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 actAct of 1934 |
For the Quarterly Period Ended March 31,June 30, 2011
| | |
o | | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange actAct of 1934 |
For the Transition Period From to .
Commission File Numbers:001 — 34465 and 001 — 31441
SELECT MEDICAL HOLDINGS CORPORATION
SELECT MEDICAL CORPORATION
(Exact name of Registrants as specified in their charters)
| | |
|
Delaware
| | 20-1764048 |
Delaware
| | 23-2872718 |
(State or other jurisdiction of | | 20-1764048
23-2872718 (I.R.S. employer identification number) |
incorporation or organization) | | |
4714 Gettysburg Road, P.O. Box 2034, Mechanicsburg, Pennsylvania 17055
(Address of principal executive offices and zip code)
(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).
YESoþ NOo
Indicate by check mark whether the Registrants are large accelerated filers, accelerated filers, non-accelerated filers, or smaller reporting companies. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| | | | | | |
|
Large accelerated filerso | | Accelerated filersþ | | Non-accelerated filerso | | 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 April 30,July 31, 2011, Select Medical Holdings Corporation had outstanding 154,273,150154,151,566 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, | | March 31, | | December 31, | | March 31, | | | December 31, | | June 30, | | December 31, | | June 30, | |
| | 2010 | | 2011 | | 2010 | | 2011 | | | 2010 | | 2011 | | 2010 | | 2011 | |
| | |
ASSETS | | |
Current Assets: | | |
Cash and cash equivalents | | $ | 4,365 | | $ | 15,068 | | $ | 4,365 | | $ | 15,068 | | | $ | 4,365 | | $ | 13,584 | | $ | 4,365 | | $ | 13,584 | |
Accounts receivable, net of allowance for doubtful accounts of $44,416 and $51,457 in 2010 and 2011, respectively | | 353,432 | | 439,310 | | 353,432 | | 439,310 | | |
Accounts receivable, net of allowance for doubtful accounts of $44,416 and $50,093 in 2010 and 2011, respectively | | | 353,432 | | 406,472 | | 353,432 | | 406,472 | |
Current deferred tax asset | | 30,654 | | 29,644 | | 30,654 | | 29,644 | | | 30,654 | | 15,635 | | 30,654 | | 15,635 | |
Prepaid income taxes | | 12,699 | | — | | 12,699 | | — | | | 12,699 | | 27,223 | | 12,699 | | 27,223 | |
Other current assets | | 28,176 | | 31,264 | | 28,176 | | 31,264 | | | 28,176 | | 29,686 | | 28,176 | | 29,686 | |
| | | | | | | | | | | | | | | | | | |
Total Current Assets | | 429,326 | | 515,286 | | 429,326 | | 515,286 | | | 429,326 | | 492,600 | | 429,326 | | 492,600 | |
| | |
Property and equipment, net | | 532,100 | | 526,905 | | 532,100 | | 526,905 | | | 532,100 | | 514,922 | | 532,100 | | 514,922 | |
Goodwill | | 1,631,252 | | 1,640,535 | | 1,631,252 | | 1,640,535 | | | 1,631,252 | | 1,627,509 | | 1,631,252 | | 1,627,509 | |
Other identifiable intangibles | | 80,119 | | 73,102 | | 80,119 | | 73,102 | | | 80,119 | | 72,776 | | 80,119 | | 72,776 | |
Assets held for sale | | 11,342 | | 11,342 | | 11,342 | | 11,342 | | | 11,342 | | 11,342 | | 11,342 | | 11,342 | |
Other assets | | 37,947 | | 36,649 | | 35,433 | | 34,273 | | | 37,947 | | 68,873 | | 35,433 | | 67,284 | |
| | | | | | | | | | | | | | | | | | |
| | |
Total Assets | | $ | 2,722,086 | | $ | 2,803,819 | | $ | 2,719,572 | | $ | 2,801,443 | | | $ | 2,722,086 | | $ | 2,788,022 | | $ | 2,719,572 | | $ | 2,786,433 | |
| | | | | | | | | | | | | | | | | | |
| | |
LIABILITIES AND EQUITY | | |
Current Liabilities: | | |
Bank overdrafts | | $ | 18,792 | | $ | 9,374 | | $ | 18,792 | | $ | 9,374 | | | $ | 18,792 | | $ | 20,894 | | $ | 18,792 | | $ | 20,894 | |
Current portion of long-term debt and notes payable | | 149,379 | | 150,323 | | 149,379 | | 150,323 | | | 149,379 | | 13,740 | | 149,379 | | 13,740 | |
Accounts payable | | 74,193 | | 86,642 | | 74,193 | | 86,642 | | | 74,193 | | 83,109 | | 74,193 | | 83,109 | |
Accrued payroll | | 63,760 | | 75,357 | | 63,760 | | 75,357 | | | 63,760 | | 75,453 | | 63,760 | | 75,453 | |
Accrued vacation | | 46,588 | | 49,057 | | 46,588 | | 49,057 | | | 46,588 | | 50,501 | | 46,588 | | 50,501 | |
Accrued interest | | 30,937 | | 12,889 | | 21,586 | | 9,898 | | | 30,937 | | 18,623 | | 21,586 | | 15,506 | |
Accrued restructuring | | 6,754 | | 6,293 | | 6,754 | | 6,293 | | | 6,754 | | 5,966 | | 6,754 | | 5,966 | |
Accrued other | | 103,856 | | 96,732 | | 116,456 | | 96,732 | | | 103,856 | | 105,564 | | 116,456 | | 110,764 | |
Income taxes payable | | — | | 6,698 | | — | | 6,698 | | |
Due to third party payors | | 5,299 | | 4,825 | | 5,299 | | 4,825 | | | 5,299 | | 4,835 | | 5,299 | | 4,835 | |
| | | | | | | | | | | | | | | | | | |
Total Current Liabilities | | 499,558 | | 498,190 | | 502,807 | | 495,199 | | | 499,558 | | 378,685 | | 502,807 | | 380,768 | |
| | |
Long-term debt, net of current portion | | 1,281,390 | | 1,324,393 | | 974,913 | | 1,017,409 | | | 1,281,390 | | 1,413,128 | | 974,913 | | 1,245,828 | |
Non-current deferred tax liability | | 59,074 | | 63,653 | | 59,074 | | 63,653 | | | 59,074 | | 64,210 | | 59,074 | | 64,210 | |
Other non-current liabilities | | 66,650 | | 69,526 | | 66,650 | | 69,526 | | | 66,650 | | 71,155 | | 66,650 | | 71,155 | |
| | | | | | | | | | | | | | | | | | |
| | |
Total Liabilities | | 1,906,672 | | 1,955,762 | | 1,603,444 | | 1,645,787 | | | 1,906,672 | | 1,927,178 | | 1,603,444 | | 1,761,961 | |
| | |
Stockholders’ Equity: | | |
Common stock of Holdings, $0.001par value, 700,000,000 shares authorized, 154,519,025 shares and 154,273,150 shares issued and outstanding in 2010 and 2011, respectively | | 155 | | 154 | | — | | — | | |
Common stock of Holdings, $0.001 par value, 700,000,000 shares authorized, 154,519,025 shares and 154,151,566 shares issued and outstanding in 2010 and 2011, respectively | | | 155 | | 154 | | — | | — | |
Common stock of Select, $0.01par value, 100 shares issued and outstanding | | — | | — | | 0 | | 0 | | | — | | — | | 0 | | 0 | |
Capital in excess of par | | 535,628 | | 535,239 | | 834,894 | | 838,305 | | | 535,628 | | 535,421 | | 834,894 | | 844,975 | |
Retained earnings | | 248,097 | | 281,094 | | 249,700 | | 285,781 | | | 248,097 | | 292,360 | | 249,700 | | 146,588 | |
| | | | | | | | | | | | | | | | | | |
Total Select Medical Holdings Corporation and Select Medical | | |
Corporation Stockholders’ Equity | | 783,880 | | 816,487 | | 1,084,594 | | 1,124,086 | | |
Total Select Medical Holdings Corporation and Select Medical Corporation Stockholders’ Equity | | | 783,880 | | 827,935 | | 1,084,594 | | 991,563 | |
Non-controlling interest | | 31,534 | | 31,570 | | 31,534 | | 31,570 | | | 31,534 | | 32,909 | | 31,534 | | 32,909 | |
| | | | | | | | | | | | | | | | | | |
Total Equity | | 815,414 | | 848,057 | | 1,116,128 | | 1,155,656 | | | 815,414 | | 860,844 | | 1,116,128 | | 1,024,472 | |
| | | | | | | | | | | | | | | | | | |
| | |
Total Liabilities and Equity | | $ | 2,722,086 | | $ | 2,803,819 | | $ | 2,719,572 | | $ | 2,801,443 | | | $ | 2,722,086 | | $ | 2,788,022 | | $ | 2,719,572 | | $ | 2,786,433 | |
| | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of 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 March 31, | | For the Quarter Ended March 31, | | | For the Three Months Ended June 30, | | For the Three Months Ended June 30, | |
| | 2010 | | 2011 | | 2010 | | 2011 | | | 2010 | | 2011 | | 2010 | | 2011 | |
| | |
Net operating revenues | | $ | 584,813 | | $ | 693,186 | | $ | 584,813 | | $ | 693,186 | | | $ | 579,877 | | $ | 698,749 | | $ | 579,877 | | $ | 698,749 | |
| | | | | | | | | | | | | | | | | | |
| | |
Costs and expenses: | | |
Cost of services | | 472,377 | | 557,416 | | 472,377 | | 557,416 | | | 470,044 | | 569,666 | | 470,044 | | 569,666 | |
General and administrative | | 12,789 | | 16,566 | | 12,789 | | 16,566 | | | 9,802 | | 16,115 | | 9,802 | | 16,115 | |
Bad debt expense | | 9,287 | | 14,350 | | 9,287 | | 14,350 | | | 10,845 | | 13,943 | | 10,845 | | 13,943 | |
Depreciation and amortization | | 17,711 | | 17,222 | | 17,711 | | 17,222 | | | 16,610 | | 17,999 | | 16,610 | | 17,999 | |
| | | | | | | | | | | | | | | | | | |
Total costs and expenses | | 512,164 | | 605,554 | | 512,164 | | 605,554 | | | 507,301 | | 617,723 | | 507,301 | | 617,723 | |
| | | | | | | | | | | | | | | | | | |
| | |
Income from operations | | 72,649 | | 87,632 | | 72,649 | | 87,632 | | | 72,576 | | 81,026 | | 72,576 | | 81,026 | |
| | |
Other income and expense: | | |
Loss on early retirement of debt | | | — | | | (31,018 | ) | | — | | | (20,385 | ) |
Equity in losses of unconsolidated subsidiaries | | — | | | (73 | ) | | — | | | (73 | ) | | — | | | (251 | ) | | — | | | (251 | ) |
Other income | | 134 | | — | | 134 | | — | | | 182 | | — | | 182 | | — | |
Interest income | | — | | 56 | | — | | 56 | | | — | | 111 | | — | | 111 | |
Interest expense | | | (30,042 | ) | | | (25,664 | ) | | | (23,038 | ) | | | (18,662 | ) | | | (29,279 | ) | | | (25,296 | ) | | | (22,325 | ) | | | (19,694 | ) |
| | | | | | | | | | | | | | | | | | |
| | |
Income before income taxes | | 42,741 | | 61,951 | | 49,745 | | 68,953 | | | 43,479 | | 24,572 | | 50,433 | | 40,807 | |
| | |
Income tax expense | | 17,109 | | 26,564 | | 19,560 | | 29,014 | | | 17,306 | | 10,915 | | 19,740 | | 16,597 | |
| | | | | | | | | | | | | | | | | | |
| | |
Net income | | 25,632 | | 35,387 | | 30,185 | | 39,939 | | | 26,173 | | 13,657 | | 30,693 | | 24,210 | |
| | |
Less: Net income attributable to non-controlling interests | | 1,406 | | 1,715 | | 1,406 | | 1,715 | | | 1,711 | | 1,938 | | 1,711 | | 1,938 | |
| | | | | | | | | | | | | | | | | | |
| | |
Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation | | $ | 24,226 | | $ | 33,672 | | $ | 28,779 | | $ | 38,224 | | | $ | 24,462 | | $ | 11,719 | | $ | 28,982 | | $ | 22,272 | |
| | | | | | | | | | | | | | | | | | |
| | |
Income per common share: | | |
Basic | | $ | 0.15 | | $ | 0.22 | | | $ | 0.15 | | $ | 0.08 | |
Diluted | | $ | 0.15 | | $ | 0.22 | | | $ | 0.15 | | $ | 0.08 | |
The accompanying notes are an integral part of these consolidated financial statements.
4
Select Medical Holdings Corporation
Consolidated StatementStatements of Changes in Equity and Income
(unaudited)
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Select Medical Holdings Corporation Stockholders | | | | |
| | | | | | | | | | | | | | Common | | | | | | | | | | |
| | | | | | Comprehensive | | | Common | | | Stock Par | | | Capital in | | | Retained | | | Non-controlling | |
| | Total | | | Income | | | Stock Issued | | | Value | | | Excess of Par | | | Earnings | | | Interests | |
Balance at December 31, 2010 | | $ | 815,414 | | | | | | | | 154,519 | | | $ | 155 | | | $ | 535,628 | | | $ | 248,097 | | | $ | 31,534 | |
Net income | | | 35,387 | | | $ | 35,387 | | | | | | | | | | | | | | | | 33,672 | | | | 1,715 | |
Issuance and vesting of restricted stock | | | 593 | | | | | | | | | | | | | | | | 593 | | | | | | | | | |
Exercise of stock options | | | 81 | | | | | | | | 24 | | | | 0 | | | | 81 | | | | | | | | | |
Stock option expense | | | 287 | | | | | | | | | | | | | | | | 287 | | | | | | | | | |
Repurchase of common shares | | | (2,026 | ) | | | | | | | (270 | ) | | | (1 | ) | | | (1,350 | ) | | | (675 | ) | | | | |
Distributions to non-controlling interests | | | (1,671 | ) | | | | | | | | | | | | | | | | | | | | | | | (1,671 | ) |
Other | | | (8 | ) | | | | | | | | | | | | | | | | | | | | | | | (8 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Balance at March 31, 2011 | | $ | 848,057 | | | | | | | | 154,273 | | | $ | 154 | | | $ | 535,239 | | | $ | 281,094 | | | $ | 31,570 | |
| | | | | | | | | | | | | | | | | | | | | | |
Select Medical Corporation
Consolidated Statement of Changes in Equity and IncomeOperations
(unaudited)
(in thousands)thousands, except per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Select Medical Corporation Stockholders | | | | |
| | | | | | | | | | | | | | Common | | | | | | | | | | |
| | | | | | Comprehensive | | | Common | | | Stock Par | | | Capital in | | | Retained | | | Non-controlling | |
| | Total | | | Income | | | Stock Issued | | | Value | | | Excess of Par | | | Earnings | | | Interests | |
Balance at December 31, 2010 | | $ | 1,116,128 | | | | | | | | 0 | | | $ | 0 | | | $ | 834,894 | | | $ | 249,700 | | | $ | 31,534 | |
Net income | | | 39,939 | | | $ | 39,939 | | | | | | | | | | | | | | | | 38,224 | | | | 1,715 | |
Federal tax benefit of losses contributed by Holdings | | | 2,450 | | | | | | | | | | | | | | | | 2,450 | | | | | | | | | |
Additional investment by Holdings | | | 81 | | | | | | | | | | | | | | | | 81 | | | | | | | | | |
Net change in dividends payable to Holdings | | | 12,600 | | | | | | | | | | | | | | | | | | | | 12,600 | | | | | |
Dividends declared and paid to Holdings | | | (14,743 | ) | | | | | | | | | | | | | | | | | | | (14,743 | ) | | | | |
Distributions to non-controlling interests | | | (1,671 | ) | | | | | | | | | | | | | | | | | | | | | | | (1,671 | ) |
Other | | | (8 | ) | | | | | | | | | | | | | | | | | | | | | | | (8 | ) |
Contribution related to restricted stock awards and stock option issuances by Holdings | | | 880 | | | | | | | | | | | | | | | | 880 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Balance at March 31, 2011 | | $ | 1,155,656 | | | | | | | | 0 | | | $ | 0 | | | $ | 838,305 | | | $ | 285,781 | | | $ | 31,570 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | Select Medical Holdings Corporation | | | Select Medical Corporation | |
| | For the Six Months Ended June 30, | | | For the Six Months Ended June 30, | |
| | 2010 | | | 2011 | | | 2010 | | | 2011 | |
| | | | | | | | | | | | | | | | |
Net operating revenues | | $ | 1,164,690 | | | $ | 1,391,935 | | | $ | 1,164,690 | | | $ | 1,391,935 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Costs and expenses: | | | | | | | | | | | | | | | | |
Cost of services | | | 942,421 | | | | 1,127,082 | | | | 942,421 | | | | 1,127,082 | |
General and administrative | | | 22,591 | | | | 32,681 | | | | 22,591 | | | | 32,681 | |
Bad debt expense | | | 20,132 | | | | 28,293 | | | | 20,132 | | | | 28,293 | |
Depreciation and amortization | | | 34,321 | | | | 35,221 | | | | 34,321 | | | | 35,221 | |
| | | | | | | | | | | | |
Total costs and expenses | | | 1,019,465 | | | | 1,223,277 | | | | 1,019,465 | | | | 1,223,277 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Income from operations | | | 145,225 | | | | 168,658 | | | | 145,225 | | | | 168,658 | |
| | | | | | | | | | | | | | | | |
Other income and expense: | | | | | | | | | | | | | | | | |
Loss on early retirement of debt | | | — | | | | (31,018 | ) | | | — | | | | (20,385 | ) |
Equity in losses of unconsolidated subsidiaries | | | — | | | | (324 | ) | | | — | | | | (324 | ) |
Other income | | | 316 | | | | — | | | | 316 | | | | — | |
Interest income | | | — | | | | 167 | | | | — | | | | 167 | |
Interest expense | | | (59,321 | ) | | | (50,960 | ) | | | (45,363 | ) | | | (38,356 | ) |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Income from operations before income taxes | | | 86,220 | | | | 86,523 | | | | 100,178 | | | | 109,760 | |
| | | | | | | | | | | | | | | | |
Income tax expense | | | 34,415 | | | | 37,479 | | | | 39,300 | | | | 45,611 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Net income | | | 51,805 | | | | 49,044 | | | | 60,878 | | | | 64,149 | |
| | | | | | | | | | | | | | | | |
Less: Net income attributable to non-controlling interests | | | 3,117 | | | | 3,653 | | | | 3,117 | | | | 3,653 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation | | $ | 48,688 | | | $ | 45,391 | | | $ | 57,761 | | | $ | 60,496 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Income per common share: | | | | | | | | | | | | | | | | |
Basic | | $ | 0.30 | | | $ | 0.29 | | | | | | | | | |
Diluted | | $ | 0.30 | | | $ | 0.29 | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
5
Select Medical Holdings Corporation
Consolidated StatementsStatement of Cash FlowsChanges in Equity and Income
(unaudited)
(in thousands)
| | | | | | | | | | | | | | | | |
| | Select Medical Holdings Corporation | | | Select Medical Corporation | |
| | For the Three Months Ended March 31, | | | For the Three Months Ended March 31, | |
| | 2010 | | | 2011 | | | 2010 | | | 2011 | |
| | | | | | | | | | | | | | | | |
Operating activities | | | | | | | | | | | | | | | | |
Net income | | $ | 25,632 | | | $ | 35,387 | | | $ | 30,185 | | | $ | 39,939 | |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | | | | | | | | | | | | | |
Depreciation and amortization | | | 17,711 | | | | 17,222 | | | | 17,711 | | | | 17,222 | |
Provision for bad debts | | | 9,287 | | | | 14,350 | | | | 9,287 | | | | 14,350 | |
Loss from disposal of assets | | | 133 | | | | 188 | | | | 133 | | | | 188 | |
Non-cash gain from interest rate swaps | | | (134 | ) | | | — | | | | (134 | ) | | | — | |
Non-cash stock compensation expense | | | 508 | | | | 880 | | | | 508 | | | | 880 | |
Amortization of debt discount | | | 450 | | | | 507 | | | | — | | | | — | |
Changes in operating assets and liabilities, net of effects from acquisition of businesses: | | | | | | | | | | | | | | | | |
Accounts receivable | | | (63,205 | ) | | | (100,135 | ) | | | (63,205 | ) | | | (100,135 | ) |
Other current assets | | | (2,066 | ) | | | (3,076 | ) | | | (2,066 | ) | | | (3,076 | ) |
Other assets | | | 2,130 | | | | 2,052 | | | | 1,992 | | | | 1,914 | |
Accounts payable | | | (1,802 | ) | | | 11,777 | | | | (1,802 | ) | | | 11,777 | |
Due to third-party payors | | | 57 | | | | (474 | ) | | | 57 | | | | (474 | ) |
Accrued expenses | | | (20,633 | ) | | | (9,948 | ) | | | (14,172 | ) | | | (3,588 | ) |
Income and deferred taxes | | | 16,136 | | | | 26,238 | | | | 18,587 | | | | 28,688 | |
| | | | | | | | | | | | |
Net cash provided by (used in) operating activities | | | (15,796 | ) | | | (5,032 | ) | | | (2,919 | ) | | | 7,685 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Investing activities | | | | | | | | | | | | | | | | |
Purchases of property and equipment | | | (13,047 | ) | | | (12,920 | ) | | | (13,047 | ) | | | (12,920 | ) |
Proceeds from sale of business | | | — | | | | 250 | | | | — | | | | 250 | |
Acquisition of businesses, net of cash acquired | | | — | | | | (2,000 | ) | | | — | | | | (2,000 | ) |
| | | | | | | | | | | | |
Net cash used in investing activities | | | (13,047 | ) | | | (14,670 | ) | | | (13,047 | ) | | | (14,670 | ) |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Financing activities | | | | | | | | | | | | | | | | |
Borrowings on revolving credit facility | | | — | | | | 205,000 | | | | — | | | | 205,000 | |
Payments on revolving credit facility | | | — | | | | (105,000 | ) | | | — | | | | (105,000 | ) |
Payment on credit facility term loans | | | — | | | | (59,563 | ) | | | — | | | | (59,563 | ) |
Borrowings of other debt | | | 5,015 | | | | 5,496 | | | | 5,015 | | | | 5,496 | |
Principal payments on seller and other debt | | | (2,357 | ) | | | (2,494 | ) | | | (2,357 | ) | | | (2,494 | ) |
Dividends paid to Holdings | | | — | | | | — | | | | (12,877 | ) | | | (14,743 | ) |
Repurchase of common stock | | | — | | | | (2,026 | ) | | | — | | | | — | |
Proceeds from issuance of common stock | | | 110 | | | | 81 | | | | — | | | | — | |
Equity investment by Holdings | | | — | | | | — | | | | 110 | | | | 81 | |
Proceeds from (repayment of) bank overdrafts | | | 17,314 | | | | (9,418 | ) | | | 17,314 | | | | (9,418 | ) |
Distributions to non-controlling interests | | | (1,746 | ) | | | (1,671 | ) | | | (1,746 | ) | | | (1,671 | ) |
| | | | | | | | | | | | |
Net cash provided by financing activities | | | 18,336 | | | | 30,405 | | | | 5,459 | | | | 17,688 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Net increase (decrease in) cash and cash equivalents | | | (10,507 | ) | | | 10,703 | | | | (10,507 | ) | | | 10,703 | |
|
Cash and cash equivalents at beginning of period | | | 83,680 | | | | 4,365 | | | | 83,680 | | | | 4,365 | |
| | | | | | | | | | | | |
Cash and cash equivalents at end of period | | $ | 73,173 | | | $ | 15,068 | | | $ | 73,173 | | | $ | 15,068 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Supplemental Cash Flow Information | | | | | | | | | | | | | | | | |
Cash paid for interest | | $ | 46,038 | | | $ | 41,365 | | | $ | 33,162 | | | $ | 28,648 | |
Cash paid for taxes | | $ | 980 | | | $ | 103 | | | $ | 980 | | | $ | 103 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Select Medical Holdings Corporation Stockholders | | | | |
| | | | | | | | | | Common | | | Common | | | | | | | | | | |
| | | | | | Comprehensive | | | Stock | | | Stock Par | | | Capital in | | | Retained | | | Non-controlling | |
| | Total | | | Income | | | Issued | | | Value | | | Excess of Par | | | Earnings | | | Interests | |
Balance at December 31, 2010 | | $ | 815,414 | | | | | | | | 154,519 | | | $ | 155 | | | $ | 535,628 | | | $ | 248,097 | | | $ | 31,534 | |
Net income | | | 49,044 | | | $ | 49,044 | | | | | | | | | | | | | | | | 45,391 | | | | 3,653 | |
Issuance and vesting of restricted stock | | | 1,192 | | | | | | | | | | | | | | | | 1,192 | | | | | | | | | |
Exercise of stock options | | | 169 | | | | | | | | 42 | | | | 0 | | | | 169 | | | | | | | | | |
Stock option expense | | | 588 | | | | | | | | | | | | | | | | 588 | | | | | | | | | |
Repurchase of common shares | | | (3,285 | ) | | | | | | | (409 | ) | | | (1 | ) | | | (2,156 | ) | | | (1,128 | ) | | | | |
Distributions to non-controlling interests | | | (2,270 | ) | | | | | | | | | | | | | | | | | | | | | | | (2,270 | ) |
Other | | | (8 | ) | | | | | | | | | | | | | | | | | | | | | | | (8 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Balance at June 30, 2011 | | $ | 860,844 | | | | | | | | 154,152 | | | $ | 154 | | | $ | 535,421 | | | $ | 292,360 | | | $ | 32,909 | |
| | | | | | | | | | | | | | | | | | | | | | |
Select Medical Corporation
Consolidated Statement of Changes in Equity and Income
(unaudited)
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Select Medical Corporation Stockholders | | | | |
| | | | | | | | | | Common | | | Common | | | | | | | | | | |
| | | | | | Comprehensive | | | Stock | | | Stock Par | | | Capital in | | | Retained | | | Non-controlling | |
| | Total | | | Income | | | Issued | | | Value | | | Excess of Par | | | Earnings | | | Interests | |
Balance at December 31, 2010 | | $ | 1,116,128 | | | | | | | | 0 | | | $ | 0 | | | $ | 834,894 | | | $ | 249,700 | | | $ | 31,534 | |
Net income | | | 64,149 | | | $ | 64,149 | | | | | | | | | | | | | | | | 60,496 | | | | 3,653 | |
Federal tax benefit of losses contributed by Holdings | | | 8,132 | | | | | | | | | | | | | | | | 8,132 | | | | | | | | | |
Additional investment by Holdings | | | 169 | | | | | | | | | | | | | | | | 169 | | | | | | | | | |
Net change in dividends payable to Holdings | | | 7,400 | | | | | | | | | | | | | | | | | | | | 7,400 | | | | | |
Dividends declared and paid to Holdings | | | (171,008 | ) | | | | | | | | | | | | | | | | | | | (171,008 | ) | | | | |
Distributions to non-controlling interests | | | (2,270 | ) | | | | | | | | | | | | | | | | | | | | | | | (2,270 | ) |
Other | | | (8 | ) | | | | | | | | | | | | | | | | | | | | | | | (8 | ) |
Contribution related to restricted stock awards and stock option issuances by Holdings | | | 1,780 | | | | | | | | | | | | | | | | 1,780 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Balance at June 30, 2011 | | $ | 1,024,472 | | | | | | | | 0 | | | $ | 0 | | | $ | 844,975 | | | $ | 146,588 | | | $ | 32,909 | |
| | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
6
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
| | | | | | | | | | | | | | | | |
| | Select Medical Holdings Corporation | | | Select Medical Corporation | |
| | For the Six Months Ended June 30, | | | For the Six Months Ended June 30, | |
| | 2010 | | | 2011 | | | 2010 | | | 2011 | |
| | | | | | | | | | | | | | | | |
Operating activities | | | | | | | | | | | | | | | | |
Net income | | $ | 51,805 | | | $ | 49,044 | | | $ | 60,878 | | | $ | 64,149 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | | | | |
Depreciation and amortization | | | 34,321 | | | | 35,221 | | | | 34,321 | | | | 35,221 | |
Provision for bad debts | | | 20,132 | | | | 28,293 | | | | 20,132 | | | | 28,293 | |
Loss on early retirement of debt | | | — | | | | 31,018 | | | | — | | | | 20,385 | |
Loss (gain) from disposal of assets | | | 660 | | | | (5,201 | ) | | | 660 | | | | (5,201 | ) |
Non-cash gain from interest rate swaps | | | (316 | ) | | | — | | | | (316 | ) | | | — | |
Non-cash stock compensation expense | | | 945 | | | | 1,780 | | | | 945 | | | | 1,780 | |
Amortization of debt discount | | | 918 | | | | 962 | | | | — | | | | 103 | |
Changes in operating assets and liabilities, net of effects from acquisition of businesses: | | | | | | | | | | | | | | | | |
Accounts receivable | | | (51,373 | ) | | | (81,240 | ) | | | (51,373 | ) | | | (81,240 | ) |
Other current assets | | | (495 | ) | | | (1,511 | ) | | | (495 | ) | | | (1,511 | ) |
Other assets | | | (1,140 | ) | | | 2,724 | | | | (1,410 | ) | | | 2,469 | |
Accounts payable | | | (8,796 | ) | | | 8,107 | | | | (8,796 | ) | | | 8,107 | |
Due to third-party payors | | | 587 | | | | (464 | ) | | | 587 | | | | (464 | ) |
Accrued expenses | | | 1,546 | | | | 6,775 | | | | 1,659 | | | | 13,008 | |
Income and deferred taxes | | | 9,925 | | | | 8,019 | | | | 14,810 | | | | 16,151 | |
| | | | | | | | | | | | |
Net cash provided by operating activities | | | 58,719 | | | | 83,527 | | | | 71,602 | | | | 101,250 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Investing activities | | | | | | | | | | | | | | | | |
Purchases of property and equipment | | | (26,454 | ) | | | (23,696 | ) | | | (26,454 | ) | | | (23,696 | ) |
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 | | | (26,454 | ) | | | (27,410 | ) | | | (26,454 | ) | | | (27,410 | ) |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Financing activities | | | | | | | | | | | | | | | | |
Borrowings on revolving credit facilities | | | — | | | | 435,000 | | | | — | | | | 435,000 | |
Payments on revolving credit facilities | | | — | | | | (395,000 | ) | | | — | | | | (395,000 | ) |
Borrowings on 2011 credit facility term loan, net of discount | | | — | | | | 841,500 | | | | — | | | | 841,500 | |
Payments on 2005 credit facility term loans, net of call premium | | | — | | | | (484,633 | ) | | | — | | | | (484,633 | ) |
Repurchase of 10% senior subordinated notes | | | — | | | | (150,000 | ) | | | — | | | | — | |
Repurchase of 7 5/8% senior subordinated notes, net of tender premium | | | — | | | | (273,941 | ) | | | — | | | | (273,941 | ) |
Borrowings of other debt | | | 5,015 | | | | 5,496 | | | | 5,015 | | | | 5,496 | |
Principal payments on seller and other debt | | | (4,442 | ) | | | (3,480 | ) | | | (4,442 | ) | | | (3,480 | ) |
Debt issuance costs | | | — | | | | (18,556 | ) | | | — | | | | (18,556 | ) |
Proceeds from bank overdrafts | | | 14,201 | | | | 2,102 | | | | 14,201 | | | | 2,102 | |
Equity investment by Holdings | | | — | | | | — | | | | 125 | | | | 169 | |
Repurchase of common stock | | | — | | | | (3,285 | ) | | | — | | | | — | |
Proceeds from issuance of common stock | | | 125 | | | | 169 | | | | — | | | | — | |
Dividends paid to Holdings | | | — | | | | — | | | | (12,883 | ) | | | (171,008 | ) |
Distributions to non-controlling interests | | | (2,091 | ) | | | (2,270 | ) | | | (2,091 | ) | | | (2,270 | ) |
| | | | | | | | | | | | |
Net cash provided by (used in) financing activities | | | 12,808 | | | | (46,898 | ) | | | (75 | ) | | | (64,621 | ) |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Net increase in cash and cash equivalents | | | 45,073 | | | | 9,219 | | | | 45,073 | | | | 9,219 | |
| | | | | | | | | | | | | | | | |
Cash and cash equivalents at beginning of period | | | 83,680 | | | | 4,365 | | | | 83,680 | | | | 4,365 | |
| | | | | | | | | | | | |
Cash and cash equivalents at end of period | | $ | 128,753 | | | $ | 13,584 | | | $ | 128,753 | | | $ | 13,584 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Supplemental Cash Flow Information | | | | | | | | | | | | | | | | |
Cash paid for interest | | $ | 55,928 | | | $ | 59,289 | | | $ | 43,055 | | | $ | 41,572 | |
Cash paid for taxes | | $ | 24,664 | | | $ | 29,435 | | | $ | 24,664 | | | $ | 29,435 | |
The accompanying notes are an integral part of 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 affectingeffectuating a leveraged buyout of Select, which was a publicly traded entity. Holdings was originally owned by an investor group that includes Welsh, Carson, Anderson, & Stowe, IX, LP (“Welsh Carson”), Thoma Cressey Bravo (“Thoma Cressey”) and members of the 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. 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���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 March 31,June 30, 2011 and for the three and six month periodperiods ended March 31,June 30, 2010 and 2011 have been prepared in accordance with generally accepted accounting principles. In the opinion of management, such information contains all adjustments, which are normal and recurring in nature, necessary for a fair statement of the financial position, results of operations and cash flow for such periods. All significant intercompany transactions and balances have been eliminated. The results of operations for the three and six months ended March 31,June 30, 2011 are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2011.
Certain information and disclosures normally included in the notes to consolidated financial statements have been condensed or omitted consistent with the rules and regulations of the Securities and Exchange Commission (the “SEC”), although the Company believes the disclosure is adequate to make the information presented not misleading. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2010 contained in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 9, 2011.
2. Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.
78
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 Generally Accepted Accounting Principles 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 activity of purchases, sales, issuances, and settlements on a gross basis, which wasallowance for doubtful accounts. Update 2011-07 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2010.2011, with early adoption permitted. The adoptionCompany is in the process of evaluating the effects of Update 2010-06 did2011-07 on its consolidated financial statements.
9
3. Significant Transactions
On April 1, 2011, the Company entered into a joint venture with Baylor Health Care System. The joint venture consists of a partnership between Baylor Institute for Rehabilitation and Select Physical Therapy Texas, a wholly-owned subsidiary of the Company. The Company contributed several businesses to the joint venture, including its Frisco inpatient rehabilitation facility and certain Texas based outpatient rehabilitation clinics. A gain of $1.2 million was recognized on this contribution and is included in the general and administrative line item on the consolidated statement of operations. Additionally, the Company purchased partnership units and made working capital advances to the newly formed partnership utilizing $13.5 million in cash. The Company owns a 49.0% interest in the partnership and is accounting for the investment using the equity method because the Company does not have an impacta controlling influence.
On June 30, 2011, the Company sold a building which it acquired in connection with the acquisition of Regency Hospital Company, L.L.C. for $7.6 million in cash. A gain of $4.2 million was recognized on this sale and is included in the general and administrative line item on the Company’s consolidated financial statements. The Company currently has no Level 3 measurements.statement of operations.
3.4. Intangible Assets
The Company’s intangible assets consist of the following:
| | | | | | | | | |
| | As of March 31, 2011 | | | | | | | | | |
| | Gross Carrying | | Accumulated | | | As of June 30, 2011 | |
| | Amount | | Amortization | | | Gross Carrying | | Accumulated | |
| | (in thousands) | | | Amount | | Amortization | |
| | | (in thousands) | |
Amortized intangible assets: | | |
Non-compete agreements | | $ | 25,909 | | $ | (24,589 | ) | | $ | 25,909 | | $ | (24,916 | ) |
| | |
Indefinite-lived intangible assets: | | |
Goodwill | | $ | 1,640,535 | | | $ | 1,627,509 | |
Trademarks | | 57,709 | | | 57,709 | |
Certificates of need | | 11,913 | | | 11,914 | |
Accreditations | | 2,160 | | | 2,160 | |
| | | | | | |
Total | | $ | 1,712,317 | | | $ | 1,699,292 | |
| | | | | | |
The Company’s accreditations and trademarks have renewal terms. The costs to renew these intangibles are expensed as incurred. At March 31,June 30, 2011, the accreditations and trademarks have a weighted average time until next renewal of approximately 1.5 years and 9.19.0 years, respectively.
Amortization expense for the Company’s intangible assets with finite lives follows:
| | | | | | | | |
| | Three Months Ended March 31, | |
| | 2010 | | | 2011 | |
| | (in thousands) | |
Amortization expense | | $ | 1,867 | | | $ | 326 | |
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | 2010 | | | 2011 | | | 2010 | | | 2011 | |
| | (in thousands) | | | (in thousands) | |
Amortization expense | | $ | 1,185 | | | $ | 327 | | | $ | 3,052 | | | $ | 653 | |
810
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 and SemperCare, Inc. The useful lives of the outpatient rehabilitation division of HealthSouth Corporation’s non-compete and the SemperCare, Inc. non-compete are five and seven years, respectively. Amortization expense related to these intangible assets for each of the next five years commencing January 1, 2011 is approximately as follows (in thousands):
| | | | |
|
2011 | | $ | 1,306 | |
2012 | | | 340 | |
2013 | | | 0 | |
2014 | | | 0 | |
2015 | | | 0 | |
The changes in the carrying amount of goodwill for the Company’s reportable segments for the threesix months ended March 31,June 30, 2011 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Specialty | | Outpatient | | | | | Specialty | | Outpatient | | | |
| | Hospitals | | Rehabilitation | | Total | | | Hospitals | | Rehabilitation | | Total | |
| | (in thousands) | | | (in thousands) | |
Balance as of December 31, 2010 | | $ | 1,330,609 | | $ | 300,643 | | $ | 1,631,252 | | | $ | 1,330,609 | | $ | 300,643 | | $ | 1,631,252 | |
Goodwill revision (1) | | 7,114 | | — | | 7,114 | | | 7,114 | | — | | 7,114 | |
Goodwill acquired during quarter | | 2,169 | | — | | 2,169 | | |
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 March 31, 2011 | | $ | 1,339,892 | | $ | 300,643 | | $ | 1,640,535 | | |
Balance as of June 30, 2011 | | | $ | 1,333,221 | | $ | 294,288 | | $ | 1,627,509 | |
| | | | | | | | | | | | | | |
| | |
(1.)(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 resolved the net working capital with the seller of Regency Hospital Company, L.L.C. |
4.5. 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.
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.
911
The following summarizes the Company’s restructuring activity:
| | | | | | | | |
| | Lease Termination Costs | | | Lease Termination Costs | |
| | (in thousands) | | | (in thousands) | |
December 31, 2010 | | $ | 6,754 | | |
Balance as of December 31, 2010 | | | $ | 6,754 | |
Amounts paid in 2011 | | | (595 | ) | | | (1,026 | ) |
Accretion expense | | 134 | | | 238 | |
| | | | | | |
March 31, 2011 | | $ | 6,293 | | |
Balance as of June 30, 2011 | | | $ | 5,966 | |
| | | | | | |
The Company expects to pay out the remaining lease termination costs through 2014 for the acquisition of the outpatient rehabilitation division of HealthSouth Corporation and through 2015 for the lease termination costs related to the Regency acquisition.
5.6. Indebtedness
The components of long-term debt and notes payable are shown in the following tables:
| | | | | | | | | | | | | | | | |
| | Holdings | | | Select | |
| | December 31, | | | June 30, | | | December 31, | | | June 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 | | | — | | | | 65,000 | | | | — | | | | 65,000 | |
Term loan (1) | | | — | | | | 841,603 | | | | — | | | | 841,603 | |
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 | | | | 7,965 | | | | 5,948 | | | | 7,965 | |
| | | | | | | | | | | | |
Total debt | | | 1,430,769 | | | | 1,426,868 | | | | 1,124,292 | | | | 1,259,568 | |
Less: current maturities | | | 149,379 | | | | 13,740 | | | | 149,379 | | | | 13,740 | |
| | | | | | | | | | | | |
Total long-term debt | | $ | 1,281,390 | | | $ | 1,413,128 | | | $ | 974,913 | | | $ | 1,245,828 | |
| | | | | | | | | | | | |
| | |
(1) | | Includes unamortized discount of $8.4 million. |
|
(2) | | Includes unamortized discount of $10.8 million. |
On June 1, 2011, Select entered into a new senior secured credit agreement (the “Credit Agreement”) that provides for $1.15 billion in senior secured credit facilities (“Senior Secured Credit Facilities”), comprised of an $850.0 million, seven-year term loan facility (“Term Loan”) and a $300.0 million, five-year revolving credit facility (“Revolving Credit Facility”), including a $75.0 million sublimit for the issuance of standby letters of credit and a $25.0 million sublimit for swingline loans.
Select used borrowings under the Senior Secured Credit Facilities to refinance all of its outstanding indebtedness under its existing credit facilities, to repurchase $266.5 million aggregate principal amount of its 7 5/8% senior subordinated notes due 2015 and to repay all of Holdings’ existing 10% senior subordinated notes due 2015. Select recognized a loss on early retirement of debt for the three and six months ended June 30, 2011 of $20.4 million related to these transactions. Holdings recognized a loss on early retirement of debt for the three and six months ended June 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.
12
Borrowings under the Senior Secured Credit Facilities will bear interest at a rate equal to:
in the case of the Term Loan, Adjusted LIBO plus 3.75%, or Alternative Base Rate plus 2.75%; and
in the case of the Revolving Credit Facility, Adjusted LIBO plus a percentage ranging from 2.75% to 3.75%, or Alternative Base Rate plus a percentage ranging from 1.75% to 2.75%, in each case based on 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 statutory reserve requirements; provided that Adjusted LIBO, when used in reference to the Term Loan, will at no time be less than 1.75% per annum.
“Alternative Base Rate” is defined as the highest of (a) the administrative 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 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.
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 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.
The Senior Secured Credit Facilities require Select to maintain a leverage ratio (based upon the ratio of indebtedness for money borrowed to consolidated EBITDA, as defined in the Credit Agreement), which is tested quarterly and becomes more restrictive over time, and prohibits Select from making capital expenditures in excess of $125.0 million in any fiscal year (subject to a 50% carry-over provision). Failure to comply with these covenants would result in an event of default under the Senior Secured Credit Facilities and, absent a waiver or an amendment from the lenders, preclude Select from making further borrowings under the Revolving Credit Facility and permit the lenders to accelerate all outstanding borrowings under the Senior Secured Credit Facilities.
13
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 July 1, 2011 through December 31, 2011 and the years after 2012 are approximately as follows and are presented net of the discount on 2011 Senior Secured Credit Facilities’ term loan:
| | | | | | | | |
| | Holdings | | | Select | |
| | (in thousands) | |
July 1, 2011 — December 31, 2011 | | $ | 8,214 | | | $ | 8,214 | |
2012 | | | 8,219 | | | | 8,219 | |
2013 | | | 7,614 | | | | 7,614 | |
2014 | | | 7,613 | | | | 7,613 | |
2015 | | | 519,845 | | | | 352,545 | |
2016 and beyond | | | 875,363 | | | | 875,363 | |
7. Fair Value
Financial instruments include cash and cash equivalents, notes payable and long-term debt. The carrying amount of cash and cash equivalents approximates fair value because of the short-term maturity of these instruments.
The carrying value of Select’s senior secured credit facilityfacilities was $506.8 million and $547.3$906.6 million at December 31, 2010 and March 31,June 30, 2011, respectively. The fair value of Select’s senior secured credit facilityfacilities was $497.7 million and $535.3$883.1 million at December 31, 2010 and March 31,June 30, 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.
The carrying value of theSelect’s 7 5/8% senior subordinated notes was $611.5 million and $345.0 million at both December 31, 2010 and March 31, 2011.June 30, 2011, respectively. The fair value of theSelect’s 7 5/8% senior subordinated notes was $616.1 million and $622.2$345.0 million at December 31, 2010 and March 31,June 30, 2011, respectively. The fair value of this registered debt was based on quoted market prices.
The carrying value of theHoldings’ senior floating rate notes was $167.3 million at both December 31, 2010 and March 31,June 30, 2011. The fair value of theHoldings’ senior floating rate notes was $156.0 million and $164.4$163.1 million at December 31, 2010 and March 31,June 30, 2011, respectively. The fair value of this registered debt was based on quoted market prices.
14
6.8. 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, stock compensation expense, equity in losses of unconsolidated subsidiaries, loss on early retirement of debt and other income.
10
The following tables summarize selected financial data for the Company’s reportable segments for the three and six months ended March 31,June 30, 2010 and 2011. The segment results of Holdings are identical to those of Select with the exception of total assets:
| | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2010 | |
| | Specialty | | | Outpatient | | | | | | | |
| | Hospitals | | | Rehabilitation | | | All Other | | | Total | |
| | (in thousands) | |
| | | | | | | | | | | | | | | | |
Net operating revenue | | $ | 411,685 | | | $ | 173,065 | | | $ | 63 | | | $ | 584,813 | |
Adjusted EBITDA | | | 82,897 | | | | 20,518 | | | | (12,547 | ) | | | 90,868 | |
Total assets: | | | | | | | | | | | | | | | | |
Select Medical Corporation | | | 1,991,456 | | | | 502,346 | | | | 132,252 | | | | 2,626,054 | |
Select Medical Holdings Corporation | | | 1,991,456 | | | | 502,346 | | | | 135,168 | | | | 2,628,970 | |
Capital expenditures | | | 10,598 | | | | 2,035 | | | | 414 | | | | 13,047 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2011 | | | Three Months Ended June 30, 2010 | |
| | Specialty | | Outpatient | | | | | | | Specialty | | Outpatient | | | | | |
| | Hospitals | | Rehabilitation | | All Other | | Total | | | Hospitals | | Rehabilitation | | All Other | | Total | |
| | (in thousands) | | | (in thousands) | |
| | |
Net operating revenue | | $ | 519,924 | | $ | 173,191 | | $ | 71 | | $ | 693,186 | | | $ | 403,079 | | $ | 176,785 | | $ | 13 | | $ | 579,877 | |
Adjusted EBITDA | | 100,353 | | 21,406 | | | (16,025 | ) | | 105,734 | | | 73,344 | | 25,956 | | | (9,677 | ) | | 89,623 | |
Total assets: | | |
Select Medical Corporation | | 2,140,798 | | 482,444 | | 178,201 | | 2,801,443 | | | 1,969,566 | | 495,399 | | 192,375 | | 2,657,340 | |
Select Medical Holdings Corporation | | 2,140,798 | | 482,444 | | 180,577 | | 2,803,819 | | | 1,969,566 | | 495,399 | | 195,158 | | 2,660,123 | |
Capital expenditures | | 10,487 | | 2,181 | | 252 | | 12,920 | | | 10,026 | | 3,133 | | 248 | | 13,407 | |
1115
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2011 | |
| | Specialty | | | Outpatient | | | | | | | |
| | Hospitals | | | Rehabilitation | | | All Other | | | Total | |
| | (in thousands) | |
| | | | | | | | | | | | | | | | |
Net operating revenue | | $ | 520,261 | | | $ | 178,473 | | | $ | 15 | | | $ | 698,749 | |
Adjusted EBITDA | | | 91,081 | | | | 24,467 | | | | (15,623 | ) | | | 99,925 | |
Total assets: | | | | | | | | | | | | | | | | |
Select Medical Corporation | | | 2,202,994 | | | | 471,175 | | | | 112,264 | | | | 2,786,433 | |
Select Medical Holdings Corporation | | | 2,202,994 | | | | 471,175 | | | | 113,853 | | | | 2,788,022 | |
Capital expenditures | | | 6,130 | | | | 2,801 | | | | 1,845 | | | | 10,776 | |
| | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2010 | |
| | Specialty | | | Outpatient | | | | | | | |
| | Hospitals | | | Rehabilitation | | | All Other | | | Total | |
| | (in thousands) | |
| | | | | | | | | | | | | | | | |
Net operating revenue | | $ | 814,764 | | | $ | 349,850 | | | $ | 76 | | | $ | 1,164,690 | |
Adjusted EBITDA | | | 156,241 | | | | 46,474 | | | | (22,224 | ) | | | 180,491 | |
Total assets: | | | | | | | | | | | | | | | | |
Select Medical Corporation | | | 1,969,566 | | | | 495,399 | | | | 192,375 | | | | 2,657,340 | |
Select Medical Holdings Corporation | | | 1,969,566 | | | | 495,399 | | | | 195,158 | | | | 2,660,123 | |
Capital expenditures | | | 20,624 | | | | 5,168 | | | | 662 | | | | 26,454 | |
| | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2011 | |
| | Specialty | | | Outpatient | | | | | | | |
| | Hospitals | | | Rehabilitation | | | All Other | | | Total | |
| | (in thousands) | |
| | | | | | | | | | | | | | | | |
Net operating revenue | | $ | 1,040,185 | | | $ | 351,664 | | | $ | 86 | | | $ | 1,391,935 | |
Adjusted EBITDA | | | 191,434 | | | | 45,873 | | | | (31,648 | ) | | | 205,659 | |
Total assets: | | | | | | | | | | | | | | | | |
Select Medical Corporation | | | 2,202,994 | | | | 471,175 | | | | 112,264 | | | | 2,786,433 | |
Select Medical Holdings Corporation | | | 2,202,994 | | | | 471,175 | | | | 113,853 | | | | 2,788,022 | |
Capital expenditures | | | 16,617 | | | | 4,982 | | | | 2,097 | | | | 23,696 | |
16
A reconciliation of Adjusted EBITDA to income before income taxes is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2010 | | | Three Months Ended June 30, 2010 | |
| | Specialty | | Outpatient | | | | | Specialty | | Outpatient | | | | | | | |
| | Hospitals | | Rehabilitation | | All Other | | | Hospitals | | Rehabilitation | | All Other | | | | | |
Adjusted EBITDA | | $ | 82,897 | | $ | 20,518 | | $ | (12,547 | ) | | $ | 73,344 | | $ | 25,956 | | $ | (9,677 | ) | | | | | |
Depreciation and amortization | | | (10,959 | ) | | | (5,856 | ) | | | (896 | ) | | | (10,899 | ) | | | (4,943 | ) | | | (768 | ) | |
Stock compensation expense | | — | | — | | | (508 | ) | | — | | — | | | (437 | ) | |
| | | | | | | | | | | | | | |
| |
| | | Select Medical | | | |
| | | Holdings | | Select Medical | |
| | | | | | | | | Corporation | | Corporation | |
Income (loss) from operations | | | $ | 62,445 | | $ | 21,013 | | $ | (10,882 | ) | | $ | 72,576 | | $ | 72,576 | |
Other income | | | 182 | | 182 | |
Interest expense, net | | | | (29,279 | ) | | | (22,325 | ) |
| | | | | | |
| | |
Income before income taxes | | | $ | 43,479 | | $ | 50,433 | |
| | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended June 30, 2011 | |
| | | Specialty | | Outpatient | | | | | | | |
| | | Hospitals | | Rehabilitation | | All Other | | | | | |
Adjusted EBITDA | | | $ | 91,081 | | $ | 24,467 | | $ | (15,623 | ) | | | | | |
Depreciation and amortization | | | | (13,047 | ) | | | (4,227 | ) | | | (725 | ) | |
Stock compensation expense | | | — | | — | | | (900 | ) | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | Select Medical | | | | | Select Medical | | | |
| | Holdings | | Select Medical | | | Holdings | | Select Medical | |
| | Corporation | | Corporation | | | | | | | | | Corporation | | Corporation | |
Income (loss) from operations | | $ | 71,938 | | $ | 14,662 | | $ | (13,951 | ) | | $ | 72,649 | | $ | 72,649 | | | $ | 78,034 | | $ | 20,240 | | $ | (17,248 | ) | | $ | 81,026 | | $ | 81,026 | |
Other income | | 134 | | 134 | | |
Loss on early retirement | | | | (31,018 | ) | | | (20,385 | ) |
Equity in losses of unconsolidated subsidiaries | | | | (251 | ) | | | (251 | ) |
Interest expense, net | | | (30,042 | ) | | | (23,038 | ) | | | (25,185 | ) | | | (19,583 | ) |
| | | | | | | | | | |
| | |
Income before income taxes | | $ | 42,741 | | $ | 49,745 | | | $ | 24,572 | | $ | 40,807 | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2011 | | | Six Months Ended June 30, 2010 | |
| | Specialty | | Outpatient | | | | | Specialty | | Outpatient | | | | | | | |
| | Hospitals | | Rehabilitation | | All Other | | | Hospitals | | Rehabilitation | | All Other | | | | | |
Adjusted EBITDA | | $ | 100,353 | | $ | 21,406 | | $ | (16,025 | ) | | $ | 156,241 | | $ | 46,474 | | $ | (22,224 | ) | | | | | |
Depreciation and amortization | | | (12,046 | ) | | | (4,459 | ) | | | (717 | ) | | | (21,858 | ) | | | (10,799 | ) | | | (1,664 | ) | |
Stock compensation expense | | — | | — | | | (880 | ) | | — | | — | | | (945 | ) | |
| | | | | | | | | | | | | | |
| |
| | | Select Medical | | | |
| | | Holdings | | Select Medical | |
| | | | | | | | | Corporation | | Corporation | |
Income (loss) from operations | | | $ | 134,383 | | $ | 35,675 | | $ | (24,833 | ) | | $ | 145,225 | | $ | 145,225 | |
Other income | | | 316 | | 316 | |
Interest expense, net | | | | (59,321 | ) | | | (45,363 | ) |
| | | | | | |
| | |
Income before income taxes | | | $ | 86,220 | | $ | 100,178 | |
| | | | | | |
17
| | | | | | | | | | | | | | | | | | | | | |
| | | Six Months Ended June 30, 2011 | |
| | | Specialty | | Outpatient | | | | | | | |
| | | Hospitals | | Rehabilitation | | All Other | | | | | |
Adjusted EBITDA | | | $ | 191,434 | | $ | 45,873 | | $ | (31,648 | ) | | | | | |
Depreciation and amortization | | | | (25,093 | ) | | | (8,686 | ) | | | (1,442 | ) | |
Stock compensation expense | | | — | | — | | | (1,780 | ) | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | Select Medical | | | | | Select Medical | | | |
| | Holdings | | Select Medical | | | Holdings | | Select Medical | |
| | Corporation | | Corporation | | | | | | | | | Corporation | | Corporation | |
Income (loss) from operations | | $ | 88,307 | | $ | 16,947 | | $ | (17,622 | ) | | $ | 87,632 | | $ | 87,632 | | | $ | 166,341 | | $ | 37,187 | | $ | (34,870 | ) | | $ | 168,658 | | $ | 168,658 | |
Loss on early retirement | | | | (31,018 | ) | | | (20,385 | ) |
Equity in losses of unconsolidated subsidiaries | | | (73 | ) | | | (73 | ) | | | (324 | ) | | | (324 | ) |
Interest expense, net | | | (25,608 | ) | | | (18,606 | ) | | | (50,793 | ) | | | (38,189 | ) |
| | | | | | | | | | |
| | |
Income before income taxes | | $ | 61,951 | | $ | 68,953 | | | $ | 86,523 | | $ | 109,760 | |
| | | | | | | | | | |
7.9. Income per Common Share
The Company applies the two-class method for calculating and presenting income per common share. The two-class method is an earnings allocation formula that determines earnings per share for each class of stock participation rights in undistributed earnings. Effective January 1, 2009 the Financial Accounting Standards Board (“FASB”) clarified that share based payment awards that have not yet vested meet the definition of a participating security provided the right to receive the dividend is non-forfeitable and non-contingent. Participating securities are defined as securities that participate in dividends with common stock according to a predetermined formula. These participating securities should be included in the computation of basic earnings per share under the two class method. Based upon the clarification made by FASB, the Company concluded that its non-vested restricted stock awards meet the definition of a participating security and should be included in the Company’s computation of basic earnings per share.
1218
The following table sets forth for the periods indicated the calculation of net income 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 per share, respectively:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | | For the Three Months | | For the Six Months | |
| | March 31, | | | Ended June 30, | | Ended June, 30 | |
| | 2010 | | 2011 | | �� | 2010 | | 2011 | | 2010 | | 2011 | |
| | (in thousands, except per share data) | | | (in thousands, except per share data) | |
Numerator: | | |
Net income attributable to Select Medical Holdings Corporation | | $ | 24,226 | | $ | 33,672 | | | $ | 24,462 | | $ | 11,719 | | $ | 48,688 | | $ | 45,391 | |
Less: Earnings allocated to unvested restricted stockholders | | 50 | | 361 | | | 46 | | 125 | | 97 | | 486 | |
| | | | | | | | | | | | | | |
Net income available to common stockholders | | $ | 24,176 | | $ | 33,311 | | | $ | 24,416 | | $ | 11,594 | | $ | 48,591 | | $ | 44,905 | |
| | | | | | | | | | | | | | |
| | |
Denominator: | | |
Weighted average shares — basic | | 159,670 | | 152,838 | | | 159,709 | | 152,603 | | 159,686 | | 152,720 | |
Effect of dilutive securities: | | |
Stock options | | 351 | | 218 | | | 266 | | 278 | | 298 | | 231 | |
| | | | | | | | | | | | | | |
Weighted average shares — diluted | | 160,021 | | 153,056 | | | 159,975 | | 152,881 | | 159,984 | | 152,951 | |
| | | | | | | | | | | | | | |
| | |
Basic income per common share | | $ | 0.15 | | $ | 0.22 | | | $ | 0.15 | | $ | 0.08 | | $ | 0.30 | | $ | 0.29 | |
Diluted income per common share | | $ | 0.15 | | $ | 0.22 | | | $ | 0.15 | | $ | 0.08 | | $ | 0.30 | | $ | 0.29 | |
The following share amounts are shown here for informational and comparative purposes only since their inclusion would be anti-dilutive:
| | | | | | | | |
| | Three Months Ended March 31, | |
| | 2010 | | | 2011 | |
| | (in thousands) | |
Stock options | | | 1,581 | | | | 2,372 | |
| | | | | | | | | | | | | | | | |
| | For the Three Months | | | For the Six Months | |
| | Ended June 30, | | | Ended June 30, | |
| | 2010 | | | 2011 | | | 2010 | | | 2011 | |
| | (in thousands) | |
Stock options | | | 2,399 | | | | 1,691 | | | | 1,620 | | | | 2,400 | |
8.10. 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.
1319
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 the qui tam provisions of the federal False Claims Act. Qui tam lawsuits typically remain under seal (hence, usually unknown to the defendant) for some time while the government decides whether or not to intervene on behalf of a private qui tam plaintiff (known as a relator) and take the lead in the litigation. These lawsuits can involve significant monetary damages and penalties and award bounties to private plaintiffs who successfully bring the suits. The Company has been a defendant in these cases in the past, and may be named as a defendant in similar cases from time to time in the future.
During July 2009, the Company received a subpoena from the Office of Inspector General of the U.S. Department of Health and Human Services seeking various documents concerning the Company’s financial relationships with certain physicians practicing at its long term acute care hospitals in Columbus, Ohio. The Company understands that the subpoena was issued in connection with a qui tam lawsuit and that the government has been investigating the matter to determine whether to intervene. The Company has produced documents in response to the subpoena and has fully cooperated with the government’s investigation. The Company ishas been in discussions with the government to attempt to resolve this matter in a manner satisfactory to the Company and the government. Any such settlement would not involve any admission of liability or wrongdoing on the part of the Company. During the second quarter of 2011, the Company recorded a pre-tax charge of $7.5 million to establish a settlement reserve, which represents the Company’s best estimate of a probable settlement and is included in the general and administrative line item on the consolidated statement of operations. The Company can provide no assurance that it will finalize a settlement on such terms, nor can the Company predict its total financial exposure in connection with this matter if a settlement is not expected to be material to the Company’s financial position.reached.
Construction Commitments
At March 31,June 30, 2011, the Company had outstanding commitments under construction contracts related to new construction, improvements and renovations at the Company’s long term acute care properties and inpatient rehabilitation facilities totaling approximately $4.6$1.9 million.
9. Refinancing
On April 25, 2011, Select commenced a cash tender offer and consent solicitation for any and all of Select’s 7 5/8% senior subordinated notes. The tender offer is scheduled to expire at 11:59 p.m. on May 20, 2011. The tender offer and consent solicitation are being conducted in connection with Select’s negotiations to refinance its senior secured credit facility. The tender offer and consent solicitation are conditioned on Select’s entry into a new senior secured credit facility. The Company expects to use a portion of the proceeds from such new senior secured credit facility to purchase the tendered and accepted 7 5/8% senior subordinated notes and to retire Holdings’ 10% senior subordinated notes.
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 remain in effect until January 31, 2012, 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.
| | |
12. | | Financial Information for Subsidiary Guarantors and Non-Guarantor Subsidiaries under Select’s 7 5/8% Senior Subordinated Notes |
Select’s 7 5/8% Senior Subordinated Notessenior subordinated notes are fully and unconditionally guaranteed 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 7 5/8% Senior Subordinated Notessenior subordinated notes (the “Non-Guarantor Subsidiaries”).
Select conducts a significant portion of its business through its subsidiaries. Presented below is condensed consolidating financial information for Select, the Subsidiary Guarantors and the Non-Guarantor Subsidiaries at December 31, 2010 and March 31,June 30, 2011 and for the three and six months ended March 31,June 30, 2010 and 2011.
14
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.
20
The following table sets forth the Non-Guarantor Subsidiaries at March 31,June 30, 2011:
Caritas Rehab Services, LLC
Elizabethtown Physical Therapy, P.S.C.
Great Lakes Specialty Hospital — Hackley, LLC
Great Lakes Specialty Hospital — Oak, LLC
Jeffersontown Physical Therapy, LLC
Kentucky Orthopedic Rehabilitation, LLC
Kessler Core PT, OT and Speech Therapy at New York, LLC
Louisville Physical Therapy, P.S.C.
Metropolitan West Physical Therapy and Sports Medicine Services, Inc.
MKJ Physical Therapy, Inc.
New York Physician Services, P.C.
North Andover Physical Therapy, P.C
Penn State Hershey Rehabilitation, LLC
Philadelphia Occupational Health, P.C.
Rehabilitation Physician Services, P.C.
Regency Hospital of Fort Worth, L.L.P.
Select LifeCare Western Michigan, LLC
Select Physical Therapy of Las Vegas Limited Partnership
Select Specialty — Downriver, LLC
Select Specialty Hospital — Akron, LLC
Select Specialty Hospital — Evansville, LLC
Select Specialty Hospital — Central Pennsylvania, L.P.
Select Specialty Hospital — Houston, L.P.
Select Specialty Hospital — Gulf Coast, Inc.
SSM Select Rehab St. Louis, LLC
Therex, P.C.
TJ Corporation I, LLC
U.S. Regional Occupational Health II, P.C.
U.S. Regional Occupational Health II of New Jersey, P.C.
1521
| | | | | | | | | | | | | | | | | | | | |
| | Select Medical Corporation | |
| | Condensed Consolidating Balance Sheet | |
| | March 31, 2011 | |
| | (unaudited) | |
| | Select Medical | | | | | | | | | | | | | |
| | Corporation (Parent | | | Subsidiary | | | Non-Guarantor | | | | | | | |
| | Company Only) | | | Guarantors | | | Subsidiaries | | | Eliminations | | | Consolidated | |
| | (in thousands) | |
Assets | | | | | | | | | | | | | | | | | | | | |
Current Assets: | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 8,864 | | | $ | 5,590 | | | $ | 614 | | | $ | — | | | $ | 15,068 | |
Accounts receivable, net | | | — | | | | 396,170 | | | | 43,140 | | | | — | | | | 439,310 | |
Current deferred tax asset | | | 7,648 | | | | 18,449 | | | | 3,547 | | | | — | | | | 29,644 | |
Other current assets | | | 9,040 | | | | 18,872 | | | | 3,352 | | | | — | | | | 31,264 | |
| | | | | | | | | | | | | | | |
Total Current Assets | | | 25,552 | | | | 439,081 | | | | 50,653 | | | | — | | | | 515,286 | |
| | | | | | | | | | | | | | | | | | | | |
Property and equipment, net | | | 6,410 | | | | 463,952 | | | | 56,543 | | | | — | | | | 526,905 | |
Investment in affiliates | | | 2,708,891 | | | | 76,947 | | | | — | | | | (2,785,838 | )(a) (b) | | | — | |
Goodwill | | | — | | | | 1,640,535 | | | | — | | | | — | | | | 1,640,535 | |
Other identifiable intangibles | | | — | | | | 73,102 | | | | — | | | | — | | | | 73,102 | |
Assets held for sale | | | 11,342 | | | | — | | | | — | | | | — | | | | 11,342 | |
Other assets | | | 21,617 | | | | 11,602 | | | | 1,054 | | | | — | | | | 34,273 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Total Assets | | $ | 2,773,812 | | | $ | 2,705,219 | | | $ | 108,250 | | | $ | (2,785,838 | ) | | $ | 2,801,443 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Liabilities and Equity | | | | | | | | | | | | | | | | | | | | |
Current Liabilities: | | | | | | | | | | | | | | | | | | | | |
Bank overdrafts | | $ | 9,374 | | | $ | — | | | $ | — | | | $ | — | | | $ | 9,374 | |
Current portion of long-term debt and notes payable | | | 148,988 | | | | 605 | | | | 730 | | | | — | | | | 150,323 | |
Accounts payable | | | 7,805 | | | | 68,188 | | | | 10,649 | | | | — | | | | 86,642 | |
Intercompany accounts | | | 933,922 | | | | (850,321 | ) | | | (83,601 | ) | | | — | | | | — | |
Accrued payroll | | | 729 | | | | 74,341 | | | | 287 | | | | — | | | | 75,357 | |
Accrued vacation | | | 3,515 | | | | 39,790 | | | | 5,752 | | | | — | | | | 49,057 | |
Accrued interest | | | 9,447 | | | | 451 | | | | — | | | | — | | | | 9,898 | |
Accrued restructuring | | | — | | | | 6,293 | | | | — | | | | — | | | | 6,293 | |
Accrued other | | | 35,190 | | | | 55,788 | | | | 5,754 | | | | — | | | | 96,732 | |
Income taxes payable | | | 6,698 | | | | — | | | | — | | | | — | | | | 6,698 | |
Due to (from) third party payors | | | — | | | | 20,647 | | | | (15,822 | ) | | | — | | | | 4,825 | |
| | | | | | | | | | | | | | | |
Total Current Liabilities | | | 1,155,668 | | | | (584,218 | ) | | | (76,251 | ) | | | — | | | | 495,199 | |
| | | | | | | | | | | | | | | | | | | | |
Long-term debt, net of current portion | | | 439,958 | | | | 510,748 | | | | 66,703 | | | | — | | | | 1,017,409 | |
Non-current deferred tax liability | | | 1,582 | | | | 53,938 | | | | 8,133 | | | | — | | | | 63,653 | |
Other non-current liabilities | | | 52,518 | | | | 17,008 | | | | — | | | | — | | | | 69,526 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Total Liabilities | | | 1,649,726 | | | | (2,524 | ) | | | (1,415 | ) | | | — | | | | 1,645,787 | |
| | | | | | | | | | | | | | | | | | | | |
Stockholder’s Equity: | | | | | | | | | | | | | | | | | | | | |
Common stock | | | 0 | | | | — | | | | — | | | | — | | | | 0 | |
Capital in excess of par | | | 838,305 | | | | — | | | | — | | | | — | | | | 838,305 | |
Retained earnings | | | 285,781 | | | | 541,983 | | | | 21,691 | | | | (563,674 | )(b) | | | 285,781 | |
Subsidiary investment | | | — | | | | 2,165,760 | | | | 56,404 | | | | (2,222,164 | )(a) | | | — | |
| | | | | | | | | | | | | | | |
Total Select Medical Corporation Stockholder’s Equity | | | 1,124,086 | | | | 2,707,743 | | | | 78,095 | | | | (2,785,838 | ) | | | 1,124,086 | |
| | | | | | | | | | | | | | | | | | | | |
Non-controlling interest | | | — | | | | — | | | | 31,570 | | | | — | | | | 31,570 | |
| | | | | | | | | | | | | | | |
Total Equity | | | 1,124,086 | | | | 2,707,743 | | | | 109,665 | | | | (2,785,838 | ) | | | 1,155,656 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Total Liabilities and Equity | | $ | 2,773,812 | | | $ | 2,705,219 | | | $ | 108,250 | | | $ | (2,785,838 | ) | | $ | 2,801,443 | |
| | | | | | | | | | | | | | | |
Select Medical CorporationCondensed Consolidating Balance Sheet
June 30, 2011
(unaudited) | | | | | | | | | | | | | | | | | | | | |
| | Select Medical | | | | | | | | | | | | | |
| | Corporation (Parent | | | Subsidiary | | | Non-Guarantor | | | | | | | |
| | Company Only) | | | Guarantors | | | Subsidiaries | | | Eliminations | | | Consolidated | |
| | (in thousands) | |
| | | | | | | |
Assets | | | | | | | | | | | | | | | | | | | | |
Current Assets: | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 10,135 | | | $ | 2,936 | | | $ | 513 | | | $ | — | | | $ | 13,584 | |
Accounts receivable, net | | | — | | | | 363,022 | | | | 43,450 | | | | — | | | | 406,472 | |
Current deferred tax asset | | | 10,116 | | | | 2,261 | | | | 3,258 | | | | — | | | | 15,635 | |
Prepaid income taxes | | | 27,223 | | | | — | | | | — | | | | — | | | | 27,223 | |
Other current assets | | | 6,656 | | | | 19,881 | | | | 3,149 | | | | — | | | | 29,686 | |
| | | | | | | | | | | | | | | |
Total Current Assets | | | 54,130 | | | | 388,100 | | | | 50,370 | | | | — | | | | 492,600 | |
| | | | | | | | | | | | | | | | | | | | |
Property and equipment, net | | | 7,550 | | | | 451,954 | | | | 55,418 | | | | — | | | | 514,922 | |
Investment in affiliates | | | 2,760,064 | | | | 82,022 | | | | — | | | | (2,842,086 | )(a)(b) | | | — | |
Goodwill | | | — | | | | 1,627,509 | | | | — | | | | — | | | | 1,627,509 | |
Other identifiable intangibles | | | — | | | | 72,776 | | | | — | | | | — | | | | 72,776 | |
Assets held for sale | | | 11,342 | | | | — | | | | — | | | | — | | | | 11,342 | |
Other assets | | | 30,933 | | | | 35,341 | | | | 1,010 | | | | — | | | | 67,284 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Total Assets | | $ | 2,864,019 | | | $ | 2,657,702 | | | $ | 106,798 | | | $ | (2,842,086 | ) | | $ | 2,786,433 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Liabilities and Equity | | | | | | | | | | | | | | | | | | | | |
Current Liabilities: | | | | | | | | | | | | | | | | | | | | |
Bank overdrafts | | $ | 20,894 | | | $ | — | | | $ | — | | | $ | — | | | $ | 20,894 | |
Current portion of long-term debt and notes payable | | | 12,579 | | | | 574 | | | | 587 | | | | — | | | | 13,740 | |
Accounts payable | | | 8,785 | | | | 64,504 | | | | 9,820 | | | | — | | | | 83,109 | |
Intercompany accounts | | | 1,028,003 | | | | (936,574 | ) | | | (91,429 | ) | | | — | | | | — | |
Accrued payroll | | | 550 | | | | 74,558 | | | | 345 | | | | — | | | | 75,453 | |
Accrued vacation | | | 3,666 | | | | 40,850 | | | | 5,985 | | | | — | | | | 50,501 | |
Accrued interest | | | 14,982 | | | | 11 | | | | 513 | | | | — | | | | 15,506 | |
Accrued restructuring | | | — | | | | 5,966 | | | | — | | | | — | | | | 5,966 | |
Accrued other | | | 45,581 | | | | 59,531 | | | | 5,652 | | | | — | | | | 110,764 | |
Due to third party payors | | | — | | | | 18,824 | | | | (13,989 | ) | | | — | | | | 4,835 | |
| | | | | | | | | | | | | | | |
Total Current Liabilities | | | 1,135,040 | | | | (671,756 | ) | | | (82,516 | ) | | | — | | | | 380,768 | |
| | | | | | | | | | | | | | | | | | | | |
Long-term debt, net of current portion | | | 680,841 | | | | 498,090 | | | | 66,897 | | | | — | | | | 1,245,828 | |
Non-current deferred tax liability | | | 1,431 | | | | 54,832 | | | | 7,947 | | | | — | | | | 64,210 | |
Other non-current liabilities | | | 55,144 | | | | 16,011 | | | | — | | | | — | | | | 71,155 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Total Liabilities | | | 1,872,456 | | | | (102,823 | ) | | | (7,672 | ) | | | — | | | | 1,761,961 | |
| | | | | | | | | | | | | | | | | | | | |
Stockholder’s Equity: | | | | | | | | | | | | | | | | | | | | |
Common stock | | | 0 | | | | — | | | | — | | | | — | | | | 0 | |
Capital in excess of par | | | 844,975 | | | | — | | | | — | | | | — | | | | 844,975 | |
Retained earnings | | | 146,588 | | | | 567,503 | | | | 25,157 | | | | (592,660 | )(b) | | | 146,588 | |
Subsidiary investment | | | — | | | | 2,193,022 | | | | 56,404 | | | | (2,249,426 | )(a) | | | — | |
| | | | | | | | | | | | | | | |
Total Select Medical Corporation Stockholder’s Equity | | | 991,563 | | | | 2,760,525 | | | | 81,561 | | | | (2,842,086 | ) | | | 991,563 | |
| | | | | | | | | | | | | | | | | | | | |
Non-controlling interest | | | — | | | | — | | | | 32,909 | | | | — | | | | 32,909 | |
| | | | | | | | | | | | | | | |
Total Equity | | | 991,563 | | | | 2,760,525 | | | | 114,470 | | | | (2,842,086 | ) | | | 1,024,472 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Total Liabilities and Equity | | $ | 2,864,019 | | | $ | 2,657,702 | | | $ | 106,798 | | | $ | (2,842,086 | ) | | $ | 2,786,433 | |
| | | | | | | | | | | | | | | |
| | |
(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 Three Months Ended June 30, 2011
(unaudited)
| | | | | | | | | | | | | | | | | | | | |
| | Select Medical | | | | | | | | | | | | | |
| | Corporation (Parent | | | Subsidiary | | | Non-Guarantor | | | | | | | |
| | Company Only) | | | Guarantors | | | Subsidiaries | | | Eliminations | | | Consolidated | |
| | (in thousands) | |
| | | | | | | |
Net operating revenues | | $ | 15 | | | $ | 605,562 | | | $ | 93,172 | | | $ | — | | | $ | 698,749 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Costs and expenses: | | | | | | | | | | | | | | | | | | | | |
Cost of services | | | 194 | | | | 493,059 | | | | 76,413 | | | | — | | | | 569,666 | |
General and administrative | | | 16,039 | | | | 76 | | | | — | | | | — | | | | 16,115 | |
Bad debt expense | | | — | | | | 11,908 | | | | 2,035 | | | | — | | | | 13,943 | |
Depreciation and amortization | | | 654 | | | | 15,099 | | | | 2,246 | | | | — | | | | 17,999 | |
| | | | | | | | | | | | | | | |
Total costs and expenses | | | 16,887 | | | | 520,142 | | | | 80,694 | | | | — | | | | 617,723 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Income (loss) from operations | | | (16,872 | ) | | | 85,420 | | | | 12,478 | | | | — | | | | 81,026 | |
| | | | | | | | | | | | | | | | | | | | |
Other income and expense: | | | | | | | | | | | | | | | | | | | | |
Intercompany interest and royalty fees | | | (1,000 | ) | | | 994 | | | | 6 | | | | — | | | | — | |
Intercompany management fees | | | 44,391 | | | | (39,901 | ) | | | (4,490 | ) | | | — | | | | — | |
Loss on early retirement of debt | | | (20,385 | ) | | | — | | | | — | | | | — | | | | (20,385 | ) |
Equity in earnings (losses) of unconsolidated subsidiaries | | | — | | | | (260 | ) | | | 9 | | | | — | | | | (251 | ) |
Interest income | | | 34 | | | | 77 | | | | — | | | | — | | | | 111 | |
Interest expense | | | (9,011 | ) | | | (9,370 | ) | | | (1,313 | ) | | | — | | | | (19,694 | ) |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Income (loss) from operations before income taxes | | | (2,843 | ) | | | 36,960 | | | | 6,690 | | | | — | | | | 40,807 | |
| | | | | | | | | | | | | | | | | | | | |
Income tax expense | | | 362 | | | | 16,224 | | | | 11 | | | | — | | | | 16,597 | |
Equity in earnings of subsidiaries | | | 25,477 | | | | 4,784 | | | | — | | | | (30,261 | )(a) | | | — | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Net income | | | 22,272 | | | | 25,520 | | | | 6,679 | | | | (30,261 | ) | | | 24,210 | |
| | | | | | | | | | | | | | | | | | | | |
Less: Net income attributable to non-controlling interests | | | — | | | | — | | | | 1,938 | | | | — | | | | 1,938 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Net income attributable to Select Medical Corporation | | $ | 22,272 | | | $ | 25,520 | | | $ | 4,741 | | | $ | (30,261 | ) | | $ | 22,272 | |
| | | | | | | | | | | | | | | |
| | |
(a) | | Elimination of equity in earnings of subsidiaries. |
23
Select Medical Corporation
Condensed Consolidating Statement of Operations
For the Six Months Ended June 30, 2011
(unaudited)
| | | | | | | | | | | | | | | | | | | | |
| | Select Medical | | | | | | | | | | | | | |
| | Corporation (Parent | | | Subsidiary | | | Non-Guarantor | | | | | | | |
| | Company Only) | | | Guarantors | | | Subsidiaries | | | Eliminations | | | Consolidated | |
| | (in thousands) | |
| | | | | | | |
Net operating revenues | | $ | 86 | | | $ | 1,205,815 | | | $ | 186,034 | | | $ | — | | | $ | 1,391,935 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Costs and expenses: | | | | | | | | | | | | | | | | | | | | |
Cost of services | | | 832 | | | | 974,281 | | | | 151,969 | | | | — | | | | 1,127,082 | |
General and administrative | | | 32,494 | | | | 187 | | | | — | | | | — | | | | 32,681 | |
Bad debt expense | | | — | | | | 24,909 | | | | 3,384 | | | | — | | | | 28,293 | |
Depreciation and amortization | | | 1,300 | | | | 29,455 | | | | 4,466 | | | | — | | | | 35,221 | |
| | | | | | | | | | | | | | | |
Total costs and expenses | | | 34,626 | | | | 1,028,832 | | | | 159,819 | | | | — | | | | 1,223,277 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Income (loss) from operations | | | (34,540 | ) | | | 176,983 | | | | 26,215 | | | | — | | | | 168,658 | |
| | | | | | | | | | | | | | | | | | | | |
Other income and expense: | | | | | | | | | | | | | | | | | | | | |
Intercompany interest and royalty fees | | | (1,995 | ) | | | 1,980 | | | | 15 | | | | — | | | | — | |
Intercompany management fees | | | 67,863 | | | | (59,131 | ) | | | (8,732 | ) | | | — | | | | — | |
Loss on early retirement of debt | | | (20,385 | ) | | | — | | | | — | | | | — | | | | (20,385 | ) |
Equity in earnings (losses) of unconsolidated subsidiaries | | | — | | | | (348 | ) | | | 24 | | | | — | | | | (324 | ) |
Interest income | | | 65 | | | | 101 | | | | 1 | | | | — | | | | 167 | |
Interest expense | | | (16,376 | ) | | | (19,319 | ) | | | (2,661 | ) | | | — | | | | (38,356 | ) |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Income (loss) from operations before income taxes | | | (5,368 | ) | | | 100,266 | | | | 14,862 | | | | — | | | | 109,760 | |
| | | | | | | | | | | | | | | | | | | | |
Income tax expense | | | 1,288 | | | | 44,044 | | | | 279 | | | | — | | | | 45,611 | |
Equity in earnings of subsidiaries | | | 67,152 | | | | 10,581 | | | | — | | | | (77,733 | )(a) | | | — | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Net income | | | 60,496 | | | | 66,803 | | | | 14,583 | | | | (77,733 | ) | | | 64,149 | |
| | | | | | | | | | | | | | | | | | | | |
Less: Net income attributable to non-controlling interests | | | — | | | | — | | | | 3,653 | | | | — | | | | 3,653 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Net income attributable to Select Medical Corporation | | $ | 60,496 | | | $ | 66,803 | | | $ | 10,930 | | | $ | (77,733 | ) | | $ | 60,496 | |
| | | | | | | | | | | | | | | |
| | |
(a) | | Elimination of equity in earnings of subsidiaries. |
24
Select Medical Corporation
Condensed Consolidating Statement of Cash Flows
For the Six Months Ended June 30, 2011
(unaudited)
| | | | | | | | | | | | | | | | | | | | |
| | Select Medical | | | | | | | | | | | | | |
| | Corporation (Parent | | | Subsidiary | | | Non-Guarantor | | | | | | | |
| | Company Only) | | | Guarantors | | | Subsidiaries | | | Eliminations | | | Consolidated | |
| | (in thousands) | |
| | | | | | | |
Operating activities | | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 60,496 | | | $ | 66,803 | | | $ | 14,583 | | | $ | (77,733 | ) (a) | | $ | 64,149 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization | | | 1,300 | | | | 29,455 | | | | 4,466 | | | | — | | | | 35,221 | |
Provision for bad debts | | | — | | | | 24,909 | | | | 3,384 | | | | — | | | | 28,293 | |
Loss on early retirement of debt | | | 20,385 | | | | — | | | | — | | | | — | | | | 20,385 | |
Loss (gain) from disposal of assets | | | 10 | | | | (5,225 | ) | | | 14 | | | | — | | | | (5,201 | ) |
Non-cash stock compensation expense | | | 1,780 | | | | — | | | | — | | | | — | | | | 1,780 | |
Amortization of debt discount | | | 103 | | | | — | | | | — | | | | — | | | | 103 | |
Changes in operating assets and liabilities, net of effects from acquisition of businesses: | | | | | | | | | | | | | | | | | | | | |
Equity in earnings of subsidiaries | | | (67,152 | ) | | | (10,581 | ) | | | — | | | | 77,733 | (a) | | | — | |
Intercompany | | | 53,735 | | | | (46,683 | ) | | | (7,052 | ) | | | — | | | | — | |
Accounts receivable | | | — | | | | (73,715 | ) | | | (7,525 | ) | | | — | | | | (81,240 | ) |
Other current assets | | | (2,096 | ) | | | 245 | | | | 340 | | | | — | | | | (1,511 | ) |
Other assets | | | (4,203 | ) | | | 6,564 | | | | 108 | | | | — | | | | 2,469 | |
Accounts payable | | | 2,758 | | | | 4,531 | | | | 818 | | | | — | | | | 8,107 | |
Due to third-party payors | | | — | | | | 6,599 | | | | (7,063 | ) | | | — | | | | (464 | ) |
Accrued expenses | | | 9,410 | | | | 4,606 | | | | (1,008 | ) | | | — | | | | 13,008 | |
Income and deferred taxes | | | 16,151 | | | | — | | | | — | | | | — | | | | 16,151 | |
| | | | | | | | | | | | | | | |
Net cash provided by operating activities | | | 92,677 | | | | 7,508 | | | | 1,065 | | | | — | | | | 101,250 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Investing activities | | | | | | | | | | | | | | | | | | | | |
Purchases of property and equipment | | | (1,178 | ) | | | (18,898 | ) | | | (3,620 | ) | | | — | | | | (23,696 | ) |
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 | | | (1,178 | ) | | | (22,612 | ) | | | (3,620 | ) | | | — | | | | (27,410 | ) |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Financing activities | | | | | | | | | | | | | | | | | | | | |
Borrowings on revolving credit facilities | | | 435,000 | | | | — | | | | — | | | | — | | | | 435,000 | |
Payments on revolving credit facilities | | | (395,000 | ) | | | — | | | | — | | | | — | | | | (395,000 | ) |
Borrowings on 2011 credit facility term loan, net of discount | | | 841,500 | | | | — | | | | — | | | | — | | | | 841,500 | |
Payments on 2005 credit facility term loan, 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 | | | (2,581 | ) | | | (899 | ) | | | — | | | | — | | | | (3,480 | ) |
Debt issuance costs | | | (18,556 | ) | | | — | | | | — | | | | — | | | | (18,556 | ) |
Proceeds from bank overdrafts | | | 2,102 | | | | — | | | | — | | | | — | | | | 2,102 | |
Equity investment by Holdings | | | 169 | | | | — | | | | — | | | | — | | | | 169 | |
Dividends paid to Holdings | | | (171,008 | ) | | | — | | | | — | | | | — | | | | (171,008 | ) |
Intercompany debt reallocation | | | (20,061 | ) | | | 15,372 | | | | 4,689 | | | | — | | | | — | |
Distributions to non-controlling interests | | | — | | | | — | | | | (2,270 | ) | | | — | | | | (2,270 | ) |
| | | | | | | | | | | | | | | |
Net cash provided by (used in) financing activities | | | (81,513 | ) | | | 14,473 | | | | 2,419 | | | | — | | | | (64,621 | ) |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | 9,986 | | | | (631 | ) | | | (136 | ) | | | — | | | | 9,219 | |
| | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents at beginning of period | | | 149 | | | | 3,567 | | | | 649 | | | | — | | | | 4,365 | |
| | | | | | | | | | | | | | | |
Cash and cash equivalents at end of period | | $ | 10,135 | | | $ | 2,936 | | | $ | 513 | | | $ | — | | | $ | 13,584 | |
| | | | | | | | | | | | | | | |
| | |
(a) | | Elimination of equity in earnings of consolidated subsidiaries. |
25
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 subsidiaries. |
|
(b) | | Elimination of investments in subsidiaries’ retained earnings. |
1626
| | | | | | | | | | | | | | | | | | | | |
| | Select Medical Corporation | |
| | Condensed Consolidating Statement of Operations | |
| | For the Quarter Ended March 31, 2011 | |
| | (unaudited) | |
| | Select Medical | | | | | | | | | | | | | |
| | Corporation (Parent | | | Subsidiary | | | Non-Guarantor | | | | | | | |
| | Company Only) | | | Guarantors | | | Subsidiaries | | | Eliminations | | | Consolidated | |
| | (in thousands) | |
| | | | | | | | | | | | | | | | | | | | |
Net operating revenues | | $ | 71 | | | $ | 600,253 | | | $ | 92,862 | | | $ | — | | | $ | 693,186 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Costs and expenses: | | | | | | | | | | | | | | | | | | | | |
Cost of services | | | 638 | | | | 481,222 | | | | 75,556 | | | | — | | | | 557,416 | |
General and administrative | | | 16,455 | | | | 111 | | | | — | | | | — | | | | 16,566 | |
Bad debt expense | | | — | | | | 13,001 | | | | 1,349 | | | | — | | | | 14,350 | |
Depreciation and amortization | | | 646 | | | | 14,356 | | | | 2,220 | | | | — | | | | 17,222 | |
| | | | | | | | | | | | | | | |
Total costs and expenses | | | 17,739 | | | | 508,690 | | | | 79,125 | | | | — | | | | 605,554 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Income (loss) from operations | | | (17,668 | ) | | | 91,563 | | | | 13,737 | | | | — | | | | 87,632 | |
| | | | | | | | | | | | | | | | | | | | |
Other income and expense: | | | | | | | | | | | | | | | | | | | | |
Intercompany interest and royalty fees | | | (995 | ) | | | 986 | | | | 9 | | | | — | | | | — | |
Intercompany management fees | | | 23,472 | | | | (19,230 | ) | | | (4,242 | ) | | | — | | | | — | |
Equity in earnings (losses) of unconsolidated subsidiaries | | | — | | | | (88 | ) | | | 15 | | | | — | | | | (73 | ) |
Interest income | | | 31 | | | | 24 | | | | 1 | | | | — | | | | 56 | |
Interest expense | | | (7,365 | ) | | | (9,949 | ) | | | (1,348 | ) | | | — | | | | (18,662 | ) |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Income (loss) before income taxes | | | (2,525 | ) | | | 63,306 | | | | 8,172 | | | | — | | | | 68,953 | |
| | | | | | | | | | | | | | | | | | | | |
Income tax expense | | | 926 | | | | 27,820 | | | | 268 | | | | — | | | | 29,014 | |
Equity in earnings of subsidiaries | | | 41,675 | | | | 5,797 | | | | — | | | | (47,472) | (a) | | | — | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Net income | | | 38,224 | | | | 41,283 | | | | 7,904 | | | | (47,472 | ) | | | 39,939 | |
| | | | | | | | | | | | | | | | | | | | |
Less: Net income attributable to non-controlling interests | | | — | | | | — | | | | 1,715 | | | | — | | | | 1,715 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Net income attributable to Select Medical Corporation | | $ | 38,224 | | | $ | 41,283 | | | $ | 6,189 | | | $ | (47,472 | ) | | $ | 38,224 | |
| | | | | | | | | | | | | | | |
Select Medical CorporationCondensed Consolidating Statement of Operations
For the Three Months Ended June 30, 2010
(unaudited) | | | | | | | | | | | | | | | | | | | | |
| | Select Medical | | | | | | | | | | | | | |
| | Corporation (Parent | | | Subsidiary | | | Non-Guarantor | | | | | | | |
| | Company Only) | | | Guarantors | | | Subsidiaries | | | Eliminations | | | Consolidated | |
| | (in thousands) | |
| | | | | | | |
Net operating revenues | | $ | 13 | | | $ | 499,330 | | | $ | 80,534 | | | $ | — | | | $ | 579,877 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Costs and expenses: | | | | | | | | | | | | | | | | | | | | |
Cost of services | | | 326 | | | | 403,366 | | | | 66,352 | | | | — | | | | 470,044 | |
General and administrative | | | 9,785 | | | | 17 | | | | — | | | | — | | | | 9,802 | |
Bad debt expense | | | — | | | | 9,070 | | | | 1,775 | | | | — | | | | 10,845 | |
Depreciation and amortization | | | 680 | | | | 13,888 | | | | 2,042 | | | | — | | | | 16,610 | |
| | | | | | | | | | | | | | | |
Total costs and expenses | | | 10,791 | | | | 426,341 | | | | 70,169 | | | | — | | | | 507,301 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Income (loss) from operations | | | (10,778 | ) | | | 72,989 | | | | 10,365 | | | | — | | | | 72,576 | |
| | | | | | | | | | | | | | | | | | | | |
Other income and expense: | | | | | | | | | | | | | | | | | | | | |
Intercompany interest and royalty fees | | | (887 | ) | | | 882 | | | | 5 | | | | — | | | | — | |
Intercompany management fees | | | 22,413 | | | | (18,458 | ) | | | (3,955 | ) | | | — | | | | — | |
Other income | | | 182 | | | | — | | | | — | | | | — | | | | 182 | |
Interest expense | | | (12,652 | ) | | | (8,477 | ) | | | (1,196 | ) | | | — | | | | (22,325 | ) |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Income (loss) from operations before income taxes | | | (1,722 | ) | | | 46,936 | | | | 5,219 | | | | — | | | | 50,433 | |
| | | | | | | | | | | | | | | | | | | | |
Income tax expense (benefit) | | | 1,402 | | | | 19,067 | | | | (729 | ) | | | — | | | | 19,740 | |
Equity in earnings of subsidiaries | | | 32,106 | | | | 4,270 | | | | — | | | | (36,376 | )(a) | | | — | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Net income | | | 28,982 | | | | 32,139 | | | | 5,948 | | | | (36,376 | ) | | | 30,693 | |
| | | | | | | | | | | | | | | | | | | | |
Less: Net income attributable to non-controlling interests | | | — | | | | — | | | | 1,711 | | | | — | | | | 1,711 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Net income attributable to Select Medical Corporation | | $ | 28,982 | | | $ | 32,139 | | | $ | 4,237 | | | $ | (36,376 | ) | | $ | 28,982 | |
| | | | | | | | | | | | | | | |
| | |
(a) | | Elimination of equity in net income from consolidated subsidiaries. |
27
Select Medical Corporation
Condensed Consolidating Statement of Operations
For the Six Months Ended June 30, 2010
(unaudited)
| | | | | | | | | | | | | | | | | | | | |
| | Select Medical | | | | | | | | | | | | | | |
| | Corporation (Parent | | | Subsidiary | | | Non-Guarantor | | | | | | | |
| | Company Only) | | | Guarantors | | | Subsidiaries | | | Eliminations | | | Consolidated | |
| | (in thousands) | |
| | | | | | | |
Net operating revenues | | $ | 76 | | | $ | 1,001,657 | | | $ | 162,957 | | | $ | — | | | $ | 1,164,690 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Costs and expenses: | | | | | | | | | | | | | | | | | | | | |
Cost of services | | | 654 | | | | 808,631 | | | | 133,136 | | | | — | | | | 942,421 | |
General and administrative | | | 22,559 | | | | 32 | | | | — | | | | — | | | | 22,591 | |
Bad debt expense | | | — | | | | 16,741 | | | | 3,391 | | | | — | | | | 20,132 | |
Depreciation and amortization | | | 1,498 | | | | 28,538 | | | | 4,285 | | | | — | | | | 34,321 | |
| | | | | | | | | | | | | | | |
Total costs and expenses | | | 24,711 | | | | 853,942 | | | | 140,812 | | | | — | | | | 1,019,465 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Income (loss) from operations | | | (24,635 | ) | | | 147,715 | | | | 22,145 | | | | — | | | | 145,225 | |
| | | | | | | | | | | | | | | | | | | | |
Other income and expense: | | | | | | | | | | | | | | | | | | | | |
Intercompany interest and royalty fees | | | (1,961 | ) | | | 1,952 | | | | 9 | | | | — | | | | — | |
Intercompany management fees | | | 45,229 | | | | (37,769 | ) | | | (7,460 | ) | | | — | | | | — | |
Other income | | | 316 | | | | — | | | | — | | | | — | | | | 316 | |
Interest expense | | | (26,100 | ) | | | (17,004 | ) | | | (2,259 | ) | | | — | | | | (45,363 | ) |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Income (loss) from operations before income taxes | | | (7,151 | ) | | | 94,894 | | | | 12,435 | | | | — | | | | 100,178 | |
| | | | | | | | | | | | | | | | | | | | |
Income tax expense (benefit) | | | 1,490 | | | | 38,559 | | | | (749 | ) | | | — | | | | 39,300 | |
Equity in earnings of subsidiaries | | | 66,402 | | | | 9,866 | | | | — | | | | (76,268 | )(a) | | | — | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Net income | | | 57,761 | | | | 66,201 | | | | 13,184 | | | | (76,268 | ) | | | 60,878 | |
| | | | | | | | | | | | | | | | | | | | |
Less: Net income attributable to non-controlling interests | | | — | | | | — | | | | 3,117 | | | | — | | | | 3,117 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Net income attributable to Select Medical Corporation | | $ | 57,761 | | | $ | 66,201 | | | $ | 10,067 | | | $ | (76,268 | ) | | $ | 57,761 | |
| | | | | | | | | | | | | | | |
| | |
(a) | | Elimination of equity in net income from consolidated subsidiaries. |
28
Select Medical Corporation
Condensed Consolidating Statement of Cash Flows
For the Six Months Ended June 30, 2010
(unaudited)
| | | | | | | | | | | | | | | | | | | | |
| | Select Medical | | | | | | | | | | | | | | |
| | Corporation (Parent | | | Subsidiary | | | Non-Guarantor | | | | | | | |
| | Company Only) | | | Guarantors | | | Subsidiaries | | | Eliminations | | | Consolidated | |
| | (in thousands) | |
| | | | | | | |
Operating activities | | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 57,761 | | | $ | 66,201 | | | $ | 13,184 | | | $ | (76,268 | )(a) | | $ | 60,878 | |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization | | | 1,498 | | | | 28,538 | | | | 4,285 | | | | — | | | | 34,321 | |
Provision for bad debts | | | — | | | | 16,741 | | | | 3,391 | | | | — | | | | 20,132 | |
Loss from disposal of assets | | | — | | | | 643 | | | | 17 | | | | — | | | | 660 | |
Non-cash gain from interest rate swaps | | | (316 | ) | �� | | — | | | | — | | | | — | | | | (316 | ) |
Non-cash stock compensation expense | | | 945 | | | | — | | | | — | | | | — | | | | 945 | |
Changes in operating assets and liabilities, net of effects from acquisition of businesses: | | | | | | | | | | | | | | | | | | | | |
Equity in earnings of subsidiaries | | | (66,402 | ) | | | (9,866 | ) | | | — | | | | 76,268 | (a) | | | — | |
Intercompany | | | 48,740 | | | | (38,047 | ) | | | (10,693 | ) | | | — | | | | — | |
Accounts receivable | | | — | | | | (38,152 | ) | | | (13,221 | ) | | | — | | | | (51,373 | ) |
Other current assets | | | 369 | | | | (3,363 | ) | | | 2,499 | | | | — | | | | (495 | ) |
Other assets | | | (2,517 | ) | | | 1,526 | | | | (419 | ) | | | — | | | | (1,410 | ) |
Accounts payable | | | 2,718 | | | | (10,137 | ) | | | (1,377 | ) | | | — | | | | (8,796 | ) |
Due to third-party payors | | | — | | | | 7,050 | | | | (6,463 | ) | | | — | | | | 587 | |
Accrued expenses | | | (13,018 | ) | | | 14,022 | | | | 655 | | | | — | | | | 1,659 | |
Income and deferred taxes | | | 14,810 | | | | — | | | | — | | | | — | | | | 14,810 | |
| | | | | | | | | | | | | | | |
Net cash provided by (used in) operating activities | | | 44,588 | | | | 35,156 | | | | (8,142 | ) | | | — | | | | 71,602 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Investing activities | | | | | | | | | | | | | | | | | | | | |
Purchases of property and equipment | | | (662 | ) | | | (24,041 | ) | | | (1,751 | ) | | | — | | | | (26,454 | ) |
| | | | | | | | | | | | | | | |
Net cash used in investing activities | | | (662 | ) | | | (24,041 | ) | | | (1,751 | ) | | | — | | | | (26,454 | ) |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Financing activities | | | | | | | | | | | | | | | | | | | | |
Borrowings of other debt | | | 5,015 | | | | — | | | | — | | | | — | | | | 5,015 | |
Principal payments on seller and other debt | | | 3,556 | | | | (8,503 | ) | | | 505 | | | | — | | | | (4,442 | ) |
Dividends paid to Holdings | | | (12,883 | ) | | | — | | | | — | | | | — | | | | (12,883 | ) |
Equity investment by Holdings | | | 125 | | | | — | | | | — | | | | — | | | | 125 | |
Proceeds from bank overdrafts | | | 14,201 | | | | — | | | | — | | | | — | | | | 14,201 | |
Intercompany debt reallocation | | | (8,735 | ) | | | (2,429 | ) | | | 11,164 | | | | — | | | | — | |
Distributions to non-controlling interests | | | — | | | | (345 | ) | | | (1,746 | ) | | | — | | | | (2,091 | ) |
| | | | | | | | | | | | | | | |
Net cash provided by (used in) financing activities | | | 1,279 | | | | (11,277 | ) | | | 9,923 | | | | — | | | | (75 | ) |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | 45,205 | | | | (162 | ) | | | 30 | | | | — | | | | 45,073 | |
| | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents at beginning of period | | | 80,940 | | | | 2,298 | | | | 442 | | | | — | | | | 83,680 | |
| | | | | | | | | | | | | | | |
Cash and cash equivalents at end of period | | $ | 126,145 | | | $ | 2,136 | | | $ | 472 | | | $ | — | | | $ | 128,753 | |
| | | | | | | | | | | | | | | |
| | |
(a) | | Elimination of equity in earnings of subsidiaries. |
17
| | | | | | | | | | | | | | | | | | | | |
| | Select Medical Corporation | |
| | Condensed Consolidating Statement of Cash Flows | |
| | For the Quarter Ended March 31, 2011 | |
| | (unaudited) | |
| | Select Medical | | | | | | | Non- | | | | | | | |
| | Corporation (Parent | | | Subsidiary | | | Guarantor | | | | | | | |
| | Company Only) | | | Guarantors | | | Subsidiaries | | | Eliminations | | | Consolidated | |
| | (in thousands) | |
| | | | | | | | | | | | | | | | | | | | |
Operating activities | | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 38,224 | | | $ | 41,283 | | | $ | 7,904 | | | $ | (47,472) | (a) | | $ | 39,939 | |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization | | | 646 | | | | 14,356 | | | | 2,220 | | | | — | | | | 17,222 | |
Provision for bad debts | | | — | | | | 13,001 | | | | 1,349 | | | | — | | | | 14,350 | |
Loss from disposal of assets | | | 2 | | | | 181 | | | | 5 | | | | — | | | | 188 | |
Non-cash stock compensation expense | | | 880 | | | | — | | | | — | | | | — | | | | 880 | |
Changes in operating assets and liabilities, net of effects from acquisition of businesses: | | | | | | | | | | | | | | | | | | | | |
Equity in earnings of subsidiaries | | | (41,675 | ) | | | (5,797 | ) | | | — | | | | 47,472 | (a) | | | — | |
Intercompany | | | 3,234 | | | | (3,781 | ) | | | 547 | | | | — | | | | — | |
Accounts receivable | | | — | | | | (94,955 | ) | | | (5,180 | ) | | | — | | | | (100,135 | ) |
Other current assets | | | (4,480 | ) | | | 1,267 | | | | 137 | | | | — | | | | (3,076 | ) |
Other assets | | | 676 | | | | 1,174 | | | | 64 | | | | — | | | | 1,914 | |
Accounts payable | | | 1,778 | | | | 8,352 | | | | 1,647 | | | | — | | | | 11,777 | |
Due to third-party payors | | | — | | | | 8,422 | | | | (8,896 | ) | | | — | | | | (474 | ) |
Accrued expenses | | | (6,487 | ) | | | 4,096 | | | | (1,197 | ) | | | — | | | | (3,588 | ) |
Income and deferred taxes | | | 28,688 | | | | — | | | | — | | | | — | | | | 28,688 | |
| | | | | | | | | | | | | | | |
Net cash provided by (used in) operating activities | | | 21,486 | | | | (12,401 | ) | | | (1,400 | ) | | | — | | | | 7,685 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Investing activities | | | | | | | | | | | | | | | | | | | | |
Purchases of property and equipment | | | (288 | ) | | | (11,561 | ) | | | (1,071 | ) | | | — | | | | (12,920 | ) |
Proceeds from sale of business | | | — | | | | 250 | | | | — | | | | — | | | | 250 | |
Acquisition of businesses, net of cash acquired | | | — | | | | (2,000 | ) | | | — | | | | — | | | | (2,000 | ) |
| | | | | | | | | | | | | | | |
Net cash used in investing activities | | | (288 | ) | | | (13,311 | ) | | | (1,071 | ) | | | — | | | | (14,670 | ) |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Financing activities | | | | | | | | | | | | | | | | | | | | |
Equity investment by Holdings | | | 81 | | | | — | | | | — | | | | — | | | | 81 | |
Borrowings on revolving credit facility | | | 205,000 | | | | — | | | | — | | | | — | | | | 205,000 | |
Payments on revolving credit facility | | | (105,000 | ) | | | — | | | | — | | | | — | | | | (105,000 | ) |
Payments on credit facility term loans | | | (59,563 | ) | | | — | | | | — | | | | — | | | | (59,563 | ) |
Borrowings of other debt | | | 5,496 | | | | — | | | | — | | | | — | | | | 5,496 | |
Principal payments on seller and other debt | | | (1,880 | ) | | | (279 | ) | | | (335 | ) | | | — | | | | (2,494 | ) |
Dividends paid to Holdings | | | (14,743 | ) | | | — | | | | — | | | | — | | | | (14,743 | ) |
Proceeds from bank overdrafts | | | (9,418 | ) | | | — | | | | — | | | | — | | | | (9,418 | ) |
Intercompany debt reallocation | | | (32,456 | ) | | | 28,014 | | | | 4,442 | | | | — | | | | — | |
Distributions to non-controlling interests | | | — | | | | — | | | | (1,671 | ) | | | — | | | | (1,671 | ) |
| | | | | | | | | | | | | | | |
Net cash provided by (used in) financing activities | | | (12,483 | ) | | | 27,735 | | | | 2,436 | | | | — | | | | 17,688 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | 8,715 | | | | 2,023 | | | | (35 | ) | | | — | | | | 10,703 | |
| | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents at beginning of period | | | 149 | | | | 3,567 | | | | 649 | | | | — | | | | 4,365 | |
| | | | | | | | | | | | | | | |
Cash and cash equivalents at end of period | | $ | 8,864 | | | $ | 5,590 | | | $ | 614 | | | $ | — | | | $ | 15,068 | |
| | | | | | | | | | | | | | | |
| | |
(a) | | Elimination of equity in earnings of subsidiaries. |
18
| | | | | | | | | | | | | | | | | | | | |
| | 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 subsidiaries. |
|
(b) | | Elimination of investments in subsidiaries’ retained earnings. |
19
| | | | | | | | | | | | | | | | | | | | |
| | Select Medical Corporation | |
| | Condensed Consolidating Statement of Operations | |
| | For the Quarter Ended March 31, 2010 | |
| | (unaudited) | |
| | Select Medical | | | | | | | Non- | | | | | | | |
| | Corporation (Parent | | | Subsidiary | | | Guarantor | | | | | | | |
| | Company Only) | | | Guarantors | | | Subsidiaries | | | Eliminations | | | Consolidated | |
| | (in thousands) | |
| | | | | | | | | | | | | | | | | | | | |
Net operating revenues | | $ | 63 | | | $ | 502,327 | | | $ | 82,423 | | | $ | — | | | $ | 584,813 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Costs and expenses: | | | | | | | | | | | | | | | | | | | | |
Cost of services | | | 328 | | | | 405,265 | | | | 66,784 | | | | — | | | | 472,377 | |
General and administrative | | | 12,774 | | | | 15 | | | | — | | | | — | | | | 12,789 | |
Bad debt expense | | | — | | | | 7,671 | | | | 1,616 | | | | — | | | | 9,287 | |
Depreciation and amortization | | | 818 | | | | 14,650 | | | | 2,243 | | | | — | | | | 17,711 | |
| | | | | | | | | | | | | | | |
Total costs and expenses | | | 13,920 | | | | 427,601 | | | | 70,643 | | | | — | | | | 512,164 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Income (loss) from operations | | | (13,857 | ) | | | 74,726 | | | | 11,780 | | | | — | | | | 72,649 | |
| | | | | | | | | | | | | | | | | | | | |
Other income and expense: | | | | | | | | | | | | | | | | | | | | |
Intercompany interest and royalty fees | | | (1,074 | ) | | | 1,070 | | | | 4 | | | | — | | | | — | |
Intercompany management fees | | | 22,816 | | | | (19,311 | ) | | | (3,505 | ) | | | — | | | | — | |
Other income | | | 134 | | | | — | | | | — | | | | — | | | | 134 | |
Interest expense | | | (13,448 | ) | | | (8,527 | ) | | | (1,063 | ) | | | — | | | | (23,038 | ) |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Income (loss) before income taxes | | | (5,429 | ) | | | 47,958 | | | | 7,216 | | | | — | | | | 49,745 | |
| | | | | | | | | | | | | | | | | | | | |
Income tax expense (benefit) | | | 88 | | | | 19,492 | | | | (20 | ) | | | — | | | | 19,560 | |
Equity in earnings of subsidiaries | | | 34,296 | | | | 5,596 | | | | — | | | | (39,892) | (a) | | | — | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Net income | | | 28,779 | | | | 34,062 | | | | 7,236 | | | | (39,892 | ) | | | 30,185 | |
| | | | | | | | | | | | | | | | | | | | |
Less: Net income attributable to non-controlling interests | | | — | | | | — | | | | 1,406 | | | | — | | | | 1,406 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Net income attributable to Select Medical Corporation | | $ | 28,779 | | | $ | 34,062 | | | $ | 5,830 | | | $ | (39,892 | ) | | $ | 28,779 | |
| | | | | | | | | | | | | | | |
| | |
(a) | | Elimination of equity in earnings of subsidiaries. |
20
| | | | | | | | | | | | | | | | | | | | |
| | Select Medical Corporation | |
| | Condensed Consolidating Statement of Cash Flows | |
| | For the Quarter Ended March 31, 2010 | |
| | (unaudited) | |
| | Select Medical | | | | | | | | | | | | | | |
| | Corporation | | | | | | | Non- | | | | | | | |
| | (Parent Company | | | Subsidiary | | | Guarantor | | | | | | | |
| | Only) | | | Guarantors | | | Subsidiaries | | | Eliminations | | | Consolidated | |
| | (in thousands) | |
| | | | | | | | | | | | | | | | | | | | |
Operating activities | | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 28,779 | | | $ | 34,062 | | | $ | 7,236 | | | $ | (39,892 | )(a) | | $ | 30,185 | |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization | | | 818 | | | | 14,650 | | | | 2,243 | | | | — | | | | 17,711 | |
Provision for bad debts | | | — | | | | 7,671 | | | | 1,616 | | | | — | | | | 9,287 | |
Loss from disposal of assets | | | — | | | | 96 | | | | 37 | | | | — | | | | 133 | |
Non-cash gain from interest rate swaps | | | (134 | ) | | | — | | | | — | | | | — | | | | (134 | ) |
Non-cash stock compensation expense | | | 508 | | | | — | | | | — | | | | — | | | | 508 | |
Changes in operating assets and liabilities, net of effects from acquisition of businesses: | | | | | | | | | | | | | | | | | | | | |
Equity in earnings of subsidiaries | | | (34,296 | ) | | | (5,596 | ) | | | — | | | | 39,892 | (a) | | | — | |
Intercompany | | | 2,808 | | | | (6,753 | ) | | | 3,945 | | | | — | | | | — | |
Accounts receivable | | | — | | | | (51,648 | ) | | | (11,557 | ) | | | — | | | | (63,205 | ) |
Other current assets | | | (1,394 | ) | | | (2,977 | ) | | | 2,305 | | | | — | | | | (2,066 | ) |
Other assets | | | 1,754 | | | | 794 | | | | (556 | ) | | | — | | | | 1,992 | |
Accounts payable | | | 3,107 | | | | (5,070 | ) | | | 161 | | | | — | | | | (1,802 | ) |
Due to third-party payors | | | — | | | | 8,606 | | | | (8,549 | ) | | | — | | | | 57 | |
Accrued expenses | | | (22,991 | ) | | | 11,603 | | | | (2,784 | ) | | | — | | | | (14,172 | ) |
Income and deferred taxes | | | 18,587 | | | | — | | | | — | | | | — | | | | 18,587 | |
| | | | | | | | | | | | | | | |
Net cash provided by (used in) operating activities | | | (2,454 | ) | | | 5,438 | | | | (5,903 | ) | | | — | | | | (2,919 | ) |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Investing activities | | | | | | | | | | | | | | | | | | | | |
Purchases of property and equipment | | | (413 | ) | | | (11,146 | ) | | | (1,488 | ) | | | — | | | | (13,047 | ) |
| | | | | | | | | | | | | | | |
Net cash used in investing activities | | | (413 | ) | | | (11,146 | ) | | | (1,488 | ) | | | — | | | | (13,047 | ) |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Financing activities | | | | | | | | | | | | | | | | | | | | |
Borrowings of other debt | | | 5,015 | | | | — | | | | — | | | | — | | | | 5,015 | |
Principal payments on seller and other debt | | | (1,798 | ) | | | (270 | ) | | | (289 | ) | | | — | | | | (2,357 | ) |
Dividends paid to Holdings | | | (12,877 | ) | | | — | | | | — | | | | — | | | | (12,877 | ) |
Equity investment by Holdings | | | 110 | | | | — | | | | — | | | | — | | | | 110 | |
Proceeds from bank overdrafts | | | 17,314 | | | | — | | | | — | | | | — | | | | 17,314 | |
Intercompany debt reallocation | | | (17,433 | ) | | | 7,962 | | | | 9,471 | | | | — | | | | — | |
Distributions to non-controlling interests | | | — | | | | — | | | | (1,746 | ) | | | — | | | | (1,746 | ) |
| | | | | | | | | | | | | | | |
Net cash provided by (used in) financing activities | | | (9,669 | ) | | | 7,692 | | | | 7,436 | | | | — | | | | 5,459 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | (12,536 | ) | | | 1,984 | | | | 45 | | | | — | | | | (10,507 | ) |
| | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents at beginning of period | | | 80,940 | | | | 2,298 | | | | 442 | | | | — | | | | 83,680 | |
| | | | | | | | | | | | | | | |
Cash and cash equivalents at end of period | | $ | 68,404 | | | $ | 4,282 | | | $ | 487 | | | $ | — | | | $ | 73,173 | |
| | | | | | | | | | | | | | | |
| | |
(a) | | Elimination of equity in earnings of subsidiaries. |
2129
| | |
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,” “expect,” “anticipate,” “plan,” “target,” “ estimate,” “project,” “intend,” and similar expressions. These statements include, among others, statements regarding our expected business outlook, anticipated financial and operating results, our business strategy and means to implement our strategy, our objectives, the amount and timing of capital expenditures, the likelihood of our success in expanding our business, financing plans, budgets, working capital needs and sources of liquidity.
Forward-looking statements are only predictions and are not guarantees of performances. These statements are based on our 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 may cause our net operating revenues and profitability to decline;
the failure of our facilities operated as “hospitals within hospitals” to qualify as hospitals separate from their host hospitals may cause our net operating revenues and profitability to decline;
a government investigation or assertion that we have violated applicable regulations may result in sanctions or reputational harm and increased costs;
acquisitions or joint ventures may prove difficult or unsuccessful, use significant resources or expose us to unforeseen liabilities;
private third-party payors for our services may undertake future cost containment initiatives that limit our future net operating revenues and profitability;
the failure to maintain established relationships with the physicians in the areas we serve could reduce our net operating revenues and profitability;
shortages in qualified nurses or therapists could increase our operating costs significantly;
competition may limit our ability to grow and result in a decrease in our net operating revenues and profitability;
the loss of key members of our management team could significantly disrupt our operations;
30
the effect of claims asserted against us could subject us to substantial uninsured liabilities and in the future we may not be able to obtain insurance at a reasonable price;and
other factors discussed from time to time in our filings with the Securities and Exchange Commission (the “SEC”), including factors discussed under the heading “Risk Factors” offor the year ended December 31, 2010 contained in our annual report on Form 10-K forfiled with the year ended December 31, 2010.Securities and Exchange Commission on March 9, 2011.
22
Except as required by applicable law, including the securities laws of the United States and the rules and regulations of the SEC, we are under no obligation to publicly update or revise any forward-looking statements, whether as a result of any new information, future events or otherwise. You should not place undue reliance on our forward-looking statements. Although we believe that the expectations reflected in forward-looking statements are reasonable, we cannot guarantee future results or performance.
Investors should also be aware that while we do, from time to time, communicate with securities analysts, it is against our policy to disclose to security analysts any material non-public information or other confidential commercial information. Accordingly, stockholders should not assume that we agree with any statement or report issued by any analyst irrespective of the content of the statement or report. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of the Company.
Overview
We believe that we are one of the largest operators of both specialty hospitals and outpatient rehabilitation clinics in the United States based on number of facilities. As of March 31,June 30, 2011, we operated 110 long term acute care hospitals and eightnine inpatient rehabilitation facilities in 28 states, and 945952 outpatient rehabilitation clinics in 3534 states and the District of Columbia. We also provide medical rehabilitation services on a contracted basis to nursing homes, hospitals, assisted living and senior care centers, schools and work sites. We began operations in 1997 under the leadership of our current management team.
We manage our Company through two business segments, our specialty hospital segment and our outpatient rehabilitation segment. We had net operating revenues of $693.2$1,391.9 million for the threesix months ended March 31,June 30, 2011. Of this total, we earned approximately 75% of our net operating revenues from our specialty hospitals and approximately 25% from our outpatient rehabilitation business, compared to 70% and 30% respectively in the comparable period in 2010. The increase in the relative portion of our net operating revenues generated from our specialty hospitals resulted from the hospitals added through our Regency Hospital Company, L.L.C (“Regency”) acquisition on September 1, 2010. Our specialty hospital segment consists of hospitals designed to serve the needs of long term stay acute patients and hospitals designed to serve patients that require intensive inpatient medical rehabilitation care. Patients are typically admitted to our long term acute care hospitals from general acute care hospitals. These patients have specialized needs, and serious and often complex medical conditions such as respiratory failure, neuromuscular disorders, traumatic brain and spinal cord injuries, strokes, non-healing wounds, cardiac disorders, renal disorders and cancer. Our outpatient rehabilitation segment consists of clinics and contract services that provide physical, occupational and speech rehabilitation services. Our outpatient rehabilitation patients are typically diagnosed with musculoskeletal impairments that restrict their ability to perform normal activities of daily living.
2331
Significant 2011 Events
Refinancing
On April 25,June 1, 2011, Select commenced a cash tender offer and consent solicitation for any and all of its 7 5/8% senior subordinated notes. The tender offer is scheduled to expire at 11:59 p.m. on May 20, 2011. The tender offer and consent solicitation are being conducted in connection with Select’s negotiations to refinance its senior secured credit facility. The tender offer and consent solicitation are conditioned on Select’s entryMedical Corporation (“Select”) entered into a new senior secured credit facility. Select expects to use a portion of the proceeds from such newagreement that provides for $1.15 billion in senior secured credit facilities, comprised of an $850.0 million, seven-year term loan facility to purchaseand a $300.0 million five-year revolving credit facility of which $125.0 million was drawn at closing. The refinancing also included the tendered and acceptedcompletion of a cash tender offer for $266.5 million aggregate principal amount of Select’s 7 5/8% senior subordinated notes due 2015 and to retirethe repurchase of all $150.0 million principal amount of Holdings’ 10%10.0% senior subordinated notes.
At June 30, 2011, Select had outstanding an $850.0 million term loan (at aggregate principal value) and a $65.0 million balance on the revolving portion of its senior secured credit facilities and $345.0 million in principal amount of 7 5/8% senior subordinated notes due 2015. Holdings also had $167.3 million in principal amount outstanding of its senior floating rate notes due 2015.
Significant Transactions
On April 1, 2011, we entered into a joint venture with Baylor Health Care System (“Baylor JV”). The joint venture consists of a partnership between Baylor Institute for Rehabilitation and Select Physical Therapy Texas, a wholly-owned subsidiary of Select. We contributed several businesses to the joint venture, including our Frisco inpatient rehabilitation facility and certain of our Texas based outpatient rehabilitation clinics. A gain of $1.2 million was recognized on this contribution and is included in the general and administrative line item on the consolidated statement of operations. Additionally, 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 are accounting for the investment using the equity method because we do not have a controlling interest.
On June 30, 2011, we sold a building which we acquired in connection with the acquisition of Regency for $7.6 million in cash. A gain of $4.2 million was recognized on this sale and is included in the general and administrative line item on the consolidated statement of operations.
Litigation
During July 2009, we received a subpoena from the Office of Inspector General of the U.S. Department of Health and Human Services seeking various documents concerning our financial relationships with certain physicians practicing at our long term acute care hospitals in Columbus, Ohio (“Columbus Matter”). We understand that the subpoena was issued in connection with a qui tam lawsuit and that the government has been investigating the matter to determine whether to intervene. We have produced documents in response to the subpoena and have fully cooperated with the government’s investigation. We have been in discussions with the government in an attempt to resolve this matter in a manner satisfactory to us and the government. Any such settlement would not involve any admission of liability or wrongdoing on the part of the Company. During the second quarter of 2011, we recorded a pre-tax charge of $7.5 million to establish a settlement reserve, which represents our best estimate of a probable settlement and is included in the general and administrative line item on the consolidated statement of operations. We can provide no assurance that we will finalize a settlement on such terms, nor can we predict our total financial exposure in connection with this matter if a settlement is not reached.
Stock Repurchase Program
On August 3, 2011, our board of directors authorized an increase of $50.0 million in the capacity of our common stock repurchase program, from $100.0 million to $150.0 million. The other terms of the program remain unchanged. The program will remain in effect until January 31, 2012, unless extended by the board of directors. Stock repurchases under this program may be made in the open market or through privately negotiated transactions, and at times and in such amounts as we deem appropriate.
32
Summary Financial Results
FirstSecond Quarter Ended March 31,June 30, 2011
For the three months ended March 31,June 30, 2011, our net operating revenues increased 18.5%20.5% to $693.2$698.7 million compared to $584.8$579.9 million for the three months ended March 31,June 30, 2010. This increase in net operating revenues resulted principally from a 26.3%29.1% increase in our specialty hospital net operating revenue. The increase in our specialty hospital net operating revenue is primarily due to the Regency hospitals acquired on September 1, 2010. We had income from operations for the three months ended March 31,June 30, 2011 of $87.6$81.0 million compared to $72.6 million for the three months ended March 31,June 30, 2010. The increase in income from operations is primarily due toresulted from the addition of the Regency hospitals acquired on September 1, 2010.2010 and improved operating performance at our other specialty hospitals, offset by an increase in general and administrative costs. Holdings’ interest expense for the three months ended March 31,June 30, 2011 was $25.7$25.3 million compared to $30.0$29.3 million for the three months ended March 31,June 30, 2010. Select’s interest expense for the three months ended March 31,June 30, 2011 was $18.7$19.7 million compared to $23.0$22.3 million for the three months ended March 31,June 30, 2010. The decrease in interest expense for both Holdings and Select was attributable to a reduction in our average interest rate that resulted from the expiration of interest rate swaps induring 2010 that carried higher fixed interest rates.rates and lower interest rates on portions of the debt we refinanced on June 1, 2011.
For the six months ended June 30, 2011, our net operating revenues increased 19.5% to $1,391.9 million compared to $1,164.7 million for the six months ended June 30, 2010. This increase in net operating revenues resulted principally from a 27.7% increase in our specialty hospital net operating revenue. The increase in our specialty hospital net operating revenue is primarily due to the Regency hospitals acquired on September 1, 2010. We had income from operations for the six months ended June 30, 2011 of $168.7 million compared to $145.2 million for the six months ended June 30, 2010. The increase in income from operations resulted from the addition of the Regency hospitals acquired on September 1, 2010 and improved operating performance at our other specialty hospitals, offset by an increase in general and administrative costs. Holdings’ interest expense for the six months ended June 30, 2011 was $51.0 million compared to $59.3 million for the six months ended June 30, 2010. Select’s interest expense for the six months ended June 30, 2011 was $38.4 million compared to $45.4 million for the six months ended June 30, 2010. The decrease in interest expense for both Holdings and Select was attributable to a reduction in our average interest rate that resulted from the expiration of interest rate swaps during 2010.
Cash flow from operations used $5.0provided $83.5 million of cash for the threesix months ended March 31,June 30, 2011 for Holdings and provided $7.7$101.3 million of cash for the threesix months ended March 31,June 30, 2011 for Select. The difference between Holdings and Select primarily relates to interest payments on Holdings’ 10% senior subordinated notes and senior floating rate notes.
Regulatory Changes
In the past few years, there have been significant regulatory changes that have affected our net operating revenues and, in some cases, caused us to change our operating models and strategies. The following is a discussion of recent regulatory changes that have affected our results of operations for the three and six months ended March 31,June 30, 2011. Our Annual Report on Form 10-K for the year ended December 31, 2010 filed with the Securities and Exchange Commission (“SEC”) on March 9, 2011 contains a more detailed discussion of the regulations that affect our business in Part I — Business — Government Regulations, and the information below should be read in connection with that more detailed discussion.
2433
Health Reform Legislation
Federal agencies, including the Centers for Medicare & Medicaid Services (“CMS”), continue to implement provisions of the “PatientPatient 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 the “Health Care and Education Affordability Reconciliation Act of 2010,” which made some limited but important changes to the PPACA.
We have included in our Annual Report on Form 10-K for the year ended December 31, 2010 a detailed discussion of the PPACA provisions that affect our business, as well as regulatory initiatives adopted by CMS in response to particular provisions of the PPACA.
Medicare Payment of Long Term Acute Care Hospitals during Fiscal Year 2011
On August 16, 2010, CMS published the policies and payment rates for long term care hospital prospective payment system (LTCH-PPS”(“LTCH-PPS”) for fiscal year 2011 (affecting discharges and cost reporting periods beginning on or after October 1, 2010 through September 30, 2011). The standard federal rate for fiscal year 2011 is $39,600, which is a decrease from the fiscal year 2010 federal rate of $39,897 in effect from October 1, 2009 to March 31, 2010 and $39,795 in effect from April 1, 2010 to September 30, 2010. The final rule establishes a fixed-loss amount for high cost outlier cases for fiscal year 2011 of $18,785, which is higher than the fiscal year 2010 fixed-loss amount of $18,425 in effect from October 1, 2009 to March 31, 2010 and $18,615 in effect from April 1, 2010 to September 31, 2010. The final rule included revisions to the relative weights for the MS-LTC-DRGsMedicare severity long term care diagnostic related groups for fiscal year 2011.
Medicare Payment of Long Term Acute Care Hospitals during Fiscal Year 2012
On April 19,August 1, 2011, CMS released an advanced copy of the proposedfinal rule updating the policies and payment rates for LTCH-PPS for fiscal year 2012 (affecting discharges and cost reporting periods beginning on or after October 1, 2011 through September 30, 2012). The standard federal rate for fiscal year 2012 would be set at $40,083,is $40,222, an increase from $39,600 applicable duringthe fiscal year 2011.2011 federal rate of $39,600. The increase, if adopted, would be based onfinal rule establishes a market basket increase estimate of 2.8% minus a productivity adjustment of 1.2% and minus an additional 0.1% mandated by the PPACA. The fixed loss amount for high cost outlier cases would be set at $19,270. Thisfor fiscal year 2012 of $17,931, which is an increasea decrease from the fixed loss amount in the 2011 fiscal year of $18,785.
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 estimate aggregate LTCH-PPS payments are not affected.
34
An LTCH must have an average inpatient length of stay for Medicare patients (including both Medicare covered and non-covered days) of greater than 25 days. In the preamble to the final rule for fiscal year 2012, CMS clarified its policy on the calculation of the average length of stay by specifying that all data on all Medicare inpatient days, including Medicare Advantage days, must be included in the average length of stay calculation effective for cost reporting periods beginning on or after January 1, 2012. CMS now has the ability to capture Medicare Advantage days through the required submission of “information only” bills for Medicare Advantage patients.
Medicare Payment of Inpatient Rehabilitation Facilities during Fiscal Year 2011
On July 22, 2010, CMS published an update to the payment rates for inpatient rehabilitation facility prospective payment system (“IRF-PPS”) for fiscal year 2011 (affecting discharges and cost reporting periods beginning on or after October 1, 2010 through September 30, 2011). The standard federal ratepayment conversion factor for discharges during fiscal year 2011 is $13,860 which is an increase from $13,661 in effect from October 1, 2009 to March 31, 2010 and $13,627 in effect from April 1, 2010 to September 30, 2010. CMS also increased the outlier threshold amount for fiscal year 2011 to $11,410 from $10,721 in fiscal year 2010.
25
Medicare Payment of Inpatient Rehabilitation Facilities during Fiscal Year 2012
On April 22,July 29, 2011, CMS released an advanced copy of the proposedfinal rule updating 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 discharges during fiscal year 2012 would be set at $14,528,is $14,076 which is an increase from $13,860 applicable during fiscal year 2011. The increase, if adopted, would be based on a market basket increase estimate of 2.8% minus a productivity adjustment of 1.2% and minus an additional 0.1% mandated by the PPACA. CMS proposes to increasedecreased the outlier threshold amount for FYfiscal year 2012 to $11,822$10,660 from $11,410.$11,410 for fiscal year 2011.
The IRF-PPS provides a low-income patient adjustment to account for the cost differences associated with treatment of low-income patients. Similarly, the IRF-PPS provides a teaching adjustment to account for the higher indirect operating costs experienced by hospitals that participate in graduate medical education programs. The teaching adjustment is based on the number of full-time equivalent interns and residents training in the IRF and the 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 its proposal, CMS decided to maintain the same low-income patient and teaching status adjustment factors that applied in fiscal year 2011. CMS indicated that it would continue to review its policies on these adjustment factors.
Reductions to the 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.Physician Fee Schedule. The Medicare physician fee schedulePhysician Fee Schedule rates are automatically updated annually based on a formula, called the sustainable growth rate (“SGR”) formula, contained in legislation. The SGR formula has resulted in automatic reductions in rates in every year since 2002; however, for each year through 2011 CMS or Congress has taken action to prevent the SGR formula reductions. On December 15,The Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 President Obama signed into law the “Medicareprovided 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.” This law averts2010 (“MMEA”) prevented a 25.5% cutreduction 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
35
MMEA extends the current Medicare Physician Fee Schedule payment rates through December 31, 2011. On July 1, 2011 CMS released the proposed 2012 Medicare Physician Fee Schedule rule and noted that due to the SGR formula, the proposed physician fee schedule that was scheduledupdate for calendar year 2012 is projected to take effect January 1, 2011 under the SGR formula. An additional reduction will occur on January 1, 2012,be a negative 29.5% unless Congress preventsagain takes legislative action to prevent the SGR formula reductions from going into effect. CMS is required to issue a proposed rule that reflects current law, so the rule does not consider any policies that may expire at the end of the year. Over the last several years, Congress has taken legislative action to avert these cuts prior to their effective date. If the 29.5% 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 positive 3% 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 positive 5% on outpatient physical therapy payments. For the year ended December 31, 2010, we received approximately 10% of our outpatient rehabilitation net operating revenues from Medicare.
Medicare Payment of Outpatient Rehabilitation ServicesTherapy Caps
Beginning on January 1, 1999, the Balanced Budget Act of 1997 subjected certain outpatient therapy providers reimbursed under the Medicare Physician Fee Schedule to annual limits for therapy expenses. Effective January 1, 2011, the annual limit on outpatient therapy services is $1,870 for combined physical and speech language pathology services and $1,870 for occupational therapy services. The per beneficiary caps were $1,860 for calendar year 2010. In the Deficit Reduction Act of 2005, Congress implemented an exceptions process to the annual limit for therapy expenses. Under this process, a Medicare enrollee (or person acting on behalf of the Medicare enrollee) is able to request an exception from the therapy caps if the provision of therapy services was deemed to be medically necessary. Therapy cap exceptions have been available automatically for certain conditions and on a case-by-case basis upon submission of documentation of medical necessity. The “Medicare and Medicaid Extenders Act of 2010”MMEA extended the exceptions process for outpatient therapy caps through December 31, 2011. Unless Congress extends the exceptions process, the therapy caps will apply to all outpatient therapy services beginning on January 1, 2012, except those services furnished and billed by outpatient hospital departments. In theThe 2011 final Medicare Physician Fee Schedule rule indicated that CMS indicated they are alsois evaluating alternative payment methodologies that wouldmay provide appropriate payment for medically necessary and effective therapy services furnished to Medicare beneficiaries based on patient needs rather than the current therapy caps. The dollar amount of the therapy caps for calendar year 2012 is not included in the proposed 2012 Medicare Physician Fee Schedule rule. It is anticipated that the 2012 therapy cap amount will be the 2011 rate ($1,870) increased by the percentage increase in the medical economic index (“MEI”). As in past years, congressional action will be necessary to extend the exceptions process after December 31, 2011.
26
Multiple Procedure Payment Reduction
CMS adopted a multiple procedure payment reduction for therapy services in the final update to the Medicare Physician Fee Schedule for calendar year 2011. Under the policy, the Medicare program pays 100% of the practice expense component of the therapy procedure or unit of service with the highest Relative Value Unit (“RVU”), and then reduces the payment for the practice expense component by the 20% in office and other non-institutional settings and 25% in institutional settings for the second and subsequent therapy procedures or units of service furnished during the same day for the same patient, regardless of whether those therapy services are furnished in separate sessions. This multiple procedure payment reduction policy (“MPPR”)was effective January 1, 2011 and applies to all outpatient therapy services paid under Medicare Part B. Furthermore, the multiple procedure payment reduction policy applies across all therapy disciplines — occupational therapy, physical therapy, and speech-language pathology. Our outpatient rehabilitation therapy services are primarily offered in institutional settings and, as such, will be subject to the applicable 25% payment reduction in the practice expense component for the second and subsequent therapy services furnished by us to the same patient on the same day. In the proposed 2012 Medicare Physician Fee Schedule rule, there were no revisions made to CMS’s policy regarding application of the MPPR to outpatient therapy services. CMS did indicate in the proposed rule that over the next year they 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.
36
Medicare Quality Reporting Program for LTCHs and IRFs
The PPACA requires that CMS establish new quality data reporting programs for LTCHs and IRFs by ratefiscal year 2014. Under the PPACA, if an LTCH or IRF fails to report on the selected quality measures, it will see its reimbursement reduced by 2% of the annual market basket update. The reduction can result in payment rates less than the prior year. However, the reduction will not carry over into the subsequent rate years. CMS is required to establish the quality measures applicable to rate year 2014 no later than October 1, 2012.
In its proposed update to the payment rates for LTCH-PPS for fiscal year 2012 CMS proposes to implementhas 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 has requested public comment on the three proposed quality measures and may change the particular measures or the data collection and reporting requirements for the quality measures in its final rule.
In its proposed update to the payment rates for IRF-PPS for fiscal year 2012, CMS proposes to implementadopted a quality data reporting program by requiring IRFs to submit data from two quality measures in order to receive the full payment update in FYfiscal 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 has requested public commentregulations, if an LTCH or IRF fails to report on the two proposedselected quality measures, and may changeit will see its reimbursement reduced by 2.0% of the particular measures orannual market basket update. The reduction can result in payment rates less than the data collection and reporting requirements forprior year. However, the quality measures in its final rule.reductions will not carry over into the subsequent fiscal years.
Facility Licensure, Certification and Accreditation
Our specialty hospitals and outpatient rehabilitation clinics are subject to extensive and changing federal, state and local regulations and private accreditation standards. Hospitals are required to comply with state hospital standards setting requirements related to patient rights, composition and responsibilities of the hospital governing body, medical staff, quality improvement, infection control, nursing services, food and nutrition, medical records, drug distribution, diagnostic and treatment services, surgical services, emergency services and social work. Our specialty hospitals are also required to meet conditions of participation under Medicare programs in order to qualify to receive reimbursement under these programs. In addition, all of our specialty hospitals are currently accredited by The Joint Commission, previously known as The Joint Commission on Accreditation of Healthcare Organizations, by voluntarily complying with a specific set of accreditation standards.
Our specialty hospitals and outpatient rehabilitation clinics are subject to inspections, surveys and other reviews by governmental and private regulatory authorities, not only at scheduled intervals but also in response to complaints from patients and others. While our specialty hospitals and outpatient rehabilitation clinics intend to comply with existing licensing, Medicare certification requirements and accreditation standards, there can be no assurance that regulatory authorities will determine that all applicable requirements are fully met at any given time. A determination by an applicable regulatory authority that a facility is not in compliance with these requirements could lead to the imposition of requirements that the facility takes corrective action, assessment of fines and penalties or loss of licensure, Medicare certification or accreditation. These consequences could have a material adverse effect on the Company.
2737
Operating Statistics
The following tables set forth operating statistics for our specialty hospitals and our outpatient rehabilitation clinics for each of the periods presented. The data in the tables reflect the changes in the number of specialty hospitals and outpatient rehabilitation clinics we operate that resulted from acquisitions, start-up activities, closures and sales. The operating statistics reflect data for the period of time these operations were managed by us.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Three Months Ended | | Six Months Ended | |
| | March 31, | | | June 30, | | June 30, | |
| | 2010 | | 2011 | | | 2010 | | 2011 | | 2010 | | 2011 | |
Specialty hospital data(1): | | |
Number of hospitals owned — start of period | | 94 | | 116 | | | 94 | | 116 | | 94 | | 116 | |
Number of hospitals acquired | | — | | 1 | | | — | | — | | — | | 1 | |
Number of hospitals closed/sold | | — | | | (1 | ) | | — | | | (1 | ) | | — | | | (2 | ) |
| | | | | | | | | | | | | | |
Number of hospitals owned — end of period | | 94 | | 116 | | | 94 | | 115 | | 94 | | 115 | |
Number of hospitals managed — end of period | | 1 | | 2 | | | 1 | | 4 | | 1 | | 4 | |
| | | | | | | | | | | | | | |
Total number of hospitals (all) — end of period | | 95 | | 118 | | | 95 | | 119 | | 95 | | 119 | |
| | | | | | | | | | | | | | |
| | |
Available licensed beds | | 4,245 | | 5,153 | | | 4,250 | | 5,135 | | 4,250 | | 5,135 | |
Admissions | | 11,101 | | 13,810 | | | 10,616 | | 13,556 | | 21,717 | | 27,366 | |
Patient days | | 267,848 | | 333,856 | | | 264,898 | | 327,001 | | 532,746 | | 660,857 | |
Average length of stay (days) | | 25 | | 25 | | | 24 | | 24 | | 25 | | 24 | |
Net revenue per patient day(2) | | $ | 1,491 | | $ | 1,514 | | | $ | 1,474 | | $ | 1,505 | | $ | 1,483 | | $ | 1,510 | |
Occupancy rate | | | 70 | % | | | 72 | % | | | 68 | % | | | 70 | % | | | 69 | % | | | 71 | % |
Percent patient days — Medicare | | | 65 | % | | | 64 | % | | | 63 | % | | | 64 | % | | | 64 | % | | | 64 | % |
| | |
Outpatient rehabilitation data: | | |
Number of clinics owned — start of period | | 883 | | 875 | | | 885 | | 874 | | 883 | | 875 | |
Number of clinic start-ups | | 5 | | 8 | | | 5 | | 7 | | 10 | | 15 | |
Number of clinics closed/sold | | | (3 | ) | | | (9 | ) | | | (10 | ) | | | (32 | ) | | | (13 | ) | | | (41 | ) |
| | | | | | | | | | | | | | |
Number of clinics owned — end of period | | 885 | | 874 | | | 880 | | 849 | | 880 | | 849 | |
Number of clinics managed — end of period | | 74 | | 71 | | | 73 | | 103 | | 73 | | 103 | |
| | | | | | | | | | | | | | |
Total number of clinics (all) — end of period | | 959 | | 945 | | | 953 | | 952 | | 953 | | 952 | |
| | | | | | | | | | | | | | |
Number of visits | | 1,125,958 | | 1,138,700 | | | 1,172,212 | | 1,143,854 | | 2,298,170 | | 2,282,554 | |
Net revenue per visit (3) | | $ | 101 | | $ | 103 | | | $ | 101 | | $ | 102 | | $ | 101 | | $ | 102 | |
| | |
(1) | | Specialty hospitals consist of long term acute care hospitals and inpatient rehabilitation facilities. |
|
(2) | | Net revenue per patient day is calculated by dividing specialty hospital direct patient service revenues by the total number of patient days. |
|
(3) | | Net revenue per visit is calculated by dividing outpatient rehabilitation clinic revenue by the total number of visits. For purposes of this computation, outpatient rehabilitation clinic revenue does not include managed clinics or contract services revenue. |
2838
Results of Operations
The following table outlines, for the periods indicated, selected operating data as a percentage of net operating revenues:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Select Medical Holdings | | | | | Select Medical Holdings | | | |
| | Corporation | | Select Medical Corporation | | | Corporation | | Select Medical Corporation | |
| | Three Months | | Three Months | | | Three Months | | Three Months | |
| | Ended | | Ended | | | Ended | | Ended | |
| | March 31, | | March 31, | | | June 30, | | June 30, | |
| | 2010 | | 2011 | | 2010 | | 2011 | | | 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) | | 80.8 | | 80.4 | | 80.8 | | 80.4 | | | 81.0 | | 81.5 | | 81.0 | | 81.5 | |
General and administrative | | 2.2 | | 2.4 | | 2.2 | | 2.4 | | | 1.7 | | 2.3 | | 1.7 | | 2.3 | |
Bad debt expense | | 1.6 | | 2.1 | | 1.6 | | 2.1 | | | 1.9 | | 2.0 | | 1.9 | | 2.0 | |
Depreciation and amortization | | 3.0 | | 2.5 | | 3.0 | | 2.5 | | | 2.9 | | 2.6 | | 2.9 | | 2.6 | |
| | | | | | | | | | | | | | | | | | |
Income from operations | | 12.4 | | 12.6 | | 12.4 | | 12.6 | | | 12.5 | | 11.6 | | 12.5 | | 11.6 | |
Loss on early retirement of debt | | | — | | | (4.4 | ) | | — | | | (2.9 | ) |
Equity in losses of unconsolidated subsidiaries | | — | | | (0.0 | ) | | — | | | (0.0 | ) | | — | | | (0.0 | ) | | — | | | (0.0 | ) |
Other income | | 0.0 | | — | | 0.0 | | — | | | 0.0 | | — | | 0.0 | | — | |
Interest expense, net | | | (5.1 | ) | | | (3.7 | ) | | | (4.0 | ) | | | (2.7 | ) | | | (5.0 | ) | | | (3.6 | ) | | | (3.8 | ) | | | (2.8 | ) |
| | | | | | | | | | | | | | | | | | |
Income before income taxes | | 7.3 | | 8.9 | | 8.4 | | 9.9 | | | 7.5 | | 3.6 | | 8.7 | | 5.9 | |
Income tax expense | | 2.9 | | 3.8 | | 3.3 | | 4.2 | | | 3.0 | | 1.6 | | 3.4 | | 2.4 | |
| | | | | | | | | | | | | | | | | | |
Net income | | 4.4 | | 5.1 | | 5.1 | | 5.7 | | | 4.5 | | 2.0 | | 5.3 | | 3.5 | |
Net income attributable to non-controlling interest | | 0.2 | | 0.2 | | 0.2 | | 0.2 | | | 0.3 | | 0.3 | | 0.3 | | 0.3 | |
| | | | | | | | | | | | | | | | | | |
| | |
Net income attributable to Holdings and Select | | | 4.2 | % | | | 4.9 | % | | | 4.9 | % | | | 5.5 | % | | | 4.2 | % | | | 1.7 | % | | | 5.0 | % | | | 3.2 | % |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | Select Medical Holdings | | | | |
| | Corporation | | | Select Medical Corporation | |
| | Six Months | | | Six Months | |
| | Ended | | | Ended | |
| | June 30, | | | June 30, | |
| | 2010 | | | 2011 | | | 2010 | | | 2011 | |
Net operating revenues | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
Cost of services(1) | | | 80.9 | | | | 81.0 | | | | 80.9 | | | | 81.0 | |
General and administrative | | | 2.0 | | | | 2.4 | | | | 2.0 | | | | 2.4 | |
Bad debt expense | | | 1.7 | | | | 2.0 | | | | 1.7 | | | | 2.0 | |
Depreciation and amortization | | | 2.9 | | | | 2.5 | | | | 2.9 | | | | 2.5 | |
| | | | | | | | | | | | |
Income from operations | | | 12.5 | | | | 12.1 | | | | 12.5 | | | | 12.1 | |
Loss on early retirement of debt | | | — | | | | (2.2 | ) | | | — | | | | (1.5 | ) |
Equity in losses of unconsolidated subsidiaries | | | — | | | | (0.0 | ) | | | — | | | | (0.0 | ) |
Other income | | | 0.0 | | | | — | | | | 0.0 | | | | — | |
Interest expense, net | | | (5.1 | ) | | | (3.7 | ) | | | (3.9 | ) | | | (2.7 | ) |
| | | | | | | | | | | | |
Income before income taxes | | | 7.4 | | | | 6.2 | | | | 8.6 | | | | 7.9 | |
Income tax expense | | | 3.0 | | | | 2.7 | | | | 3.4 | | | | 3.3 | |
| | | | | | | | | | | | |
Net income | | | 4.4 | | | | 3.5 | | | | 5.2 | | | | 4.6 | |
Net income attributable to non-controlling interest | | | 0.2 | | | | 0.3 | | | | 0.2 | | | | 0.3 | |
| | | | | | | | | | | | |
| | | | | | | |
Net income attributable to Holdings and Select | | | 4.2 | % | | | 3.2 | % | | | 5.0 | % | | | 4.3 | % |
| | | | | | | | | | | | |
2939
The following tables summarize selected financial data by business segment, for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Select Medical Holdings Corporation | | Select Medical Corporation | | | Select Medical Holdings Corporation | | Select Medical Corporation | |
| | Three Months Ended March 31, | | Three Months Ended March 31, | | | Three Months Ended June 30, | | Three Months Ended June 30, | |
| | % | | % | | | % | | % | |
| | 2010 | | 2011 | | Change | | 2010 | | 2011 | | Change | | | 2010 | | 2011 | | Change | | 2010 | | 2011 | | Change | |
| | (in thousands) | | | (in thousands) | |
Net operating revenues: | | |
Specialty hospitals | | $ | 411,685 | | $ | 519,924 | | | 26.3 | % | | $ | 411,685 | | $ | 519,924 | | | 26.3 | % | | $ | 403,079 | | $ | 520,261 | | | 29.1 | % | | $ | 403,079 | | $ | 520,261 | | | 29.1 | % |
Outpatient rehabilitation | | 173,065 | | 173,191 | | 0.1 | | 173,065 | | 173,191 | | 0.1 | | | 176,785 | | 178,473 | | 1.0 | | 176,785 | | 178,473 | | 1.0 | |
Other(3) | | 63 | | 71 | | 12.7 | | 63 | | 71 | | 12.7 | | | 13 | | 15 | | 15.4 | | 13 | | 15 | | 15.4 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Total company | | $ | 584,813 | | $ | 693,186 | | | 18.5 | % | | $ | 584,813 | | $ | 693,186 | | | 18.5 | % | | $ | 579,877 | | $ | 698,749 | | | 20.5 | % | | $ | 579,877 | | $ | 698,749 | | | 20.5 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
Income (loss) from operations: | | |
Specialty hospitals | | $ | 71,938 | | $ | 88,307 | | | 22.8 | % | | $ | 71,938 | | $ | 88,307 | | | 22.8 | % | | $ | 62,445 | | $ | 78,034 | | | 25.0 | % | | $ | 62,445 | | $ | 78,034 | | | 25.0 | % |
Outpatient rehabilitation | | 14,662 | | 16,947 | | 15.6 | | 14,662 | | 16,947 | | 15.6 | | | 21,013 | | 20,240 | | | (3.7 | ) | | 21,013 | | 20,240 | | | (3.7 | ) |
Other(3) | | | (13,951 | ) | | | (17,622 | ) | | | (26.3 | ) | | | (13,951 | ) | | | (17,622 | ) | | | (26.3 | ) | | | (10,882 | ) | | | (17,248 | ) | | | (58.5 | ) | | | (10,882 | ) | | | (17,248 | ) | | | (58.5 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Total company | | $ | 72,649 | | $ | 87,632 | | | 20.6 | % | | $ | 72,649 | | $ | 87,632 | | | 20.6 | % | | $ | 72,576 | | $ | 81,026 | | | 11.6 | % | | $ | 72,576 | | $ | 81,026 | | | 11.6 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
Adjusted EBITDA: (2) | | |
Adjusted EBITDA:(2) | | |
Specialty hospitals | | $ | 82,897 | | $ | 100,353 | | | 21.1 | % | | $ | 82,897 | | $ | 100,353 | | | 21.1 | % | | $ | 73,344 | | $ | 91,081 | | | 24.2 | % | | $ | 73,344 | | $ | 91,081 | | | 24.2 | % |
Outpatient rehabilitation | | 20,518 | | 21,406 | | 4.3 | | 20,518 | | 21,406 | | 4.3 | | | 25,956 | | 24,467 | | | (5.7 | ) | | 25,956 | | 24,467 | | | (5.7 | ) |
Other(3) | | | (12,547 | ) | | | (16,025 | ) | | | (27.7 | ) | | | (12,547 | ) | | | (16,025 | ) | | | (27.7 | ) | | | (9,677 | ) | | | (15,623 | ) | | | (61.4 | ) | | | (9,677 | ) | | | (15,623 | ) | | | (61.4 | ) |
| | |
Adjusted EBITDA margins: (2) | | |
Adjusted EBITDA margins:(2) | | |
Specialty hospitals | | | 20.1 | % | | | 19.3 | % | | | 20.1 | % | | | 19.3 | % | | | | 18.2 | % | | | 17.5 | % | | | 18.2 | % | | | 17.5 | % | |
Outpatient rehabilitation | | 11.9 | | 12.4 | | 11.9 | | 12.4 | | | 14.7 | | 13.7 | | 14.7 | | 13.7 | |
Other(3) | | N/M | | N/M | | N/M | | N/M | | | N/M | | N/M | | N/M | | N/M | |
| | |
Total assets: | | |
Specialty hospitals | | $ | 1,991,456 | | $ | 2,140,798 | | $ | 1,991,456 | | $ | 2,140,798 | | | $ | 1,969,566 | | $ | 2,202,994 | | $ | 1,969,566 | | $ | 2,202,994 | |
Outpatient rehabilitation | | 502,346 | | 482,444 | | 502,346 | | 482,444 | | | 495,399 | | 471,175 | | 495,399 | | 471,175 | |
Other(3) | | 135,168 | | 180,577 | | 132,252 | | 178,201 | | | 195,158 | | 113,853 | | 192,375 | | 112,264 | |
| | | | | | | | | | | | | | | | | | |
Total company | | $ | 2,628,970 | | $ | 2,803,819 | | $ | 2,626,054 | | $ | 2,801,443 | | | $ | 2,660,123 | | $ | 2,788,022 | | $ | 2,657,340 | | $ | 2,786,433 | |
| | | | | | | | | | | | | | | | | | |
| | |
Purchases of property and equipment, net: | | |
Specialty hospitals | | $ | 10,598 | | $ | 10,487 | | $ | 10,598 | | $ | 10,487 | | | $ | 10,026 | | $ | 6,130 | | $ | 10,026 | | $ | 6,130 | |
Outpatient rehabilitation | | 2,035 | | 2,181 | | 2,035 | | 2,181 | | | 3,133 | | 2,801 | | 3,133 | | 2,801 | |
Other(3) | | 414 | | 252 | | 414 | | 252 | | | 248 | | 1,845 | | 248 | | 1,845 | |
| | | | | | | | | | | | | | | | | | |
Total company | | $ | 13,047 | | $ | 12,920 | | $ | 13,047 | | $ | 12,920 | | | $ | 13,407 | | $ | 10,776 | | $ | 13,407 | | $ | 10,776 | |
| | | | | | | | | | | | | | | | | | |
3040
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Select Medical Holdings Corporation | | | Select Medical Corporation | |
| | Six Months Ended June 30, | | | Six Months Ended June 30, | |
| | | | | | | | | | % | | | | | | | | | | | % | |
| | 2010 | | | 2011 | | | Change | | | 2010 | | | 2011 | | | Change | |
| | (in thousands) | |
Net operating revenues: | | | | | | | | | | | | | | | | | | | | | | | | |
Specialty hospitals | | $ | 814,764 | | | $ | 1,040,185 | | | | 27.7 | % | | $ | 814,764 | | | $ | 1,040,185 | | | | 27.7 | % |
Outpatient rehabilitation | | | 349,850 | | | | 351,664 | | | | 0.5 | | | | 349,850 | | | | 351,664 | | | | 0.5 | |
Other(3) | | | 76 | | | | 86 | | | | 13.2 | | | | 76 | | | | 86 | | | | 13.2 | |
| | | | | | | | | | | | | | | | | | |
Total company | | $ | 1,164,690 | | | $ | 1,391,935 | | | | 19.5 | % | | $ | 1,164,690 | | | $ | 1,391,935 | | | | 19.5 | % |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Income (loss) from operations: | | | | | | | | | | | | | | | | | | | | | | | | |
Specialty hospitals | | $ | 134,383 | | | $ | 166,341 | | | | 23.8 | % | | $ | 134,383 | | | $ | 166,341 | | | | 23.8 | % |
Outpatient rehabilitation | | | 35,675 | | | | 37,187 | | | | 4.2 | | | | 35,675 | | | | 37,187 | | | | 4.2 | |
Other(3) | | | (24,833 | ) | | | (34,870 | ) | | | (40.4 | ) | | | (24,833 | ) | | | (34,870 | ) | | | (40.4 | ) |
| | | | | | | | | | | | | | | | | | |
Total company | | $ | 145,225 | | | $ | 168,658 | | | | 16.1 | % | | $ | 145,225 | | | $ | 168,658 | | | | 16.1 | % |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Adjusted EBITDA:(2) | | | | | | | | | | | | | | | | | | | | | | | | |
Specialty hospitals | | $ | 156,241 | | | $ | 191,434 | | | | 22.5 | % | | $ | 156,241 | | | $ | 191,434 | | | | 22.5 | % |
Outpatient rehabilitation | | | 46,474 | | | | 45,873 | | | | (1.3 | ) | | | 46,474 | | | | 45,873 | | | | (1.3 | ) |
Other(3) | | | (22,224 | ) | | | (31,648 | ) | | | (42.4 | ) | | | (22,224 | ) | | | (31,648 | ) | | | (42.4 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Adjusted EBITDA margins:(2) | | | | | | | | | | | | | | | | | | | | | | | | |
Specialty hospitals | | | 19.2 | % | | | 18.4 | % | | | | | | | 19.2 | % | | | 18.4 | % | | | | |
Outpatient rehabilitation | | | 13.3 | | | | 13.0 | | | | | | | | 13.3 | | | | 13.0 | | | | | |
Other(3) | | | N/M | | | | N/M | | | | | | | | N/M | | | | N/M | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total assets: | | | | | | | | | | | | | | | | | | | | | | | | |
Specialty hospitals | | $ | 1,969,566 | | | $ | 2,202,994 | | | | | | | $ | 1,969,566 | | | $ | 2,202,994 | | | | | |
Outpatient rehabilitation | | | 495,399 | | | | 471,175 | | | | | | | | 495,399 | | | | 471,175 | | | | | |
Other(3) | | | 195,158 | | | | 113,853 | | | | | | | | 192,375 | | | | 112,264 | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Total company | | $ | 2,660,123 | | | $ | 2,788,022 | | | | | | | $ | 2,657,340 | | | $ | 2,786,433 | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Purchases of property and equipment, net: | | | | | | | | | | | | | | | | | | | | | | | | |
Specialty hospitals | | $ | 20,624 | | | $ | 16,617 | | | | | | | $ | 20,624 | | | $ | 16,617 | | | | | |
Outpatient rehabilitation | | | 5,168 | | | | 4,982 | | | | | | | | 5,168 | | | | 4,982 | | | | | |
Other(3) | | | 662 | | | | 2,097 | | | | | | | | 662 | | | | 2,097 | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Total company | | $ | 26,454 | | | $ | 23,696 | | | | | | | $ | 26,454 | | | $ | 23,696 | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | |
N/M | | — Not Meaningful. |
|
(1) | | Cost of services includes salaries, wages and benefits, operating supplies, lease and rent expense and other operating costs. |
41
| | |
(2) | | We define Adjusted EBITDA as net income before interest, income taxes, depreciation and amortization, stock compensation expense, equity in losses of unconsolidated subsidiaries, loss on early retirement of debt and other income. We believe that the presentation of Adjusted EBITDA is important to investors because Adjusted EBITDA is commonly used as an analytical indicator of performance by investors within the healthcare industry. Adjusted EBITDA is used by management to evaluate financial performance and determine resource allocation for each of our operating units. Adjusted EBITDA is not a measure of financial performance under generally accepted accounting principles. Items excluded from Adjusted EBITDA are significant components in understanding and assessing financial performance. Adjusted EBITDA should not be considered in isolation or as an alternative to, or substitute for, net income, cash flows generated by operations, investing or financing activities, or other financial statement data presented in the consolidated financial statements as indicators of financial performance or liquidity. Because Adjusted EBITDA is not a measurement determined in accordance with generally accepted accounting principles and is thus susceptible to varying calculations, Adjusted EBITDA as presented may not be comparable to other similarly titled measures of other companies. See Note 68 to our interim unaudited consolidated financial statements for the period ended March 31,June 30, 2011 for a reconciliation of net income to Adjusted EBITDA as utilized by us in reporting our segment performance. |
|
(3) | | Other includes our general and administrative services and non-healthcare services. |
Three Months Ended March 31,June 30, 2011 Compared to Three Months Ended March 31,June 30, 2010
In the following discussion, we address the results of operations of Select and Holdings. With the exception of incremental interest expense, loss on early retirement of debt and income taxes, the results of operations of Holdings are identical to those of Select. Therefore, discussion related to net operating revenue, operating expenses, Adjusted EBITDA, income from operations and non-controlling interest is identical for Holdings and Select.
Net Operating Revenues
Our net operating revenues increased by 18.5%20.5% to $693.2$698.7 million for the three months ended March 31,June 30, 2011 compared to $584.8$579.9 million for the three months ended March 31,June 30, 2010.
Specialty Hospitals.Our specialty hospital net operating revenues increased by 26.3%29.1% to $519.9$520.3 million for the three months ended March 31,June 30, 2011 compared to $411.7$403.1 million for the three months ended March 31,June 30, 2010. The Regency hospitals acquired on September 1, 2010 contributed $90.1$80.8 million of the increased net operating revenues. The remaining increase resulted from both an increase in patient volumes and net revenue per patient day in our other specialty hospitals. Our patient days increased 24.6%23.4% to 333,856327,001 days for the three months ended March 31,June 30, 2011, which was principally related to the addition of the Regency hospitals. The Regency hospitals contributed over 54,50051,155 patient days, and excluding the effect of the Regency hospitals, patient days would have increased 4.3%4.1% compared to the same period, prior year.year principally as a result of increased Medicare patient volumes. The occupancy percentage increased to 72% for the three months ended March 31, 2011 from 70% for the three months ended March 31, 2010 which was primarily due to an increase in our non-Medicare patient days.June 30, 2011 from 68% for the three months ended June 30, 2010. Our average net revenue per patient day was $1,514$1,505 for the three months ended March 31,June 30, 2011 compared to $1,491$1,474 for the three months ended March 31,June 30, 2010. The increase in our net revenue per patient day was due toresulted from increases in our average Medicare net revenue per patient day, offset by a decline in our average non-Medicare net revenue per patient day. The decrease in our average non-Medicare rate resulted from a decline in the severity of patients we treated covered under Medicare HMO plans and a reduction in Medicaid reimbursements.
3142
Outpatient Rehabilitation.Our outpatient rehabilitation net operating revenues for the segment increased slightly1.0% to $173.2$178.5 million for the three months ended March 31,June 30, 2011 compared to $173.1$176.8 million for the three months ended March 31,June 30, 2010. The net operating revenues generated by our outpatient rehabilitation clinics grew approximately 2.5% as2.0% compared to the three months ended March 31,June 30, 2010. The number of patient visits in our owned outpatient rehabilitation clinics increased 1.1%decreased 2.4% for the three months ended March 31,June 30, 2011 to 1,138,7001,143,854 visits compared to 1,125,9581,172,212 visits for the three months ended March 31,June 30, 2010. The decrease in visits, which also slowed our revenue growth, resulted from the 18 clinics in the Dallas-Fort Worth metroplex that were contributed to the Baylor JV, which is accounted for as an unconsolidated joint venture. Net revenue per visit in our clinics increased 2.0%1.0% to $103$102 for the three months ended March 31,June 30, 2011, compared to $101 for the three months ended March 31,June 30, 2010. Our contract services business experienced a decline in net operating revenues of approximately 7.3% as2.4% compared to the three months ended March 31,June 30, 2010 aswhich was the result of a loss of a significant group of locations during the second quarter of 2010 where our contract was cancelled when our customer sold its business. We were able to partially offset some of the lost net revenue through the addition of new contracts.
Operating Expenses
Our operating expenses include our cost of services, general and administrative expense and bad debt expense. Our operating expenses increased by $93.8$109.0 million to $588.3$599.7 million for the three months ended March 31,June 30, 2011 compared to $494.5$490.7 million for the three months ended March 31,June 30, 2010. As a percentage of our net operating revenues, our operating expenses were 84.9%85.8% for the three months ended March 31,June, 2011 compared to 84.6% for the three months ended March 31,June 30, 2010. Our cost of services, a major component of which is labor expense, were $557.4$569.7 million for the three months ended March 31,June 30, 2011 compared to $472.4$470.0 million for the three months ended March 31,June 30, 2010. The principal cause of this increase was increased costs associated withresulted from the addition of the Regency hospitals. Additionally, our facility rent expense, which is a component of cost of services, was $30.0$29.6 million for the three months ended March 31,June 30, 2011 compared to $29.1$28.6 million for the three months ended March 31,June 30, 2010. General and administrative expenses were $16.6$16.1 million for three months ended March 31,June, 2011, compared to $12.8$9.8 million for three months ended March 31,June 30, 2010. The increase in our general and administrative expenses resulted from increased compensation costs of approximately $4.0 million primarily from higherrelated to executive compensation, increased legal expenses and executive compensation costs inof approximately $6.8 million primarily related to the three months ended March 31, 2011 then inreserve taken for the same period in the prior yearColumbus matter and additional corporate administrative costssupport related to support the Regency hospitals.hospitals of approximately $1.0 million. These cost increases were offset by the gain of $5.4 million on the sale of assets. Our bad debt expense as a percentage of net operating revenues was 2.1%2.0% for the three months ended March 31,June 30, 2011 compared to 1.6%1.9% for the three months ended March 31,June 30, 2010. We experienced an increase in our bad debt expense in both our business segments that resulted from aging of some of our accounts receivable. We do not believe our experience in the first quarter of 2011 is indicative of any new trend and we expect our bad debt expense will decline to historical levels over the remainder of the year.
Adjusted EBITDA
Specialty Hospitals.Our specialty hospital Adjusted EBITDA increased by 21.1%24.2% to $100.4$91.1 million for the three months ended March 31,June 30, 2011 compared to $82.9$73.3 million for the three months ended March 31,June 30, 2010. Adjusted EBITDA margins for the segment decreased to 19.3%17.5% for the three months ended March 31,June 30, 2011 from 20.1%18.2% for the three months ended March 31,June 30, 2010. For the three months ended March 31, 2010,June 30, 2011, the Regency hospitals acquired on September 1, 2010 contributed $14.5$8.7 million of the increase in specialty hospital Adjusted EBITDA. Excluding the effect of the Regency hospitals, the Adjusted EBITDA margin would have been 20.0%18.7% for the three months ended March 31,June 30, 2011. In addition to the contribution from the Regency hospitals, the increase in the Adjusted EBITDA for the remainder of our specialty hospitals was primarily the result of the increase in patient daysvolumes and our Medicare net revenue per patient day described above under “Net Operating Revenues — Specialty Hospitals.”
3243
Outpatient Rehabilitation. Our outpatient rehabilitation Adjusted EBITDA for the segment increaseddecreased by 4.3%5.7% to $21.4$24.5 million for the three months ended March 31,June 30, 2011 compared to $20.5$26.0 million for the three months ended March 31,June 30, 2010. Our outpatient rehabilitation Adjusted EBITDA margins for the segment increaseddecreased to 12.4%13.7% for the three months ended March 31,June 30, 2011 from 11.9%14.7% for the three months ended March 31,June 30, 2010. The principal reason for the increase in Adjusted EBITDA and the Adjusted EBITDA margin for the segment was related to our outpatient rehabilitation clinics. Our Adjusted EBITDA in our outpatient rehabilitation clinics increased by $3.8$0.8 million for the three months ended March 31,June 30, 2011 compared to the three months ended March 31,June 30, 2010. Additionally, our Adjusted EBITDA margins for our outpatient rehabilitation clinics grew to 13.4%14.9% for the three months ended March 31,June 30, 2011 from 10.9%14.6% for the three months ended March 31,June 30, 2010. The increase in our Adjusted EBITDA and Adjusted EBITDA margin in our rehabilitation clinics was principally due to an increase in our net revenue per visit. We experienced a decline in the Adjusted EBITDA and Adjusted EBITDA margin of our contract services business that resulted from the loss of a significant contract during the second quarter of 2010 as described under “Net Operating Revenues — Outpatient Rehabilitation” and regulatory changes.
Other. The Adjusted EBITDA loss was $15.6 million for the three months ended June 30, 2011 compared to an Adjusted EBITDA loss of $9.7 million for the three months ended June 30, 2010 and is primarily related to our general and administrative expenses as described above under “Operating Expenses.”
Income from Operations
For the three months ended June 30, 2011 we had income from operations of $81.0 million compared to $72.6 million for the three months ended June 30, 2010. The increase in income from operations resulted primarily from the Regency hospitals acquired on September 1, 2010, which contributed $6.8 million of income from operations for the quarter, and improved operating performance at our other specialty hospitals, which was partially offset by an increase in general and administrative costs.
Loss on Early Retirement of Debt
Select Medical Corporation.On June 1, 2011 we refinanced our senior secured credit facility which now consists of an $850.0 million term loan facility and a $300.0 million revolving facility. A portion of the proceeds from this transaction was used to repay $266.5 million of Select’s 7 5/8% senior subordinated notes. We recognized a loss on early retirement of debt of $20.4 million for the three months ended June 30, 2011 which included the write-off of unamortized deferred financing costs and tender premiums.
Select Medical Holdings Corporation.On June 1, 2011 we refinanced our senior secured credit facility which now consists of an $850.0 million term loan facility and a $300.0 million revolving facility. A portion of the proceeds from this transaction was 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. We recognized a loss on early retirement of debt of $31.0 million for the three months ended June 30, 2011, which included the write-off of unamortized deferred financing costs, tender premiums and original issue discount.
Interest Expense
Select Medical Corporation.Interest expense was $19.7 million for the three months ended June 30, 2011 compared to $22.3 million for the three months ended June 30, 2010. The decrease in interest expense has resulted primarily from the expiration of interest rate swaps in 2010 that carried higher fixed interest rates and lower interest rates on a portion of the debt we refinanced on June 1, 2011.
Select Medical Holdings Corporation.Interest expense was $25.3 million for the three months ended June 30, 2011 compared to $29.3 million for the three months ended June 30, 2010. The decrease in interest expense has resulted primarily from the expiration of interest rate swaps in 2010 that carried higher fixed interest rates and lower interest rates on a portion of the debt we refinanced on June 1, 2011.
44
Income Taxes
Select Medical Corporation.We recorded income tax expense of $16.6 million for the three months ended June 30, 2011. The expense represented an effective tax rate of 40.7%. We recorded income tax expense of $19.7 million for the three months ended June 30, 2010. The expense represented an effective tax rate of 39.1%. 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 $10.9 million for the three months ended June 30, 2011. The expense represented an effective tax rate of 44.4%. We recorded income tax expense of $17.3 million for the three months ended June 30, 2010. The expense represented an effective tax rate of 39.8%. The increase in our effective tax rate has resulted from a difference between the tax accounting basis and the financial accounting basis associated with a hospital exchange that occurred in 2011 and an increase in our reserves for uncertain tax positions resulting from the reserve recorded for the Columbus matter.
Non-Controlling Interests
Non-controlling interests in consolidated earnings were $1.9 million for the three months ended June 30, 2011 compared to $1.7 million for the three months ended June 30, 2010.
Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010
In the following discussion, we address the results of operations of Select and Holdings. With the exception of interest expense, loss on early retirement of debt and income taxes, the results of operations of Holdings are identical to those of Select. Therefore, discussion related to net operating revenue, operating expenses, Adjusted EBITDA, income from operations and non-controlling interest is identical for Holdings and Select.
Net Operating Revenues
Our net operating revenues increased by 19.5% to $1,391.9 million for the six months ended June 30, 2011 compared to $1,164.7 million for the six months ended June 30, 2010.
Specialty Hospitals.Our specialty hospital net operating revenues increased by 27.7% to $1,040.2 million for the six months ended June 30, 2011 compared to $814.8 million for the six months ended June 30, 2010. The Regency hospitals acquired on September 1, 2010 contributed $170.9 million of the increased net operating revenues. The remaining increase resulted from both an increase in patient volumes and net revenue per patient day in our other specialty hospitals. Our patient days increased 24.0% to 660,857 days for the six months ended June 30, 2011, which was principally related to the addition of the Regency hospitals. The Regency hospitals contributed 105,738 patient days, and excluding the effect of the Regency hospitals, patient days would have increased 4.2% compared to the same period, prior year principally as a result of increases in both Medicare and non-Medicare volumes. The occupancy percentage increased to 71% for the six months ended June 30, 2011 from 69% for the six months ended June 30, 2010. Our average net revenue per patient day was $1,510 for the six months ended June 30, 2011 compared to $1,483 for the six months ended June 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.
45
Outpatient Rehabilitation.Our outpatient rehabilitation net operating revenues increased 0.5% to $351.7 million for the six months ended June 30, 2011 compared to $349.9 million for the six months ended June 30, 2010. The net operating revenues generated by our outpatient rehabilitation clinics grew approximately 2.2% compared to the six months ended June 30, 2010. The number of patient visits in our owned outpatient rehabilitation clinics decreased slightly for the six months ended June 30, 2011 to 2,282,554 visits compared to 2,298,170 visits for the six months ended June 30, 2010. The decrease in visits, which also slowed our revenue growth, resulted from the 18 clinics in the Dallas-Fort Worth metroplex that were contributed to the Baylor JV, which is accounted for as an unconsolidated joint venture. Net revenue per visit in our clinics increased 1.0% to $102 for the six months ended June 30, 2011, compared to $101 for the six months ended June 30, 2010. Our contract services business experienced a decline in net operating revenues of approximately 4.9% compared to the six months ended June 30, 2010 which was the result of a loss of a significant group of locations during the second quarter of 2010 where our contract was cancelled when our customer sold its business. We were able to partially offset some of the lost net revenue through the addition of new contracts.
Operating Expenses
Our operating expenses include our cost of services, general and administrative expense and bad debt expense. Our operating expenses increased by $203.0 million to $1,188.1 million for the six months ended June 30, 2011 compared to $985.1 million for the six months ended June 30, 2010. As a percentage of our net operating revenues, our operating expenses were 85.4% for the six months ended June 30, 2011 compared to 84.6% for the six months ended June 30, 2010. Our cost of services, a major component of which is labor expense, were $1,127.1 million for the six months ended June 30, 2011 compared to $942.4 million for the six months ended June 30, 2010. The principal cause of this increase resulted from the addition of the Regency hospitals. Additionally facility rent expense, which is a component of cost of services, was $59.6 million for the six months ended June 30, 2011 compared to $57.7 million for the six months ended June 30, 2010. General and administrative expenses were $32.7 million for the six months ended June 30, 2011 compared to $22.6 million for the six months ended June 30 2010. The increase in our general and administrative expenses resulted from increased compensation costs of approximately $5.1 million primarily related to executive compensation, increased legal expenses of approximately $7.0 million primarily related to the reserve taken for the Columbus matter and additional corporate administrative support related to the Regency hospitals of approximately $1.9 million. These cost increases were offset by the gain of $5.4 million on the sale of assets. Our bad debt expense as a percentage of net operating revenues was 2.0% for the six months ended June 30, 2011 compared to 1.7% for the six months ended June 30, 2010. During the first quarter of 2011 we experienced an increase in our bad debt expense in both our business segments greater than that of the previous comparable quarter that resulted from aging of some of our accounts receivable.
Adjusted EBITDA
Specialty Hospitals. Our specialty hospital Adjusted EBITDA increased by 22.5% to $191.4 million for the six months ended June 30, 2011 compared to $156.2 million for the six months ended June 30, 2010. Our Adjusted EBITDA margins decreased to 18.4% for the six months ended June 30, 2011 from 19.2% for the six months ended June 30, 2010. For the six months ended June 30, 2011, the Regency hospitals acquired on September 1, 2010 contributed $23.2 million of the increase in specialty hospital Adjusted EBITDA. Excluding the effect of the Regency hospitals, the Adjusted EBITDA margin would have been 19.4% for the six months ended June 30, 2011. In addition to the contribution from the Regency hospitals, the increase in the Adjusted EBITDA for the remainder of our specialty hospitals was primarily the result of the increase in patient volumes and our Medicare net revenue per patient day described above under “Net Operating Revenues — Specialty Hospitals.”
46
Outpatient Rehabilitation. Our outpatient rehabilitation Adjusted EBITDA for the segment decreased by 1.3% to $45.9 million for the six months ended June 30, 2011 compared to $46.5 million for the six months ended June 30, 2010. Our outpatient rehabilitation Adjusted EBITDA margins for the segment decreased to 13.0% for the six months ended June 30, 2011 from 13.3% for the six months ended June 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 $4.6 million for the six months ended June 30, 2011 compared to the six months ended June 30, 2010. Additionally, our Adjusted EBITDA margins for our outpatient rehabilitation clinics grew to 14.2% for the six months ended June 30, 2011 from 12.8% for the six months ended June 30, 2010. The increase in our Adjusted EBITDA and Adjusted EBITDA margin in our rehabilitation clinics was principally due to an improvement in the performance in the clinics acquired in 2007 from HealthSouth Corporation and the increase in our net revenue per visit. We experienced a decline in the Adjusted EBITDA and Adjusted EBITDA margin of our contract services business that resulted from the a loss of a significant groupcontract during the second quarter of locations2010 as described under “Net Operating Revenues — Outpatient Rehabilitation.”Rehabilitation” and regulatory changes.
Other. The Adjusted EBITDA loss was $16.0$31.6 million for the threesix months ended March 31,June 30, 2011 compared to an Adjusted EBITDA loss of $12.5$22.2 million for the threesix months ended March 31,June 30, 2010 and is primarily related to our general and administrative expenses.expenses as described under “Operating Expenses.”
Income from Operations
For the threesix months ended March 31,June 30, 2011 we had income from operations of $87.6$168.7 million compared to $72.6$145.2 million for the threesix months ended March 31,June 30, 2010. The increase in income from operations resulted primarily from the Regency hospitals acquired on September 1, 2010 which contributed $12.7$19.5 million of income from operations for the quarter.six months ended June 30, 2011, and improved operating performance at our other specialty hospitals, offset by an increase in general and administrative costs.
Loss on Early Retirement of Debt
Select Medical Corporation.On June 1, 2011 we refinanced our senior secured credit facility which now consists of an $850.0 million term loan facility and a $300.0 million revolving facility. A portion of the proceeds from this transaction was 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 six months ended June 30, 2011 which included the write-off of unamortized deferred financing costs and tender premiums.
Select Medical Holdings Corporation.On June 1, 2011 we refinanced our senior secured credit facility which now consists of an $850.0 million term loan facility and a $300.0 million revolving facility. A portion of the proceeds from this transaction was 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. We recognized a loss on early retirement of debt of $31.0 million for the six months ended June 30, 2011 which included the write-off of unamortized deferred financing costs, tender premiums and original issue discount.
47
Interest Expense
Select Medical Corporation.Interest expense was $18.7$38.4 million for the threesix months ended March 31,June 30, 2011 compared to $23.0$45.4 million for the threesix months ended March 31,June 30, 2010. The decrease in interest expense has resulted primarily from the expiration of interest rate swaps in 2010 that carried higher fixed interest rates.
Select Medical Holdings Corporation.Interest expense was $25.7$51.0 million for the threesix months ended March 31,June 30, 2011 compared to $30.0$59.3 million for the threesix months ended March 31,June 30, 2010. The decrease in interest expense has resulted primarily from the expiration of interest rate swaps in 2010 that carried higher fixed interest rates.
Income Taxes
Select Medical Corporation.We recorded income tax expense of $29.0$45.6 million for the threesix months ended March 31,June 30, 2011. The expense represented an effective tax rate of 42.1%41.6%. We recorded income tax expense of $19.6$39.3 million for the threesix months ended March 31,June 30, 2010. The expense represented an effective tax rate of 39.3%39.2%. 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 $37.5 million for the six months ended June 30, 2011. The expense represented an effective tax rate of 43.3%. We recorded income tax expense of $34.4 million for the six months ended June 30, 2010. The expense represented an effective tax rate of 39.9%. The increase in our effective tax rate has resulted from a difference between the tax accounting basis and the financial accounting basis associated with a hospital exchange that occurred in 2011.
Select Medical Holdings Corporation.We recorded income tax expense of $26.6 million for the three months ended March 31, 2011. The expense represented2011 and an effective tax rate of 42.9%. We recorded income tax expense of $17.1 million for the three months ended March 31, 2010. The expense represented an effective tax rate of 40.0%. The increase in our effectivereserves for uncertain tax rate has resultedpositions resulting from a difference between the tax accounting basis andreserve recorded for the financial accounting basis associated with a hospital exchange that occurred in 2011.Columbus matter.
33
Non-Controlling Interests
Non-controlling interests in consolidated earnings were $1.7$3.7 million for the threesix months ended March 31,June 30, 2011 compared to $1.4$3.1 million for the threesix months ended March 31,June 30, 2010.
48
Liquidity and Capital Resources
Cash Flows for the ThreeSix Months Ended March 31,June 30, 2011 and ThreeSix Months Ended March 31,June 30, 2010
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Select Medical Holdings | | | | | Select Medical Holdings | | | |
| | Corporation | | Select Medical Corporation | | | Corporation | | Select Medical Corporation | |
| | Three Months Ended | | Three Months Ended | | | Six Months | | Six Months | |
| | March 31, | | March 31, | | | Ended June 30, | | Ended June 30, | |
| | 2010 | | 2011 | | 2010 | | 2011 | | | 2010 | | 2011 | | 2010 | | 2011 | |
| | (in thousands) | | (in thousands) | | | (in thousands) | | (in thousands) | |
| | |
Cash flows provided by (used in) operating activities | | $ | (15,796 | ) | | $ | (5,032 | ) | | $ | (2,919 | ) | | $ | 7,685 | | |
Cash flows provided by operating activities | | | $ | 58,719 | | $ | 83,527 | | $ | 71,602 | | $ | 101,250 | |
Cash flows used in investing activities | | | (13,047 | ) | | | (14,670 | ) | | | (13,047 | ) | | | (14,670 | ) | | | (26,454 | ) | | | (27,410 | ) | | | (26,454 | ) | | | (27,410 | ) |
Cash flows provided by financing activities | | 18,336 | | 30,405 | | 5,459 | | 17,688 | | |
Cash flows provided by (used in) financing activities | | | 12,808 | | | (46,898 | ) | | | (75 | ) | | | (64,621 | ) |
| | | | | | | | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | (10,507 | ) | | 10,703 | | | (10,507 | ) | | 10,703 | | |
Net increase in cash and cash equivalents | | | 45,073 | | 9,219 | | 45,073 | | 9,219 | |
Cash and cash equivalents at beginning of period | | 83,680 | | 4,365 | | 83,680 | | 4,365 | | | 83,680 | | 4,365 | | 83,680 | | 4,365 | |
| | | | | | | | | | | | | | | | | | |
Cash and cash equivalents at end of period | | $ | 73,173 | | $ | 15,068 | | $ | 73,173 | | $ | 15,068 | | | $ | 128,753 | | $ | 13,584 | | $ | 128,753 | | $ | 13,584 | |
| | | | | | | | | | | | | | | | | | |
Operating activities for Select provided $7.7$101.3 million of cash flows for the threesix months ended March 31,June 30, 2011. Our days sales outstanding were 5753 days at March 31,June 30, 2011 compared to 5653 days at March 31,June 30, 2010 and 51 days at December 31, 2010. The increase in days sales outstanding between December 31, 2010 and March 31,June 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. Our periodic interim payments were delayed during the current quarter as the result of a change in our Medicare fiscal intermediary that was mandated by CMS. Our bi-weekly payment date was pushed back five days. We will recoup the five lost days of Medicare reimbursement over future months as our hospitals cycle through their semi-annual payment reviews.
The operating cash flows of Select exceeded the operating cash flows of Holdings by $12.7$17.7 million for the threesix months ended March 31,June 30, 2011 and by $12.9 million for the threesix months ended March 31,June 30, 2010. The difference relates to interest payments onand losses associated with the repurchase of a portion of Holdings’ indebtedness.
Investing activities used $14.7$27.4 million of cash flow for the threesix months ended March 31,June 30, 2011. The principal use of cash included $12.9$23.7 million related to the purchase of property and equipment and $2.0$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 hospital exchange.building we acquired in connection with the acquisition of Regency and $2.0 million from the acquisition activities that includes the resolution of the Regency net working capital with the seller. Investing activities used $13.0$26.5 million of cash flow for the threesix months ended March 31,June 30, 2010. The use of cash was related to the purchase of property and equipment.
Financing activities for Select provided $17.7used $64.6 million of cash flow for the threesix months ended March 31,June 30, 2011. The primary sourcesuse of cash related to proceeds from net borrowings under our revolving credit facility of $100.0 million and net borrowings of other debt of $3.0 million. These borrowings were offset by aggregate payments on our term loans of $59.6 million, dividends paid to Holdings of $171.0 million to fund interest payments and stock repurchasesthe repurchase of $14.7all $150.0 million reduction in bank overdraftsprincipal amount of $9.4Holdings 10% senior subordinated notes, $18.6 million of debt issuance costs and $1.7$2.3 million in distributions paid to non-controlling interests.interests offset by net borrowings of debt of $124.9 million and $2.1 million in proceeds from bank overdrafts. Financing activities for Select provided $5.5$0.1 million of cash flow for the threesix months ended March 31,June 30, 2010. The primary sourcessource of cash related to proceeds from bank overdrafts of $17.3$14.2 million and net borrowings of other debt of $2.7$5.0 million, which were offset by payments on our seller and other debt of $4.4 million, dividends paid to Holdings to fund interest payments of $12.9 million and $1.7$2.1 million in distributions to non-controlling interests.
3449
The difference in cash flows provided by financing activities of Holdings compared to Select of $12.7$17.7 million for the threesix months ended March 31,June 30, 2011 and $12.9 million for the threesix months ended March 31,June 30, 2010 relates to dividends paid by Select to Holdings to service Holdings’ interest obligations related to indebtedness.
Capital Resources
Select Medical Corporation.Select had net working capital of $20.1$111.8 million at March 31,June 30, 2011 compared to net working capital deficit of $73.5 million at December 31, 2010. The increase in net working capital is primarily due to a decrease in our current portion of long-term debt resulting from our debt refinancing and an increase in our accounts receivable.
Select Medical Holdings Corporation.Holdings had net working capital of $17.1$113.9 million at March 31,June 30, 2011 compared to net working capital deficit of $70.2 million at December 31, 2010. The increase in net working capital is primarily due to a decrease in our current portion of long-term debt resulting from our debt refinancing and an increase in our accounts receivable.
At March 31,On June 1, 2011, ourSelect entered into a new senior secured credit agreement (the “Credit Agreement”) that provides for $1.15 billion in senior secured credit facilities (“Senior Secured Credit Facilities”) comprised of an $850.0 million, seven-year term loan facility (as described below), consists of:
(“Term Loan”) and a $300.0 million, five-year revolving loancredit facility that will terminate on August 22, 2013,(“Revolving Credit Facility”), including both a letter$75.0 million sublimit for the issuance of standby letters of credit sub-facility and a $25.0 million sublimit for swingline loan sub-facility,loans. 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
$143.5in the case of the Revolving Credit Facility, Adjusted LIBO plus a percentage ranging from 2.75% to 3.75%, or Alternative Base Rate plus a percentage ranging from 1.75% to 2.75%, in each case based on 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 statutory reserve requirements; provided that Adjusted LIBO, when used in reference to the Term Loan, will at no time be less than 1.75% per annum.
“Alternative Base Rate” is defined as the highest of (a) the administrative 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 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 term loansSeptember 2011. The balance of the Term Loan will be payable on June 1, 2018, provided that matureif on February 24, 2012the 90th day prior to the scheduled final maturity date of Select’s 7 5/8% senior subordinated notes due 2015 (the “Tranche B Term Loans”Trigger Date”), and
$278.8 more than $60.0 million in term loans that mature on August 22, 2014 (the “Tranche B-1 Term Loans”).
The interest rates per annum applicable to loans, other than swingline loans and Tranche B-1 Term Loans, under our senior secured credit facility are, at our option, equal to either an alternate base rate or an adjusted LIBOR rate for a one, two, three or six month interest period, or a nine or twelve month period if available, in each case, plus an applicable margin percentage. The interest rates per annum applicable to the Tranche B-1 Term Loans under our senior credit facility are, at our option, equal to either an alternate base rate or an adjusted LIBOR rate for a three or six month interest period, or a nine or twelve month period if available, in each case, plus an applicable margin percentage. The alternate base rate is the greater of (1) JPMorgan Chase Bank, N.A.’s prime rate and (2) one-half of 1% over the weighted average of rates on overnight Federal funds as published by the Federal Reserve Bank of New York. The adjusted LIBOR rate is determined by reference to settlement rates established for deposits in dollars in the London interbank market for a period equal to the interest period of the loan and the maximum reserve percentages established by the Board of Governors of the United States Federal Reserve to which our lenders are subject. The applicable margin percentage for borrowings under our revolving loans is subject to change based upon the ratioaggregate principal amount of Select’s leverage ratio (as defined in7 5/8% senior subordinated notes due 2015 are outstanding, the credit agreement). The applicable margin percentagematurity date for revolving loans is currently (1) 2.75% for alternate base rate loans and (2) 3.75% for adjusted LIBOR loans. The applicable margin percentages forthe 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 are (1) 2.75% for alternate base rate loans and (2) 3.75% for adjusted LIBOR loans.Revolving Credit Facility will be the Revolving Trigger Date.
3550
Our seniorSelect 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 credit facility requiresby 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 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.
The 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). For the four consecutiveCredit Agreement), which is tested quarterly, and prohibits Select from making capital expenditures in excess of $125.0 million in any fiscal quarters ended March 31, 2011, Select was requiredyear (subject to maintain an interest expense coverage ratio (its ratio of consolidated EBITDA (as defined in our senior secured credit facility) to cash interest expense) for the prior four consecutive fiscal quarters of at least 2.25 to 1.00. Select’s interest expense coverage ratio was 3.32 to 1.00 for such period.a 50% carry-over provision). As of March 31,June 30, 2011, Select was required to maintain its leverage ratio (its ratio of total indebtedness to consolidated EBITDA for the prior four consecutive fiscal quarters) at less than 4.506.00 to 1.00.1.00, and Select’s leverage ratio was 3.423.72 to 1.00 as of March 31,June 30, 2011. Failure to comply with these covenants would result in an event of default under the Senior Secured Credit Facilities and, absent a waiver or an amendment from the lenders, preclude Select from making further borrowings under the Revolving Credit Facility and permit the lenders to accelerate all outstanding borrowings under the Senior Secured Credit Facilities.
Also, asThe Senior Secured Credit Facilities also contain a number of March 31,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 June 30, 2011, we had $147.2$202.2 million of availability under our revolving loan facilityRevolving Credit Facility (after giving effect to $27.8$32.8 million of outstanding letters of credit).
On April 25, 2011, Select commenced a cash tender offer and consent solicitation for any and all of its $611.5 million of outstanding 7 5/8% senior subordinated notes due 2015. The tender offer is scheduled to expire at 11:59 p.m. on May 20, 2011. The tender offer and consent solicitation are being conducted in connection with Select’s negotiations to refinance its senior secured credit facility. The tender offer and consent solicitation are conditioned on Select’s entry into a new senior secured credit facility. Select expects to use a portion of the proceeds from such new senior secured credit facility to purchase the tendered and accepted 7 5/8% senior subordinated notes and to retire Holdings’ $150.0 million principal value outstanding 10% senior subordinated notes due 2015. We can provide no assurance that we will be able to successfully refinance either our current senior secured credit facility or the 7 5/8% senior subordinated notes, or that the refinancing, if it occurs, will not be delayed beyond the second quarter of 2011, or that the terms of any new indebtedness will be as favorable as the terms of our existing indebtedness.
We may also from time to time seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity securities, in open market purchases, in tender offers, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, may be funded from operating cash flows or other sources and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
Holdings has authorized a program to repurchase up to $100.0 million worth of shares of our common stock. On August 3, 2011, our board of directors authorized an increase of $50.0 million in capacity of our common stock repurchase program, from $100.0 million to $150.0 million. The program will remain in effect until January 31, 2012, unless extended by the board of directors. Through March 31,June 30, 2011, Select has repurchased 7,175,6917,315,475 shares at a cost of $46.2$47.4 million, which includes related transaction costs. We anticipate funding this program through available operating cash flow and borrowings under our senior secured credit facility.
51
We believe our internally generated cash flows and borrowing capacity under our senior secured credit facility will be sufficient to finance operations over the next twelve months.
As a result of the SCHIP Extension Act as amended by PPACA, which prohibits the establishment and classification of new LTCHs or satellites during the five calendar years commencing on December 29, 2007, we have stopped all new LTCH development with the exception of one new hospital under development that we acquired in the Regency acquisition.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.
36
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,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 fair value measurements in accordance with Generally Accepted Accounting Principles 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.
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. We adopted update 2010-06present 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 adoptions of Update 2011-05 will cause us to change our presentation of other comprehensive income on January 1, 2010, exceptour consolidated financial statements.
52
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 activity of purchases, sales, issuances, and settlements on a gross basis, which wasallowance for doubtful accounts. Update 2011-07 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2010. The2011, with early adoption permitted. We are in the process of evaluating the effects of Update 2010-06 did not have an impact2011-07 on our consolidated financial statements. We currently have no Level 3 measurements.
| | |
ITEM 3. | | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Quantitative and Qualitative Disclosures About Market Risk
We are subject to interest rate risk in connection with our long-term indebtedness. Our principal interest rate exposure relates to the loans outstanding under Select’s senior secured credit facility and Holdings’ senior floating rate notes. As of March 31,June 30, 2011, Select had $547.3$915.0 million in term and revolving loans outstanding under its senior secured credit facility, excluding the unamortized debt discount of $8.4 million, and Holdings had $167.3 million in senior floating rate notes outstanding, which bear interest at variable rates. Each eighth point change in interest rates on the variable rate portion of our long-term indebtedness would result in a $0.9$1.4 million annual change in interest expense on our term loans. However, because the variable interest rate for our $850.0 million in term loans is subject to an Adjusted LIBO Rate floor of 1.75%, until the Adjusted LIBO Rate exceeds 1.75%, our interest rate on this indebtedness is effectively fixed at 5.5%.
| | |
ITEM 4. | | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) as of the end of the period covered in this report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures, including the accumulation and communication of disclosure to our principal executive officer and principal financial officer as appropriate to allow timely decisions regarding disclosure, are effective as of March 31,June 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.
37
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 firstsecond quarter ended March 31,June 30, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
53
On September 1, 2010, Select completed the acquisition of all the issued and outstanding equity securities of Regency Hospital Company, L.L.C. (“Regency”). During 2010, we transferred all accounting for Regency to our headquarters and began integrating Regency into our existing internal control procedures. The Regency integration may lead us to change our controls in future periods, but we do not expect changes to significantly affect our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there is only reasonable assurance that our controls will succeed in achieving their goals under all potential future conditions.
PART II OTHER INFORMATION
| | |
ITEM 1. | | LEGAL PROCEEDINGS |
To cover claims arising out of the operations of the 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.
The Company is subject to legal proceedings and claims that arise in the ordinary course of business, which include malpractice claims covered under insurance policies, subject to self-insured retention of $2.0 million per medical incident for professional liability claims and $2.0 million per occurrence for general liability claims. In the 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 the qui tam provisions of the federal False Claims Act. Qui tam lawsuits typically remain under seal (hence, usually unknown to the defendant) for some time while the government decides whether or not to intervene on behalf of a private qui tam plaintiff (known as a relator) and take the lead in the litigation. These lawsuits can involve significant monetary damages and penalties and award bounties to private plaintiffs who successfully bring the suits. The Company has been a defendant in these cases in the past, and may be named as a defendant in similar cases from time to time in the future.
38
During July 2009, the Company received a subpoena from the Office of Inspector General of the U.S. Department of Health and Human Services seeking various documents concerning the Company’s financial relationships with certain physicians practicing at its long term acute care hospitals in Columbus, Ohio.Ohio (“Columbus Matter”). The Company understands that the subpoena was issued in connection with a qui tam lawsuit and that the government has been investigating the matter to determine whether to intervene. The Company has produced documents in response to the subpoena and has fully cooperated with the government’s investigation. The Company ishas been in discussions with the government to attempt to resolve this matter in a manner satisfactory to the Company and the government. Any such settlement would not involve any admission of liability or wrongdoing on the part of the Company. During the second quarter of 2011, the Company recorded a pre-tax charge of $7.5 million to establish a settlement reserve, which represents the Company’s best estimate of a probable settlement. The Company can provide no assurance that it will finalize a settlement on such terms, nor can the Company predict its total financial exposure in connection with this matter if a settlement is not expected to be material to our financial position.reached.
54
There have been no material changes from our risk factors as previously reported in our Annual Report on Form 10-K for the year ended December 31, 2010.
| | |
ITEM 2. | | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Purchases of Equity Securities by the Issuer
In November 2010, our board of directors authorized a stock repurchase program pursuant to which we may purchase up to $100.0 million worth of our common stock. On August 3, 2011, our board of directors authorized an increase of $50.0 million in the capacity of our common stock repurchase program, from $100.0 million to $150.0 million. The other terms of the plan remain unchanged. The program will remain in effect until January 31, 2012, unless extended by our board of directors. In the quarterthree months ended March 31,June 30, 2011, we purchased a total of 269,991139,784 shares of our common stock at an average purchase price of $7.48.$8.99. The following table sets forth the monthly purchases made under this program during the quarterthree months ended March 31,June 30, 2011:
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Approximate | |
| | | | | | | | | | Total Number | | | Dollar Value of | |
| | | | | | | | | | of Shares | | | Shares that | |
| | | | | | | | | | Purchased as | | | May Yet Be | |
| | | | | | | | | | Part of Publicly | | | Purchased | |
| | Total Number | | | | | | | Announced | | | Under the | |
| | of Shares | | | Average Price | | | Plans or | | | Plans or | |
Period | | Purchased | | | Paid Per Share | | | Programs | | | Programs | |
January 1, 2011 to January 31, 2011 | | | — | | | | — | | | | — | | | $ | 55,856,585 | |
February 1, 2011 to February 28, 2011 | | | — | | | | — | | | | — | | | $ | 55,856,585 | |
March 1, 2011 to March 31, 2011 | | | 269,991 | | | $ | 7.48 | | | | 269,991 | | | $ | 53,831,437 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | 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 | |
April 1, 2011 to April 30, 2011 | | | — | | | | — | | | | — | | | $ | 53,831,437 | |
May 1, 2011 to May 31, 2011 | | | — | | | | — | | | | — | | | $ | 53,831,437 | |
June 1, 2011 to June 30, 2011 | | | 139,784 | | | $ | 8.99 | | | | 139,784 | | | $ | 52,571,798 | |
| | |
ITEM 3. | | DEFAULTS UPON SENIOR SECURITIES |
Not applicable.
| | |
ITEM 4. | | REMOVED AND RESERVED |
| | |
ITEM 5. | | OTHER INFORMATION |
None.
The exhibits to this report are listed in the Exhibit Index appearing on page 4157 hereof.
3955
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: MayAugust 5, 2011
| | | | |
| SELECT MEDICAL HOLDINGS CORPORATION | |
| By: | /s/ Martin F. Jackson | |
| | Martin F. Jackson | |
| | Executive Vice President and Chief Financial Officer (Duly Authorized Officer) | |
| | |
| By: | /s/ Scott A. Romberger | |
| | Scott A. Romberger | |
| | Senior Vice President, Chief Accounting Officer and Controller (Principal Accounting Officer) | |
Dated: MayAugust 5, 2011
4056
EXHIBIT INDEX
| | | | |
Exhibit | | Description |
| | | | |
| 10.1 | | | Fourth Amendment to Change of ControlCredit Agreement, dated March 8,as of June 1, 2011, betweenamong Select Medical Holdings Corporation, Select Medical Corporation, JPMorgan Chase Bank, N.A., as Administrative and Martin F. Jackson,Collateral Agent, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Goldman Sachs Bank USA, as Co-Syndication Agents and Morgan Stanley Senior Funding, Inc. and Wells Fargo Bank, National Association, LLC, as Co-Documentation Agents and the other lenders party thereto, incorporated herein by reference to Exhibit 10.11110.1 of the AnnualCurrent Report on Form 10-K8-K of Select Medical Holdings Corporation and Select Medical Corporation filed on March 9,June 2, 2011 (Reg. Nos. 001-34465 and 001-31441). |
| | | | |
| 10.2 | | | Amendment No. 8 to Employment Agreement, dated March 8, 2011, between Select Medical Corporation and Robert A. Ortenzio, incorporated herein by reference to Exhibit 10.112 of the Annual Report on Form 10-K of Select Medical Holdings Corporation and Select Medical Corporation filed on March 9, 2011 (Reg. Nos. 001-34465 and 001-31441). |
| | | | |
| 10.3 | | | Amendment No. 8 to Employment Agreement, dated March 8, 2011, between Select Medical Corporation and Rocco A. Ortenzio, incorporated herein by reference to Exhibit 10.113 of the Annual Report on Form 10-K of Select Medical Holdings Corporation and Select Medical Corporation filed on March 9, 2011 (Reg. Nos. 001-34465 and 001-31441). |
| | | | |
| 10.4 | | | Amendment No. 9 to Employment Agreement, dated March 8, 2011, between Select Medical Corporation and Patricia A. Rice, incorporated herein by reference to Exhibit 10.114 of the Annual Report on Form 10-K of Select Medical Holdings Corporation and Select Medical Corporation filed on March 9, 2011 (Reg. Nos. 001-34465 and 001-31441). |
| | | | |
| 10.5 | | | Fourth Amendment to Change of Control Agreement, dated March 8, 2011, between Select Medical Corporation and Scott A. Romberger, incorporated herein by reference to Exhibit 10.115 of the Annual Report on Form 10-K of Select Medical Holdings Corporation and Select Medical Corporation filed on March 9, 2011 (Reg. Nos. 001-34465 and 001-31441). |
| | | | |
| 10.6 | | | Fourth Amendment to Change of Control Agreement, dated March 8, 2011, between Select Medical Corporation and James J. Talalai, incorporated herein by reference to Exhibit 10.116 of the Annual Report on Form 10-K of Select Medical Holdings Corporation and Select Medical Corporation filed on March 9, 2011 (Reg. Nos. 001-34465 and 001-31441). |
| | | | |
| 10.7 | | | Fourth Amendment to Change of Control Agreement, dated March 8, 2011, between Select Medical Corporation and Michael E. Tarvin, incorporated herein by reference to Exhibit 10.117 of the Annual Report on Form 10-K of Select Medical Holdings Corporation and Select Medical Corporation filed on March 9, 2011 (Reg. Nos. 001-34465 and 001-31441). |
| | | | |
| 10.8 | | | Amendment No. 1 to Employment Agreement, dated March 21, 2011, between Select Medical Corporation and David S. Chernow. |
| | | | |
| 31.1 | | | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | | |
| 31.2 | | | Certification of Executive Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | | |
| 32.1 | | | Certification of Chief Executive Officer, and Executive Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
4157