UNITED STATES
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, 20102011
| | |
o | | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Transition Period From_________to_________.
Commission File Numbers:001 — 34465 and 001 — 31441
SELECT MEDICAL HOLDINGS CORPORATION
SELECT MEDICAL CORPORATION
(Exact name of Registrants as specified in their charters)
| | |
|
Delaware
Delaware | | 20-1764048
|
Delaware | | 23-2872718 |
(State or other jurisdiction of
incorporation or organization) | | (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)
(717) 972-1100
(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.
YESþ NOo
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).
YesYESoþ NoNOo
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.
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Large accelerated filerso | | Accelerated filersoþ | | Non-accelerated filersþo | | Smaller reporting companyo |
Indicate by check mark whether the Registrants are shell companies (as defined in Rule 12b-2 of the Exchange Act).
YESo NOþ
As of October 31, 2010,2011, Select Medical Holdings Corporation had outstanding 161,040,060148,108,130 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.
PART I FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS | | |
ITEM 1. | | CONSOLIDATED FINANCIAL STATEMENTS |
Consolidated Balance Sheets
(unaudited)
(in thousands, except share and per share amounts)
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Select Medical Holdings Corporation | | Select Medical Corporation | |
| | Select Medical Holdings Corporation | | Select Medical Corporation | | | December 31, | | September 30, | | December 31, | | September 30, | |
| | December 31, | | September 30, | | December 31, | | September 30, | | | 2010 | | 2011 | | 2010 | | 2011 | |
| | 2009 | | 2010 | | 2009 | | 2010 | | |
ASSETS | | |
Current Assets: | | |
Cash and cash equivalents | | $ | 83,680 | | $ | 15,343 | | $ | 83,680 | | $ | 15,343 | | | $ | 4,365 | | $ | 10,213 | | $ | 4,365 | | $ | 10,213 | |
Accounts receivable, net of allowance for doubtful accounts of $43,357 and $46,332 in 2009 and 2010, respectively | | 307,079 | | 325,338 | | 307,079 | | 325,338 | | |
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 | | 48,535 | | 38,949 | | 48,535 | | 38,949 | | | 30,654 | | 19,834 | | 30,654 | | 19,834 | |
Prepaid income taxes | | 11,179 | | 12,966 | | 11,179 | | 12,966 | | | 12,699 | | 10,340 | | 12,699 | | 10,340 | |
Other current assets | | 24,240 | | 25,897 | | 24,240 | | 25,897 | | | 28,176 | | 28,106 | | 28,176 | | 28,106 | |
| | | | | | | | | | | | | | | | | | |
Total Current Assets | | 474,713 | | 418,493 | | 474,713 | | 418,493 | | | 429,326 | | 463,482 | | 429,326 | | 463,482 | |
| |
Property and equipment, net | | 466,131 | | 538,026 | | 466,131 | | 538,026 | | | 532,100 | | 505,894 | | 532,100 | | 505,894 | |
Goodwill | | 1,548,269 | | 1,646,698 | | 1,548,269 | | 1,646,698 | | | 1,631,252 | | 1,627,509 | | 1,631,252 | | 1,627,509 | |
Other identifiable intangibles | | 65,297 | | 67,719 | | 65,297 | | 67,719 | | | 80,119 | | 72,448 | | 80,119 | | 72,448 | |
Assets held for sale | | 11,342 | | 11,342 | | 11,342 | | 11,342 | | | 11,342 | | 11,342 | | 11,342 | | 11,342 | |
Other assets | | 36,481 | | 38,330 | | 33,427 | | 35,682 | | | 37,947 | | 70,435 | | 35,433 | | 68,937 | |
| | | | | | | | | | | | | | | | | | |
| | |
Total Assets | | $ | 2,602,233 | | $ | 2,720,608 | | $ | 2,599,179 | | $ | 2,717,960 | | | $ | 2,722,086 | | $ | 2,751,110 | | $ | 2,719,572 | | $ | 2,749,612 | |
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| | |
LIABILITIES AND EQUITY | | |
Current Liabilities: | | |
Bank overdrafts | | $ | — | | $ | 10,971 | | $ | — | | $ | 10,971 | | | $ | 18,792 | | $ | 14,618 | | $ | 18,792 | | $ | 14,618 | |
Current portion of long-term debt and notes payable | | 4,145 | | 149,116 | | 4,145 | | 149,116 | | | 149,379 | | 10,268 | | 149,379 | | 10,268 | |
Accounts payable | | 73,434 | | 76,447 | | 73,434 | | 76,447 | | | 74,193 | | 88,942 | | 74,193 | | 88,942 | |
Accrued payroll | | 62,035 | | 72,450 | | 62,035 | | 72,450 | | | 63,760 | | 70,917 | | 63,760 | | 70,917 | |
Accrued vacation | | 41,013 | | 46,152 | | 41,013 | | 46,152 | | | 46,588 | | 48,243 | | 46,588 | | 48,243 | |
Accrued interest | | 32,919 | | 13,191 | | 23,473 | | 10,256 | | | 30,937 | | 5,590 | | 21,586 | | 5,153 | |
Accrued restructuring | | 4,256 | | 2,831 | | 4,256 | | 2,831 | | | 6,754 | | 5,608 | | 6,754 | | 5,608 | |
Accrued other | | 84,234 | | 95,538 | | 97,134 | | 95,538 | | | 103,856 | | 105,053 | | 116,456 | | 105,053 | |
Due to third party payors | | 1,905 | | 6,445 | | 1,905 | | 6,445 | | | 5,299 | | 4,249 | | 5,299 | | 4,249 | |
| | | | | | | | | | | | | | | | | | |
Total Current Liabilities | | 303,941 | | 473,141 | | 307,395 | | 470,206 | | | 499,558 | | 353,488 | | 502,807 | | 353,051 | |
| |
Long-term debt, net of current portion | | 1,401,426 | | 1,276,816 | | 1,096,842 | | 970,836 | | | 1,281,390 | | 1,397,418 | | 974,913 | | 1,230,118 | |
Non-current deferred tax liability | | 66,768 | | 66,269 | | 66,768 | | 66,269 | | | 59,074 | | 68,399 | | 59,074 | | 68,399 | |
Other non-current liabilities | | 60,543 | | 67,266 | | 60,543 | | 67,266 | | | 66,650 | | 73,219 | | 66,650 | | 73,219 | |
| | | | | | | | | | | | | | | | | | |
| | |
Total Liabilities | | 1,832,678 | | 1,883,492 | | 1,531,548 | | 1,574,577 | | | 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, 159,980,544 shares and 161,040,060 shares issued and outstanding in 2009 and 2010, respectively | | 160 | | 161 | | — | | — | | |
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 | | 578,648 | | 565,342 | | 822,664 | | 831,479 | | | 535,628 | | 518,295 | | 834,894 | | 846,806 | |
Retained earnings | | 169,094 | | 240,627 | | 223,314 | | 280,918 | | | 248,097 | | 307,648 | | 249,700 | | 145,526 | |
Accumulated other comprehensive loss | | | (8,914 | ) | | | (414 | ) | | | (8,914 | ) | | | (414 | ) | |
| | | | | | | | | | | | | | | | | | |
Total Select Medical Holdings Corporation and Select Medical Corporation Stockholders’ Equity | | 738,988 | | 805,716 | | 1,037,064 | | 1,111,983 | | | 783,880 | | 826,093 | | 1,084,594 | | 992,332 | |
Non-controlling interests | | 30,567 | | 31,400 | | 30,567 | | 31,400 | | |
Non-controlling interest | | | 31,534 | | 32,493 | | 31,534 | | 32,493 | |
| | | | | | | | | | | | | | | | | | |
Total Equity | | 769,555 | | 837,116 | | 1,067,631 | | 1,143,383 | | | 815,414 | | 858,586 | | 1,116,128 | | 1,024,825 | |
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| | |
Total Liabilities and Equity | | $ | 2,602,233 | | $ | 2,720,608 | | $ | 2,599,179 | | $ | 2,717,960 | | | $ | 2,722,086 | | $ | 2,751,110 | | $ | 2,719,572 | | $ | 2,749,612 | |
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The accompanying notes are an integral part of this statement.these consolidated financial statements.
3
Consolidated Statements of Operations
(unaudited)
(in thousands, except per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Select Medical Holdings Corporation | | Select Medical Corporation | | | Select Medical Holdings Corporation | | Select Medical Corporation | |
| | For the Quarter Ended September 30, | | For the Quarter Ended September 30, | | | For the Three Months Ended September 30, | | For the Three Months Ended September 30, | |
| | 2009 | | 2010 | | 2009 | | 2010 | | | 2010 | | 2011 | | 2010 | | 2011 | |
| | |
Net operating revenues | | $ | 545,621 | | $ | 588,250 | | $ | 545,621 | | $ | 588,250 | | | $ | 588,250 | | $ | 694,131 | | $ | 588,250 | | $ | 694,131 | |
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Costs and expenses: | | |
Cost of services | | 448,702 | | 498,739 | | 448,702 | | 498,739 | | | 498,739 | | 581,829 | | 498,739 | | 581,829 | |
General and administrative | | 34,618 | | 19,228 | | 34,618 | | 19,228 | | | 19,228 | | 14,975 | | 19,228 | | 14,975 | |
Bad debt expense | | 11,720 | | 11,317 | | 11,720 | | 11,317 | | | 11,317 | | 11,709 | | 11,317 | | 11,709 | |
Depreciation and amortization | | 17,676 | | 17,012 | | 17,676 | | 17,012 | | | 17,012 | | 17,545 | | 17,012 | | 17,545 | |
| | | | | | | | | | | | | | | | | | |
Total costs and expenses | | 512,716 | | 546,296 | | 512,716 | | 546,296 | | | 546,296 | | 626,058 | | 546,296 | | 626,058 | |
| | | | | | | | | | | | | | | | | | |
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Income from operations | | 32,905 | | 41,954 | | 32,905 | | 41,954 | | | 41,954 | | 68,073 | | 41,954 | | 68,073 | |
| | |
Other income and expense: | | |
Gain on early retirement of debt | | 1,129 | | — | | — | | — | | |
Equity in losses of unconsolidated subsidiaries | | — | | | (186 | ) | | — | | | (186 | ) | |
Equity in earnings (losses) of unconsolidated subsidiaries | | | | (186 | ) | | 1,653 | | | (186 | ) | | 1,653 | |
Other income | | — | | 148 | | 2,215 | | 148 | | | 148 | | — | | 148 | | — | |
Interest income | | 2 | | — | | 2 | | — | | | — | | 119 | | — | | 119 | |
Interest expense | | | (33,451 | ) | | | (27,677 | ) | | | (25,114 | ) | | | (20,821 | ) | | | (27,677 | ) | | | (24,134 | ) | | | (20,821 | ) | | | (21,526 | ) |
| | | | | | | | | | | | | | | | | | |
| | |
Income from operations before income taxes | | 585 | | 14,239 | | 10,008 | | 21,095 | | |
Income before income taxes | | | 14,239 | | 45,711 | | 21,095 | | 48,319 | |
| | |
Income tax expense (benefit) | | | (804 | ) | | 5,574 | | 2,494 | | 7,974 | | |
Income tax expense | | | 5,574 | | 19,330 | | 7,974 | | 20,243 | |
| | | | | | | | | | | | | | | | | | |
| | |
Net income | | 1,389 | | 8,665 | | 7,514 | | 13,121 | | | 8,665 | | 26,381 | | 13,121 | | 28,076 | |
| | |
Less: Net income attributable to non-controlling interests | | 806 | | 656 | | 806 | | 656 | | | 656 | | 785 | | 656 | | 785 | |
| | | | | | | | | | | | | | | | | | |
| | |
Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation | | 583 | | 8,009 | | $ | 6,708 | | $ | 12,465 | | | $ | 8,009 | | $ | 25,596 | | $ | 12,465 | | $ | 27,291 | |
| | | | | | | | | | | | | | |
| | |
Less: Preferred dividends | | 6,667 | | — | | |
| | | | | | |
| |
Net income (loss) available to common stockholders and participating securities | | $ | (6,084 | ) | | $ | 8,009 | | |
| | | | | | |
| | |
Income (loss) per common share: | | |
Income per common share: | | |
Basic | | $ | (0.09 | ) | | $ | 0.05 | | | $ | 0.05 | | $ | 0.17 | |
Diluted | | $ | (0.09 | ) | | $ | 0.05 | | | $ | 0.05 | | $ | 0.17 | |
The accompanying notes are an integral part of this statement.these consolidated financial statements.
4
Consolidated Statements of Operations
(unaudited)
(in thousands, except per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Select Medical Holdings Corporation | | Select Medical Corporation | | | Select Medical Holdings Corporation | | Select Medical Corporation | |
| | For the Nine Months Ended September 30, | | For the Nine Months Ended September 30, | | | For the Nine Months Ended September 30, | | For the Nine Months Ended September 30, | |
| | 2009 | | 2010 | | 2009 | | 2010 | | | 2010 | | 2011 | | 2010 | | 2011 | |
| | |
Net operating revenues | | $ | 1,666,328 | | $ | 1,752,940 | | $ | 1,666,328 | | $ | 1,752,940 | | | $ | 1,752,940 | | $ | 2,086,066 | | $ | 1,752,940 | | $ | 2,086,066 | |
| | | | | | | | | | | | | | | | | | |
| | |
Costs and expenses: | | |
Cost of services | | 1,353,107 | | 1,441,160 | | 1,353,107 | | 1,441,160 | | | 1,441,160 | | 1,708,911 | | 1,441,160 | | �� | | 1,708,911 | |
General and administrative | | 60,278 | | 41,819 | | 60,278 | | 41,819 | | | 41,819 | | 47,656 | | 41,819 | | 47,656 | |
Bad debt expense | | 33,678 | | 31,449 | | 33,678 | | 31,449 | | | 31,449 | | 40,002 | | 31,449 | | 40,002 | |
Depreciation and amortization | | 53,346 | | 51,333 | | 53,346 | | 51,333 | | | 51,333 | | 52,766 | | 51,333 | | 52,766 | |
| | | | | | | | | | | | | | | | | | |
Total costs and expenses | | 1,500,409 | | 1,565,761 | | 1,500,409 | | 1,565,761 | | | 1,565,761 | | 1,849,335 | | 1,565,761 | | 1,849,335 | |
| | | | | | | | | | | | | | | | | | |
| | |
Income from operations | | 165,919 | | 187,179 | | 165,919 | | 187,179 | | | 187,179 | | 236,731 | | 187,179 | | 236,731 | |
| | |
Other income and expense: | | |
Gain on early retirement of debt | | 16,445 | | — | | 15,316 | | — | | |
Equity in losses of unconsolidated subsidiaries | | — | | | (186 | ) | | — | | | (186 | ) | |
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 | | 3,836 | | 464 | | | 464 | | — | | 464 | | — | |
Interest income | | 82 | | — | | 82 | | — | | | — | | 286 | | — | | 286 | |
Interest expense | | | (101,781 | ) | | | (86,998 | ) | | | (75,936 | ) | | | (66,184 | ) | | | (86,998 | ) | | | (75,094 | ) | | | (66,184 | ) | | | (59,882 | ) |
| | | | | | | | | | | | | | | | | | |
| | |
Income from operations before income taxes | | 80,665 | | 100,459 | | 109,217 | | 121,273 | | | 100,459 | | 132,234 | | 121,273 | | 158,079 | |
| |
Income tax expense | | 33,076 | | 39,989 | | 43,069 | | 47,274 | | | 39,989 | | 56,809 | | 47,274 | | 65,854 | |
| | | | | | | | | | | | | | | | | | |
| |
Net income | | 47,589 | | 60,470 | | 66,148 | | 73,999 | | | 60,470 | | 75,425 | | 73,999 | | 92,225 | |
| | |
Less: Net income attributable to non-controlling interests | | 2,218 | | 3,773 | | 2,218 | | 3,773 | | | 3,773 | | 4,438 | | 3,773 | | 4,438 | |
| | | | | | | | | | | | | | | | | | |
| | |
Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation | | 45,371 | | 56,697 | | $ | 63,930 | | $ | 70,226 | | | $ | 56,697 | | $ | 70,987 | | $ | 70,226 | | $ | 87,787 | |
| | | | | | | | | | | | | | |
| | |
Less: Preferred dividends | | 19,537 | | — | | |
| | | | | | |
| | |
Net income available to common stockholders and participating securities | | $ | 25,834 | | $ | 56,697 | | |
| | | | | | |
| | |
Income per common share: | | |
Basic | | $ | 0.38 | | $ | 0.35 | | | $ | 0.35 | | $ | 0.46 | |
Diluted | | $ | 0.37 | | $ | 0.35 | | | $ | 0.35 | | $ | 0.46 | |
The accompanying notes are an integral part of this statement.these consolidated financial statements.
5
Select Medical Holdings Corporation
Consolidated Statement of Changes in Equity and Comprehensive Income (Loss)
(unaudited)
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Select Medical Holdings Corporation Stockholders | | | | | Select Medical Holdings Corporation Stockholders | | | |
| | Accumulated | | | | | Common | | | | | | | |
| | Common | | Common | | Capital in | | Other | | Non- | | | Comprehensive | | Common | | Stock Par | | Capital in | | Retained | | Non-controlling | |
| | Comprehensive | | Stock | | Stock Par | | Excess of | | Retained | | Comprehensive | | controlling | | | Total | | Income | | Stock Issued | | Value | | Excess of Par | | Earnings | | Interests | |
| | Total | | Income | | Issued | | Value | | Par | | Earnings | | Income (Loss) | | Interests | | |
Balance at December 31, 2009 | | $ | 769,555 | | 159,981 | | $ | 160 | | $ | 578,648 | | $ | 169,094 | | $ | (8,914 | ) | | $ | 30,567 | | |
Balance at December 31, 2010 | | | $ | 815,414 | | 154,519 | | $ | 155 | | $ | 535,628 | | $ | 248,097 | | $ | 31,534 | |
Net income | | 60,470 | | $ | 60,470 | | 56,697 | | 3,773 | | | 75,425 | | $ | 75,425 | | 70,987 | | 4,438 | |
Unrealized gain on interest rate swap, net of tax | | 8,500 | | 8,500 | | 8,500 | | |
| | | | | | |
Total comprehensive income | | 68,970 | | $ | 68,970 | | |
| | | | |
Issuance and vesting of restricted stock | | 530 | | 1 | | 529 | | | 1,801 | | 26 | | | (0 | ) | | 1,801 | |
Exercise of stock options | | 125 | | 1,059 | | 125 | | | 169 | | 42 | | 0 | | 169 | |
Stock option expense | | 876 | | 876 | | | 897 | | 897 | |
Reclassification of deemed dividend | | — | | | (14,836 | ) | | 14,836 | | |
Repurchase of common shares | | | | (31,641 | ) | | | (4,650 | ) | | | (5 | ) | | | (20,200 | ) | | | (11,436 | ) | |
Distributions to non-controlling interests | | | (3,618 | ) | | | (3,618 | ) | | | (3,507 | ) | | | (3,507 | ) |
Other | | 678 | | 678 | | | 28 | | 28 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at September 30, 2010 | | $ | 837,116 | | 161,040 | | $ | 161 | | $ | 565,342 | | $ | 240,627 | | $ | (414 | ) | | $ | 31,400 | | |
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 Comprehensive Income (Loss)
(unaudited)
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Select Medical Corporation Stockholders | | | | | Select Medical Corporation Stockholders | | | |
| | Accumulated | | | | | Common | | | | | | | |
| | Common | | Common | | Capital in | | Other | | Non- | | | Comprehensive | | Common | | Stock Par | | Capital in | | Retained | | Non-controlling | |
| | Comprehensive | | Stock | | Stock Par | | Excess of | | Retained | | Comprehensive | | controlling | | | Total | | Income | | Stock Issued | | Value | | Excess of Par | | Earnings | | Interests | |
| | Total | | Income | | Issued | | Value | | Par | | Earnings | | Income (Loss) | | Interests | | |
Balance at December 31, 2009 | | $ | 1,067,631 | | — | | $ | — | | $ | 822,664 | | $ | 223,314 | | $ | (8,914 | ) | | $ | 30,567 | | |
Balance at December 31, 2010 | | | $ | 1,116,128 | | 0 | | $ | 0 | | $ | 834,894 | | $ | 249,700 | | $ | 31,534 | |
Net income | | 73,999 | | $ | 73,999 | | 70,226 | | 3,773 | | | 92,225 | | $ | 92,225 | | 87,787 | | 4,438 | |
Unrealized gain on interest rate swap, net of tax | | 8,500 | | 8,500 | | 8,500 | | |
| | | | | | |
Total comprehensive income | | 82,499 | | $ | 82,499 | | |
| | | | |
Federal tax benefit of losses contributed by Holdings | | 7,285 | | 7,285 | | | 9,045 | | 9,045 | |
Additional investment by Holdings | | 125 | | 125 | | | 169 | | 169 | |
Settlement of dividends paid to Holdings | | | (12,622 | ) | | | (12,622 | ) | | |
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 | | | (3,618 | ) | | | (3,618 | ) | | | (3,507 | ) | | | (3,507 | ) |
Other | | 678 | | 678 | | | 28 | | 28 | |
Contribution related to restricted stock awards and stock option issuances by Holdings | | 1,405 | | 1,405 | | | 2,698 | | 2,698 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at September 30, 2010 | | $ | 1,143,383 | | — | | $ | — | | $ | 831,479 | | $ | 280,918 | | $ | (414 | ) | | $ | 31,400 | | |
Balance at September 30, 2011 | | | $ | 1,024,825 | | 0 | | $ | 0 | | $ | 846,806 | | $ | 145,526 | | $ | 32,493 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of this statement.these consolidated financial statements.
6
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Select Medical Holdings Corporation | | Select Medical Corporation | |
| | Select Medical Holdings Corporation | | Select Medical Corporation | | | For the Nine Months Ended September 30, | | For the Nine Months Ended September 30, | |
| | For the Nine Months Ended September 30, | | For the Nine Months Ended September 30, | | | 2010 | | 2011 | | 2010 | | 2011 | |
| | 2009 | | 2010 | | 2009 | | 2010 | | |
Operating activities | | |
Net income | | $ | 47,589 | | $ | 60,470 | | $ | 66,148 | | $ | 73,999 | | | $ | 60,470 | | $ | 75,425 | | $ | 73,999 | | $ | 92,225 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | |
Depreciation and amortization | | 53,346 | | 51,333 | | 53,346 | | 51,333 | | | 51,333 | | 52,766 | | 51,333 | | 52,766 | |
Provision for bad debts | | 33,678 | | 31,449 | | 33,678 | | 31,449 | | | 31,449 | | 40,002 | | 31,449 | | 40,002 | |
Gain on early retirement of debt | | | (16,445 | ) | | — | | | (15,316 | ) | | — | | |
Loss from disposal of assets | | 550 | | 612 | | 550 | | 612 | | |
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 | ) | | | (3,836 | ) | | | (464 | ) | | | (464 | ) | | — | | | (464 | ) | | — | |
Non-cash stock compensation expense | | 4,795 | | 1,405 | | 4,795 | | 1,405 | | | 1,405 | | 2,698 | | 1,405 | | 2,698 | |
Amortization of debt discount | | 1,239 | | 1,396 | | — | | — | | | 1,396 | | 1,271 | | — | | 412 | |
Changes in operating assets and liabilities, net of effects from acquisition of businesses: | | |
Accounts receivable | | | (32,033 | ) | | | (26,668 | ) | | | (32,033 | ) | | | (26,668 | ) | | | (26,668 | ) | | | (81,466 | ) | | | (26,668 | ) | | | (81,466 | ) |
Other current assets | | | (982 | ) | | 3,571 | | | (982 | ) | | 3,571 | | | 3,571 | | 240 | | 3,571 | | 240 | |
Other assets | | 4,018 | | 494 | | 3,589 | | 88 | | | 494 | | 1,072 | | 88 | | 723 | |
Accounts payable | | | (8,366 | ) | | | (3,469 | ) | | | (8,366 | ) | | | (3,469 | ) | | | (3,469 | ) | | 14,008 | | | (3,469 | ) | | 14,008 | |
Due to third-party payors | | | (3,530 | ) | | | (756 | ) | | | (3,530 | ) | | | (756 | ) | | | (756 | ) | | | (1,050 | ) | | | (756 | ) | | | (1,050 | ) |
Accrued expenses | | | (1,024 | ) | | | (13,038 | ) | | 7,615 | | | (6,527 | ) | | | (13,038 | ) | | | (12,566 | ) | | | (6,527 | ) | | | (3,650 | ) |
Income and deferred taxes | | 10,612 | | 3,930 | | 20,608 | | 11,214 | | | 3,930 | | 25,678 | | 11,214 | | 34,723 | |
| | | | | | | | | | | | | | | | | | |
Net cash provided by operating activities | | 93,447 | | 110,265 | | 126,266 | | 135,787 | | | 110,265 | | 143,914 | | 135,787 | | 166,834 | |
| | | | | | | | | | | | | | | | | | |
| | |
Investing activities | | |
Purchases of property and equipment | | | (35,250 | ) | | | (38,626 | ) | | | (35,250 | ) | | | (38,626 | ) | | | (38,626 | ) | | | (32,094 | ) | | | (38,626 | ) | | | (32,094 | ) |
Proceeds from sale of property | | 1,341 | | — | | 1,341 | | — | | |
Investment in business | | | — | | | (13,514 | ) | | — | | | (13,514 | ) |
Acquisition of businesses, net of cash acquired | | | (381 | ) | | | (165,802 | ) | | | (381 | ) | | | (165,802 | ) | | | (165,802 | ) | | 1,921 | | | (165,802 | ) | | 1,921 | |
Proceeds from sale of assets | | | — | | 7,879 | | — | | 7,879 | |
| | | | | | | | | | | | | | | | | | |
Net cash used in investing activities | | | (34,290 | ) | | | (204,428 | ) | | | (34,290 | ) | | | (204,428 | ) | | | (204,428 | ) | | | (35,808 | ) | | | (204,428 | ) | | | (35,808 | ) |
| | | | | | | | | | | | | | | | | | |
| | |
Financing activities | | |
Proceeds from initial public offering, net of fees | | 282,000 | | — | | — | | — | | |
Equity investment by Holdings | | — | | — | | 282,024 | | 125 | | |
Payment of initial public offering costs | | | (584 | ) | | — | | | (584 | ) | | — | | |
Borrowings on revolving credit facility | | 193,000 | | 90,000 | | 193,000 | | 90,000 | | |
Payments on revolving credit facility | | | (253,000 | ) | | (70,000 | ) | | | (253,000 | ) | | (70,000 | ) | |
Payment on credit facility term loan | | | (5,033 | ) | | — | | | (5,033 | ) | | — | | |
Repurchase of 7 5/8% senior subordinated notes | | | (30,114 | ) | | — | | | (30,114 | ) | | — | | |
Repurchase of senior floating rate notes | | | (6,468 | ) | | — | | — | | — | | |
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 | | 5,184 | | 5,015 | | 5,184 | | 5,015 | | | 5,015 | | 5,496 | | 5,015 | | 5,496 | |
Principal payments on seller and other debt | | | (5,738 | ) | | | (6,667 | ) | | | (5,738 | ) | | | (6,667 | ) | | | (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 | | — | | — | | | (39,367 | ) | | | (25,522 | ) | | — | | — | | | (25,522 | ) | | | (204,561 | ) |
Repurchase of common and preferred stock | | | (80 | ) | | — | | — | | — | | |
Exercise of stock options | | 24 | | 125 | | — | | — | | |
Borrowings (repayment) of bank overdrafts | | | (21,130 | ) | | 10,971 | | | (21,130 | ) | | 10,971 | | |
Equity contribution and loans from non-controlling interests | | 1,500 | | — | | 1,500 | | — | | |
Distributions to non-controlling interests | | | (2,486 | ) | | | (3,618 | ) | | | (2,486 | ) | | | (3,618 | ) | | | (3,618 | ) | | | (3,507 | ) | | | (3,618 | ) | | | (3,507 | ) |
| | | | | | | | | | | | | | | | | | |
Net cash provided by financing activities | | 157,075 | | 25,826 | | 124,256 | | 304 | | |
Net cash provided by (used in) financing activities | | | 25,826 | | | (102,258 | ) | | 304 | | | (125,178 | ) |
| | | | | | | | | | | | | | | | | | |
| | |
Net increase (decrease) in cash and cash equivalents | | 216,232 | | | (68,337 | ) | | 216,232 | | | (68,337 | ) | | | (68,337 | ) | | 5,848 | | | (68,337 | ) | | 5,848 | |
| | |
Cash and cash equivalents at beginning of period | | 64,260 | | 83,680 | | 64,260 | | 83,680 | | | 83,680 | | 4,365 | | 83,680 | | 4,365 | |
| | | | | | | | | | | | | | | | | | |
Cash and cash equivalents at end of period | | $ | 280,492 | | $ | 15,343 | | $ | 280,492 | | $ | 15,343 | | | $ | 15,343 | | $ | 10,213 | | $ | 15,343 | | $ | 10,213 | |
| | | | | | | | | | | | | | | | | | |
| | |
Supplemental Cash Flow Information | | |
Cash paid for interest | | $ | 115,901 | | $ | 99,897 | | $ | 83,082 | | $ | 74,381 | | | $ | 99,897 | | $ | 94,632 | | $ | 74,381 | | $ | 71,719 | |
Cash paid for taxes | | $ | 22,441 | | $ | 36,424 | | $ | 22,441 | | $ | 36,424 | | | $ | 36,424 | | $ | 31,105 | | $ | 36,424 | | $ | 31,105 | |
The accompanying notes are an integral part of this statement.these consolidated financial statements.
7
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 effectingeffectuating a leveraged buyout of Select, which was a publicly traded entity. Holdings was originally owned by an investor group that includedincludes Welsh, Carson, Anderson, & Stowe, IX, LP (“Welsh Carson”), Thoma Cressey Bravo (“Thoma Cressey”) and members of the Company’s senior management. On February 24, 2005, Select merged with a subsidiary of Holdings, which resulted in Select becoming a wholly-owned subsidiary of Holdings (the “Merger”). On September 30, 2009, Holdings completed its initial public offering of common stock at a price to the public of $10.00 per share.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 Select’s 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, 20102011 and for the three and nine month periods ended September 30, 20092010 and 20102011 have been prepared in accordance with generally accepted accounting principles.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, 20102011 are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2010.2011.
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, 20092010 contained in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 17, 2010.9, 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
Recent Accounting Pronouncements
In January 2010,May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-06,2011-04, “Fair Value Measurements and DisclosuresMeasurement (Topic 820) — Improving Disclosures aboutAmendments to Achieve Common Fair Value Measurements”Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“Update 2010-06”2011-04”), which amends the guidance on. Update 2011-04 generally represents clarification of Topic 820, but also includes instances where a particular principle or requirement for measuring fair value to add newor disclosing information about fair value measurements has changed. Update 2011-04 results in common principles and requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. It also clarifies existingmeasuring fair value disclosuresand for disclosing information about the level of disaggregationfair value measurements in accordance with GAAP and about inputsInternational Financial Reporting Standards. Update 2011-04 is effective for interim and valuation techniques usedannual periods beginning after December 15, 2011 and is to measure fair value.be applied prospectively. Early application is not permitted. The Company adopted update 2010-06does not expect the adoption of Update 2011-04 to have a material impact on January 1, 2010, exceptits 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 requirementcurrent 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 Level 3 activityallowance 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 purchases, sales, issuances,evaluating the effects of Update 2011-07 on its consolidated financial statements.
In September 2011, the FASB issued ASU 2011-08, “Intangibles — Goodwill and settlementsOther (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 gross basis, whichqualitative 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, 2010, and for interim periods within those fiscal years. The adoption2011. Update 2011-08 does not change the accounting or measurement of Update 2010-06 did notimpairments. This update will have an impactno effect on the Company’s consolidated financial statements. The Company currently has no Level 3 measurements.
3. Purchase of Regency Hospital Company, L.L.C.
On September 1, 2010, Select completed 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, for $210.0 million, including certain assumed liabilities. The amount paid at closing was reduced by $33.1 million for certain assumed liabilities, payments to employees, payments for the purchase of minority interests and an estimated working capital adjustment. The purchase price is subject to a final settlement of net working capital. Regency operated a network of 23 long-term acute care hospitals located in nine states. The results of operations of Regency have been included in the Company’s consolidated financial statements since September 1, 2010 and consisted of net operating revenues of $23.4 million and pre-tax losses of $4.2 million. Regency’s operations have been included in the specialty hospitals segment.
The purchase price was allocated to tangible and identifiable intangible assets and liabilities based upon preliminary estimates of fair value, with the remainder allocated to goodwill. The Company is in the process of completing its valuation analysis to identify and determine the fair values of tangible and intangible assets acquired and the liabilities assumed. Thus, the final allocation of the purchase price may differ from preliminary estimates used at September 30, 2010. The Company expects to finalize the allocation of the purchase price prior to December 31, 2010. In accordance with the provisions of ASC 350 Intangibles — Goodwill and other, no amortization of goodwill has been recorded. The factors that were considered when deciding to acquire Regency and determining the purchase price that resulted in goodwill included the historical earnings of the acquired long-term acute care hospitals, general and administrative cost saving opportunities that could be achieved by utilizing the Company’s infrastructure and the benefits that could be achieved with patients and commercial payors by having a larger network of long-term acute care hospitals.
The preliminary purchase price allocation is as follows (in thousands):
| | | | |
Cash paid, net of cash acquired of $11.3 million | | $ | 165,616 | |
| | | |
Fair value of net tangible assets acquired: | | | | |
Accounts receivable | | | 22,526 | |
Other current assets | | | 5,194 | |
Property and equipment | | | 83,976 | |
Other assets | | | 506 | |
Current liabilities | | | (43,615 | ) |
Other liabilities | | | (6,313 | ) |
| | | |
Net tangible assets acquired | | | 62,274 | |
Tradename | | | 5,000 | |
Goodwill | | | 98,342 | |
| | | |
| | $ | 165,616 | |
| | | |
9
Unaudited pro forma net revenue3. 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 net incomeSelect 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 three and nine months ended September 30, 20102011. Additionally, the Company purchased partnership units and 2009made 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 Select and Holdings as ifthe 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 occurred as of January 1, 2009Regency Hospital Company, L.L.C. for $7.6 million in cash. A gain of $4.2 million was recognized on this sale and January 1, 2010 is as follows:
| | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | | For the Nine Months Ended | |
| | September 30, | | | September 30, | |
| | 2009 | | | 2010 | | | 2009 | | | 2010 | |
| | (in thousands except per share amounts) | |
| | | | | | | | | | | | | | | | |
Net revenue | | $ | 636,126 | | | $ | 645,300 | | | $ | 1,944,487 | | | $ | 1,987,885 | |
Net income: | | | | | | | | | | | | | | | | |
Select Medical Corporation | | $ | 8,044 | | | $ | 12,250 | | | $ | 71,288 | | | $ | 71,985 | |
Select Medical Holdings Corporation | | $ | 1,919 | | | $ | 7,444 | | | $ | 52,595 | | | $ | 58,484 | |
Income (loss) per common share of Select Medical Holdings Corporation: | | | | | | | | | | | | | | | | |
Basic | | $ | (0.08 | ) | | $ | 0.04 | | | $ | 0.44 | | | $ | 0.34 | |
Diluted | | $ | (0.08 | ) | | $ | 0.04 | | | $ | 0.44 | | | $ | 0.34 | |
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 Company’s intangible assets consist of the following:
| | | | | | | | | | | | | | | | |
| | As of September 30, 2010 | | | As of September 30, 2011 | |
| | Gross Carrying | | Accumulated | | | Gross Carrying | | Accumulated | |
| | Amount | | Amortization | | | Amount | | Amortization | |
| | (in thousands) | | | (in thousands) | |
Amortized intangible assets: | | |
Contract therapy relationships | | $ | 20,456 | | $ | (20,456 | ) | |
Non-compete agreements | | 25,909 | | | (23,937 | ) | | $ | 25,909 | | $ | (25,244 | ) |
| | | | | | |
Total | | $ | 46,365 | | $ | (44,393 | ) | |
| | | | | | |
| | |
Indefinite-lived intangible assets: | | |
Goodwill | | $ | 1,646,698 | | | $ | 1,627,509 | |
Trademarks | | 52,858 | | | 57,709 | |
Certificates of need | | 11,550 | | | 11,914 | |
Accreditations | | 1,339 | | | 2,160 | |
| | | | | | |
Total | | $ | 1,712,445 | | | $ | 1,699,292 | |
| | | | | | |
The Company’s accreditations and trademarks have renewal terms. The costs to renew these intangibles are expensed as incurred. At September 30, 2010,2011, the accreditations and trademarks have a weighted average time until next renewal of approximately 1.5 years and 3.78.7 years, respectively.
10
Amortization expense for the Company’s intangible assets with finite lives follows:
| | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, | |
| | 2009 | | | 2010 | | | 2009 | | | 2010 | |
| | (in thousands) | |
Amortization expense | | $ | 2,207 | | | $ | 869 | | | $ | 6,623 | | | $ | 3,921 | |
| | | | | | | | | | | | | | | | |
| | 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 Company’s 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 Kessler Rehabilitation Corporation and SemperCare, Inc. and the value assigned to the Company’s contract therapy relationships. The useful lives of the outpatient rehabilitation division of HealthSouth Corporation’s non-compete the Kessler Rehabilitation Corporation non-compete,and the SemperCare, Inc. non-compete are five and the Company’s contract therapy relationships are approximately five, seven seven and five years, respectively. Amortization expense related to these intangible assets for each of the next five years commencing January 1, 20102011 is approximately as follows (in thousands):
| | | | | | | | |
2010 | | $ | 4,247 | | |
| 2011 | | 1,306 | | | $ | 1,306 | |
2012 | | 340 | | | 340 | |
2013 | | 0 | | | 0 | |
2014 | | 0 | | | 0 | |
2015 | | | 0 | |
The changes in the carrying amount of goodwill for the Company’s reportable segments for the nine months ended September 30, 20102011 are as follows:
| | | | | | | | | | | | |
| | Specialty | | | Outpatient | | | | |
| | Hospitals | | | Rehabilitation | | | Total | |
| | (in thousands) | |
Balance as of December 31, 2009 | | $ | 1,247,713 | | | $ | 300,556 | | | $ | 1,548,269 | |
Goodwill acquired during the year | | | 98,342 | | | | 87 | | | | 98,429 | |
| | | | | | | | | |
Balance as of September 30, 2010 | | $ | 1,346,055 | | | $ | 300,643 | | | $ | 1,646,698 | |
| | | | | | | | | |
| | | | | | | | | | | | |
| | 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
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 Company’s restructuring plan.
11
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 Company’s restructuring activity:
| | | | |
| | Lease Termination Costs | |
| | (in thousands) | |
December 31, 2009 | | $ | 4,256 | |
Amounts paid in 2010 | | | (1,050 | ) |
Revision of estimate | | | (375 | ) |
| | | |
September 30, 2010 | | $ | 2,831 | |
| | | |
| | | | |
| | 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 2014.2014 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. ExtensionIndebtedness
The components of Revolving Credit Facilitylong-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
On June 7, 2010, the Company1, 2011, Select entered into an amendment to itsa 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 that extended the maturity of its(“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 Select’s current domestic subsidiaries and will be guaranteed by Select’s future domestic subsidiaries and secured by substantially all of Select’s existing and future property and assets and by a pledge of Select’s capital stock, the capital stock of Select’s domestic subsidiaries and up to 65% of the capital stock of Select’s 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 February 24, 20112.75% to August 22, 2013. The applicable margin3.75%, or Alternative Base Rate plus a percentage and commitment fee for revolving loans have increased and are determinedranging from 1.75% to 2.75%, in each case based on a pricing grid whereby changesSelect’s 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 the leverage ratio, as defined in the credit agreement, results in changesreference to the applicable margin percentage. UnderTerm Loan, will at no time be less than 1.75% per annum.
“Alternative Base Rate” is defined as the pricing grid,highest of (a) the administrative agent’s 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 ABR loans rangeswill decrease from 2% per annum(1) 2.75% to 3% per annum,2.50% for alternate base rate loans and (2) 3.75% to 3.50% for adjusted LIBOR loans upon the delivery of Select’s Form 10-Q to JP Morgan Chase Bank, N.A., as administrative agent to Select’s 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 Select’s 7 5/8% senior subordinated notes due 2015 (the “Tranche B Trigger Date”) more than $60.0 million in aggregate principal amount of Select’s 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 Select’s 7 5/8% senior subordinated notes due 2015 (the “Revolving Trigger Date”) more than $60.0 million in aggregate principal amount of Select’s 7 5/8% senior subordinated notes due 2015 are outstanding, the maturity date for the Revolving Credit Facility will be the Revolving Trigger Date.
13
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 Select’s leverage ratio is greater than 3.75 to 1.00 and 25% of excess cash flow if Select’s 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 margin percentagefiscal year. Select will not be required to prepay borrowings with excess cash flow if Select’s 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 revolving Eurodollar loans rangesmoney borrowed to consolidated EBITDA, as defined in the Credit Agreement), which is tested quarterly and becomes more restrictive over time, and prohibits Select from 3% per annummaking capital expenditures in excess of $125.0 million in any fiscal year (subject to 4% per annum,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 Company’s long-term debt for the period from October 1, 2011 through December 31, 2011 and the commitment fee rate for extended revolving commitments ranges from 0.375% to 0.75%.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
Fair Value Measurements
The Company measures its interest rate swaps at fair value on a recurring basis. The Company determines the fair value of its interest rate swaps based on financial models that consider current and future market interest rates and adjustments for non-performance risk. The Company considers those inputs utilized in the valuation process to be Level 2 in the fair value hierarchy. Level 2 in the fair value hierarchy is defined as inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. The fair value of the Company’s interest rate swaps was a liability of $1.0 million at September 30, 2010 and $14.1 million at December 31, 2009. These liabilities are reported on the consolidated balance sheet as current liabilities in accrued other.
Fair Value of Financial Instruments
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
The carrying value of Select’s senior secured credit facilityfacilities was $483.1$506.8 million and $503.1$889.8 million at December 31, 20092010 and September 30, 2010,2011, respectively. The fair value of Select’s senior secured credit facilityfacilities was $471.0$497.7 million and $493.4$800.3 million at December 31, 20092010 and September 30, 2010,2011, respectively. The fair value of Select’s senior secured credit facilityfacilities was based on quoted market prices for this debt in the syndicated loan market.
12
The carrying value of theSelect’s 75/8% 5/8% senior subordinated notes was $611.5 million and $345.0 million at both December 31, 20092010 and September 30, 2010.2011, respectively. The fair value of theSelect’s 75/8% 5/8% senior subordinated notes was $593.2$616.1 million and $596.2$300.2 million at December 31, 20092010 and September 30, 2010,2011, respectively. The fair value of this registeredpublicly traded debt was based on quoted market prices.
The carrying value of theHoldings’ senior floating rate notes was $167.3 million at both December 31, 20092010 and September 30, 2010.2011. The fair value of theHoldings’ senior floating rate notes was $155.6$156.0 million and $145.8$148.1 million at December 31, 20092010 and September 30, 2010,2011, respectively. The fair value of this registeredpublicly traded debt was based on quoted market prices.
Interest Rate Swaps
The Company is exposed to the impact of interest rate changes. The Company’s objective is to manage the impact of the interest rate changes on earnings and cash flows. At September 30, 2010, Select has one outstanding interest swap contract that it entered into on November 16, 2007 to hedge Select’s interest rate risk for a portion of its term loans under its senior secured credit facility. The effective date of the swap transaction was November 23, 2007. The swap is designated as a cash flow hedge of forecasted LIBOR based variable rate interest payments. The notional amount of the interest rate swap is $100.0 million, and the underlying variable rate debt is associated with Select’s senior secured credit facility. The weighted average variable interest rate of the debt was 3.41% and the weighted average fixed rate of the swap was 7.34% at September 30, 2010. The swap is for a period of three years, and matures on November 22, 2010.
For the portion of swaps that qualify as a hedge, the interest rate swaps are reflected at fair value in the consolidated balance sheet. A gain of $2.5 million, net of tax, was recorded in Holdings’ stockholders’ equity as a component of other comprehensive loss for the nine months ended September 30, 2009. A gain of $8.5 million, net of tax, was recorded for the nine months ended September 30, 2010. Select recorded a gain of $0.8 million, net of tax, for the nine months ended September 30, 2009, and a gain of $8.5 million, net of tax, for the nine months ended September 30, 2010 related to the swaps in Select’s stockholder’s equity as a component of other comprehensive loss. The Company tests for ineffectiveness whenever financial statements are issued or at least every three months using the Hypothetical Derivative Method. See also Note 8,Accumulated Other Comprehensive Loss.
8. Accumulated Other Comprehensive Loss
Included in accumulated other comprehensive loss at December 31, 2009 and September 30, 2010 were cumulative losses of $8.9 million (net of tax) and $0.4 million (net of tax), respectively, on interest rate swaps accounted for as cash flow hedges.
9. Stockholders’ Equity
Participating Preferred Stock
Upon completion of Holdings’ initial public offering of common stock on September 30, 2009, Holdings’ outstanding participating preferred stock converted into a total of 64,276,974 common shares. Each share of preferred stock converted into a number of shares of common stock determined by:
• | | dividing the original cost of a share of the preferred stock ($26.90 per share of preferred stock) plus all accrued and unpaid dividends through September 30, 2009 thereon less the amount of any previously declared and paid special dividends, or the “accreted value” of such preferred stock, by the initial public offering price per share net of any expenses incurred and underwriting commissions or concessions paid or allowed in connection with the offering; plus |
|
• | | .30 shares of common stock for each share of preferred stock owned. |
13
Common Stock
On September 25, 2009 Holdings effected a 1 for .30 reverse stock split of its common stock. Accordingly all common issued and outstanding share and per share information in this report has been retroactively restated to reflect the effects of this reverse stock split.
10. Segment Information
The Company’s 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, gainstock compensation expense, equity in earnings (losses) of unconsolidated subsidiaries, loss on early retirement of debt stock compensation expense, long term incentive compensation, equity in losses of unconsolidated subsidiaries and other income.
The following tables summarize selected financial data for the Company’s reportable segments for the three and nine months ended September 30, 20092010 and 2010.2011. The segment results of Holdings are identical to those of Select with the exception of total assets:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2009 | | | Three Months Ended September 30, 2010 | |
| | Specialty | | Outpatient | | | | | | | Specialty | | Outpatient | | | | | |
| | Hospitals | | Rehabilitation | | All Other | | Total | | | Hospitals | | Rehabilitation | | All Other | | Total | |
| | (in thousands) | | | (in thousands) | |
| | |
Net operating revenue | | $ | 376,859 | | $ | 168,751 | | $ | 11 | | $ | 545,621 | | | $ | 419,798 | | $ | 168,438 | | $ | 14 | | $ | 588,250 | |
Adjusted EBITDA | | 64,381 | | 20,898 | | | (12,236 | ) | | 73,043 | | | 58,282 | | 20,339 | | | (19,195 | ) | | 59,426 | |
Total assets: | | |
Select Medical Corporation | | 1,898,494 | | 484,703 | | 378,356 | | 2,761,553 | | | 2,051,238 | | 487,171 | | 179,551 | | 2,717,960 | |
Select Medical Holdings Corporation | | 1,898,494 | | 484,703 | | 381,545 | | 2,764,742 | | | 2,051,238 | | 487,171 | | 182,199 | | 2,720,608 | |
Capital expenditures | | 12,371 | | 1,566 | | 332 | | 14,269 | | | 9,339 | | 2,019 | | 814 | | 12,172 | |
1415
| | | | | | | | | | | | | | | | |
| | 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2009 | | | Three Months Ended September 30, 2011 | |
| | Specialty | | Outpatient | | | | | | | Specialty | | Outpatient | | | | | |
| | Hospitals | | Rehabilitation | | All Other | | Total | | | Hospitals | | Rehabilitation | | All Other | | Total | |
| | (in thousands) | | | (in thousands) | |
| | |
Net operating revenue | | $ | 1,156,422 | | $ | 509,760 | | $ | 146 | | $ | 1,666,328 | | | $ | 521,085 | | $ | 173,030 | | $ | 16 | | $ | 694,131 | |
Adjusted EBITDA | | 212,122 | | 67,476 | | | (37,277 | ) | | 242,321 | | | 81,570 | | 19,435 | | | (14,469 | ) | | 86,536 | |
Total assets: | | |
Select Medical Corporation | | 1,898,494 | | 484,703 | | 378,356 | | 2,761,553 | | | 2,191,493 | | 468,551 | | 89,568 | | 2,749,612 | |
Select Medical Holdings Corporation | | 1,898,494 | | 484,703 | | 381,545 | | 2,764,742 | | | 2,191,493 | | 468,551 | | 91,066 | | 2,751,110 | |
Capital expenditures | | 27,748 | | 6,575 | | 927 | | 35,250 | | | 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 | |
1516
A reconciliation of Adjusted EBITDA to income (loss) from operations before income taxes is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2009 | | | Three Months Ended September 30, 2010 | |
| | Specialty | | Outpatient | | | | | Specialty | | Outpatient | | | |
| | Hospitals | | Rehabilitation | | All Other | | | Hospitals | | Rehabilitation | | All Other | |
Adjusted EBITDA | | $ | 64,381 | | $ | 20,898 | | $ | (12,236 | ) | | | | | $ | 58,282 | | $ | 20,339 | | $ | (19,195 | ) | | | | | |
Depreciation and amortization | | | (10,485 | ) | | | (6,282 | ) | | | (909 | ) | | | | (11,237 | ) | | | (4,953 | ) | | | (822 | ) | |
Long term incentive compensation | | | (18,261 | ) | | |
Stock compensation expense | | — | | — | | | (4,201 | ) | | | — | | — | | | (460 | ) | |
| | | | | | | | | | | | | | |
| | Select Medical | | | | | | | | | | | | | | | | | | | | | | | |
| | Holdings | | Select Medical | | | Select Medical | | | |
| | Corporation | | Corporation | | | Holdings | | Select Medical | |
| | | Corporation | | Corporation | |
Income (loss) from operations | | $ | 53,896 | | $ | 14,616 | | $ | (35,607 | ) | | $ | 32,905 | | $ | 32,905 | | | $ | 47,045 | | $ | 15,386 | | $ | (20,477 | ) | | $ | 41,954 | | $ | 41,954 | |
Gain on early retirement of debt | | 1,129 | | — | | |
Other expense | | — | | 2,215 | | |
Equity in losses of unconsolidated subsidiaries | | | | (186 | ) | | | (186 | ) |
Other income | | | 148 | | 148 | |
Interest expense, net | | | (33,449 | ) | | | (25,112 | ) | | | (27,677 | ) | | | (20,821 | ) |
| | | | | | | | | | |
| | |
Income from operations before income taxes | | $ | 585 | | $ | 10,008 | | |
Income before income taxes | | | $ | 14,239 | | $ | 21,095 | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2010 | | | Three Months Ended September 30, 2011 | |
| | Specialty | | Outpatient | | | | | Specialty | | Outpatient | | | |
| | Hospitals | | Rehabilitation | | All Other | | | Hospitals | | Rehabilitation | | All Other | |
Adjusted EBITDA | | $ | 58,282 | | $ | 20,339 | | $ | (19,195 | ) | | | | | $ | 81,570 | | $ | 19,435 | | $ | (14,469 | ) | | | | | |
Depreciation and amortization | | | (11,237 | ) | | | (4,953 | ) | | | (822 | ) | | | | (12,828 | ) | | | (4,003 | ) | | | (714 | ) | |
Stock compensation expense | | — | | — | | | (460 | ) | | | — | | — | | | (918 | ) | |
| | | | | | | | | | | | | | |
| | Select Medical | | | | | | | | | | | | | | | | | | | | | | | |
| | Holdings | | Select Medical | | | Select Medical | | | |
| | Corporation | | Corporation | | | Holdings | | Select Medical | |
| | | Corporation | | Corporation | |
Income (loss) from operations | | $ | 47,045 | | $ | 15,386 | | $ | (20,477 | ) | | $ | 41,954 | | $ | 41,954 | | | $ | 68,742 | | $ | 15,432 | | $ | (16,101 | ) | | $ | 68,073 | | $ | 68,073 | |
Equity in losses of unconsolidated subsidiaries | | | (186 | ) | | | (186 | ) | |
Other income | | 148 | | 148 | | |
Equity in earnings of unconsolidated subsidiaries | | | 1,653 | | 1,653 | |
Interest expense, net | | | (27,677 | ) | | | (20,821 | ) | | | (24,015 | ) | | | (21,407 | ) |
| | | | | | | | | | |
| | |
Income from operations before income taxes | | $ | 14,239 | | $ | 21,095 | | |
Income before income taxes | | | $ | 45,711 | | $ | 48,319 | |
| | | | | | | | | | |
1617
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2009 | | | Nine Months Ended September 30, 2010 | |
| | Specialty | | Outpatient | | | | | Specialty | | Outpatient | | | |
| | Hospitals | | Rehabilitation | | All Other | | | Hospitals | | Rehabilitation | | All Other | |
Adjusted EBITDA | | $ | 212,122 | | $ | 67,476 | | $ | (37,277 | ) | | | | | $ | 214,523 | | $ | 66,813 | | $ | (41,419 | ) | | | | | |
Depreciation and amortization | | | (32,022 | ) | | | (18,679 | ) | | | (2,645 | ) | | | | (33,095 | ) | | | (15,752 | ) | | | (2,486 | ) | |
Long term incentive compensation | | — | | — | | | (18,261 | ) | | |
Stock compensation expense | | — | | — | | | (4,795 | ) | | | — | | — | | | (1,405 | ) | |
| | | | | | | | | | | | | | |
| | Select Medical | | | | | | | | | | | | | | | | | | | | | | | |
| | Holdings | | Select Medical | | | Select Medical | | | |
| | Corporation | | Corporation | | | Holdings | | Select Medical | |
| | | Corporation | | Corporation | |
Income (loss) from operations | | $ | 180,100 | | $ | 48,797 | | $ | (62,978 | ) | | $ | 165,919 | | $ | 165,919 | | | $ | 181,428 | | $ | 51,061 | | $ | (45,310 | ) | | $ | 187,179 | | $ | 187,179 | |
Gain on early retirement of debt | | 16,445 | | 15,316 | | |
Equity in losses of unconsolidated subsidiaries | | | | (186 | ) | | | (186 | ) |
Other income | | — | | 3,836 | | | 464 | | 464 | |
Interest expense, net | | | (101,699 | ) | | | (75,854 | ) | | | (86,998 | ) | | | (66,184 | ) |
| | | | | | | | | | |
| | |
Income from operations before income taxes | | $ | 80,665 | | $ | 109,217 | | |
Income before income taxes | | | $ | 100,459 | | $ | 121,273 | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2010 | | | Nine Months Ended September 30, 2011 | |
| | Specialty | | Outpatient | | | | | Specialty | | Outpatient | | | |
| | Hospitals | | Rehabilitation | | All Other | | | Hospitals | | Rehabilitation | | All Other | |
Adjusted EBITDA | | $ | 214,523 | | $ | 66,813 | | $ | (41,419 | ) | | | $ | 273,004 | | $ | 65,308 | | $ | (46,117 | ) | | | | | |
Depreciation and amortization | | | (33,095 | ) | | | (15,752 | ) | | | (2,486 | ) | | | | | | (37,921 | ) | | | (12,689 | ) | | | (2,156 | ) | |
Stock compensation expense | | — | | — | | | (1,405 | ) | | | — | | — | | | (2,698 | ) | |
| | | | | | | | | | | | | | |
| | Select Medical | | | | | | | | | | | | | | | | | | | | | | | |
| | Holdings | | Select Medical | | | Select Medical | | | |
| | Corporation | | Corporation | | | Holdings | | Select Medical | |
| | | Corporation | | Corporation | |
Income (loss) from operations | | $ | 181,428 | | $ | 51,061 | | $ | (45,310 | ) | | $ | 187,179 | | $ | 187,179 | | | $ | 235,083 | | $ | 52,619 | | $ | (50,971 | ) | | $ | 236,731 | | $ | 236,731 | |
Equity in losses of unconsolidated subsidiaries | | | (186 | ) | | | (186 | ) | |
Other income | | 464 | | 464 | | |
Loss on early retirement of debt | | | | (31,018 | ) | | | (20,385 | ) |
Equity in earnings of unconsolidated subsidiaries | | | 1,329 | | 1,329 | |
Interest expense, net | | | (86,998 | ) | | | (66,184 | ) | | | (74,808 | ) | | | (59,596 | ) |
| | | | | | | | | | |
| | |
Income from operations before income taxes | | $ | 100,459 | | $ | 121,273 | | |
Income before income taxes | | | $ | 132,234 | | $ | 158,079 | |
| | | | | | | | | | |
11.9. Income (loss) per Common Share
The Company applies the two-class method for calculating and presenting income (loss) per common share. The two-class method is an earnings (loss) allocation formula that determines earnings (loss) per share for each class of stock participation rights in undistributed earnings. Effective January 1, 2009 the Financial Accounting Standards Board (“FASB”)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 (loss) 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 Company’s computation of basic earnings (loss) per share.
1718
The following table sets forth for the periods indicated the calculation of net income (loss) per share in the Company’s 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 (loss) per share, respectively:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Quarter Ended | | For the Nine Months Ended | | | Three Months Ended | | Nine Months Ended | |
| | September 30, | | September 30, | | | September 30, | | September 30, | |
| | 2009 | | 2010 | | 2009 | | 2010 | | | 2010 | | 2011 | | 2010 | | 2011 | |
| | (in thousands, except per share amounts) | | | (in thousands, except per share amounts) | |
Numerator: | | |
Net income attributable to Select Medical Holdings Corporation | | $ | 583 | | $ | 8,009 | | $ | 45,371 | | $ | 56,697 | | | $ | 8,009 | | $ | 25,596 | | $ | 56,697 | | $ | 70,987 | |
Less: Preferred stock dividends | | 6,667 | | — | | 19,537 | | — | | |
Less: Earnings (loss) allocated to preferred stockholders | | | (582 | ) | | — | | 2,497 | | — | | |
Less: Earnings allocated to unvested restricted stockholders | | — | | 25 | | 315 | | 135 | | | 25 | | 278 | | 135 | | 763 | |
| | | | | | | | | | | | | | | | | | |
Income (loss) available to common and preferred stockholders — basic and diluted | | $ | (5,502 | ) | | $ | 7,984 | | $ | 23,022 | | $ | 56,562 | | |
Net income available to common stockholders | | | $ | 7,984 | | $ | 25,318 | | $ | 56,562 | | $ | 70,224 | |
| | | | | | | | | | | | | | | | | | |
| | |
Denominator: | | |
Weighted average shares — basic | | 62,078 | | 159,717 | | 61,030 | | 159,698 | | | 159,717 | | 151,470 | | 159,698 | | 152,299 | |
Effect of dilutive securities: | | |
Stock options | | — | | 238 | | 470 | | 266 | | | 238 | | 206 | | 266 | | 223 | |
| | | | | | | | | | | | | | | | | | |
Weighted average shares — diluted | | 62,078 | | 159,955 | | 61,500 | | 159,964 | | | 159,955 | | 151,676 | | 159,964 | | 152,522 | |
| | | | | | | | | | | | | | | | | | |
| | |
Basic income (loss) per common share | | $ | (0.09 | ) | | $ | 0.05 | | $ | 0.38 | | $ | 0.35 | | |
Diluted income (loss) per common share | | $ | (0.09 | ) | | $ | 0.05 | | $ | 0.37 | | $ | 0.35 | | |
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:
| | | | | | | | | | | | | | | | |
| | For the Quarter Ended | | | For the Nine Months Ended | |
| | September 30, | | | September 30, | |
| | 2009 | | | 2010 | | | 2009 | | | 2010 | |
| | (in thousands) | |
Stock options | | | 469 | | | | 2,392 | | | | — | | | | 2,383 | |
18
12. Early Retirement of Debt
During the first and second quarter of 2009, the Company paid approximately $30.1 million to repurchase and retire a portion of its 75/8% senior subordinated notes. These notes had a carrying value of $46.5 million. A gain on early retirement of debt in the amount of $15.3 million was recognized, which was net of the write-off of $1.0 million in unamortized deferred financing costs related to the debt. In the third quarter of 2009, the Company paid approximately $6.5 million to repurchase and retire a portion of Holdings senior floating rate notes with a carrying value of $7.7 million. A gain on the early retirement of debt in the amount of $1.1 million was recognized in the third quarter of 2009 which was net of the write off of $0.1 million in unamortized deferred financing costs related to the debt. | | | | | | | | | | | | | | | | |
| | 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 | |
13.10. Commitments and Contingencies
Litigation
To cover claims arising out of the operations of the Company’s 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 Company’s 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
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 Company’s 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 thequi tamprovisions of the federal False Claims Act.Qui tamlawsuits 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 privatequi tamplaintiff (known as a relator) and take the lead in the litigation. These lawsuits can involve significant monetary damages and penalties and award bounties to private plaintiffs who successfully bring the suits. The Company has been a defendant in these cases in the past, and may be named as a defendant in similar cases from time to time in the future.
During July 2009,the third quarter of 2011, the Company receivedentered into a settlement agreement with the United States government in connection with the previously disclosedqui tamlawsuit filed in Columbus, Ohio against certain subsidiaries of the Company. The lawsuit, filed under seal in September 2007, led to the Company’s receiving, in July 2009, a subpoena from the Office of Inspector General of the U.S. Department of Health and Human Servicesgovernment seeking various documents concerning the Company’s financial relationships with certain physicians practicing at its long term acute care hospitals in Columbus, Ohio. TheUnder the terms of the settlement, the Company believes that the subpoena has been issued in connection with a qui tam lawsuit, and thatagreed to pay $7.5 million to the government is currently investigating the matter to determine whether to intervene. The Company has produced documents in response to the subpoena and intends to fully cooperate with the government’s investigation. At this time, the Company is unable to predict the timing and outcome of this matter.
19
On March 8, 2010, the Company receivedenter into a letter from the United States Senate Finance Committee in response to a New York Times article published February 10, 2010 focusing on our Company and the5-year corporate integrity agreement covering its long term acute care hospital industry entitled “Long-Term Care Hospitals Face Little Scrutiny.”hospitals. The letter fromCompany also agreed to pay certain legal fees of the Senate Finance Committee askedqui tamrelator’s counsel. In the settlement agreement, the Company to respond to a varietyadmitted no liability or wrongdoing. During the second quarter of questions regarding our long-term care hospitals. On March 23, 2010,2011, the Company respondedrecorded a pre-tax charge of $7.5 million to establish a settlement reserve in connection with the letter. On May 25, 2010matter. The settlement amounts and counsel fees were paid in full during the third quarter of 2011, and the Company received follow-up questions from the committee, which the Company respondeddoes not expect to on June 4, 2010. The Company intends on fully cooperatingincur any additional material charges in connection with the Committee. At this time, the Company is unable to predict the timing and outcome of this matter.
Construction Commitments
At September 30, 2010,2011, the Company had outstanding commitments under construction contracts related to new construction, improvements and renovations at certain of the Company’s long term acute care properties and inpatient rehabilitation facilities totaling approximately $10.3$2.7 million.
11. Common Stock Repurchase Program
On August 3, 2011, the Company’s 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
14. Financial Information for Subsidiary Guarantors and Non-Guarantor Subsidiaries under Select’s 75/8% Senior Subordinated Notes12. | | Financial Information for Subsidiary Guarantors and Non-Guarantor Subsidiaries under Select’s 7 5/8% Senior Subordinated Notes |
Select’s 75/8% Senior Subordinated Notes 5/8% senior subordinated notes are fully and unconditionally guaranteed, except for customary limitations, on a senior subordinated basis by all of Select’s wholly-owned subsidiaries (the “Subsidiary Guarantors”). Certain of Select’s subsidiaries did not guarantee the 75/8% Senior Subordinated Notes 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, 2009 and 20102011 and for the three and nine months ended September 30, 20092010 and 2010.2011.
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, 2010 after giving effect to the guarantees of the subsidiaries acquired in the Regency transaction:2011:
Caritas Rehab Services, LLC
Elizabethtown Physical Therapy, P.S.C.
Great Lakes Specialty Hospital — Hackley, LLC
Great Lakes Specialty Hospital — Oak, LLC
Jeff Ayres, PT Therapy Center, Inc.
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
Partners in Physical Therapy, PLLC
Penn State Hershey Rehabilitation, LLC
Philadelphia Occupational Health, P.C.
Rehabilitation Physician Services, P.C.
Regency Hospital of ForthFort Worth, LLPL.L.P.
Select LifeCare Western Michigan, LLC
Select Physical Therapy/Baptist Rehabilitation Center, 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
| | | | | | | | | | | | | | | | | | | | |
| | Select Medical Corporation | |
| | Condensed Consolidating Balance Sheet | |
| | September 30, 2010 | |
| | (unaudited) | |
| | Select Medical | | | | | | | | | | | | | |
| | Corporation (Parent | | | Subsidiary | | | Non-Guarantor | | | | | | | |
| | Company Only) | | | Guarantors | | | Subsidiaries | | | Eliminations | | | Consolidated | |
| | (in thousands) | |
Assets | | | | | | | | | | | | | | | | | | | | |
Current Assets: | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 8,185 | | | $ | 6,614 | | | $ | 544 | | | $ | — | | | $ | 15,343 | |
Accounts receivable, net | | | — | | | | 276,189 | | | | 49,149 | | | | — | | | | 325,338 | |
Current deferred tax asset | | | 7,307 | | | | 26,248 | | | | 5,394 | | | | — | | | | 38,949 | |
Prepaid income taxes | | | 12,966 | | | | — | | | | — | | | | — | | | | 12,966 | |
Other current assets | | | 2,793 | | | | 20,775 | | | | 2,329 | | | | — | | | | 25,897 | |
| | | | | | | | | | | | | | | |
Total Current Assets | | | 31,251 | | | | 329,826 | | | | 57,416 | | | | — | | | | 418,493 | |
| | | | | | | | | | | | | | | | | | | | |
Property and equipment, net | | | 5,901 | | | | 473,360 | | | | 58,765 | | | | — | | | | 538,026 | |
Investment in affiliates | | | 2,964,610 | | | | 80,797 | | | | — | | | | (3,045,407 | )(a) (b) | | | — | |
Goodwill | | | — | | | | 1,646,698 | | | | — | | | | — | | | | 1,646,698 | |
Other identifiable intangibles | | | — | | | | 67,719 | | | | — | | | | — | | | | 67,719 | |
Assets held for sale | | | 11,342 | | | | — | | | | — | | | | — | | | | 11,342 | |
Other assets | | | 22,172 | | | | 9,438 | | | | 4,072 | | | | — | | | | 35,682 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Total Assets | | $ | 3,035,276 | | | $ | 2,607,838 | | | $ | 120,253 | | | $ | (3,045,407 | ) | | $ | 2,717,960 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Liabilities and Equity | | | | | | | | | | | | | | | | | | | | |
Current Liabilities: | | | | | | | | | | | | | | | | | | | | |
Bank overdrafts | | $ | 10,971 | | | $ | — | | | $ | — | | | $ | — | | | $ | 10,971 | |
Current portion of long-term debt and notes payable | | | 147,955 | | | | 858 | | | | 303 | | | | — | | | | 149,116 | |
Accounts payable | | | 7,808 | | | | 59,469 | | | | 9,170 | | | | — | | | | 76,447 | |
Intercompany accounts | | | 1,153,988 | | | | (1,079,892 | ) | | | (74,096 | ) | | | — | | | | — | |
Accrued payroll | | | 147 | | | | 72,114 | | | | 189 | | | | — | | | | 72,450 | |
Accrued vacation | | | 3,072 | | | | 37,645 | | | | 5,435 | | | | — | | | | 46,152 | |
Accrued interest | | | 9,936 | | | | 320 | | | | — | | | | — | | | | 10,256 | |
Accrued restructuring | | | — | | | | 2,831 | | | | — | | | | — | | | | 2,831 | |
Accrued other | | | 32,615 | | | | 56,254 | | | | 6,669 | | | | — | | | | 95,538 | |
Due to third party payors | | | — | | | | 6,445 | | | | — | | | | — | | | | 6,445 | |
| | | | | | | | | | | | | | | |
Total Current Liabilities | | | 1,366,492 | | | | (843,956 | ) | | | (52,330 | ) | | | — | | | | 470,206 | |
| | | | | | | | | | | | | | | | | | | | |
Long-term debt, net of current portion | | | 494,627 | | | | 422,363 | | | | 53,846 | | | | — | | | | 970,836 | |
Non-current deferred tax liability | | | (620 | ) | | | 60,074 | | | | 6,815 | | | | — | | | | 66,269 | |
Other non-current liabilities | | | 62,794 | | | | 4,472 | | | | — | | | | — | | | | 67,266 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Total Liabilities | | | 1,923,293 | | | | (357,047 | ) | | | 8,331 | | | | — | | | | 1,574,577 | |
| | | | | | | | | | | | | | | | | | | | |
Stockholder’s Equity: | | | | | | | | | | | | | | | | | | | | |
Common stock | | | — | | | | — | | | | — | | | | — | | | | — | |
Capital in excess of par | | | 831,479 | | | | — | | | | — | | | | — | | | | 831,479 | |
Retained earnings | | | 280,918 | | | | 494,448 | | | | 25,957 | | | | (520,405 | )(b) | | | 280,918 | |
Subsidiary investment | | | — | | | | 2,470,437 | | | | 54,565 | | | | (2,525,002 | )(a) | | | — | |
Accumulated other comprehensive loss | | | (414 | ) | | | — | | | | — | | | | — | | | | (414 | ) |
| | | | | | | | | | | | | | | |
Total Select Medical Corporation Stockholder’s Equity | | | 1,111,983 | | | | 2,964,885 | | | | 80,522 | | | | (3,045,407 | ) | | | 1,111,983 | |
| | | | | | | | | | | | | | | | | | | | |
Non-controlling interests | | | — | | | | — | | | | 31,400 | | | | — | | | | 31,400 | |
| | | | | | | | | | | | | | | |
Total Equity | | | 1,111,983 | | | | 2,964,885 | | | | 111,922 | | | | (3,045,407 | ) | | | 1,143,383 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Total Liabilities and Equity | | $ | 3,035,276 | | | $ | 2,607,838 | | | $ | 120,253 | | | $ | (3,045,407 | ) | | $ | 2,717,960 | |
| | | | | | | | | | | | | | | |
Select Medical CorporationCondensed 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 | |
| | | | | | | | | | | | | | | | | | | | |
Stockholder’s 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 Stockholder’s 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
| | | | | | | | | | | | | | | | | | | | |
| | Select Medical Corporation | |
| | 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 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 | |
| | | | | | | | | | | | | | | |
Select Medical CorporationCondensed 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 net income from consolidatedearnings of subsidiaries. |
23
| | | | | | | | | | | | | | | | | | | | |
| | Select Medical Corporation | |
| | 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 | |
| | | | | | | | | | | | | | | |
Select Medical Corporation
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 net income from consolidatedearnings of subsidiaries. |
24
| | | | | | | | | | | | | | | | | | | | |
| | Select Medical Corporation | |
| | 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 | |
| | | | | | | | | | | | | | | |
Select Medical Corporation
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
| | | | | | | | | | | | | | | | | | | | |
| | Select Medical Corporation | |
| | Condensed Consolidating Balance Sheet | |
| | December 31, 2009 | |
| | Select Medical | | | | | | | Non- | | | | | | | |
| | Corporation (Parent | | | Subsidiary | | | Guarantor | | | | | | | |
| | Company Only) | | | Guarantors | | | Subsidiaries | | | Eliminations | | | Consolidated | |
| | (in thousands) | |
Assets | | | | | | | | | | | | | | | | | | | | |
Current Assets: | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 80,940 | | | $ | 2,298 | | | $ | 442 | | | $ | — | | | $ | 83,680 | |
Accounts receivable, net | | | — | | | | 282,670 | | | | 24,409 | | | | — | | | | 307,079 | |
Current deferred tax asset | | | 13,677 | | | | 29,854 | | | | 5,004 | | | | — | | | | 48,535 | |
Prepaid income taxes | | | 11,179 | | | | — | | | | — | | | | — | | | | 11,179 | |
Other current assets | | | 5,386 | | | | 13,588 | | | | 5,266 | | | | — | | | | 24,240 | |
| | | | | | | | | | | | | | | |
Total Current Assets | | | 111,182 | | | | 328,410 | | | | 35,121 | | | | — | | | | 474,713 | |
| | | | | | | | | | | | | | | | | | | | |
Property and equipment, net | | | 6,649 | | | | 409,258 | | | | 50,224 | | | | — | | | | 466,131 | |
Investment in affiliates | | | 2,142,189 | | | | 72,628 | | | | — | | | | (2,214,817 | )(a) (b) | | | — | |
Goodwill | | | — | | | | 1,548,269 | | | | — | | | | — | | | | 1,548,269 | |
Other identifiable intangibles | | | — | | | | 65,297 | | | | — | | | | — | | | | 65,297 | |
Assets held for sale | | | 11,342 | | | | — | | | | — | | | | — | | | | 11,342 | |
Other assets | | | 22,400 | | | | 8,716 | | | | 2,311 | | | | — | | | | 33,427 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Total Assets | | $ | 2,293,762 | | | $ | 2,432,578 | | | $ | 87,656 | | | $ | (2,214,817 | ) | | $ | 2,599,179 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Liabilities and Equity | | | | | | | | | | | | | | | | | | | | |
Current Liabilities: | | | | | | | | | | | | | | | | | | | | |
Current portion of long-term debt and notes payable | | $ | 2,545 | | | $ | 803 | | | $ | 797 | | | $ | — | | | $ | 4,145 | |
Accounts payable | | | 3,229 | | | | 61,215 | | | | 8,990 | | | | — | | | | 73,434 | |
Intercompany accounts | | | 495,981 | | | | (416,944 | ) | | | (79,037 | ) | | | — | | | | — | |
Accrued payroll | | | 81 | | | | 61,860 | | | | 94 | | | | — | | | | 62,035 | |
Accrued vacation | | | 2,942 | | | | 33,024 | | | | 5,047 | | | | — | | | | 41,013 | |
Accrued interest | | | 23,354 | | | | 119 | | | | — | | | | — | | | | 23,473 | |
Accrued restructuring | | | — | | | | 4,256 | | | | — | | | | — | | | | 4,256 | |
Accrued other | | | 50,122 | | | | 41,661 | | | | 5,351 | | | | — | | | | 97,134 | |
Due to third party payors | | | — | | | | 11,319 | | | | (9,414 | ) | | | — | | | | 1,905 | |
| | | | | | | | | | | | | | | |
Total Current Liabilities | | | 578,254 | | | | (202,687 | ) | | | (68,172 | ) | | | — | | | | 307,395 | |
| | | | | | | | | | | | | | | | | | | | |
Long-term debt, net of current portion | | | 616,906 | | | | 434,384 | | | | 45,552 | | | | — | | | | 1,096,842 | |
Non-current deferred tax liability | | | 995 | | | | 58,346 | | | | 7,427 | | | | — | | | | 66,768 | |
Other non-current liabilities | | | 60,543 | | | | — | | | | — | | | | — | | | | 60,543 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Total Liabilities | | | 1,256,698 | | | | 290,043 | | | | (15,193 | ) | | | — | | | | 1,531,548 | |
| | | | | | | | | | | | | | | | | | | | |
Stockholder’s Equity: | | | | | | | | | | | | | | | | | | | | |
Common stock | | | — | | | | — | | | | — | | | | — | | | | — | |
Capital in excess of par | | | 822,664 | | | | — | | | | — | | | | — | | | | 822,664 | |
Retained earnings | | | 223,314 | | | | 407,870 | | | | 21,075 | | | | (428,945 | )(b) | | | 223,314 | |
Subsidiary investment | | | — | | | | 1,734,665 | | | | 51,207 | | | | (1,785,872 | )(a) | | | — | |
Accumulated other comprehensive loss | | | (8,914 | ) | | | — | | | | — | | | | — | | | | (8,914 | ) |
| | | | | | | | | | | | | | | |
Total Select Medical Corporation Stockholder’s Equity | | | 1,037,064 | | | | 2,142,535 | | | | 72,282 | | | | (2,214,817 | ) | | | 1,037,064 | |
| | | | | | | | | | | | | | | | | | | | |
Non-controlling interests | | | — | | | | — | | | | 30,567 | | | | — | | | | 30,567 | |
| | | | | | | | | | | | | | | |
Total Equity | | | 1,037,064 | | | | 2,142,535 | | | | 102,849 | | | | (2,214,817 | ) | | | 1,067,631 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Total Liabilities and Equity | | $ | 2,293,762 | | | $ | 2,432,578 | | | $ | 87,656 | | | $ | (2,214,817 | ) | | $ | 2,599,179 | |
| | | | | | | | | | | | | | | |
Select Medical Corporation
Condensed Consolidating Balance Sheet
December 31, 2010
(unaudited) | | | | | | | | | | | | | | | | | | | | |
| | Select Medical | | | | | | | | | | | | | |
| | Corporation (Parent | | | Subsidiary | | | Non-Guarantor | | | | | | | |
| | Company Only) | | | Guarantors | | | Subsidiaries | | | Eliminations | | | Consolidated | |
| | (in thousands) | |
| | | | | | | | | | | | | | | | | | | | |
Assets | | | | | | | | | | | | | | | | | | | | |
Current Assets: | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 149 | | | $ | 3,567 | | | $ | 649 | | | $ | — | | | $ | 4,365 | |
Accounts receivable, net | | | — | | | | 314,123 | | | | 39,309 | | | | — | | | | 353,432 | |
Current deferred tax asset | | | 8,007 | | | | 19,226 | | | | 3,421 | | | | — | | | | 30,654 | |
Prepaid income taxes | | | 12,699 | | | | — | | | | — | | | | — | | | | 12,699 | |
Other current assets | | | 4,560 | | | | 20,127 | | | | 3,489 | | | | — | | | | 28,176 | |
| | | | | | | | | | | | | | | |
Total Current Assets | | | 25,415 | | | | 357,043 | | | | 46,868 | | | | — | | | | 429,326 | |
| | | | | | | | | | | | | | | | | | | | |
Property and equipment, net | | | 6,806 | | | | 467,554 | | | | 57,740 | | | | — | | | | 532,100 | |
Investment in affiliates | | | 2,667,767 | | | | 81,839 | | | | — | | | | (2,749,606 | )(a) (b) | | | — | |
Goodwill | | | — | | | | 1,631,252 | | | | — | | | | — | | | | 1,631,252 | |
Other identifiable intangibles | | | — | | | | 80,119 | | | | — | | | | — | | | | 80,119 | |
Assets held for sale | | | 11,342 | | | | — | | | | — | | | | — | | | | 11,342 | |
Other assets | | | 22,293 | | | | 12,022 | | | | 1,118 | | | | — | | | | 35,433 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Total Assets | | $ | 2,733,623 | | | $ | 2,629,829 | | | $ | 105,726 | | | $ | (2,749,606 | ) | | $ | 2,719,572 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Liabilities and Equity | | | | | | | | | | | | | | | | | | | | |
Current Liabilities: | | | | | | | | | | | | | | | | | | | | |
Bank overdrafts | | $ | 18,792 | | | $ | — | | | $ | — | | | $ | — | | | $ | 18,792 | |
Current portion of long-term debt and notes payable | | | 147,609 | | | | 758 | | | | 1,012 | | | | — | | | | 149,379 | |
Accounts payable | | | 6,027 | | | | 59,164 | | | | 9,002 | | | | — | | | | 74,193 | |
Intercompany accounts | | | 925,741 | | | | (832,683 | ) | | | (93,058 | ) | | | — | | | | — | |
Accrued payroll | | | 967 | | | | 62,539 | | | | 254 | | | | — | | | | 63,760 | |
Accrued vacation | | | 3,255 | | | | 37,948 | | | | 5,385 | | | | — | | | | 46,588 | |
Accrued interest | | | 21,198 | | | | 388 | | | | — | | | | — | | | | 21,586 | |
Accrued restructuring | | | — | | | | 6,754 | | | | — | | | | — | | | | 6,754 | |
Accrued other | | | 29,948 | | | | 79,157 | | | | 7,351 | | | | — | | | | 116,456 | |
Due to third party payors | | | — | | | | 12,225 | | | | (6,926 | ) | | | — | | | | 5,299 | |
| | | | | | | | | | | | | | | |
Total Current Liabilities | | | 1,153,537 | | | | (573,750 | ) | | | (76,980 | ) | | | — | | | | 502,807 | |
| | | | | | | | | | | | | | | | | | | | |
Long-term debt, net of current portion | | | 429,743 | | | | 482,858 | | | | 62,312 | | | | — | | | | 974,913 | |
Non-current deferred tax liability | | | 2,266 | | | | 48,976 | | | | 7,832 | | | | — | | | | 59,074 | |
Other non-current liabilities | | | 63,483 | | | | 3,167 | | | | — | | | | — | | | | 66,650 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Total Liabilities | | | 1,649,029 | | | | (38,749 | ) | | | (6,836 | ) | | | — | | | | 1,603,444 | |
| | | | | | | | | | | | | | | | | | | | |
Stockholder’s 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 Stockholder’s 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 consolidated subsidiaries. |
|
(b) | | Elimination of investments in consolidated subsidiaries’ retained earnings. |
26
| | | | | | | | | | | | | | | | | | | | |
| | Select Medical Corporation | |
| | Condensed Consolidating Statement of Operations | |
| | For the Quarter Ended September 30, 2009 | |
| | (unaudited) | |
| | Select Medical | | | | | | | Non- | | | | | | | |
| | Corporation (Parent | | | Subsidiary | | | Guarantor | | | | | | | |
| | Company Only) | | | Guarantors | | | Subsidiaries | | | Eliminations | | | Consolidated | |
| | (in thousands) | |
Net operating revenues | | $ | 11 | | | $ | 486,958 | | | $ | 58,652 | | | $ | — | | | $ | 545,621 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Costs and expenses: | | | | | | | | | | | | | | | | | | | | |
Cost of services | | | 90 | | | | 399,316 | | | | 49,296 | | | | — | | | | 448,702 | |
General and administrative | | | 34,594 | | | | 24 | | | | — | | | | — | | | | 34,618 | |
Bad debt expense | | | — | | | | 8,440 | | | | 3,280 | | | | — | | | | 11,720 | |
Depreciation and amortization | | | 831 | | | | 15,297 | | | | 1,548 | | | | — | | | | 17,676 | |
| | | | | | | | | | | | | | | |
Total costs and expenses | | | 35,515 | | | | 423,077 | | | | 54,124 | | | | — | | | | 512,716 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Income (loss) from operations | | | (35,504 | ) | | | 63,881 | | | | 4,528 | | | | — | | | | 32,905 | |
| | | | | | | | | | | | | | | | | | | | |
Other income and expense: | | | | | | | | | | | | | | | | | | | | |
Intercompany interest and royalty fees | | | (1,141 | ) | | | 1,138 | | | | 3 | | | | — | | | | — | |
Intercompany management fees | | | 31,929 | | | | (29,286 | ) | | | (2,643 | ) | | | — | | | | — | |
Other income | | | 2,215 | | | | — | | | | — | | | | — | | | | 2,215 | |
Interest income | | | 2 | | | | — | | | | — | | | | — | | | | 2 | |
Interest expense | | | (15,513 | ) | | | (8,726 | ) | | | (875 | ) | | | — | | | | (25,114 | ) |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Income (loss) from operations before income taxes | | | (18,012 | ) | | | 27,007 | | | | 1,013 | | | | — | | | | 10,008 | |
| | | | | | | | | | | | | | | | | | | | |
Income tax expense (benefit) | | | (3,768 | ) | | | 5,318 | | | | 944 | | | | — | | | | 2,494 | |
Equity in earnings of subsidiaries | | | 20,952 | | | | (429 | ) | | | — | | | | (20,523 | )(a) | | | — | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Net income | | | 6,708 | | | | 21,260 | | | | 69 | | | | (20,523 | ) | | | 7,514 | |
| | | | | | | | | | | | | | | | | | | | |
Less: Net income attributable to non-controlling interests | | | — | | | | — | | | | 806 | | | | — | | | | 806 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Net income (loss) attributable to Select Medical Corporation | | $ | 6,708 | | | $ | 21,260 | | | $ | (737 | ) | | $ | (20,523 | ) | | $ | 6,708 | |
| | | | | | | | | | | | | | | |
Select Medical Corporation
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. |
27
| | | | | | | | | | | | | | | | | | | | |
| | Select Medical Corporation | |
| | Condensed Consolidating Statement of Operations | |
| | For the Nine Months Ended September 30, 2009 | |
| | (unaudited) | |
| | Select Medical Corporation (Parent | | | Subsidiary | | | Non- Guarantor | | | | | | | |
| | Company Only) | | | Guarantors | | | Subsidiaries | | | Eliminations | | | Consolidated | |
| | (in thousands) | |
| | | | | | | | | | | | | | | | | | | | |
Net operating revenues | | $ | 146 | | | $ | 1,487,899 | | | $ | 178,283 | | | $ | — | | | $ | 1,666,328 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Costs and expenses: | | | | | | | | | | | | | | | | | | | | |
Cost of services | | | 201 | | | | 1,202,007 | | | | 150,899 | | | | — | | | | 1,353,107 | |
General and administrative | | | 60,210 | | | | 68 | | | | — | | | | — | | | | 60,278 | |
Bad debt expense | | | — | | | | 27,862 | | | | 5,816 | | | | — | | | | 33,678 | |
Depreciation and amortization | | | 2,408 | | | | 46,315 | | | | 4,623 | | | | — | | | | 53,346 | |
| | | | | | | | | | | | | | | |
Total costs and expenses | | | 62,819 | | | | 1,276,252 | | | | 161,338 | | | | — | | | | 1,500,409 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Income (loss) from operations | | | (62,673 | ) | | | 211,647 | | | | 16,945 | | | | — | | | | 165,919 | |
| | | | | | | | | | | | | | | | | | | | |
Other income and expense: | | | | | | | | | | | | | | | | | | | | |
Intercompany interest and royalty fees | | | (6,292 | ) | | | 6,252 | | | | 40 | | | | — | | | | — | |
Intercompany management fees | | | 95,063 | | | | (87,810 | ) | | | (7,253 | ) | | | — | | | | — | |
Gain on early retirement of debt | | | 15,316 | | | | — | | | | — | | | | — | | | | 15,316 | |
Other income | | | 3,836 | | | | — | | | | — | | | | — | | | | 3,836 | |
Interest income | | | 65 | | | | 16 | | | | 1 | | | | — | | | | 82 | |
Interest expense | | | (47,914 | ) | | | (25,670 | ) | | | (2,352 | ) | | | — | | | | (75,936 | ) |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Income (loss) from operations before income taxes | | | (2,599 | ) | | | 104,435 | | | | 7,381 | | | | — | | | | 109,217 | |
| | | | | | | | | | | | | | | | | | | | |
Income tax expense | | | 3,420 | | | | 38,833 | | | | 816 | | | | — | | | | 43,069 | |
Equity in earnings of subsidiaries | | | 69,949 | | | | 4,767 | | | | — | | | | (74,716 | )(a) | | | — | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Net income | | | 63,930 | | | | 70,369 | | | | 6,565 | | | | (74,716 | ) | | | 66,148 | |
| | | | | | | | | | | | | | | | | | | | |
Less: Net income attributable to non-controlling interests | | | — | | | | — | | | | 2,218 | | | | — | | | | 2,218 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Net income attributable to Select Medical Corporation | | $ | 63,930 | | | $ | 70,369 | | | $ | 4,347 | | | $ | (74,716 | ) | | $ | 63,930 | |
| | | | | | | | | | | | | | | |
Select Medical Corporation
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. |
28
| | | | | | | | | | | | | | | | | | | | |
| | Select Medical Corporation | |
| | Condensed Consolidating Statement of Cash Flows | |
| | For the Nine Months Ended September 30, 2009 | |
| | (unaudited) | |
| | Select Medical | | | | | | | Non- | | | | | | | |
| | Corporation (Parent | | | Subsidiary | | | Guarantor | | | | | | | |
| | Company Only) | | | Guarantors | | | Subsidiaries | | | Eliminations | | | Consolidated | |
| | (in thousands) | |
| | | | | | | | | | | | | | | | | | | | |
Operating activities | | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 63,930 | | | $ | 70,369 | | | $ | 6,565 | | | $ | (74,716 | )(a) | | $ | 66,148 | |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization | | | 2,408 | | | | 46,315 | | | | 4,623 | | | | — | | | | 53,346 | |
Provision for bad debts | | | — | | | | 27,862 | | | | 5,816 | | | | — | | | | 33,678 | |
Gain on early retirement of debt | | | (15,316 | ) | | | — | | | | — | | | | — | | | | (15,316 | ) |
Loss from disposal of assets and sale of business units | | | 15 | | | | 506 | | | | 29 | | | | — | | | | 550 | |
Non-cash gain from interest rate swaps | | | (3,836 | ) | | | — | | | | — | | | | — | | | | (3,836 | ) |
Non-cash stock compensation expense | | | 4,795 | | | | — | | | | — | | | | — | | | | 4,795 | |
Changes in operating assets and liabilities, net of effects from acquisition of businesses: | | | | | | | | | | | | | | | | | | | | |
Equity in earnings of subsidiaries | | | (69,949 | ) | | | (4,767 | ) | | | — | | | | 74,716 | (a) | | | — | |
Intercompany | | | 132,270 | | | | (125,875 | ) | | | (6,395 | ) | | | — | | | | — | |
Accounts receivable | | | (111 | ) | | | (26,654 | ) | | | (5,268 | ) | | | — | | | | (32,033 | ) |
Other current assets | | | (765 | ) | | | 1,681 | | | | (1,898 | ) | | | — | | | | (982 | ) |
Other assets | | | 5,724 | | | | (2,235 | ) | | | 100 | | | | — | | | | 3,589 | |
Accounts payable | | | (3,105 | ) | | | (4,253 | ) | | | (1,008 | ) | | | — | | | | (8,366 | ) |
Due to third-party payors | | | — | | | | (8,118 | ) | | | 4,588 | | | | — | | | | (3,530 | ) |
Accrued expenses | | | 8,002 | | | | (1,211 | ) | | | 824 | | | | — | | | | 7,615 | |
Income and deferred taxes | | | 20,608 | | | | — | | | | — | | | | — | | | | 20,608 | |
| | | | | | | | | | | | | | | |
Net cash provided by (used in) operating activities | | | 144,670 | | | | (26,380 | ) | | | 7,976 | | | | — | | | | 126,266 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Investing activities | | | | | | | | | | | | | | | | | | | | |
Purchases of property and equipment | | | (1,117 | ) | | | (23,644 | ) | | | (10,489 | ) | | | — | | | | (35,250 | ) |
Proceeds from sale of property | | | — | | | | 1,341 | | | | — | | | | — | | | | 1,341 | |
Acquisition of businesses, net of cash acquired | | | — | | | | (381 | ) | | | — | | | | — | | | | (381 | ) |
| | | | | | | | | | | | | | | |
Net cash used in investing activities | | | (1,117 | ) | | | (22,684 | ) | | | (10,489 | ) | | | — | | | | (34,290 | ) |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Financing activities | | | | | | | | | | | | | | | | | | | | |
Borrowings on revolving credit facility | | | 193,000 | | | | — | | | | — | | | | — | | | | 193,000 | |
Payments on revolving credit facility | | | (253,000 | ) | | | — | | | | — | | | | — | | | | (253,000 | ) |
Payments on credit facility term loan | | | (5,033 | ) | | | — | | | | — | | | | — | | | | (5,033 | ) |
Repurchase of 7 5/8% senior subordianted notes | | | (30,114 | ) | | | — | | | | — | | | | — | | | | (30,114 | ) |
Borrowings of other debt | | | 5,184 | | | | — | | | | — | | | | — | | | | 5,184 | |
Principal payments on seller and other debt | | | (4,892 | ) | | | (837 | ) | | | (9 | ) | | | — | | | | (5,738 | ) |
Dividends paid to Holdings | | | (39,367 | ) | | | — | | | | — | | | | — | | | | (39,367 | ) |
Payment of initial public offering costs | | | (584 | ) | | | — | | | | — | | | | — | | | | (584 | ) |
Equity investment by Holdings | | | 282,024 | | | | — | | | | — | | | | — | | | | 282,024 | |
Repayment of bank overdrafts | | | (21,130 | ) | | | — | | | | — | | | | — | | | | (21,130 | ) |
Intercompany debt reallocation | | | (50,515 | ) | | | 47,405 | | | | 3,110 | | | | — | | | | — | |
Equity contribution and loans from non-controlling interests | | | — | | | | — | | | | 1,500 | | | | — | | | | 1,500 | |
Distributions to non-controlling interests | | | — | | | | — | | | | (2,486 | ) | | | — | | | | (2,486 | ) |
| | | | | | | | | | | | | | | |
Net cash provided by financing activities | | | 75,573 | | | | 46,568 | | | | 2,115 | | | | — | | | | 124,256 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | 219,126 | | | | (2,496 | ) | | | (398 | ) | | | — | | | | 216,232 | |
| | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents at beginning of period | | | 58,332 | | | | 5,108 | | | | 820 | | | | — | | | | 64,260 | |
| | | | | | | | | | | | | | | |
Cash and cash equivalents at end of period | | $ | 277,458 | | | $ | 2,612 | | | $ | 422 | | | $ | — | | | $ | 280,492 | |
| | | | | | | | | | | | | | | |
Select Medical Corporation
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. |
29
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | | |
ITEM 2. | | MANAGEMENT’S 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,‘believe,” “expect,” “anticipate,” “plan,” “target,” “estimate,“ estimate,” “project,” “intend”“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 performance.performances. These statements are based on our management’s 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 as such 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;
future acquisitions or joint ventures (such as the acquisition of Regency Hospital Company, LLC) 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;
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| • | | the loss of key members of our management team could significantly disrupt our operations; |
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| • | | 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 |
the effect of claims asserted against us or lack of adequate available insurance could subject us to substantial uninsured liabilities;
other factors discussed from time to time in our filings with the SEC,Securities and Exchange Commission (the “SEC”), including factors discussed under the heading “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2009.2010 contained in our annual report on Form 10-K filed with the Securities and Exchange Commission on March 9, 2011.
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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, 2010,2011, we operated 111110 long term acute care hospitals and sixnine inpatient rehabilitation facilities in 28 states, and 950952 outpatient rehabilitation clinics in 3634 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 hospitalshospital segment and our outpatient rehabilitation segment. We had net operating revenues of $1,752.9$2,086.1 million for the nine months ended September 30, 2010.2011. Of this total, we earned approximately 70%75% of our net operating revenues from our specialty hospitals and approximately 30%25% from our outpatient rehabilitation business.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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Recent Trends andSignificant 2011 Events
Purchase of Regency Hospital Company, L.L.C.Refinancing
On SeptemberJune 1, 2010, we completed2011, 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 acquisitionrepurchase of $266.5 million aggregate principal amount of Select’s 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 issuedrevolving 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 equity securities of Regency Hospital Company, L.L.C.its senior floating rate notes due 2015.
Significant Transactions
On April 1, 2011, we entered into a joint venture with Baylor Health Care System (“Regency”Baylor JV”) an operator. The joint venture consists of long-term acute care hospitals,a partnership between Baylor Institute for $210.0Rehabilitation 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 including certain assumed liabilities. The amount paid at closing was reduced by $33.1 million for certain assumed liabilities, payments to employees, paymentsrecognized 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 purchase of minority interests and an estimated working capital adjustment. The purchase price is subject to a final settlement of net working capital. Regency operated a network of 23 long-term acute care hospitals located in nine states.
During the three months ended September 30, 2010, our2011. 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 costs include approximately $2.1 millionline item on the consolidated statement of costs related tooperations for the transition of management functions and closing ofnine months ended September 30, 2011.
Litigation
During the Regency corporate office. The transition and closing of the Regency corporate office will be completed in the fourththird quarter of 2010. We anticipate incurring approximately $2.0 million to complete the closure during the fourth quarter of 2010. Additionally, we expect to record a restructuring charge in the fourth quarter of approximately $5.0 million related to lease termination costs associated with Regency’s corporate headquarters.
Extension of Revolving Credit Facility
On June 7, 2010,2011, we entered into an amendment to our senior secured credit facility that extendeda settlement agreement with the maturityUnited States government in connection with the previously disclosedqui tamlawsuit filed in Columbus, Ohio against certain of our $300.0subsidiaries. The lawsuit, filed under seal in September 2007, led to the Company’s 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 revolving credit facility from February 24,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 thequi tamrelator’s 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 22, 2013. The applicable margin percentage and commitment fee for revolving loans have increased and are determined based on a pricing grid whereby changes3, 2011, our board of directors authorized an increase of $50.0 million in the leverage ratio, as definedcapacity 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 credit agreement, resultsopen market or through privately negotiated transactions, and at times and in changes to the applicable margin percentage. Under the pricing grid, the applicable margin percentagesuch amounts as we deem appropriate. Through September 30, 2011, we have repurchased 11,555,447 shares for revolving ABR loans ranges from 2% per annum to 3% per annum, the applicable margin percentage for revolving Eurodollar loans ranges from 3% per annum to 4% per annum, and the commitment fee rate for extended revolving commitments ranges from 0.375% to 0.75%.an aggregate cost, including transaction fees, of $75.8 million.
Summary Financial Results
Third Quarter Ended September 30, 20102011
For the three months ended September 30, 2010,2011, our net operating revenues increased 7.8%,18.0% to $588.3$694.1 million compared to $545.6$588.3 million for the three months ended September 30, 2009.2010. This increase in net operating revenues resulted principally from ana 24.1% increase in our specialty hospital net operating revenues. The increase in our specialty hospital net operating revenue is principally due to (1) the acquisition of Regency, (2) growth in the hospitals opened as of January 1, 2009 and operated by us throughout both periods and (3) the hospitals opened and acquired in 2009. We had income from operations for the three months ended September 30, 2010 of $42.0 million compared to $32.9 million for the three months ended September 30, 2009. Holdings’ interest expense for the three months ended September 30, 2010 was $27.7 million compared to $33.5 million for the three months ended September 30, 2009. Select’s interest expense for the three months ended September 30, 2010 was $20.8 million compared to $25.1 million for the three months ended September 30, 2009.The decrease in interest expense for both Holdings and Select was attributable to our repayment of outstanding debt with a portion of the proceeds Holding’s initial public offering of common stock in September 2009 and lower interest rates that resulted from the maturation of interest rate swaps that carried higher fixed interest rates.
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For the nine months ended September 30, 2010, our net operating revenues increased 5.2% to $1,752.9 million compared to $1,666.3 million for the nine months ended September 30, 2009. This increase in net operating revenues resulted from a 6.8% increase in our specialty hospital net operating revenue and a 1.7% increase in our outpatient rehabilitation net operating revenue. The increase in our specialty hospital net operating revenue is principallyprimarily due to (1) the acquisitionRegency 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 (2) growthhospitals 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. Select’s 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 hospitals opened and acquired asdebt we refinanced on June 1, 2011. Higher interest expense was incurred by Select because a portion of JanuaryHoldings 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, 2009 and operated by us throughout both periods and (3)2011.
For the hospitals opened and acquirednine 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 2009.net operating revenues resulted principally from a 26.5% increase in our specialty hospital net operating revenue. The increase in our outpatient rehabilitationspecialty hospital net operating revenue is principallyprimarily due to an increase in both our contract services based revenue and increased revenues in our rehabilitation clinics.the Regency hospitals acquired on September 1, 2010. We had income from operations for the nine months ended September 30, 20102011 of $187.2$236.7 million compared to $165.9$187.2 million for the nine months ended September 30, 2009.2010. 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, 20102011 was $87.0$75.1 million compared to $101.8$87.0 million for the nine months ended September 30, 2009.2010. Select’s interest expense for the nine months ended September 30, 20102011 was $66.2$59.9 million compared to $75.9$66.2 million for the nine months ended September 30, 2009.2010. The decrease in interest expense for both Holdings and Select was primarily attributable to a reduction in outstanding debt balancesour average interest rate that occurred throughout 2009resulted from the expiration of interest rate swaps during 2010 and lower interest rates that resulted from that maturationon portions of interest rate swaps that carried higher fixed interest rates.the debt we refinanced on June 1, 2011.
Cash flow from operations provided $110.3$143.9 million of cash for the nine months ended September 30, 20102011 for Holdings and $135.8provided $166.8 million of cash for the nine months ended September 30, 20102011 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 lastpast 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 significantrecent regulatory changes that have occurred since we filedaffected our Annual Report on Form 10-Kresults of operations for the yearthree and nine months ended December 31, 2009 with the Securities and Exchange Commission (“SEC”)September 30, 2011 or may have an affect on March 17, 2010.our future results of operations. Our Annual Report on Form 10-K for the year ended December 31, 20092010 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
On March 23, 2010, President Obama signed into law H.R. 3590,Federal agencies, including the “PatientCenters for Medicare & Medicaid Services (“CMS”), continue to implement provisions of the Patient Protection and Affordable Care Act”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 H.R. 4872, the “Health Care and Education Affordability Reconciliation Act of 2010,” which made some limited but important changes to the PPACA.
Extension of Changes Made byWe have included in our Annual Report on Form 10-K for the Medicare, Medicaid, and SCHIP Extension Act of 2007
The PPACA includesyear ended December 31, 2010 a two-year extension to Sections 114(c) and (d)detailed discussion of the Medicare, Medicaid, and SCHIP Extension Act of 2007 (“SCHIP Extension Act”),PPACA provisions that affect our business, as amendedwell as regulatory initiatives adopted by the American Recovery and Reinvestment Act of 2009 (Public Law 111-5) (“ARRA”). The two-year extension applies the relief granted by Section 114(c)CMS in response to the “25% Rule” payment adjustment, the one-time budget neutrality adjustment and the very short stay outlier payment adjustment. The two-year extension also applies to the moratorium on new LTCHs and new LTCH beds adopted in Section 114(d) of the SCHIP Extension Act. These changes are described further below.
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25% Rule
The 25% Rule is a downward payment adjustment that applies to Medicare patients discharged from LTCHs who were admitted from a co-located (“host”) hospital or a non-co-located hospital and who exceed applicable percentage thresholds of discharged Medicare patients. The following table describes the types of LTCHs and the relief they have received under the SCHIP Extension Act as amended by the ARRA and PPACA, from the payment adjustment for these discharges:
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Type of LTCH | | Non Co-located Admissions | | Co-located Admissions |
Non-grandfathered HIHs
opened before October
1, 2004
(63 owned hospitals) | | Not subject to any extensions of the admissions thresholds under the 25% Rule. LTCHs in this category are subject to a payment adjustment for discharged Medicare patients exceeding 25% of the LTCH’s total Medicare population. | | Percentage admissions threshold was raised from 25% to 50%. This relief is now effective for five years starting with cost reporting periods beginning on or after October 1, 2007. In the special case of rural LTCHs, LTCHs co-located with an urban single hospital, or LTCHs co-located with an MSA-dominate hospital the referral percentage was raised to 75%. |
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Non-grandfathered
satellite facilities
opened before October
1, 2004
(nine owned hospitals) | | Not subject to any extensions of the admissions thresholds under the 25% Rule. LTCHs in this category are subject to a payment adjustment for discharged Medicare patients exceeding 25% of the LTCH’s total Medicare population. | | Percentage admissions threshold was raised from 25% to 50%. This relief is now effective for five years starting with cost reporting periods beginning on or after October 1, 2007. In the special case of rural LTCHs, LTCHs co-located with an urban single hospital, or LTCHs co-located with an MSA-dominate hospital the referral percentage was raised to 75%. |
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Grandfathered HIHs
(two owned hospitals) | | Percentage admissions threshold is suspended for five years starting with cost reporting periods beginning on or after July 1, 2007. | | Percentage admission threshold is suspended for five years starting with cost reporting periods beginning on or after July 1, 2007. |
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| | | | |
Type of LTCH | | Non Co-located Admissions | | Co-located Admissions |
Grandfathered satellites
(no owned hospitals) | | Not subject to any extensions of the admissions thresholds under the 25% Rule. LTCHs in this category are subject to a payment adjustment for discharged Medicare patients exceeding 25% of the LTCH’s total Medicare population. | | Percentage admissions threshold was raised from 25% to 50%. This relief is now effective for five years starting with cost reporting periods beginning on or after July 1, 2007. In the special case of rural LTCHs, LTCHs co-located with an urban single hospital, or LTCHs co-located with an MSA-dominate hospital the referral percentage was raised to 75%. |
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Freestanding facilities
(29 owned hospitals) | | Percentage admissions threshold is suspended for five years starting with cost reporting periods beginning on or after July 1, 2007. | | 25% Rule not applicable. |
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Facilities co-located with a provider-based, off-campus, non-inpatient location of an inpatient prospective payment system hospital
(no owned hospitals) | | Percentage admissions threshold is suspended for five years starting with cost reporting periods beginning on or after July 1, 2007. | | Percentage admission threshold is suspended for five years starting with cost reporting periods beginning on or after July 1, 2007. |
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HIHs and satellite facilities opened on or after October 1, 2004.
(seven owned hospitals) | | LTCHs in this category are subject to a payment adjustment for discharged Medicare patients exceeding 25% of the LTCH’s total Medicare population. | | LTCHs in this category are subject to a payment adjustment for discharged Medicare patients exceeding 25% of the LTCH’s total Medicare population. |
One-Time Budget Neutrality Adjustment
The regulations governing the prospective payment system specifically applicable to LTCHs, referred to as “LTCH-PPS,” give the Centers for Medicare and Medicaid Services (“CMS”) the ability to make a one-time adjustment to the standard federal rate to correct any “significant difference between actual payments and estimated payments for the first year” of LTCH-PPS. In the rate year 2009 LTCH-PPS final rule, CMS estimated this one-time adjustment would result in a negative adjustment of 3.75% to the base rate. The SCHIP Extension Act precluded CMS from implementing the one-time prospective adjustment to the LTCH standard amount for a period of three years. PPACA extends by two years the stay on CMS’s ability to adopt a one-time budget neutrality adjustment to LTCH-PPS. PPACA prohibits such a one-time adjustment before December 29, 2012.
Short Stay Outlier Policy
The SCHIP Extension Act prevented CMS from applying the so-called very short stay outlier policy that was added to LTCH-PPS in the 2008 rate year update published on May 11, 2007. This policy would result in a payment equivalent to the short-term care hospital rate for cases with a length of stay that is less than the average length of stay plus one standard deviation of a case with the same diagnosis related group under the inpatient prospective payment system, regardless of the clinical considerations for admission to the LTCH or the average length of stay an LTCH must satisfy for Medicare certification. The SCHIP Extension Act precluded CMS from implementing the very short stay outlier policy for a period of three years. PPACA extends this prohibition by two years. CMS may not apply the very short stay outlier policy before December 29, 2012.
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Moratorium on New LTCHs and New LTCH Beds
The SCHIP Extension Act imposed a moratorium on the establishment and classification of new LTCHs, LTCH satellite facilities and LTCH beds in existing LTCHs or satellite facilities. PPACA extends this moratorium by two years. The moratorium will now expire on December 28, 2012.
Medicare Quality Reporting
The PPACA requires that CMS establish new quality data reporting programs for LTCHs and IRFs. By rate year 2014, CMS is required to select and implement quality measures for these providers. These programs are mandatory. If a provider fails to report on the selected quality measures, it will see its reimbursement reduced by 2% of the annual market basket update. The reduction can result in payment rates less than the prior year. However, the reduction will not carry over into the subsequent rate years. CMS is required to establish the quality measures applicable to rate year 2014 no later than October 1, 2012.
Medicare Market Basket Adjustments
The PPACA institutes a market basket payment adjustment to LTCHs. In rate year 2010, LTCHs are subject to a market basket reduction of minus 0.25% for discharges occurring after April 1, 2010. In rate year 2011, LTCHs are subject to a market basket reduction of minus 0.5%. There will be a slightly smaller 0.1% market basket reduction for LTCHs in rate years 2012 and 2013. Rate year 2014 the market basket update will be reduced by 0.3%. Rate years 2015 and 2016 the market basket update will be reduced by 0.2%. Finally, in rate years 2017-2019, the market basket update will be reduced by 0.75%. The PPACA specifically allows these market basket reductions to result in less than a 0% payment update and payment rates that are less than the prior year.
The PPACA also implements a market basket payment adjustment for IRFs. For fiscal years 2010 and 2011, IRFs are subject to a market basket reduction of minus 0.25%. For fiscal years 2012 and 2013, the reduction is 0.1%. For fiscal year 2014, the reduction is 0.3%. For fiscal years 2015 and 2016, the reduction is 0.2%. For fiscal years 2017 — 2019, the reduction is 0.75%.
Medicare Productivity Adjustment
PPACA implements a separate productivity adjustment for the first time for hospital inpatient services beginning in rate year 2012 for LTCHs and fiscal year 2012 for IRFs. This provision will apply a negative productivity adjustment to the market basket that is used to update the standard federal rate on an annual basis. The adjustment will be applied each year. The market basket does not currently account for increases in provider productivity that could reduce the actual cost of providing services (e.g., through new technology or fewer inputs). The productivity adjustment will equal the 10-year moving average of changes in the annual economy-wide private non-farm business multi-factor productivity. This is a statistic reported by the Bureau of Labor Statistics and updated in the spring of each year. While this adjustment will change year-to-year, it is currently estimated that this adjustment to the market basket will be approximately minus 1.0% on average.
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Hospital Wage Index
The PPACA abandons the current system of calculating the hospital wage index based on data submitted in hospital cost reports, which currently has a four year lag in data. In its place, CMS is required to develop a comprehensive reform plan to present to Congress by December 31, 2011 using Bureau of Labor Statistics data, or other data or methodologies, to calculate relative wages for each geographic area involved. Although the PPACA addresses the hospital wage index generally, this change presumably applies to LTCHs given that the LTCH-PPS wage index is computed using wage data from inpatient acute care hospitals.
Independent Payment Advisory Board
The PPACA establishes an independent board called the “Independent Payment Advisory Board” that will develop and submit proposals to the President and Congress beginning in 2014. The Independent Payment Advisory Board’s proposals must be designed to reduce Medicare spending by targeted amounts compared to the trajectory of Medicare spending under current law. The Independent Payment Advisory Board’s first proposal with savings recommendations could be submitted by January 14, 2014, for implementation in 2015, if the Medicare per capita target growth rate is exceeded, as described in the PPACA. However, the Independent Payment Advisory Board is precluded from submitting proposals that reduce Medicare payments prior to December 31, 2019 for providers scheduled to receive a reduction in their payment updates as a result of the Medicare productivity adjustment (discussed above).
Physician-Owned Hospital Limitations
Under the transparency and program integrityparticular provisions of the PPACA, the exception to the federal self-referral law (or “Stark law”) that currently permits physicians to refer patients to hospitals in which they have an ownership or investment interest will be dramatically curtailed. Only hospitals, including LTCHs, with physician ownership and a provider agreement in place on December 31, 2010 are exempt from the general ban on self-referral. Existing physician-owned hospitals are prohibited from increasing the percentage of physician ownership or investment interests held in the hospital after March 23, 2010. In addition, physician-owned hospitals are prohibited from increasing the number of licensed beds after March 23, 2010, unless meeting specific exceptions related to the hospital’s location and patient population. The Secretary of the Department of Health and Human Services is required to implement a process for allowing bed increases by August 1, 2011 and must promulgate regulations to carry out this process no later than January 1, 2012. In order to retain their exemption from the general ban on self-referrals, our physician-owned hospitals are required to adopt specific measures relating to conflicts of interest, bona fide investments and patient safety.
Provider and Employee Screening
The PPACA imposes new screening requirements on all Medicare providers. The screening must include a licensure check and may include other procedures such as a criminal background check, fingerprinting, unscheduled and unannounced site visits, database checks, and other screening techniques CMS deems appropriate to prevent fraud, waste and abuse. Medicare providers and suppliers will be required to pay a fee in connection with the screening procedures. In a proposed rule published on September 23, 2010, CMS proposes to implement an enrollment application fee for new providers and for current enrolled providers revalidating their enrollment status on or after March 23, 2011. The proposed rule would implement a $500 application fee that is adjusted by the percentage change in the consumer price index. The PPACA also imposes new disclosure requirements and authorizes surety bonds for the enrollment of new providers and suppliers.
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In addition, the PPACA requires LTCHs to conduct national and state criminal background checks, including fingerprint checks of their employees and contractors who have (or may have) one-on-one contact with patients. Our LTCHs are prohibited from hiring or retaining workers with a finding of patient or resident abuse that is disqualifying.
Medicare Compliance Requirements and Penalties
The PPACA includes new compliance requirements and increases existing penalties for non-compliance with federal law and the Medicare conditions of participation. In addition, Medicare claims will be paid only if submitted within 12 months. Penalties for submitting false claims and for submitting false statements material to a false claim will be increased. The Secretary will be granted the authority to suspend payments to a provider pending an investigation of credible allegations of fraud. Further, the Recovery Audit Contractor or RAC program will be extended to Medicare Parts C and D and Medicaid no later than December 31, 2010.PPACA.
Medicare Payment of Long-Term Acute Care Hospitals during Fiscal Year 2010
On June 2, 2010, CMS published a notice of changes to the payment rates for LTCH-PPS during the portion of rate year 2010 occurring on or after April 1, 2010. The standard federal rate for discharges occurring on or after April 1, 2010 was revised to $39,795. This change reflects a decrease from $39,897 established in the original final rule for RY 2010. This change to the LTCH-PPS standard federal rate for the remainder of FY 2010 is based on a market basket increase estimate of 2.5% less a reduction of 0.5% to account for what CMS attributes as an increase in case-mix resulting from changes in documentation and coding practices less an additional reduction of 0.25% as mandated by the PPACA. The notice revises the fixed-loss amount for high cost outlier cases for RY 2010 discharges occurring on or after April 1, 2010 to $18,615, which is higher than the RY 2010 fixed-loss amount of $18,425 in effect from October 1, 2009 to March 31, 2010.
Medicare Payment of Long-TermLong Term Acute Care Hospitals during Fiscal Year 2011
On August 16, 2010, CMS published the policies and payment rates for LTCH-PPSlong 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 and beforethrough September 30, 2011). The standard federal rate for FYfiscal year 2011 is $39,600, which is a decrease from the RYfiscal year 2010 federal rate of $39,897 in effect from October 1, 2009 to March 31, 2010 and the RY 2010 federal rate of $39,795 that went intoin effect onfrom April 1, 2010. This update2010 to the LTCH-PPS standard federal rate for FY 2011 is based on a market basket increase of 2.5% less a reduction of 2.5% to account for what CMS attributes as an increase in case-mix in prior periods (FYs 2008 and 2009) that resulted from changes in documentation and coding practices less an additional reduction of 0.5% as mandated by the PPACA.September 30, 2010. The final rule establishesestablished a fixed-loss amount for high cost outlier cases for FYfiscal year 2011 of $18,785, which is higher than the RYfiscal year 2010 fixed-loss amount of $18,425 in effect from October 1, 2009 to March 31, 2010 and the $18,615 that went intoin effect onfrom April 1, 2010 to September 31, 2010. The final rule includesincluded revisions to the relative weights for the MS-LTC-DRGsMedicare severity long term care diagnostic related groups for FY 2011 based on the standard federal rate. Consistent with the May 4, 2010 proposed rule for FYfiscal year 2011.
Medicare Payment of Long Term Acute Care Hospitals during Fiscal Year 2012
On August 18, 2011, CMS replaced the term “rate year” for LTCHs with “fiscal year” in order to reflect the fact thatpublished the policies and payment rates for LTCHs are now revised on aLTCH-PPS for fiscal year basis (from October 1st through September 30th).
Medicare Payment of Inpatient Rehabilitation Facilities during Fiscal Year 2010
On July 22, 2010, CMS published a notice of changes to the payment rates for IRF-PPS during the portion of rate year 2010 occurring2012 (affecting discharges and cost reporting periods beginning on or after April 1, 2010 and before October 1, 2010. As described above, the PPACA mandates a market basket reduction of 0.25% for FY 2010.2011 through September 30, 2012). The standard federal rate for discharges occurring on or after April 1, 2010 was revised to $13,627. This change reflectsfiscal 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 $13,661 establishedthe fixed loss amount in the original2011 fiscal year of $18,785. The final rule included revisions to the relative weights for FY 2010. In the same notice, CMS increased the outlier threshold amount to $10,721Medicare severity long term care diagnostic related groups for discharges occurring on or after April 1, 2010. The outlier threshold was $10,652 for discharges occurring on or after October 1, 2009 through March 31, 2010.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 IRF-PPSinpatient rehabilitation facility prospective payment system (“IRF-PPS”) for fiscal year 2011 (affecting discharges and cost reporting periods beginning on or after October 1, 2010 and beforethrough September 30, 2011). The standard federal ratepayment conversion factor for discharges during FYfiscal year 2011 is revised to $13,860. This change reflects$13,860 which is an increase from $13,661 in effect from October 1, 2009 to March 31, 2010 and $13,627 established in the revised final rule for the final months of FYeffect from April 1, 2010 as well as the market basket reduction of 0.25% required by PPACA.to September 30, 2010. CMS also increased the outlier threshold amount for FYfiscal year 2011 to $11,410 from $10,721.$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.
ReductionsMedicare 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 Medicare Physician Fee ScheduleCMG 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 Medicare program reimburses outpatient rehabilitation providersIRF-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 Medicare physician fee schedule. The Medicare physician fee schedule rates are automatically updated annually basednumber of full-time equivalent interns and residents training in the IRF and the IRF’s 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 a formula, calledits proposal, CMS decided to maintain the sustainable growth rate (“SGR”) formula, containedsame low-income patient and teaching status adjustment factors that applied in legislation. The SGR formula has resulted in automatic reductions in rates in every year since 2002; however, for each year through 2009 CMS or Congress has taken action to prevent the SGR formula reductions. On June 25, 2010, President Obama signed into law the “Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010,” which, among other things, provides 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.
On November 2, 2010, CMS released the final update to the Medicare physician fee schedule for calendarfiscal year 2011. In the final rule, the Medicare physician fee schedule payment rates between November 30, 2010 and January 1, 2011 will be reduced by 24.9% as a result of the SGR formula. An additional reduction will occurCMS indicated that it would continue to review its policies on January 1, 2011, unless Congress prevents the SGR formula reductions from going into effect.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 schedulePhysician Fee Schedule to annual limits for therapy expenses. Effective January 1, 2011,2012, the annual limit on outpatient therapy services will be $1,870is $1,880 for combined physical and speech language pathology services and $1,870$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 PPACAMMEA extended the exceptions process for outpatient therapy caps
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through December 31, 2010.2011. 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.
InMultiple 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, CMS adopted a multiple procedure payment reduction for therapy services.2011. Under the policy, the Medicare program will paypays 100% of the practice expense component of the CPT code/therapy procedure or unit of service with the highest Relative Value Unit (RVU)(“RVU”), and then reduce by 25%reduces the payment for the practice expense component ofby 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 by a single provider to a beneficiary on a single date of service.in separate sessions. This multiple procedure payment reduction policy is(“MPPR”) was effective January 1, 2011 and will applyapplies to all outpatient therapy services paid under Medicare Part B, including those furnished in office and facility settings.B. Furthermore, the multiple procedure payment reduction policy applies across all therapy disciplines-occupationaldisciplines — 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, manyall of our specialty hospitals and outpatient rehabilitation clinics are currently accredited by The Joint Commission, previously known as The Joint Commission on Accreditation of Healthcare Organizations, and The Commission on Accreditation of Rehabilitation Facilities, 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 GAO’s 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 sales and consolidations.sales. The operating statistics reflect data for the period of time these operations were managed by us.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | | Three Months Ended | | Nine Months Ended | |
| | September 30, | | September 30, | | | September 30, | | September 30, | |
| | 2009 | | 2010 | | 2009 | | 2010 | | | 2010 | | 2011 | | 2010 | | 2011 | |
Specialty hospital data(1): | | |
Number of hospitals — start of period | | 92 | | 94 | | 93 | | 94 | | |
Number of hospital start-ups | | 1 | | — | | 1 | | — | | |
Number of hospitals owned — start of period | | | 94 | | 115 | | 94 | | 116 | |
Number of hospitals acquired | | 1 | | 23 | | 1 | | 23 | | | 23 | | — | | 23 | | 1 | |
Number of hospitals closed | | | (1 | ) | | | (2 | ) | | | (2 | ) | | | (2 | ) | |
Number of hospitals closed/sold | | | | (2 | ) | | — | | | (2 | ) | | | (2 | ) |
| | | | | | | | | | | | | | | | | | |
Number of hospitals owned — end of period | | 93 | | 115 | | 93 | | 115 | | | 115 | | 115 | | 115 | | 115 | |
Number of hospitals managed — end of period | | 1 | | 2 | | 1 | | 2 | | | 2 | | 4 | | 2 | | 4 | |
| | | | | | | | | | | | | | | | | | |
Total number of hospitals (all) — end of period | | 94 | | 117 | | 94 | | 117 | | | 117 | | 119 | | 117 | | 119 | |
| | | | | | | | | | | | | | | | | | |
Available licensed beds — end of period | | 4,173 | | 5,117 | | 4,173 | | 5,117 | | |
| | |
Available licensed beds | | | 5,117 | | 5,135 | | 5,117 | | 5,135 | |
Admissions | | 10,466 | | 11,305 | | 31,775 | | 33,022 | | | 11,305 | | 13,599 | | 33,022 | | 40,965 | |
Patient days | | 248,504 | | 275,387 | | 757,487 | | 808,133 | | | 275,387 | | 333,322 | | 808,133 | | 994,179 | |
Average length of stay (days) | | 24 | | 24 | | 24 | | 24 | | | 24 | | 25 | | 24 | | 24 | |
Net revenue per patient day(2) | | $ | 1,479 | | $ | 1,478 | | $ | 1,489 | | $ | 1,481 | | | $ | 1,478 | | $ | 1,474 | | $ | 1,481 | | $ | 1,498 | |
Occupancy rate | | | 65 | % | | | 65 | % | | | 66 | % | | | 68 | % | | | 65 | % | | | 71 | % | | | 68 | % | | | 71 | % |
Percent patient days — Medicare | | | 65 | % | | | 64 | % | | | 65 | % | | | 64 | % | | | 64 | % | | | 65 | % | | | 64 | % | | | 65 | % |
| | |
Outpatient rehabilitation data: | | |
Number of clinics owned — start of period | | 875 | | 880 | | 880 | | 883 | | | 880 | | 849 | | 883 | | 875 | |
Number of clinics acquired | | 2 | | 1 | | 3 | | 1 | | | 1 | | — | | 1 | | — | |
Number of clinic start-ups | | 2 | | 7 | | 9 | | 17 | | | 7 | | 7 | | 17 | | 22 | |
Number of clinics closed/sold | | | (6 | ) | | | (9 | ) | | | (19 | ) | | | (22 | ) | | | (9 | ) | | | (9 | ) | | | (22 | ) | | | (50 | ) |
| | | | | | | | | | | | | | | | | | |
Number of clinics owned — end of period | | 873 | | 879 | | 873 | | 879 | | | 879 | | 847 | | 879 | | 847 | |
Number of clinics managed — end of period | | 74 | | 71 | | 74 | | 71 | | | 71 | | 105 | | 71 | | 105 | |
| | | | | | | | | | | | | | | | | | |
Total number of clinics (all) — end of period | | 947 | | 950 | | 947 | | 950 | | | 950 | | 952 | | 950 | | 952 | |
| | | | | | | | | | | | | | | | | | |
| | |
Number of visits | | 1,126,096 | | 1,144,096 | | 3,385,733 | | 3,442,266 | | | 1,144,096 | | 1,099,342 | | 3,442,266 | | 3,381,896 | |
Net revenue per visit (3) | | $ | 101 | | $ | 101 | | $ | 102 | | $ | 101 | | | $ | 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 inpatientpatient service revenues by the total number of patient days. |
|
(3) | | Net revenue per visit is calculated by dividing outpatient rehabilitation clinic revenue by the total number of visits. For purposes of this computation, outpatient rehabilitation clinic revenue does not include managed clinics or contract services revenue. |
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Results of Operations
The following table outlines, for the periods indicated, selected operating data as a percentage of net operating revenues:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Select Medical | | | | | Select Medical Holdings | | | |
| | Holdings | | Select Medical | | | Corporation | | Select Medical Corporation | |
| | Corporation | | Corporation | | | Three Months | | Three Months | |
| | Three Months Ended | | Three Months Ended | | | Ended | | Ended | |
| | September 30, | | September 30, | | | September 30, | | September 30, | |
| | 2009 | | 2010 | | 2009 | | 2010 | | | 2010 | | 2011 | | 2010 | | 2011 | |
Net operating revenues | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
Cost of services(1) | | 82.3 | | 84.8 | | 82.3 | | 84.8 | | | 84.8 | | 83.8 | | 84.8 | | 83.8 | |
General and administrative | | 6.3 | | 3.3 | | 6.3 | | 3.3 | | | 3.3 | | 2.2 | | 3.3 | | 2.2 | |
Bad debt expense | | 2.2 | | 1.9 | | 2.2 | | 1.9 | | | 1.9 | | 1.7 | | 1.9 | | 1.7 | |
Depreciation and amortization | | 3.2 | | 2.9 | | 3.2 | | 2.9 | | | 2.9 | | 2.5 | | 2.9 | | 2.5 | |
| | | | | | | | | | | | | | | | | | |
Income from operations | | 6.0 | | 7.1 | | 6.0 | | 7.1 | | | 7.1 | | 9.8 | | 7.1 | | 9.8 | |
Gain on early retirement of debt | | 0.2 | | — | | — | | — | | |
Equity in losses of unconsolidated subsidiaries | | — | | 0.0 | | — | | 0.0 | | |
Equity in earnings (losses) of unconsolidated subsidiaries | | | | (0.0 | ) | | 0.2 | | | (0.0 | ) | | 0.2 | |
Other income | | — | | 0.0 | | 0.4 | | 0.0 | | | 0.0 | | — | | 0.0 | | — | |
Interest expense, net | | | (6.1 | ) | | | (4.7 | ) | | | (4.6 | ) | | | (3.5 | ) | | | (4.7 | ) | | | (3.4 | ) | | | (3.5 | ) | | | (3.1 | ) |
| | | | | | | | | | | | | | | | | | |
Income from operations before income taxes | | 0.1 | | 2.4 | | 1.8 | | 3.6 | | |
Income tax expense (benefit) | | | (0.2 | ) | | 0.9 | | 0.4 | | 1.4 | | |
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 | | 0.3 | | 1.5 | | 1.4 | | 2.2 | | | 1.5 | | 3.8 | | 2.2 | | 4.0 | |
Net income attributable to non-controlling interests | | 0.2 | | 0.1 | | 0.2 | | 0.1 | | |
Net income attributable to non-controlling interest | | | 0.1 | | 0.1 | | 0.1 | | 0.1 | |
| | | | | | | | | | | | | | | | | | |
| |
Net income attributable to Holdings and Select | | | 0.1 | % | | | 1.4 | % | | | 1.2 | % | | | 2.1 | % | | | 1.4 | % | | | 3.7 | % | | | 2.1 | % | | | 3.9 | % |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Select Medical | | | | | Select Medical Holdings | | | |
| | Holdings | | Select Medical | | | Corporation | | Select Medical Corporation | |
| | Corporation | | Corporation | | | Nine Months | | Nine Months | |
| | Nine Months Ended | | Nine Months Ended | | | Ended | | Ended | |
| | September 30, | | September 30, | | | September 30, | | September 30, | |
| | 2009 | | 2010 | | 2009 | | 2010 | | | 2010 | | 2011 | | 2010 | | 2011 | |
Net operating revenues | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
Cost of services(1) | | 81.2 | | 82.2 | | 81.2 | | 82.2 | | | 82.2 | | 81.9 | | 82.2 | | 81.9 | |
General and administrative | | 3.6 | | 2.4 | | 3.6 | | 2.4 | | | 2.4 | | 2.3 | | 2.4 | | 2.3 | |
Bad debt expense | | 2.0 | | 1.8 | | 2.0 | | 1.8 | | | 1.8 | | 1.9 | | 1.8 | | 1.9 | |
Depreciation and amortization | | 3.2 | | 2.9 | | 3.2 | | 2.9 | | | 2.9 | | 2.5 | | 2.9 | | 2.5 | |
| | | | | | | | | | | | | | | | | | |
Income from operations | | 10.0 | | 10.7 | | 10.0 | | 10.7 | | | 10.7 | | 11.4 | | 10.7 | | 11.4 | |
Gain on early retirement of debt | | 1.0 | | — | | 0.9 | | — | | |
Equity in losses of unconsolidated subsidiaries | | — | | 0.0 | | — | | 0.0 | | |
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 | | 0.2 | | 0.0 | | | 0.0 | | — | | 0.0 | | — | |
Interest expense, net | | | (6.1 | ) | | | (5.0 | ) | | | (4.5 | ) | | | (3.8 | ) | | | (5.0 | ) | | | (3.6 | ) | | | (3.8 | ) | | | (2.9 | ) |
| | | | | | | | | | | | | | | | | | |
Income from operations before income taxes | | 4.9 | | 5.7 | | 6.6 | | 6.9 | | |
Income before income taxes | | | 5.7 | | 6.3 | | 6.9 | | 7.6 | |
Income tax expense | | 2.0 | | 2.3 | | 2.6 | | 2.7 | | | 2.3 | | 2.7 | | 2.7 | | 3.2 | |
| | | | | | | | | | | | | | | | | | |
Net income | | 2.9 | | 3.4 | | 4.0 | | 4.2 | | | 3.4 | | 3.6 | | 4.2 | | 4.4 | |
Net income attributable to non-controlling interests | | 0.1 | | 0.2 | | 0.1 | | 0.2 | | |
Net income attributable to non-controlling interest | | | 0.2 | | 0.2 | | 0.2 | | 0.2 | |
| | | | | | | | | | | | | | | | | | |
| | |
Net income attributable to Holdings and Select | | | 2.8 | % | | | 3.2 | % | | | 3.9 | % | | | 4.0 | % | | | 3.2 | % | | | 3.4 | % | | | 4.0 | % | | | 4.2 | % |
| | | | | | | | | | | | | | | | | | |
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The following tables summarize selected financial data by business segment, for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Select Medical Holdings Corporation | | Select Medical Corporation | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Three Months Ended | | | Select Medical Holdings Corporation | | Select Medical Corporation | |
| | September 30, | | September 30, | | | Three Months Ended September 30, | | Three Months Ended September 30, | |
| | % | | % | | | % | | % | |
| | 2009 | | 2010 | | Change | | 2009 | | 2010 | | Change | | | 2010 | | 2011 | | Change | | 2010 | | 2011 | | Change | |
| | (in thousands) | | (in thousands) | | | (in thousands) | |
Net operating revenues: | | |
Specialty hospitals | | $ | 376,859 | | $ | 419,798 | | | 11.4 | % | | $ | 376,859 | | $ | 419,798 | | | 11.4 | % | | $ | 419,798 | | $ | 521,085 | | | 24.1 | % | | $ | 419,798 | | $ | 521,085 | | | 24.1 | % |
Outpatient rehabilitation | | 168,751 | | 168,438 | | | (0.2 | ) | | 168,751 | | 168,438 | | | (0.2 | ) | | 168,438 | | 173,030 | | 2.7 | | 168,438 | | 173,030 | | 2.7 | |
Other(3) | | 11 | | 14 | | 27.3 | | 11 | | 14 | | 27.3 | | | 14 | | 16 | | 14.3 | | 14 | | 16 | | 14.3 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Total company | | $ | 545,621 | | $ | 588,250 | | | 7.8 | % | | $ | 545,621 | | $ | 588,250 | | | 7.8 | % | | $ | 588,250 | | $ | 694,131 | | | 18.0 | % | | $ | 588,250 | | $ | 694,131 | | | 18.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
Income (loss) from operations: | | |
Specialty hospitals | | $ | 53,896 | | $ | 47,045 | | | (12.7 | %) | | $ | 53,896 | | $ | 47,045 | | | (12.7 | %) | | $ | 47,045 | | $ | 68,742 | | | 46.1 | % | | $ | 47,045 | | $ | 68,742 | | | 46.1 | % |
Outpatient rehabilitation | | 14,616 | | 15,386 | | 5.3 | | 14,616 | | 15,386 | | 5.3 | | | 15,386 | | 15,432 | | 0.3 | | 15,386 | | 15,432 | | 0.3 | |
Other(3) | | | (35,607 | ) | | | (20,477 | ) | | 42.5 | | | (35,607 | ) | | | (20,477 | ) | | 42.5 | | | | (20,477 | ) | | | (16,101 | ) | | 21.4 | | | (20,477 | ) | | | (16,101 | ) | | 21.4 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Total company | | $ | 32,905 | | $ | 41,954 | | | 27.5 | % | | $ | 32,905 | | $ | 41,954 | | | 27.5 | % | | $ | 41,954 | | $ | 68,073 | | | 62.3 | % | | $ | 41,954 | | $ | 68,073 | | | 62.3 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
Adjusted EBITDA:(2) | | |
Specialty hospitals | | $ | 64,381 | | $ | 58,282 | | | (9.5 | )% | | $ | 64,381 | | $ | 58,282 | | | (9.5 | )% | | $ | 58,282 | | $ | 81,570 | | | 40.0 | % | | $ | 58,282 | | $ | 81,570 | | | 40.0 | % |
Outpatient rehabilitation | | 20,898 | | 20,339 | | | (2.7 | ) | | 20,898 | | 20,339 | | | (2.7 | ) | | 20,339 | | 19,435 | | | (4.4 | ) | | 20,339 | | 19,435 | | | (4.4 | ) |
Other(3) | | | (12,236 | ) | | | (19,195 | ) | | | (56.9 | ) | | | (12,236 | ) | | | (19,195 | ) | | | (56.9 | ) | | | (19,195 | ) | | | (14,469 | ) | | 24.6 | | | (19,195 | ) | | | (14,469 | ) | | 24.6 | |
| |
Adjusted EBITDA margins:(2) Specialty hospitals | | | 17.1 | % | | | 13.9 | % | | | 17.1 | % | | | 13.9 | % | | |
Adjusted EBITDA margins:(2) | | |
Specialty hospitals | | | | 13.9 | % | | | 15.7 | % | | | 13.9 | % | | | 15.7 | % | |
Outpatient rehabilitation | | 12.4 | | 12.1 | | 12.4 | | 12.1 | | | 12.1 | | 11.2 | | 12.1 | | 11.2 | |
Other | | N/M | | N/M | | N/M | | N/M | | |
Other(3) | | | N/M | | N/M | | N/M | | N/M | |
| | |
Total assets: | | |
Specialty hospitals | | $ | 1,898,494 | | $ | 2,051,238 | | $ | 1,898,494 | | $ | 2,051,238 | | | $ | 2,051,238 | | $ | 2,191,493 | | $ | 2,051,238 | | $ | 2,191,493 | |
Outpatient rehabilitation | | 484,703 | | 487,171 | | 484,703 | | 487,171 | | | 487,171 | | 468,551 | | 487,171 | | 468,551 | |
Other(3) | | 381,545 | | 182,199 | | 378,356 | | 179,551 | | | 182,199 | | 91,066 | | 179,551 | | 89,568 | |
| | | | | | | | | | | | | | | | | | |
Total company | | $ | 2,764,742 | | $ | 2,720,608 | | $ | 2,761,553 | | $ | 2,717,960 | | | $ | 2,720,608 | | $ | 2,751,110 | | $ | 2,717,960 | | $ | 2,749,612 | |
| | | | | | | | | | | | | | | | | | |
| | |
Purchases of property and equipment, net: | | |
Specialty hospitals | | $ | 12,371 | | $ | 9,339 | | $ | 12,371 | | $ | 9,339 | | | $ | 9,339 | | $ | 4,957 | | $ | 9,339 | | $ | 4,957 | |
Outpatient rehabilitation | | 1,566 | | 2,019 | | 1,566 | | 2,019 | | | 2,019 | | 3,160 | | 2,019 | | 3,160 | |
Other(3) | | 332 | | 814 | | 332 | | 814 | | | 814 | | 281 | | 814 | | 281 | |
| | | | | | | | | | | | | | | | | | |
Total company | | $ | 14,269 | | $ | 12,172 | | $ | 14,269 | | $ | 12,172 | | | $ | 12,172 | | $ | 8,398 | | $ | 12,172 | | $ | 8,398 | |
| | | | | | | | | | | | | | | | | | |
4341
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Select Medical Holdings | | | | |
| | Corporation | | Select Medical Corporation | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended | | Nine Months Ended | | | Select Medical Holdings Corporation | | Select Medical Corporation | |
| | September 30, | | September 30, | | | Nine Months Ended September 30, | | Nine Months Ended September 30, | |
| | % | | % | | | % | | % | |
| | 2009 | | 2010 | | Change | | 2009 | | 2010 | | Change | | | 2010 | | 2011 | | Change | | 2010 | | 2011 | | Change | |
| | (in thousands) | | (in thousands) | | | (in thousands) | |
Net operating revenues: | | |
Specialty hospitals | | $ | 1,156,422 | | $ | 1,234,562 | | | 6.8 | % | | $ | 1,156,422 | | $ | 1,234,562 | | | 6.8 | % | | $ | 1,234,562 | | $ | 1,561,270 | | | 26.5 | % | | $ | 1,234,562 | | $ | 1,561,270 | | | 26.5 | % |
Outpatient rehabilitation | | 509,760 | | 518,288 | | 1.7 | | 509,760 | | 518,288 | | 1.7 | | | 518,288 | | 524,694 | | 1.2 | | 518,288 | | 524,694 | | 1.2 | |
Other(3) | | 146 | | 90 | | | (38.4 | ) | | 146 | | 90 | | | (38.4 | ) | | 90 | | 102 | | 13.3 | | 90 | | 102 | | 13.3 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Total company | | $ | 1,666,328 | | $ | 1,752,940 | | | 5.2 | % | | $ | 1,666,328 | | $ | 1,752,940 | | | 5.2 | % | | $ | 1,752,940 | | $ | 2,086,066 | | | 19.0 | % | | $ | 1,752,940 | | $ | 2,086,066 | | | 19.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
Income (loss) from operations: | | |
Specialty hospitals | | $ | 180,100 | | $ | 181,428 | | | 0.7 | % | | $ | 180,100 | | $ | 181,428 | | | 0.7 | % | | $ | 181,428 | | $ | 235,083 | | | 29.6 | % | | $ | 181,428 | | $ | 235,083 | | | 29.6 | % |
Outpatient rehabilitation | | 48,797 | | 51,061 | | 4.6 | | 48,797 | | 51,061 | | 4.6 | | | 51,061 | | 52,619 | | 3.1 | | 51,061 | | 52,619 | | 3.1 | |
Other(3) | | | (62,978 | ) | | | (45,310 | ) | | 28.1 | | | (62,978 | ) | | | (45,310 | ) | | 28.1 | | | | (45,310 | ) | | | (50,971 | ) | | | (12.5 | ) | | | (45,310 | ) | | | (50,971 | ) | | | (12.5 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Total company | | $ | 165,919 | | $ | 187,179 | | | 12.8 | % | | $ | 165,919 | | $ | 187,179 | | | 12.8 | % | | $ | 187,179 | | $ | 236,731 | | | 26.5 | % | | $ | 187,179 | | $ | 236,731 | | | 26.5 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
Adjusted EBITDA:(2) | | |
Specialty hospitals | | $ | 212,122 | | $ | 214,523 | | | 1.1 | % | | $ | 212,122 | | $ | 214,523 | | | 1.1 | % | | $ | 214,523 | | $ | 273,004 | | | 27.3 | % | | $ | 214,523 | | $ | 273,004 | | | 27.3 | % |
Outpatient rehabilitation | | 67,476 | | 66,813 | | | (1.0 | ) | | 67,476 | | 66,813 | | | (1.0 | ) | | 66,813 | | 65,308 | | | (2.3 | ) | | 66,813 | | 65,308 | | | (2.3 | ) |
Other(3) | | | (37,277 | ) | | | (41,419 | ) | | | (11.1 | ) | | | (37,277 | ) | | | (41,419 | ) | | | (11.1 | ) | | | (41,419 | ) | | | (46,117 | ) | | | (11.3 | ) | | | (41,419 | ) | | | (46,117 | ) | | | (11.3 | ) |
| | |
Adjusted EBITDA margins:(2) | | |
Specialty hospitals | | | 18.3 | % | | | 17.4 | % | | | 18.3 | % | | | 17.4 | % | | | | 17.4 | % | | | 17.5 | % | | | 17.4 | % | | | 17.5 | % | |
Outpatient rehabilitation | | 13.2 | | 12.9 | | 13.2 | | 12.9 | | | 12.9 | | 12.4 | | 12.9 | | 12.4 | |
Other | | N/M | | N/M | | N/M | | N/M | | |
Other(3) | | | N/M | | N/M | | N/M | | N/M | |
| | |
Total assets: | | |
Specialty hospitals | | $ | 1,898,494 | | $ | 2,051,238 | | $ | 1,898,494 | | $ | 2,051,238 | | | $ | 2,051,238 | | $ | 2,191,493 | | $ | 2,051,238 | | $ | 2,191,493 | |
Outpatient rehabilitation | | 484,703 | | 487,171 | | 484,703 | | 487,171 | | | 487,171 | | 468,551 | | 487,171 | | 468,551 | |
Other(3) | | 381,545 | | 182,199 | | 378,356 | | 179,551 | | | 182,199 | | 91,066 | | 179,551 | | 89,568 | |
| | | | | | | | | | | | | | | | | | |
Total company | | $ | 2,764,742 | | $ | 2,720,608 | | $ | 2,761,553 | | $ | 2,717,960 | | | $ | 2,720,608 | | $ | 2,751,110 | | $ | 2,717,960 | | $ | 2,749,612 | |
| | | | | | | | | | | | | | | | | | |
| | |
Purchases of property and equipment, net: | | |
Specialty hospitals | | $ | 27,748 | | $ | 29,963 | | $ | 27,748 | | $ | 29,963 | | | $ | 29,963 | | $ | 21,574 | | $ | 29,963 | | $ | 21,574 | |
Outpatient rehabilitation | | 6,575 | | 7,187 | | 6,575 | | 7,187 | | | 7,187 | | 8,142 | | 7,187 | | 8,142 | |
Other(3) | | 927 | | 1,476 | | 927 | | 1,476 | | | 1,476 | | 2,378 | | 1,476 | | 2,378 | |
| | | | | | | | | | | | | | | | | | |
Total company | | $ | 35,250 | | $ | 38,626 | | $ | 35,250 | | $ | 38,626 | | | $ | 38,626 | | $ | 32,094 | | $ | 38,626 | | $ | 32,094 | |
| | | | | | | | | | | | | | | | | | |
4442
The following tables reconcile same store hospital information:
| | | | | | | | | | | | | | | | |
| | Select Medical Holdings | | | Select Medical | |
| | Corporation | | | Corporation | |
| | Three Months Ended | | | Three Months Ended | |
| | September 30, | | | September 30, | |
| | 2009 | | | 2010 | | | 2009 | | | 2010 | |
| | (in thousands) | | | (in thousands) | |
Net operating revenue | | | | | | | | | | | | | | | | |
Specialty hospitals net operating revenue | | $ | 376,859 | | | $ | 419,798 | | | $ | 376,859 | | | $ | 419,798 | |
Less: Specialty hospitals in development, opened, acquired or closed after 1/1/09 | | | 3,482 | | | | 34,965 | | | | 3,482 | | | | 34,965 | |
| | | | | | | | | | | | |
Specialty hospitals same store net operating revenue | | $ | 373,377 | | | $ | 384,833 | | | $ | 373,377 | | | $ | 384,833 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Adjusted EBITDA(2) | | | | | | | | | | | | | | | | |
Specialty hospitals Adjusted EBITDA(2) | | $ | 64,381 | | | $ | 58,282 | | | $ | 64,381 | | | $ | 58,282 | |
Less: Specialty hospitals in development, opened, acquired or closed after 1/1/09 | | | (1,779 | ) | | | (2,231 | ) | | | (1,779 | ) | | | (2,231 | ) |
| | | | | | | | | | | | |
Specialty hospitals same store Adjusted EBITDA(2) | | $ | 66,160 | | | $ | 60,513 | | | $ | 66,160 | | | $ | 60,513 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
All specialty hospitals Adjusted EBITDA margin(2) | | | 17.1 | % | | | 13.9 | % | | | 17.1 | % | | | 13.9 | % |
Specialty hospitals same store Adjusted EBITDA margin(2) | | | 17.7 | % | | | 15.7 | % | | | 17.7 | % | | | 15.7 | % |
| | | | | | | | | | | | | | | | |
| | Select Medical Holdings | | | Select Medical | |
| | Corporation | | | Corporation | |
| | Nine Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
| | 2009 | | | 2010 | | | 2009 | | | 2010 | |
| | (in thousands) | | | (in thousands) | |
Net operating revenue | | | | | | | | | | | | | | | | |
Specialty hospitals net operating revenue | | $ | 1,156,422 | | | $ | 1,234,562 | | | $ | 1,156,422 | | | $ | 1,234,562 | |
Less: Specialty hospitals in development, opened, acquired or closed after 1/1/09 | | | 10,711 | | | | 58,366 | | | | 10,711 | | | | 58,366 | |
| | | | | | | | | | | | |
Specialty hospitals same store net operating revenue | | $ | 1,145,711 | | | $ | 1,176,196 | | | $ | 1,145,711 | | | $ | 1,176,196 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Adjusted EBITDA(2) | | | | | | | | | | | | | | | | |
Specialty hospitals Adjusted EBITDA(2) | | $ | 212,122 | | | $ | 214,523 | | | $ | 212,122 | | | $ | 214,523 | |
Less: Specialty hospitals in development, opened, acquired or closed after 1/1/09 | | | (3,698 | ) | | | (3,321 | ) | | | (3,698 | ) | | | (3,321 | ) |
| | | | | | | | | | | | |
Specialty hospitals same store Adjusted EBITDA(2) | | $ | 215,820 | | | $ | 217,844 | | | $ | 215,820 | | | $ | 217,844 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
All specialty hospitals Adjusted EBITDA margin(2) | | | 18.3 | % | | | 17.4 | % | | | 18.3 | % | | | 17.4 | % |
Specialty hospitals same store Adjusted EBITDA margin(2) | | | 18.8 | % | | | 18.5 | % | | | 18.8 | % | | | 18.5 | % |
N/M — Not Meaningful. | | |
N/M | | — Not Meaningful. |
|
(1) | | Cost of services includes salaries, wages and benefits, operating supplies, lease and rent expense and other operating costs. |
45
| | |
(2) | | We define Adjusted EBITDA as net income before interest, income taxes, depreciation and amortization, gainstock compensation expense, equity in earnings (losses) of unconsolidated subsidiaries, loss on early retirement of debt stock compensation expense,and other income, equity in losses of unconsolidated subsidiaries and long term incentive compensation.income. We believe that the presentation of Adjusted EBITDA is important to investors because Adjusted EBITDA is commonly used as an analytical indicator of performance by investors within the healthcare industry. Adjusted EBITDA is used by management to evaluate financial performance and determine resource allocation for each of our operating units. Adjusted EBITDA is not a measure of financial performance under generally accepted accounting principles.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 generally accepted accounting principlesGAAP and is thus susceptible to varying calculations, Adjusted EBITDA as presented may not be comparable to other similarly titled measures of other companies. See footnote 10Note 8 to our interim unaudited consolidated financial statements for the period ended September 30, 20102011 for a reconciliation of net income from operations before income taxes 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, 20102011 Compared to Three Months Ended September 30, 20092010
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 interestsinterest is identical for Holdings and Select.
Net Operating Revenues
Our net operating revenues increased by 7.8%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 compared to $545.6 million for the three months ended September 30, 2009.2010.
Specialty Hospitals.Our specialty hospital net operating revenues increased by 11.4%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 $376.9the 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.
43
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, 2009. For the three months ended September 30, 2010, the hospitals opened and acquired in 2009 increased net operating revenues by $10.2 million and the Regency hospitals acquired on September 1, 2010 increased net operating revenue by $23.4 million. These increases were offset by the loss of revenues from hospitals that closed during 2009 and 2010, which accounted for $2.1 million of the difference in net operating revenues between the three months ended September 30, 2009 and September 30, 2010. Net operating revenues for the specialty hospitals opened as of January 1, 2009 and operated by us throughout both periods increased by $11.4 million to $384.8 million for the three months ended September 30, 2010,2011 compared to $373.4 million for the three months ended September 30, 2009. This increase in net operating revenue is principally related to an increase in our patient days in these same store hospitals. Our patient days for these same store hospitals for the three months ended September 30, 2010 increased 2.4% as compared to the three months ended September 30, 2009, which was primarily due to an increase in our Non-Medicare patient days. The occupancy percentage in our same store hospitals was 66% for both the three months ended September 30, 2010 and for the three months ended September 30, 2009. Our average net revenue per patient day in our specialty hospitals was $1,478 for the three months ended September 30, 2010 compared to $1,479 for the three months ended September 30, 2009.
46
Outpatient Rehabilitation.Net operating revenue for our outpatient rehabilitation segment, which is comprised of outpatient rehabilitation clinics and contract therapy services, were $168.4 million for the three months ended September 30, 2010 compared to $168.8 million for the three months ended September 30, 2009. The decrease in our outpatient rehabilitation segment net operating revenues was due to a decrease in our contracted services based revenue, partially offset by an increase in our outpatient rehabilitation clinic revenue.2010. The net operating revenues generated by our outpatient rehabilitation clinics for the three months ended September 30, 2010 grew approximately 1.2% as2.4% compared to the three months ended September 30, 2009.2010. 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 increased 1.6%decreased 3.9% for the three months ended September 30, 20102011 to 1,144,0961,099,342 visits compared to 1,126,0961,144,096 visits for the three months ended September 30, 2009.2010. 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 remained stable atincreased 2.0% to $103 for the three months ended September 30, 2011, compared to $101 for the three months ended September 30, 2010 and September 30, 2009. We experienced a decline in our2010. Our contract services based revenuebusiness experienced an increase in net operating revenues of approximately 5.0% for the three months ended September 30, 2010 as3.9% compared to the three months ended September 30, 2009. This decline2010, which was primarily due the terminationresult of a significantgrowth from existing locations where we provide therapy services contract.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 $34.3$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 compared to $495.0 million for the three months ended September 30, 2009.2010. 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 compared to 90.8% for the three months ended September 30, 2009.2010. 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 compared to $448.72010. 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, 2009. The principal cause of this increase was increased costs associated with the hospitals acquired in 2009 and 2010 and increased cost in our hospitals opened as of January 1, 2009 and operated by us throughout both periods. Our labor costs in these same store hospitals were 154 basis points higher and our other operating costs were 83 basis points higher for the three months ended September 30, 2010 when2011 compared to the three months ended September 30, 2009. Our labor costs were primarily higher due to increased patient care hours that resulted from a higher acuity patient population for the three months ended September 30, 2010 compared to the three months ended September 30, 2009. Additionally, the labor costs included a $4.0 million charge due to an increase in our workers compensation program costs during the three months ended September 30, 2010. The increase in our other operating costs were caused by increasing onsite physician services at certain hospitals, increased equipment leasing costs and increased purchases of minor equipment and supplies. Another component of cost of services is facility rent expense, which was $29.8 million for the three months ended September 30, 2010 compared to $29.12010. General and administrative expenses were 2.2% of net operating revenue or $15.0 million for the three months ended September 30, 2009. General and administrative expenses were2011, compared to 3.3% of net operating revenue or $19.2 million for the three months ended September 30, 2010 compared to $34.6 million for2010. Our general and administrative costs in the three monthsmonth period ended September 30, 2009. The change is related to a number of factors. In 2009 our general and administrative expenses were significantly higher because we incurred non-recurring charges related to an $18.3 million payment under the Long Term Cash Incentive Plan and $3.7 million in stock compensation expense related to the grant of restricted stock that vested in connection with our initial public offering of common stock. In 2010 our expenses were higher because we incurredincluded $2.1 million of additional costs related to the transition of management functions and closing of the Regency corporate office. Additionally we incurredoffice and a $4.8 million charge due to an increase in employee healthcare costs. These increases in 2010 increases were partially offset by a reduction of $1.8 million in incentive compensation for executive officers from the same period in the prior year.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 compared2010. The decline principally occurred in our outpatient rehabilitation segment and was due to 2.2%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, 2009.
47
Adjusted EBITDA
Specialty Hospitals. Adjusted EBITDA decreased by 9.5%2011 compared to $58.3 million for the three months ended September 30, 2010 compared to $64.4 million for the three months ended September 30, 2009. Our2010. Adjusted EBITDA margins were 13.9% for the three months ended September 30, 2010 compared to 17.1% for the three months ended September 30, 2009. The hospitals opened as of January 1, 2009 and operated by us throughout both periods had Adjusted EBITDA of $60.5 million for the three months ended September 30, 2010, a decrease of $5.7 million or 8.5% compared to the Adjusted EBITDA of $66.2 million for these hospitals for the three months ended September 30, 2009. Our Adjusted EBITDA margin in these same store hospitals decreasedsegment increased to 15.7% for the three months ended September 30, 20102011 from 17.7%13.9% for the three months ended September 30, 2009. The principal reason2010. 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 declinethree months ended September 30, 2011 and 2010, respectively. In addition to the Adjusted EBITDA contribution from the Regency hospitals, the increase in ourthe Adjusted EBITDA for these same storethe remainder of our specialty hospitals was anprimarily the result of the increase in costs of servicespatient volumes described above under “Operating Expenses”“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 hospitals acquiredAdjusted EBITDA in 2009 and 2010 had losses ofour outpatient rehabilitation clinics increased by $1.1 million for the three months ended September 30, 20102011 compared to lossesthe 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 $0.1our 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, 2009. The increased losses were due2011 compared to the hospitals acquired from Regency which generated an Adjusted EBITDA loss of $1.3 million from its acquisition date through September 30, 2010 in addition to the $2.1 million of transition costs discussed under “Operating Expenses” above. Our hospitals opened during 2009 or currently still in development incurred Adjusted EBITDA losses of $0.5$19.2 million for the three months ended September 30, 2010 and 2009.
Outpatient Rehabilitation. Adjusted EBITDA decreased by 2.7% to $20.3 million for the three months ended September 30, 2010 compared to $20.9 million for the three months ended September 30, 2009. Our Adjusted EBITDA margins decreased to 12.1% for the three months ended September 30, 2010 from 12.4% for the three months ended September 30, 2009. The decrease in Adjusted EBITDA wasis primarily due to the termination of a significant therapy services contract.
Other. The Adjusted EBITDA loss was $19.2 million for the three months ended September 30, 2010 compared to an Adjusted EBITDA loss of $12.2 million for the three months ended September 30, 2009. This increased loss is related to the cost affecting our general and administrative expenses as described above under “Operating“Operating Expenses.”
Income from Operations
For the three months ended September 30, 20102011 we experiencedhad income from operations of $42.0$68.1 million compared to $32.9$42.0 million for the three months ended September 30, 2009.2010. The increase in income from operations resulted primarily from a reduction inthe 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 expenses.costs.
Gain on Early Retirement of Debt
Select Medical Holdings Corporation.For the three months ended September 30, 2009, we paid approximately $6.5 million to repurchase and retire a portion of Holdings’ senior floating rate notes. These notes had a carrying value of $7.7 million. A gain on early retirement of debt in the amount of $1.1 million was recognized on the transactions, which was net of the write-off of unamortized deferred financing costs related to the repurchased debt.
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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 compared to $25.1 million for the three months ended September 30, 2009.2010. The decreaseincrease in interest expense is related to a reduction in outstanding debt balances that occurred in 2009 as a result of repurchases of our 75/8% senior subordinated notes andfor Select resulted from the repayment of a portion$150.0 million of ourHoldings debt, for which Select was not previously obligated, which was refinanced at Select through indebtedness incurred under the new senior secured credit facility with proceeds from Holdings’ initial public offering of common stock and a reduction in rate that has resulted from the maturation of interest rate swaps that carried higher fixed interest rates.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 compared to $33.52010. 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, 2009.2011. The decrease in interest expense is related to a reduction in outstanding debt balances that occurred in 2009 as a resultrepresented an effective tax rate of repurchases of Select’s 75/8% senior subordinated notes, repurchases of our senior floating rate notes and the repayment of a portion of Select’s senior secured credit facility with proceeds from our initial public offering of common stock and a reduction in rate that has resulted from the maturation of interest rate swaps that carried higher fixed interest rates.
Income Taxes
Select Medical Corporation.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 $2.5$19.3 million for the three months ended September 30, 2009.2011. The expense represented an effective tax rate of 24.9%42.3%. In 2009 we favorably resolved with the Internal Revenue Service certain matters related to the 2005 tax return that resulted in interest being paid to us by the Internal Revenue Service. The total effect of this benefit is reflected in our effective tax rate for the three months ended September 30, 2009.
Select Medical Holdings Corporation.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%. We recorded incomeThe increase in our effective tax benefit of $0.8 million forrate has resulted primarily from a difference between the three months ended September 30, 2009. The significant reductiontax accounting basis and the financial accounting basis associated with a hospital exchange that occurred in taxable income for the three months ended September 30, 2009 resulted in minimal tax expense and this was further offset by the favorable resolution of our 2005 tax return with the Internal Revenue Service that resulted in interest being paid to us which was reflected as a tax benefit.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 and $0.8 million for the three months ended September 30, 2009. These amounts reflect minority owners’ share of the earnings of joint ventured operations.2010.
Nine Months Ended September 30, 20102011 Compared to Nine Months Ended September 30, 20092010
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 interestsinterest is identical for Holdings and Select.
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Net Operating Revenues
Our net operating revenues increased by 5.2%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 compared to $1,666.3 million for the nine months ended September 30, 2009.2010.
Specialty Hospitals.Our specialty hospital net operating revenues increased by 6.8%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 $1,156.4the 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, 2009. For the nine months ended September 30, 2010, the hospitals opened and acquired in 2009 increased net operating revenues by $28.3 million and the Regency hospitals acquired on September 1, 2010 increased net operating revenues by $23.4 million from the three months ended September 30, 2009. These increases were offset by the loss of revenues from hospitals that closed during 2009 and 2010, which accounted for the $4.0 million of the differences in the net operating revenues between the nine months ended September 30, 2009 and September 30, 2010. Net operating revenues for the specialty hospitals opened as of January 1, 2009 and operated by us throughout both periods increased by $30.5 million to $1,176.2 million for the nine months ended September 30, 2010,2011 compared to $1,145.7 million for the nine months ended September 30, 2009. This increase in net operating revenue is principally related to an increase in our occupancy and patient days in these same store hospitals. Our patient days for these same store hospitals for the nine months ended September 30, 2010 increased 2.9% as compared to the nine months ended September 30, 2009, which resulted from to an increase in both our Medicare and Non-Medicare patient days. The occupancy percentage in our same store hospitals increased to 69% for the nine months ended September 30, 2010 from 67% for the nine months ended September 30, 2009. Our average net revenue per patient day in our specialty hospitals was $1,481 for the nine months ended September 30, 2010 compared to $1,489 for the nine months ended September 30, 2009. This decline was principally due to a decline in our average Medicare revenue per patient day, which resulted from the June 3, 2009 interim final rule in which CMS adopted a new table of MS-LTC-DRG relative weights that had the effect of reducing reimbursement for Medicare cases. This reduction in Medicare payments was partially offset by the annual payment update that became effective on October 1, 2009. Additionally, on April 1, 2010 we experienced a further reduction in the standard federal rate per case of 0.25% mandated by PPACA
Outpatient Rehabilitation.Our outpatient rehabilitation segment net operating revenues increased 1.7% to $518.3 million for the nine months ended September 30, 2010 compared to $509.8 million for the nine months ended September 30, 2009. The increase in our outpatient rehabilitation segment net operating revenues was due to an increase in both our outpatient rehabilitation clinic revenue and contract services based revenue.2010. The net operating revenues generated by our outpatient rehabilitation clinics for the nine months ended September 30, 2010 grew approximately 1.1% as2.3% compared to the nine months ended September 30, 2009.2010. 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 increased 1.7%decreased 1.8% for the nine months ended September 30, 20102011 to 3,442,2663,381,896 visits compared to 3,385,7333,442,266 visits for the nine months ended September 30, 2009.2010. 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 declined 1.0%increased 2.0% to $103 for the nine months ended September 30, 2011, compared to $101 for the nine months ended September 30, 2010, compared to $102 for the nine months ended September 30, 2009.2010. Our contractedcontract services based revenue for the nine months ended September 30, 2010 grewbusiness experienced a decline in net operating revenues of approximately 3.5% as2.3% compared to the nine months ended September 30, 2009. This increase principally resulted from operations acquired in 2009.2010 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.
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Operating Expenses
Our operating expenses include our cost of services, general and administrative expense and bad debt expense. Our operating expenses increased by $67.3$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 compared to $1,447.1 million for the nine months ended September 30, 2009.2010. 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 compared to 86.8% for the nine months ended September 30, 2009.2010. 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 compared to $1,353.12010. 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, 2009. The principal cause of this increase was increased costs associated with the hospital operations acquired in 2009 and 2010 and the growth experienced in our hospitals opened as of January 1, 2009 and operated by us throughout both periods. Our labor costs in these same store hospitals were 42 basis points higher and our other operating costs were 11 basis points higher2011 compared to $87.5 million for the nine months ended September 30, 2010 when compared to2010. General and administrative expenses were 2.3% of net operating revenue or $47.7 million for the nine months ended September 30, 2009. Our labor costs were primarily higher due2011 compared to increased patient care hours that resulted from a higher acuity patient population2.4% of net operating revenue or $41.8 million for the three months ended September 30, 2010 compared to the three months ended September 30, 2009. Additionally, the labor costs included a $4.0 million charge due to an increase in our workers compensation program costs during the threenine months ended September 30, 2010. The increase in our other operating costs was caused by increasing onsite physician services at certain hospitals, increased equipment leasing costsgeneral and increased purchases of minor equipment and supplies. Another component of cost of services is facility rent expense, which was $87.5 millionadministrative expenses for the nine months ended September 30, 2010 compared to $87.42011 resulted from increased compensation costs of approximately $7.6 million for the nine months ended September 30, 2009. General and administrative expenses were $41.8 million for the nine months ended September 30, 2010 compared to $60.3 million for the nine months ended September 30 2009. The change isprimarily related to a numberexecutive compensation, and increased legal expenses of factors. In 2009 our general and administrative expenses were significantly higher because we incurred non-recurring charges related to an $18.3approximately $7.8 million payment under the Long Term Cash Incentive Plan and $3.7 million in stock compensation expenseprimarily related to the grantColumbus matter. These cost increases were offset by gains of restricted stock that vested in connection with our initial public offering$5.4 million on the sale of common stock. Inassets. Additionally, the 2010 our expenses were higher than normal because we incurred $2.1 million of additional costs related to the transition and closing of the Regency corporate office. Additionally we incurredperiod included a $4.8 million charge duerelated to an increase in employee healthcare costs. These 2010 increases were offset by a reduction in incentive compensation for executive officers of $5.2 million from the same period in the prior year. 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 compared to 2.0% for the nine months ended September 30, 2009. The reduction resulted from improved collections and a reduction in the amount of accounts receivable outstanding greater than 180 days.2010.
Adjusted EBITDA
Specialty Hospitals. Our specialty hospital Adjusted EBITDA increased by 1.1%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 compared2010. Our Adjusted EBITDA margins increased to $212.1 million17.5% for the nine months ended September 30, 2009. Our Adjusted EBITDA margins decreased to2011 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 from 18.3%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, 2009. The2011 and 2010, respectively. In addition to the contribution from the Regency hospitals, opened as of January 1, 2009 and operated by us throughout both periods had Adjusted EBITDA of $217.8 million for the nine months ended September 30, 2010, an increase of $2.0 million or 0.9% overin the Adjusted EBITDA of $215.8 million for these hospitals for the nine months ended September 30, 2009. Our Adjusted EBITDA margin in these same store hospitals decreased to 18.5% for the nine months ended September 30, 2010 from 18.8% for the nine months ended September 30, 2009. The principal reason for the growth inremainder of our Adjusted EBITDA for these same storespecialty hospitals was anprimarily the result of the increase in the volume of cases we treated in these hospitals. The Adjusted EBITDA margins declined due to higher relative costs of services as a percentage ofpatient volumes and our Medicare net operating revenues. These increases wererevenue per patient day described above under “Operating Expenses”. We were also able to reduce the bad debt expense in these hospitals, which had the effect of increasing our Adjusted EBITDA. The hospitals acquired in 2009 and 2010 had losses of $1.5 million for the nine months ended September 30, 2010 compared to losses of $0.1 million for the nine months ended September 30, 2009. The increased losses were due to the hospitals acquired from Regency which generated an Adjusted EBITDA loss of $1.3 million from its acquisition date through September 30, 2010 in addition to the $2.1 million of transition costs discussed under ““Net Operating ExpensesRevenues — Specialty Hospitals.” above. Our hospitals opened during 2009 or currently still in development incurred Adjusted EBITDA losses of $1.9 million for the nine months ended September 30, 2010 compared to $0.7 million for the nine months ended September 30, 2009.
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Outpatient Rehabilitation. Our outpatient rehabilitation Adjusted EBITDA wasfor 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 compared2010. Our outpatient rehabilitation Adjusted EBITDA margins for the segment decreased to $67.512.4% 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, 2009. Our2011 compared to the nine months ended September 30, 2010. Additionally, our Adjusted EBITDA margins declinedfor our outpatient rehabilitation clinics grew to 12.9%13.6% for the nine months ended September 30, 20102011 from 13.2%12.5% for the nine months ended September 30, 2009.2010. The decreaseincrease in our Adjusted EBITDA and Adjusted EBITDA margin in our rehabilitation clinics was primarilyprincipally due to an improvement in the resultperformance 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 higher costs in our contract services business. Thisbusiness that resulted from the need to use higher cost agency staffing at some of our locations due to the turnoverloss of a number of our contracts and lost productivity in the Northeastsignificant contract during the three months ended March 31,second quarter of 2010 due to a difficult winter weather season. This decline was partially offsetas described under “Net Operating Revenues — Outpatient Rehabilitation” and higher labor costs for the treatment models required by an increase of Adjusted EBITDA in our outpatient rehabilitation clinicsRUGS IV/MDS 3.0 rules that resulted from an increase in patient visits.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 compared to an Adjusted EBITDA loss of $37.3 million for the nine months ended September 30, 2009. This increased lossand is primarily related to theour general and administrative expenses as described above under “Operating Expenses.“Operating Expenses.”
Income from Operations
For the nine months ended September 30, 20102011 we experiencedhad income from operations of $187.2$236.7 million compared to $165.9$187.2 million for the nine months ended September 30, 2009.2010. The increase in income from operations resulted primarily from a reductionthe 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 ourpart by an increase in general and administrative expenses.costs.
GainLoss on Early Retirement of Debt
Select Medical Corporation.ForOn 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, 2009, we paid approximately $30.1 million to repurchase and retire a portion of our 75/8% senior subordinated notes. These notes had a carrying value of $46.5 million. A gain on early retirement of debt in the amount of $15.3 million was recognized on the transactions2011 which was net ofincluded the write-off of unamortized deferred financing costs related to the repurchased debt.and tender premiums.
Select Medical Holdings Corporation.ForOn 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 Select’s 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, 2009, we paid approximately $30.1 million to repurchase and retire a portion of our 75/8% senior subordinated notes. These notes had a carrying value of $46.5 million. A gain on early retirement of debt in the amount of $16.4 million was recognized on the transactions2011 which was net ofincluded the write-off of unamortized deferred financing costs, related to the repurchased debt. In addition for the nine months ended September 30, 2009, we paid approximately $6.5 million to repurchasetender premiums and retire a portion of Holdings’ senior floating rate notes. These notes have a carrying value of $7.7 million. A gain on early retirement of debt in the amount of $1.1 million was recognized on the transaction which was net of the write-off of unamortized deferred financing costs related to the repurchased debt.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 compared to $75.9 million for the nine months ended September 30, 2009.2010. The decrease in interest expense is related to a reduction in outstanding debt balances that occurred in 2009 as a result of repurchases of our 75/8% senior subordinated notes and the repayment of a portion of our senior secured credit facility with proceeds from Holdings’ initial public offering of common stock and a reduction in rate that has resulted primarily from the maturationexpiration of interest rate swaps in 2010 that carried higher fixed interest rates.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.
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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 compared to $101.8 million for the nine months ended September 30, 2009.2010. The decrease in interest expense is related to a reduction in outstanding debt balances that occurred in 2009 as a result of repurchases of Select’s 75/8% senior subordinated notes, repurchases of our senior floating rate notes and the repayment of a portion of Select’s senior secured credit facility with proceeds from our initial public offering of common stock and a reduction in rate that has resulted primarily from the maturationexpiration of interest rate swaps in 2010 that carried higher fixed interest rates.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 $43.1$56.8 million for the nine months ended September 30, 2009.2011. The expense represented an effective tax rate of 39.4%43.0%. The lower effective tax rate we experienced for the nine months ended September 30, 2010 is due to a reduction in our effective tax rate for state and local taxes and a reduction in the amount of tax reserves provided on uncertain tax positions.
Select Medical Holdings Corporation.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%. We recorded income tax expense of $33.1 million for the nine months ended September 30, 2009. The expense represented an effective tax rate of 41.0%. The lower effective tax rate we experienced for the nine months ended September 30, 2010 is due to a reductionincrease in our effective tax rate for statehas resulted primarily from a difference between the tax accounting basis and local taxesthe financial accounting basis associated with a hospital exchange that occurred in 2011 and a reductionan increase in the amount of taxour reserves provided onfor uncertain tax positions.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 and $2.2 million for the nine months ended September 30, 2009. These amounts reflect minority owners’ share of the earnings of joint ventured operations.2010.
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Liquidity and Capital Resources
Cash Flows for the Nine Months Ended September 30, 20102011 and Nine Months Ended September 30, 20092010
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Select Medical Holdings | | | | | Select Medical Holdings | | | |
| | Corporation | | Select Medical Corporation | | | Corporation | | Select Medical Corporation | |
| | Nine Months Ended | | Nine Months Ended | | | Nine Months | | Nine Months | |
| | September 30, | | September 30, | | | Ended September 30, | | Ended September 30, | |
| | 2009 | | 2010 | | 2009 | | 2010 | | | 2010 | | 2011 | | 2010 | | 2011 | |
| | (in thousands) | | (in thousands) | | | (in thousands) | | (in thousands) | |
| | |
Cash flows provided by operating activities | | $ | 93,447 | | $ | 110,265 | | $ | 126,266 | | $ | 135,787 | | | $ | 110,265 | | $ | 143,914 | | $ | 135,787 | | $ | 166,834 | |
Cash flows used in investing activities | | | (34,290 | ) | | | (204,428 | ) | | | (34,290 | ) | | | (204,428 | ) | | | (204,428 | ) | | | (35,808 | ) | | | (204,428 | ) | | | (35,808 | ) |
Cash flows provided by financing activities | | 157,075 | | 25,826 | | 124,256 | | 304 | | |
Cash flows provided by (used in) financing activities | | | 25,826 | | | (102,258 | ) | | 304 | | | (125,178 | ) |
| | | | | | | | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | 216,232 | | | (68,337 | ) | | 216,232 | | | (68,337 | ) | | | (68,337 | ) | | 5,848 | | | (68,337 | ) | | 5,848 | |
Cash and cash equivalents at beginning of period | | 64,260 | | 83,680 | | 64,260 | | 83,680 | | | 83,680 | | 4,365 | | 83,680 | | 4,365 | |
| | | | | | | | | | | | | | | | | | |
Cash and cash equivalents at end of period | | $ | 280,492 | | $ | 15,343 | | $ | 280,492 | | $ | 15,343 | | | $ | 15,343 | | $ | 10,213 | | $ | 15,343 | | $ | 10,213 | |
| | | | | | | | | | | | | | | | | | |
Operating activities for Select provided $135.8$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, 2010. Our days sales outstanding were 47 days at September 30, 2010 compared to 49 days at December 31, 2009. The decrease in days sales outstanding between December 31, 20092011 and September 30, 2010 is primarily related to the affect of the Regency acquisition which had a lower days sales outstanding.
The cash flow from operating activities of Select exceeds the operating cash flow of Holdings by $25.5 million for the nine months ended September 30, 20102010. The difference relates to interest payments associated with Holdings’ indebtedness.
Investing activities for Select and by $32.8Holdings used $35.8 million of cash flow for the nine months ended September 30, 2009.2011. The difference relatesprincipal use of cash included $32.1 million related to interest payments on Holdings’ senior subordinated notesthe purchase of property and senior floating rate notes.
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, 20102010. The use of cash included acquisition payments of $165.8 million related principally to the acquisition of Regency, and $34.3$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, 2009.2011. The primary use of cash forrelated to dividends paid to Holdings of $204.6 million to fund interest payments and the nine months ended September 30, 2010 related principally to the acquisitionrepurchase of Regency which was $165.6 million. We used cash for the purchaseall $150.0 million principal amount of property and equipmentHoldings 10% senior subordinated notes, $18.6 million of $38.6debt issuance costs, repayment of bank overdrafts of $4.2 million and $35.3$3.5 million for the nine months ended September 30, 2010 and 2009, respectively.
in distributions to non-controlling interests offset by net borrowings of debt of $105.5 million. Financing activities for Select 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 $1.6$1.7 million. Financing activities used $124.3 million of cash flow for the nine months ended September 30, 2009. The primary source of cash related to $282.0 in net proceeds from Holdings’ initial public offering of common stock offset by the repurchase of a portion of Select’s 75/8% senior subordinated notes for $30.1 million, repayment of bank overdrafts of $21.1 million, net payments on our senior secured credit facility of $65.0 million, dividends paid to Holdings to fund interest payments of $39.4 million, $2.5 million in distributions to non-controlling interests and net payments related to seller and other debt of $0.6 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 and $32.8 million for the nine months ended September 30, 2009 relates to dividends paid by Select to Holdings to service Holdings’ interest obligations related to its senior subordinated notes and its senior floating rate notes and the repurchase of senior floating rate notes.indebtedness.
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Capital Resources
Select Medical CorporationCorporation..Select had anet working capital of $110.4 million at September 30, 2011 compared to net working capital deficit of $51.7 million at September 30, 2010 compared to net working capital of $167.3$73.5 million at December 31, 2009.2010. The decreaseincrease in net working capital is primarily due to an increasea decrease in our current portion of long-term debt related to scheduled principal dueresulting from our debt refinancing on June 1, 2011 and an increase in our Tranche B Term Loans and the use of cash to fund the Regency acquisition.accounts receivable.
Select Medical Holdings CorporationCorporation..Holdings had net a working capital deficit of $54.6$110.0 million at September 30, 20102011 compared to net working capital deficit of $170.8$70.2 million at December 31, 2009.2010. The decreaseincrease in net working capital is primarily due to an increasea decrease in our current portion of long-term debt related to scheduled principal dueresulting from our debt refinancing on June 1, 2011 and an increase in our Tranche B Term Loans and the use of cash to fund the Regency acquisition.accounts receivable.
At September 30, 2010, ourOn June 1, 2011, Select entered into a new senior secured credit facility provides for senior secured financing consisting of:
a $300.0 million revolving loan facility that will terminate on August 22, 2013, including both a letter of credit sub-facility and a swingline loan sub-facility, and
$191.8 million in term loans that mature on February 24, 2012 (the “Tranche B Term Loans”), and
$291.3 million in term loans that mature on August 22, 2014 (the “Tranche B-1 Term Loans”).
On June 7, 2010 we entered into an Assignment and Assumption and Amendment No. 4 (“Amendment No. 4”) to Select’s senior secured credit facilityagreement (the “Credit Agreement”) withthat 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 group of lenders and JPMorgan Chase Bank, N.A. as administrative agent. Amendment No. 4 extended the maturity of all $300.0 million, of commitments under Select’sfive-year revolving credit facility from February 24, 2011 to August 22, 2013,(“Revolving Credit Facility”), including a $75.0 million sublimit for the issuance of standby letters of credit and made related technical changes toa $25.0 million sublimit for swingline loans. Borrowings under the Senior Secured Credit Agreement. The applicable margin percentage for extended revolving loansFacilities are guaranteed by Holdings and the commitment fee rate for extended revolving commitments have increasedsubstantially all of Select’s current domestic subsidiaries and will be determined based onguaranteed by Select’s future domestic subsidiaries and secured by substantially all of Select’s existing and future property and assets and by a pricing grid set forth pledge of Select’s capital stock, the capital stock of Select’s domestic subsidiaries and up to 65% of the capital stock of Select’s foreign subsidiaries, if any.
Borrowings under the Senior Secured Credit Facilities will bear interest at a rate equal to:
in Amendment No. 4. Under the pricing grid,case of the applicable marginTerm 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 for revolving ABR loans rangesranging from 2% per annum2.75% to 3% per annum, the applicable margin3.75%, or Alternative Base Rate plus a percentage for revolving Eurodollar loans rangesranging from 3% per annum1.75% to 4% per annum, and the commitment fee rate for extended revolving commitments ranges from 0.375% to 0.75%.
On June 7, 2010, we also entered into an Amendment No. 4-A to the Credit Agreement with a group of lenders and JPMorgan Chase Bank, N.A. as administrative agent. Amendment No. 4-A made a technical change to the Credit Agreement that permits us to refinance existing indebtedness with the proceeds of new indebtedness, including the refinancing of existing senior subordinated indebtedness with the proceeds of new senior subordinated indebtedness.
The interest rates per annum applicable to loans, other than swingline loans and Tranche B-1 Term Loans, under our senior secured credit facility are, at our option, equal to either an alternate base rate or an adjusted LIBOR rate for a one, two, three or six month interest period, or a nine or twelve month period if available,2.75%, in each case plus anbased on Select’s 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 margin percentage. The interest rates per annum applicablestatutory reserve requirements; provided that Adjusted LIBO, when used in reference to the Tranche B-1 Term Loans under our senior credit facility are,Loan, will at our option, equalno time be less than 1.75% per annum.
“Alternative Base Rate” is defined as the highest of (a) the administrative agent’s Prime Rate, (b) the Federal Funds Effective Rate plus 1/2 of 1.00% and (c) the Adjusted LIBO from time to eithertime for an alternate base rate or an adjusted LIBOR rate for a three or six month interest period or a nine or twelveof one month, period if available, in each case, plus an applicable margin percentage. The alternate base rate is the greater of (1) JPMorgan Chase Bank, N.A.’s prime rate1.00%.
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and (2) one-half of 1% over the weighted average of rates on overnight Federal funds as published by the Federal Reserve Bank of New York. The adjusted LIBOR rate is determined by reference to settlement rates established for deposits in dollars in the London interbank market for a period equal to the interest period of the loan and the maximum reserve percentages established by the Board of Governors of the United States Federal Reserve to which our lenders are subject. The applicable margin percentage for borrowings under our revolving loans is subject to change based upon Select’s leverage ratio (as defined in the credit agreement). The applicable margin percentage for revolving loans will increasedecrease from (1) 2.50%2.75% to 2.75%2.50% for alternate base rate loans and (2) 3.50%3.75% to 3.75%3.50% for adjusted LIBOR loans upon the delivery of Select’s Form 10-Q to JP Morgan Chase Bank, N.A., as administrative agent to Select’s senior secured credit facility.
The applicable margin percentagesTerm 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 Select’s 7 5/8% senior subordinated notes due 2015 (the “Tranche B Trigger Date”) more than $60.0 million in aggregate principal amount of Select’s 7 5/8% senior subordinated notes due 2015 are outstanding, the maturity date for the Term Loan will be the Tranche B Term LoansTrigger 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 Select’s 7 5/8% senior subordinated notes due 2015 (the “Revolving Trigger Date”) more than $60.0 million in aggregate principal amount of Select’s 7 5/8% senior subordinated notes due 2015 are (1) 1.00% for alternate base rate loans and (2) 2.00% for adjusted LIBOR loans. The applicable margin percentagesoutstanding, the maturity date for the Tranche B-1 Term Loans areRevolving Credit Facility will be the Revolving Trigger Date.
Select will be required to prepay borrowings under the Senior Secured Credit Facilities with (1) 2.75% for alternate base rate100% 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 Select’s leverage ratio is greater than 3.75 to 1.00 and 25% of excess cash flow if Select’s 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 and (2) 3.75% for adjusted LIBOR loans.optionally prepaid during the applicable fiscal year. Select will not be required to prepay borrowings with excess cash flow if Select’s leverage ratio is less than or equal to 3.25 to 1.00.
Our senior secured credit facility requiresThe Senior Secured Credit Facilities require Select to maintain certain interest expense coverage ratios anda leverage ratios (bothratio (based upon the ratio of indebtedness for money borrowed to consolidated EBITDA, as defined in our senior secured credit facility)the Credit Agreement), which become more restrictive over time. For the four consecutiveis tested quarterly, and prohibits Select from making capital expenditures in excess of $125.0 million in any fiscal quarters endedyear (subject to a 50% carry-over provision). As of September 30, 2010,2011, Select was required to maintain an interest expense coverage ratio (its ratio of consolidated EBITDA to cash interest expense) for the prior four consecutive fiscal quarters of at least 2.00 to 1.00. Select’s interest expense coverage ratio was 3.25 to 1.00 for such period. As of September 30, 2010, Select was required to maintain aits leverage ratio (its ratio of total indebtedness to consolidated EBITDA for the prior four consecutive fiscal quarters) at less than 4.506.00 to 1.00.1.00, and Select’s leverage ratio was 3.073.44 to 1.00 as of September 30, 2010.2011. 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.
Also, asThe 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, 2010,2011, we had $251.4$217.2 million of availability under our revolving loan facilityRevolving Credit Facility (after giving effect to $28.6$32.8 million of outstanding letters of credit).
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On November 23, 2007, Select entered into an interest rate swap transaction for three years with an effective date of November 23, 2007. The swap is designated as a cash flow hedge of forecasted LIBOR-based variable rate interest payments. The underlying variable rate debt is $100.0 million.
Select has outstanding $611.5 million in aggregate principal amount of 75/8% senior subordinated notes due 2015. Interest on the notes is payable semi-annually in arrears on February 1 and August 1 of each year. The notes are guaranteed by all of Select’s wholly-owned subsidiaries, subject to certain exceptions. The notes may be redeemed at Select’s option, in whole or in part, at redemption prices that decline annually to 100% on and after February 1, 2013, plus accrued and unpaid interest. Currently through January 31, 2011, Select may redeem the notes at a redemption price equal to 103.813% of the principal amount of the notes, plus accrued and unpaid interest, if any, to the redemption date. Upon a change of control of Holdings, each holder of notes may require us to repurchase all or any portion of the holder’s notes at a purchase price equal to 101% of the principal amount plus accrued and unpaid interest to the date of purchase.
As of September 30, 2010, Holdings had outstanding $167.3 million of senior floating rate notes due 2015, which bear interest at a rate per annum, reset semi-annually, equal to the 6-month LIBOR plus 5.75%. Interest is payable semi-annually in arrears on March 15 and September 15 of each year, with the principal due in full on September 15, 2015. The senior floating rate notes are general unsecured obligations of Holdings and are not guaranteed by Select or any of its subsidiaries.
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.
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Holdings has authorized a program to repurchase up to $100.0$150.0 million worth of shares of our common stock. The program will remain in effect until JanuaryMarch 31, 2012,2013, unless extended by the Boardboard of Directors.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 normal operations over the next twelve months. Our lenders, including the lenders participating in our senior secured credit facility, may have suffered losses related to their lending and other financial relationships, especially because of the general weakening of the national economy, increased financial instability of many borrowers and the declining value of their assets. As a result, lenders may become insolvent or tighten their lending standards, which could make it more difficult for us to borrow under our revolving credit facility. Our access to funds under the senior secured credit facility is dependent upon the ability of our lenders to meet their funding commitments. Our financial condition and results of operations would be adversely affected if we were unable to draw funds under our senior secured credit facility because of a lender default or to obtain other cost-effective financing.
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. As part of the Regency acquisition, we acquired one LTCH under construction.
Inflation
The healthcare industry is labor intensive. Wages and other expenses increase during periods of inflation and when labor shortages occur in the marketplace. In addition, suppliers pass along rising costs to us in the form of higher prices. We have implemented cost control measures, including our case and resource management program, to curtail increases in operating costs and expenses. We cannot predict our ability to cover or offset future cost increases.
Recent Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (“FASB”)May 2011, FASB issued Accounting Standards Update (“ASU”) 2010-06,2011-04, “Fair Value Measurements and DisclosuresMeasurement (Topic 820) — Improving Disclosures aboutAmendments to Achieve Common Fair Value Measurements”Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“Update 2010-06”2011-04”), which amends the guidance on. Update 2011-04 generally represents clarification of Topic 820, but also includes instances where a particular principle or requirement for measuring fair value to add newor disclosing information about fair value measurements has changed. Update 2011-04 results in common principles and requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. It also clarifies existingmeasuring fair value disclosuresand 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 leveladoption of disaggregationUpdate 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 about inputstransparency of financial reporting and valuation techniques usedincreases the prominence of items reported in other comprehensive income by eliminating the option to measure fair value.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 Company adopted update 2010-06adoption of Update 2011-05 will cause us to change our presentation of other comprehensive income on January 1, 2010, exceptour 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 requirementAllowance 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 Level 3 activityallowance 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 purchases, sales, issuances,evaluating the effects of Update 2011-07 on our consolidated financial statements.
In September 2011, the FASB issued ASU 2011-08, “Intangibles — Goodwill and settlementsOther (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 gross basis, whichqualitative 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, 2010, and for interim periods within those fiscal years. The adoption2011. Update 2011-08 does not change the accounting or measurement of Update 2010-06 did notimpairments. This update will have an impactno effect on the Company’sour consolidated financial statements. The Company currently has no Level 3 measurements.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | | |
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 Select’s senior secured credit facility and Holdings’ senior floating rate notes. As of September 30, 2010,2011, Select had $503.1$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. On November 16, 2007, Select entered into an interest rate swap transaction for three years with an effective date of November 23, 2007. Select entered into the swap transaction to mitigate the risks of future variable rate interest payments. The notional amount of the interest rate swap is $100.0 million and the underlying variable rate debt is associated with the senior secured credit facility. Each eighth point change in interest rates on the variable rate portion of our long-term indebtedness would result in a $0.8$1.3 million annual change in interest expenseexpense. 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 our term loans.this indebtedness is effectively fixed at 5.50%.
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ITEM 4T. CONTROLS AND PROCEDURES | | |
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 nine monthsthird quarter ended September 30, 20102011 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 PROCEEDINGSTo cover claims arising out of the operations of the Company’s 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 Company’s 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.
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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 Company’s 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 thequi tamprovisions of the federal False Claims Act.Qui tamlawsuits 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 privatequi tamplaintiff (known as a relator) and take the lead in the litigation. These lawsuits can involve significant monetary damages and penalties and award bounties to private plaintiffs who successfully bring the suits. The Company has been a defendant in these cases in the past, and may be named as a defendant in similar cases from time to time in the future.
During July 2009,the third quarter of 2011, the Company receivedentered into a settlement agreement with the United States government in connection with the previously disclosedqui tamlawsuit filed in Columbus, Ohio against certain subsidiaries of the Company. The lawsuit, filed under seal in September 2007, led to the Company’s receiving, in July 2009, a subpoena from the Office of Inspector General of the U.S. Department of Health and Human Servicesgovernment seeking various documents concerning the Company’s financial relationships with certain physicians practicing at its long term acute care hospitals in Columbus, Ohio. We believe thatUnder the subpoena has been issued in connection with a qui tam lawsuit, and thatterms of the settlement, the Company agreed to pay $7.5 million to the government is currently investigating the matter to determine whether to intervene. The Company has produced documents in response to the subpoena and intends to fully cooperate with the government’s investigation. At this time, the Company is unable to predict the timing and outcome of this matter.
On March 8, 2010, the Company receivedenter into a letter from the United States Senate Finance Committee in response to a New York Times article published February 10, 2010 focusing on our Company and the5-year corporate integrity agreement covering its long term acute care hospital industry entitled “Long-Term Care Hospitals Face Little Scrutiny.”hospitals. The letter fromCompany also agreed to pay certain legal fees of the Senate Finance Committee asked us to respond to a variety of questions regarding our long-term care hospitals. On March 23, 2010,qui tamrelator’s counsel. In the settlement agreement, the Company responded toadmitted no liability or wrongdoing. During the letter. On May 25, 2010second quarter of 2011, the Company received follow-up questions fromrecorded a pre-tax charge of $7.5 million to establish a settlement reserve in connection with the committee, whichmatter. The settlement amounts and counsel fees were paid in full during the third quarter of 2011, and the Company respondeddoes not expect to on June 4, 2010. The Company intends on fully cooperatingincur any additional material charges in connection with the Committee. At this time, the Company is unable to predict the timing and outcome of this matter.
As a result of the enactment of the PPACA, which President Obama signed into law on March 23, 2010, there have been changes to certain of the laws and regulations that were described in the risk factors contained in our Annual Report on Form 10-K for the year ended December 31, 2009. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Regulatory Changes” for a description of these regulatory changes.
Except as set forth above, thereThere 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, 2009.2010.
ITEM 2. | | |
ITEM 2. | | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Purchases of Equity Securities by the Issuer
None.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:
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable. | | | | | | | | | | | | | | | | |
| | | | | | | | | | 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 4. REMOVED AND RESERVED | | |
ITEM 3. | | DEFAULTS UPON SENIOR SECURITIES |
Not applicable.
ITEM 5. OTHER INFORMATION | | |
ITEM 4. | | REMOVED AND RESERVED |
None.
The exhibits to this report are listed in the Exhibit Index appearing on page 6158 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 12, 2010
| | | | |
| 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 12, 20103, 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 |
| | | | |
| 3.1 | | | Amended and Restated Bylaws of Select Medical Holdings Corporation, as amended. |
| | | | |
| 3.2 | | | Amended and Restated Bylaws of Select Medical Corporation, as amended. |
| | | | |
| 10.1 | | | Second Addendum to Lease Agreement, dated August 1, 2010, by and between Old Gettysburg Associates II and Select Medical Corporation. |
| | | | |
| 10.2 | | | Restricted Stock Award Agreement, dated August 11, 2010, by and between Select Medical Holdings Corporation and Bryan C. Cressey. |
| | | | |
| 10.3 | | | Restricted Stock Award Agreement, dated August 11, 2010, by and between Select Medical Holdings Corporation and James E. Dalton, Jr. |
| | | | |
| 10.4 | | | Restricted Stock Award Agreement, dated August 11, 2010, by and between Select Medical Holdings Corporation and James S. Ely, III. |
| | | | |
| 10.5 | | | Restricted Stock Award Agreement, dated August 11, 2010, by and between Select Medical Holdings Corporation and William H. Frist, M.D. |
| | | | |
| 10.6 | | | Restricted Stock Award Agreement, dated August 11, 2010, by and between Select Medical Holdings Corporation and Leopold Swergold. |
| | | | |
| 10.7 | | | Employment Agreement, dated September 13, 2010, by and between Select Medical Corporation and David S. Chernow, incorporated herein by reference to Exhibit 10.1 of the Current Report on Form 8-K of Select Medical Holdings Corporation and Select Medical Corporation filed on September 15, 2010. |
| | | | |
| 10.8 | | | Restricted Stock Award Agreement, dated September 13, 2010, by and between Select Medical Holdings Corporation and David S. Chernow, incorporated herein by reference to Exhibit 10.2 of the Current Report on Form 8-K of Select Medical Holdings Corporation and Select Medical Corporation filed on September 15, 2010. |
| | | | |
| 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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