,051 | ||||||||||||
Long-term debt, net of current portion |
1,281,390 | 1,397,418 | 974,913 | 1,230,118 | ||||||||||||
Non-current deferred tax liability |
59,074 | 68,399 | 59,074 | 68,399 | ||||||||||||
Other non-current liabilities |
66,650 | 73,219 | 66,650 | 73,219 | ||||||||||||
Total Liabilities |
1,906,672 | 1,892,524 | 1,603,444 | 1,724,787 | ||||||||||||
Stockholders Equity: |
||||||||||||||||
Common stock of Holdings, $0.001 par value, 700,000,000
shares authorized, 154,519,025 shares and 149,936,594 shares
issued and outstanding in 2010 and 2011, respectively |
155 | 150 | | | ||||||||||||
Common stock of Select, $0.01 par value, 100 shares issued
and outstanding |
| | 0 | 0 | ||||||||||||
Capital in excess of par |
535,628 | 518,295 | 834,894 | 846,806 | ||||||||||||
Retained earnings |
248,097 | 307,648 | 249,700 | 145,526 | ||||||||||||
Total Select Medical Holdings Corporation and Select Medical Corporation Stockholders Equity |
783,880 | 826,093 | 1,084,594 | 992,332 | ||||||||||||
Non-controlling interest |
31,534 | 32,493 | 31,534 | 32,493 | ||||||||||||
Total Equity |
815,414 | 858,586 | 1,116,128 | 1,024,825 | ||||||||||||
Total Liabilities and Equity |
$ | 2,722,086 | $ | 2,751,110 | $ | 2,719,572 | $ | 2,749,612 | ||||||||
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)
Select Medical Holdings Corporation | Select Medical Corporation | |||||||||||||||
For the Three Months Ended September 30, | For the Three Months Ended September 30, | |||||||||||||||
2010 | 2011 | 2010 | 2011 | |||||||||||||
Net operating revenues |
$ | 588,250 | $ | 694,131 | $ | 588,250 | $ | 694,131 | ||||||||
Costs and expenses: |
||||||||||||||||
Cost of services |
498,739 | 581,829 | 498,739 | 581,829 | ||||||||||||
General and administrative |
19,228 | 14,975 | 19,228 | 14,975 | ||||||||||||
Bad debt expense |
11,317 | 11,709 | 11,317 | 11,709 | ||||||||||||
Depreciation and amortization |
17,012 | 17,545 | 17,012 | 17,545 | ||||||||||||
Total costs and expenses |
546,296 | 626,058 | 546,296 | 626,058 | ||||||||||||
Income from operations |
41,954 | 68,073 | 41,954 | 68,073 | ||||||||||||
Other income and expense: |
||||||||||||||||
Equity in earnings (losses) of unconsolidated subsidiaries |
(186 | ) | 1,653 | (186 | ) | 1,653 | ||||||||||
Other income |
148 | | 148 | | ||||||||||||
Interest income |
| 119 | | 119 | ||||||||||||
Interest expense |
(27,677 | ) | (24,134 | ) | (20,821 | ) | (21,526 | ) | ||||||||
Income before income taxes |
14,239 | 45,711 | 21,095 | 48,319 | ||||||||||||
Income tax expense |
5,574 | 19,330 | 7,974 | 20,243 | ||||||||||||
Net income |
8,665 | 26,381 | 13,121 | 28,076 | ||||||||||||
Less: Net income attributable to
non-controlling interests |
656 | 785 | 656 | 785 | ||||||||||||
Net income attributable to Select Medical Holdings
Corporation and Select
Medical Corporation |
$ | 8,009 | $ | 25,596 | $ | 12,465 | $ | 27,291 | ||||||||
Income per common share: |
||||||||||||||||
Basic |
$ | 0.05 | $ | 0.17 | ||||||||||||
Diluted |
$ | 0.05 | $ | 0.17 |
The accompanying notes are an integral part of these consolidated financial statements.
4
Table of Contents
Consolidated Statements of Operations
(unaudited)
(in thousands, except per share amounts)
Select Medical Holdings Corporation | Select Medical Corporation | |||||||||||||||
For the Nine Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
2010 | 2011 | 2010 | 2011 | |||||||||||||
Net operating revenues |
$ | 1,752,940 | $ | 2,086,066 | $ | 1,752,940 | $ | 2,086,066 | ||||||||
Costs and expenses: |
||||||||||||||||
Cost of services |
1,441,160 | 1,708,911 | 1,441,160 | 1,708,911 | ||||||||||||
General and administrative |
41,819 | 47,656 | 41,819 | 47,656 | ||||||||||||
Bad debt expense |
31,449 | 40,002 | 31,449 | 40,002 | ||||||||||||
Depreciation and amortization |
51,333 | 52,766 | 51,333 | 52,766 | ||||||||||||
Total costs and expenses |
1,565,761 | 1,849,335 | 1,565,761 | 1,849,335 | ||||||||||||
Income from operations |
187,179 | 236,731 | 187,179 | 236,731 | ||||||||||||
Other income and expense: |
||||||||||||||||
Loss on early retirement of debt |
| (31,018 | ) | | (20,385 | ) | ||||||||||
Equity in earnings (losses) of unconsolidated subsidiaries |
(186 | ) | 1,329 | (186 | ) | 1,329 | ||||||||||
Other income |
464 | | 464 | | ||||||||||||
Interest income |
| 286 | | 286 | ||||||||||||
Interest expense |
(86,998 | ) | (75,094 | ) | (66,184 | ) | (59,882 | ) | ||||||||
Income from operations before income taxes |
100,459 | 132,234 | 121,273 | 158,079 | ||||||||||||
Income tax expense |
39,989 | 56,809 | 47,274 | 65,854 | ||||||||||||
Net income |
60,470 | 75,425 | 73,999 | 92,225 | ||||||||||||
Less: Net income attributable to non-controlling interests |
3,773 | 4,438 | 3,773 | 4,438 | ||||||||||||
Net income attributable to Select Medical Holdings Corporation
and Select Medical Corporation |
$ | 56,697 | $ | 70,987 | $ | 70,226 | $ | 87,787 | ||||||||
Income per common share: |
||||||||||||||||
Basic |
$ | 0.35 | $ | 0.46 | ||||||||||||
Diluted |
$ | 0.35 | $ | 0.46 |
The accompanying notes are an integral part of these consolidated financial statements.
5
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 |
75,425 | $ | 75,425 | 70,987 | 4,438 | |||||||||||||||||||||||
Issuance and vesting of restricted stock |
1,801 | 26 | (0 | ) | 1,801 | |||||||||||||||||||||||
Exercise of stock options |
169 | 42 | 0 | 169 | ||||||||||||||||||||||||
Stock option expense |
897 | 897 | ||||||||||||||||||||||||||
Repurchase of common shares |
(31,641 | ) | (4,650 | ) | (5 | ) | (20,200 | ) | (11,436 | ) | ||||||||||||||||||
Distributions to non-controlling
interests |
(3,507 | ) | (3,507 | ) | ||||||||||||||||||||||||
Other |
28 | 28 | ||||||||||||||||||||||||||
Balance at September 30, 2011 |
$ | 858,586 | 149,937 | $ | 150 | $ | 518,295 | $ | 307,648 | $ | 32,493 | |||||||||||||||||
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 |
92,225 | $ | 92,225 | 87,787 | 4,438 | |||||||||||||||||||||||
Federal tax benefit of losses contributed by
Holdings |
9,045 | 9,045 | ||||||||||||||||||||||||||
Additional investment by Holdings |
169 | 169 | ||||||||||||||||||||||||||
Net change in dividends payable to Holdings |
12,600 | 12,600 | ||||||||||||||||||||||||||
Dividends declared and paid to Holdings |
(204,561 | ) | (204,561 | ) | ||||||||||||||||||||||||
Distributions to non-controlling interests |
(3,507 | ) | (3,507 | ) | ||||||||||||||||||||||||
Other |
28 | 28 | ||||||||||||||||||||||||||
Contribution related to restricted stock awards
and stock option issuances by Holdings |
2,698 | 2,698 | ||||||||||||||||||||||||||
Balance at September 30, 2011 |
$ | 1,024,825 | 0 | $ | 0 | $ | 846,806 | $ | 145,526 | $ | 32,493 | |||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
6
Table of Contents
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
Select Medical Holdings Corporation | Select Medical Corporation | |||||||||||||||
For the Nine Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
2010 | 2011 | 2010 | 2011 | |||||||||||||
Operating activities |
||||||||||||||||
Net income |
$ | 60,470 | $ | 75,425 | $ | 73,999 | $ | 92,225 | ||||||||
Adjustments to reconcile net income to net cash
provided by operating activities: |
||||||||||||||||
Depreciation and amortization |
51,333 | 52,766 | 51,333 | 52,766 | ||||||||||||
Provision for bad debts |
31,449 | 40,002 | 31,449 | 40,002 | ||||||||||||
Loss on early retirement of debt |
| 31,018 | | 20,385 | ||||||||||||
Loss (gain) from disposal of assets |
612 | (5,182 | ) | 612 | (5,182 | ) | ||||||||||
Non-cash gain from interest rate swaps |
(464 | ) | | (464 | ) | | ||||||||||
Non-cash stock compensation expense |
1,405 | 2,698 | 1,405 | 2,698 | ||||||||||||
Amortization of debt discount |
1,396 | 1,271 | | 412 | ||||||||||||
Changes in operating assets and liabilities, net of
effects from acquisition of businesses: |
||||||||||||||||
Accounts receivable |
(26,668 | ) | (81,466 | ) | (26,668 | ) | (81,466 | ) | ||||||||
Other current assets |
3,571 | 240 | 3,571 | 240 | ||||||||||||
Other assets |
494 | 1,072 | 88 | 723 | ||||||||||||
Accounts payable |
(3,469 | ) | 14,008 | (3,469 | ) | 14,008 | ||||||||||
Due to third-party payors |
(756 | ) | (1,050 | ) | (756 | ) | (1,050 | ) | ||||||||
Accrued expenses |
(13,038 | ) | (12,566 | ) | (6,527 | ) | (3,650 | ) | ||||||||
Income and deferred taxes |
3,930 | 25,678 | 11,214 | 34,723 | ||||||||||||
Net cash provided by operating activities |
110,265 | 143,914 | 135,787 | 166,834 | ||||||||||||
Investing activities |
||||||||||||||||
Purchases of property and equipment |
(38,626 | ) | (32,094 | ) | (38,626 | ) | (32,094 | ) | ||||||||
Investment in business |
| (13,514 | ) | | (13,514 | ) | ||||||||||
Acquisition of businesses, net of cash acquired |
(165,802 | ) | 1,921 | (165,802 | ) | 1,921 | ||||||||||
Proceeds from sale of assets |
| 7,879 | | 7,879 | ||||||||||||
Net cash used in investing activities |
(204,428 | ) | (35,808 | ) | (204,428 | ) | (35,808 | ) | ||||||||
Financing activities |
||||||||||||||||
Borrowings on revolving credit facilities |
90,000 | 595,000 | 90,000 | 595,000 | ||||||||||||
Payments on revolving credit facilities |
(70,000 | ) | (570,000 | ) | (70,000 | ) | (570,000 | ) | ||||||||
Borrowings on 2011 credit facility term loan, net of discount |
| 841,500 | | 841,500 | ||||||||||||
Payments on 2011 credit facility term loans |
| (2,125 | ) | | (2,125 | ) | ||||||||||
Payments on 2005 credit facility term loans, net of call premium |
| (484,633 | ) | | (484,633 | ) | ||||||||||
Repurchase of 10% senior subordinated notes |
| (150,000 | ) | | | |||||||||||
Repurchase of 7 5/8% senior subordinated notes, net of tender
premium |
| (273,941 | ) | | (273,941 | ) | ||||||||||
Borrowings of other debt |
5,015 | 5,496 | 5,015 | 5,496 | ||||||||||||
Principal payments on seller and other debt |
(6,667 | ) | (5,846 | ) | (6,667 | ) | (5,846 | ) | ||||||||
Debt issuance costs |
| (18,556 | ) | | (18,556 | ) | ||||||||||
Proceeds from (repayment of) bank overdrafts |
10,971 | (4,174 | ) | 10,971 | (4,174 | ) | ||||||||||
Equity investment by Holdings |
| | 125 | 169 | ||||||||||||
Repurchase of common stock |
| (31,641 | ) | | | |||||||||||
Proceeds from issuance of common stock |
125 | 169 | | | ||||||||||||
Dividends paid to Holdings |
| | (25,522 | ) | (204,561 | ) | ||||||||||
Distributions to non-controlling interests |
(3,618 | ) | (3,507 | ) | (3,618 | ) | (3,507 | ) | ||||||||
Net cash provided by (used in) financing activities |
25,826 | (102,258 | ) | 304 | (125,178 | ) | ||||||||||
Net increase (decrease) in cash and cash equivalents |
(68,337 | ) | 5,848 | (68,337 | ) | 5,848 | ||||||||||
Cash and cash equivalents at beginning of period |
83,680 | 4,365 | 83,680 | 4,365 | ||||||||||||
Cash and cash equivalents at end of period |
$ | 15,343 | $ | 10,213 | $ | 15,343 | $ | 10,213 | ||||||||
Supplemental Cash Flow Information |
||||||||||||||||
Cash paid for interest |
$ | 99,897 | $ | 94,632 | $ | 74,381 | $ | 71,719 | ||||||||
Cash paid for taxes |
$ | 36,424 | $ | 31,105 | $ | 36,424 | $ | 31,105 |
The accompanying notes are an integral part of these consolidated financial statements.
7
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 effectuating 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. 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 September 30,
2011 and for the three and nine month periods ended September 30, 2010 and 2011 have been
prepared in accordance with GAAP. 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 and nine months ended September 30, 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.
8
Table of Contents
Recent Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) 2011-04, Fair Value Measurement (Topic 820) Amendments to Achieve Common Fair
Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (Update 2011-04). Update
2011-04 generally represents clarification of Topic 820, but also includes instances where a
particular principle or requirement for measuring fair value or disclosing information about fair
value measurements has changed. Update 2011-04 results in common principles and requirements for
measuring fair value and for disclosing information about fair value measurements in accordance
with GAAP and International Financial Reporting Standards.
Update 2011-04 is effective for interim and annual periods beginning after December 15, 2011 and is
to be applied prospectively. Early application is not permitted. The Company does not expect the
adoption of Update 2011-04 to have a material impact on its consolidated financial statements.
In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220) Presentation of
Comprehensive Income (Update 2011-05) that improves the comparability, consistency and
transparency of financial reporting and increases the prominence of items reported in other
comprehensive income by eliminating the option to present components of other comprehensive income
as part of the statement of changes in stockholders equity. Update 2011-05 requires that all
non-owner changes in stockholders equity be presented either in a single continuous statement of
comprehensive income or in two separate but consecutive statements. Under either method,
adjustments must be displayed for items that are reclassified from other comprehensive income
(OCI) to net income, in both net income and OCI. Update 2011-05 does not change the current
option for presenting components of OCI gross or net of the effect of income taxes, provided that
such tax effects are presented in the statement in which OCI is presented or disclosed in the notes
to the financial statements. Additionally, Update 2011-05 does not affect the calculation or
reporting of earnings per share. Update 2011-05 is effective for fiscal years, and interim periods
within those years, beginning after December 15, 2011 and is to be applied retrospectively, with
early adoption permitted. The adoption of Update 2011-05 will cause the Company to change its
presentation of other comprehensive income on its consolidated financial statements.
In July 2011, the FASB issued ASU 2011-07, Health Care Entities (Topic 954): Presentation
and Disclosure of Patient Service Revenue, Provision for Bad Debts and the Allowance for Doubtful
Accounts for Certain Health Care Entities (Update 2011-07). Update 2011-07 requires certain
health care entities to change the presentation in their statement of operations by reclassifying
the provision for bad debts associated with patient service revenue from an operating expense to a
deduction from patient service revenue (net of contractual allowances and discounts).
Additionally, those health care entities are required to provide enhanced disclosure about their
policies for recognizing revenue and assessing bad debts. The amendments also require disclosures
of patient service revenue (net of contractual allowances and discounts) as well as qualitative and
quantitative information about changes in the allowance for doubtful accounts. Update 2011-07 is
effective for fiscal years and interim periods within those fiscal years beginning after December
15, 2011, with early adoption permitted. The Company is in the process of evaluating the effects
of Update 2011-07 on its consolidated financial statements.
In September 2011, the FASB issued ASU 2011-08, Intangibles Goodwill and Other (Topic
350): Testing Goodwill for Impairment (Update 2011-08). Update 2011-08 allows an entity to
first assess qualitative factors to determine whether it is necessary to perform the two-step
quantitative goodwill impairment test. Under Update 2011-08, an entity would not be required to
calculate the fair value of a reporting unit unless the entity determines, based on a qualitative
assessment, that it is more likely than not that its fair value is less than its carrying amount.
Update 2011-08 includes a number of events and circumstances
for an entity to consider in conducting the qualitative assessment. Update 2011-08 will be
effective for goodwill impairment test performed for fiscal years beginning after December 15,
2011. Update 2011-08 does not change the accounting or measurement of impairments. This update
will have no effect on the Companys consolidated financial statements.
9
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3. Significant Transactions
On April 1, 2011, the Company entered into a joint venture with Baylor Health Care System.
The joint venture consists of a partnership between Baylor Institute for Rehabilitation and Select
Physical Therapy Texas, a wholly-owned subsidiary of the Company. The Company contributed several
businesses to the joint venture, including its Frisco inpatient rehabilitation facility and certain
Texas-based outpatient rehabilitation clinics. A gain of $1.2 million was recognized on this
contribution and is included in the general and administrative line item on the consolidated
statement of operations for the nine months ended September 30, 2011. Additionally, the Company
purchased partnership units and made initial working capital advances to the newly formed
partnership utilizing $13.5 million in cash. The Company owns a 49.0% interest in the partnership
and is accounting for the investment using the equity method because the Company does not have a
controlling influence.
On June 30, 2011, the Company sold a building which it acquired in connection with the
acquisition of Regency Hospital Company, L.L.C. for $7.6 million in cash. A gain of $4.2 million
was recognized on this sale and is included in the general and administrative line item on the
consolidated statement of operations for the nine months ended September 30, 2011.
4. Intangible Assets
The Companys intangible assets consist of the following:
As of September 30, 2011 | ||||||||
Gross Carrying | Accumulated | |||||||
Amount | Amortization | |||||||
(in thousands) | ||||||||
Amortized intangible assets: |
||||||||
Non-compete agreements |
$ | 25,909 | $ | (25,244 | ) | |||
Indefinite-lived intangible assets: |
||||||||
Goodwill |
$ | 1,627,509 | ||||||
Trademarks |
57,709 | |||||||
Certificates of need |
11,914 | |||||||
Accreditations |
2,160 | |||||||
Total |
$ | 1,699,292 | ||||||
The Companys accreditations and trademarks have renewal terms. The costs to renew these
intangibles are expensed as incurred. At September 30, 2011, the accreditations and trademarks have
a weighted average time until next renewal of approximately 1.5 years and 8.7 years, respectively.
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Amortization expense for the Companys intangible assets with finite lives follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2010 | 2011 | 2010 | 2011 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Amortization expense |
$ | 869 | $ | 328 | $ | 3,921 | $ | 981 |
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
nine months ended September 30, 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 | |||||||||
Purchase price settlement (2) |
(3,921 | ) | | (3,921 | ) | |||||||
Goodwill acquired during the period |
2,169 | | 2,169 | |||||||||
Goodwill allocated to dispositions
during the period |
(2,750 | ) | (6,355 | ) | (9,105 | ) | ||||||
Balance as of September 30, 2011 |
$ | 1,333,221 | $ | 294,288 | $ | 1,627,509 | ||||||
(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. | |
(2) | During the three months ended June 30, 2011, the Company completed the post-closing settlement of net working capital with the seller of Regency Hospital Company, L.L.C. |
11
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5. 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.
The following summarizes the Companys restructuring activity:
Lease Termination Costs | ||||
(in thousands) | ||||
Balance as of December 31, 2010 |
$ | 6,754 | ||
Amounts paid in 2011 |
(1,480 | ) | ||
Accretion expense |
334 | |||
Balance as of September 30, 2011 |
$ | 5,608 | ||
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.
6. Indebtedness
The components of long-term debt and notes payable are shown in the following table:
Holdings | Select | |||||||||||||||
December 31, | September 30, | December 31, | September 30, | |||||||||||||
2010 | 2011 | 2010 | 2011 | |||||||||||||
(in thousands) | ||||||||||||||||
7 5/8% senior subordinated notes |
$ | 611,500 | $ | 345,000 | $ | 611,500 | $ | 345,000 | ||||||||
2011 - senior secured credit facilities: |
||||||||||||||||
Revolving loan |
| 50,000 | | 50,000 | ||||||||||||
Term loan (1) |
| 839,787 | | 839,787 | ||||||||||||
2005 - senior secured credit facilities: |
||||||||||||||||
Revolving loan |
25,000 | | 25,000 | | ||||||||||||
Term loan B |
191,268 | | 191,268 | | ||||||||||||
Term loan B-1 |
290,576 | | 290,576 | | ||||||||||||
10% senior subordinated notes (2) |
139,177 | | | | ||||||||||||
Senior floating rate notes |
167,300 | 167,300 | | | ||||||||||||
Other debt |
5,948 | 5,599 | 5,948 | 5,599 | ||||||||||||
Total debt |
1,430,769 | 1,407,686 | 1,124,292 | 1,240,386 | ||||||||||||
Less: current maturities |
149,379 | 10,268 | 149,379 | 10,268 | ||||||||||||
Total long-term debt |
$ | 1,281,390 | $ | 1,397,418 | $ | 974,913 | $ | 1,230,118 | ||||||||
(1) | Presented net of unamortized discount of $8.1 million. | |
(2) | Presented net of unamortized discount of $10.8 million. |
12
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On June 1, 2011, Select entered into a new senior secured credit agreement (the Credit
Agreement) that provides for $1.15 billion in senior secured credit facilities (Senior Secured
Credit Facilities), comprised of an $850.0 million, seven-year term loan facility (Term Loan)
and a $300.0 million, five-year revolving credit facility (Revolving Credit Facility), including
a $75.0 million sublimit for the issuance of standby letters of credit and a $25.0 million sublimit
for swingline loans.
Select used borrowings under the Senior Secured Credit Facilities to refinance all of its
outstanding indebtedness under its existing credit facilities, to repurchase $266.5 million
aggregate principal amount of its 7 5/8% senior subordinated notes due 2015 and to repay all of
Holdings existing 10% senior subordinated notes due 2015. Select recognized a loss on early
retirement of debt for the nine months ended
September 30, 2011 of $20.4 million related to these transactions. Holdings recognized a loss on
early retirement of debt for the nine months ended September 30, 2011 of $31.0 million related to
these transactions. Borrowings under the Senior Secured Credit Facilities are guaranteed by
Holdings and substantially all of Selects current domestic subsidiaries and will be guaranteed by
Selects future domestic subsidiaries and secured by substantially all of Selects existing and
future property and assets and by a pledge of Selects capital stock, the capital stock of Selects
domestic subsidiaries and up to 65% of the capital stock of Selects foreign subsidiaries, if any.
Borrowings under the Senior Secured Credit Facilities will bear interest at a rate equal to:
| in the case of the Term Loan, Adjusted LIBO plus 3.75%, or Alternative Base Rate plus 2.75%; and |
| in the case of the Revolving Credit Facility, Adjusted LIBO plus a percentage ranging from 2.75% to 3.75%, or Alternative Base Rate plus a percentage ranging from 1.75% to 2.75%, in each case based on Selects leverage ratio. |
Adjusted LIBO is defined as, with respect to any interest period, the London interbank
offered rate for such interest period, adjusted for any applicable statutory reserve requirements;
provided that Adjusted LIBO, when used in reference to the Term Loan, will at no time be less than
1.75% per annum.
Alternative Base Rate is defined as the highest of (a) the administrative agents Prime
Rate, (b) the Federal Funds Effective Rate plus 1/2 of 1.00% and (c) the Adjusted LIBO from time to
time for an interest period of one month, plus 1.00%.
The applicable margin percentage for revolving loans will decrease from (1) 2.75% to 2.50% for
alternate base rate loans and (2) 3.75% to 3.50% for adjusted LIBOR loans upon the delivery of
Selects Form 10-Q to JP Morgan Chase Bank, N.A., as administrative agent to Selects senior
secured credit facility.
The Term Loan will amortize in equal quarterly installments on the last day of each March,
June, September and December in aggregate annual amounts equal to $2.1 million commencing in
September 2011. The balance of the Term Loan will be payable on June 1, 2018, provided that if on
the 90th day prior to the scheduled final maturity date of Selects 7 5/8% senior subordinated
notes due 2015 (the Tranche B Trigger Date) more than $60.0 million in aggregate principal amount
of Selects 7 5/8% senior subordinated notes due 2015 are outstanding, the maturity date for the
Term Loan will be the Tranche B Trigger Date. Similarly, the Revolving Credit Facility will be
payable on June 1, 2016, provided that if on the 90th day prior to the scheduled final maturity
date of Selects 7 5/8% senior subordinated notes due 2015 (the Revolving Trigger Date) more than
$60.0 million in aggregate principal amount of Selects 7 5/8% senior subordinated notes due 2015
are outstanding, the maturity date for the Revolving Credit Facility will be the Revolving Trigger
Date.
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Select will be required to prepay borrowings under the Senior Secured Credit Facilities with
(1) 100% of the net cash proceeds received from non-ordinary course asset sales or other
dispositions, or as a result of a casualty or condemnation, subject to reinvestment provisions and
other customary carveouts and the payment of certain indebtedness secured by liens subject to a
first lien intercreditor agreement, (2) 100% of the net cash proceeds received from the issuance of
debt obligations other than certain permitted debt obligations, and (3) 50% of excess cash flow (as
defined in the Credit Agreement) if Selects leverage ratio is greater than 3.75 to 1.00 and 25% of
excess cash flow if Selects leverage ratio is less than or equal to 3.75 to 1.00 and greater than
3.25 to 1.00, in each case, reduced by the aggregate amount of term loans optionally prepaid during
the applicable fiscal year. Select will not be required to prepay borrowings with excess cash flow
if Selects leverage ratio is less than or equal to 3.25 to 1.00.
The Senior Secured Credit Facilities require Select to maintain a leverage ratio (based upon
the ratio of indebtedness for money borrowed to consolidated EBITDA, as defined in the Credit
Agreement), which is tested quarterly and becomes more restrictive over time, and prohibits Select
from making capital expenditures in excess of $125.0 million in any fiscal year (subject to a 50%
carry-over provision). Failure to comply with these covenants would result in an event of default
under the Senior Secured Credit Facilities and, absent a waiver or an amendment from the lenders,
preclude Select from making further borrowings under the Revolving Credit Facility and permit the
lenders to accelerate all outstanding borrowings under the Senior Secured Credit Facilities.
The Senior Secured Credit Facilities also contain a number of affirmative and restrictive
covenants, including limitations on mergers, consolidations and dissolutions; sales of assets;
investments and acquisitions; indebtedness; liens; affiliate transactions; and dividends and
restricted payments. The Senior Secured Credit Facilities contain events of default for non-payment
of principal and interest when due, cross-default and cross-acceleration provisions and an event of
default that would be triggered by a change of control.
Maturities of Long-Term Debt and Notes Payable
Maturities of the Companys long-term debt for the period from October 1, 2011 through December 31,
2011 and the years after 2011 are approximately as follows and are presented net of the discount on
2011 Senior Secured Credit Facilities term loan:
Holdings | Select | |||||||
(in thousands) | ||||||||
2011 |
$ | 3,425 | $ | 3,425 | ||||
2012 |
8,826 | 8,826 | ||||||
2013 |
7,614 | 7,614 | ||||||
2014 |
7,613 | 7,613 | ||||||
2015 |
519,845 | 352,545 | ||||||
2016 and beyond |
860,363 | 860,363 |
7. 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.
14
Table of Contents
The carrying value of Selects senior secured credit facilities was $506.8 million and $889.8
million at December 31, 2010 and September 30, 2011, respectively. The fair value of Selects
senior secured credit facilities was $497.7 million and $800.3 million at December 31, 2010 and
September 30, 2011, respectively. The fair value of Selects senior secured credit facilities was
based on quoted market prices for this debt in the syndicated loan market.
The carrying value of Selects 7 5/8% senior subordinated notes was $611.5 million and $345.0
million at December 31, 2010 and September 30, 2011, respectively. The fair value of Selects 7
5/8% senior subordinated notes was $616.1 million and $300.2 million at December 31, 2010 and
September 30, 2011, respectively. The fair value of this publicly traded debt was based on quoted
market prices.
The carrying value of Holdings senior floating rate notes was $167.3 million at both December
31, 2010 and September 30, 2011. The fair value of Holdings senior floating rate notes was $156.0
million and $148.1 million at December 31, 2010 and September 30, 2011, respectively. The fair
value of this publicly traded debt was based on quoted market prices.
8. 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
earnings (losses) of unconsolidated subsidiaries, loss on early retirement of debt and other
income.
The following tables summarize selected financial data for the Companys reportable segments
for the three and nine months ended September 30, 2010 and 2011. The segment results of Holdings
are identical to those of Select with the exception of total assets:
Three Months Ended September 30, 2010 | ||||||||||||||||
Specialty | Outpatient | |||||||||||||||
Hospitals | Rehabilitation | All Other | Total | |||||||||||||
(in thousands) | ||||||||||||||||
Net operating revenue |
$ | 419,798 | $ | 168,438 | $ | 14 | $ | 588,250 | ||||||||
Adjusted EBITDA |
58,282 | 20,339 | (19,195 | ) | 59,426 | |||||||||||
Total assets: |
||||||||||||||||
Select Medical Corporation |
2,051,238 | 487,171 | 179,551 | 2,717,960 | ||||||||||||
Select Medical Holdings
Corporation |
2,051,238 | 487,171 | 182,199 | 2,720,608 | ||||||||||||
Capital expenditures |
9,339 | 2,019 | 814 | 12,172 |
15
Table of Contents
Three Months Ended September 30, 2011 | ||||||||||||||||
Specialty | Outpatient | |||||||||||||||
Hospitals | Rehabilitation | All Other | Total | |||||||||||||
(in thousands) | ||||||||||||||||
Net operating revenue |
$ | 521,085 | $ | 173,030 | $ | 16 | $ | 694,131 | ||||||||
Adjusted EBITDA |
81,570 | 19,435 | (14,469 | ) | 86,536 | |||||||||||
Total assets: |
||||||||||||||||
Select Medical Corporation |
2,191,493 | 468,551 | 89,568 | 2,749,612 | ||||||||||||
Select Medical Holdings Corporation |
2,191,493 | 468,551 | 91,066 | 2,751,110 | ||||||||||||
Capital expenditures |
4,957 | 3,160 | 281 | 8,398 |
Nine Months Ended September 30, 2010 | ||||||||||||||||
Specialty | Outpatient | |||||||||||||||
Hospitals | Rehabilitation | All Other | Total | |||||||||||||
(in thousands) | ||||||||||||||||
Net operating revenue |
$ | 1,234,562 | $ | 518,288 | $ | 90 | $ | 1,752,940 | ||||||||
Adjusted EBITDA |
214,523 | 66,813 | (41,419 | ) | 239,917 | |||||||||||
Total assets: |
||||||||||||||||
Select Medical Corporation |
2,051,238 | 487,171 | 179,551 | 2,717,960 | ||||||||||||
Select Medical Holdings Corporation |
2,051,238 | 487,171 | 182,199 | 2,720,608 | ||||||||||||
Capital expenditures |
29,963 | 7,187 | 1,476 | 38,626 |
Nine Months Ended September 30, 2011 | ||||||||||||||||
Specialty | Outpatient | |||||||||||||||
Hospitals | Rehabilitation | All Other | Total | |||||||||||||
(in thousands) | ||||||||||||||||
Net operating revenue |
$ | 1,561,270 | $ | 524,694 | $ | 102 | $ | 2,086,066 | ||||||||
Adjusted EBITDA |
273,004 | 65,308 | (46,117 | ) | 292,195 | |||||||||||
Total assets: |
||||||||||||||||
Select Medical Corporation |
2,191,493 | 468,551 | 89,568 | 2,749,612 | ||||||||||||
Select Medical Holdings Corporation |
2,191,493 | 468,551 | 91,066 | 2,751,110 | ||||||||||||
Capital expenditures |
21,574 | 8,142 | 2,378 | 32,094 |
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A reconciliation of Adjusted EBITDA to income before income taxes is as follows (in
thousands):
Three Months Ended September 30, 2010 | ||||||||||||||||||||
Specialty | Outpatient | |||||||||||||||||||
Hospitals | Rehabilitation | All Other | ||||||||||||||||||
Adjusted EBITDA |
$ | 58,282 | $ | 20,339 | $ | (19,195 | ) | |||||||||||||
Depreciation and amortization |
(11,237 | ) | (4,953 | ) | (822 | ) | ||||||||||||||
Stock compensation expense |
| | (460 | ) | ||||||||||||||||
Select Medical | ||||||||||||||||||||
Holdings | Select Medical | |||||||||||||||||||
Corporation | Corporation | |||||||||||||||||||
Income (loss) from operations |
$ | 47,045 | $ | 15,386 | $ | (20,477 | ) | $ | 41,954 | $ | 41,954 | |||||||||
Equity in losses of
unconsolidated subsidiaries |
(186 | ) | (186 | ) | ||||||||||||||||
Other income |
148 | 148 | ||||||||||||||||||
Interest expense, net |
(27,677 | ) | (20,821 | ) | ||||||||||||||||
Income before income taxes |
$ | 14,239 | $ | 21,095 | ||||||||||||||||
Three Months Ended September 30, 2011 | ||||||||||||||||||||
Specialty | Outpatient | |||||||||||||||||||
Hospitals | Rehabilitation | All Other | ||||||||||||||||||
Adjusted EBITDA |
$ | 81,570 | $ | 19,435 | $ | (14,469 | ) | |||||||||||||
Depreciation and amortization |
(12,828 | ) | (4,003 | ) | (714 | ) | ||||||||||||||
Stock compensation expense |
| | (918 | ) | ||||||||||||||||
Select Medical | ||||||||||||||||||||
Holdings | Select Medical | |||||||||||||||||||
Corporation | Corporation | |||||||||||||||||||
Income (loss) from operations |
$ | 68,742 | $ | 15,432 | $ | (16,101 | ) | $ | 68,073 | $ | 68,073 | |||||||||
Equity in earnings of
unconsolidated subsidiaries |
1,653 | 1,653 | ||||||||||||||||||
Interest expense, net |
(24,015 | ) | (21,407 | ) | ||||||||||||||||
Income before income taxes |
$ | 45,711 | $ | 48,319 | ||||||||||||||||
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Nine Months Ended September 30, 2010 | ||||||||||||||||||||
Specialty | Outpatient | |||||||||||||||||||
Hospitals | Rehabilitation | All Other | ||||||||||||||||||
Adjusted EBITDA |
$ | 214,523 | $ | 66,813 | $ | (41,419 | ) | |||||||||||||
Depreciation and amortization |
(33,095 | ) | (15,752 | ) | (2,486 | ) | ||||||||||||||
Stock compensation expense |
| | (1,405 | ) | ||||||||||||||||
Select Medical | ||||||||||||||||||||
Holdings | Select Medical | |||||||||||||||||||
Corporation | Corporation | |||||||||||||||||||
Income (loss) from operations |
$ | 181,428 | $ | 51,061 | $ | (45,310 | ) | $ | 187,179 | $ | 187,179 | |||||||||
Equity in losses of
unconsolidated subsidiaries |
(186 | ) | (186 | ) | ||||||||||||||||
Other income |
464 | 464 | ||||||||||||||||||
Interest expense, net |
(86,998 | ) | (66,184 | ) | ||||||||||||||||
Income before income taxes |
$ | 100,459 | $ | 121,273 | ||||||||||||||||
Nine Months Ended September 30, 2011 | ||||||||||||||||||||
Specialty | Outpatient | |||||||||||||||||||
Hospitals | Rehabilitation | All Other | ||||||||||||||||||
Adjusted EBITDA |
$ | 273,004 | $ | 65,308 | $ | (46,117 | ) | |||||||||||||
Depreciation and amortization |
(37,921 | ) | (12,689 | ) | (2,156 | ) | ||||||||||||||
Stock compensation expense |
| | (2,698 | ) | ||||||||||||||||
Select Medical | ||||||||||||||||||||
Holdings | Select Medical | |||||||||||||||||||
Corporation | Corporation | |||||||||||||||||||
Income (loss) from operations |
$ | 235,083 | $ | 52,619 | $ | (50,971 | ) | $ | 236,731 | $ | 236,731 | |||||||||
Loss on early retirement of debt |
(31,018 | ) | (20,385 | ) | ||||||||||||||||
Equity in earnings of
unconsolidated subsidiaries |
1,329 | 1,329 | ||||||||||||||||||
Interest expense, net |
(74,808 | ) | (59,596 | ) | ||||||||||||||||
Income before income taxes |
$ | 132,234 | $ | 158,079 | ||||||||||||||||
9. 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
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.
18
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:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2011 | 2010 | 2011 | |||||||||||||
(in thousands, except per share amounts) | ||||||||||||||||
Numerator: |
||||||||||||||||
Net income attributable to Select
Medical Holdings Corporation |
$ | 8,009 | $ | 25,596 | $ | 56,697 | $ | 70,987 | ||||||||
Less: Earnings allocated to
unvested restricted stockholders |
25 | 278 | 135 | 763 | ||||||||||||
Net income available to common
stockholders |
$ | 7,984 | $ | 25,318 | $ | 56,562 | $ | 70,224 | ||||||||
Denominator: |
||||||||||||||||
Weighted average shares basic |
159,717 | 151,470 | 159,698 | 152,299 | ||||||||||||
Effect of dilutive securities: |
||||||||||||||||
Stock options |
238 | 206 | 266 | 223 | ||||||||||||
Weighted average shares diluted |
159,955 | 151,676 | 159,964 | 152,522 | ||||||||||||
Basic income per common share |
$ | 0.05 | $ | 0.17 | $ | 0.35 | $ | 0.46 | ||||||||
Diluted income per common share |
$ | 0.05 | $ | 0.17 | $ | 0.35 | $ | 0.46 |
The following share amounts are shown here for informational and comparative purposes only
since their inclusion would be anti-dilutive:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2011 | 2010 | 2011 | |||||||||||||
(in thousands) | ||||||||||||||||
Stock options |
2,392 | 2,437 | 2,383 | 2,412 |
10. 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.
19
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 a
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 the third quarter of 2011, the Company entered into a settlement agreement with the
United States government in connection with the previously disclosed qui tam lawsuit filed in
Columbus, Ohio against certain subsidiaries of the Company. The lawsuit, filed under seal in
September 2007, led to the Companys receiving, in July 2009, a subpoena from the government
seeking various documents concerning the Companys financial relationships with certain physicians
practicing at its long term acute care hospitals in Columbus, Ohio. Under the terms of the
settlement, the Company agreed to pay $7.5 million to the government and enter into a 5-year
corporate integrity agreement covering its long term acute care hospitals. The Company also agreed
to pay certain legal fees of the qui tam relators counsel. In the settlement agreement, the
Company admitted no liability or wrongdoing. During the second quarter of 2011, the Company
recorded a pre-tax charge of $7.5 million to establish a settlement reserve in connection with the
matter. The settlement amounts and counsel fees were paid in full during the third quarter of 2011,
and the Company does not expect to incur any additional material charges in connection with this
matter.
Construction Commitments
At September 30, 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 $2.7 million.
11. Common Stock Repurchase Program
On August 3, 2011, the Companys board of directors authorized an increase of $50.0 million in
the capacity of its common stock repurchase program, from $100.0 million to $150.0 million. The
other terms of the program remain unchanged. The program will now remain in effect until March 31,
2013, unless extended by the board of directors. Stock repurchases under this program may be made
in the open market or through privately negotiated transactions, and at times and in such amounts
as the Company deems appropriate.
20
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12. | 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, except for customary
limitations, 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 September 30, 2011 and for the three and
nine months ended September 30, 2010 and 2011.
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 September 30, 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.
21
Table of Contents
Select Medical Corporation
Condensed Consolidating Balance Sheet
September 30, 2011
(unaudited)
Select Medical | ||||||||||||||||||||
Corporation | ||||||||||||||||||||
(Parent Company | Subsidiary | Non-Guarantor | ||||||||||||||||||
Only) | Guarantors | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Assets |
||||||||||||||||||||
Current Assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 8,968 | $ | 580 | $ | 665 | $ | | $ | 10,213 | ||||||||||
Accounts receivable, net |
| 352,525 | 42,464 | | 394,989 | |||||||||||||||
Current deferred tax asset |
10,455 | 6,025 | 3,354 | | 19,834 | |||||||||||||||
Prepaid income taxes |
10,340 | | | | 10,340 | |||||||||||||||
Other current assets |
5,015 | 19,885 | 3,206 | | 28,106 | |||||||||||||||
Total Current Assets |
34,778 | 379,015 | 49,689 | | 463,482 | |||||||||||||||
Property and equipment, net |
7,176 | 444,451 | 54,267 | | 505,894 | |||||||||||||||
Investment in affiliates |
2,727,699 | 77,954 | | (2,805,653 | )(a) (b) | | ||||||||||||||
Goodwill |
| 1,627,509 | | | 1,627,509 | |||||||||||||||
Other identifiable intangibles |
| 72,448 | | | 72,448 | |||||||||||||||
Assets held for sale |
11,342 | | | | 11,342 | |||||||||||||||
Other assets |
30,599 | 37,423 | 915 | | 68,937 | |||||||||||||||
Total Assets |
$ | 2,811,594 | $ | 2,638,800 | $ | 104,871 | $ | (2,805,653 | ) | $ | 2,749,612 | |||||||||
Liabilities and Equity |
||||||||||||||||||||
Current Liabilities: |
||||||||||||||||||||
Bank overdrafts |
$ | 14,618 | $ | | $ | | $ | | $ | 14,618 | ||||||||||
Current portion of long-term debt and notes payable |
9,584 | 384 | 300 | | 10,268 | |||||||||||||||
Accounts payable |
7,649 | 70,007 | 11,286 | | 88,942 | |||||||||||||||
Intercompany accounts |
954,939 | (865,649 | ) | (89,290 | ) | | | |||||||||||||
Accrued payroll |
412 | 70,288 | 217 | | 70,917 | |||||||||||||||
Accrued vacation |
3,608 | 38,715 | 5,920 | | 48,243 | |||||||||||||||
Accrued interest |
4,562 | 8 | 583 | | 5,153 | |||||||||||||||
Accrued restructuring |
| 5,608 | | | 5,608 | |||||||||||||||
Accrued other |
42,332 | 56,347 | 6,374 | | 105,053 | |||||||||||||||
Due to third party payors |
| 14,935 | (10,686 | ) | | 4,249 | ||||||||||||||
Total Current Liabilities |
1,037,704 | (609,357 | ) | (75,296 | ) | | 353,051 | |||||||||||||
Long-term debt, net of current portion |
723,410 | 445,070 | 61,638 | | 1,230,118 | |||||||||||||||
Non-current deferred tax liability |
1,321 | 58,651 | 8,427 | | 68,399 | |||||||||||||||
Other non-current liabilities |
56,827 | 16,392 | | | 73,219 | |||||||||||||||
Total Liabilities |
1,819,262 | (89,244 | ) | (5,231 | ) | | 1,724,787 | |||||||||||||
Stockholders Equity: |
||||||||||||||||||||
Common stock |
0 | | | | 0 | |||||||||||||||
Capital in excess of par |
846,806 | | | | 846,806 | |||||||||||||||
Retained earnings |
145,526 | 604,446 | 21,637 | (626,083 | )(b) | 145,526 | ||||||||||||||
Subsidiary investment |
| 2,123,598 | 55,972 | (2,179,570 | )(a) | | ||||||||||||||
Total Select Medical Corporation Stockholders Equity |
992,332 | 2,728,044 | 77,609 | (2,805,653 | ) | 992,332 | ||||||||||||||
Non-controlling interest |
| | 32,493 | | 32,493 | |||||||||||||||
Total Equity |
992,332 | 2,728,044 | 110,102 | (2,805,653 | ) | 1,024,825 | ||||||||||||||
Total Liabilities and Equity |
$ | 2,811,594 | $ | 2,638,800 | $ | 104,871 | $ | (2,805,653 | ) | $ | 2,749,612 | |||||||||
(a) | Elimination of investments in consolidated subsidiaries. | |
(b) | Elimination of investments in consolidated subsidiaries earnings. |
22
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Select Medical Corporation
Condensed Consolidating Statement of Operations
For the Three Months Ended September 30, 2011
(unaudited)
Select Medical | Non- | |||||||||||||||||||
Corporation (Parent | Subsidiary | Guarantor | ||||||||||||||||||
Company Only) | Guarantors | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Net operating revenues |
$ | 16 | $ | 603,737 | $ | 90,378 | $ | | $ | 694,131 | ||||||||||
Costs and expenses: |
||||||||||||||||||||
Cost of services |
430 | 502,576 | 78,823 | | 581,829 | |||||||||||||||
General and administrative |
14,804 | 171 | | | 14,975 | |||||||||||||||
Bad debt expense |
| 10,219 | 1,490 | | 11,709 | |||||||||||||||
Depreciation and amortization |
641 | 14,484 | 2,420 | | 17,545 | |||||||||||||||
Total costs and expenses |
15,875 | 527,450 | 82,733 | | 626,058 | |||||||||||||||
Income (loss) from operations |
(15,859 | ) | 76,287 | 7,645 | | 68,073 | ||||||||||||||
Other income and expense: |
||||||||||||||||||||
Intercompany interest and royalty fees |
(659 | ) | 655 | 4 | | | ||||||||||||||
Intercompany management fees |
18,698 | (14,320 | ) | (4,378 | ) | | | |||||||||||||
Equity in earnings of unconsolidated subsidiaries |
| 1,633 | 20 | | 1,653 | |||||||||||||||
Interest income |
36 | 16 | 67 | | 119 | |||||||||||||||
Interest expense |
(12,556 | ) | (7,874 | ) | (1,096 | ) | | (21,526 | ) | |||||||||||
Income (loss) from operations before income taxes |
(10,340 | ) | 56,397 | 2,262 | | 48,319 | ||||||||||||||
Income tax expense (benefit) |
(1,502 | ) | 21,215 | 530 | | 20,243 | ||||||||||||||
Equity in earnings of subsidiaries |
36,129 | 1,761 | | (37,890 | )(a) | | ||||||||||||||
Net income |
27,291 | 36,943 | 1,732 | (37,890 | ) | 28,076 | ||||||||||||||
Less: Net income attributable to non-controlling
interests |
| | 785 | | 785 | |||||||||||||||
Net income attributable to Select Medical Corporation |
$ | 27,291 | $ | 36,943 | $ | 947 | $ | (37,890 | ) | $ | 27,291 | |||||||||
(a) | Elimination of equity in earnings of subsidiaries. |
23
Table of Contents
Select Medical Corporation
Condensed Consolidating Statement of Operations
For the Nine Months Ended September 30, 2011
(unaudited)
Condensed Consolidating Statement of Operations
For the Nine Months Ended September 30, 2011
(unaudited)
Select Medical | Non- | |||||||||||||||||||
Corporation (Parent | Subsidiary | Guarantor | ||||||||||||||||||
Company Only) | Guarantors | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Net operating revenues |
$ | 102 | $ | 1,809,552 | $ | 276,412 | $ | | $ | 2,086,066 | ||||||||||
Costs and expenses: |
||||||||||||||||||||
Cost of services |
1,262 | 1,476,857 | 230,792 | | 1,708,911 | |||||||||||||||
General and administrative |
47,298 | 358 | | | 47,656 | |||||||||||||||
Bad debt expense |
| 35,128 | 4,874 | | 40,002 | |||||||||||||||
Depreciation and amortization |
1,941 | 43,939 | 6,886 | | 52,766 | |||||||||||||||
Total costs and expenses |
50,501 | 1,556,282 | 242,552 | | 1,849,335 | |||||||||||||||
Income (loss) from operations |
(50,399 | ) | 253,270 | 33,860 | | 236,731 | ||||||||||||||
Other income and expense: |
||||||||||||||||||||
Intercompany interest and royalty fees |
(2,654 | ) | 2,635 | 19 | | | ||||||||||||||
Intercompany management fees |
86,561 | (73,451 | ) | (13,110 | ) | | | |||||||||||||
Loss on early retirement of debt |
(20,385 | ) | | | | (20,385 | ) | |||||||||||||
Equity in earnings of unconsolidated subsidiaries |
| 1,285 | 44 | | 1,329 | |||||||||||||||
Interest income |
101 | 117 | 68 | | 286 | |||||||||||||||
Interest expense |
(28,932 | ) | (27,193 | ) | (3,757 | ) | | (59,882 | ) | |||||||||||
Income (loss) from operations before income taxes |
(15,708 | ) | 156,663 | 17,124 | | 158,079 | ||||||||||||||
Income tax expense (benefit) |
(214 | ) | 65,259 | 809 | | 65,854 | ||||||||||||||
Equity in earnings of subsidiaries |
103,281 | 12,342 | | (115,623 | )(a) | | ||||||||||||||
Net income |
87,787 | 103,746 | 16,315 | (115,623 | ) | 92,225 | ||||||||||||||
Less: Net income attributable to non-controlling
interests |
| | 4,438 | | 4,438 | |||||||||||||||
Net income attributable to Select Medical Corporation |
$ | 87,787 | $ | 103,746 | $ | 11,877 | $ | (115,623 | ) | $ | 87,787 | |||||||||
(a) | Elimination of equity in earnings of subsidiaries. |
24
Table of Contents
Select Medical Corporation
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2011
(unaudited)
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2011
(unaudited)
Select Medical | Non- | |||||||||||||||||||
Corporation (Parent | Subsidiary | Guarantor | ||||||||||||||||||
Company Only) | Guarantors | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Operating activities |
||||||||||||||||||||
Net income |
$ | 87,787 | $ | 103,746 | $ | 16,315 | $ | (115,623 | )(a) | $ | 92,225 | |||||||||
Adjustments to reconcile net income to net cash
provided by operating activities: |
||||||||||||||||||||
Depreciation and amortization |
1,941 | 43,939 | 6,886 | | 52,766 | |||||||||||||||
Provision for bad debts |
| 35,128 | 4,874 | | 40,002 | |||||||||||||||
Loss on early retirement of debt |
20,385 | | | | 20,385 | |||||||||||||||
Loss (gain) from disposal of assets |
13 | (5,233 | ) | 38 | | (5,182 | ) | |||||||||||||
Non-cash stock compensation expense |
2,698 | | | | 2,698 | |||||||||||||||
Amortization of debt discount |
412 | | | | 412 | |||||||||||||||
Changes in operating assets and liabilities, net of
effects from acquisition of businesses: |
||||||||||||||||||||
Equity in earnings of subsidiaries |
(103,281 | ) | (12,342 | ) | | 115,623 | (a) | | ||||||||||||
Intercompany |
60,188 | (49,269 | ) | (10,919 | ) | | | |||||||||||||
Accounts receivable |
| (73,437 | ) | (8,029 | ) | | (81,466 | ) | ||||||||||||
Other current assets |
(455 | ) | 412 | 283 | | 240 | ||||||||||||||
Other assets |
(8,306 | ) | 8,826 | 203 | | 723 | ||||||||||||||
Accounts payable |
1,622 | 10,102 | 2,284 | | 14,008 | |||||||||||||||
Due to third-party payors |
| 2,710 | (3,760 | ) | | (1,050 | ) | |||||||||||||
Accrued expenses |
(4,455 | ) | 701 | 104 | | (3,650 | ) | |||||||||||||
Income and deferred taxes |
34,723 | | | | 34,723 | |||||||||||||||
Net cash provided by operating activities |
93,272 | 65,283 | 8,279 | | 166,834 | |||||||||||||||
Investing activities |
||||||||||||||||||||
Purchases of property and equipment |
(2,384 | ) | (26,342 | ) | (3,368 | ) | | (32,094 | ) | |||||||||||
Investment in business |
| (13,514 | ) | | | (13,514 | ) | |||||||||||||
Acquisition of businesses, net of cash acquired |
| 1,921 | | | 1,921 | |||||||||||||||
Proceeds from sale of assets |
| 7,879 | | | 7,879 | |||||||||||||||
Net cash used in investing activities |
(2,384 | ) | (30,056 | ) | (3,368 | ) | | (35,808 | ) | |||||||||||
Financing activities |
||||||||||||||||||||
Borrowings on revolving credit facility |
595,000 | | | | 595,000 | |||||||||||||||
Payments on revolving credit facility |
(570,000 | ) | | | | (570,000 | ) | |||||||||||||
Borrowings on 2011 credit facility term loan |
841,500 | | | | 841,500 | |||||||||||||||
Payments on 2011 credit facility term loans, net of discount |
(2,125 | ) | | | | (2,125 | ) | |||||||||||||
Payments on 2005 credit facility term loans, net of call premium |
(484,633 | ) | | | | (484,633 | ) | |||||||||||||
Repurchase of 7 5/8% senior subordinated notes, net of tender
premium |
(273,941 | ) | | | | (273,941 | ) | |||||||||||||
Borrowings of other debt |
5,496 | | | | 5,496 | |||||||||||||||
Principal payments on seller and other debt |
(4,326 | ) | (650 | ) | (870 | ) | | (5,846 | ) | |||||||||||
Debt issuance costs |
(18,556 | ) | | | | (18,556 | ) | |||||||||||||
Repayments of bank overdrafts |
(4,174 | ) | | | | (4,174 | ) | |||||||||||||
Equity investment by Holdings |
169 | | | | 169 | |||||||||||||||
Dividends paid to Holdings |
(204,561 | ) | | | | (204,561 | ) | |||||||||||||
Intercompany debt reallocation |
38,082 | (37,564 | ) | (518 | ) | | | |||||||||||||
Distributions to non-controlling interests |
| | (3,507 | ) | | (3,507 | ) | |||||||||||||
Net cash used in financing activities |
(82,069 | ) | (38,214 | ) | (4,895 | ) | | (125,178 | ) | |||||||||||
Net increase (decrease) in cash and cash equivalents |
8,819 | (2,987 | ) | 16 | | 5,848 | ||||||||||||||
Cash and cash equivalents at beginning of period |
149 | 3,567 | 649 | | 4,365 | |||||||||||||||
Cash and cash equivalents at end of period |
$ | 8,968 | $ | 580 | $ | 665 | $ | | $ | 10,213 | ||||||||||
(a) | Elimination of equity in earnings of consolidated subsidiaries. |
25
Table of Contents
Select Medical Corporation
Condensed Consolidating Balance Sheet
December 31, 2010
(unaudited)
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 September 30, 2010
(unaudited)
Condensed Consolidating Statement of Operations
For the Quarter Ended September 30, 2010
(unaudited)
Select Medical | Non- | |||||||||||||||||||
Corporation (Parent | Subsidiary | Guarantor | ||||||||||||||||||
Company Only) | Guarantors | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Net operating revenues |
$ | 14 | $ | 507,589 | $ | 80,647 | $ | | $ | 588,250 | ||||||||||
Costs and expenses: |
||||||||||||||||||||
Cost of services |
440 | 427,761 | 70,538 | | 498,739 | |||||||||||||||
General and administrative |
17,031 | 2,197 | | | 19,228 | |||||||||||||||
Bad debt expense |
| 9,661 | 1,656 | | 11,317 | |||||||||||||||
Depreciation and amortization |
662 | 14,249 | 2,101 | | 17,012 | |||||||||||||||
Total costs and expenses |
18,133 | 453,868 | 74,295 | | 546,296 | |||||||||||||||
Income (loss) from operations |
(18,119 | ) | 53,721 | 6,352 | | 41,954 | ||||||||||||||
Other income and expense: |
||||||||||||||||||||
Intercompany interest and royalty fees |
(888 | ) | 877 | 11 | | | ||||||||||||||
Intercompany management fees |
22,773 | (18,937 | ) | (3,836 | ) | | | |||||||||||||
Equity in losses of unconsolidated subsidiaries |
| (186 | ) | | | (186 | ) | |||||||||||||
Other income |
148 | | | | 148 | |||||||||||||||
Interest expense |
(11,330 | ) | (8,462 | ) | (1,029 | ) | | (20,821 | ) | |||||||||||
Income (loss) from operations before income taxes |
(7,416 | ) | 27,013 | 1,498 | | 21,095 | ||||||||||||||
Income tax expense |
366 | 7,600 | 8 | | 7,974 | |||||||||||||||
Equity in earnings of subsidiaries |
20,247 | 965 | | (21,212 | )(a) | | ||||||||||||||
Net income |
12,465 | 20,378 | 1,490 | (21,212 | ) | 13,121 | ||||||||||||||
Less: Net income attributable to non-controlling interests |
| | 656 | | 656 | |||||||||||||||
Net income attributable to Select Medical Corporation |
$ | 12,465 | $ | 20,378 | $ | 834 | $ | (21,212 | ) | $ | 12,465 | |||||||||
(a) | Elimination of equity in net income from consolidated subsidiaries. |
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Table of Contents
Select Medical Corporation
Condensed Consolidating Statement of Operations
For the Nine Months Ended September 30, 2010
(unaudited)
Condensed Consolidating Statement of Operations
For the Nine Months Ended September 30, 2010
(unaudited)
Select Medical | Non- | |||||||||||||||||||
Corporation (Parent | Subsidiary | Guarantor | ||||||||||||||||||
Company Only) | Guarantors | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Net operating revenues |
$ | 90 | $ | 1,509,246 | $ | 243,604 | $ | | $ | 1,752,940 | ||||||||||
Costs and expenses: |
||||||||||||||||||||
Cost of services |
1,094 | 1,236,392 | 203,674 | | 1,441,160 | |||||||||||||||
General and administrative |
39,590 | 2,229 | | | 41,819 | |||||||||||||||
Bad debt expense |
| 26,402 | 5,047 | | 31,449 | |||||||||||||||
Depreciation and amortization |
2,160 | 42,787 | 6,386 | | 51,333 | |||||||||||||||
Total costs and expenses |
42,844 | 1,307,810 | 215,107 | | 1,565,761 | |||||||||||||||
Income (loss) from operations |
(42,754 | ) | 201,436 | 28,497 | | 187,179 | ||||||||||||||
Other income and expense: |
||||||||||||||||||||
Intercompany interest and royalty fees |
(2,849 | ) | 2,829 | 20 | | | ||||||||||||||
Intercompany management fees |
68,002 | (56,706 | ) | (11,296 | ) | | | |||||||||||||
Equity in losses of unconsolidated subsidiaries |
| (186 | ) | | | (186 | ) | |||||||||||||
Other income |
464 | | | | 464 | |||||||||||||||
Interest expense |
(37,430 | ) | (25,466 | ) | (3,288 | ) | | (66,184 | ) | |||||||||||
Income (loss) from operations before income taxes |
(14,567 | ) | 121,907 | 13,933 | | 121,273 | ||||||||||||||
Income tax expense (benefit) |
1,856 | 46,159 | (741 | ) | | 47,274 | ||||||||||||||
Equity in earnings of subsidiaries |
86,649 | 10,831 | | (97,480 | )(a) | | ||||||||||||||
Net income |
70,226 | 86,579 | 14,674 | (97,480 | ) | 73,999 | ||||||||||||||
Less: Net income attributable to non-controlling
interests |
| | 3,773 | | 3,773 | |||||||||||||||
Net income attributable to Select Medical Corporation |
$ | 70,226 | $ | 86,579 | $ | 10,901 | $ | (97,480 | ) | $ | 70,226 | |||||||||
(a) | Elimination of equity in net income from consolidated subsidiaries. |
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Select Medical Corporation
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2010
(unaudited)
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2010
(unaudited)
Select Medical | Non- | |||||||||||||||||||
Corporation (Parent | Subsidiary | Guarantor | ||||||||||||||||||
Company Only) | Guarantors | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Operating activities |
||||||||||||||||||||
Net income |
$ | 70,226 | $ | 86,579 | $ | 14,674 | $ | (97,480 | )(a) | $ | 73,999 | |||||||||
Adjustments to reconcile net income to net cash
provided by (used in) operating activities: |
||||||||||||||||||||
Depreciation and amortization |
2,160 | 42,787 | 6,386 | | 51,333 | |||||||||||||||
Provision for bad debts |
| 26,402 | 5,047 | | 31,449 | |||||||||||||||
Loss from disposal of assets |
127 | 352 | 133 | | 612 | |||||||||||||||
Non-cash gain from interest rate swaps |
(464 | ) | | | | (464 | ) | |||||||||||||
Non-cash stock compensation expense |
1,405 | | | | 1,405 | |||||||||||||||
Changes in operating assets and liabilities,
net of
effects from acquisition of businesses: |
||||||||||||||||||||
Equity in earnings of subsidiaries |
(86,649 | ) | (10,831 | ) | | 97,480 | (a) | | ||||||||||||
Intercompany |
(54,741 | ) | 62,368 | (7,627 | ) | | | |||||||||||||
Accounts receivable |
| 3,119 | (29,787 | ) | | (26,668 | ) | |||||||||||||
Other current assets |
2,593 | (1,959 | ) | 2,937 | | 3,571 | ||||||||||||||
Other assets |
228 | 1,621 | (1,761 | ) | | 88 | ||||||||||||||
Accounts payable |
4,579 | (8,228 | ) | 180 | | (3,469 | ) | |||||||||||||
Due to third-party payors |
| (10,170 | ) | 9,414 | | (756 | ) | |||||||||||||
Accrued expenses |
(30,729 | ) | 22,401 | 1,801 | | (6,527 | ) | |||||||||||||
Income and deferred taxes |
11,214 | | | | 11,214 | |||||||||||||||
Net cash provided by (used in) operating activities |
(80,051 | ) | 214,441 | 1,397 | | 135,787 | ||||||||||||||
Investing activities |
||||||||||||||||||||
Purchases of property and equipment |
(1,475 | ) | (30,107 | ) | (7,044 | ) | | (38,626 | ) | |||||||||||
Acquisition of businesses, net of cash acquired |
| (165,802 | ) | | | (165,802 | ) | |||||||||||||
Net cash used in investing activities |
(1,475 | ) | (195,909 | ) | (7,044 | ) | | (204,428 | ) | |||||||||||
Financing activities |
||||||||||||||||||||
Borrowings on revolving credit facility |
90,000 | | | | 90,000 | |||||||||||||||
Payments on revolving credit facility |
(70,000 | ) | | | | (70,000 | ) | |||||||||||||
Borrowings of other debt |
5,015 | | | | 5,015 | |||||||||||||||
Principal payments on seller and other debt |
(5,181 | ) | (1,428 | ) | (58 | ) | | (6,667 | ) | |||||||||||
Dividends paid to Holdings |
(25,522 | ) | | | | (25,522 | ) | |||||||||||||
Equity investment by Holdings |
125 | | | | 125 | |||||||||||||||
Proceeds from bank overdrafts |
10,971 | | | | 10,971 | |||||||||||||||
Intercompany debt reallocation |
3,363 | (12,788 | ) | 9,425 | | | ||||||||||||||
Distributions to non-controlling interests |
| | (3,618 | ) | | (3,618 | ) | |||||||||||||
Net cash provided by (used in) financing activities |
8,771 | (14,216 | ) | 5,749 | | 304 | ||||||||||||||
Net increase (decrease) in cash and cash equivalents |
(72,755 | ) | 4,316 | 102 | | (68,337 | ) | |||||||||||||
Cash and cash equivalents at beginning of period |
80,940 | 2,298 | 442 | | 83,680 | |||||||||||||||
Cash and cash equivalents at end of period |
$ | 8,185 | $ | 6,614 | $ | 544 | $ | | $ | 15,343 | ||||||||||
(a) | Elimination of equity in earnings of consolidated 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 for the year ended December 31, 2010 contained in our annual report on Form 10-K filed with the Securities and Exchange Commission on March 9, 2011. |
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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 September 30,
2011, we operated 110 long term acute care hospitals and nine inpatient rehabilitation facilities
in 28 states, and 952 outpatient rehabilitation clinics in 34 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 $2,086.1 million for the nine
months ended
September 30, 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.
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Table of Contents
Significant 2011 Events
Refinancing
On June 1, 2011, Select Medical Corporation (Select) entered into a new senior secured
credit agreement that provides for $1.15 billion in senior secured credit facilities, comprised of
an $850.0 million, seven-year term loan facility and a $300.0 million five-year revolving credit
facility of which $125.0 million was drawn at closing. The refinancing also included the repurchase
of $266.5 million aggregate principal amount of Selects 7 5/8% senior subordinated notes due 2015
and the repurchase of all $150.0 million principal amount of Holdings 10.0% senior subordinated
notes.
At September 30, 2011, Select had outstanding an $847.9 million term loan (at aggregate
principal value) and a $50.0 million balance on the revolving portion of its senior secured credit
facilities and $345.0 million in principal amount of 7 5/8% senior subordinated notes due 2015.
Holdings also had $167.3 million in principal amount outstanding of its senior floating rate notes
due 2015.
Significant Transactions
On April 1, 2011, we entered into a joint venture with Baylor Health Care System (Baylor
JV). The joint venture consists of a partnership between Baylor Institute for Rehabilitation and
Select Physical Therapy Texas, a wholly-owned subsidiary of Select. We contributed several
businesses to the joint venture, including our Frisco inpatient rehabilitation facility and certain
of our Texas-based outpatient rehabilitation clinics. A gain of $1.2 million was recognized on
this contribution during the second quarter of 2011 and is included in the general and
administrative line item on the consolidated statement of operations for the nine months ended
September 30, 2011. Additionally, on April 1, 2011 we purchased partnership units and made working
capital advances to the newly formed partnership utilizing $13.5 million in cash. We own a 49.0%
interest in the partnership and account for the investment using the equity method because we do
not have a controlling interest.
On June 30, 2011, we sold a building which we acquired in connection with the acquisition of
Regency for $7.6 million in cash. A gain of $4.2 million was recognized on this sale and is
included in the general and administrative line item on the consolidated statement of operations
for the nine months ended
September 30, 2011.
Litigation
During the third quarter of 2011, we entered into a settlement agreement with the United
States government in connection with the previously disclosed qui tam lawsuit filed in Columbus,
Ohio against certain of our subsidiaries. The lawsuit, filed under seal in September 2007, led to
the Companys receiving, in July 2009, a subpoena from the government seeking various documents concerning our
financial relationships with certain physicians practicing at our long term acute care hospitals in
Columbus, Ohio. Under the terms of the settlement, we agreed to pay $7.5 million to the government
and entered into a 5-year corporate integrity agreement covering our long term acute care
hospitals. We also agreed to pay certain legal fees of the qui tam relators counsel. In the
settlement agreement, we admitted no liability or wrongdoing. During the second quarter of 2011,
we recorded a pre-tax charge of $7.5 million to establish a settlement reserve in connection with
the matter. The settlement amounts and counsel fees were paid in full during the third quarter
2011, and we do not expect to incur any additional material charges in connection with this matter.
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Stock Repurchase Program
On August 3, 2011, our board of directors authorized an increase of $50.0 million in the
capacity of our common stock repurchase program, from $100.0 million to $150.0 million. The other
terms of the program remain unchanged. The program will now remain in effect until March 31, 2013,
unless extended by the board of directors. Stock repurchases under this program may be made in the
open market or through privately negotiated transactions, and at times and in such amounts as we
deem appropriate. Through September 30, 2011, we have repurchased 11,555,447 shares for an
aggregate cost, including transaction fees, of $75.8 million.
Summary Financial Results
Third Quarter Ended September 30, 2011
For the three months ended September 30, 2011, our net operating revenues increased 18.0% to
$694.1 million compared to $588.3 million for the three months ended September 30, 2010. This
increase in net operating revenues resulted principally from a 24.1% 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 September 30, 2011 of $68.1 million compared to $42.0 million for the
three months ended September 30, 2010. The increase in income from operations resulted from the
addition of the Regency hospitals acquired on September 1, 2010, improved operating performance at
our other specialty hospitals and lower general and administrative costs. Holdings interest
expense for the three months ended September 30, 2011 was $24.1 million compared to $27.7 million
for the three months ended September 30, 2010. Selects interest expense for the three months ended
September 30, 2011 was $21.5 million compared to $20.8 million for the three months ended September
30, 2010. The decrease in interest expense for Holdings was attributable to a reduction in our
average interest rate that resulted from lower interest rates on portions of the debt we refinanced
on June 1, 2011. Higher interest expense was incurred by Select because a portion of Holdings debt
for which Select was not previously obligated was refinanced at Select through indebtedness
incurred under the new senior secured credit facility on June 1, 2011.
For the nine months ended September 30, 2011, our net operating revenues increased 19.0% to
$2,086.1 million compared to $1,752.9 million for the nine months ended September 30, 2010. This
increase in net operating revenues resulted principally from a 26.5% 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 nine months ended September 30, 2011 of $236.7 million compared to $187.2 million for the
nine months ended September 30, 2010. The increase in income from operations resulted from the
addition of the Regency hospitals acquired on September 1, 2010 and improved operating performance
at our other specialty hospitals, offset in part by an increase in general and administrative
costs. Holdings interest expense for the nine months ended September 30, 2011 was $75.1 million
compared to $87.0 million for the nine months ended September 30, 2010. Selects interest expense
for the nine months ended September 30, 2011 was $59.9 million compared to $66.2 million for the
nine months ended September 30, 2010. The decrease in interest expense for both Holdings and
Select was primarily attributable to a reduction in our average interest rate that resulted from
the expiration of interest rate swaps during 2010 and lower interest rates on portions of the debt
we refinanced on June 1, 2011.
Cash flow from operations provided $143.9 million of cash for the nine months ended September
30, 2011 for Holdings and provided $166.8 million of cash for the nine months ended September 30,
2011 for Select. The difference between Holdings and Select primarily relates to interest payments
on Holdings 10% senior subordinated notes and senior floating rate notes.
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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 and nine months ended September 30, 2011 or may have an affect on our
future results of operations. 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.
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 established 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
Medicare severity long term care diagnostic related groups for fiscal year 2011.
Medicare Payment of Long Term Acute Care Hospitals during Fiscal Year 2012
On August 18, 2011, CMS published the 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 is $40,222, an increase from
the fiscal year 2011 federal rate of $39,600. The final rule establishes a fixed loss amount for
high cost outlier cases for fiscal year 2012 of $17,931, which is a decrease from the fixed loss
amount in the 2011 fiscal year of $18,785. The final rule included revisions to the relative
weights for the Medicare severity long term care diagnostic related groups for fiscal year 2012.
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The labor-related share of the LTCH-PPS standard federal rate is adjusted annually to account
for geographic differences in area wage levels by applying the applicable LTCH-PPS wage index. CMS
adopted a decrease in the labor-related share from 75.271% to 70.199% under the LTCH-PPS for fiscal
year 2012. In addition, CMS applied an area wage level budget neutrality factor to the standard
federal rate to make annual changes to the area wage level adjustment budget neutral. Previously,
there was no statutory or regulatory requirement that these adjustments to the area wage level be
made in a budget neutral manner. The final rule creates a regulatory requirement that any
adjustments or updates to the area wage level adjustment be made in a budget neutral manner such
that estimated aggregate LTCH-PPS payments are not affected.
An LTCH must have an average inpatient length of stay for Medicare patients (including both
Medicare covered and non-covered days) of greater than 25 days. In the preamble to the final rule
for fiscal year 2012, CMS clarified its policy on the calculation of the average length of stay by
specifying that all data on all Medicare inpatient days, including Medicare Advantage days, must be
included in the average length of stay calculation effective for cost reporting periods beginning
on or after January 1, 2012. CMS now has the ability to capture Medicare Advantage days through the
required submission of information only bills for Medicare Advantage patients.
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
payment conversion factor 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. The final rule included updates to the Case-Mix-Group
(CMG) relative weights and average length of stay values for fiscal year 2011.
Medicare Payment of Inpatient Rehabilitation Facilities during Fiscal Year 2012
On August 5, 2011, CMS published the 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 is $14,076
which is an increase from $13,860 applicable during fiscal year 2011. CMS decreased the outlier
threshold amount for fiscal year 2012 to $10,660 from $11,410 for fiscal year 2011. The final rule
includes updates to the CMG relative weights and average length of stay values for fiscal year
2012. In a notice published September 26, 2011, CMS revised its calculation of the outlier
threshold amount for fiscal year 2012 which changed the amount from $10,660 to $10,713 and made
corrections to the CMG relative weights.
The IRF-PPS provides a low-income patient adjustment to account for the cost differences
associated with treatment of low-income patients. Similarly, the IRF-PPS provides a teaching
adjustment to account for the higher indirect operating costs experienced by hospitals that
participate in graduate medical education programs. The teaching adjustment is based on the number
of full-time equivalent interns and residents training in the IRF and the IRFs average daily
census. In the proposed rule for fiscal year 2012, CMS proposed updating the low-income patient and
teaching status adjustment factors. However, after receiving public comments on its proposal, CMS
decided to maintain the same low-income patient and teaching status adjustment factors that applied
in fiscal year 2011. CMS indicated that it would continue to review its policies on these
adjustment factors.
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Medicare Payment of Outpatient Rehabilitation Services
Medicare Physician Fee Schedule Sustainable Growth Rate Update
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. The Preservation of Access to Care for Medicare Beneficiaries and Pension
Relief Act of 2010 provided a 2.2% increase to Medicare Physician Fee Schedule payment rates,
retroactive from June 1, 2010 through November 30, 2010, suspending a 21.3% reduction that briefly
became effective on June 1, 2010. The Medicare and Medicaid Extenders Act of 2010 (MMEA)
prevented a 25.5% reduction in the Medicare Physician Fee Schedule payment rates as a result of the
SGR formula that would have taken effect on January 1, 2011. The MMEA extends the current Medicare
Physician Fee Schedule payment rates through December 31, 2011.
On
November 1, 2011 CMS released the 2012 Medicare Physician Fee
Schedule final rule and noted
that due to the SGR formula, the physician fee schedule update for calendar year 2012 is
projected to be a 27.4% reduction unless Congress again takes legislative action to prevent the SGR
formula reductions from going into effect.
Over the last several years, Congress has taken legislative action to avert these cuts prior to
their effective date. If the 27.4% cut is averted by Congress, the projected impact of other
changes in the rule on outpatient physical therapy service payments
in aggregate would be a 4.0%
increase in 2012, primarily due to the continued phase in of new practice expense survey data
derived from the Physician Practice Information Survey (PPIS). In 2013, when the use of the PPIS
data is fully phased in, the impact would be a 6.0% increase for outpatient physical therapy
payments.
On October 6, 2011, the Medicare Payment Advisory Commission (MedPAC) voted to recommend that
Congress repeal and replace the statutory SGR formula. The MedPAC proposal which would require
congressional approval would freeze current Medicare Physician Fee Schedule rates for primary
care services for ten years, while other services would be subject to annual payment reductions of
5.9% for three years, followed by a freeze. MedPAC offered a list of options for Congress to
consider if it decides to offset SGR repeal costs (estimated at about $200 billion over ten years)
within the Medicare program. For the year ended December 31, 2010, we received approximately 10%
of our outpatient rehabilitation net operating revenues from Medicare.
Therapy Caps
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, 2012, the annual limit on
outpatient therapy services is $1,880 for
combined physical and speech language pathology services and $1,880 for occupational therapy
services. The per beneficiary caps were $1,870 for calendar year 2011
and $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 MMEA extended the exceptions process for outpatient therapy caps
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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. The 2011 final Medicare Physician Fee Schedule rule indicated
that CMS is evaluating alternative payment methodologies that may provide appropriate payment for
medically necessary and effective therapy services furnished to Medicare beneficiaries based on
patient needs rather than the current therapy caps. As in past years, congressional action
will be necessary to extend the exceptions process after December 31, 2011.
Multiple Procedure Payment Reduction
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 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 (MPPR) 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.
In the final 2012
Medicare Physician Fee Schedule rule, CMS indicated that
over the next year it will continue to review whether specific Current Procedural Terminology
(CPT) codes billed under the fee schedule are overvalued or undervalued, including certain
specific CPT codes used by physical therapists.
Medicare Quality Reporting Program for LTCHs and IRFs
The PPACA requires that CMS establish new quality data reporting programs for LTCHs and IRFs
by fiscal year 2014. CMS has adopted 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 adopted a quality data reporting program requiring IRFs to submit data from two quality
measures in order to receive the full payment update in fiscal year 2014, including measures
related to (1) catheter-associated urinary tract infections and (2) pressure ulcers that are new or
have worsened. Under the PPACA and CMS regulations, if an LTCH or IRF fails to report on the
selected quality measures, it will see its reimbursement reduced by 2.0% 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 fiscal years.
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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.
On September 15, 2011, the United States Government Accountability Office (GAO) issued a
report concerning the oversight of LTCHs. The GAO examined the extent to which CMS (1) collects
data about LTCHs quality of care and (2) oversees LTCH survey activities. GAO identified several
potential areas where the data may assist CMS in more effectively overseeing survey activities at
LTCHs, such as how effectively state survey agencies triage and conduct complaint validation
surveys. The GAO report recommends that CMS strengthen its oversight of LTCHs by improving
available data on quality of care and by improving oversight of LTCH survey activities. According
to the GAO, the Department of Health and Human Services concurred with the GAOs recommendations.
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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 | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2011 | 2010 | 2011 | |||||||||||||
Specialty hospital data(1): |
||||||||||||||||
Number of hospitals owned start of period |
94 | 115 | 94 | 116 | ||||||||||||
Number of hospitals acquired |
23 | | 23 | 1 | ||||||||||||
Number of hospitals closed/sold |
(2 | ) | | (2 | ) | (2 | ) | |||||||||
Number of hospitals owned end of period |
115 | 115 | 115 | 115 | ||||||||||||
Number of hospitals managed end of period |
2 | 4 | 2 | 4 | ||||||||||||
Total number of hospitals (all) end of period |
117 | 119 | 117 | 119 | ||||||||||||
Available licensed beds |
5,117 | 5,135 | 5,117 | 5,135 | ||||||||||||
Admissions |
11,305 | 13,599 | 33,022 | 40,965 | ||||||||||||
Patient days |
275,387 | 333,322 | 808,133 | 994,179 | ||||||||||||
Average length of stay (days) |
24 | 25 | 24 | 24 | ||||||||||||
Net revenue per patient day(2) |
$ | 1,478 | $ | 1,474 | $ | 1,481 | $ | 1,498 | ||||||||
Occupancy rate |
65 | % | 71 | % | 68 | % | 71 | % | ||||||||
Percent patient days Medicare |
64 | % | 65 | % | 64 | % | 65 | % | ||||||||
Outpatient rehabilitation data: |
||||||||||||||||
Number of clinics owned start of period |
880 | 849 | 883 | 875 | ||||||||||||
Number of clinics acquired |
1 | | 1 | | ||||||||||||
Number of clinic start-ups |
7 | 7 | 17 | 22 | ||||||||||||
Number of clinics closed/sold |
(9 | ) | (9 | ) | (22 | ) | (50 | ) | ||||||||
Number of clinics owned end of period |
879 | 847 | 879 | 847 | ||||||||||||
Number of clinics managed end of period |
71 | 105 | 71 | 105 | ||||||||||||
Total number of clinics (all) end of period |
950 | 952 | 950 | 952 | ||||||||||||
Number of visits |
1,144,096 | 1,099,342 | 3,442,266 | 3,381,896 | ||||||||||||
Net revenue per visit (3) |
$ | 101 | $ | 103 | $ | 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. |
39
Table of Contents
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 | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2011 | 2010 | 2011 | |||||||||||||
Net operating revenues |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Cost of services(1) |
84.8 | 83.8 | 84.8 | 83.8 | ||||||||||||
General and administrative |
3.3 | 2.2 | 3.3 | 2.2 | ||||||||||||
Bad debt expense |
1.9 | 1.7 | 1.9 | 1.7 | ||||||||||||
Depreciation and amortization |
2.9 | 2.5 | 2.9 | 2.5 | ||||||||||||
Income from operations |
7.1 | 9.8 | 7.1 | 9.8 | ||||||||||||
Equity in earnings (losses) of unconsolidated
subsidiaries |
(0.0 | ) | 0.2 | (0.0 | ) | 0.2 | ||||||||||
Other income |
0.0 | | 0.0 | | ||||||||||||
Interest expense, net |
(4.7 | ) | (3.4 | ) | (3.5 | ) | (3.1 | ) | ||||||||
Income before income taxes |
2.4 | 6.6 | 3.6 | 6.9 | ||||||||||||
Income tax expense |
0.9 | 2.8 | 1.4 | 2.9 | ||||||||||||
Net income |
1.5 | 3.8 | 2.2 | 4.0 | ||||||||||||
Net income attributable to non-controlling
interest |
0.1 | 0.1 | 0.1 | 0.1 | ||||||||||||
Net income attributable to Holdings and Select |
1.4 | % | 3.7 | % | 2.1 | % | 3.9 | % | ||||||||
Select Medical Holdings | ||||||||||||||||
Corporation | Select Medical Corporation | |||||||||||||||
Nine Months | Nine Months | |||||||||||||||
Ended | Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2011 | 2010 | 2011 | |||||||||||||
Net operating revenues |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Cost of services(1) |
82.2 | 81.9 | 82.2 | 81.9 | ||||||||||||
General and administrative |
2.4 | 2.3 | 2.4 | 2.3 | ||||||||||||
Bad debt expense |
1.8 | 1.9 | 1.8 | 1.9 | ||||||||||||
Depreciation and amortization |
2.9 | 2.5 | 2.9 | 2.5 | ||||||||||||
Income from operations |
10.7 | 11.4 | 10.7 | 11.4 | ||||||||||||
Loss on early retirement of debt |
| (1.5 | ) | | (0.9 | ) | ||||||||||
Equity in earnings (losses) of unconsolidated
subsidiaries |
(0.0 | ) | 0.0 | (0.0 | ) | 0.0 | ||||||||||
Other income |
0.0 | | 0.0 | | ||||||||||||
Interest expense, net |
(5.0 | ) | (3.6 | ) | (3.8 | ) | (2.9 | ) | ||||||||
Income before income taxes |
5.7 | 6.3 | 6.9 | 7.6 | ||||||||||||
Income tax expense |
2.3 | 2.7 | 2.7 | 3.2 | ||||||||||||
Net income |
3.4 | 3.6 | 4.2 | 4.4 | ||||||||||||
Net income attributable to non-controlling
interest |
0.2 | 0.2 | 0.2 | 0.2 | ||||||||||||
Net income attributable to Holdings and Select |
3.2 | % | 3.4 | % | 4.0 | % | 4.2 | % | ||||||||
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Table of Contents
The following tables summarize selected financial data by business segment, for the periods
indicated:
Select Medical Holdings Corporation | Select Medical Corporation | |||||||||||||||||||||||
Three Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||||||||||
% | % | |||||||||||||||||||||||
2010 | 2011 | Change | 2010 | 2011 | Change | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Net operating revenues: |
||||||||||||||||||||||||
Specialty hospitals |
$ | 419,798 | $ | 521,085 | 24.1 | % | $ | 419,798 | $ | 521,085 | 24.1 | % | ||||||||||||
Outpatient rehabilitation |
168,438 | 173,030 | 2.7 | 168,438 | 173,030 | 2.7 | ||||||||||||||||||
Other(3) |
14 | 16 | 14.3 | 14 | 16 | 14.3 | ||||||||||||||||||
Total company |
$ | 588,250 | $ | 694,131 | 18.0 | % | $ | 588,250 | $ | 694,131 | 18.0 | % | ||||||||||||
Income (loss) from
operations: |
||||||||||||||||||||||||
Specialty hospitals |
$ | 47,045 | $ | 68,742 | 46.1 | % | $ | 47,045 | $ | 68,742 | 46.1 | % | ||||||||||||
Outpatient rehabilitation |
15,386 | 15,432 | 0.3 | 15,386 | 15,432 | 0.3 | ||||||||||||||||||
Other(3) |
(20,477 | ) | (16,101 | ) | 21.4 | (20,477 | ) | (16,101 | ) | 21.4 | ||||||||||||||
Total company |
$ | 41,954 | $ | 68,073 | 62.3 | % | $ | 41,954 | $ | 68,073 | 62.3 | % | ||||||||||||
Adjusted EBITDA:(2) |
||||||||||||||||||||||||
Specialty hospitals |
$ | 58,282 | $ | 81,570 | 40.0 | % | $ | 58,282 | $ | 81,570 | 40.0 | % | ||||||||||||
Outpatient rehabilitation |
20,339 | 19,435 | (4.4 | ) | 20,339 | 19,435 | (4.4 | ) | ||||||||||||||||
Other(3) |
(19,195 | ) | (14,469 | ) | 24.6 | (19,195 | ) | (14,469 | ) | 24.6 | ||||||||||||||
Adjusted EBITDA
margins:(2) |
||||||||||||||||||||||||
Specialty hospitals |
13.9 | % | 15.7 | % | 13.9 | % | 15.7 | % | ||||||||||||||||
Outpatient rehabilitation |
12.1 | 11.2 | 12.1 | 11.2 | ||||||||||||||||||||
Other(3) |
N/M | N/M | N/M | N/M | ||||||||||||||||||||
Total assets: |
||||||||||||||||||||||||
Specialty hospitals |
$ | 2,051,238 | $ | 2,191,493 | $ | 2,051,238 | $ | 2,191,493 | ||||||||||||||||
Outpatient rehabilitation |
487,171 | 468,551 | 487,171 | 468,551 | ||||||||||||||||||||
Other(3) |
182,199 | 91,066 | 179,551 | 89,568 | ||||||||||||||||||||
Total company |
$ | 2,720,608 | $ | 2,751,110 | $ | 2,717,960 | $ | 2,749,612 | ||||||||||||||||
Purchases of property and
equipment, net: |
||||||||||||||||||||||||
Specialty hospitals |
$ | 9,339 | $ | 4,957 | $ | 9,339 | $ | 4,957 | ||||||||||||||||
Outpatient rehabilitation |
2,019 | 3,160 | 2,019 | 3,160 | ||||||||||||||||||||
Other(3) |
814 | 281 | 814 | 281 | ||||||||||||||||||||
Total company |
$ | 12,172 | $ | 8,398 | $ | 12,172 | $ | 8,398 | ||||||||||||||||
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Table of Contents
Select Medical Holdings Corporation | Select Medical Corporation | |||||||||||||||||||||||
Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
% | % | |||||||||||||||||||||||
2010 | 2011 | Change | 2010 | 2011 | Change | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Net operating revenues: |
||||||||||||||||||||||||
Specialty hospitals |
$ | 1,234,562 | $ | 1,561,270 | 26.5 | % | $ | 1,234,562 | $ | 1,561,270 | 26.5 | % | ||||||||||||
Outpatient rehabilitation |
518,288 | 524,694 | 1.2 | 518,288 | 524,694 | 1.2 | ||||||||||||||||||
Other(3) |
90 | 102 | 13.3 | 90 | 102 | 13.3 | ||||||||||||||||||
Total company |
$ | 1,752,940 | $ | 2,086,066 | 19.0 | % | $ | 1,752,940 | $ | 2,086,066 | 19.0 | % | ||||||||||||
Income (loss) from
operations: |
||||||||||||||||||||||||
Specialty hospitals |
$ | 181,428 | $ | 235,083 | 29.6 | % | $ | 181,428 | $ | 235,083 | 29.6 | % | ||||||||||||
Outpatient rehabilitation |
51,061 | 52,619 | 3.1 | 51,061 | 52,619 | 3.1 | ||||||||||||||||||
Other(3) |
(45,310 | ) | (50,971 | ) | (12.5 | ) | (45,310 | ) | (50,971 | ) | (12.5 | ) | ||||||||||||
Total company |
$ | 187,179 | $ | 236,731 | 26.5 | % | $ | 187,179 | $ | 236,731 | 26.5 | % | ||||||||||||
Adjusted EBITDA:(2) |
||||||||||||||||||||||||
Specialty hospitals |
$ | 214,523 | $ | 273,004 | 27.3 | % | $ | 214,523 | $ | 273,004 | 27.3 | % | ||||||||||||
Outpatient rehabilitation |
66,813 | 65,308 | (2.3 | ) | 66,813 | 65,308 | (2.3 | ) | ||||||||||||||||
Other(3) |
(41,419 | ) | (46,117 | ) | (11.3 | ) | (41,419 | ) | (46,117 | ) | (11.3 | ) | ||||||||||||
Adjusted EBITDA
margins:(2) |
||||||||||||||||||||||||
Specialty hospitals |
17.4 | % | 17.5 | % | 17.4 | % | 17.5 | % | ||||||||||||||||
Outpatient rehabilitation |
12.9 | 12.4 | 12.9 | 12.4 | ||||||||||||||||||||
Other(3) |
N/M | N/M | N/M | N/M | ||||||||||||||||||||
Total assets: |
||||||||||||||||||||||||
Specialty hospitals |
$ | 2,051,238 | $ | 2,191,493 | $ | 2,051,238 | $ | 2,191,493 | ||||||||||||||||
Outpatient rehabilitation |
487,171 | 468,551 | 487,171 | 468,551 | ||||||||||||||||||||
Other(3) |
182,199 | 91,066 | 179,551 | 89,568 | ||||||||||||||||||||
Total company |
$ | 2,720,608 | $ | 2,751,110 | $ | 2,717,960 | $ | 2,749,612 | ||||||||||||||||
Purchases of property and
equipment, net: |
||||||||||||||||||||||||
Specialty hospitals |
$ | 29,963 | $ | 21,574 | $ | 29,963 | $ | 21,574 | ||||||||||||||||
Outpatient rehabilitation |
7,187 | 8,142 | 7,187 | 8,142 | ||||||||||||||||||||
Other(3) |
1,476 | 2,378 | 1,476 | 2,378 | ||||||||||||||||||||
Total company |
$ | 38,626 | $ | 32,094 | $ | 38,626 | $ | 32,094 | ||||||||||||||||
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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 earnings (losses) of unconsolidated subsidiaries, loss on early retirement of debt 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 GAAP. Items excluded from Adjusted EBITDA are significant components in understanding and assessing financial performance. Adjusted EBITDA should not be considered in isolation or as an alternative to, or substitute for, net income, cash flows generated by operations, investing or financing activities, or other financial statement data presented in the consolidated financial statements as indicators of financial performance or liquidity. Because Adjusted EBITDA is not a measurement determined in accordance with GAAP and is thus susceptible to varying calculations, Adjusted EBITDA as presented may not be comparable to other similarly titled measures of other companies. See Note 8 to our interim unaudited consolidated financial statements for the period ended September 30, 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 September 30, 2011 Compared to Three Months Ended September 30, 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 18.0% to $694.1 million for the three months ended
September 30, 2011 compared to $588.3 million for the three months ended September 30, 2010.
Specialty Hospitals. Our specialty hospital net operating revenues increased by 24.1% to
$521.1 million for the three months ended September 30, 2011 compared to $419.8 million for the
three months ended September 30, 2010. The Regency hospitals acquired on September 1, 2010
contributed $84.1 million of net revenue, or $61.3 million of the increased net operating revenues.
The remaining increase resulted primarily from an increase in patient volumes in our other
specialty hospitals. Our patient days increased 21.0% from the three months ended September 30,
2010 to 333,322 days for the three months ended September 30, 2011, which was primarily related to
the addition of the Regency hospitals. The Regency hospitals contributed a net increase in patient
days of 37,354 days. Excluding the effect of the Regency hospitals, patient days would have
increased 8.0% compared to the same quarter, prior year primarily as a result of increased Medicare
patient volumes. The occupancy percentage increased to 71% for the three months ended September
30, 2011 from 65% for the three months ended September 30, 2010. Our average net revenue per
patient day was $1,474 for the three months ended September 30, 2011 compared to $1,478 for the
three months ended September 30, 2010. The decrease in our net revenue per patient day resulted
from a decline in our average non-Medicare net revenue per patient day which resulted from a lower
non-Medicare per patient day rate realized at the rehabilitation hospital we acquired through a
hospital exchange in January 2011.
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Outpatient Rehabilitation. Our outpatient rehabilitation net operating revenues for the
segment increased 2.7% to $173.0 million for the three months ended September 30, 2011 compared to
$168.4 million for the three months ended September 30, 2010. The net operating revenues generated
by our outpatient rehabilitation clinics grew approximately 2.4% compared to the three months ended
September 30, 2010. The increase was principally related to revenues we are generating from
services provided to the Baylor JV. The number of patient visits in our owned outpatient
rehabilitation clinics decreased 3.9% for the three months ended
September 30, 2011 to 1,099,342 visits compared to 1,144,096 visits for the three months ended
September 30, 2010. The decrease in visits, which also slowed our revenue growth, resulted
from the 18 clinics in the Dallas-Fort Worth metroplex that were contributed to the Baylor JV,
which is accounted for as an unconsolidated joint venture, and the adverse effect hurricanes Irene
and Lee had on our clinics in the Mid-Atlantic and Northeast regions. Net revenue per visit in our
clinics increased 2.0% to $103 for the three months ended September 30, 2011, compared to $101 for
the three months ended September 30, 2010. Our contract services business experienced an increase
in net operating revenues of approximately 3.9% compared to the three months ended September 30,
2010, which was the result of growth from existing locations where we provide therapy services and
new locations that have been added in 2011.
Operating Expenses
Our operating expenses include our cost of services, general and administrative expense and
bad debt expense. Our operating expenses increased by $79.2 million to $608.5 million for the
three months ended September 30, 2011 compared to $529.3 million for the three months ended
September 30, 2010. As a percentage of our net operating revenues, our operating expenses were
87.7% for the three months ended September 30, 2011 compared to 90.0% for the three months ended
September 30, 2010. Our cost of services, a major component of which is labor expense, were $581.8
million for the three months ended September 30, 2011 compared to $498.7 million for the three
months ended September 30, 2010. The principal cause of this increase resulted from the addition
of the Regency hospitals. Additionally, our facility rent expense, which is a component of cost of
services, was $29.5 million for the three months ended September 30, 2011 compared to $29.8 million
for the three months ended September 30, 2010. General and administrative expenses were 2.2% of
net operating revenue or $15.0 million for three months ended September 30, 2011, compared to 3.3%
of net operating revenue or $19.2 million for three months ended September 30, 2010. Our general
and administrative costs in the three month period ended September 30, 2010 included $2.1 million
of costs related to the transition of management functions and closing of the Regency corporate
office and a $4.8 million charge due to an increase in employee healthcare costs. These increases
in 2010 were partially offset by a reduction of $1.8 million in incentive compensation for
executive officers in 2010. Our bad debt expense as a percentage of net operating revenues was
1.7% for the three months ended September 30, 2011 compared to 1.9% for the three months ended
September 30, 2010. The decline principally occurred in our outpatient rehabilitation segment and
was due to improved collection activity.
Adjusted EBITDA
Specialty Hospitals. Our specialty hospital Adjusted EBITDA increased by 40.0% to $81.6
million for the three months ended September 30, 2011 compared to $58.3 million for the three
months ended September 30, 2010. Adjusted EBITDA margins for the segment increased to 15.7% for the
three months ended September 30, 2011 from 13.9% for the three months ended September 30, 2010. For
the three months ended September 30, 2011, the Regency hospitals acquired on September 1, 2010
contributed $12.7 million of the increase in specialty hospital Adjusted EBITDA. Excluding the
effect of the Regency hospitals in both periods, the Adjusted EBITDA margin would have been 16.0%
and 14.9% for the three months ended September 30, 2011 and 2010, respectively. In addition to the
Adjusted EBITDA 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 volumes described above under Net Operating Revenues Specialty
Hospitals and lower operating costs. During the three months ended September 30, 2010 we incurred
an unanticipated $4.0 million charge due to an abnormal increase in our workers compensation
program costs.
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Outpatient Rehabilitation. Our outpatient rehabilitation Adjusted EBITDA for the segment
decreased by 4.4% to $19.4 million for the three months ended September 30, 2011 compared to $20.3
million for the three months ended September 30, 2010. Our outpatient rehabilitation Adjusted
EBITDA margins for the segment decreased to 11.2% for the three months ended September 30, 2011
from 12.1% for the three months ended September 30, 2010. The Adjusted EBITDA in our outpatient
rehabilitation clinics increased by $1.1 million for the three months ended September 30, 2011
compared to the three months ended September 30, 2010. Additionally, our Adjusted EBITDA margins
for our outpatient rehabilitation clinics grew to 12.5% for the three months ended September 30,
2011 from 12.0% for the three months ended September 30, 2010. The increase in our Adjusted EBITDA
and Adjusted EBITDA margin in our rehabilitation clinics was primarily due to an increase in our
net revenue per visit and lower bad debt expense. We experienced a decline in the Adjusted EBITDA
and Adjusted EBITDA margin of our contract services business that resulted from higher labor costs
for the treatment models required by RUGS IV/MDS 3.0 rules that became effective on October 1, 2010
and higher labor costs associated with the recently added contract therapy locations.
Other. The Adjusted EBITDA loss was $14.5 million for the three months ended September 30,
2011 compared to an Adjusted EBITDA loss of $19.2 million for the three months ended September 30,
2010 and is primarily related to our general and administrative expenses as described above under
Operating Expenses.
Income from Operations
For the three months ended September 30, 2011 we had income from operations of $68.1 million
compared to $42.0 million for the three months ended September 30, 2010. The increase in income
from operations resulted primarily from the Regency hospitals acquired on September 1, 2010, which
contributed $11.5 million of income from operations for the quarter, and improved operating
performance at our other specialty hospitals, and lower general and administrative costs.
Interest Expense
Select Medical Corporation. Interest expense was $21.5 million for the three months ended
September 30, 2011 compared to $20.8 million for the three months ended September 30, 2010. The
increase in interest expense for Select resulted from the repayment of $150.0 million of
Holdings debt, for which Select was not previously obligated, which was refinanced at Select through
indebtedness incurred under the new senior secured credit facility on June 1, 2011.
Select Medical Holdings Corporation. Interest expense was $24.1 million for the three months
ended
September 30, 2011 compared to $27.7 million for the three months ended September 30, 2010.
The decrease in interest expense resulted primarily from lower interest rates on the portions
of the debt that were refinanced on June 1, 2011.
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Income Taxes
Select Medical Corporation. We recorded income tax expense of $20.2 million for the three
months ended September 30, 2011. The expense represented an effective tax rate of 41.9%. We
recorded income tax expense of $8.0 million for the three months ended September 30, 2010. The
expense represented an effective tax rate of 37.8%. Select Medical Corporation is part of the
consolidated federal tax return for Select Medical Holdings
Corporation. We allocate income taxes between Select and Holdings for purposes of financial
statement presentation. Because Holdings is a passive investment company incorporated in Delaware,
it does not incur any state income tax expense or benefit on its specific income or loss and, as
such, receives a tax allocation equal to the federal statutory rate of 35% on its specific income
or loss. Based upon the relative size of Holdings income or loss, this can cause the effective
tax rate for Select to differ from the effective tax rate for the consolidated company. The
analysis in the following paragraph discusses the change in our consolidated tax rate.
Select Medical Holdings Corporation. We recorded income tax expense of $19.3 million for the
three months ended September 30, 2011. The expense represented an effective tax rate of 42.3%. We
recorded income tax expense of $5.6 million for the three months ended September 30, 2010. The
expense represented an effective tax rate of 39.1%. The increase in our effective tax rate has
resulted primarily from a difference between the tax accounting basis and the financial accounting
basis associated with a hospital exchange that occurred in 2011.
Non-Controlling Interests
Non-controlling interests in consolidated earnings were $0.8 million for the three months
ended September 30, 2011 compared to $0.7 million for the three months ended September 30, 2010.
Nine Months Ended September 30, 2011 Compared to Nine Months Ended September 30, 2010
In the following discussion, we address the results of operations of Select and Holdings. With
the exception of interest expense, loss on early retirement of debt 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 19.0% to $2,086.1 million for the nine months ended
September 30, 2011 compared to $1,752.9 million for the nine months ended September 30, 2010.
Specialty Hospitals. Our specialty hospital net operating revenues increased by 26.5% to
$1,561.3 million for the nine months ended September 30, 2011 compared to $1,234.6 million for the
nine months ended September 30, 2010. The Regency hospitals acquired on September 1, 2010
contributed $255.0 million of net operating revenue, or $232.2 million of the increased net
operating revenues. The remaining increase primarily resulted from an increase in patient volumes
in our other specialty hospitals. Our patient days increased 23.0% to 994,179 days for the nine
months ended September 30, 2011, which was principally related to the addition of the Regency
hospitals. The Regency hospitals contributed a net increase in patient days of 143,092 days.
Excluding the effect of the Regency hospitals, patient days would have increased 5.4% compared to
the same period, prior year as a result of increases in both Medicare and non-Medicare volumes.
The occupancy percentage increased to 71% for the nine months ended September 30, 2011 from 68% for
the nine months ended September 30, 2010. Our average net revenue per patient day was $1,498 for
the nine months ended September 30, 2011 compared to $1,481 for the nine months ended September 30,
2010. The increase in our net revenue per patient day was principally due to increases in our
average Medicare net revenue per patient day.
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Outpatient Rehabilitation. Our outpatient rehabilitation net operating revenues increased
1.2% to $524.7 million for the nine months ended September 30, 2011 compared to $518.3 million for
the nine months ended
September 30, 2010. The net operating revenues generated by our outpatient rehabilitation
clinics grew approximately 2.3% compared to the nine months ended September 30, 2010. The increase
was principally related to revenues we are generating from services provided to the Baylor JV. The
number of patient visits in our owned outpatient rehabilitation clinics decreased 1.8% for the nine
months ended September 30, 2011 to 3,381,896 visits compared to 3,442,266 visits for the nine
months ended September 30, 2010. The decrease in visits, which also slowed our revenue growth,
resulted primarily from the 18 clinics in the Dallas-Fort Worth metroplex that were contributed to
the Baylor JV, which is accounted for as an unconsolidated joint venture. Net revenue per visit in
our clinics increased 2.0% to $103 for the nine months ended September 30, 2011, compared to $101
for the nine months ended September 30, 2010. Our contract services business experienced a decline
in net operating revenues of approximately 2.3% compared to the nine months ended September 30,
2010 which was 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 $282.2 million to $1,796.6 million for the
nine months ended September 30, 2011 compared to $1,514.4 million for the nine months ended September 30, 2010.
As a percentage of our net operating revenues, our operating expenses were 86.1% for the nine
months ended September 30, 2011 compared to 86.4% for the nine months ended September 30, 2010.
Our cost of services, a major component of which is labor expense, were $1,708.9 million for the
nine months ended September 30, 2011 compared to $1,441.2 million for the nine months ended
September 30, 2010. The principal cause of this increase resulted from the addition of the Regency
hospitals. Additionally facility rent expense, which is a component of cost of services, was $89.1
million for the nine months ended September 30, 2011 compared to $87.5 million for the nine months
ended September 30, 2010. General and administrative expenses were 2.3% of net operating revenue
or $47.7 million for the nine months ended September 30, 2011 compared to 2.4% of net operating
revenue or $41.8 million for the nine months ended September 30, 2010. The increase in our general
and administrative expenses for the nine months ended September 30, 2011 resulted from increased
compensation costs of approximately $7.6 million primarily related to executive compensation, and
increased legal expenses of approximately $7.8 million primarily related to the Columbus matter.
These cost increases were offset by gains of $5.4 million on the sale of assets. Additionally, the
2010 period included a $4.8 million charge related to an increase in employee healthcare costs.
Our bad debt expense as a percentage of net operating revenues was 1.9% for the nine months ended
September 30, 2011 compared to 1.8% for the nine months ended September 30, 2010.
Adjusted EBITDA
Specialty Hospitals. Our specialty hospital Adjusted EBITDA increased by 27.3% to $273.0
million for the nine months ended September 30, 2011 compared to $214.5 million for the nine months
ended September 30, 2010. Our Adjusted EBITDA margins increased to 17.5% for the nine months ended
September 30, 2011 from 17.4% for the nine months ended September 30, 2010. For the nine months
ended September 30, 2011, the Regency hospitals acquired on September 1, 2010 contributed $35.9
million of the increase in specialty hospital Adjusted EBITDA. Excluding the effect of the Regency
hospitals in both periods, the Adjusted EBITDA margin would have been 18.2% and 17.8% for the nine
months ended September 30, 2011 and 2010, respectively. 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 volumes and our Medicare net revenue per
patient day described above under Net Operating Revenues Specialty Hospitals.
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Outpatient Rehabilitation. Our outpatient rehabilitation Adjusted EBITDA for the segment
decreased by 2.3% to $65.3 million for the nine months ended September 30, 2011 compared to $66.8
million for the nine months ended September 30, 2010. Our outpatient rehabilitation Adjusted EBITDA
margins for the segment decreased to 12.4% for the nine months ended September 30, 2011 from 12.9%
for the nine months ended September 30, 2010. The principal reason for the decrease in the Adjusted
EBITDA margin for the segment was related to our contract services business. The Adjusted EBITDA
in our outpatient rehabilitation clinics increased by $5.7 million for the nine months ended
September 30, 2011 compared to the nine months ended September 30, 2010. Additionally, our
Adjusted EBITDA margins for our outpatient rehabilitation clinics grew to 13.6% for the nine months
ended September 30, 2011 from 12.5% for the nine months ended September 30, 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 loss of a
significant contract during the second quarter of 2010 as described under Net Operating Revenues
Outpatient Rehabilitation and higher labor costs for the treatment models required by RUGS
IV/MDS 3.0 rules that became effective on October 1, 2010.
Other. The Adjusted EBITDA loss was $46.1 million for the nine months ended September 30,
2011 compared to an Adjusted EBITDA loss of $41.4 million for the nine months ended September 30,
2010 and is primarily related to our general and administrative expenses as described
under Operating Expenses.
Income from Operations
For the nine months ended September 30, 2011 we had income from operations of $236.7 million
compared to $187.2 million for the nine months ended September 30, 2010. The increase in income
from operations resulted primarily from the Regency hospitals acquired on September 1, 2010 which
contributed $31.0 million of income from operations for the nine months ended September 30, 2011,
and improved operating performance at our other specialty hospitals, offset in part by an increase
in general and administrative costs.
Loss on Early Retirement of Debt
Select Medical Corporation. On June 1, 2011 we refinanced our senior secured credit facility
which consisted of an $850.0 million term loan facility and a $300.0 million revolving facility. A
portion of the proceeds from this transaction were used to repay $266.5 million of our 7 5/8%
senior subordinated notes. We recognized a loss on early retirement of debt of $20.4 million for
the nine months ended September 30, 2011 which included the write-off of unamortized deferred
financing costs and tender premiums.
Select Medical Holdings Corporation. On June 1, 2011 we refinanced our senior secured credit
facility which consisted of an $850.0 million term loan facility and a $300.0 million revolving
facility. A portion of the proceeds from this transaction were used to repurchase and retire
$266.5 million of Selects 7 5/8% senior subordinated notes and $150.0 million to repurchase and
retire our 10% senior subordinated notes. In connection with the refinancing, we recognized a loss
on early retirement of debt of $31.0 million for the nine months ended September 30, 2011 which
included the write-off of unamortized deferred financing costs, tender premiums and original issue
discount.
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Interest Expense
Select Medical Corporation. Interest expense was $59.9 million for the nine months ended
September 30, 2011 compared to $66.2 million for the nine months ended September 30, 2010. The
decrease in interest
expense resulted primarily from the expiration of interest rate swaps in 2010 that carried
higher fixed interest rates, which was offset in part by the effects of the repayment of $150.0
million of Holdings debt, for which Select was not previously
obligated, which was refinanced at Select
through indebtedness incurred under the new senior secured credit facility on June 1, 2011.
Select Medical Holdings Corporation. Interest expense was $75.1 million for the nine months
ended September 30, 2011 compared to $87.0 million for the nine months ended September 30, 2010.
The decrease in interest expense resulted primarily from the expiration of interest rate swaps
in 2010 that carried higher fixed interest rates and lower interest rates on the portions of the
debt that were refinanced on June 1, 2011.
Income Taxes
Select Medical Corporation. We recorded income tax expense of $65.9 million for the nine
months ended September 30, 2011. The expense represented an effective tax rate of 41.7%. We
recorded income tax expense of $47.3 million for the nine months ended September 30, 2010. The
expense represented an effective tax rate of 39.0%. Select Medical Corporation is part of the
consolidated federal tax return for Select Medical Holdings Corporation. We allocate income taxes
between Select and Holdings for purposes of financial statement presentation. Because Holdings is
a passive investment company incorporated in Delaware, it does not incur any state income tax
expense or benefit on its specific income or loss and, as such, receives a tax allocation equal to
the federal statutory rate of 35% on its specific income or loss. Based upon the relative size of
Holdings income or loss, this can cause the effective tax rate for Select to differ from the
effective tax rate for the consolidated company. The analysis in the following paragraph
discusses the change in our consolidated tax rate.
Select Medical Holdings Corporation. We recorded income tax expense of $56.8 million for the
nine months ended September 30, 2011. The expense represented an effective tax rate of 43.0%. We
recorded income tax expense of $40.0 million for the nine months ended September 30, 2010. The
expense represented an effective tax rate of 39.8%. The increase in our effective tax rate has
resulted primarily from a difference between the tax accounting basis and the financial accounting
basis associated with a hospital exchange that occurred in 2011 and an increase in our reserves for
uncertain tax positions resulting from the settlement costs associated with the Columbus matter.
Non-Controlling Interests
Non-controlling interests in consolidated earnings were $4.4 million for the nine months ended
September 30, 2011 compared to $3.8 million for the nine months ended September 30, 2010.
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Liquidity and Capital Resources
Cash Flows for the Nine Months Ended September 30, 2011 and Nine Months Ended September 30, 2010
Select Medical Holdings | ||||||||||||||||
Corporation | Select Medical Corporation | |||||||||||||||
Nine Months | Nine Months | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
2010 | 2011 | 2010 | 2011 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Cash flows provided by operating activities |
$ | 110,265 | $ | 143,914 | $ | 135,787 | $ | 166,834 | ||||||||
Cash flows used in investing activities |
(204,428 | ) | (35,808 | ) | (204,428 | ) | (35,808 | ) | ||||||||
Cash flows provided by (used in) financing
activities |
25,826 | (102,258 | ) | 304 | (125,178 | ) | ||||||||||
Net increase (decrease) in cash and cash
equivalents |
(68,337 | ) | 5,848 | (68,337 | ) | 5,848 | ||||||||||
Cash and cash equivalents at beginning of
period |
83,680 | 4,365 | 83,680 | 4,365 | ||||||||||||
Cash and cash equivalents at end of period |
$ | 15,343 | $ | 10,213 | $ | 15,343 | $ | 10,213 | ||||||||
Operating activities for Select provided $166.8 million of cash flows for the nine months
ended September 30, 2011. Our days sales outstanding were 52 days at September 30, 2011 compared
to 47 days at September 30, 2010 and 51 days at December 31, 2010. The increase in days sales
outstanding between
September 30, 2010 and September 30, 2011 is primarily related to the timing of the periodic
interim payments we receive from Medicare for the services provided at our specialty hospitals.
The operating cash flows of Select exceeded the operating cash flows of Holdings by $22.9
million for the nine months ended September 30, 2011 and by $25.5 million for the nine months ended
September 30, 2010. The difference relates to interest payments associated with Holdings
indebtedness.
Investing activities for Select and Holdings used $35.8 million of cash flow for the nine
months ended September 30, 2011. The principal use of cash included $32.1 million related to the
purchase of property and equipment and $13.5 million related to the purchase of the Baylor JV
partnership units and working capital advances, offset by proceeds from the sale of assets of $7.9
million, which was primarily related to the sale of a building we acquired in connection with the
acquisition of Regency and $1.9 million from acquisition activities that includes the post-closing
settlement of the Regency net working capital adjustment with the seller. Investing activities
used $204.4 million of cash flow for the nine months ended September 30, 2010. The use of cash
included acquisition payments of $165.8 million related principally to the acquisition of Regency,
and $38.6 million for the purchase of property and equipment.
Financing activities for Select used $125.2 million of cash flow for the nine months ended
September 30, 2011. The primary use of cash related to dividends paid to Holdings of $204.6
million to fund interest payments and the repurchase of all $150.0 million principal amount of
Holdings 10% senior subordinated notes, $18.6 million of debt issuance costs, repayment of bank
overdrafts of $4.2 million and $3.5 million in distributions to non-controlling interests offset by
net borrowings of debt of $105.5 million. Financing activities provided $0.3 million of cash flow
for the nine months ended September 30, 2010. The primary source of cash related to net borrowings
on our revolving credit facility of $20.0 million and proceeds from bank overdrafts of $11.0
million which were offset by dividends paid to Holdings to fund interest
payments of $25.5 million, $3.6 million in distributions to non-controlling interests, and net
payments related to seller and other debt of $1.7 million.
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The difference in cash flows provided by financing activities of Holdings compared to Select
of $22.9 million for the nine months ended September 30, 2011 and $25.5 million for the nine months
ended
September 30, 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 $110.4 million at
September 30, 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 a decrease in our current portion of
long-term debt resulting from our debt refinancing on June 1, 2011 and an increase in our accounts
receivable.
Select Medical Holdings Corporation. Holdings had net working capital of $110.0 million at
September 30, 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 a decrease in our current portion of
long-term debt resulting from our debt refinancing on June 1, 2011 and an increase in our accounts
receivable.
On June 1, 2011, Select entered into a new senior secured credit agreement (the Credit
Agreement) that provides for $1.15 billion in senior secured credit facilities (Senior Secured
Credit Facilities) comprised of an $850.0 million, seven-year term loan facility (Term Loan) and
a $300.0 million, five-year revolving credit facility (Revolving Credit Facility), including a
$75.0 million sublimit for the issuance of standby letters of credit and a $25.0 million sublimit
for swingline loans. Borrowings under the Senior Secured Credit Facilities are guaranteed by
Holdings and substantially all of Selects current domestic subsidiaries and will be guaranteed by
Selects future domestic subsidiaries and secured by substantially all of Selects existing and
future property and assets and by a pledge of Selects capital stock, the capital stock of Selects
domestic subsidiaries and up to 65% of the capital stock of Selects foreign subsidiaries, if any.
Borrowings under the Senior Secured Credit Facilities will bear interest at a rate equal to:
| in the case of the Term Loan, Adjusted LIBO plus 3.75%, or Alternative Base Rate plus 2.75%; and |
| in the case of the Revolving Credit Facility, Adjusted LIBO plus a percentage ranging from 2.75% to 3.75%, or Alternative Base Rate plus a percentage ranging from 1.75% to 2.75%, in each case based on Selects leverage ratio. |
Adjusted LIBO is defined as, with respect to any interest period, the London interbank
offered rate for such interest period, adjusted for any applicable statutory reserve requirements;
provided that Adjusted LIBO, when used in reference to the Term Loan, will at no time be less than
1.75% per annum.
Alternative Base Rate is defined as the highest of (a) the administrative agents Prime
Rate, (b) the Federal Funds Effective Rate plus 1/2 of 1.00% and (c) the Adjusted LIBO from time to
time for an interest period of one month, plus 1.00%.
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The applicable margin percentage for revolving loans will decrease from (1) 2.75% to 2.50% for
alternate base rate loans and (2) 3.75% to 3.50% for adjusted LIBOR loans upon the delivery of
Selects Form 10-Q to JP Morgan Chase Bank, N.A., as administrative agent to Selects senior
secured credit facility.
The Term Loan amortizes in equal quarterly installments on the last day of each March, June,
September and December in aggregate annual amounts equal to $2.1 million. The balance of the Term
Loan will be payable on June 1, 2018, provided that if on the 90th day prior to the scheduled final
maturity date of Selects 7 5/8% senior subordinated notes due 2015 (the Tranche B Trigger Date)
more than $60.0 million in aggregate principal amount of Selects 7 5/8% senior subordinated notes
due 2015 are outstanding, the maturity date for the Term Loan will be the Tranche B Trigger Date.
Similarly, the Revolving Credit Facility will be payable on June 1, 2016, provided that if on the
90th day prior to the scheduled final maturity date of Selects 7 5/8% senior subordinated notes
due 2015 (the Revolving Trigger Date) more than $60.0 million in aggregate principal amount of
Selects 7 5/8% senior subordinated notes due 2015 are outstanding, the maturity date for the
Revolving Credit Facility will be the Revolving Trigger Date.
Select will be required to prepay borrowings under the Senior Secured Credit Facilities with
(1) 100% of the net cash proceeds received from non-ordinary course asset sales or other
dispositions, or as a result of a casualty or condemnation, subject to reinvestment provisions and
other customary carveouts and the payment of certain indebtedness secured by liens subject to a
first lien intercreditor agreement, (2) 100% of the net cash proceeds received from the issuance of
debt obligations other than certain permitted debt obligations, and (3) 50% of excess cash flow (as
defined in the Credit Agreement) if Selects leverage ratio is greater than 3.75 to 1.00 and 25% of
excess cash flow if Selects leverage ratio is less than or equal to 3.75 to 1.00 and greater than
3.25 to 1.00, in each case, reduced by the aggregate amount of term loans optionally prepaid during
the applicable fiscal year. Select will not be required to prepay borrowings with excess cash flow
if Selects leverage ratio is less than or equal to 3.25 to 1.00.
The Senior Secured Credit Facilities require Select to maintain a leverage ratio (based upon
the ratio of indebtedness for money borrowed to consolidated EBITDA, as defined in the Credit
Agreement), which is tested quarterly, and prohibits Select from making capital expenditures in
excess of $125.0 million in any fiscal year (subject to a 50% carry-over provision). As of
September 30, 2011, Select was required to maintain its leverage ratio at less than 6.00 to 1.00,
and Selects leverage ratio was 3.44 to 1.00 as of September 30, 2011. Failure to comply with
these covenants would result in an event of default under the Senior Secured Credit Facilities and,
absent a waiver or an amendment from the lenders, preclude Select from making further borrowings
under the Revolving Credit Facility and permit the lenders to accelerate all outstanding borrowings
under the Senior Secured Credit Facilities.
The Senior Secured Credit Facilities also contain a number of affirmative and restrictive
covenants, including limitations on mergers, consolidations and dissolutions; sales of assets;
investments and acquisitions; indebtedness; liens; affiliate transactions; and dividends and
restricted payments. The Senior Secured Credit Facilities contain events of default for non-payment
of principal and interest when due, cross-default and cross-acceleration provisions and an event of
default that would be triggered by a change of control.
Select used borrowings under the Senior Secured Credit Facilities to refinance all of its
outstanding indebtedness under its existing credit facilities, to repurchase $266.5 million
aggregate principal amount of its 7 5/8% senior subordinated notes due 2015 and to repay all of
Holdings existing 10% senior subordinated notes due 2015.
As of September 30, 2011, we had $217.2 million of availability under our Revolving Credit
Facility (after giving effect to $32.8 million of outstanding letters of credit).
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We may 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 $150.0 million worth of shares of our
common stock. The program will remain in effect until March 31, 2013, unless extended by the board
of directors. Through September 30, 2011, Holdings has repurchased 11,555,447 shares at a cost of
$75.8 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. 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.
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 May 2011, FASB issued Accounting Standards
Update (ASU) 2011-04, Fair Value Measurement (Topic 820) Amendments to Achieve Common Fair
Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (Update 2011-04). Update
2011-04 generally represents clarification of Topic 820, but also includes instances where a
particular principle or requirement for measuring fair value or disclosing information about fair
value measurements has changed. Update 2011-04 results in common principles and requirements for
measuring fair value and for disclosing information about fair value measurements in accordance
with GAAP and International Financial Reporting Standards.
Update 2011-04 is effective for interim and annual periods beginning after December 15, 2011 and is
to be applied prospectively. Early application is not permitted. We do not expect the adoption of
Update 2011-04 to have a material impact on our consolidated financial statements.
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In June 2011, FASB issued ASU 2011-05, Comprehensive Income (Topic 220) Presentation of
Comprehensive Income (Update 2011-05) that improves the comparability, consistency, and
transparency of financial reporting and increases the prominence of items reported in other
comprehensive income by
eliminating the option to present components of other comprehensive income as part of the
statement of changes in stockholders equity. Update 2011-05 requires that all non-owner changes in
stockholders equity be presented either in a single continuous statement of comprehensive income
or in two separate but consecutive statements. Under either method, adjustments must be displayed
for items that are reclassified from other comprehensive income (OCI) to net income, in both net
income and OCI. Update 2011-05 does not change the current option for presenting components of OCI
gross or net of the effect of income taxes, provided that such tax effects are presented in the
statement in which OCI is presented or disclosed in the notes to the financial statements.
Additionally, Update 2011-05 does not affect the calculation or reporting of earnings per share.
Update 2011-05 is effective for fiscal years, and interim periods within those years, beginning
after December 15, 2011 and is to be applied retrospectively, with early adoption permitted. The
adoption of Update 2011-05 will cause us to change our presentation of other comprehensive income
on our consolidated financial statements.
In July 2011, the FASB issued ASU 2011-07, Health Care Entities (Topic 954): Presentation
and Disclosure of Patient Service Revenue, Provision for Bad Debts and the Allowance for Doubtful
Accounts for Certain Health Care Entities (Update 2011-07). Update 2011-07 requires certain
health care entities to change the presentation in their statement of operations by reclassifying
the provision for bad debts associated with patient service revenue from an operating expense to a
deduction from patient service revenue (net of contractual allowances and discounts).
Additionally, those health care entities are required to provide enhanced disclosure about their
policies for recognizing revenue and assessing bad debts. The amendments also require disclosures
of patient service revenue (net of contractual allowances and discounts) as well as qualitative and
quantitative information about changes in the allowance for doubtful accounts. Update 2011-07 is
effective for fiscal years and interim periods within those fiscal years beginning after December
15, 2011, with early adoption permitted. We are in the process of evaluating the effects of Update
2011-07 on our consolidated financial statements.
In September 2011, the FASB issued ASU 2011-08, Intangibles Goodwill and Other (Topic
350): Testing Goodwill for Impairment (Update 2011-08). Update 2011-08 allows an entity to
first assess qualitative factors to determine whether it is necessary to perform the two-step
quantitative goodwill impairment test. Under Update 2011-08, an entity would not be required to
calculate the fair value of a reporting unit unless the entity determines, based on a qualitative
assessment, that it is more likely than not that its fair value is less than its carrying amount.
Update 2011-08 includes a number of events and circumstances for an entity to consider in
conducting the qualitative assessment. Update 2011-08 will be effective for goodwill impairment
test performed for fiscal years beginning after December 15, 2011. Update 2011-08 does not change the accounting or measurement of impairments. This update will have no effect on our consolidated financial statements.
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 September 30, 2011, Select had
$897.9 million in term and revolving loans outstanding under its senior secured credit facility,
excluding the unamortized debt discount of $8.1 million, and Holdings had $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 $1.3
million annual change in interest expense. However, because the variable interest rate for our
$847.9 million in term loans is subject to an Adjusted LIBO Rate floor of 1.75%, until the Adjusted
LIBO Rate exceeds 1.75%, our interest rate on this indebtedness is effectively fixed at 5.50%.
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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 September 30, 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.
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 third
quarter ended September 30, 2011 that has materially affected, or is reasonably likely to
materially 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 a
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.
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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 the third quarter of 2011, the Company entered into a settlement agreement with the
United States government in connection with the previously disclosed qui tam lawsuit filed in
Columbus, Ohio against certain subsidiaries of the Company. The lawsuit, filed under seal in
September 2007, led to the Companys receiving, in July 2009, a subpoena from the government
seeking various documents concerning the Companys financial relationships with certain physicians
practicing at its long term acute care hospitals in Columbus, Ohio. Under the terms of the
settlement, the Company agreed to pay $7.5 million to the government and enter into a 5-year
corporate integrity agreement covering its long term acute care hospitals. The Company also agreed
to pay certain legal fees of the qui tam relators counsel. In the settlement agreement, the
Company admitted no liability or wrongdoing. During the second quarter of 2011, the Company
recorded a pre-tax charge of $7.5 million to establish a settlement reserve in connection with the
matter. The settlement amounts and counsel fees were paid in full during the third quarter of 2011,
and the Company does not expect to incur any additional material charges in connection with this
matter.
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. On August 3, 2011, our board
of directors authorized an increase of $50.0 million in the capacity of our common stock repurchase
program, from $100.0 million to $150.0 million. The other terms of the plan remain unchanged. The
program will now remain in effect until March 31, 2013, unless extended by our board of directors. In
the three months ended September 30, 2011, we purchased a total of 4,239,972 shares of our common
stock at an average purchase price of $6.67. The following table sets forth the monthly purchases
made under this program during the three months ended September 30, 2011:
Total | ||||||||||||||||
Number of | Approximate | |||||||||||||||
Shares | Dollar Value of | |||||||||||||||
Purchased | Shares that | |||||||||||||||
as Part of | May Yet Be | |||||||||||||||
Total | Average | Publicly | Purchased | |||||||||||||
Number | Price | Announced | Under the | |||||||||||||
of Shares | Paid Per | Plans or | Plans or | |||||||||||||
Period | Purchased | Share | Programs | Programs | ||||||||||||
July 1, 2011 to July 31, 2011 |
| | | $ | 52,571,798 | |||||||||||
August 1, 2011 to August 31, 2011 |
1,438,760 | $ | 6.20 | 1,438,760 | $ | 93,622,314 | ||||||||||
September 1, 2011 to September 30, 2011 |
2,801,212 | $ | 6.91 | 2,801,212 | $ | 74,215,982 |
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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 58 hereof.
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: November 3, 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: November 3, 2011
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EXHIBIT INDEX OPEN
Exhibit | Description | |||
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. |
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